<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 12, 1996
REGISTRATION NO. 333-14313
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
STB SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
TEXAS 3670 75-1855896
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
1651 NORTH GLENVILLE DRIVE
RICHARDSON, TEXAS 75081
(972) 234-8750
(Address, including zip code, telephone number,
including area code, of registrant's principal executive office)
WILLIAM E. OGLE
CHIEF EXECUTIVE OFFICER
STB SYSTEMS, INC.
1651 NORTH GLENVILLE DRIVE
RICHARDSON, TEXAS 75081
(972) 234-8750
(Name, address, including zip code, telephone number,
including area code, of agent for service)
------------------------
COPIES TO:
<TABLE>
<S> <C>
HARLAN P. COHEN STEVEN K. COCHRAN
Locke Purnell Rain Harrell Thompson & Knight
(A Professional Corporation) A Professional Corporation
2200 Ross Avenue, Suite 2200 1700 Pacific Avenue, Suite 3300
Dallas, Texas 75201 Dallas, Texas 75201
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
<PAGE>
SUBJECT TO COMPLETION, DATED NOVEMBER 12, 1996
PROSPECTUS
1,800,000 SHARES
[LOGO]
COMMON STOCK
Of the 1,800,000 shares of Common Stock offered hereby, 1,500,000 shares are
being sold by the Company and 300,000 shares are being sold by the Selling
Shareholders. The Company will not receive any of the proceeds from the sale of
shares by the Selling Shareholders. See "Principal and Selling Shareholders."
The Company's Common Stock is quoted on the Nasdaq National Market under the
symbol STBI. On October 15, 1996, the last reported sale price of the Common
Stock was $24.00 per share. See "Price Range of Common Stock and Dividend
Policy."
----------------
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 7.
--------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT (1) COMPANY (2) SHAREHOLDERS
<S> <C> <C> <C> <C>
Per Share............... $ $ $ $
Total (3)............... $ $ $ $
</TABLE>
(1) See "Underwriting" for indemnification arrangements with the several
Underwriters.
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Selling Shareholders have granted to the Underwriters a 30-day option to
purchase up to 270,000 additional shares of Common Stock solely to cover
over-allotments, if any. If all such shares are purchased, the total Price
to Public, Underwriting Discount and Proceeds to Selling Shareholders will
be $ , $ and $ , respectively. See "Underwriting."
----------------
The shares of Common Stock are offered by the several Underwriters subject
to prior sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that certificates for such shares will be made
available for delivery on or about , 1996, at the office of the agent
of Hambrecht & Quist LLC in New York, New York.
HAMBRECHT & QUIST COWEN & COMPANY
, 1996
<PAGE>
Photograph of computer monitor with 3D video graphics adapter insert.
STB supplies multimedia subsystems to leading OEMs, including Gateway 2000,
Dell Computer, Compaq Computer and IBM. STB also sells its products in the
commercial and specialized technology product markets.
Picture of award medals from PC World, Multimedia World, Windows Magazine
and Info World.
The quality and performance of STB's products are reflected in the awards
the Company has received from its customers and the PC industry.
Photograph of product offerings, along with STB Logo.
----------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET
MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN
ACCORDANCE WITH RULE 10b-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE
"UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO
APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, INFORMATION
IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITERS' OPTION TO PURCHASE
ADDITIONAL COMMON STOCK TO COVER OVER-ALLOTMENTS, IF ANY. UNLESS THE CONTEXT
OTHERWISE REQUIRES, THE TERM "COMPANY" OR "STB" WHEN USED IN THIS PROSPECTUS
REFERS TO STB SYSTEMS, INC., A TEXAS CORPORATION, AND ITS CONSOLIDATED
SUBSIDIARIES AND PRIOR AFFILIATES. THIS PROSPECTUS CONTAINS CERTAIN
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE FEDERAL SECURITIES LAWS.
ACTUAL RESULTS AND THE TIMING OF CERTAIN EVENTS COULD DIFFER MATERIALLY FROM
THOSE PROJECTED IN OR CONTEMPLATED BY THE FORWARD-LOOKING STATEMENTS DUE TO A
NUMBER OF FACTORS, INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE
IN THIS PROSPECTUS.
THE COMPANY
STB designs, manufactures and sells graphics adapters and other multimedia
subsystem products for use primarily in desktop personal computers ("PCs"). The
Company's graphics adapters, almost all of which are video graphics adapters
that display full-motion video images on a monitor, enable users to take
advantage of true-color graphics, 3D and video features found in the latest
operating systems, such as Microsoft Windows 95 and Windows NT, and in
multimedia applications. The Company's multimedia subsystem product line
includes a wide selection of video graphics adapters designed for use primarily
in mid-range to high-end PCs and also features several complementary products,
including digital video products and sound cards. The Company's multimedia
subsystem products are sold to original equipment manufacturers ("OEMs") and, to
a lesser extent, through the commercial sales channel to retailers, distributors
and direct-mail companies. The Company's OEM and commercial customers include
Gateway 2000, Dell Computer, Compaq Computer, CompUSA, Best Buy, Tech Data and
Ingram Micro. STB also sells specialized technology products that incorporate
graphics technologies and are usually designed to enable one computer to
simultaneously control the display of multiple monitors. These products are sold
to customers for specialized applications in a number of industries, including
the financial services, hospitality, factory automation, transportation and
emergency response industries. The Company's customers for specialized
technology products include Reuters and Lodgenet.
STB has demonstrated outstanding growth, with revenues increasing from $23.8
million in fiscal 1991 to $129.6 million in fiscal 1995, a compound annual
growth rate of 52.8%. According to International Data Corporation ("IDC"), STB
has increased its market share to become the second largest independent supplier
of graphics adapters (based on units shipped), with an estimated 16.7% worldwide
market share in 1995.
Dataquest estimates that 71.7 million PCs are expected to be shipped
worldwide in 1996, compared to 60.2 million units in 1995 and 47.9 million units
in 1994. A substantial portion of PCs shipped in recent periods incorporate high
performance Intel Pentium and Pentium Pro processors and support multimedia
functionality including CD-ROM storage, higher-resolution graphics, digital
video and audio and, in some systems, hardware 3D and telecommunications. The
evolution of these multimedia-enabled PCs has been driven by the proliferation
of higher performance hardware, operating systems such as Microsoft Windows 95
and Windows NT, the popularity of the Internet and the growth in the number of
consumer and business applications featuring greater use of 3D graphics, video
and sound. The accelerating pace of technological advancement in the PC industry
has made it increasingly difficult for OEMs to devote the resources necessary
for the timely internal development of multimedia subsystems incorporating the
latest innovations. Furthermore, many OEMs are seeking to expand their product
lines in response to consumer demand for a broader range of price and
performance options. As a result, the Company believes OEMs increasingly are
choosing to outsource many of their component and subsystem needs to specialized
subsystem vendors with focused development efforts.
The Company focuses primarily on the sale of its products to OEMs. Sales of
multimedia subsystem products to OEMs represented approximately 81% of the
Company's total net sales in the nine months ended July 31, 1996. The Company
has increased its unit sales volumes in each of the five most recent quarters
primarily as a result of the expansion of relationships with established OEM
customers, such as Gateway 2000,
3
<PAGE>
and the addition of new OEM customers, such as Dell Computer, Compaq Computer
and IBM. STB is striving to expand its position in the OEM market by adding new
high-end video graphics adapters to its product line, such as the Velocity 3D
video graphics adapter. The Company is also broadening its relationships with
OEMs beyond the sale of video graphics adapters through the sale of other
multimedia subsystem products, such as digital video products and sound cards.
STB works closely with component suppliers and OEM customers to develop
innovative products that are responsive to product development trends and
consumer demands. As OEM customers communicate desired features of next
generation products, STB uses its numerous supplier relationships and its
technical and marketing expertise to determine the most appropriate components
to meet required price and performance specifications. The Company designs and
installs STB's proprietary software drivers and utilities to optimize the
performance and compatibility of a new video graphics adapter product. This
strategy has allowed the Company to be a leader in computer graphics technology.
The Company develops new products at its headquarters in Richardson, Texas
and manufactures products at its facility in Juarez, Mexico. By maintaining
direct control over production, the Company can control product quality and
costs and quickly respond to changing customer needs. The Company's
manufacturing facility is located in Mexico to benefit from low labor and
shipping costs, as well as proximity to the Company's headquarters in
Richardson, Texas. The Company believes that the benefits derived from its close
relationships with customers and suppliers, its low-cost manufacturing
operations and its technical expertise position it to compete effectively in its
target markets.
In addition to focusing its efforts on the OEM market, STB sells its
multimedia subsystem products to the commercial market. The Company has invested
substantial marketing efforts to build the STB brand in the commercial sales
channel. STB has experienced strong growth in this sales channel in the first
nine months of fiscal 1996 and now has significant shelf space with retailers
such as CompUSA, Best Buy and Computer City.
STB also serves specialized technology product markets, where it seeks to
capitalize on its technical expertise in targeted industry niches. The Company's
specialized technology products are sold primarily to resellers and corporate
customers for specialized applications in a number of industries, including the
financial services, hospitality, factory automation, transportation and
emergency response industries. STB's efforts in the specialized technology
market increase the Company's awareness of the demands of sophisticated
end-users, and the prices that the Company's products can command in this market
bolster the Company's margins.
The Company's principal offices are located at 1651 North Glenville Drive,
Richardson, Texas 75081, and the Company's telephone number is (972) 234-8750.
The STB logo is a registered trademark of the Company. STB owns common law
trademark rights for STB Vision, Mediator, Powergraph, Lightspeed, Velocity,
Soundrage, Video Rage, MVP and Channel. Windows is a trademark of Microsoft
Corporation. Pentium, Pentium Pro, MMX, AGP and Intercast are trademarks of
Intel Corporation. Destination is a trademark of Gateway 2000, Inc. Dolby
Digital is a trademark of Dolby Labs.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company.................. 1,500,000 shares
Common Stock offered by the Selling Shareholders..... 300,000 shares
Common Stock to be outstanding after the offering.... 6,013,598 shares (1)
Use of proceeds...................................... To reduce bank indebtedness and for
general corporate purposes
Nasdaq National Market symbol........................ STBI
</TABLE>
- ------------------------
(1) Excludes (i) 850,000 shares of Common Stock reserved for issuance under the
Company's 1995 Long Term Incentive Plan (the "Incentive Plan"), of which
options to purchase 775,000 shares of Common Stock were outstanding as of
October 31, 1996 with a weighted average exercise price of $15.81 per share,
(ii) 100,000 shares of Common Stock reserved for issuance under the
Company's Stock Option Plan for Non-Employee Directors (the "Directors
Option Plan"), of which options to purchase 25,000 shares of Common Stock
were outstanding as of October 31, 1996 with an exercise price of $12.00 per
share, and (iii) 197,402 shares of Common Stock reserved for issuance under
the Company's 1995 Employee Stock Option Purchase Plan (the "Employee
Plan"). See "Management."
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS
FISCAL YEAR ENDED OCTOBER 31, ENDED JULY 31,
----------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales...................................... $ 23,818 $ 27,786 $ 39,236 $ 89,836 $ 129,603 $ 89,771 $ 132,034
Gross profit................................... 6,698 6,885 8,510 16,623 19,474 13,356 24,281
Income from operations......................... 557 97 786 4,109 3,146 1,482 6,868
Net Income (loss).............................. $ 362 $ (100) $ 560 $ 3,521 $ 1,998 $ 1,057 $ 3,947
PRO FORMA DATA:
Pro forma adjustments (1)...................... (315) (315)
--------- ---------
Pro forma net income........................... $ 1,683 $ 742
--------- ---------
Pro forma net income per share (1996 actual)
(2).......................................... $ 0.45 $ 0.20 $ 0.88
--------- --------- ---------
Weighted average shares and equivalents used
for pro forma net income per share (1996
actual) (2).................................. 3,746 3,746 4,504
</TABLE>
<TABLE>
<CAPTION>
AS OF JULY 31, 1996
----------------------
AS
ACTUAL ADJUSTED(3)
--------- -----------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital.......................................................................... $ 23,427 $ 57,107
Total assets............................................................................. 52,606 83,176
Short-term borrowings including current portion of long-term liabilities................. 5,540 2,430
Long-term liabilities, net of current portion............................................ 1,672 1,672
Total shareholders' equity............................................................... 27,360 61,040
</TABLE>
5
<PAGE>
- ------------------------
(1) Reflects certain pro forma adjustments assuming (a) the Company's
profit-sharing allocation to employees had been reduced from 25% to 10% of
income before taxes (as calculated prior to profit sharing expenses),
effective November 1, 1994; (b) the portion of indebtedness evidenced by
certain promissory notes (the "Founding Shareholder Notes") issued to the
founding shareholders of the Company (the "Founding Shareholders") relating
to approximately one-half of the amount of undistributed earnings of the
Company as of October 31, 1994 (at which time the Company was treated as an
S corporation for federal and state income tax purposes) (the "Undistributed
S Corporation Earnings"), or $2.04 million, had been outstanding effective
November 1, 1994 and bearing interest at 9% per annum; and (c) the Company
had been treated as a C corporation rather than as an S corporation for
federal and state income tax purposes, effective November 1, 1994 (and
assuming an effective tax rate of approximately 33%). The adjustment in the
Company's profit sharing allocation to employees and the termination of the
Company's S corporation status occurred contemporaneously with the Company's
initial public offering ("IPO") in February 1995. See "Management--Profit
Sharing Plan," "Certain Transactions--S Corporation Distribution" and Note 1
of Notes to October 31, 1995 Consolidated Financial Statements.
(2) Pro forma net income per share is based on the Company's weighted average
number of shares outstanding, plus the common equivalent number of shares
that the Company would have had to issue to distribute to the Founding
Shareholders $2.04 million, which amount equals approximately one-half of
the Undistributed S Corporation Earnings at October 31, 1994. See "Certain
Transactions--S Corporation Distribution" and Note 1 of Notes to October 31,
1995 Consolidated Financial Statements.
(3) Adjusted to reflect the sale of 1,500,000 shares of Common Stock offered by
the Company hereby and the application of the estimated net proceeds
therefrom (assuming a public offering price of $24.00 per share). See "Use
of Proceeds" and "Capitalization."
6
<PAGE>
RISK FACTORS
THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF THE FEDERAL SECURITIES LAWS. ACTUAL RESULTS AND THE TIMING OF CERTAIN
EVENTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN OR CONTEMPLATED BY THE
FORWARD-LOOKING STATEMENTS DUE TO A NUMBER OF FACTORS, INCLUDING THOSE SET FORTH
BELOW AND ELSEWHERE IN THIS PROSPECTUS. IN ADDITION TO THE OTHER INFORMATION IN
THIS PROSPECTUS, THE FOLLOWING FACTORS, WHICH MAY AFFECT THE COMPANY'S CURRENT
POSITION AND FUTURE PROSPECTS, SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE
COMPANY AND AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY.
POTENTIAL FOR FLUCTUATING OPERATING RESULTS; SEASONALITY. 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, product reviews and other media
coverage, changes in sales channel mix and product returns or price protection
claims from customers. Many of these factors are beyond the control of the
Company. The volume and timing of orders received during a quarter are difficult
to forecast. Customers generally order on an as-needed basis. Consequently, the
Company historically has operated with a relatively small backlog. Moreover, as
sometimes occurs in the PC industry, a disproportionate percentage of the
Company's net sales in any quarter may be generated in the last month of a
quarter. As a result, a shortfall in sales in any quarter as compared to
expectations may not be identifiable until the end of the quarter. The Company's
gross profit margins are impacted by product sales cycles, sales channel mix,
product mix, pricing pressures, the availability and cost of components from the
Company's suppliers and general economic conditions. The Company's markets are
characterized by intense ongoing competition and a trend of declining average
selling prices. Accordingly, the Company's margins may decline in the future
from the levels experienced to date. In addition, the Company's margins may be
adversely affected by shortages in the availability of key components for the
Company's products, as well as by fluctuations in the value of certain foreign
currencies. 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--Selected Quarterly Operating Results and Seasonality."
DEPENDENCE ON SUPPLIERS. Several components used in the Company's products
are obtained from single or limited sources and, in instances in which component
manufacturers do not allocate a sufficient supply of components to meet the
Company's needs, the Company must obtain such components from distributors or on
the spot market at a higher cost. 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. The Company believes
that with respect to its single and limited source components, it could obtain
similar components from other sources but likely would be required to pay
significantly more for such products, alter product designs to use alternative
components (which would cause significant delays) or reduce its production of
the related graphics adapters. As a result of delays in the delivery of
components or lack of available components, the Company in the past has
experienced difficulty in meeting certain product shipment dates to customers,
which in some instances has resulted in a loss of business. In addition,
software drivers, which are essential to product performance, are included with
some of these single and limited source components. In the past, the Company has
experienced delays in the delivery of its products due to the inadequacy or the
incompatibility of software drivers provided by component suppliers or developed
internally. It is likely that delays in delivery of components, shortages of
components and problems with software drivers will continue to occur in the
future, and such delays or problems would materially adversely affect the
Company and its results of operations. Additionally, in its attempt to counter
actual or perceived component shortages, the Company may overpurchase certain
components, resulting in excess inventory or, in the event of inventory
obsolescence or a decline in the market value of such inventory, causing
inventory write-offs against the Company's operating results.
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 quickly adjust the price of its products accordingly. Occasional
worldwide shortages of DRAM (dynamic random access memory) and other memory and
controller
7
<PAGE>
chips and international tariff disputes have resulted in substantial component
cost increases in the past that have materially adversely affected the Company
and its results of operations.
The Company relies upon outside suppliers to continue to develop, introduce
and manufacture in sufficient volumes controller chips, memory chips and other
components. Moreover, the technology of these components must compare favorably
in terms of functionality, features and price with the offerings of other
manufacturers, including competitors of the Company that have internally
developed computer chips or manufacturing expertise. The Company's dependence on
single and limited source suppliers, and the risks associated with any delay or
shortfall in supply, are exacerbated by the short life cycles which characterize
multimedia subsystem products. See "Business--Suppliers."
DEPENDENCE ON VIDEO GRAPHICS ADAPTER MARKET; MIGRATION TO MOTHERBOARDS. A
substantial portion of the Company's net sales is derived from the sale of video
graphics adapters. According to Jon Peddie Associates, approximately 59% of all
graphics controller chips manufactured in the 12-month period ended June 30,
1996, were incorporated onto graphics adapters, and approximately 41% were
incorporated onto motherboards. Video graphics adapters generally are used in
higher-end PCs offering the latest technology and performance features. However,
as a given functionality becomes technologically stable and widely accepted by
PC users, it typically migrates to the PC motherboard. The Company anticipates
that such migration could occur with respect to the functionality provided by
certain of its current products. In this regard, Intel Corporation's MMX
instruction set and the expanded operating systems provided by Microsoft
Corporation incorporate several functions that traditionally have been performed
by graphics adapters. In addition, single chip solutions are currently available
that provide 16-bit sound functionality for implementation directly onto PC
motherboards. As a result of this tendency of technology to migrate to the PC
motherboard, the Company's success is largely dependent on its ability to
continue to develop products that incorporate new and rapidly evolving
technologies that manufacturers have not yet fully incorporated onto PC
motherboards. While the Company believes that a market will continue to exist
for add-in subsystems that provide advanced functionalities and offer
flexibility in systems configuration, there can be no assurance that the
incorporation of new functionalities onto PC motherboards will not adversely
affect the market for the Company's products. An increase in the number or
percentage of PCs that incorporate graphics circuitry on the motherboard at the
expense of add-in video graphics adapters, an increase in the number or
percentage of video graphics adapters manufactured internally 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.
See "Business--Industry."
TECHNOLOGICAL CHANGE AND NEW PRODUCTS. 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. OEMs introduce new system configurations as often as twice a year, and
the life cycles of the Company's video graphics adapters typically range from 6
to 9 months (plus a few additional months of sales of certain of such products
in the commercial market). If the Company does not successfully introduce new
products within a given product cycle, the Company's sales will be adversely
affected for that cycle and possibly for subsequent cycles. Any such failure
could also impair the Company's brand name, reputation and relationships with
its OEM customers. The Company's success depends upon market acceptance of its
existing products, its ability to enhance its existing products and its ability
to continually develop and introduce new products and features to meet changing
customer requirements. Each new product cycle presents new opportunities for
current or prospective competitors of the Company to gain market share. The
Company's competitors include manufacturers of products that directly compete
with the Company's products, as well as competitors that can produce products
that have a similar functionality to the Company's products. For instance, Intel
Corporation is adding new functionalities, such as MMX, to its controller chips
to enhance the power of the central processing unit ("CPU") of a PC to manage
the display features of a PC. Similarly, Microsoft Corporation is introducing
new versions of its operating systems with features, such as Direct 3D, that
increase the capability of its operating systems to control a PC's display
features. Moreover, because of the short product life cycles and the long lead
times for many components used in the Company's products, the Company may not be
able to quickly reduce its production or inventory levels in response to
unexpected shortfalls in sales or, conversely, to
8
<PAGE>
increase production in response to unexpected demand. There can be no assurance
of the continued acceptance of the Company's existing products or 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 would materially adversely affect the Company and its results
of operations.
Sales of individual products and product lines are typically characterized
by declines in volumes, pricing and margins toward the end of the product's life
cycle, the precise timing of which may be difficult to predict. As new products
are planned and introduced, the Company attempts to monitor closely the
inventory of older products (and older components) and to phase out their
manufacture in a controlled manner. Nevertheless, the Company could experience
unexpected reductions in sales of older generation products as customers
anticipate new products. These reductions could give rise to additional charges
for obsolete or excess inventory, returns of older generation products by
retailers or commercial distributors or substantial price protection claims. To
the extent that the Company is unsuccessful in managing product transitions, its
business and operating results would be materially adversely affected.
DEPENDENCE ON KEY CUSTOMERS AND DESKTOP PC MARKET. The Company's top three
customers accounted for 55.5% and 63.0% of net sales during fiscal 1995 and the
nine-month period ended July 31, 1996, respectively. In recent years, Gateway
2000 has been the Company's top customer, although STB's other significant
customers have changed from period to period. See "Business--Sales and
Marketing--Sales." 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 and its results of operations. In addition, the Company's
future success will depend significantly upon the success of its customers,
particularly its OEM customers. The Company has no long-term commitments or
contracts with its customers. While a number of the Company's OEM customers have
achieved strong PC sales in recent periods, such customers, and the PC industry
in general, are subject to dynamic competitive conditions. In particular, the
loss of sales by the Company's OEM customers to other OEMs or a decrease in the
popularity of desktop PCs that incorporate the Company's products would
adversely affect the Company and its results of operations.
CHANGE IN PRODUCT OR SALES CHANNEL MIX. The Company offers two broad
categories of products: multimedia subsystem products that are sold to OEMs and
the commercial market and specialized technology products that are sold to
resellers and corporate customers in certain industries. Sales of video graphics
adapters to OEMs, which currently account for substantially all of the Company's
OEM multimedia subsystem product sales, are characterized by relatively high
unit volumes and relatively low gross profit margins. The Company began shipping
significant unit volumes of certain new multimedia subsystem products (i.e.,
other than video graphics adapters) to OEM customers in the third quarter of its
1996 fiscal year but is not yet in a position to forecast the effect that the
sale of these new products will have on it results of operations. Sales to the
commercial market are characterized by modest volumes and moderate gross profit
margins. Sales of the Company's specialized technology products are
characterized by relatively low unit volumes and relatively high gross profit
margins. The Company's sales to OEMs, the commercial market and specialized
technology products customers represented approximately 81%, 10% and 6% of the
Company's total net sales during the nine-month period ended July 31, 1996. In
the event the Company experiences a shift in the type of products that it is
able to sell or a shift in the sales channels into which such products are sold,
its results of operations could be materially adversely affected. In particular,
a decrease in sales of multimedia subsystem products to the commercial market or
in sales of specialized technology products could result in a disproportionately
greater decrease in the Company's gross profit. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Overview" and
"Business--Products."
ENTRY INTO NEW PRODUCT MARKETS. While the Company's business historically
has focused on the design, manufacture and sale of graphics adapters, in the
third quarter of fiscal 1996 the Company first began shipping significant unit
volumes of new multimedia subsystem products. See "Business--Products." There
are numerous risks inherent in the entry into new product markets, including the
reallocation of limited management,
9
<PAGE>
engineering and capital resources to unproven product ventures, a greater
likelihood for encountering technical problems and a greater likelihood that the
market will not accept the Company's new products or the PCs into which they are
incorporated. The failure of one or more of such products, or any negative
effects upon the Company's core video graphics adapter business, could
materially adversely affect the Company and its results of operations.
PRICE PROTECTION AND STOCK ROTATION RISKS. As is common practice in its
industry, the Company's arrangements with its commercial customers generally
allow customers, in the event of a price decrease, credit equal to the
difference between the price originally paid and the new decreased price on
units in the customers' inventories on the date of the price decrease. In
addition, commercial customers generally have the right to return slow-moving or
excess inventory for product credit up to an agreed upon percentage of shipments
within specified time periods. While the Company establishes reserves to cover
these practices, there can be no assurance that these reserves will be
sufficient or that any future price protection claims or returns will not have a
material adverse effect on the Company and its results of operations,
particularly because results are heavily dependent on products for which the
Company has little or no operating history. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Overview" and
"Business--Sales and Marketing--Sales."
COMPETITION. The markets for the Company's products are highly competitive.
The Company has competitors specifically dedicated to the multimedia subsystem
market or specific segments within that market. Companies in related markets
also offer products with functions similar to the Company's products. For
example, the Company's suppliers sell video graphics controller chips directly
to OEMs for use in internally produced video graphics adapters or on
motherboards. Increased sales of competitive products could result in price
reductions by the Company or loss of its market share, which would materially
adversely affect the Company and its results of operations. In addition, the
Company's OEM customers could commence or increase internal production of video
graphics adapters or other multimedia subsystems. Furthermore, the Company's
markets are expected to become increasingly competitive as multimedia functions
continue to converge and companies that previously supplied products providing
distinct functions (for example, companies in the sound board and telephony
markets) emerge as competitors across broader product categories. The Company
also anticipates that as the breadth of its product lines expand, the markets in
which it competes and the number of competitors against which it competes also
will expand. There can be no assurance that the Company will be able to continue
to compete successfully in its markets or that it will be able to compete
successfully against current and new competition as these markets continue to
evolve. Many of the Company's current and potential competitors design and
manufacture some of their own product components. While the Company believes
that its controller chip independence enables it to select from among the most
advanced components available, there may be instances in which these internally
developed components have better features and performance characteristics than
those available from third party vendors. Furthermore, the Company believes that
certain of its current and potential competitors compete largely on the basis of
price, which may result in significant price competition, lower margins for the
Company's products or otherwise affect the market for the Company's products.
Certain of the Company's current and potential competitors also are located in
foreign jurisdictions that may have lower labor costs, impose significantly
lower taxes than the United States or levy duties on product imports. Many of
the Company's current and potential competitors have greater financial,
marketing, manufacturing and technological resources than the Company. There can
be no assurance that the Company will be able to continue to compete
successfully with its existing competitors or with new competitors. See
"Business--Competition."
DEPENDENCE ON KEY PERSONNEL. The Company's success depends upon the
services of its management, sales, marketing and engineering personnel. While
the Company has entered into employment agreements with a number of such
personnel, the loss of the services of one or more of such personnel could have
a material adverse effect on the Company and its results of operations. See
"Management--Employment Agreements." The success of the Company will depend, in
part, on its ability to retain its key management, sales, marketing and
engineering personnel and to attract other personnel to satisfy the Company's
current and future needs.
10
<PAGE>
There is substantial competition for such personnel in the computer industry,
and the inability to retain key personnel or to attract additional personnel to
satisfy the Company's needs could have a material adverse effect on the Company
and its results of operations.
MANAGEMENT OF GROWTH. The Company has experienced rapid growth, and future
growth may require larger quantities of components, additional marketing, sales
and engineering personnel, additional manufacturing equipment and improved
operating, financial and administrative controls, any of which could require
significant additional capital expenditures. The Company may experience
difficulty securing adequate quantities of components or additional
manufacturing equipment, attracting or retaining skilled personnel, improving
infrastructure and information systems or overcoming other difficulties
associated with growth. In addition, gross profit margins derived from initial
orders with new OEM customers are frequently lower than the Company's typical
gross profit margins. There can be no assurance that the Company will be able to
manage any future growth successfully or that difficulties in doing so will not
have a material adverse effect on the Company and its results of operations.
SINGLE MANUFACTURING FACILITY. The Company's primary manufacturing facility
is located in Juarez, Mexico. Since the Company is substantially dependent on
this single manufacturing facility, a disruption of the Company's manufacturing
operations at this facility would have a material adverse effect on the Company
and its results of operations. Such disruption could result from various
factors, including a labor dispute, human error, governmental or political risks
or a natural disaster such as an earthquake, tornado, fire or flood. In
addition, in comparison to those of its competitors that do not maintain their
own manufacturing facilities, the Company incurs higher relative fixed overhead
and labor costs as a result of operating its own manufacturing facility. Any
failure to generate the level of product revenues needed to absorb these
overhead and labor costs would have a material adverse effect on the Company and
its results of operations. See "Business-- Manufacturing."
INTERNATIONAL OPERATIONS. A substantial portion of the Company's
manufacturing operations are carried out in Mexico. The Company's export sales
(which primarily consist of European sales) were approximately 19% of net sales
in the first nine months of fiscal 1996. 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,
state imposed restrictions on the repatriation of funds, 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. In addition, a substantial portion of the Company's
manufacturing labor costs are paid in Mexican pesos, so any decrease in the
value of the U.S. dollar relative to the Mexican peso could increase the
Company's manufacturing costs and adversely affect the Company and its results
of operations. See "Business--Manufacturing" and "Business--Sales and
Marketing."
DEPENDENCE ON SALES REPRESENTATIVES AND DISTRIBUTORS. The Company markets
and distributes a significant portion of its products in the United States to
OEM customers and commercial channel customers through independent sales
representatives and distributors. The Company's sales representatives work in
tandem with the Company's sales force and are organized by customer account. The
services of an independent sales representative are important in obtaining and
maintaining a customer relationship. The Company's distributors resell the
Company's products to retailers and other resellers in the commercial market.
The Company's
11
<PAGE>
agreements with its sales representatives and distributors are cancelable upon
30-days' notice. There can be no assurance that future sales by sales
representatives or distributors will continue at present levels. The loss of one
or more sales representatives or distributors, or the decision by one or more
distributors to reduce the number of the Company's products offered or to carry
the product lines of the Company's competitors, could have a material adverse
effect on the Company and its results of operations. See "Business--Sales and
Marketing."
PROPRIETARY TECHNOLOGY. The Company's success partially depends upon its
proprietary technology, consisting of its software drivers and utilities and, to
a lesser extent, its hardware designs. The Company relies upon copyright and
trade secret laws and agreements with its suppliers and customers to protect its
proprietary technology. There can be no assurance that the Company's present
protective measures will be adequate to prevent misappropriation of its
technology or independent third party development of the same or similar
technology. Many foreign jurisdictions offer less protection of intellectual
property rights than the United States, and there can be no assurance that the
protection provided to the Company's proprietary technology by the laws of the
United States or foreign jurisdictions will be sufficient to protect the
Company's technology. See "Business--Intellectual Property."
The Company has and may in the future find it necessary or desirable to
procure licenses from third parties relating to current or future products or
technologies, but there can be no assurance that the Company will continue to be
able to obtain such licenses or other rights or, if it is able to obtain them,
that it will be able to do so on commercially acceptable terms. The Company
could be placed at a disadvantage if its competitors obtain licenses with lower
royalty fee payments or other terms more favorable than those received by the
Company. If the Company or its suppliers were unable to obtain licenses relating
to current or future products or technologies, the Company could be forced to
market products without certain technological features. The Company's inability
to obtain licenses necessary to use certain technology or its inability to
obtain such licenses on competitive terms could have a material adverse effect
on the Company and its results of operations. See "Business--Intellectual
Property."
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 were 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 were 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.
STOCK MARKET VOLATILITY. There has been significant volatility in the
market price of the Company's Common Stock, as well as in the market price of
securities of technology-based companies. Factors such as announcements of new
products by the Company or its competitors, variations in the Company's
quarterly operating results or general economic or stock market conditions
unrelated to the Company's operating performance may have a significant impact
on the market price of the Common Stock. See "Price Range of Common Stock and
Dividend Policy."
SHARES ELIGIBLE FOR FUTURE SALE. Upon completion of the offering, the
Company will have outstanding 6,013,598 shares of Common Stock. In addition to
the 2,688,923 shares of Common Stock that are currently freely tradeable, the
shares of Common Stock offered hereby will be freely tradeable after the close
of this offering. The executive officers, directors and Selling Shareholders of
the Company, who in the aggregate will beneficially own 1,524,675 outstanding
shares of Common Stock upon completion of the offering, together with the
Company, have agreed that they will not sell or otherwise dispose of any Common
Stock without the prior
12
<PAGE>
written consent of Hambrecht & Quist LLC for a period of 90 days from the date
of this Prospectus. Upon expiration of these restrictions, the executive
officers and directors of the Company and the Selling Shareholders will be free
to sell the shares beneficially owned by them, subject to compliance with the
Securities Act of 1933, as amended (the "Securities Act"), including Rule 144
promulgated thereunder, and the terms of a Right of First Refusal Agreement, to
which certain of such shares are subject. A substantial portion of the shares
held by such beneficial owners may be sold into the public market effectively
free of any significant restrictions. See "Certain Transactions--Right of First
Refusal" and "Shares Eligible for Future Sale." No prediction can be made as to
the effect, if any, that market sales of the above shares or the availability of
such shares for future sale will have on the market price of shares of Common
Stock prevailing from time to time. Future sales of substantial amounts of
Common Stock by existing shareholders could adversely affect the prevailing
market price of the Common Stock after the offering and the Company's ability to
raise additional capital.
13
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of 1,500,000 shares of Common
Stock offered by the Company hereby at an assumed public offering price of
$24.00 per share are estimated to be $33.7 million, after deducting the
estimated underwriting discount and estimated offering expenses payable by the
Company.
The Company anticipates that, of the net proceeds, approximately $7.3
million will be used to partially repay indebtedness outstanding under the
Company's secured revolving credit facility ("Revolving Credit Facility"). Such
amount includes $4.8 million that was outstanding under the Revolving Credit
Facility as of July 31, 1996, which amount and additional indebtedness incurred
subsequent to that date was incurred for general working capital purposes. The
Revolving Credit Facility currently bears interest at the bank's prime rate plus
0.75% (subject to a required minimum monthly interest charge of $25,000) and
matures on November 1, 1999. The Company expects that the remainder of the
proceeds from the offering, approximately $26.4 million, will be used for
general corporate purposes, including working capital, increased engineering and
other staffing expenses, increased promotional expenses, the purchase of
additional manufacturing equipment and the possible purchase of land for
corporate facilities. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources." Pending
application of the net proceeds as described above, the Company intends to
invest such proceeds in short-term, investment grade, interest-bearing
securities. The Company will not receive any of the proceeds from the sale of
the shares by the Selling Shareholders (including any shares sold in connection
with the Underwriters' exercise of the over-allotment option).
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Company effected its initial public offering ("IPO") on February 14,
1995, at a price to the public of $12.00 per share. Since that date, the
Company's Common Stock has traded on the Nasdaq National Market under the symbol
STBI. As of October 15, 1996, there were approximately 36 record holders of
Common Stock, although the Company believes that the number of beneficial owners
of its Common Stock is substantially greater. The table below sets forth for the
fiscal quarters indicated the high and low sale prices for the Common Stock.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
FISCAL 1997
First quarter (through November 7, 1996)........................................ $ 22.00 $ 19.63
FISCAL 1996
Fourth quarter.................................................................. $ 25.88 $ 12.25
Third quarter................................................................... 18.50 10.25
Second quarter.................................................................. 11.25 8.13
First quarter................................................................... 12.25 7.38
FISCAL 1995
Fourth quarter.................................................................. 13.38 7.75
Third quarter................................................................... 11.75 6.75
Second quarter (from February 14, 1995)......................................... 15.50 10.50
</TABLE>
On October 15, 1996, the last reported sale price for the Company's Common
Stock on the Nasdaq National Market was $24.00 per share.
The Company intends to retain any future earnings for use in its business
and does not intend to pay cash dividends in the foreseeable future. The payment
of future dividends, if any, will be at the discretion of the Company's Board of
Directors and will depend, among other factors, upon future earnings,
operations, capital requirements, restrictions in future financing agreements,
the general financial condition of the Company and general business conditions.
The Company's Revolving Credit Facility permits the payment of dividends of up
to 25% of the Company's annual net income. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
14
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization and short term borrowings
of the Company (i) as of July 31, 1996, and (ii) as adjusted to give effect to
the receipt by the Company of the net proceeds from the sale of 1,500,000 shares
of Common Stock offered hereby at an assumed offering price of $24.00 per share.
See "Use of Proceeds." This table should be read in conjunction with the
Consolidated Financial Statements and the Notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JULY 31, 1996
----------------------
ACTUAL AS ADJUSTED
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Short-term borrowings including current portion of long-term liabilities (1).............. $ 5,540 $ 2,430
--------- -----------
--------- -----------
Long-term liabilities, net of current portion (1)......................................... $ 1,672 $ 1,672
--------- -----------
Shareholders' equity:
Preferred Stock, $.01 par value, 2,000,000 shares authorized;
no shares outstanding........................................................... -- --
Common Stock, $.01 par value, 20,000,000 shares authorized; 4,504,387 shares
outstanding (actual); 6,004,387 shares outstanding (as adjusted) (2)............ 45 60
Treasury Stock, 35 shares, at cost................................................ (245) (245)
Additional paid-in capital........................................................ 22,213 55,878
Retained earnings................................................................. 5,347 5,347
--------- -----------
Total shareholders' equity.................................................... 27,360 61,040
--------- -----------
Total capitalization.................................................. $ 29,032 $ 62,712
--------- -----------
--------- -----------
</TABLE>
- ------------------------
(1) See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources" for a description of the
Company's credit facilities.
(2) Excludes (i) 850,000 shares of Common Stock reserved for issuance under the
Incentive Plan, of which options to purchase 775,000 shares of Common Stock
were outstanding as of October 31, 1996 with a weighted average exercise
price of $15.81 per share, (ii) 100,000 shares of Common Stock reserved for
issuance under the Directors Option Plan, of which options to purchase
25,000 shares of Common Stock were outstanding as of October 31, 1996 with
an exercise price of $12.00 per share, and (iii) 197,402 shares of Common
Stock reserved for issuance under the Employee Plan. See "Management."
15
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data of the
Company. The selected consolidated statement of operations and consolidated
balance sheet data of the Company for the fiscal years ended October 31, 1991,
1992, 1993, 1994 and 1995 are derived from the Company's Consolidated Financial
Statements that were audited by Price Waterhouse LLP, independent accountants,
whose report thereon for the fiscal years ended October 31, 1994 and 1995 is
included elsewhere in this Prospectus. The selected consolidated statement of
operations and consolidated balance sheet data of the Company for the nine
months ended July 31, 1995 and July 31, 1996 are derived from the Company's
Consolidated Financial Statements included elsewhere in this Prospectus, and are
unaudited. The pro forma consolidated statement of operations data for the year
ended October 31, 1995, and the nine months ended July 31, 1995 and 1996 set
forth below, are unaudited.
The Selected Consolidated Financial Data set forth below should be read in
conjunction with, and are qualified in their entirety by, the Consolidated
Financial Statements and related Notes and other financial information included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS
FISCAL YEAR ENDED OCTOBER 31, ENDED JULY 31,
----------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Net sales............................ $ 23,818 $ 27,786 $ 39,236 $ 89,836 $ 129,603 $ 89,771 $ 132,034
Cost of sales........................ 17,120 20,901 30,726 73,213 110,129 76,415 107,753
--------- --------- --------- --------- --------- --------- ---------
Gross profit......................... 6,698 6,885 8,510 16,623 19,474 13,356 24,281
--------- --------- --------- --------- --------- --------- ---------
Operating expenses
Research and development......... 985 914 1,079 1,795 2,719 2,051 2,975
Sales and marketing.............. 2,708 3,139 3,835 5,529 7,437 5,300 7,847
General and administrative....... 2,448 2,735 2,810 5,190 6,172 4,523 6,591
--------- --------- --------- --------- --------- --------- ---------
Total operating expenses..... 6,141 6,788 7,724 12,514 16,328 11,874 17,413
--------- --------- --------- --------- --------- --------- ---------
Income from operations............... 557 97 786 4,109 3,146 1,482 6,868
Interest expense..................... 195 197 226 588 818 556 869
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before income tax...... 362 (100) 560 3,521 2,328 926 5,999
Provision (benefit) for income tax
(1)................................ -- -- -- -- 330 (131) 2,052
--------- --------- --------- --------- --------- --------- ---------
Net income (loss).................... $ 362 $ (100) $ 560 $ 3,521 $ 1,998 $ 1,057 $ 3,947
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
PRO FORMA DATA:
Pro forma adjustments (2)............ $ (315) $ (315)
--------- ---------
Pro forma net income................. $ 1,683 $ 742
--------- ---------
Pro forma net income per share
(1996 actual) (3).................. $ 0.45 $ 0.20 $ 0.88
--------- --------- ---------
--------- --------- ---------
Weighted average shares and
equivalents used for pro forma net
income per share (1996 actual)
(3)................................ 3,746 3,746 4,504
</TABLE>
<TABLE>
<CAPTION>
AS OF OCTOBER 31, AS OF JULY 31, 1996
----------------------------------------------------- --------------------------
1991 1992 1993 1994 1995 ACTUAL AS ADJUSTED (4)
--------- --------- --------- --------- --------- --------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital........................... $ 1,388 $ 1,423 $ 1,480 $ 4,373 $ 21,449 $ 23,427 $ 57,107
Total assets.............................. 7,005 8,039 14,777 23,651 57,539 52,606 83,176
Short-term borrowings including current
portion of long-term liabilities........ 1,925 1,614 3,679 6,793 12,138 5,540 2,430
Long-term liabilities, net of current
portion................................. 29 37 38 2,164 1,982 1,672 1,672
Total shareholders' equity................ 1,877 1,829 2,088 4,196 23,362 27,360 61,040
</TABLE>
16
<PAGE>
- ------------------------------
(1) The Company 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.
(2) Reflects certain pro forma adjustments assuming (a) the Company's
profit-sharing allocation to employees had been reduced from 25% to 10% of
income before taxes (as calculated prior to profit sharing expenses),
effective November 1, 1994; (b) the portion of indebtedness evidenced by the
Founding Shareholder Notes issued to the Founding Shareholders relating to
approximately one-half of the Undistributed S Corporation Earnings, or $2.04
million, had been outstanding effective November 1, 1994 and bearing
interest at 9% per annum; and (c) the Company had been treated as a C
corporation rather than as an S corporation for federal and state income tax
purposes, effective November 1, 1994 (and assuming an effective tax rate of
approximately 33%). The adjustment in the Company's profit sharing
allocation to employees and the termination of the Company's S corporation
status occurred contemporaneously with the IPO in February 1995. See
"Management--Profit Sharing Plan," "Certain Transactions--S Corporation
Distribution" and Note 1 of Notes to October 31, 1995 Consolidated Financial
Statements.
(3) Pro forma net income per share is based on the Company's weighted average
number of shares outstanding, plus the common equivalent number of shares
that the Company would have had to issue to distribute to the Founding
Shareholders $2.04 million, which amount equals approximately one-half of
the Undistributed S Corporation Earnings at October 31, 1994. See "Certain
Transactions-- S Corporation Distribution" and Note 1 of Notes to October
31, 1995 Consolidated Financial Statements.
(4) Adjusted to reflect the sale of 1,500,000 shares of Common Stock offered by
the Company hereby and the application of the estimated net proceeds
therefrom (assuming a public offering price of $24.00 per share). See "Use
of Proceeds" and "Capitalization."
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
STB currently sells two broad categories of products, which the Company
refers to as multimedia subsystem products and specialized technology products.
The Company's multimedia subsystem product line includes a wide selection of
graphics adapters designed for use in mid-range to high-end PCs and also
features several complementary products, including digital video products and
sound cards. STB's specialized technology products incorporate graphics
technologies and are usually designed to enable one computer to simultaneously
control the display of multiple monitors.
The Company sells its products to OEMs, the commercial market and the
specialized technology market. Multimedia subsystem products are sold both to
OEMs as subsystems for their PC products and to the commercial market. Sales of
video graphics adapters to OEMs, which currently account for substantially all
of the Company's OEM multimedia subsystem product sales, are characterized by
higher unit volumes and lower gross profit margins. Sales of multimedia products
to the commercial market are characterized by modest unit volumes and higher
gross profit margins than the sale of similar products to OEMs. Although sales
volumes of specialized technology products are relatively low, the Company
realizes higher gross profit margins from the sale of these products than from
the sale of multimedia subsystem products. The Company began shipping
significant unit volumes of certain new multimedia subsystem products (products
other than video graphics adapters) to OEM customers in the third quarter of
fiscal 1996. The Company is not yet in a position to forecast the effect that
the sale of these new products will have upon the Company's results of
operations.
For the nine months ended July 31, 1996, sales of the Company's products to
the OEM, commercial and specialized technology product markets constituted
approximately 81% (approximately 2% of which is comprised of sales of new
multimedia subsystem products), 10% and 6% of net sales, respectively. The
Company has experienced substantial growth in each of its sales channels in
recent periods. The balance of total net sales was derived primarily from the
provision of third party assembly services, which constituted approximately 3%
of total net sales for the nine months ended July 31, 1996. Export sales of the
Company's products, which are made through all of the Company's sales channels,
have grown more moderately in recent periods, and as a result declined as a
percentage of net sales to 19% for the nine months ended July 31, 1996.
The Company recognizes revenue upon shipment of its products. For products
sold through the commercial channel, the Company generally allows returns in the
form of stock rotations and price protection in the form of credits. The
Company's current stock rotation policies typically permit a commercial channel
customer to return to the Company approximately 10% of products purchased within
the previous 90 days if it places an order for other Company products of equal
or greater value. The Company usually is able to resell returned products. STB
typically provides price protection to commercial channel customers in the form
of credits for price reductions on products remaining in customer inventories.
The Company maintains reserves to cover these practices, which it believes are
adequate.
The Company has no guaranteed supply arrangements with any of its suppliers.
The Company obtains most of the primary components included in its products,
consisting mainly of controller chips and memory chips, directly from the
component manufacturers. The prices of such components can change significantly
from time to time. The Company has in the past experienced, and may in the
future experience, increases in its unit component costs without being able to
increase the price of the related products, with the result that gross profit
margins and the Company's results of operations would be adversely affected. In
particular, occasional worldwide shortages of DRAM and other memory and
controller chips and international tariff disputes have in the past resulted in
substantial unit component cost increases that have materially adversely
affected the Company and its results of operations. In recent periods, a decline
in the price of memory chips, together with the Company's inventory management
practices and other factors, has contributed to improved gross profit margins.
Although it is not possible to accurately forecast the prices of memory chips or
other components, the
18
<PAGE>
Company believes that memory chip prices recently have stabilized and in certain
instances increased. See "Risk Factors--Dependence on Suppliers."
The Company's total gross profit margins and gross profits will likely
fluctuate from period to period as a result of the factors identified above,
among others. In particular, the Company's total gross profit margin and gross
profits will be substantially affected by the Company's product mix, sales
channel mix, component costs and competitive pricing pressures on the Company's
products. See "Risk Factors--Potential for Fluctuating Operating Results;
Seasonality."
STB 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. See Note 10 of Notes to October 31, 1995 Consolidated Financial
Statements.
All statements other than statements of historical fact contained in this
Prospectus, including statements in this "Management's Discussion and Analysis
of Financial Condition and Results of Operations" concerning the Company's
financial position and liquidity, results of operations, prospects for continued
growth, component and other costs, ability to maintain or improve unit volumes,
net sales or profit margins and other matters are forward-looking statements.
Although the Company believes that the expectations reflected in such forward-
looking statements are reasonable, no assurance can be given that such
expectations will prove correct. Factors that could cause the Company's results
to differ materially from the results discussed in or contemplated by such
forward-looking statements include the risks described under "Risk Factors,"
such as the risks associated with the potential for fluctuating operating
results, dependence on suppliers and the video graphics adapter market, rapid
technological change and short product life cycles, dependence on key customers
and the PC market, changes in product or sales channel mix, entry into new
product markets, price protection and stock rotation policies, intense
competition, dependence on key personnel, difficulties in managing growth,
reliance on a single manufacturing facility, international operations and
dependence on sales representatives and distributors. All forward-looking
statements in this Prospectus are expressly qualified in their entirety by the
cautionary statements in this paragraph, in "Risk Factors" and elsewhere in this
Prospectus.
19
<PAGE>
RESULTS OF OPERATIONS
The following discussion of the Company's results of operations for the
fiscal years ended October 31, 1993, 1994 and 1995 and for the nine-months ended
July 31, 1995 and 1996 is based upon data derived from the statements of
operations contained in the Company's selected consolidated financial statements
appearing elsewhere in the Prospectus. The following table sets forth this data
as a percentage of net sales.
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
----------------------------------------------------------
NINE MONTHS
FISCAL YEAR ENDED OCTOBER 31, ENDED JULY 31,
---------------------------------- ----------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net sales............................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales........................................... 78.3 81.5 85.0 85.1 81.6
---------- ---------- ---------- ---------- ----------
Gross profit............................................ 21.7 18.5 15.0 14.9 18.4
Operating expenses:
Research and development.............................. 2.7 2.0 2.1 2.3 2.3
Sales and marketing................................... 9.8 6.2 5.7 5.9 5.9
General and administrative............................ 7.2 5.8 4.8 5.0 5.0
---------- ---------- ---------- ---------- ----------
Total operating expenses.......................... 19.7 14.0 12.6 13.2 13.2
Income from operations.................................. 2.0 4.5 2.4 1.7 5.2
Interest expense........................................ 0.6 0.7 0.6 0.6 0.7
---------- ---------- ---------- ---------- ----------
Income before income taxes.............................. 1.4 3.8 1.8 1.1 4.5
Provision (benefit) for income taxes (1)................ 0.0 0.0 0.3 (0.1) 1.5
---------- ---------- ---------- ---------- ----------
Net income.............................................. 1.4% 3.8% 1.5% 1.2% 3.0%
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Pro forma adjustments (2)............................... (0.2)% (0.4)%
---------- ----------
Pro forma net income (3)................................ 1.3% 0.8%
---------- ----------
---------- ----------
</TABLE>
- ------------------------
(1) The Company 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.
(2) Reflects certain pro forma adjustments assuming (a) the Company's
profit-sharing allocation to employees had been reduced from 25% to 10% of
income before taxes (as calculated prior to profit sharing expenses),
effective November 1, 1994; (b) the portion of indebtedness evidenced by the
Founding Shareholder Notes issued to the Founding Shareholders relating to
approximately one-half of the Undistributed S Corporation Earnings, or $2.04
million, had been outstanding effective November 1, 1994 and bearing
interest at 9% per annum; and (c) the Company had been treated as a C
corporation rather than as an S corporation for federal and state income tax
purposes, effective November 1, 1994 (and assuming an effective tax rate of
approximately 33%). The adjustment in the Company's profit sharing
allocation to employees and the termination of the Company's S corporation
status occurred contemporaneously with the IPO in February 1995. See
"Management--Profit Sharing Plan," "Certain Transactions--S Corporation
Distribution" and Note 1 of Notes to October 31, 1995 Consolidated Financial
Statements.
(3) Pro forma net income per share is based on the Company's weighted average
number of shares outstanding, plus the common equivalent number of shares
that the Company would have had to issue to distribute to the Founding
Shareholders $2.04 million, which amount equals approximately one-half of
the Undistributed S Corporation Earnings at October 31, 1994. See "Certain
Transactions--S Corporation Distribution" and Note 1 of Notes to October 31,
1995 Consolidated Financial Statements.
20
<PAGE>
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%, to $132.0
million in the first nine months of fiscal 1996, as compared to the same period
in fiscal 1995. This increase resulted primarily from continuing growth in sales
of the Company's products to established OEM customers, as well as new OEM
customers. North American shipments to OEMs remained strong during the first
nine months of fiscal 1996, offsetting continued weak demand in Europe during
this period. The Company also experienced continued growth in the Company's
other sales channels. Net sales for the nine months ended July 31, 1995 were
negatively affected by the inability of one of the Company's suppliers to
deliver controller chips pursuant to confirmed purchase orders and the
subsequent receipt by STB of incompatible software drivers from the replacement
supplier.
GROSS PROFIT. Gross profit increased by $10.9 million, or 81.8%, to $24.3
million in the first nine months of fiscal 1996, as compared to the same period
in fiscal 1995. For the periods, gross profit margin increased from 14.9% to
18.4%. The increase in gross profit resulted primarily from significant
increases in sales volumes of the Company's products. The increase in gross
profit margin resulted primarily from the economies of scale resulting from
higher production volumes and lower memory chip prices.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased by $0.9 million, or 45.1%, to $3.0 million in the first nine months of
fiscal 1996, as compared to the same period in fiscal 1995. This increase
resulted from heightened staffing and equipment requirements associated with the
development of new products and the continuing enhancement and support of the
Company's products. For the periods, research and development expenses as a
percentage of net sales remained steady at 2.3%.
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased by
$2.5 million, or 48.1%, to $7.8 million in the first nine months of fiscal 1996,
as compared to the same period in fiscal 1995. This increase resulted primarily
from additions to the Company's sales staff, increased commissions paid as a
result of higher sales and increased advertising and trade show expenses. For
the periods, sales and marketing expenses as a percentage of net sales remained
steady at 5.9%.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by $2.1 million, or 45.7%, to $6.6 million in the first nine months of
fiscal 1996, as compared to the same period in fiscal 1995, due primarily to
expenses associated with the Company's growth, including increased personnel
expenses and other expenses, such as insurance premiums, legal expenses and
facilities costs. For the periods, general and administrative expenses as a
percentage of net sales remained steady at 5.0%.
NET INCOME. As a result of the foregoing factors, net income increased by
$2.9 million, or 273.4%, to $3.9 million in the first nine months of fiscal
1996, as compared to the same period in fiscal 1995.
FISCAL YEAR ENDED OCTOBER 31, 1995 COMPARED TO FISCAL YEAR ENDED OCTOBER 31,
1994
NET SALES. Net sales increased by $39.8 million, or 44.3%, to $129.6
million in fiscal 1995, as compared to fiscal 1994. This increase resulted
primarily from continued growth in sales of the Company's products to OEMs and
from growth in sales of the Company's products in the commercial channel. Net
sales for the second and third quarters of fiscal 1995 were negatively impacted
by the inability of one of the Company's suppliers to deliver controller chips
pursuant to confirmed purchase orders and the subsequent receipt by STB of
incompatible software drivers from the replacement supplier. In addition, sales
of the Company's specialized technology products during these quarters were
adversely affected by delays in the development by PC system and motherboard
suppliers of certain BIOS bridge support.
GROSS PROFIT. Gross profit increased by $2.9 million, or 17.2%, to $19.5
million in fiscal 1995, as compared to fiscal 1994. For the period, gross profit
margin declined from 18.5% to 15.0%. The decline in gross profit margin resulted
primarily from decreasing margins on sales of multimedia subsystem products to
OEMs due to higher memory and other chip prices, lower sales of higher margin
specialized technology products and pricing
21
<PAGE>
pressures from certain of the Company's competitors. The Company's gross profits
in fiscal 1995 were negatively impacted by the factors listed in the above
paragraph affecting net sales.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased by $0.9 million, or 51.5%, to $2.7 million in fiscal 1995, as compared
to fiscal 1994. This increase resulted from additional staffing and equipment
requirements associated with the development of new products and the continuing
enhancement and support of the Company's existing products. For the periods,
research and development expenses as a percentage of net sales increased from
2.0% to 2.1%.
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased by
$1.9 million, or 34.5%, to $7.4 million in fiscal 1995, as compared to fiscal
1994. The increase resulted from additions to the Company's sales staff,
increased advertising expenses and higher trade show and travel expenses. For
the periods, sales and marketing expenses as a percentage of net sales decreased
from 6.2% to 5.7%.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by $1.0 million, or 18.9%, to $6.2 million in fiscal 1995, as compared
to fiscal 1994. For the periods, general and administrative expenses as a
percentage of net sales declined from 5.8% to 4.8%. General and administrative
expenses, excluding profit sharing expenses, increased by $1.7 million, or
41.8%, to $5.7 million in fiscal 1995, as compared to fiscal 1994 due primarily
to expenses associated with the Company's growth, including increased personnel
expenses and increased facility, equipment and insurance expenses. The Company's
profit sharing allocation to employees, which amounted to 25% of income before
taxes (as calculated prior to profit sharing expenses) in fiscal 1994, was
reduced to 10% of income before taxes following the first quarter of fiscal 1995
in connection with the completion of the IPO.
NET INCOME. As a result primarily of the factors discussed in the
paragraphs above that address net sales and gross profit, net income decreased
by $1.5 million, or 43.3%, to $2.0 million in fiscal 1995 as compared to fiscal
1994.
FISCAL YEAR ENDED OCTOBER 31, 1994 COMPARED TO FISCAL YEAR ENDED OCTOBER 31,
1993
NET SALES. Net sales increased by $50.6 million, or 129.1%, to $89.8
million in fiscal 1994, as compared to fiscal 1993. This increase was the result
of higher shipment volumes of the Company's products in all sales channels,
particularly to OEMs.
GROSS PROFIT. Gross profit increased by $8.1 million, or 95.3%, to $16.6
million in fiscal 1994, as compared to fiscal 1993. For the periods, gross
profit margin declined from 21.7% to 18.5%. The increase in gross profit
resulted from significant increases in sales volume in all three of the
Company's sales channels. The decrease in gross profit margin resulted from a
proportionately greater increase in sales of the Company's multimedia subsystem
products to OEMs at lower margins, as well as from general pricing pressures
resulting from increased competition in the PC industry.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased by $0.7 million, or 66.4%, to $1.8 million in fiscal 1994, as compared
to fiscal 1993. This increase resulted from added staffing and equipment
requirements associated with the continued enhancement and support of the
Company's existing products and the development of new products. Although
research and development expenses increased significantly, these expenses as a
percentage of net sales declined from 2.7% to 2.0%.
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased by
$1.7 million, or 44.2%, to $5.5 million in fiscal 1994, as compared to fiscal
1993. The increase in sales and marketing expenses resulted from heightened
promotional efforts aimed at supporting the continued growth in the Company's
higher margin multimedia subsystem products sold through the commercial channel
and specialized technology products, additions to the Company's sales staff and
increased commission payments due to higher sales levels. Marketing expenses
incurred in connection with sales to OEMs tend to be relatively constant due to
the limited number of OEMs in the market and the Company's reliance upon
developing direct relationships with OEM contacts. For
22
<PAGE>
the periods, marketing expenses as a percentage of net sales declined from 9.8%
in fiscal 1993 to 6.2% in fiscal 1994 as a result of the substantial increase in
sales volume during fiscal 1994.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by $2.4 million, or 84.7%, to $5.2 million in fiscal 1994, as compared
to fiscal 1993 due primarily to expenses associated with the Company's growth,
including increased personnel expenses, increased profit sharing expenses and
increased facility and equipment expenses. General and administrative expenses,
excluding profit sharing expenses, increased by $1.4 million, or 53.8%, to $4.0
million in fiscal 1994, as compared to fiscal 1993. For the periods, general and
administrative expenses as a percentage of net sales declined from 7.2% in
fiscal 1993 to 5.8% in fiscal 1994.
NET INCOME. As a result of the foregoing factors, net income increased by
$3.0 million, or 528.8%, to $3.5 million in fiscal 1994 as compared to fiscal
1993.
SELECTED QUARTERLY OPERATING RESULTS AND SEASONALITY
The Company's quarterly operating results vary significantly depending on
factors such as the timing of large customer orders, timing of new product
introductions, adequacy of component supply, changes in component costs,
variations in the Company's product or sales channel 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. See "Risk Factors--Potential for Fluctuating Operating Results;
Seasonality."
23
<PAGE>
The following table sets forth certain unaudited quarterly financial
information for the periods indicated, which in the opinion of management
includes all adjustments (consisting of only normal recurring adjustments)
necessary for a fair presentation of the information set forth therein:
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------------------------
FISCAL
1994 FISCAL 1995 FISCAL 1996
----------- ------------------------------------------------ -----------
OCT. 31, JAN. 31, APR. 30, JUL. 31, OCT. 31, JAN. 31,
1994 1995 1995 1995 1995 1996
----------- ----------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales........................................ $ 24,523 $ 30,738 $ 33,370 $ 25,663 $ 39,832 $ 44,905
Cost of sales.................................... 20,416 25,643 28,658 22,114 33,715 37,643
----------- ----------- ----------- --------- ----------- -----------
Gross profit..................................... 4,107 5,095 4,712 3,549 6,117 7,262
Operating expenses............................... 3,245 3,796 3,945 4,134 4,454 5,083
----------- ----------- ----------- --------- ----------- -----------
Income (loss) from operations.................... 862 1,299 767 (585) 1,663 2,179
Interest expense................................. 181 242 144 170 261 333
Provision (benefit) for certain income taxes
(1)............................................. 3 -- 127 (258) 461 632
----------- ----------- ----------- --------- ----------- -----------
Net income (loss)................................ $ 678 $ 1,057 $ 496 $ (497) $ 941 $ 1,214
----------- ----------- ----------- --------- ----------- -----------
----------- ----------- ----------- --------- ----------- -----------
PRO FORMA DATA...................................
Pro forma adjustments (2)........................ (229) (86) -- -- --
Pro forma net income (loss) (July 31, 1995
through July 31, 1996 reflects actual).......... $ 828 $ 410 $ (497) $ 941 $ 1,214
----------- ----------- --------- ----------- -----------
----------- ----------- --------- ----------- -----------
Pro forma net income (loss)(July 31, 1995 through
July 31, 1996 reflects actual) per share (3).... $ 0.31 $ 0.10 $ (0.11) $ 0.21 $ 0.27
----------- ----------- --------- ----------- -----------
----------- ----------- --------- ----------- -----------
<CAPTION>
APR. 30, JUL. 31,
1996 1996
----------- ---------
<S> <C> <C>
Net sales........................................ $ 44,592 $ 42,537
Cost of sales.................................... 36,189 33,921
----------- ---------
Gross profit..................................... 8,403 8,616
Operating expenses............................... 6,075 6,243
----------- ---------
Income (loss) from operations.................... 2,328 2,373
Interest expense................................. 278 271
Provision (benefit) for certain income taxes
(1)............................................. 699 722
----------- ---------
Net income (loss)................................ $ 1,351 $ 1,380
----------- ---------
----------- ---------
PRO FORMA DATA...................................
Pro forma adjustments (2)........................ -- --
Pro forma net income (loss) (July 31, 1995
through July 31, 1996 reflects actual).......... $ 1,351 $ 1,380
----------- ---------
----------- ---------
Pro forma net income (loss)(July 31, 1995 through
July 31, 1996 reflects actual) per share (3).... $ 0.30 $ 0.30
----------- ---------
----------- ---------
</TABLE>
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL NET SALES
QUARTER ENDED
----------------------------------------------------------------------------
OCT. 31, JAN. 31, APR. 30, JUL. 31, OCT. 31, JAN. 31,
1994 1995 1995 1995 1995 1996
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net sales......................................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales..................................... 83.3 83.4 85.9 86.2 84.6 83.8
----- ----------- ----------- ----------- ----- -----
Gross profit...................................... 16.7 16.6 14.1 13.8 15.4 16.2
Operating expenses................................ 13.2 12.4 11.8 16.1 11.2 11.3
----- ----------- ----------- ----------- ----- -----
Income from operations............................ 3.5 4.2 2.3 (2.3) 4.2 4.9
Interest expense.................................. 0.7 0.8 0.4 0.6 0.7 0.7
Provision (benefit) for certain income taxes
(1).............................................. -- -- 0.6 (1.0) 1.1 1.4
Net income........................................ 2.8% 3.4% 1.3% (1.9)% 2.4% 2.8%
----- ----------- ----------- ----------- ----- -----
----- ----------- ----------- ----------- ----- -----
Pro forma adjustments (2)......................... (0.7)% (0.2)%
Pro forma net income (loss)....................... 2.7% 1.1%
----------- -----------
----------- -----------
<CAPTION>
APR. 30, JUL. 31,
1996 1996
----------- -----------
<S> <C> <C>
Net sales......................................... 100.0% 100.0%
Cost of sales..................................... 81.2 79.7
----- -----
Gross profit...................................... 18.8 20.3
Operating expenses................................ 13.6 14.7
----- -----
Income from operations............................ 5.2 5.6
Interest expense.................................. 0.6 0.6
Provision (benefit) for certain income taxes
(1).............................................. 1.6 1.7
Net income........................................ 3.0% 3.3%
----- -----
----- -----
Pro forma adjustments (2).........................
Pro forma net income (loss).......................
</TABLE>
- ------------------------------
(1) The Company 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. See Note 2 of Notes to October 31, 1995 Consolidated
Financial Statements.
(2) Reflects certain pro forma adjustments assuming (a) the Company's
profit-sharing allocation to employees had been reduced from 25% to 10% of
income before taxes (as calculated prior to profit sharing expenses),
effective November 1, 1994; (b) the portion of indebtedness evidenced by the
Founding Shareholder Notes issued to the Founding Shareholders relating to
approximately one-half of the Undistributed S Corporation Earnings, or $2.04
million, had been outstanding effective November 1, 1994, and bearing
interest at 9% per annum; and (c) the Company had been treated as a C
corporation rather than as an S corporation for federal and state income tax
purposes, effective November 1, 1994 (and assuming an effective tax rate of
approximately 33%). The adjustment in the Company's profit sharing
allocation to employees and the termination of the Company's S corporation
status occurred contemporaneously with the IPO in February 1995. See
"Management--Profit Sharing Plan," "Certain Transactions--S Corporation
Distribution" and Note 1 of Notes to October 31, 1995 Consolidated Financial
Statements.
(3) Pro forma net income per share is based on the Company's weighted average
number of shares outstanding, plus the common equivalent number of shares
that the Company would have had to issue to distribute to the Founding
Shareholders $2.04 million, which amount equals approximately one-half of
the Undistributed S Corporation Earnings at October 31, 1994. See "Certain
Transactions--S Corporation Distribution" and Note 1 of Notes to October 31,
1995 Consolidated Financial Statements.
24
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital and liquidity needs are for financing
inventory and accounts receivable and, to a lesser degree, purchasing
manufacturing and other equipment. The Company has financed these requirements,
and its operations generally, through a combination of cash generated from
operations, bank borrowings and proceeds from the IPO. As a result of the
Company's rapid growth in recent years, its capital requirements have increased
substantially. The Company anticipates that future growth will require
additional capital, particularly to support increased working capital needs,
engineering and other staffing expenses, promotional expenses, manufacturing
facilities and equipment requirements, and possibly for the purchase of land for
corporate facilities. The Company believes that its various sources of available
financing will be adequate to meet its capital requirements through fiscal 1997.
The Company generated cash from operations of $9.7 million in the nine-month
period ended July 31, 1996, compared with $7.8 million in the comparable period
of fiscal 1995. This increase resulted primarily from increased net income and a
reduction in inventory costs, offset by increased accounts receivable and a
reduction in accounts payable. The Company's 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.
The Company's expenditures for equipment totalled $1.9 million during the
nine-month period ended July 31, 1996, compared with net purchases of equipment
of $2.0 million during the comparable period in fiscal 1995. The Company's
investment in equipment is primarily attributable to manufacturing equipment
additions and upgrades of existing equipment to support the increased demand for
the Company's products. In addition, subsequent to the end of its fiscal 1996
third quarter, the Company installed four new surface-mount technology assembly
lines at its manufacturing facility in Juarez, Mexico, at an approximate cost of
$4.2 million. The Company financed this equipment purchase through traditional
equipment lease financing arrangements. The Company expects that additional
capital expenditures for similar types of equipment may be necessary to support
the Company's future production requirements.
The Company currently has a line of credit of up to $25.0 million under the
Revolving Credit Facility, which includes a $2.0 million term loan (the
"Mezzanine Facility" and, together with the Revolving Credit Facility, the
"Facilities"). During fiscal 1996, the Company increased the size of its
Revolving Credit Facility by $10.0 million to its current level. As of July 31,
1996, the Company had outstanding $4.8 million and $1.6 million under the
Revolving Credit Facility and the Mezzanine Facility, respectively. Principal
amounts outstanding under the Revolving Credit Facility bear interest at the
rate of prime plus 0.75%, and the interest rate applicable to principal amounts
outstanding under the Mezzanine Facility was reduced during the first quarter of
fiscal 1996 from prime plus 3.0% to prime plus 0.75%. The Revolving Credit
Facility agreement provides for a minimum monthly interest charge of $25,000,
which can be satisfied through the accrual of interest under both the Revolving
Credit Facility and the Mezzanine Facility. Availability under the Revolving
Credit Facility is based on formulas derived from accounts receivable and
inventory. All indebtedness under the Facilities matures on November 1, 1999.
Commencing December 1, 1995, the Company was required to make the first of 48
successive monthly installments of principal in the amount of $41,667 each,
together with accrued interest.
In accordance with the provisions of a contingent payment agreement executed
in connection with the Facilities, the Company was obligated to pay the lender a
one-time fee equal to one percent (1.0%) of the product of six times the
Company's earnings before income taxes, interest, depreciation and amortization
for the fiscal year preceding the fiscal year in which the payment is made. The
Company paid this fee, in the amount of $250,234, in September 1996.
25
<PAGE>
BUSINESS
INTRODUCTION
STB designs, manufactures and sells graphics adapters and other multimedia
subsystem products for use primarily in desktop PCs. The Company's graphics
adapters, almost all of which are video graphics adapters that display
full-motion video images on a monitor, enable users to take advantage of
true-color graphics, 3D and video features found in the latest PC operating
systems, such as Microsoft Windows 95 and Windows NT, and in multimedia
applications. The Company's multimedia subsystem product line includes a wide
selection of video graphics adapters designed for use primarily in mid-range to
high-end PCs and also features several complementary products, including digital
video products and sound cards. The Company's multimedia subsystem products are
sold to OEMs and, to a lesser extent, through the commercial sales channel to
retailers, distributors and direct-mail companies. The Company's OEM and
commercial customers include Gateway 2000, Dell Computer, Compaq Computer,
CompUSA, Best Buy, Tech Data and Ingram Micro.
STB also sells specialized technology products that incorporate graphics
technologies and are usually designed to enable one computer to simultaneously
control the display of multiple monitors. These products are sold to customers
for specialized applications in a number of industries, including the financial
services, hospitality, factory automation, transportation and emergency response
industries. The Company's customers for specialized technology products include
Reuters and Lodgenet.
STB has demonstrated outstanding growth, with revenues increasing from $23.8
million in fiscal 1991 to $129.6 million in fiscal 1995, a compound annual
growth rate of 52.8%. According to IDC, STB has increased its market share to
become the second largest independent supplier of graphics adapters (based on
units shipped), with an estimated 16.7% worldwide market share in 1995.
INDUSTRY
According to Dataquest, an estimated 71.7 million PCs are expected to be
shipped worldwide in 1996, compared to 60.2 million units in 1995 and 47.9
million units in 1994. A substantial portion of the PCs shipped in recent
periods incorporate high performance Intel Pentium and Pentium Pro processors
and support multimedia functionality, including CD-ROM storage,
higher-resolution graphics, digital video and audio and, in some systems,
hardware 3D and telecommunications. The evolution of these multimedia-enabled
PCs has been driven by the proliferation of higher performance hardware,
operating systems like Microsoft Windows 95 and Windows NT, the popularity of
the Internet and the growth in the number of consumer and business applications
featuring greater use of 3D graphics, video and sound.
Multimedia applications typically place significantly higher processing
demands on a PC's CPU, which can substantially degrade system performance. The
processing burden on the CPU can be reduced by off-loading the
multimedia-intensive processing functions to specialized video graphics and
other multimedia subsystems. This allows for significant improvements in a PC's
performance and can be achieved either through the placement of subsystems on
the motherboard or the use of add-in subsystems. Motherboard implementations
typically cost less but generally provide lower levels of functionality and
performance. While add-in subsystems cost slightly more, they generally can
support higher levels of functionality and provide a higher degree of
flexibility in PC configuration, which allow PC manufacturers to more rapidly
integrate new technologies into their product lines and to meet a range of price
and performance requirements.
The market continually demands more sophisticated multimedia products as new
technologies evolve and enter the mainstream. Intel's incorporation of the MMX
extended instruction set in its microprocessors, as well as efforts to develop
specifications for an accelerated graphics port ("AGP"), demonstrate the demand
for higher CPU functionality and better integration between the CPU and the PC
graphics subsystem. The incorporation of these architectural enhancements, in
addition to evolving standards such as MPEG-2 decompression, Dolby Digital audio
and DVD storage, are laying the foundation for using the PC as an enabling
platform for digital television, video teleconferencing and other emerging
multimedia capabilities.
26
<PAGE>
The accelerating pace of technological advancement in the PC industry has
made it increasingly difficult for OEMs to devote the resources necessary for
the timely internal development of multimedia subsystems incorporating the
latest innovations. Furthermore, many OEMs are seeking to expand their product
lines in response to consumer demand for a broader range of price and
performance options. As a result, the Company believes OEMs increasingly are
choosing to outsource many of their component and subsystem needs to specialized
subsystem vendors with focused development efforts.
STRATEGY
The Company's goal is to become the leading supplier of video graphics
adapters and certain other multimedia subsystems for PCs. The Company's focus on
the design, manufacture and sale of video graphics adapters has earned it a
reputation for providing advanced graphics display solutions. With its size and
reputation, the Company has built relationships with chip suppliers that allow
it to obtain advance information about new developments in video controller chip
technology. Additionally, close relationships with many of its OEM customers
better enable the Company to determine what future performance features are most
desired. The Company believes that the strength of these relationships also
places it in a strong position to be the provider of choice to OEMs for a number
of other multimedia subsystem products. STB believes that it is positioned to
compete effectively by using its knowledge of technological advances and
customer desires, together with its own value-added development of software
drivers and utilities, to provide high-quality video graphics adapters and other
multimedia subsystems to the PC marketplace on a timely, cost-effective basis.
The major elements of the Company's strategic plan are as follows:
FOCUS ON GRAPHICS ADAPTER MARKET AND EMERGING MULTIMEDIA SUBSYSTEM
OPPORTUNITIES. The Company intends to continue focusing its efforts on the
graphics adapter market, where it has consistently demonstrated an ability to
introduce innovative graphics adapters designed to satisfy rapidly evolving and
increasingly demanding performance standards. Furthermore, the Company believes
that it can leverage its strong OEM relationships and technological and
manufacturing expertise to be the provider of choice to OEMs for other
multimedia subsystem products.
CONTINUED FOCUS ON OEM SALES CHANNEL. The Company has continued to focus on
the OEM sales channel, as evidenced by a significant increase in sales within
this channel during the first nine months of fiscal 1996 and the fact that
approximately 81% of the Company's revenues during such period were derived from
sales to OEMs. The expansion of the Company's business with several established
OEM customers, such as Gateway 2000, as well as the recent addition of several
new OEM customers, including Dell Computer, Compaq Computer and IBM, demonstrate
the success of the Company's commitment to meeting the needs of OEMs.
Historically, the Company provided OEMs with mid-range video graphics adapters.
The Company recently has commenced delivery of high-end video graphics adapters
and other multimedia subsystem products in an effort to expand its product
offerings to the OEM market.
CONTROL OF MANUFACTURING. The Company believes that it is the only major
independent supplier of video graphics adapters that manufactures its own
products rather than outsourcing its manufacturing operations. The Company
believes that having its own manufacturing facility in Juarez, Mexico enables it
to maintain lower manufacturing costs, meet expedited customer delivery
schedules, quickly adjust to changes in product orders, achieve shorter
production cycles and accommodate modified or unusual design specifications,
while at the same time ensuring product quality and reliability.
CONTROLLER CHIP INDEPENDENCE. Unlike some of its competitors, the Company
designs its products after evaluating controller chips produced by a number of
leading suppliers. The selection of a controller chip is based on competitive
factors including cost, performance, compatibility and reliability of supply.
The Company believes that purchasing rather than internally developing
controller chips allows it to consistently develop products incorporating the
latest technological advances. Moreover, the Company is able to leverage the
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substantial expenditures made by developers of controller chips, achieve
component flexibility and decrease the time and expense required to develop new
products. See "Risk Factors--Dependence on Suppliers."
MINIMIZE DESIGN-TO-MARKET CYCLES. By capitalizing on the foregoing elements
of its strategy, STB is able to design, manufacture, test and ship new products
in relatively short amounts of time, which is particularly important for
obtaining, maintaining and strengthening relationships with its OEM customers,
who also must operate under short design-to-market cycles.
SELECTIVELY PURSUE OTHER SALES CHANNELS. In addition to focusing on the OEM
sales channel, the Company intends to continue its efforts to further penetrate
the commercial market. The Company believes that the high quality, low cost
standards that it must meet for its OEM customers better position it to provide
competitive products in the commercial market. The Company believes that
increasing awareness of the STB brand, created in part by its penetration in the
OEM sales channel, has strengthened its position in the commercial market. This
strength is demonstrated by the Company's substantial increase in commercial
channel sales during the first nine months of fiscal 1996 and by the addition of
significant retailers such as Best Buy to its customer base. The Company also
seeks to take advantage of its expertise gained in developing multimedia
subsystem products to develop its specialized technology products. The Company
believes it is one of the largest suppliers of specialized technology products
in the world and intends to continue marketing these products to current
customers, as well as to new customers in the same and other targeted
industries.
BRING NEW TECHNOLOGIES TO THE MARKETPLACE. The Company's experienced
software and hardware engineers provide STB with industry-leading expertise. The
Company intends to continue applying this expertise to respond quickly to
customer requirements, anticipate trends and advances in its industry and expand
its product line to take advantage of new technology applications. In
particular, the Company believes that its video graphics expertise places it in
a strong position to develop competitive products employing the most advanced
digital video and audio technologies, including TV tuner cards, DVS products and
DVD adapters.
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PRODUCTS
The Company divides its products into two categories: multimedia subsystem
products and specialized technology products. From its entry-level to its most
sophisticated products, the Company offers customers products that enhance the
video and audio capabilities for an increasingly broad range of PC
configurations and applications.
MULTIMEDIA SUBSYSTEM PRODUCTS
The Company's multimedia subsystem products include a full range of video
graphics adapters at various price points, as well as other multimedia subsystem
products. The Company's current major products include the following:
<TABLE>
<CAPTION>
PRODUCT NAME DESCRIPTION STATUS
<S> <C> <C>
- --------------------------------------------------------------------------------------------
VIDEO GRAPHICS ADAPTERS
Powergraph64 Video Entry-level 2D video graphics adapter using Mature
either 1MB or 2MB of EDO DRAM
Powergraph 3D Consumer 3D video graphics adapter using 2MB of Shipping
EDO DRAM
Lightspeed 128 High performance 2D video graphics adapter using Shipping
either 2MB or 2.25MB of MDRAM (Multi-bank DRAM)
Velocity 3D Workstation 3D graphics adapter using 4MB of EDO Newly Introduced
VRAM, upgradable to 8MB using 4MB of EDO DRAM
- -------------------------------------------------------------------------------------------
OTHER MULTIMEDIA SUBSYSTEM PRODUCTS
Soundrage 32 Plug and play wavetable sound card with 32 voice Shipping
synthesis
Soundrage 32 3D Soundrage 32 with special audio effects, such as Shipping
3D sound
TV Tuner Card TV tuner product allowing TV playback, video Newly Introduced
capture, video conferencing and Intercast
support on the multimedia PC system
DVS MPEG-2 video/audio decoder for displaying Newly Introduced
compressed television programming from
satellite or cable signal
DVD Adapter MPEG-2 video and Dolby Digital audio decoder for Under
playback of DVD format multimedia applications Development
Video Enhanced video graphics adapter with camera Under
Teleconferencing interface, compression/decompression capability Development
and user interface software
</TABLE>
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The Company anticipates that its multimedia subsystem product line will
continue to evolve based upon its assessment of strategic multimedia
opportunities and the continuing demand for new generations of video and audio
solutions from OEMs and end-users. The Company's multimedia subsystem products
tend to have relatively short life cycles, reflecting the dynamic nature of
technological development within the PC industry. OEMs introduce new system
configurations as often as twice a year, and the Company must introduce its new
products to comply with OEMs' schedules. The life cycle for a video graphics
adapter typically is 6 to 9 months (plus a few additional months of sales of
certain of such products in the commercial market).
VIDEO GRAPHICS ADAPTERS. Almost all of the Company's graphics adapters are
video graphics adapters that display full-motion video images on a monitor. A
video graphics adapter consists of a printed circuit board configured with a
video controller chip, memory chips and software drivers and utilities. The
Company believes that optimal graphics enhancement and video display require
custom software and hardware design that maximize the performance and features
of a PC system. The Company distinguishes its products from those of its
competitors through its innovative proprietary software drivers and utilities
and through the hardware design of its video graphics adapters. The Company
incorporates its proprietary STB Vision software on all of its video graphics
adapter products. STB Vision software supports various chip sets, with a
consistent interface that supports multiple languages, including German,
English, French, Dutch, Polish, Japanese, Italian and Spanish, and enhances the
performance of a video graphics adapter.
The Company's video graphics adapter product line is comprised of products
with varying degrees of performance based on display speed, resolution, color
depth and 2D/3D capability. The display speed of a video graphics adapter is
determined primarily by the controller chip and software drivers, while display
resolution and color depth are determined primarily by the amount of display
memory. The Company offers a large family of video graphics adapters that are
compatible with the bus architectures prevalent in today's market.
By offering a complete line of video graphics adapters, the Company can
better establish and build relationships with OEMs. The Company currently offers
a high-end video graphics adapter that has 3D capability and 4 megabytes of EDO
(extended data out) VRAM (video random access memory) and 4 megabytes of EDO
DRAM. The Company offers a number of mid-range products, including products with
2D and 3D capability, which generally contain from 1 to 2 megabytes of EDO DRAM
memory or 2 to 2.5 megabytes of MDRAM memory. The Company's entry-level video
graphics adapters generally perform at slower speeds but produce industry
standard display resolution and color depth. Although entry-level products
generate only a small portion of the Company's overall revenue and profit, they
allow the Company to offer a complete line of video graphics adapters.
OTHER MULTIMEDIA SUBSYSTEM PRODUCTS. In addition to video graphics
adapters, the Company also offers complementary multimedia subsystem products
that incorporate emerging technologies.
- SOUND CARDS. A sound card, or "audio adapter," converts digital audio
information into high-fidelity, stereo-quality sound. A sound card
incorporates an audio controller chip, memory chips and software drivers
and utilities in configurations designed to produce high quality sound.
The Company began shipping sound card products in July 1996 in response to
OEM customer demand for this additional product offering. The Company
believes that its sound cards are an important complement to its video
display products. The sale of sound cards accounted for 6.1% of net sales
in the three-month period ended July 31, 1996.
- TV TUNER CARDS. The Company's TV tuner cards are capable of receiving
analog television broadcasts or cable transmissions and producing a
full-motion television display on a PC monitor. One important feature of
these products is their ability to take advantage of Intel Intercast,
which broadcasts information similar to a web page within an analog
transmission signal. These products are sold through the OEM channel, and
are available through retailers such as CompUSA and Best Buy. The
Company's Video Rage TV tuner/video graphics subsystem is used in Gateway
2000's Destination PC/TV product line.
- DVS PRODUCTS. The Company's DVS products are capable of receiving MPEG-2
encoded data from a satellite source or other medium and displaying the
data on a PC or TV monitor to produce full-screen,
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<PAGE>
full-motion video images. The Company's DVS products are intended to be
used in conjunction with products of satellite entertainment providers,
such as Direct TV and Echostar. The Company began limited production of
DVS products in the fourth quarter of fiscal 1996.
In addition to the multimedia subsystem products that the Company currently
offers, it is currently developing the following products:
- DVD ADAPTERS. DVD adapters are capable of producing broadcast quality
video and audio playback of the digital information stored on DVD disks.
DVD disks are capable of storing seven or more times more data than a
CD-ROM disk of the same physical size. It is therefore anticipated that
DVD will become the medium of choice for various entertainment and
multimedia products that require increasing amounts of data storage
capacity. The Company believes that its knowledge of MPEG-2 video and
Dolby Digital audio standards gained in developing its DVS products
provides it with much of the expertise needed to produce DVD adapters. The
Company has not received any orders for these products to date.
- VIDEO TELECONFERENCING PRODUCTS. The Company is developing products that
are capable of capturing, compressing and transmitting full-motion video
images, while simultaneously receiving, decompressing and displaying
full-motion video images. These products are intended for the consumer and
corporate markets and will provide fully synchronized video and audio
teleconferencing capabilities for PC systems. The Company has not received
any orders for these products to date.
The Company's multimedia subsystem products (other than graphics adapters
and sound cards) are still in the early, limited production stage or are in
development. There can be no assurance that such products can be produced in
profitable quantities, if at all. The Company anticipates that it will continue
to expend efforts to develop these and other potential products. See "Risk
Factors--Entry Into New Product Markets."
SPECIALIZED TECHNOLOGY PRODUCTS
The Company's specialized technology products are characterized by their
incorporation of complex technologies, relatively low unit sales volumes and
relatively high unit prices and gross profit margins. The Company's specialized
technology products are sold primarily to resellers and corporate customers for
specialized applications in a number of industries, including the financial
services, hospitality, factory automation, transportation and emergency response
industries. Most specialized technology products are designed to enable a single
computer to control the display of more than one monitor. The use of the
Company's multi-monitor products in certain configurations can allow one
computer to control up to 32 monitors. The Company believes it is one of the
largest suppliers of multi-monitor products in the world.
The Company offers two families of multi-monitor video graphics adapter
products distinguished by the resolution of the monitors with which they are
designed to be used. The MVP family of products is used with high-resolution
monitors, and the Channel family is used with low-resolution, television-type
monitors. An important component that the Company incorporates into the MVP is
its "virtual screen" software driver and Mediator utility. This software driver
allows multiple monitors to act as a single screen, displaying numerous
"windows" of information through only one computer. The Mediator utility allows
the user to control the placement of applications on the available displays.
Many financial institutions employ this capability in their trading rooms, where
large amounts of information must be continuously available to traders. The
Company has made technological advances to its existing MVP product line,
including the introduction of new products, such as full motion digital video
scalers and live video/TV tuner input ports, which are based on the PCI bus
standard and new video graphics drivers and utilities. Channel products are used
in applications, such as airport arrival and departure displays, where lower
cost and larger display size are more important than clarity of display. Channel
products are also used to facilitate the selection of on-demand programming for
hotel room televisions.
The Company also is developing several specialized technology products that
incorporate digital video features that meet the MPEG-2 decompression standard
and may or may not incorporate a video graphics adapter. These products, some of
which have multi-monitor control capability, may be used for applications such
as video-on-demand, storing video data for viewing at a later time and receiving
MPEG-2 encoded material over
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<PAGE>
direct broadcast satellite or advanced technology cable. There can be no
assurance that such products can be produced in profitable quantities, if at
all. See "Risk Factors--Entry Into New Product Markets."
Listed below are the principal industries and applications for the Company's
specialized technology products:
<TABLE>
<CAPTION>
INDUSTRY APPLICATION
- ------------------- ---------------------------------------------------------------
<S> <C>
Financial services Support of simultaneous display of multiple data sources on
multiple monitors from a single PC for use by financial
traders
Hospitality Control of display on hotel room televisions to allow guests to
view movie choices, review bill prior to checking out and
obtain other information
Factory automation Dual-monitor graphical man-machine interface for factory
machinery
Transportation Flight arrival and departure information
Emergency response 911 emergency call center displays to allow the operator to
follow multiple calls simultaneously, plus view a map of the
emergency location on a separate monitor
</TABLE>
DESIGN AND DEVELOPMENT
The timely development and introduction of new products is essential to
meeting the performance requirements of OEM customers as well as reinforcing the
Company's competitive position in STB's other sales channels. The Company works
closely with its OEM customers and suppliers to develop new products that
satisfy specific OEM product requirements, such as performance and display
features. The Company's software and hardware engineers design, develop and test
the new product prototype, selecting the most appropriate controller chip,
memory chips and other components for the product.
Operating compatibility of the Company's products is critical for customer
acceptance. STB's compatibility lab personnel ensure that the new product can
function properly in a variety of PC system configurations and with most popular
commercial application software and operating systems. The compatibility lab
also compares the test performance of the Company's products against that of
competitors' products. In addition, STB sends product prototypes to OEM
customers for performance and compatibility testing and to the Federal
Communications Commission (the "FCC") and to the Cenelec branch of the European
Economic Community ("EEC") for "CE Certification." See "--Government
Regulations." After any necessary modifications are made to a product, it is
released for production.
The Company's design and development personnel have enabled STB to
repeatedly deliver the latest technologies to the OEM market. The Company also
has won numerous top awards from recognized industry magazines, including PC
Magazine, PC World, Windows Magazine, PC Professional, Multimedia World,
InfoWorld and New Media Magazine.
The Company believes that the strength of its engineering resources is
critical to its competitiveness. The Company has substantially increased its
engineering and technical resources, so that as of July 31, 1996 it had a total
engineering staff of 64, including 31 engineers. In particular, the Company
added 10 software engineers during the twelve months ended July 31, 1996,
bringing the total number of software engineers to 22 as of July 31, 1996. The
Company has also established software engineering centers in Houston, Texas and
Eugene, Oregon. The Company's engineering resources are critical to its strength
in responding quickly to customer requirements, anticipating trends and advances
in its industry and expanding its product line to take advantage of new
technology applications. See "--Products." The Company anticipates that it will
continue to increase its engineering resources in the future.
SUPPLIERS
The Company believes that its close relationships with its component
suppliers are essential to producing low-cost, innovative products and
maintaining short design-to-market cycles. The Company's primary products,
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<PAGE>
video graphics adapters, are printed circuit boards that contain a number of
components, including a video controller chip, memory chips, logic chips,
capacitors and resistors. The video controller chip, which regulates the
information that is displayed on the PC monitor, and the memory chip, which
stores graphics information for display, are the most important components in
determining the functions and manufacturing cost of a video graphics adapter.
The Company's other multimedia subsystem products generally contain components
similar to those found on an STB video graphics adapter but with different types
of controller chips.
The Company purchases memory chips from a number of manufacturers, including
Hyundai, Mosel/ Vitelic, NEC, Toshiba, Siemens, Samsung, IBM and Mitsubishi.
Memory chips generally are less expensive if purchased directly from the
manufacturer, but manufacturers sometimes do not produce sufficient quantities
of memory chips to satisfy market demand. In times of restricted supply of
memory chips, manufacturers may allocate the sale of their memory chips to
customers based, among other factors, upon purchase volumes and the customer's
creditworthiness. The Company's ability to purchase from distributors, and
possibly on the spot market, provides an alternative, but more costly, source of
supply if the Company cannot obtain necessary supplies from memory chip
manufacturers. See "Risk Factors--Dependence on Suppliers."
The Company purchases controller chips directly from a number of suppliers,
including S3, Cirrus Logic, Tseng Labs, Brooktree, SGS Thompson, Advanced Micro
Devices and Zoran. These controller chips typically include related software
drivers, which the Company's software engineers often enhance for use in STB
products. In addition to controller chips and the related software drivers,
several other components that are used in the Company's products are 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 and limited 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 or delay its production of the related products. As a result
of delays in the delivery of components, lack of available components or the
lack of compatible software drivers from component vendors, the Company has in
the past experienced difficulty in meeting its own scheduled shipment dates to
customers, and such difficulties could recur. See "Risk Factors-- Dependence on
Suppliers."
The Company's unit component costs tend to be volatile, and a significant
increase or decrease in unit component costs may have a significant effect on
the Company's results of operations. The Company may experience component cost
increases in the future, which could have a negative effect upon gross profit
margins and gross profits. See "Risk Factors--Dependence on Suppliers" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations."
MANUFACTURING
STB considers its ability to manufacture high quality products at a low cost
to be critical to its competitiveness. STB began manufacturing at its facility
in Juarez, Mexico in 1988 and presently conducts substantially all of its
manufacturing operations at this ISO 9002 certified facility. STB believes that
by operating its own manufacturing facility the Company has a competitive
advantage in terms of its ability to respond quickly to changing customer needs
and to control product quality. The Company's manufacturing facility is located
in Juarez, Mexico to benefit from low labor and shipping costs, as well as
proximity to the Company's headquarters in Richardson, Texas. The Company has
increased its monthly manufacturing capacity in Mexico from approximately
120,000 boards at the beginning of fiscal 1995 to approximately 400,000 boards
by the end of fiscal 1996, depending on product mix. This increase in
manufacturing capacity has been achieved primarily through the addition of new
high-volume surface-mount technology ("SMT") equipment, as well as through
upgrading existing equipment. The Company believes that the addition of this
equipment has increased not only its manufacturing capacity but also the speed
and efficiency of its manufacturing operations. With this additional equipment,
the Company believes its manufacturing capacity is sufficient for its current
level of operations. Nevertheless, the Company recently entered into a lease for
a larger facility near its present manufacturing facility, which should enable
the Company to significantly increase its manufacturing capacity. See
"--Properties."
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<PAGE>
The Company emphasizes a comprehensive quality control program at each step
in the manufacturing process. The manufacturing process involves both automated
and manual placement and soldering of components on the circuit board. After
final assembly is completed, each product unit undergoes an elevated temperature
burn-in, a process simulating a PC environment in which the product is placed in
an oven and connected to an electrical source for several hours. After each
product has been burned-in, it is placed through a series of diagnostic tests to
detect defects. The Company believes its comprehensive testing procedures
significantly contribute to its ability to satisfy its customers' stringent
product performance and reliability requirements. The Company offers a limited
warranty ranging from 15 to 39 months for products sold to OEMs, a two-year
limited warranty on its specialized technology products and a limited lifetime
warranty on products sold to commercial customers.
While the Company conducts substantially all of its manufacturing operations
at its facility in Juarez, Mexico, it maintains a smaller facility at its
Richardson, Texas headquarters for the development and testing of prototypes and
the first-run testing of new products. The Company also maintains a separate
facility in Richardson, Texas for technical support and product repair. In
addition, the Company burns-in and functionally tests a small portion of its
products assembled in Mexico at its Richardson, Texas facilities.
STB provides contract assembly services for third parties, providing
incremental gross profit and contributing to the absorption of overhead by
increasing utilization of manufacturing capacity. Revenues from these assembly
services constituted approximately 3% of the Company's net sales for the
nine-month period ended July 31, 1996.
SALES AND MARKETING
SALES. The Company presently sells its products in North America, most
countries in Europe and certain countries in the Pacific Rim. United States
sales accounted for approximately 81% of the Company's net sales in the
nine-month period ended July 31, 1996.
The Company organizes its Richardson, Texas-based North American sales force
on the basis of its three sales channels. The OEM sales force coordinates the
efforts of the Company's independent sales representatives and provides direct
sales coverage of selected OEMs. The commercial market sales force focuses on
marketing and sales to retailers, distributors and direct mail companies. The
specialized technology sales force coordinates its efforts with the Company's
engineering staff to create interest among prospects and customers and to
determine product features.
The Company's North American sales force generally operates in tandem with
the Company's independent sales representative network. These sales
representatives typically are retained based on relationships they have with
potential customers. The Company believes that the services of independent sales
representatives are important to obtaining and maintaining relationships with
certain OEM and commercial customers. The Company's independent sales
representatives generally do not sell products competitive with those products
that they handle for the Company. The Company generally does not utilize
independent sales representatives for its specialized technology products.
The Company's European sales force, which is headquartered in London, is
responsible for OEM, commercial and specialized technology product sales in the
region. The European sales force has more direct sales coverage responsibility
than the North American sales force because STB employs fewer European
independent sales representatives. The Company's marketing and sales efforts for
countries outside of North America and Europe are coordinated from STB's
Richardson, Texas offices.
The Company's net sales to OEMs, the commercial market and specialized
technology customers represented approximately 81%, 10% and 6% of the Company's
total net sales in the nine-month period ended July 31, 1996. The Company's top
three customers accounted for 63.0% of net sales during the nine-month period
ended July 31, 1996, and net sales to Gateway 2000 accounted for 49% of the
Company's net sales for such period. Although sales volumes to Gateway 2000
increased during the three-month period ended July 31, 1996, as compared to the
same period in fiscal 1995, the percentage of the Company's net sales
attributable to Gateway 2000 decreased to 43% for the three-month period ended
July 31, 1996, due primarily to the addition of
34
<PAGE>
new OEM customers and increased sales in the commercial market. The Company
recently has increased its marketing efforts in the commercial market. The
Company believes that its recent increase in commercial channel sales is
attributable to these increased efforts. The Company sells products to the
commercial market through specialty retailers, such as CompUSA, Computer City
and Best Buy, and to commercial distributors, such as Tech Data, Ingram Micro
and Merisel. The Company sells its specialized technology products primarily to
resellers and corporate customers in the financial services, hospitality,
factory automation, transportation and emergency response industries, which
include customers such as Reuters and Lodgenet.
The Company generally allows returns in the form of stock rotations only of
products sold through the commercial channel. The Company's current stock
rotation policies typically permit a commercial channel customer to return
approximately 10% of products purchased from STB within the previous 90 days if
it places an order for other STB products of equal or greater value. The Company
usually is able to resell returned products. In addition, the Company typically
provides price protection to commercial channel customers in the form of credits
for price reductions on products remaining in customer inventories. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview" and "Risk Factors-- Stock Rotation and Price Protection
Risks."
The Company currently sells all its products at prices denominated in U.S.
dollars, but expects to sell its products in other currencies in the future,
thereby increasing its currency exposure risk. Additionally, a substantial
portion of the Company's manufacturing labor costs are incurred in Mexican
pesos. See "Risk Factors--International Operations."
MARKETING. STB promotes its products to OEM customers and specialized
technology customers primarily through the efforts of the Company's sales force
and sales representatives. The Company believes such direct promotion enables it
to develop products that are more in line with customers' needs and market
trends. The Company supplements these efforts through the promotion of its
products at industry trade shows. The Company's commercial channel marketing
efforts include advertising in recognized industry trade magazines and
cooperative promotional efforts with retailers and commercial distributors.
TECHNICAL SUPPORT
The Company believes that providing technical support to its customers is
essential to its ongoing competitiveness. The Company maintains a toll-free
telephone line in the United States for technical support of its specialized
technology products and for its video graphics adapter products and other
multimedia subsystem products sold in the commercial market. The Company also
maintains electronic bulletin board systems in Richardson, Texas and London,
England to provide customers with new software drivers and utilities that update
the capabilities of the Company's products. The Company's technical support
group provides the software on disk at a nominal charge to customers who are
unable to obtain updates through the electronic bulletin board system. The
Company's policy of providing updates allows products to maintain compatibility
with new versions of software and increases the useful life of these products.
The Company also devotes significant efforts to the preparation of user manuals
and other product documentation that are informative and easy to understand.
COMPETITION
The market for the Company's products is highly competitive. The Company
competes with independent manufacturers of brand name multimedia subsystem
products, as well as contract manufacturers and certain OEM manufacturing
operations that produce multimedia subsystem products. See "--Industry." The
Company's major competitors in the multimedia subsystem product market include
Diamond Multimedia, ATI Technologies, Number Nine Visual Technology, Matrox,
Miro, Elsa, Creative Labs, Ensoniq, CEI, Hauppauge and Aztec. In the specialized
technology product market, the Company's major competitors include
ColorGraphics, Datapath and Miro.
In addition to its major competitors, certain of the Company's suppliers
sell controller chips directly to OEMs for use in internally produced video
graphics adapters, other multimedia subsystems or on motherboards. If one or
more of the Company's significant OEM customers were to commence or increase
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<PAGE>
internal production of video graphics adapters or other multimedia subsystems,
the Company's results of operations could be negatively impacted. Furthermore, a
number of significant OEMs currently integrate video controller chips on the
motherboard of their PCs. If one or more of the Company's significant OEM
customers begins to incorporate video controller chips or other controller chips
onto motherboards rather than using the Company's products, the Company's
results of operations could be negatively impacted. See "Risk Factors--
Dependence on Video Graphics Adapter Market; Migration to Motherboard."
The Company competes in its markets on the basis of a number of factors,
including the compatibility, reliability, price and performance of its products,
its ability to reach the market quickly with new products, its ability to meet
customer delivery and reliability requirements, the quality of its technical
support and its ability to develop and maintain relationships with customers and
suppliers. Many of the Company's competitors and potential competitors have
greater financial, marketing, manufacturing and technical resources than the
Company. In addition, some of the Company's competitors manufacture their own
controller chips, which in certain circumstances may provide these competitors
with an advantage over the Company. Furthermore, while the Company believes it
is the only supplier of brand name video graphics adapters that produces its own
products, some of STB's competitors internally manufacture other multimedia
subsystem products, such as sound cards and TV tuner cards. The rapid pace of
change in the Company's industry places a premium on factors that include the
knowledge and experience of a company's management, engineers and other
personnel and their ability to develop and improve products. The Company has
substantially increased its engineering resources over the last year and
believes that its ability to continue adding new engineers to its staff in the
future will affect its competitiveness. See "Risk Factors--Dependence on Key
Personnel."
INTELLECTUAL PROPERTY
The Company's success depends in part upon its proprietary technology,
consisting of both its software drivers and utilities and its hardware designs.
The Company relies upon copyright, trademark and trade secret laws to protect
its proprietary technology. The Company generally also enters into nondisclosure
agreements with persons to whom it reveals its proprietary information, such as
OEMs that the Company works with concerning future products. There can be no
assurance that the Company's present protective measures will be adequate to
prevent misappropriation of its technology or independent third party
development of the same or similar technology. Many foreign jurisdictions offer
less protection of intellectual property rights than the United States, and
there can be no assurance that the protection provided to the Company's
proprietary technology by the laws of the United States or foreign jurisdictions
will be sufficient to protect the Company's technology. See "Risk
Factors--Proprietary Technology." While the Company's competitive position may
be affected by its ability to protect its proprietary information, the Company
believes that the rapid pace of technological change in the video graphics
adapter industry will cause other factors to be more significant in maintaining
the Company's competitive position. These factors include the technical
expertise, knowledge and innovative skill of the Company's management and
technical personnel, name recognition, the timeliness and quality of support
services provided by the Company and its ability to rapidly develop, produce,
enhance and market innovative products.
STB generally enters into nondisclosure agreements with suppliers of
components for its products in connection with discussions regarding forthcoming
features of those components. The Company also commonly enters into licensing
agreements with suppliers of components that the Company desires to incorporate
into its products.
The Company has filed one United States patent application and a
corresponding international patent application under the Patent Cooperation
Treaty for an invention associated with the Company's MPEG-2 related products.
The Company also has a United States trademark registration for the STB logo,
and owns common law trademark rights with respect to certain other trademarks.
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 STB's products. The Company presently is unaware of
any material intellectual property claims pending against it. If an intellectual
property claim were brought against
36
<PAGE>
the Company and one of the Company's products were 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. In
addition, the assertion of such claims against one or more of the Company's
vendors could adversely affect the availability from those vendors of components
used by the Company. "See Risk Factors--Intellectual Property Infringement
Claims."
LEGAL PROCEEDINGS
The Company is a party from time to time to certain legal proceedings
arising in the ordinary course of its business. Although the amount of any
liability that could arise with respect to these proceedings cannot be predicted
accurately, in the opinion of the Company any liability that might result from
such claims will not have a material adverse effect on the financial position of
the Company.
A plaintiff class action denoted TEICH V. STB SYSTEMS, INC., ET. AL.,
(Citation No. 95-9681-G) was filed on September 6, 1995 in the Texas State
District Court of Dallas County against the Company and certain of its officers
and directors. The complaint alleged that the Registration Statement for the
IPO, which was declared effective on February 14, 1995, contained false and
misleading statements of material facts and omitted to state material facts. The
complaint asserted claims under Section 11 and 12(2) of the Securities Act of
1933 and Section 581-33 of the Texas Securities Act on behalf of a purported
class of persons who purchased or otherwise acquired the Company's Common Stock
during the period February 14, 1995 through May 25, 1995. The complaint sought
unspecified damages. The defendants deny the allegations in the complaint and
have defended this action vigorously. In August 1996, the trial court dismissed
the complaint for want of prosecution. The deadline for the plaintiffs to file a
motion with the trial court to reinstate the complaint has passed. The
plaintiffs have an additional period within which to appeal this dismissal.
GOVERNMENT REGULATIONS
The Company's business is regulated by federal, state, local and foreign
authorities. The products produced by the Company are subject to approval by the
FCC and the EEC to assure that they do not interfere with the frequencies of
other consumer electronics products. The Company installs certain filter
circuitry on its products to prevent them from disturbing other frequencies in
compliance with FCC and EEC regulations. To date, regulations applicable to the
Company's business have had no material effect on the Company's capital
expenditures, earnings or competitive position. Although historically the
Company has not experienced material delays in obtaining FCC or EEC approval of
any of its products, relatively recent government budget constraints have caused
delays in obtaining approval of certain of the Company's products. The Company
believes that any delay in obtaining approvals could, in turn, result in delays
in making certain shipments on a timely basis.
The Company's relationships with its employees at its Mexican manufacturing
facility are regulated by the Mexican Federal Labor Law, which contains detailed
provisions regarding minimum employment conditions and specifies rights that
must be provided to all employees in Mexico. Other Mexican federal laws require
employers to make contributions to the Mexican Social Security System and to
establish and make regular contributions, in specified amounts, to individual
retirement savings and housing accounts at a commercial bank for all employees.
In addition, Mexican federal law requires the payment of substantial severance
amounts in the event of the termination of a Mexican employee. Although Mexican
laws governing employment relationships are extensive, aggregate labor costs at
the Company's Mexican facility are nevertheless significantly less than labor
costs would be at a similar facility in the United States. There can be no
assurance, however, that these laws will not be amended or supplemented in the
future to increase the compensation required to be paid to Mexican employees or
the costs of compliance with such laws or that any such change would not have a
material adverse effect on the Company and its results of operations.
The Company's Mexican manufacturing operations are subject to regulation by
various Mexican environmental agencies. In order to ensure compliance, the
Company regularly monitors changes in Mexican environmental laws, and
representatives of environmental agencies periodically inspect the Company's
Mexican facility.
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<PAGE>
The Company anticipates that it will spend approximately $36,500 in order to
comply with Mexican environmental regulations in each of fiscal 1996 and 1997.
BACKLOG
As of October 31, 1996, the Company's backlog was approximately $26.0
million, as compared to approximately $25.2 million at October 31, 1995. The
Company includes in its backlog accepted purchase orders with respect to which a
delivery schedule has been specified for product shipment within 60 days. The
Company's business is characterized by short-term order and shipment schedules,
and backlog tends to fluctuate substantially from month to month. Generally,
orders constituting backlog are subject to changes in delivery schedule or to
cancellation at the option of the purchaser. The Company's agreements with its
customers typically specify penalties for cancellation of orders within 60 days
prior to shipment. Other factors, including the Company's inability to obtain
components in sufficient quantities, may result in delays in shipment or
cancellation of orders included in backlog. See "Risk Factors--Dependence on
Suppliers." Therefore, although backlog is useful for scheduling production,
backlog as of any particular date should not be considered a reliable measure of
sales for the current or any future period.
EMPLOYEES
As of July 31, 1996, the Company employed 1,322 individuals, of whom 1,096
were employed in operations, 64 in engineering, 57 in sales and marketing and
105 in administration and finance. Included in the foregoing figures are 1,101
employees in Mexico. Competition for personnel in the PC industry is intense.
The Company believes that its future success will depend in part on its ability
to continue to attract and retain highly skilled technical, marketing and
management personnel. None of the Company's employees is represented by a labor
union or is subject to a collective bargaining agreement. The Company believes
that its relations with its employees are good. See "--Government Regulations."
PROPERTIES
The Company leases a 56,100 square foot facility in Richardson, Texas
(16,200 square feet of which are subleased to the Company pursuant to a sublease
that commences November 1, 1996 and expires October 31, 1998) that serves as its
headquarters and as a site for product development and testing. The Company also
leases an additional approximately 11,700 square foot facility that is near its
headquarters in Richardson, Texas and is used for technical support and product
repair. The foregoing leases both expire in December 1998. The Company currently
leases a 79,100 square foot manufacturing facility in Juarez, Mexico, and
recently entered into a lease for an approximately 125,000 square foot
manufacturing facility on an adjacent site that would provide increased space
and improved layout for manufacturing operations, as well as options to acquire
additional space. The term of the new lease is ten years from the date that the
new facility is available for the Company's occupancy (plus four optional
renewal periods of five years each). The Company has negotiated an extension of
its current lease covering the 79,100 square foot Juarez facility to cover the
period through the occupancy date of its new facility. See "--Manufacturing."
Additionally, the Company leases 6,900 square feet of storage space in El
Paso, Texas, under a lease expiring in December 1997, a software development
office in Houston, Texas under a lease expiring in May 1999, a software
development office in Eugene, Oregon under a lease on a month-to-month basis,
and sales offices in London and Paris under leases expiring in October 1998 and
December 2004, respectively. The Company also maintains a Munich sales office
under a lease on a month-to-month basis. The Company also maintains product
inventories in Austin, Texas and Shannon, Ireland under bonded warehouse
arrangements in order to permit the timely delivery of certain products to
nearby customers. The Company believes that its existing facilities are well
maintained and in good operating condition and are adequate for its present and
anticipated levels of operations.
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<PAGE>
MANAGEMENT
Set forth below is information concerning the directors, executive officers
and other key employees of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------- --- -----------------------------------------------------------------------
<S> <C> <C>
William E. Ogle 49 Chief Executive Officer and Chairman of the Board of Directors
Randall D. Eisenbach 45 Executive Vice President, Chief Operating Officer, Assistant Secretary
and Director
James L. Hopkins 50 Chief Financial Officer, Vice President of Strategic Marketing and
Director
J. Shane Long 29 Vice President of Sales and Marketing and Director
Bryan F. Keyes 48 Director of Legal and Finance, Secretary and Treasurer
William R. Milford 34 Chief Engineer
James J. Byrne 59 Director
Lawrence E. Wesneski 48 Director
</TABLE>
WILLIAM E. OGLE is a co-founder of the Company and has served as Chief
Executive Officer since 1981 and Chairman of the Board since 1985. Prior to
founding the Company, Mr. Ogle co-founded Sundance Sales, Inc., a manufacturer's
sales representative organization selling a broad variety of electronic
components and served as President of that company from 1978 to 1983.
RANDALL D. EISENBACH has served as a director since December 1994, as
Executive Vice President and Chief Operating Officer of the Company since
December 1993 and as Assistant Secretary since December 1994. From August 1990
to December 1993, Mr. Eisenbach served as Director of Operations of the Company.
From November 1985 to December 1993, Mr. Eisenbach served as Director of
Manufacturing for the Company.
JAMES L. HOPKINS has served as a director and as Chief Financial Officer and
Vice President of Strategic Marketing of the Company since December 1994. Mr.
Hopkins' present responsibilities include directing European sales and
marketing, managing specialized technology products and planning financial
strategy. From 1987 through December 1994, Mr. Hopkins was active as a general
partner of H&H Management Systems, a consulting firm owned by Mr. Hopkins and
his wife. H&H Management Systems, through Mr. Hopkins, provided a broad spectrum
of consulting services to the Company from March 1990 through December 1994. Mr.
Hopkins' responsibilities to the Company pursuant to STB's arrangement with H&H
Management Systems were substantially identical to Mr. Hopkins' current
responsibilities as an officer of the Company. See "Certain Transactions--H&H
Consulting Relationship." Mr. Hopkins also served as an advisory director for
the Company from 1992 until his election as a director in December 1994.
J. SHANE LONG has served as Vice President of Sales and Marketing of the
Company since November 1994. Mr. Long served as National Sales Manager of the
Company from November 1992 to October 1994 and as Western Area Sales Manager
from July 1992 to October 1992. From January 1991 to July 1992, Mr. Long served
as a field sales employee for Quad State Sales, a manufacturer's representative
company specializing in the sale of high-technology products. Mr. Long was
elected a director of the Company following the completion of the IPO.
BRYAN F. KEYES has served as Director of Legal and Finance of the Company
since April 1993 and as Secretary and Treasurer since December 1994. Mr. Keyes
is responsible for all legal matters, vendor and customer financial relations,
inventory and cash flow management. From November 1992 to April 1993, Mr. Keyes
was self-employed as a financial consultant. From January 1988 to November 1992,
Mr. Keyes served as Vice President of Finance and Administration for Trammell
Crow Distribution Corporation, a national warehousing and logistics company.
From 1972 to 1987, Mr. Keyes was employed by the public accounting firm of
39
<PAGE>
Coopers & Lybrand, where he was a partner from 1980 to 1987. Mr. Keyes is a
member of the American Institute of Certified Public Accountants, the Texas
Society of CPAs and the State Bar of Texas.
WILLIAM R. MILFORD has served as Chief Engineer of the Company since July
1996. Mr. Milford served as Senior Hardware Engineer of the Company from
November 1992 to June 1996. Prior to joining the Company, Mr. Milford served as
an Electronic Systems Engineer at E-Systems, Garland Division, a major defense
contractor, from January 1986 to November 1992.
JAMES J. BYRNE has been a director of the Company since February 1995. Mr.
Byrne has served as Managing Partner of Byrne Technology Partners, Ltd. since
January 1996. The firm provides professional services for strategic alliances
and mergers within the computer industry and offers technology consulting
services for corporate re-engineering. From April 1990 to its sale in March
1995, Mr. Byrne served as President of Harris Adacom Corporation, a company
formed from the merger of the data communications division of Harris Corp. and
Adacom Inc., which was engaged in network systems and services. From December
1986 to April 1990, Mr. Byrne was the Vice President and General Manager of the
data communications division of Harris Corp. Mr. Byrne serves on the board of
directors of Lennox International, Inc., a manufacturer of heating, ventilation
and air conditioning systems and is also a member of the national board of
directors of the American Electronics Association (AEA). He is also a member of
the Advisory Council of the University of Texas School of Engineering and
Computer Science.
LAWRENCE E. WESNESKI has been a director of the Company since February 1995.
He has served as President and Chief Executive Officer of Hoak Breedlove
Wesneski & Co. ("HBW") (the successor to BW Securities, Inc. ("BWS")), an
investment banking firm, since August 1996. Prior to that time, Mr. Wesneski was
President of BWS, which provided certain financial advisory services to the
Company. See "--Compensation and Other Committee Interlocks and Insider
Participation" and "Underwriting." From January 1987 to August 1996, Mr.
Wesneski was President and Managing Director of Breedlove Wesneski & Co., a
private merchant banking firm. From 1987 to 1995, Mr. Wesneski served as an
advisory director for the Company. Mr. Wesneski serves on the board of directors
of TPG Holdings, Inc., a defense products manufacturing company, and TelServe
Communication, Inc., an independent operator of private pay telephones.
Directors of the Company are elected annually by the shareholders and hold
office until their respective successors are elected and qualified. All
executive officers are elected annually by the Board of Directors to serve until
the next annual meeting of the Board of Directors and until their respective
successors are chosen and qualified.
COMMITTEES OF BOARD OF DIRECTORS
The Board of Directors has an Audit Committee, a Compensation Committee, and
a Stock Option Committee, the members of each of which are Lawrence E. Wesneski
and James J. Byrne, the Company's non-employee directors. Mr. Ogle also serves
on the Compensation Committee.
AUDIT COMMITTEE. The Audit Committee recommends annually to the Board of
Directors an accounting firm to serve as the Company's independent public
accountants, consults with the Company's independent auditors and with personnel
from the internal audit and financial staffs with respect to corporate
accounting, reporting, and internal control practices and reviews and approves
transactions with parties affiliated with the Company.
COMPENSATION COMMITTEE. The Compensation Committee approves annual salary,
bonus and sales commission levels for executive officers, oversees
administration of the Company's employment agreements, and administers the
Company's Profit Sharing Incentive Plan.
STOCK OPTION COMMITTEE. The Stock Option Committee administers the
Company's 1995 Long Term Incentive Plan and 1995 Employee Stock Option Purchase
Plan.
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<PAGE>
EXECUTIVE COMPENSATION
The following information summarizes annual and long-term compensation for
services in all capacities to the Company for the fiscal years ended October 31,
1996, 1995 and 1994, of the Chief Executive Officer and the other four most
highly compensated executive officers of the Company:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
------------------------ ---------------------
BONUS SECURITIES UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY (1) (2)(3)(4) OPTIONS (#) COMPENSATION (5)
- --------------------------------------- --------- ------------ ---------- --------------------- -----------------
<S> <C> <C> <C> <C> <C>
William E. Ogle........................ 1996 $ 200,000 $ 96,147 40,000 $ 1,974
Chairman and Chief Executive 1995 175,000 79,814 54,000 2,685
Officer 1994 152,882 196,650 -- 4,000
J. Shane Long (6)...................... 1996 211,684 55,219 40,000 1,150
Vice President of Sales and 1995 153,349 20,393 31,000 975
Marketing 1994 149,502 32,189 -- --
Randall D. Eisenbach................... 1996 177,770 82,674 40,000 1,746
Executive Vice President and 1995 150,000 28,275 42,000 8,148
Chief Operating Officer 1994 115,000 61,696 -- 4,000
James L. Hopkins (7)................... 1996 160,400 60,017 40,000 1,250
Chief Financial Officer and Vice 1995 108,199 7,701 31,000 1,917
President of Strategic Marketing
Bryan F. Keyes......................... 1996 97,767 27,873 8,000 712
Director of Legal and Finance, 1995 91,267 18,678 8,000 400
Secretary and Treasurer 1994 80,208 42,538 -- --
</TABLE>
- ------------------------
(1) The salaries of Messrs. Ogle, Long, Eisenbach and Hopkins have been
increased for fiscal 1997, in accordance with the terms of their employment
agreements. Messrs. Long and Hopkins are entitled to receive sales
commissions under their employment agreements. See "--Employment
Agreements." Mr. Keyes' salary also has increased for fiscal 1997.
(2) All amounts reported as bonus for fiscal 1994 were paid pursuant to the
Company's former Profit Sharing Plan, which, except for the percentage of
pretax income allocated to the Plan, the categories of participants and the
relative amounts allocated among participants, was substantially identical
to the Company's current Profit Sharing Plan. The Company's current Profit
Sharing Plan became effective upon the consummation of the IPO, and amounts
reported as bonus for fiscal 1995 include certain payments that were made
pursuant to the former Profit Sharing Plan prior to such consummation. See
"--Profit Sharing Plan."
(3) None of the named executive officers received any perquisites or other
personal benefits in fiscal 1994, fiscal 1995 or fiscal 1996 that in the
aggregate exceeded the lesser of $50,000 or 10% of such named executive
officer's salary and bonus for such year.
(4) All bonus awards reflect bonuses awarded with respect to the first through
third quarters of fiscal 1996. The amounts do not include bonuses from the
fourth quarter, if any. See "--Profit Sharing Plan."
(5) Reflects for fiscal 1996 matching contributions made by the Company pursuant
to its 401(k) Savings Plan to Messrs. Ogle, Long, Eisenbach, Hopkins and
Keyes in the amounts of $1,974, $1,150, $1,746, $1,250 and $712,
respectively.
(6) Salary amount includes for fiscal 1994 $60,000 paid as base salary and
$89,502 paid as sales commissions, for fiscal 1995 $97,500 paid as base
salary and $55,849 paid as sales commissions and for fiscal 1996 $115,000
paid as base salary and $96,684 paid as sales commissions.
(7) Salary amount includes for fiscal 1995 (beginning January 1, 1995, when Mr.
Hopkins was first compensated as an officer of the Company) $91,667 paid as
base salary and $16,532 paid as sales commissions and for fiscal 1996
$125,000 paid as base salary and $35,400 paid as sales commissions. In
fiscal 1994 and a
41
<PAGE>
portion of fiscal 1995, the Company paid certain consulting fees to H&H
Management Systems, a company owned by Mr. Hopkins and his wife. See
"Certain Transactions--H&H Consulting Relationship."
OPTION GRANTS IN LAST FISCAL YEAR
The following table provides information regarding options granted during
fiscal 1996 to the named executive officers:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------- POTENTIAL REALIZABLE
NUMBER OF VALUE AT ASSUMED ANNUAL
SECURITIES PERCENT OF RATES OF STOCK PRICE
UNDERLYING TOTAL OPTIONS EXERCISE APPRECIATION FOR OPTION
OPTIONS GRANTED TO OR BASE TERM (3)
GRANTED EMPLOYEES IN PRICE PER EXPIRATION ------------------------
NAME (#)(1) 1996 (SHARE)(2) DATE 5% ($) 10% ($)
- ------------------------------------ ----------- ------------- ----------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
William E. Ogle..................... 40,000 9.8% $ 22.00 10/11/06 $ 553,427 $ 1,402,493
J. Shane Long....................... 40,000 9.8 22.00 10/11/06 553,427 1,402,493
Randall D. Eisenbach................ 40,000 9.8 22.00 10/11/06 553,427 1,402,493
James L. Hopkins.................... 40,000 9.8 22.00 10/11/06 553,427 1,402,493
Bryan F. Keyes...................... 3,000 0.7 10.38 2/22/06 19,584 49,629
5,000 1.2 22.00 10/11/06 69,178 175,312
</TABLE>
- ------------------------
(1) All options awarded to Messrs. Ogle, Long, Eisenbach and Hopkins were
granted on October 11, 1996 and vest at the rate of 20% per year on each of
the first five anniversaries of the date of grant. Of the 8,000 options
awarded to Mr. Keyes, 3,000 were granted on February 22, 1996 and 5,000 were
granted on October 11, 1996 and all options vest at the rate of 20% per year
on each of the first five anniversaries of the dates of grant. The 1995 Long
Term Incentive Plan allows for the payment of the exercise price of an
option with shares of Common Stock, upon the approval of the Company's Stock
Option Committee. In addition, the 1995 Long Term Incentive Plan permits an
optionee under certain circumstances to cause the Company to withhold shares
issued upon the exercise of an option granted under that plan in payment of
the taxes due upon the exercise of such option.
(2) The exercise price per share of all of the options granted to Messrs. Ogle,
Long, Eisenbach and Hopkins is $22.00. The exercise price per share of 3,000
of the options granted to Mr. Keyes is $10.38, and the exercise price per
share of 5,000 of the options granted to Mr. Keyes is $22.00.
(3) Calculated based on the market price per share of the Common Stock on the
date of grant, which in each case equaled the exercise price. The amounts
represent only certain assumed rates of appreciation. Actual gains, if any,
on stock option exercises and Company Common Stock holdings cannot be
predicted, and there can be no assurance that the gains set forth in the
table will be achieved.
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<PAGE>
AGGREGATE OPTION EXERCISES IN
LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following table shows information concerning the number of unexercised
options held by the named executive officers at fiscal 1996 year-end. No options
were exercised by such persons during fiscal 1996:
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT OCTOBER 31, IN-THE-MONEY OPTIONS AT
1996 OCTOBER 31, 1996 (1)
-------------------------- --------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
William E. Ogle............................................ 10,800 83,200 $ 88,605 $ 354,418
J. Shane Long.............................................. 6,200 64,800 56,606 226,424
Randall D. Eisenbach....................................... 8,400 73,600 76,692 306,768
James L. Hopkins........................................... 6,200 64,800 56,606 226,424
Bryan F. Keyes............................................. 1,600 14,400 14,608 90,682
</TABLE>
- ------------------------
(1) The last sale price of the Common Stock as reported by the Nasdaq National
Market on October 31, 1996 was $21.13 and the exercise prices of the options
in this table ranged from $12.00 to $22.00 per share.
1995 LONG TERM INCENTIVE PLAN
SCOPE. The Board of Directors and shareholders of the Company have approved
the STB Systems, Inc. 1995 Long Term Incentive Plan (the "Incentive Plan"). The
Incentive Plan authorizes the granting of incentive stock options and
nonqualified stock options to purchase Common Stock, stock appreciation rights,
restricted stock and performance units to key executives and other key employees
of the Company, including officers of the Company and its subsidiaries. The
purpose of the Incentive Plan is to attract and retain key employees, to
motivate key employees to achieve long-range goals and to further identify the
interests of key employees with those of the other shareholders of the Company.
The Incentive Plan authorizes the award of 850,000 shares of Common Stock to
be used for stock options, stock appreciation rights or restricted stock. If an
award made under the Incentive Plan expires, terminates or is forfeited,
cancelled or settled in cash, without issuance of shares of Common Stock covered
by the award, those shares will be available for future awards under the
Incentive Plan. The Incentive Plan will terminate on December 31, 2004.
ADMINISTRATION. The Incentive Plan may be administered by the Board of
Directors or, if directed by the Board of Directors, the Stock Option Committee
or any successor thereto of the Board of Directors of the Company (the Board of
Directors or, if applicable, the Stock Option Committee is referred to herein as
the "Stock Option Committee"). Subject to the provisions of the Incentive Plan,
the Stock Option Committee will have authority to select employees to receive
awards, to determine the time or times of receipt, to determine the types of
awards and the number of shares covered by the awards, to establish the terms,
conditions and provisions of such awards, to determine the value of performance
units and to cancel or suspend awards. In making such award determinations, the
Stock Option Committee may take into account the nature of services rendered by
the employee, his or her present and potential contribution to the Company's
growth and success and such other factors as the Stock Option Committee deems
relevant. The Stock Option Committee is authorized to interpret the Incentive
Plan, to establish, amend, and rescind any rules and regulations relating to the
Incentive Plan, to determine the terms and provisions of any agreements made
pursuant to the Incentive Plan and to make all other determinations that may be
necessary or advisable for the administration of the Incentive Plan.
ELIGIBILITY. Executives and other key full-time employees of the Company
and its subsidiaries may be selected by the Stock Option Committee to receive
awards under the Incentive Plan. The Incentive Plan provides that no more than
250,000 shares of Common Stock may be subject to awards granted per year to any
one employee participating in the Incentive Plan. In the discretion of the Stock
Option Committee, an eligible
43
<PAGE>
employee may receive an award in the form of a stock option, stock appreciation
right, restricted stock award or performance unit or any combination thereof,
and more than one award may be granted to an eligible employee.
STOCK OPTIONS. The Incentive Plan authorizes the award of both incentive
stock options ("ISOs") and nonqualified stock options. Under the Incentive Plan,
an option may be exercised at any time during the exercise period established by
the Stock Option Committee, except that: (i) no option may be exercised prior to
the expiration of six months from the date of grant; (ii) no option may be
exercised more than 90 days after employment with the Company and its
subsidiaries terminates by reason other than death, disability or authorized
leave of absence for military or government service; and (iii) no option may be
exercised more than 12 months after employment with the Company and its
subsidiaries terminates by reason of death or disability. The aggregate fair
market value (determined at the time of the award) of the Common Stock with
respect to which ISOs are exercisable for the first time by any employee during
any calendar year may not exceed $100,000. The term of each option is determined
by the Stock Option Committee, but in no event may such term exceed 10 years
from the date of grant. The exercise price of options is determined by the Stock
Option Committee, but the exercise price of ISOs cannot be less than the fair
market value of the Common Stock on the date of the grant. The exercise price of
options may be paid in cash or, with the Stock Option Committee's approval, in
shares of Common Stock. Grants of options do not entitle any optionee to any
rights as a shareholder, and such rights will accrue only as to shares actually
purchased through the exercise of an option.
STOCK APPRECIATION RIGHTS. The Incentive Plan authorizes the grant of both
primary stock appreciation rights ("SARs") and additional SARs. Primary SARs may
be granted either separately or in tandem with options. Primary SARs entitle the
holder to receive an amount equal to the difference between the fair market
value of a share of Common Stock at the time of exercise of the SAR and the
option price (or deemed option price in the event of an SAR that is not granted
in tandem with an option), multiplied by the number of shares of Common Stock
subject to the option or deemed option as to which the SAR is being exercised
(subject to the terms and conditions of the option or deemed option). An SAR may
be exercised at any time when the option to which it relates may be exercised
and will terminate no later than the date on which the right to exercise the
tandem option (or deemed option) terminates (or is deemed to terminate). The
participating employee has the discretion to determine whether the exercise of
an SAR will be settled in cash, in Common Stock (valued at its fair market value
at the time of exercise) or in a combination of the two, subject to the approval
of the Stock Option Committee in certain circumstances. The exercise of an SAR
requires the surrender of the tandem option, if any, and the exercise of a stock
option requires the surrender of the tandem SAR, if any.
Additional SARs may be granted only in tandem with stock options and entitle
the holder to receive an amount equal to the difference between the fair market
value of a share of Common Stock on the date of exercise of the related option
and the option price, multiplied by the number of shares of Common Stock subject
to the option as to which the SAR is being exercised (subject to the terms and
conditions of the option), multiplied by a percentage factor ranging from 10% to
100% (as determined either by the Stock Option Committee at the date of grant or
by the formula established by the Stock Option Committee at the date of grant).
If an SAR, or the corresponding option with which the SAR was awarded, is
not exercised prior the date that it ceases to be exercisable, then such SAR
generally shall be deemed exercised as of such date and shall be paid to the
employee in cash. No SAR may be exercised more than 90 days after employment
with the Company and its subsidiaries terminates by reason other than death,
disability or authorized leave of absence for military or government service. No
SAR may be exercised more than 12 months after the holder's employment with the
Company and its subsidiaries terminates by reason of death or disability.
RESTRICTED STOCK. Restricted stock awards are grants of Common Stock made
to employees subject to a required period of employment following the award (the
"Restricted Period") and any other conditions established by the Stock Option
Committee. An employee will become the holder of shares of restricted stock free
of all restrictions if he or she completes the Restricted Period and satisfies
any other conditions; otherwise, the shares will be forfeited. Under the
Incentive Plan, the Restricted Period may not be more than ten years. The
employee will have the right to vote the shares of restricted stock and, unless
the Stock Option Committee
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determines otherwise, will have the right to receive dividends on the shares
during the Restricted Period. The employee may not sell, pledge or otherwise
encumber or dispose of restricted stock until the conditions imposed by the
Stock Option Committee have been satisfied. The Stock Option Committee may
accelerate the termination of the Restricted Period or waive any other
conditions with respect to any restricted stock.
PERFORMANCE UNITS. Performance units are awards that entitle the holders to
receive a specified value for the units at the end of a performance period
established by the Stock Option Committee if performance measures established by
the Stock Option Committee at the beginning of the performance period are met.
Although the performance measures and performance period will be determined by
the Stock Option Committee at the time of the award of performance units, they
may be subject to such later revision as the Stock Option Committee deems
appropriate to reflect significant events or changes. If the employment of a
holder of a performance unit with the Company or a subsidiary terminates by
reason of death, disability or retirement, then the Company will pay the
employee or his or her beneficiary or estate the amount of the performance unit
earned as of the date of termination. If the employment of a holder of a
performance unit with the Company or a subsidiary terminates for any other
reason, then the performance units held by such holder will automatically be
forfeited.
ADJUSTMENTS. In the event of any change in the outstanding shares of Common
Stock by reason of any stock dividend, split, spinoff, recapitalization, merger,
consolidation, combination, exchange of shares or other similar change, the
aggregate number of shares with respect to which awards may be made under the
Incentive Plan, and the terms and the number of shares of any outstanding
option, SAR, performance unit or restricted stock, may be equitably adjusted by
the Stock Option Committee in its sole discretion.
BUSINESS COMBINATIONS. Unless provision is otherwise made in the terms of
the award granted by the Stock Option Committee, or by the terms of the
agreement with respect to the business combination, in the event of a change in
control of the Company (as defined), all outstanding stock options, stock
appreciation rights, restricted stock and performance units shall terminate,
provided that the holders of any options or SARs may exercise such awards to the
extent then vested immediately prior to any such event and the holders of any
performance units shall be entitled to the then vested values of such units as
of such date.
TERMINATION AND AMENDMENT. The Incentive Plan may be suspended, terminated
or amended by the Board of Directors, provided that, in the absence of
shareholder approval, no amendment of the Incentive Plan or action of the Board
of Directors may materially increase the total number of shares of Common Stock
with respect to which awards may be made under the Incentive Plan (except as
discussed in "--Adjustments" above), change the exercise price of a stock option
or the base price of an SAR, materially modify the requirements as to
eligibility for participation in the Incentive Plan or materially increase the
benefits accruing to participants under the Incentive Plan. No amendment,
suspension or termination of the Incentive Plan may alter or impair any option,
SAR, share of restricted stock or performance unit previously awarded under the
Incentive Plan without the consent of the holder thereof.
The Company's Board of Directors intends to adopt an Amended and Restated
Incentive Plan (the "Restated Incentive Plan"), effective November 1, 1996,
subject to approval of the Company's shareholders at its next annual meeting.
The purpose of the Restated Incentive Plan will be to reflect changes in new
Rule 16b-3, issued by the Securities and Exchange Commission on May 31, 1996. In
addition, the Restated Incentive Plan will (i) authorize the Committee to
accelerate or extend the exercisability of outstanding awards; (ii) permit an
option agreement to provide for its exercisability prior to the expiration of
six (6) months from the date of the award; and (iii) permit the award of
nonqualified options under the Incentive Plan with limited transferability
features.
RECENT GRANTS. On October 11, 1996, the Company granted stock options under
the Incentive Plan for a total of 272,000 shares of Common Stock. All such
options had an exercise price of $22.00 per share, the fair market value per
share of the Common Stock on the date of grant. Of such options, options for
40,000 shares were granted to Mr. Ogle, 40,000 shares to Mr. Long, 40,000 shares
to Mr. Eisenbach, 40,000 shares to
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Mr. Hopkins and 5,000 shares to Mr. Keyes. In addition, the Company granted to
Mr. Keyes incentive stock options to purchase 3,000 shares of Common Stock at
the then current fair market value of $10.38 per share on February 22, 1996.
During the period from October 12, 1996 through October 31, 1996, the Company
granted stock options under the Incentive Plan in the amount of 10,000 shares at
exercise prices ranging from $22.88 to $23.38 per share.
1995 EMPLOYEE STOCK OPTION PURCHASE PLAN
SCOPE. The 1995 Employee Stock Option Purchase Plan (the "Employee Plan")
provides a method for eligible employees of the Company to acquire a proprietary
interest in the Company through the regular and systematic purchase of shares of
the Company's Common Stock by means of voluntary payroll deductions. The purpose
of the Employee Plan is to provide additional incentives for employees.
The right of a participating employee to purchase shares of Common Stock
under the Employee Plan is referred to as an "option." The Employee Plan
authorizes the grant of 200,000 shares of Common Stock to be used for such
options. If an option granted under the Employee Plan expires, terminates or is
forfeited without issuance of shares of Common Stock covered by the award, those
shares may be available for future awards under the Employee Plan. The Employee
Plan will terminate on December 31, 2004.
ELIGIBILITY. The employees eligible to participate in the Employee Plan
include all employees of the Company (and of such of its subsidiaries as the
Stock Option Committee designates) who have completed six months of employment
and who are not holders of 5% or more of the Common Stock of the Company (or of
its subsidiaries) ("Eligible Employees").
ADMINISTRATION. The Employee Plan is administered by the Stock Option
Committee, which has the exclusive right to grant options under the Employee
Plan and to delegate power and authority under the Employee Plan as it deems
appropriate. The Stock Option Committee also has full power and authority to
construe, interpret and administer the Employee Plan and to establish the terms
of each offering under the Employee Plan. No member of the Stock Option
Committee is eligible for participation in the Employee Plan while a member of
the Stock Option Committee. The expenses of the administration of the Employee
Plan, including interest paid on payroll deduction accounts, is borne by the
Company.
OFFERINGS UNDER THE EMPLOYEE PLAN. Each year the Company offers Eligible
Employees the option to purchase Common Stock through voluntary payroll
deductions of up to ten percent (10%) of their compensation. The purchase price
for a share of Common Stock under the Employee Plan is determined by the Stock
Option Committee, but such price may not be less than eighty-five percent (85%)
of the fair market value of Common Stock on the date the option is granted, or
in the alternative, such price may not be less than eighty-five percent (85%) of
the fair market value of the Common Stock on the date the option is exercised.
Eligible Employees may purchase up to that number of full shares that can be
purchased at the option price with an amount equal to ten percent (10%) of their
compensation. No employee may purchase shares under the Employee Plan at a rate
that exceeds $25,000 in fair market value (determined at the time an option is
granted) for each calendar year. Eligible Employees who wish to participate in
the Employee Plan must elect to do so by the end of a two-month offering period.
Payroll deductions are made over a twelve-month period. Such deductions are
posted to an employee's payroll deduction account. At any time during the
twelve-month deduction period an employee can withdraw the funds credited to his
or her payroll deduction account, but employees may not increase or reduce
payroll deductions during the payroll deduction period.
At the end of the payroll deduction period, employees will have a subsequent
twelve-month period (the "Exercise Period") during which they may either
exercise their options in whole or part, or withdraw the funds credited to their
payroll deduction account, with interest credited at a rate determined by the
Stock Option Committee. All options not exercised or withdrawn by the last day
of the Exercise Period are automatically exercised in full, if on that day the
fair market value of the Common Stock equals or exceeds the price at which
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the option may be exercised. If not so automatically exercised because the fair
market value of the Common Stock is less than the price at which the option may
be exercised, the amount in an employee's payroll deduction account is returned
to the employee with interest. All shares purchased under the Employee Plan are
paid for in full at the time the option is exercised by transfer of the purchase
price from the employee's payroll deduction account.
ADJUSTMENTS, TERMINATION AND AMENDMENT. In the event of any change in the
Company's capitalization, including any merger, consolidation, acquisition,
stock split or stock dividend, appropriate adjustments will be made to the
number of shares available under the Employee Plan. The Employee Plan may be
suspended, terminated, altered or amended in any way by the Board of Directors,
provided that, in the absence of shareholder approval, no amendment of the
Employee Plan or action of the Board of Directors may increase the total number
of shares of Common Stock with respect to which options may be granted under the
Employee Plan (except for adjustments in the event of changes in
capitalization). No suspension, termination, alteration or amendment of the
Employee Plan may alter or impair the rights of any participant under options
previously granted.
The Company's Board of Directors intends to adopt a Restated Employee Stock
Option Purchase Plan (the "Restated Employee Plan"), effective November 1, 1996,
subject to approval of the Company's shareholders at its next annual meeting.
The purpose of the Restated Employee Plan will be to reflect changes in new Rule
16b-3, issued by the Securities and Exchange Commission on May 31, 1996.
STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS
The purpose of the Stock Option Plan for Non-Employee Directors (the
"Non-Employee Director Plan") is to provide present and prospective non-employee
Directors of the Company with the opportunity to obtain equity ownership
interests in the Company through the exercise of stock options and thereby
secure for the Company's shareholders the benefits associated with stock
ownership by those who will oversee the Company's future growth and success.
ELIGIBILITY. Each member of the Board of Directors of the Company who is
not an employee of the Company or any subsidiary or affiliate of the Company
("Non-Employee Directors") will be eligible to receive a grant of stock options
under the Non-Employee Directors Plan. The Company currently has two Non-
Employee Directors, both of whom are eligible to receive awards under the
Non-Employee Director Plan. The eligible status of a Non-Employee Director will
terminate as to future stock option grants at the time the individual ceases to
be a director or the individual becomes an employee of the Company, or any
subsidiary or affiliate of the Company.
ADMINISTRATION. The Non-Employee Director Plan is administered by the Board
of Directors of the Company. The Board of Directors has full power to administer
and interpret the Non-Employee Director Plan to carry out its purpose. It is
expected that the Board of Directors will designate from time to time Company
personnel to assist it in carrying out its responsibilities under the
Non-Employee Director Plan.
OPTIONS; EXERCISE PRICE; VESTING. Options to purchase 10,000 and 15,000
shares of Common Stock were granted to Messrs. Byrne and Wesneski, respectively,
upon their election as directors immediately following completion of the IPO.
These options are exercisable at $12.00 per share and have been and will
continue to vest equally over the five year period from the date of grant. In
the future, each Non-Employee Director will automatically receive options to
purchase 2,000 shares of Common Stock annually immediately following his or her
election or re-election to the Board at an annual meeting of shareholders,
exercisable at the fair market value of the Common Stock at the close of
business on the date immediately preceding the date of grant. However, Messrs.
Byrne and Wesneski will not be eligible for such grants until their initial
options have fully vested. Such annual options will vest at the conclusion of
the Non-Employee Director's annual term. In addition, all options become
immediately exercisable in the event of a "Business Combination" as described in
the Non-Employee
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Director Plan. The maximum number of shares available for grant and issuance
under the Non-Employee Director Plan is 100,000.
In the case of events such as stock dividends, stock splits,
recapitalizations or other changes in the Company's capitalization, an automatic
adjustment will be made to the number of unexercised options, the purchase price
of unexercised options, and the aggregate number of shares which are available
for option grants under the Non-Employee Director Plan. The automatic adjustment
is designed to ensure that the Non-Employee Directors maintain the same
proportionate position after the particular event as before the event.
An option granted under the Non-Employee Director Plan may be evidenced by a
written instrument describing the terms and conditions of the grant. Options
granted under the Non-Employee Director Plan are not assignable or transferable
by the Non-Employee Director, other than by will or the laws of descent and
distribution. During the Non-Employee Director's lifetime, an option is
exercisable only by the Non-Employee Director, or, in the case of incapacity, by
a person properly appointed to act on the Non-Employee Director's behalf.
Options may be exercised by the delivery of cash or shares of Common Stock or
any combination of such forms of payment.
TERM OF PLAN AND OPTION. Unless terminated earlier by the Board of
Directors, the Non-Employee Director Plan will terminate on December 31, 2004.
Options granted prior to such termination date continue to be exercisable in
accordance with the terms of the Non-Employee Director Plan. Each option granted
under the Non-Employee Director Plan will automatically expire on the earlier of
ten years from the date the option is granted or six months after the
Non-Employee Director ceases to be a director of the Company.
AMENDMENT AND TERMINATION OF THE PLAN. The Board of Directors may amend,
terminate, or modify the Non-Employee Director Plan at any time without
shareholder approval, including amendments necessary to conform with Rule 16b-3
of the Securities Exchange Act of 1934 (the "Exchange Act"), unless the
particular amendment or modification requires shareholder approval under the
Internal Revenue Code, under the rules and regulations of the exchange or system
on which the Common Stock is listed or reported, or pursuant to other applicable
laws, rules or regulations.
The Company's Board of Directors intends to adopt a Restated Stock Option
Plan for Non-Employee Directors (the "Restated Non-Employee Director Plan"),
effective November 1, 1996, subject to approval of the Company's shareholders at
its next annual meeting. The purpose of the Restated Non-Employee Director Plan
will be to reflect changes in new Rule 16b-3, issued by the Securities and
Exchange Commission on May 31, 1996. In addition, the Restated Non-Employee
Director Plan will (i) delete the provision setting forth a maximum number of
shares of Common Stock that may be issued thereunder (such a provision is no
longer required by Rule 16b-3); and (ii) permit the award of nonqualified
options under the Non-Employee Director Plan with limited transferability
features.
PROFIT SHARING PLAN
The Board of Directors of the Company has approved a cash bonus program
administered by the Company's Compensation Committee, called the Profit Sharing
Incentive Plan (the "Profit Sharing Plan"). Under the Profit Sharing Plan, the
Company reserves each fiscal quarter an amount equal to 7% of its income before
income taxes (as calculated prior to profit sharing expense) (the "Reserve") for
the payment of cash bonuses to certain of the Company's employees. Of the total
amount of the Reserve, approximately 43% is allocated to the Management
Incentive Program, and the remaining 57% is allocated to the Employees Incentive
Program. Each participant in the Management Incentive Program receives an award
based on the ratio that his base salary bears to the total base salaries of all
designated participants. Most of the Company's executive officers currently
share in the Management Incentive Program, with the balance participating in
other compensation programs.
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401(K) SAVINGS PLAN
The Company sponsors a qualified defined contribution retirement plan,
called the STB Systems, Inc. 401(k) Savings Plan ("401(k) Savings Plan"). The
trustee for the 401(k) Savings Plan is Southwest Guaranty Trust Company. The
401(k) Savings Plan permits employees to direct investment of their accounts in
the 401(k) Savings Plan among a selection of five mutual funds, or to purchase
Common Stock with all or part of their accounts. Employees are permitted to
direct transfers or changes in their investments in the Common Stock on a
monthly basis.
EMPLOYMENT AGREEMENTS
The Company is a party to employment agreements with each of Messrs. Ogle,
Eisenbach, Hopkins and Long. Each agreement has a term extending through October
31, 1997 and automatically renews for an additional year on each subsequent
October 31, subject to the right of the Company or the employee to terminate the
agreement with a 30-day notice prior to the date of renewal. Under the
agreements, Messrs. Ogle, Eisenbach, Hopkins and Long will receive base annual
salaries in fiscal 1997 of $260,000, $212,000, $180,000 and $160,000,
respectively, and each is eligible to receive incentive compensation under the
Company's Profit Sharing Plan. The agreements with Messrs. Hopkins and Long also
provide for the payment of sales commissions, the amount of which is subject to
annual adjustment by the Compensation Committee. Each agreement provides for a
severance payment if the agreement is terminated under certain circumstances
(including termination of an agreement during the period immediately preceding a
renewal date). The amounts of the severance payments are as follows: Mr. Ogle
would receive two times the sum of his base annual salary and annualized
incentive compensation; Mr. Eisenbach would receive the sum of his base annual
salary and annualized incentive compensation; each of Mr. Hopkins and Mr. Long
would receive the sum of his base annual salary, annualized incentive
compensation and annualized sales commissions. If an agreement is terminated
under certain circumstances within 12 months after a change in control of the
Company, such agreement also provides for a parachute payment in an amount that
is two times the severance payment. For purposes of calculating severance and
parachute payments, the employee's base annual salary is equal to the employee's
then current base annual salary; the annualized incentive compensation is four
times the average of the amount earned in the eight full quarters preceding the
termination; and the annualized sales commissions is 12 times the average of the
amount earned in the 24 full months preceding the termination. Except in the
event of a termination that requires payment of a parachute payment, Messrs.
Ogle, Eisenbach, Hopkins and Long also agree not to participate, in any manner,
during the term of their respective agreements and for two years thereafter, in
the development, manufacture or sale of graphics adapters for desktop PCs or in
any other business in which the Company may be engaged at the time of
termination of employment.
DIRECTOR COMPENSATION
Prior to its IPO, the Company paid each director a fee of $1,000 per meeting
and paid advisory director fees of $1,000 per meeting to Messrs. Eisenbach,
Hopkins and Wesneski. See "--Compensation and Other Committee Interlocks and
Insider Participation." Beginning in the second quarter of fiscal 1995, the
Company stopped paying directors fees for their services as directors, although
the Company continues to reimburse directors for all expenses incurred in
connection with their activities as directors. As described above, Non-Employee
Directors of the Company automatically receive certain stock option awards under
the Non-Employee Director Plan. See "--Stock Option Plan for Non-Employee
Directors."
COMPENSATION AND OTHER COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Before the IPO, decisions concerning compensation, including decisions
concerning compensation for fiscal 1995, were made by the Company's Board of
Directors. At the time such decisions were made concerning compensation for
fiscal 1995, the Board of Directors consisted of Mr. Ogle, Mr. Mark S. Sims and
Mr. William D. Balthaser, Jr. (the "Founding Shareholders"). Mr. Eisenbach also
participated in deliberations concerning such compensation. Each of Messrs.
Ogle, Eisenbach, Balthaser and Sims served as officers of the Company during
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fiscal 1995. In March, 1995, the Company's Board of Directors appointed a
Compensation Committee comprised of Messrs. Ogle, Byrne and Wesneski and a Stock
Option Committee comprised of Messrs. Byrne and Wesneski, the Company's
independent directors.
Lawrence E. Wesneski, a director of the Company, serves as President and
Chief Executive Officer of Hoak Breedlove Wesneski & Co. ("HBW"), the successor
pursuant to an acquisition of BW Securities, Inc. ("BWS"), and owns a portion of
the equity securities of HBW. Mr. Wesneski served as President of Breedlove
Wesneski & Company ("BWC") and its affiliate, BWS, and before the acquisition of
BWS, owned a portion of the equity of BWC and BWS. The Company paid BWC and its
affiliates $138,662 and $57,922 in fiscal years 1994 and 1996, respectively, for
the performance of certain services relating to the arrangement of credit
facilities for the Company. It is expected that HBW will participate as a member
of the underwriting syndicate in connection with the offering contemplated
hereby. See "Underwriting."
In April 1994, BWS agreed to provide to the Company certain advisory
services, including services relating to the Company's IPO. In return for these
services, the Company paid BWS a flat fee of $150,000, of which $17,450 and
$132,550 was paid in fiscal years 1994 and 1995, respectively.
Mr. Wesneski served as an advisory director for the Company from 1987 until
he became a director of the Company. In connection with these services, Mr.
Wesneski received fees of $4,000 and $1,000 in fiscal years 1994 and 1995,
respectively.
CERTAIN TRANSACTIONS
REORGANIZATION
The Company was incorporated under the laws of the State of Texas in 1981.
Prior to the consummation of the IPO, the Company issued one share of Common
Stock of the Company to each of the Founding Shareholders in exchange for all of
the shares of common stock of STB Assembly, Inc. ("STB Assembly") (the
"Reorganization"). The Reorganization was approved by the Company's Board of
Directors in December 1994. As a result of the Reorganization, STB Assembly is
now a wholly-owned subsidiary of the Company, and STB de Mexico, S.A. (formerly
known as Industrias Fronterizas de Chihuahua, S.A. de C.V.) ("IFC"), a Mexican
corporation in which STB Assembly owns more than 99% of the outstanding capital
stock, is subject to the control of the Company. IFC operates the Company's
Mexican operations pursuant to a manufacturing services agreement with STB
Systems, Inc.
RIGHT OF FIRST REFUSAL
The Company and Messrs. Ogle, Sims and Balthaser have entered into a Right
of First Refusal Agreement providing that if Mr. Ogle, Mr. Sims or Mr. Balthaser
proposes to sell any shares of Common Stock registered in his name as of the
date of the closing of the IPO, then the Company will have a right of first
refusal to purchase such shares on terms similar to those proposed. If the
Company does not exercise its right to purchase all of the shares of Common
Stock proposed to be sold by either Mr. Sims or Mr. Balthaser, then Mr. Ogle
will have a right of first refusal to purchase those shares of Common Stock that
the Company does not wish to purchase. Mr. Ogle will not participate in any
decision by the Company to exercise its right of first refusal to purchase
shares proposed to be sold by Mr. Ogle, Mr. Sims or Mr. Balthaser. If the
foregoing rights of first refusal are not independently or collectively fully
exercised, then the shares not purchased may be sold in accordance with the
proposed terms of sale. Notwithstanding the foregoing, the Right of First
Refusal Agreement does not restrict the ability of Messrs. Ogle, Sims or
Balthaser to sell shares of Common Stock in the public market pursuant to Rule
144 promulgated under the Securities Act.
After consummation of the offering, Messrs. Sims and Balthaser may no longer
be deemed to be affiliates of the Company within the meaning of Rule 144, and
therefore will be able to sell all shares owned by them (766,666 shares in the
aggregate) without restriction pursuant to paragraph (k) of Rule 144. Such sales
would not be subject to the provisions of the Right of First Refusal Agreement.
Sales by Mr. Ogle, who will remain an
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affiliate of the Company, will be subject to the restrictions contained in Rule
144, including the volume limitation. See "Shares Eligible for Future Sale."
The Company and Mr. Ogle have waived their rights under the Right of First
Refusal Agreement with respect to the shares of Common Stock to be sold by the
Selling Shareholders in the offering pursuant to Waiver Letters executed by each
of the Company and Mr. Ogle dated October 15, 1996.
CERTAIN PRODUCT SALES
Paul A. Ogle, the father of William E. Ogle, was a Company employee and
sales agent for certain products. Paul Ogle retired effective October 15, 1996.
Paul Ogle paid to the Company $261,917, $155,537 and $110,580 in fiscal years
1994, 1995 and 1996, respectively, in connection with the purchase of products
from the Company that he resold to certain customers. The Company sold the
products to Mr. Ogle on terms roughly comparable to those provided to other
distributors. In addition, the Company paid compensation to Paul Ogle in the
amount of $15,072, $14,400 and $14,410 in fiscal years 1994, 1995 and 1996
respectively.
H & H CONSULTING RELATIONSHIP
H&H Management Systems, a company owned by Mr. Hopkins and his wife,
provided a broad spectrum of consulting services to the Company beginning in
March 1990. The Company's relationship with H&H Management Systems was
terminated in December 1994 when Mr. Hopkins was elected Chief Financial Officer
and Vice President of Strategic Marketing of the Company. The Company paid H&H
Management Systems $104,450 and $53,702 for such consulting services in fiscal
years 1994 and 1995, respectively. See "Management."
TAX AGREEMENT
As of December 16, 1994, the Company, on the one hand, and the Founding
Shareholders, on the other (the "parties"), entered into a Tax Allocation and
Indemnification Agreement (the "Tax Agreement") relating to their respective
income tax liabilities. Since the Company became fully subject to corporate
income taxation as a C corporation after its status as an S corporation
terminated immediately prior to the IPO, the reallocation of income and
deductions between the period during which the Company was treated as an S
corporation and a period during which the Company was or will be subject to
corporate income taxation as a C corporation may increase the taxable income of
one party in one period while decreasing that of another party in another
period. The Tax Agreement generally provides that the Founding Shareholders will
be indemnified by the Company with respect to income taxes (plus interest and
penalties) arising due to taxable income shifted from a C corporation taxable
year to a taxable year in which the Company was an S corporation, and that the
Company will be indemnified by the Founding Shareholders with respect to income
taxes (plus interest and penalties) arising due to taxable income shifted from
an S corporation taxable year to a C corporation taxable year; provided,
however, that only in the case of the Founding Shareholders' obligation to
indemnify the Company, such obligation shall be reduced by an amount equal to
the federal or state tax benefit (if any) derived by the Company due to the
shift of taxable income from a taxable year in which the Company was an S
corporation to a C corporation taxable year and shall not exceed the amount, if
any, by which (i) the amount of the reduction in the liability for taxes and
interest thereon of a Founding Shareholder that results from the shifting of S
corporation taxable income to a C corporation taxable year of the Company
exceeds (ii) all reasonable costs incurred by the Founding Shareholder
reasonably attributable to securing such reduction in liability for taxes. The
Company will also be indemnified by the Founding Shareholders for any federal or
state taxes that arise because the Company's status as an S corporation was
ineffective, revoked or terminated prior to the termination of the Company's S
corporation status. Any payment made by the Company to the Founding Shareholders
pursuant to the Tax Agreement may be considered by the Internal Revenue Service
or the state taxing authorities to be nondeductible by the Company for income
tax purposes.
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S CORPORATION DISTRIBUTION
Prior to the IPO, the Company declared a dividend (the "S Corporation
Distribution") in an amount equal to its undistributed S corporation earnings
through the date immediately prior to the completion of the IPO, or
approximately $4.2 million (the "Undistributed S Corporation Earnings"),
approximately one-half of which was paid in cash to the Founding Shareholders
out of the proceeds of the Company's IPO. The remaining half of the S
Corporation Distribution was distributed to the Founding Shareholders in the
form of promissory notes providing for 12 equal monthly payments of both
principal and interest and bearing interest at 9%, the prime rate in effect on
the date of issuance (the "Founding Shareholder Notes"). The Company paid
$1,427,208 and $700,422 in fiscal 1995 and fiscal 1996, respectively, from cash
generated from operations in connection with its obligations under the Founding
Shareholder Notes. The final payment on the remaining outstanding balance under
the Founding Shareholder Notes was made in February 1996.
INDEMNIFICATION OF SELLING SHAREHOLDERS
The Company has agreed to indemnify each of the Selling Shareholders for any
indemnification obligations that they may owe to the Underwriters pursuant to
the terms of the Underwriting Agreement by and among the Company, the Selling
Shareholders and the Underwriters. See "Underwriting."
FUTURE TRANSACTIONS
The Company has adopted a policy that all transactions between the Company
and related parties are subject to approval by a majority of all disinterested
directors and must be on terms no less favorable than those that could be
obtained from unrelated third parties.
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PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock as of October 16, 1996, and after
completion of the offering, by (i) each person known by the Company to
beneficially own more than 5% of the outstanding shares of the Common Stock,
(ii) each of the executive officers of the Company named in the Summary
Compensation Table, (iii) each director of the Company, (iv) all directors and
executive officers of the Company as a group and (v) each Selling Shareholder.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO THE OWNED AFTER THE
OFFERING (1) NUMBER OF OFFERING (1)
--------------------- SHARES -----------------------
NAME NUMBER PERCENT OFFERED NUMBER PERCENT
- ------------------------------------------------------- --------- ---------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C>
William E. Ogle (2)(3)(4)(5)(6)........................ 859,469 19.0% 100,000 759,469 12.6%
William D. Balthaser, Jr. (2)(5)(6).................... 483,333 10.7 100,000 383,333 6.4
Mark S. Sims (2)(5)(6)................................. 483,333 10.7 100,000 383,333 6.4
Mitchell Hutchins Asset Management, Inc. (7)........... 254,800 5.6 -- 254,800 4.2
Randall D. Eisenbach (3)(4)............................ 10,240 * -- 10,240 *
James L. Hopkins (3)................................... 7,200 * -- 7,200 *
J. Shane Long (3)...................................... 6,200 * -- 6,200 *
Bryan F. Keyes (3)..................................... 2,100 * -- 2,100 *
James J. Byrne (3)..................................... 3,000 * -- 3,000 *
Lawrence E. Wesneski (3)(8)............................ 8,000 * -- 8,000 *
Directors and executive officers as a group (7 persons)
(3).................................................. 896,209 19.7 796,209 13.2
</TABLE>
- ------------------------
* Less than 1%
(1) Unless otherwise indicated, to the knowledge of the Company, all shares are
owned directly and the owner has sole voting and investment power.
(2) Messrs. Ogle, Balthaser and Sims have granted the Underwriters an
over-allotment option, exercisable not later than 30 days after the date of
this Prospectus, to purchase an aggregate of 270,000 shares of Common Stock
at the public offering price set forth on the cover page of this Prospectus,
less the underwriting discount. See "Underwriting." If the Underwriters
exercise the option in full, Mr. Ogle will sell an additional 90,000 shares,
resulting in his ownership of 669,469 shares (11.1%), Mr. Balthaser will
sell an additional 90,000 shares, resulting in his ownership of 293,333
shares (4.9%), Mr. Sims will sell an additional 90,000 shares, resulting in
his ownership of 293,333 shares (4.9%), and all directors and executive
officers as a group will own 706,209 shares (11.7%) after the closing of the
offering.
(3) Includes options to purchase 10,800, 8,400, 6,200, 6,200, 1,600, 2,000,
3,000 and 38,200 shares of Common Stock granted to Messrs. Ogle, Eisenbach,
Hopkins, Long, Keyes, Byrne, Wesneski and all directors and executive
officers as a group, respectively, that are exercisable within 60 days of
October 16, 1996. Does not include options to purchase 83,200, 73,600,
64,800, 64,800, 14,400, 8,000, 12,000 and 320,800 shares of Common Stock
granted to Messrs. Ogle, Eisenbach, Hopkins, Long, Keyes, Byrne, Wesneski
and all directors and executive officers as a group, respectively, that are
not exercisable within 60 days of October 16, 1996.
(4) Includes for William E. Ogle 3,000 shares owned by his spouse, 1,500 shares
owned by a trust benefiting his children, 5,500 shares held by him pursuant
to an Individual Retirement Account and 2,335 shares held by him pursuant to
the Company's 401(k) Savings Plan. Includes for Randall D. Eisenbach 840
shares held by him pursuant to the Company's 401(k) Savings Plan.
(5) Messrs. Ogle, Balthaser and Sims are parties to a Right of First Refusal
Agreement pursuant to which either the Company or Mr. Ogle has the right to
purchase the shares of Messrs. Ogle, Balthaser or Sims under certain
circumstances. See "Certain Transactions--Right of First Refusal."
(6) The address of each of Messrs. Ogle, Balthaser and Sims is 1651 North
Glenville Drive, Richardson, Texas 75081.
(7) The address of Mitchell Hutchins Asset Management, Inc. ("MHAM") is 1285
Avenue of the Americas, New York, NY 10019. MHAM disclaims direct beneficial
ownership of all Common Stock held by it. Information with respect to the
beneficial ownership of MHAM was obtained from that shareholder's Schedule
13G dated February 13, 1996.
(8) Includes 5,000 shares held by Twin Lakes Partners, L.P. ("Twin Lakes"). Mr.
Wesneski is the sole general partner of Twin Lakes.
53
<PAGE>
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED SHARES
The Company's authorized capital stock consists of 20,000,000 shares of
Common Stock, $.01 par value per share ("Common Stock"), and 2,000,000 shares of
Preferred Stock, $.01 par value per share (the "Preferred Stock"), issuable in
series.
COMMON STOCK
The holders of shares of Common Stock have no preemptive rights to maintain
their respective percentage ownership interests in the Company or other
subscription or conversion rights for other securities of the Company. Shares of
Common Stock are not redeemable or subject to further calls or assessments. The
shares of Common Stock to be outstanding after completion of the offering,
including the shares of Common Stock offered by this Prospectus, when paid for
and issued, will be fully paid and nonassessable. Each holder of Common Stock is
entitled to one vote per share of Common Stock which that person holds. The
Company's Amended and Restated Articles of Incorporation prohibit cumulative
voting. Holders of Common Stock are entitled to receive such dividends, if any,
as may be declared by the Board of Directors of the Company out of funds legally
available therefor and are entitled to share ratably in the net assets available
for distribution to such holders upon liquidation, dissolution and winding up of
the Company.
PREFERRED STOCK
The Board of Directors of the Company may issue Preferred Stock in one or
more series and may designate the dividend rate, voting rights and other rights,
preferences and restrictions of each series. Immediately following completion of
the offering, no Preferred Stock will be outstanding, and the Company currently
has no plans to issue any Preferred Stock.
It is not possible to state the actual effect of the issuance of Preferred
Stock upon the rights of holders of the Common Stock until the Board of
Directors of the Company determines the specific rights of the holders of such
Preferred Stock. However, among other effects, the issuance of Preferred Stock
might restrict dividends on the Common Stock, dilute the voting power of the
Common Stock, impair the liquidation rights of the Common Stock and delay or
prevent a change in control of the Company without further action by the
Company's shareholders.
LIMITATIONS ON DIRECTOR LIABILITY
The Amended and Restated Articles of Incorporation of the Company provide
that directors of the Company will not be liable to the Company or its
shareholders for monetary damages for an act or omission in the director's
capacity as a director, except for (i) a breach of the directors' duty of
loyalty to the Company or the Company's shareholders, (ii) an act or omission
not in good faith that constitutes a breach of a duty of the director to the
Company or an act or omission that involves intentional misconduct or a knowing
violation of the law, (iii) a transaction from which the director received an
improper benefit, whether or not the benefit resulted from an action taken
within the scope of the director's office, or (iv) an act or omission for which
the liability of a director is expressly provided by an applicable statute.
TRADING MARKET, TRANSFER AGENT AND REGISTRAR
The Common Stock is listed on the Nasdaq National Market under the symbol
STBI. The Transfer Agent and Registrar for the Common Stock is Chemical Mellon
Shareholder Services L.L.C.
ANTI-TAKEOVER MEASURES
The Right of First Refusal Agreement to which the Company and the Founding
Shareholders are parties imposes restrictions on the transferability of the
shares held by the Founding Shareholders. These restrictions
54
<PAGE>
could make the acquisition of control of the Company more difficult, and could
therefore be deemed to have an anti-takeover effect. See "Certain
Transactions--Right of First Refusal." The Employment Agreements to which the
Company is a party with each of Messrs. Ogle, Eisenbach, Hopkins and Long impose
certain parachute payment obligations on the Company in the event the employment
of any such executive officer is terminated within a certain time period
following a change in control of the Company. These restrictions could also be
deemed to have an anti-takeover effect. See "Management--Employment Agreements."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, the Company will have outstanding 6,013,598
shares of Common Stock (assuming no further option exercises). In addition to
the 2,688,923 shares of Common Stock that are currently freely tradeable, the
shares of Common Stock offered hereby will be freely tradeable after the close
of this offering, except to the extent such shares are purchased by "affiliates"
of the Company, as that term is defined under the Securities Act. After
consummation of the offering, Messrs. Sims and Balthaser may no longer be deemed
to be affiliates of the Company within the meaning of Rule 144, and therefore
will be able to sell all shares owned by them (766,666 shares in the aggregate)
without restriction pursuant to paragraph (k) of Rule 144. Sales by Mr. Ogle,
who will remain an affiliate of the Company, will be subject to the restrictions
contained in Rule 144, including the volume limitation.
The Company, the Company's executive officers and directors and the Selling
Shareholders have agreed not to issue or sell, offer or contract to sell,
pledge, make gifts of or otherwise transfer any shares of Common Stock for a
period of 90 days after the date of this Prospectus without the prior written
consent of Hambrecht & Quist LLC, except for the shares of Common Stock offered
in connection with the offering and, with respect to the Company, pursuant to
stock option or purchase plans described in this Prospectus. Upon expiration of
these restrictions, the Company's executive officers and directors and the
Selling Shareholders will be free to sell the shares beneficially owned by them,
subject to compliance with the Securities Act, including Rule 144 promulgated
thereunder, and the terms of the Right of First Refusal Agreement, to which
certain of such shares are subject.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate of the Company who has
beneficially owned "restricted securities" for at least two years is entitled to
sell in any three-month period a number of shares that does not exceed the
greater of (i) 1% of the then outstanding shares of the Common Stock or (ii) the
average weekly trading volume of the Common Stock on the Nasdaq National Market
during the four calendar weeks immediately preceding the date on which notice of
the sale is filed with the Commission pursuant to Rule 144 (or, if no such
notice is required, the date of receipt of the order to execute the transaction
by the broker or the date of execution of the transaction directly with a market
maker). Sales pursuant to Rule 144 also are subject to certain other
requirements relating to manner of sale, notice of sale and availability of
current public information about the Company. A person (or persons whose shares
are aggregated) who is not and has not been an affiliate of the Company at any
time during the three months immediately preceding the sale of the Common Stock
is entitled to sell "restricted securities" pursuant to Rule 144(k) without
regard to the limitations described above, provided that three years have
elapsed since the later of the date on which such restricted shares were
acquired from the Company or the date they were acquired from an affiliate of
the Company.
55
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, each of
the Underwriters named below (the "Underwriters"), for whom Hambrecht & Quist
LLC and Cowen & Company are acting as representatives (the "Representatives"),
has agreed severally to purchase from the Company and the Selling Shareholders,
the following respective numbers of shares of Common Stock:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- ---------------------------------------------------------------------------------- ----------
<S> <C>
Hambrecht & Quist LLC.............................................................
Cowen & Company...................................................................
----------
Total........................................................................... 1,800,000
----------
----------
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent, including the absence of any
material adverse change in the Company's business and the receipt of certain
certificates, opinions and letters from the Company, its counsel and the
Company's independent auditors. The nature of the Underwriters' obligation is
such that they are committed to purchase all shares of Common Stock offered
hereby if any of such shares are purchased.
The Underwriters propose to offer the shares of Common Stock directly to the
public at the public offering price set forth on the cover page of this
Prospectus and to certain dealers who are members of the National Association of
Securities Dealers, Inc. (the "NASD") at such price less a concession not in
excess of $ per share. The Underwriters may allow, and such dealers may
reallow, to members of the NASD a concession not in excess of $ per share to
certain other dealers. After the offering contemplated hereby, the offering
price and other selling terms may be changed by the Representatives.
The Selling Shareholders have granted to the Underwriters an option,
exercisable no later than 30 days after the date of this Prospectus, to purchase
up to 270,000 additional shares of Common Stock at the public offering price,
less the underwriting discount, set forth on the cover page of this Prospectus.
To the extent that the Underwriters exercise this option, each of the
Underwriters will have a firm commitment to purchase approximately the same
percentage thereof which the number of shares of Common Stock to be purchased by
it shown in the above table bears to the total number of shares of Common Stock
offered hereby. The Selling Shareholders will be obligated, pursuant to the
option, to sell such shares to the Underwriters to the extent the option is
exercised. The Underwriters may exercise such option only to cover
over-allotments made in connection with the sale of shares of Common Stock
offered hereby.
The offering of the shares is made for delivery when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The Underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
56
<PAGE>
The Company and the Selling Shareholders have agreed to indemnify the
Underwriters and certain related persons against certain liabilities, including
liabilities under the Securities Act, and to contribute to payments the
Underwriters may be required to make in respect thereof. The Company has agreed
to indemnify the Selling Shareholders for any indemnification obligations that
they may owe to the Underwriters, as aforesaid. See "Certain
Transactions--Indemnification of Selling Shareholders."
The executive officers, directors and Selling Shareholders of the Company
have agreed that they will not, without the prior written consent of Hambrecht &
Quist LLC, sell, offer, contract to sell, transfer the economic risk of
ownership in, make any short sale, pledge or otherwise dispose of any shares of
Common Stock or any securities convertible into or exchangeable or exercisable
for or any rights to purchase or acquire Common Stock during the 90-day period
following the commencement of the offering to which this Prospectus relates. The
Company has also agreed that it will not, without the prior written consent of
Hambrecht & Quist LLC, issue, sell, offer, contract to sell, transfer the
economic risk of ownership in, make any short sale, pledge or otherwise dispose
of any shares of Common Stock or any securities convertible into or exchangeable
or exercisable for or any rights to purchase or acquire Common Stock during such
90-day period (except pursuant to employee and director stock plans).
In general, the rules of the Commission prohibit the Underwriters from
making a market in the Company's Common Stock during the "cooling off" period
immediately preceding the commencement of sales in the offering. The Commission
has, however, adopted exemptions from these rules that permit passive market
making under certain conditions. These rules permit an underwriter to continue
to make a market subject to the conditions, among others, that its bid not
exceed the highest bid by a market maker not connected with the offering and
that its net purchases on any one trading day not exceed prescribed limits.
Pursuant to these exemptions, certain Underwriters, selling group members (if
any) or their respective affiliates intend to engage in passive market making in
the Company's Common Stock during the cooling off period.
Lawrence E. Wesneski, a director of the Company, is President and Chief
Executive Officer of HBW, an NASD member firm that is expected to participate as
a member of the underwriting syndicate in connection with the offering
contemplated hereby. The offering will be conducted in accordance with the rules
of the NASD relating to the participation by member firms in offerings of
securities of affiliated entitles. HBW will not directly participate in the
determination of the offering price.
BWS, a predecessor of HBW, has provided certain financial advisory services
to STB. See "Management-- Compensation and Other Committee Interlocks and
Insider Participation." During fiscal 1996, Mr. Wesneski, individually, has not
received any compensation from the Company in excess of that paid to the
Company's other Non-Employee Director. Neither HBW nor Mr. Wesneski or any other
affiliate of Mr. Wesneski has received or will receive any special compensation
from the Company in connection with the offering.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered by this
Prospectus will be passed upon for the Company by Locke Purnell Rain Harrell (A
Professional Corporation), Dallas, Texas. Thompson & Knight, A Professional
Corporation, Dallas, Texas will pass upon certain legal matters for the
Underwriters.
EXPERTS
The financial statements as of October 31, 1994 and 1995 and for each of the
three years in the period ended October 31, 1995 included in this Prospectus and
the financial statement schedules included in the registration statement have
been so included in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
57
<PAGE>
AVAILABLE INFORMATION
The Company has filed a Registration Statement on Form S-1 (the
"Registration Statement") with the Commission in Washington, D.C., under the
Securities Act with respect to the shares of Common Stock offered hereby. This
Prospectus does not contain all the information set forth in the Registration
Statement, certain portions of which are omitted as permitted by the rules and
regulations of the Commission. For further information with respect to the
Company and the shares offered by this Prospectus, reference is made to the
Registration Statement, including the exhibits and schedules filed therewith.
Statements contained in this Prospectus regarding the contents of any agreement,
contract or other document referred to herein or therein are not necessarily
complete but contain a summary of the material terms of such agreements,
contracts or other documents, and in each instance reference is made to the copy
of such contract or other document filed as an exhibit to the Registration
Statement or such other document, each such statement being qualified in all
respects by such reference.
The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports, proxy and information statements
and other information with the Commission. Reports, registration statements,
proxy statements and other information filed by the Company with the Commission
can be inspected and copied at the public reference facilities of the Commission
at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549
and at the following regional offices of the Commission: Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60621 and 7 World Trade
Center, Suite 1300, New York, New York 10048, upon payment of the charges
prescribed therefor by the Commission. These reports, registration statements,
proxy statements and other information may be obtained from the web site that
the Commission maintains at www.sec.gov.
58
<PAGE>
STB SYSTEMS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
CONSOLIDATED ANNUAL FINANCIAL STATEMENTS:
Report of Independent Accountants.......................................................................... F-2
Consolidated Balance Sheets as of October 31, 1994 and 1995................................................ F-3
Consolidated Statement of Operations for the Years Ended October 31, 1993, 1994 and 1995................... F-4
Consolidated Statement of Changes in Shareholders' Equity for the Years Ended October 31, 1993,
1994 and 1995............................................................................................ F-5
Consolidated Statement of Cash Flows for the Years Ended October 31, 1993, 1994 and 1995................... F-6
Notes to Consolidated Financial Statements................................................................. F-7
CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED):
Consolidated Balance Sheet as of July 31, 1996............................................................. F-16
Consolidated Statement of Operations for the Nine Months Ended July 31, 1995 and 1996...................... F-17
Consolidated Statement of Cash Flows for the Nine Months Ended July 31, 1995 and 1996...................... F-18
Notes to Consolidated Financial Statements................................................................. F-19
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
STB Systems, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in shareholders' equity and of
cash flows present fairly, in all material respects, the consolidated financial
position of STB Systems, Inc. and subsidiaries at October 31, 1994 and 1995, and
the results of their operations and their cash flows for each of the three years
in the period ended October 31, 1995, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Dallas, Texas
December 11, 1995
F-2
<PAGE>
STB SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 1994 AND 1995
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
Current Assets:
Cash and cash equivalents................................................................. $ 277 $ 4,162
Accounts receivable--trade, net of allowance for doubtful accounts of
$363 and $449........................................................................... 11,092 20,634
Inventories, net.......................................................................... 9,952 27,875
Other current assets...................................................................... 67 869
--------- ---------
Total current assets.................................................................... 21,388 53,540
Property and equipment, net................................................................. 1,660 3,397
Other assets................................................................................ 603 602
--------- ---------
Total assets.............................................................................. $ 23,651 $ 57,539
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term debt........................................................................... $ 6,683 $ 11,411
Notes payable to related parties.......................................................... -- 700
Accounts payable--trade................................................................... 8,710 17,731
Accrued wages, commissions and bonuses.................................................... 741 559
Accrued dividends payable................................................................. 433 --
Other accrued liabilities................................................................. 338 791
Current portion of long-term liabilities.................................................. 110 727
--------- ---------
Total current liabilities............................................................... 17,015 31,919
--------- ---------
Long-term liabilities:
Long-term notes payable................................................................... 2,010 1,500
Obligations under capital leases and other long-term liabilities.......................... 430 758
--------- ---------
Total long-term liabilities............................................................. 2,440 2,258
--------- ---------
Commitments and contingencies (Note 7)...................................................... -- --
Shareholders' equity:
Preferred stock, 2,000,000 shares authorized, none issued or outstanding.................. -- --
Common stock, $.01 par value, 20,000,000 shares authorized, 2,500,000 and 4,500,000 shares
issued and outstanding.................................................................. 25 45
Additional paid-in capital................................................................ 502 22,160
Retained earnings......................................................................... 3,914 1,402
--------- ---------
4,441 23,607
Treasury stock, 35 shares, at cost........................................................ (245) (245)
--------- ---------
Total shareholders' equity................................................................ 4,196 23,362
--------- ---------
Total liabilities and shareholders' equity.............................................. $ 23,651 $ 57,539
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
STB SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED OCTOBER 31, 1993, 1994, AND 1995
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ----------
<S> <C> <C> <C>
Net sales....................................................................... $ 39,236 $ 89,836 $ 129,603
Cost of sales................................................................... 30,726 73,213 110,129
--------- --------- ----------
Gross profit.................................................................... 8,510 16,623 19,474
--------- --------- ----------
Operating expenses:
Research and development...................................................... 1,079 1,795 2,719
Sales and marketing........................................................... 3,835 5,529 7,437
General and administrative.................................................... 2,810 5,190 6,172
--------- --------- ----------
Total operating expenses........................................................ 7,724 12,514 16,328
--------- --------- ----------
Income from operations.......................................................... 786 4,109 3,146
Interest expense, net........................................................... 226 588 818
--------- --------- ----------
Income before income taxes...................................................... 560 3,521 2,328
Provision for income taxes...................................................... -- -- 330
--------- --------- ----------
Net income...................................................................... $ 560 $ 3,521 $ 1,998
--------- --------- ----------
--------- --------- ----------
Pro forma data (unaudited):
Net income.................................................................... $ 1,998
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)
----------
Pro forma net income.......................................................... $ 1,683
----------
----------
Pro forma net income per share................................................ $ 0.45
----------
----------
Weighted average shares outstanding used in the pro forma net income per share
calculation................................................................. 3,746,395
----------
----------
Supplemental pro forma net income per share................................... $ 0.42
----------
----------
Weighted average shares used in the supplemental pro forma net income per
share calculation........................................................... 3,983,014
----------
----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
STB SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED OCTOBER 31, 1993, 1994 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TREASURY STOCK
----------------------- PAID-IN RETAINED ------------------------
SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT
---------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, October 31, 1992...................... 2,500,000 $ 25 $ 502 $ 1,547 35 $ (245)
Dividends declared............................. (302)
Net Income..................................... 560
-- -
---------- ----------- ----------- -----
Balance, October 31, 1993...................... 2,500,000 25 502 1,805 35 (245)
Dividends declared............................. (1,413)
Cumulative translation gain.................... 1
Net Income..................................... 3,521
-- -
---------- ----------- ----------- -----
Balance, October 31, 1994...................... 2,500,000 25 502 3,914 35 (245)
Dividends declared............................. (851)
Establishment of deferred tax asset............ 455
Distribution of S Corporation earnings......... (4,122)
Net proceeds from initial public offering...... 2,000,000 20 21,658
Cumulative translation gain.................... 8
Net Income..................................... 1,998
-- -
---------- ----------- ----------- -----
Balance, October 31, 1995...................... 4,500,000 $ 45 $ 22,160 $ 1,402 35 $ (245)
-- -
-- -
---------- ----------- ----------- -----
---------- ----------- ----------- -----
<CAPTION>
TOTAL
---------
<S> <C>
Balance, October 31, 1992...................... $ 1,829
Dividends declared............................. (302)
Net Income..................................... 560
---------
Balance, October 31, 1993...................... 2,087
Dividends declared............................. (1,413)
Cumulative translation gain.................... 1
Net Income..................................... 3,521
---------
Balance, October 31, 1994...................... 4,196
Dividends declared............................. (851)
Establishment of deferred tax asset............ 455
Distribution of S Corporation earnings......... (4,122)
Net proceeds from initial public offering...... 21,678
Cumulative translation gain.................... 8
Net Income..................................... 1,998
---------
Balance, October 31, 1995...................... $ 23,362
---------
---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
STB SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED OCTOBER 31, 1993, 1994 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income...................................................................... $ 560 $ 3,521 $ 1,998
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization................................................. 247 395 733
Gain(loss) on sale of assets.................................................. (10) (45) --
Changes in assets and liabilities:
Accounts receivable--trade.................................................. (2,756) (4,132) (9,542)
Inventories................................................................. (3,567) (3,294) (17,923)
Other current assets........................................................ 28 31 (347)
Other assets................................................................ 9 (304) 2
Accounts payable--trade..................................................... 4,408 264 9,029
Accrued wages, commissions, and bonuses..................................... 81 514 (182)
Other accrued liabilities................................................... (70) 49 453
--------- --------- ---------
Net cash used in operating activities..................................... (1,070) (3,001) (15,779)
--------- --------- ---------
Cash flows from investing activities:
Purchases of property and equipment............................................. (441) (1,434) (2,470)
Sale of property and equipment.................................................. 42 48 --
--------- --------- ---------
Net cash used in investing activities..................................... (399) (1,386) (2,470)
--------- --------- ---------
Cash flows from financing activities:
Borrowings on short-term debt................................................... 2,070 3,042 4,727
Payments on Founding Shareholder Notes.......................................... -- -- (1,340)
Borrowings on long-term debt.................................................... 45 2,278 436
Payments against long-term debt................................................. (48) (81) --
Issuance of common stock, net of issue costs.................................... -- -- 21,678
Distribution of S Corporation earnings.......................................... -- -- (2,082)
Payment of dividends............................................................ (308) (990) (1,285)
--------- --------- ---------
Net cash provided by financing activities................................. 1,759 4,249 22,134
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents.............................. 290 (138) 3,885
Cash and cash equivalents at beginning of period.................................. 125 415 277
--------- --------- ---------
Cash and cash equivalents at end of period........................................ $ 415 $ 277 $ 4,162
--------- --------- ---------
--------- --------- ---------
Supplemental disclosure of cash flow information:
--Cash paid for interest in 1993, 1994 and 1995 was $214, $553 and $1,023, respectively.
--Accrued and unpaid dividends at October 31, 1993 and 1994 were $10 and $433
--At October 31, 1994, amounts relating to the Contingent Payment (see Note 5) include $276 in other assets and
long-term liabilities. At October 31, 1995, other assets include $220 and long term liabilities include $276
related to the Contingent Payment.
--Other assets at October 31, 1995 include $455 relating to the establishment of a deferred tax asset arising
from the effects of the conversion from S Corporation to C Corporation status.
--Amounts due related parties at October 31, 1995 represent the remaining balances on the Founding Shareholder
Notes, originally issued in the amount of $2,040 which resulted from the conversion of undistributed S
Corporation earnings to notes payable.
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
STB SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1993, 1994 AND 1995
NOTE 1--DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
STB Systems, Inc. designs, manufactures and sells graphics adapters and
other multimedia subsystem products for use primarily in desktop personal
computers ("PCs"). STB Assembly, Inc. is a wholly-owned subsidiary and provides
manufacturing services to STB Systems, Inc.
PRINCIPLES OF CONSOLIDATION--In conjunction with the Stock Offering (see
Note 2), STB Assembly, Inc. became a wholly owned subsidiary of STB Systems,
Inc. Consequently, the accompanying financial statements, which include the
historical accounts of STB Systems, Inc. and STB Assembly, Inc. (collectively
referred to as the "Company"; see also Note 2) have been combined for fiscal
years 1993 and 1994, and consolidated for fiscal 1995. STB Assembly, Inc. has
two majority owned subsidiaries, STB de Mexico and Maquilados Continentales de
Chihuahua ("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.
CASH AND CASH EQUIVALENTS--Cash equivalents are short-term, highly liquid
investments that are both readily convertible to known amounts of cash and so
near to their maturity that they present insignificant risk of changes in value
because of changes in interest rates. Investments with initial maturities of
three months or less qualify under this definition.
REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE--The Company recognizes revenue
from product sales upon shipment. Sales to original equipment manufacturers
("OEMs") account for a significant portion of the Company's sales. The Company
offers its OEM customers a limited warranty for a period of typically 15 to 39
months. Costs associated with the warranty program are accrued when revenue is
recognized and are determined on the basis of estimated future costs to fulfill
the warranty commitment.
Stock rotation returns, under specified conditions, are allowed to certain
retail customers for recently purchased products, provided an equivalent dollar
amount of other products is purchased at the time of the return. Also, under the
terms of some of the agreements, in the event the Company reduces its selling
prices, the retail customers receive price protection credit for the difference
between the original purchase price of product remaining in specified levels of
their inventories and the Company's reduced price for such products. Sales
adjustments resulting from stock rotation returns and price protection policies
are made as determined by management and have historically been minor.
Management's estimates are based on the Company's historical experience with
such arrangements and its evaluation of current exposure resulting from these
policies. The Company's sales are presented net of stock rotation returns and
price adjustments.
The Company participates in cooperative advertising programs with certain
distributors. These programs are used by the Company to reimburse distributors
for certain forms of advertising. In general, the programs allow distributors
credits up to a specified percentage of net purchases. The Company's costs
associated with these programs are accrued at the time of sale and are included
in sales and marketing expenses.
INVENTORIES--Inventories are valued at the lower of cost or market. Cost is
determined on a first-in, first-out basis using a moving weighted average
methodology.
PROPERTY AND EQUIPMENT--Property and equipment are stated at cost.
Depreciation is computed for financial statement purposes using an accelerated
method over the estimated useful lives of the assets, which range from three to
five years. Amortization of assets recorded under capital leases is included in
depreciation
F-7
<PAGE>
STB SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1993, 1994 AND 1995
NOTE 1--DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
expense. Depreciation expense for each of the years ended October 31, 1993, 1994
and 1995 was $247,000, $395,000 and $733,000, respectively.
RESEARCH AND DEVELOPMENT--Research and development costs are charged to
expense as incurred.
INCOME TAXES--Effective February 21, 1995 and in connection with the
Company's initial public offering ("Stock Offering"), the Company adopted
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (SFAS 109) on a prospective basis (see Note 2). Under the asset and
liability method of SFAS 109, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to temporary differences between
the financial statement carrying amounts and the tax basis of existing assets
and liabilities measured using estimated tax rates expected to apply to taxable
income in the years in which the temporary differences are expected to be
recovered or settled.
Prior to the Stock Offering (see Note 2), the Company 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 the Company 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 Stock Offering, the Company paid dividends to its
shareholders in an amount equal to the taxable earnings of the Company
multiplied by the current personal income tax rate.
ACCOUNTING FOR STOCK-BASED COMPENSATION--In October 1995, Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-based Compensation"
(SFAS 123), was issued. This statement requires the fair value of stock options
and other stock-based compensation issued to employees to either be included as
compensation expense in the statement of operations, or the pro forma effect on
net income and earnings per share of such compensation expense to be disclosed
in the footnotes to the Company's financial statements commencing with the
Company's 1997 fiscal year. This Company expects to adopt SFAS 123 on a
disclosure basis only. As such, implementation of SFAS 123 is not expected to
impact the Company's consolidated balance sheet or statement of operations.
FINANCIAL INSTRUMENTS--As of October 31, 1994 and 1995 the fair values of
the Company's revolving credit balance and the fair values of the Company's
fixed-rate debt approximate the related carrying values.
PRO FORMA NET INCOME AND NET INCOME PER SHARE (UNAUDITED)--Pro forma net
income and net income per share have been determined assuming that (1) the
Company had adopted the revised profit sharing plan effective November 1, 1994
(see Note 9), (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 (see Note 2), and (3) the Company had been taxed as a C corporation
for federal and certain state income tax purposes since November 1, 1994 (see
Note 10).
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 (see Note 2). Common equivalent shares are also increased to reflect the
number of shares which would have been necessary to fund the $2.04 million
distribution paid to the Founding Shareholders from the proceeds of the Stock
Offering of the Company's common stock (see Note 2).
F-8
<PAGE>
STB SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1993, 1994 AND 1995
NOTE 1--DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SUPPLEMENTAL PRO FORMA NET INCOME PER SHARE (UNAUDITED)--Supplemental pro
forma net income per share is based on the weighted number of shares of common
stock used in the calculation of pro forma net income per share plus the number
of shares that the Company would need to issue to repay $5,500,000 of bank
indebtedness outstanding under the Company's Revolving Credit Facility.
NOTE 2--STOCK SPLIT, REORGANIZATION AND STOCK OFFERING
Effective December 20, 1994, the Company consummated a common stock split at
a ratio of 8,333 to one which resulted in common stock with $.01 par value,
20,000,000 shares authorized, 2,500,000 shares issued and outstanding prior to
the Stock Offering (see below). The stock split, which was effected in the form
of a stock dividend, has been given retroactive effect in the accompanying
financial statements.
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 one-for-333 basis immediately prior to consummation of
the Stock 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, there was no
change in basis for financial reporting purposes as a result of the Share
Exchange Agreement. As a result of the reorganization, STB Assembly, Inc. became
a wholly-owned subsidiary of STB Systems, Inc. Effective February 20, 1995, STB
Systems, Inc. terminated its S Corporation status and became a C Corporation and
as a result, the Company became subject to all federal and state taxes pursuant
to the C Corporation rules of the Internal Revenue Code.
On December 16, 1994, the Board of Directors of the Company authorized an
initial public offering of the Company's common stock ("Stock Offering").
Accordingly, the Company filed a Registration Statement on Form S-1 with the
Securities and Exchange Commission for the sale of common stock. On February 14,
1995, 2,000,000 shares of common stock were offered to the public at a price of
$12.00 per share. Proceeds from the Company's Stock Offering totalled
$24,000,000, net of $2,322,000 of Stock Offering expenses. The Company's stock
is listed on the Nasdaq National Market under the symbol STBI.
NOTE 3--INVENTORIES
Inventories at October 31 consist of the following:
<TABLE>
<CAPTION>
1994 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Raw materials.......................................................... $ 4,146 $ 15,599
Work-in-process........................................................ 4,459 8,156
Finished goods......................................................... 1,347 4,120
--------- ---------
$ 9,952 $ 27,875
--------- ---------
--------- ---------
</TABLE>
F-9
<PAGE>
STB SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1993, 1994 AND 1995
NOTE 4--PROPERTY AND EQUIPMENT
Property and equipment at October 31 consist of the following:
<TABLE>
<CAPTION>
1994 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Furniture and equipment................................................ $ 3,598 $ 5,822
Leasehold improvements................................................. 310 419
--------- ---------
3,908 6,241
Less: accumulated depreciation......................................... (2,248) (2,844)
--------- ---------
Net property and equipment............................................. $ 1,660 $ 3,397
--------- ---------
--------- ---------
</TABLE>
NOTE 5--SHORT TERM DEBT AND NOTES PAYABLE TO RELATED PARTIES
At October 31, 1995, the Company had $11,411,000 outstanding under a
$13,000,000 revolving credit facility ("Revolving Credit Facility") with a bank,
payable upon demand, with interest at prime rate plus .75% (9.5% at October 31,
1995). All indebtedness under the Revolving Credit Facility matures on November
1, 1999. At October 31, 1994, $6,683,000 was outstanding under this credit
facility.
Availability under the Revolving Credit Facility is subject to limitations
determined by the Company's borrowing base, which is calculated based on
eligible accounts receivable and inventory as defined in the Revolving Credit
Facility agreement.
On February 20, 1995 the Company issued notes payable aggregating $2,040,000
to the Founding Shareholders to be repaid within 12 months of the date of issue
with interest at 9%. As of October 31, 1995 $700,000 was outstanding on the
notes.
NOTE 6--LONG-TERM LIABILITIES
Long-term liabilities at October 31 consist of the following:
<TABLE>
<CAPTION>
1994 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Mezzanine Facility, interest at prime plus 3%, payable in monthly
installments of interest only through November 1, 1995 and principal
and interest from December 1, 1995 through November 1, 1999,
collateralized by certain assets of the Company....................... $ 2,000 $ 2,000
Contingent Payment (see below).......................................... 276 276
Other loans, interest rates between 9.5% and 9.8%, payable in monthly
installments of principal and interest through July 1997,
collateralized by certain assets of the Company....................... 14 9
Obligations under capital leases........................................ 260 700
--------- ---------
2,550 2,985
Less: current portion................................................... (110) (727)
--------- ---------
Long-term liabilities................................................... $ 2,440 $ 2,258
--------- ---------
--------- ---------
</TABLE>
F-10
<PAGE>
STB SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1993, 1994 AND 1995
NOTE 6--LONG-TERM LIABILITIES (CONTINUED)
In accordance with the provisions of a contingent payment agreement
("Contingent Payment") executed in connection with the Revolving Credit and
Mezzanine Facilities, the Company is obligated to pay the lender a one-time fee
equal to one percent (1%) of the product of six (6) times the Company's earnings
before income taxes, interest, depreciation and amortization for the fiscal year
immediately preceding the year in which the payment is made. The Company has the
option to pay this fee on any date following the successful completion of an
initial public offering, and must pay the fee on any date after October 17,
1996, upon demand from the lender. The Company recorded a liability and related
asset of $276,000 at October 31, 1994. Based on fiscal 1995 earnings, the
resulting Contingent Payment at November 1, 1995 did not vary materially from
the amount recorded at October 31, 1994. The asset is being amortized to
interest expense over the term of the related debt as a yield adjustment.
The combined aggregate amount of maturities for all long-term borrowings,
excluding obligations under capital leases and the Contingent Payment, for each
of the five years following October 31, 1995 are:
<TABLE>
<CAPTION>
(IN
YEARS ENDING OCTOBER 31, THOUSANDS)
- -----------------------------------------------------------------------------------------
<S> <C>
1996............................................................................... $ 505
1997............................................................................... 504
1998............................................................................... 500
1999............................................................................... 500
2000 and thereafter................................................................ --
------
$ 2,009
------
------
</TABLE>
The Company leases certain equipment under capital leases. Future minimum
lease payments under capital leases and the present value of the minimum lease
payments at October 31, 1995 are:
<TABLE>
<CAPTION>
(IN
YEARS ENDING OCTOBER 31, THOUSANDS)
- -----------------------------------------------------------------------------------------
<S> <C>
1996............................................................................... $ 290
1997............................................................................... 244
1998............................................................................... 153
1999............................................................................... 95
2000............................................................................... 64
------
846
Less: amount representing interest....................................................... (146)
------
Present value of minimum payments........................................................ $ 700
------
------
</TABLE>
NOTE 7--COMMITMENTS AND CONTINGENCIES
The Company leases office space and equipment under various noncancelable
operating lease agreements extending through 1999. Rental expense for each of
the years ended October 31, 1993, 1994 and 1995 was $444,000, $660,000 and
$773,000, respectively.
F-11
<PAGE>
STB SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1993, 1994 AND 1995
NOTE 7--COMMITMENTS AND CONTINGENCIES (CONTINUED)
At October 31, 1995, future minimum lease payments for such operating leases
are:
<TABLE>
<CAPTION>
(IN
YEARS ENDING OCTOBER 31, THOUSANDS)
- -----------------------------------------------------------------------------------------
<S> <C>
1996............................................................................... $ 765
1997............................................................................... 506
1998............................................................................... 330
1999............................................................................... 45
2000............................................................................... --
------
Total.............................................................................. $ 1,646
------
------
</TABLE>
In September 1995, a class action lawsuit was filed against the Company
alleging the prospectus and Registration Statement for the Stock Offering
contained false and materially misleading facts, and omitted to state material
facts. The members of the class seek unspecified damages. The company denies the
allegations. No formal discovery has yet been undertaken, and the Company
intends to vigorously defend its position. In the opinion of management, this
lawsuit is not likely to result in any loss that would have a material adverse
effect on the Company's operating results or financial condition.
NOTE 8--MAJOR CUSTOMERS
Sales to major customers, as a percentage of net sales, were as follows for
each of the years ended October 31:
<TABLE>
<CAPTION>
CUSTOMER 1993 1994 1995
- ------------------------------------------------------------------ --------- --------- ---------
<S> <C> <C> <C>
A................................................................. 26% 8% 2%
B................................................................. 10% 3% 2%
C................................................................. 5% 40% 42%
D................................................................. -- 6% 10%
</TABLE>
Net sales to customers within the United States and to customers in foreign
countries were as follows for each of the years ended October 31:
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
United States......................................... $ 30,110 $ 76,560 $ 98,742
Europe................................................ 8,181 12,445 30,000
Other................................................. 945 831 861
--------- --------- ----------
$ 39,236 $ 89,836 $ 129,603
--------- --------- ----------
--------- --------- ----------
</TABLE>
NOTE 9--EMPLOYEE BENEFIT PLAN AND PROFIT SHARING PLAN
The Company has a 401(K) plan for all full-time employees. The plan provides
for the Company to make contributions of up to 25% of the amount of an
employee's contribution, but not more than 1% of an employee's total cash
compensation. The Company incurred expense of $22,000, $28,000 and $34,000 in
the years ended October 31, 1993, 1994 and 1995, respectively, for its
contributions to this plan.
F-12
<PAGE>
STB SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1993, 1994 AND 1995
NOTE 9--EMPLOYEE BENEFIT PLAN AND PROFIT SHARING PLAN (CONTINUED)
The Company's profit sharing plan provides for a portion of the Company's
income before taxes to be paid as additional compensation to participants in
this plan. Concurrent with the Stock Offering, the profit sharing percentage was
reduced from 25% to 10%. Employees meeting eligibility requirements participate
in the plan. The Company incurred compensation expense of $183,000, $1,195,000
and $503,000 in the years ended October 31, 1993, 1994 and 1995, respectively,
as a result of the Company's obligations under the profit sharing plan.
NOTE 10--CHANGE IN S CORPORATION STATUS AND INCOME TAXES
Immediately preceeding the Stock Offering (see Note 2), STB Systems, Inc.
terminated its S Corporation status, and accordingly, the Company is subject to
federal and state income taxes.
The Company paid cash distributions to its Founding Shareholders in the
aggregate amounts of $308,000, $990,000 and $1,285,000 for fiscal years 1993,
1994 and 1995, respectively. Following the Stock Offering, the Company made
final distributions of the Company's undistributed S Corporation earnings to its
Founding Shareholders. Such undistributed S Corporation earnings aggregated $4.1
million. The Company paid approximately one-half of the undistributed S
Corporation earnings from the proceeds of the Stock Offering, and the remainder
in the form of Founding Shareholder Notes, of which approximately $700,000
remains outstanding at October 31, 1995.
As a result of the termination of STB Systems, Inc.'s S Corporation status,
the Company is required to provide deferred income taxes for cumulative
temporary differences between income for financial and income tax reporting
purposes at the date of termination. A deferred tax asset of $455,000 was
recorded at the date of change in tax status resulting primarily due to the
differing methods of recognizing inventory reserves and bad debt allowances for
financial and income income tax reporting purposes. The deferred tax asset at
October 31, 1995 in the amount of $628,000 is comprised of the following and
included in other current assets in the consolidated balance sheet:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Bad debt reserves.............................................................. $ 153
Inventory reserves............................................................. 340
Depreciation................................................................... 55
Various expense accruals....................................................... 80
---
Deferred tax asset............................................................. $ 628
---
---
</TABLE>
F-13
<PAGE>
STB SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1993, 1994 AND 1995
NOTE 10--CHANGE IN S CORPORATION STATUS AND INCOME TAXES (CONTINUED)
Provision for Income Taxes--The components of the income tax provision for
the C Corporation period for the year ended October 31, 1995 are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Current provision
Federal...................................................................... $ 485
State........................................................................ 18
-----
503
-----
Deferred provision (benefit)
Federal...................................................................... (173)
State........................................................................ --
-----
(173)
-----
Provision for income taxes..................................................... $ 330
</TABLE>
A reconciliation of taxes based on the federal statutory rate of 34% and the
provision for income taxes is summarized as follows for the year ended October
31, 1995:
<TABLE>
<S> <C>
Income taxes at the federal statutory rate..................... 34.0%
S Corporation earnings......................................... (17.5)%
State income taxes, net of federal benefit..................... 0.5%
Other, net..................................................... (2.8)%
-----
Provision for income taxes..................................... 14.2%
-----
-----
</TABLE>
NOTE 11--RELATED PARTY TRANSACTIONS
In July 1993, the Company entered into an agreement with a financial
consulting firm to provide advisory services and arrange certain credit
facilities for the Company. The president of this firm, who is also an equity
holder in this firm, serves as a member to the Company's board of directors. The
Company incurred costs of $36,000 and $138,000 for each of the years ended
October 31, 1993 and 1994, respectively, related to these services.
In April 1994, this financial consulting firm agreed to provide certain
advisory services, including services relating to the Stock Offering. A flat fee
of $150,000 was paid to the firm in connection with the Stock Offering. The
Company recognized costs of $17,000 and $133,000 with respect to these services
in the years ended October 31, 1994 and 1995, respectively.
A business consulting firm has provided consulting services to the Company
since March 1990, for which the Company incurred fees of $88,000, $125,000 and
$25,000 in the years ended October 31, 1993, 1994 and 1995, respectively. A
general partner in this consulting firm is an officer of the Company and a
member of the Company's board of directors.
F-14
<PAGE>
STB SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1993, 1994 AND 1995
NOTE 12--STOCK PLANS
The Company's 1995 Long Term Incentive Plan provides for the granting of
incentive stock options and non-qualified stock options to purchase common
stock, stock appreciation rights, restricted stock and performance units to key
executives and other key employees of the Company. The plan authorizes 850,000
shares of common stock to be used for stock options, stock appreciation rights,
or restricted stock. All options were granted between February 14, 1995 and
April 7, 1995 and vest at the rate of 20% per year on each of the first five
anniversaries of the date of grant. The plan will terminate on December 31,
2004. Stock option activity during fiscal 1995 is as follows:
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE
SHARES RANGE PER SHARE
----------- ---------------
<S> <C> <C>
Balance at October 31, 1994.................................... -- --
Granted...................................................... 478,000 $12.00-$13.88
Terminated................................................... (56,500) $12.00-$13.75
Exercised.................................................... -- --
-----------
Balance at October 31, 1995.................................... 421,500 $12.00-$13.88
-----------
-----------
</TABLE>
EMPLOYEE STOCK OPTION PURCHASE PLAN--The 1995 Employee Stock Option Purchase
Plan provides a method whereby eligible employees may purchase common stock
through voluntary payroll deductions, not to exceed 10% of the employee's base
salary. Payroll deductions are made over a twelve month period. At the end of
the deduction period, employees will have a subsequent twelve month period
during which they may either exercise their options in whole or in part, or
withdraw their funds with interest at a rate determined by the Stock Option
Committee. The purchase price under the plan will be determined by the Stock
Option Committee, however, the option price will not be less than 85% of the
fair market value of the common stock on the date the option is granted or, such
price will not be less than 85% of the fair market value of the Common Stock on
the date the option is exercised. No stock or stock options have been issued
under this plan as of October 31, 1995.
NOTE 13--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------------------------
31-JAN 30-APR 31-JUL 31-OCT 31-JAN 31-APR 31-JUL 31-OCT
1994 1994 1994 1994 1995 1995 1995 1995
--------- --------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales.............................. $ 18,076 $ 23,786 $ 23,450 $ 24,523 $ 30,738 $ 33,370 $ 25,663 $ 39,832
Gross profit........................... 3,122 4,765 4,629 4,107 5,095 4,712 3,550 6,117
Net income (loss)...................... (497) 941
Net income (loss) per share............ $ (0.11) $ 0.21
Pro forma net income................... 387 999 829 534 828 410
Pro forma net income per share......... $ 0.15 $ 0.38 $ 0.31 $ 0.20 $ 0.31 $ 0.10
</TABLE>
F-15
<PAGE>
STB SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
JULY 31,
1996
---------
<S> <C>
Current Assets:
Cash and cash equivalents............................................................................ $ 4,132
Accounts receivable--trade, net of allowance for doubtful accounts of
$449 and $465...................................................................................... 22,075
Inventories, net..................................................................................... 20,465
Other current assets................................................................................. 329
---------
Total current assets............................................................................... 47,001
Property and equipment, net.......................................................................... 4,506
Other assets......................................................................................... 1,099
---------
Total assets....................................................................................... $ 52,606
---------
---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term debt...................................................................................... $ 4,818
Accounts payable--trade.............................................................................. 15,925
Notes payable to related parties..................................................................... --
Accrued wages, commissions and bonuses............................................................... 962
Other accrued liabilities............................................................................ 1,147
Current portion of long-term liabilities............................................................. 722
---------
Total current liabilities.......................................................................... 23,574
---------
Long-term liabilities:
Long-term notes payable.............................................................................. 1,125
Obligations under capital leases and other long-term liabilities..................................... 547
---------
Total long-term liabilities........................................................................ 1,672
---------
Shareholders' equity:
Preferred stock, 2,000,000 shares authorized, none issued or outstanding............................. --
Common stock, $.01 par value, 20,000,000 shares authorized, 4,500,000 and 4,504,387 shares issued and
outstanding, respectively.......................................................................... 45
Additional paid-in capital........................................................................... 22,213
Retained earnings.................................................................................... 5,347
---------
27,605
Treasury stock, 35 shares, at cost..................................................................... (245)
---------
Total shareholders' equity............................................................................. 27,360
---------
Total liabilities and shareholders' equity......................................................... $ 52,606
---------
---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-16
<PAGE>
STB SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED JULY
31,
----------------------
1995 1996
---------- ----------
<S> <C> <C>
Net sales................................................................................ $ 89,771 $ 132,034
Cost of sales............................................................................ 76,415 107,753
---------- ----------
Gross profit............................................................................. 13,356 24,281
---------- ----------
Operating expenses:
Research and development............................................................... 2,051 2,975
Sales and marketing.................................................................... 5,300 7,847
General and administrative............................................................. 4,523 6,591
---------- ----------
Total operating expenses................................................................. 11,874 17,413
---------- ----------
Income from operations................................................................... 1,482 6,868
Interest expense, net.................................................................... 556 869
---------- ----------
Income before income taxes............................................................... 926 5,999
Provision (benefit) for income taxes..................................................... (131) 2,052
---------- ----------
Net income............................................................................... $ 1,057 $ 3,947
---------- ----------
---------- ----------
Net income per share................................................................... $ 0.88
----------
----------
Weighted average shares outstanding.................................................... 4,504,239
----------
----------
Pro forma data:
Net income............................................................................. $ 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)
----------
Pro forma net income................................................................... $ 742
----------
----------
Pro forma net income per share......................................................... $ 0.20
----------
----------
Weighted average shares outstanding used in the pro forma net income per share
calculation.......................................................................... 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
----------
----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-17
<PAGE>
STB SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JULY 31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................................................ $ 1,057 $ 3,947
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization........................................................... 517 831
Deferred tax asset...................................................................... 455 --
Translation gain(loss).................................................................. 5 (1)
Changes in assets and liabilities:
Accounts receivable--trade............................................................ (424) (1,441)
Inventories........................................................................... (10,964) 7,410
Other current assets.................................................................. (168) 540
Other assets.......................................................................... (426) (497)
Accounts payable--trade............................................................... 2,773 (1,806)
Accrued wages, commissions, and bonuses............................................... (410) 403
Other accrued liabilities............................................................. (214) 356
--------- ---------
Net cash provided by (used in) operating activities................................. (7,799) 9,742
--------- ---------
Cash flows from investing activities --
Purchases of property and equipment....................................................... (2,008) (1,940)
--------- ---------
Cash flows from financing activities:
Borrowings (payments) on short-term debt.................................................. 410 (7,293)
Borrowings (payments) on long-term debt................................................... 329 (592)
Issuance of common stock, net of issue costs.............................................. 19,638 53
Payment of dividends...................................................................... (3,367) --
--------- ---------
Net cash provided by (used in) financing activities................................... 17,010 (7,832)
--------- ---------
Net increase (decrease) in cash and cash equivalents........................................ 7,203 (30)
Cash and cash equivalents at beginning of period............................................ 277 4,162
--------- ---------
Cash and cash equivalents at end of period.................................................. $ 7,480 $ 4,132
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-18
<PAGE>
STB SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1--BASIS OF PRESENTATION
STB Systems, Inc. designs, manufactures and sells graphics adapters and
other multimedia subsystem products for use primarily in desktop 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 interim
periods are not necessarily indicative of results to be expected for the year.
NOTE 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-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. are 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.
NOTE 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.
Pro forma net income and net income per share have been determined assuming
that (1) the Company had adopted the 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
F-19
<PAGE>
STB SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 3--PRO FORMA NET INCOME AND NET INCOME PER SHARE (CONTINUED)
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 for one effective December 20, 1994. 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.
NOTE 4--INVENTORIES
Inventories at July 31, 1996 consist of the following:
<TABLE>
<CAPTION>
JULY 31, 1996
-------------
(IN
THOUSANDS)
<S> <C>
Raw materials............................................................... $ 10,127
Work-in-process............................................................. 7,695
Finished goods.............................................................. 2,643
-------------
$ 20,465
-------------
</TABLE>
NOTE 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 on
eligible accounts receivable and inventory as defined in the Revolving Credit
Facility agreement.
F-20
<PAGE>
QUALITY ENGINEERING AND MANUFACTURING
Photograph of the STB manufacturing facility in Juarez, Mexico.
Photograph of surface-mount technology manufacturing equipment.
A leader in multimedia technologies, STB has extensive software and hardware
engineering expertise and operates a high-technology manufacturing facility in
Juarez, Mexico.
Photograph of design engineer seated at computer terminal.
STB Logo -- "Simply the Best"
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING SHAREHOLDER
OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM IT IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 7
Use of Proceeds................................ 14
Price Range of Common Stock and Dividend
Policy........................................ 14
Capitalization................................. 15
Selected Consolidated Financial Data........... 16
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 18
Business....................................... 26
Management..................................... 39
Certain Transactions........................... 50
Principal and Selling Shareholders............. 53
Description of Capital Stock................... 54
Shares Eligible for Future Sale................ 55
Underwriting................................... 56
Legal Matters.................................. 57
Experts........................................ 57
Available Information.......................... 58
Index to Consolidated Financial
Statements.................................... F-1
</TABLE>
1,800,000 SHARES
[LOGO]
COMMON STOCK
--------------
PROSPECTUS
--------------
HAMBRECHT & QUIST
COWEN & COMPANY
, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table indicates the expenses expected to be incurred in
connection with the offering described in this Registration Statement, all of
which will be paid by the Company:
<TABLE>
<S> <C>
SEC Registration Fee.............................................. $ 13,524
NASD Filing Fee................................................... 4,963
Nasdaq National Market Additional Listing Fee..................... 17,500
Transfer Agent and Registrar Fees................................. 3,000
Blue Sky Fees (including counsel fees)............................ 10,000
Accountants' Services and Expenses................................ 50,000
Legal Services and Expenses....................................... 100,000
Printing and Engraving Fees....................................... 75,000
Miscellaneous..................................................... 46,013
---------
TOTAL......................................................... $ 320,000
---------
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article 2.02-1 of the Texas Business Corporation Act permits a corporation
to indemnify certain persons, including officers and directors and former
officers and directors, and to purchase insurance with respect to liability
arising out of their capacity or status as officers and directors. Such law
provides further that the indemnification permitted thereunder will not be
deemed exclusive of any other rights to which officers and directors may be
entitled under the corporation's articles of incorporation, bylaws, any
agreement or otherwise.
Article Eleven of the Company's Amended and Restated Articles of
Incorporation provides as follows:
The corporation shall indemnify any person who was, is, or is threatened
to be made a named defendant or respondent in a proceeding (as hereinafter
defined) because the person (a) is or was a director or officer of the
corporation or (b) while a director or officer of the corporation, is or was
serving at the request of the corporation as a director, officer, partner,
venturer, proprietor, trustee, employee, agent or similar functionary of
another foreign or domestic corporation, partnership, joint venture, sole
proprietorship, trust, employee benefit plan or other enterprise to the
fullest extent that a corporation may grant indemnification to a person
serving in such capacity under the Texas Business Corporation Act, as the
same exists or may hereafter be amended.
Such right shall be a contract right and shall include the right to be
paid by the corporation for all expenses incurred in defending any such
proceeding in advance of its final disposition to the maximum extent
permitted under the Texas Business Corporation Act, as the same exists or
may hereafter be amended. If a claim for indemnification or advancement of
expenses under the corporation's articles of incorporation is not paid in
full by the corporation within 90 days after a written claim has been
received by the corporation, the claimant may at any time thereafter bring
suit against the corporation to recover the unpaid amount of the claim and,
if successful in whole or in part, the claimant shall be entitled to be paid
also the expenses of prosecuting such claim. It shall be a defense to any
such action that such indemnification or advancement of costs of defense is
not permitted under the Texas Business Corporation Act, but the burden of
proving such defense shall be on the corporation. Neither the failure of the
corporation (including its Board of Directors or any committee thereof,
special legal counsel, or shareholders) to have made its determination prior
to the commencement of such action that indemnification of, or advancement
of costs of defense to, the claimant is permissible in the circumstances nor
an actual determination by the corporation (including its Board of Directors
or any committee thereof, special legal counsel, or shareholders) that such
indemnification or advancement is not permissible shall be a defense to the
action or create a presumption that such indemnification or advancement is
not permissible.
II-1
<PAGE>
The corporation additionally may indemnify any person covered by the
grant of mandatory indemnification contained above to such further extent as
is permitted by law and may indemnify any other person to the fullest extent
permitted by law.
As used herein, the term "proceeding" means any threatened, pending or
completed action, suit or proceeding, whether civil, criminal,
administrative, arbitrative or investigative, any appeal in such an action,
suit or proceeding and any inquiry or investigation that could lead to such
an action, suit or proceeding.
In addition, Article IX of the Company's Amended and Restated Bylaws
provides for such indemnification of officers and directors within the limits
set forth in the Articles of Incorporation and applicable provisions of Texas
law.
Article Twelve of the Company's Amended and Restated Articles of
Incorporation further includes a provision eliminating the monetary liability of
a director to the Company or its shareholders for an act or omission in the
director's capacity as a director to the fullest extent permitted by Texas law.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The following information relates to all securities issued or sold by the
Company within the past three years and not registered under the Securities Act.
On December 20, 1994, the Company effected a stock split in the form of a
stock dividend pursuant to which the Company issued to each of the holders of
its Common Stock 8,332 shares of its Common Stock for each share owned by that
person. Each certificate issued in connection with such stock split contains an
appropriate restrictive legend. This stock split was not subject to the
registration provisions of the Securities Act because it did not involve an
offer or sale of securities. All of the information regarding sales of the
Company's securities set forth herein has been adjusted to give effect to the
stock split.
The Company entered into a Share Exchange Agreement with the shareholders of
STB Assembly, Inc. in connection with the Reorganization described under
"Certain Transactions--Reorganization." The issuance of shares of Common Stock
to the shareholders of STB Assembly, Inc. was conducted in reliance upon the
exemption from registration provided in Section 4(2) of the Securities Act and
the rules and regulations promulgated thereunder. Each of the certificates
representing the Company's securities issued in connection with such transaction
contains a restrictive legend. Each person acquiring such securities from the
Company furnished investment representations to the Company. No underwriters
participated in such transaction.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ---------- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
1.1* -- Form of Underwriting Agreement by and among the Company, the Selling Shareholders and the
Underwriters.
2 -- Share Exchange Agreement dated December 16, 1994 by and among the Company and the shareholders of
STB Assembly, Inc. (incorporated by reference to Exhibit 2 to the Company's Registration
Statement on Form S-1 (Registration No. 33-8762)).
3.1 -- Amended and Restated Articles of Incorporation of the Company (incorporated by reference to Exhibit
3.1 to the Company's Registration Statement on Form S-1 (Registration No. 33-8762)).
3.2 -- Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the
Company's Registration Statement on Form S-1 (Registration No. 33-8762)).
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ---------- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
4.1 -- Specimen of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-1 (Registration No. 33-8762)).
4.2 -- Amended and Restated Articles of Incorporation and Bylaws of the Company (see Exhibits 3.1 and 3.2)
(incorporated by reference to Exhibit 4.2 to the Company's Registration Statement on Form S-1
(Registration No. 33-8762)).
4.3 -- Right of First Refusal Agreement dated December 16, 1994 by and among the Company and Messrs. Ogle,
Balthaser and Sims (incorporated by reference to Exhibit 4.3 to the Company's Registration
Statement on Form S-1 (Registration No. 33-8762)).
5.1+ -- Opinion of Locke Purnell Rain Harrell (A Professional Corporation) as to the legality of the Common
Stock being issued.
10.1 -- Lease Agreement dated December 6, 1988 by and between STB de Mexico S.A. de C.V. (formerly known as
Industrias Fronterizas de Chihuahua, S.A. de C.V.) (subsidiary of the Company, as lessee) and
Complejo Industrial Fuentes, S.A. de C.V. (as lessor), including an Agreement for Modification
dated February 25, 1994 by and between the same parties (incorporated by reference to Exhibit
10.1 to the Company's Registration Statement on Form S-1 (Registration No. 33-8762)).
10.2 -- Lease Agreement, as amended, dated July 8, 1986 by and between the Company (as lessee) and Central
Park Associates, Ltd. (as lessor) (incorporated by reference to Exhibit 10.2 to the Company's
Registration Statement on Form S-1 (Registration No. 33-8762)).
10.4 -- Loan and Security Agreement dated December 21, 1993 by and between Sanwa Business Credit
Corporation and STB Systems, Inc. (incorporated by reference to Exhibit 10.4 to the Company's
Registration Statement on Form S-1 (Registration No. 33-8762)).
10.5 -- First Amendment to Loan and Security Agreement dated October 14, 1994 by and between Sanwa Business
Credit Corporation and the Company (incorporated by reference to Exhibit 10.5 to the Company's
Registration Statement on Form S-1 (Registration No. 33-8762)).
10.6 -- Second Amendment to Loan and Security Agreement dated December 9, 1994 by and between Sanwa
Business Credit Corporation and the Company. (incorporated by reference to Exhibit 10.6 to the
Company's Registration Statement on Form S-1 (Registration No. 33-8762)).
10.7 -- Amended and Restated Support Agreements dated October 14, 1994 from each of Messrs. Ogle, Balthaser
and Sims to Sanwa Business Credit Corporation (incorporated by reference to Exhibit10.7 to the
Company's Registration Statement on Form S-1 (Registration No. 33-8762)).
10.8 -- Depository Account Agreement dated December 21, 1993 by and among Sanwa Business Credit
Corporation, Bank One, Texas, N.A. and the Company (incorporated by reference to Exhibit 10.8 to
the Company's Registration Statement on Form S-1 (Registration No. 33-8762)).
10.9 -- Trademark Security Agreement dated December 21, 1993 by and between Sanwa Business Credit
Corporation and the Company (incorporated by reference to Exhibit 10.9 to the Company's
Registration Statement on Form S-1 (Registration No. 33-8762)).
10.10 -- Contingent Payment Agreement dated October 17, 1994 by and between Sanwa Business Credit
Corporation and the Company (incorporated by reference to Exhibit 10.10 to the Company's
Registration Statement on Form S-1 (Registration No. 33-8762)).
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ---------- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
10.11 -- Collateral Agency Agreement dated November 30, 1994 by and among STB de Mexico S.A. de C.V.
(formerly known as Industrias Fronterizas de Chihuahua, S.A. de C.V.), Sanwa Business Credit
Corporation and the Company (incorporated by reference to Exhibit 10.11 to the Company's
Registration Statement on Form S-1 (Registration No. 33-8762)).
10.12 -- Company's Stock Option Plan for Non-Employee Directors (incorporated by reference to Exhibit 10.12
to the Company's Registration Statement on Form S-1 (Registration No. 33-8762)).
10.13 -- Company's 1995 Long Term Incentive Plan (incorporated by reference to Exhibit 10.13 to the
Company's Registration Statement on Form S-1 (Registration No. 33-8762)).
10.14 -- Company's Profit Sharing Incentive Plan (incorporated by reference to Exhibit 10.14 to the
Company's Registration Statement on Form S-1 (Registration No. 33-8762)).
10.15 -- Tax Allocation and Indemnification Agreement dated December 16, 1994 by and among the Company and
Messrs. Ogle, Balthaser and Sims (incorporated by reference to Exhibit 10.15 to the Company's
Registration Statement on Form S-1 (Registration No. 33-8762)).
10.16 -- Founding Shareholder Note by and between the Company and William E. Ogle (incorporated by reference
to Exhibit 10.16 to the Company's Annual Report on Form 10-K for the fiscal year ended October
31, 1995).
10.17 -- Agreements by and between Breedlove Wesneski & Co. (and one of its affiliates) and the Company
dated July 16, 1993, April 6, 1994 and October 18, 1994 (incorporated by reference to Exhibit
10.17 to the Company's Registration Statement on Form S-1 (Registration No. 33-8762)).
10.21 -- Agreement dated September 9, 1994, by and between the Company and Gateway 2000, Inc. (incorporated
by reference to Exhibit 10.21 to the Company's Registration Statement on Form S-1 (Registration
No. 33-8762)).
10.22 -- Third Amendment to Loan and Security Agreement dated February 8, 1995 by and between Sanwa Business
Credit Corporation and the Company (incorporated by reference to Exhibit 10.22 to the Company's
Registration Statement on Form S-1 (Registration No. 33-8762)).
10.23 -- Indemnification Agreement dated February 8, 1995 by and between William E. Ogle and the Company
(incorporated by reference to Exhibit 10.23 to the Company's Registration Statement on Form S-1
(Registration No. 33-8762)).
10.24 -- Indemnification Agreement dated February 8, 1995 by and between Randall D. Eisenbach and the
Company (incorporated by reference to Exhibit 10.24 to the Company's Registration Statement on
Form S-1 (Registration No. 33-8762)).
10.25 -- Indemnification Agreement dated February 8, 1995 by and between James L. Hopkins and the Company
(incorporated by reference to Exhibit 10.25 to the Company's Registration Statement on Form S-1
(Registration No. 33-8762)).
10.26 -- Indemnification Agreement dated February 8, 1995 by and between Mark S. Sims and the Company
(incorporated by reference to Exhibit 10.26 to the Company's Registration Statement on Form S-1
(Registration No. 33-8762)).
10.27 -- Indemnification Agreement dated February 8, 1995 by and between William D. Balthaser Jr. and the
Company (incorporated by reference to Exhibit 10.27 to the Company's Registration Statement on
Form S-1 (Registration No. 33-8762)).
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ---------- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
10.28 -- Indemnification Agreement dated February 8, 1995 by and between James J. Byrne and the Company
(incorporated by reference to Exhibit 10.28 to the Company's Registration Statement on Form S-1
(Registration No. 33-8762)).
10.29 -- Indemnification Agreement dated February 8, 1995 by and between Lawrence E. Wesneski and the
Company (incorporated by reference to Exhibit 10.29 to the Company's Registration Statement on
Form S-1 (Registration No. 33-8762)).
10.30 -- Indemnification Agreement dated February 8, 1995 by and between J. Shane Long and the Company
(incorporated by reference to Exhibit 10.30 to the Company's Registration Statement on Form S-1
(Registration No. 33-8762)).
10.31 -- Underwriting Agreement by and among the Company, Messrs. Balthaser and Sims (the selling
shareholders) and Rauscher Pierce Refsnes, Inc. and Sutro & Co. Incorporated (incorporated by
reference to Exhibit 10.31 to the Company's Annual Report on Form 10-K for the fiscal year ended
October 31, 1995).
10.32 -- Lease Agreement dated June, 1995, by and between the Company (as lessee) and Springcreek Place,
Ltd. (as lessor) (incorporated by reference to Exhibit 10.32 to the Company's Annual Report on
Form 10-K for the fiscal year ended October 31, 1995).
10.33 -- Lease Agreement dated December 19, 1994, by and between the Company (as lessee) and 50 Walter Jones
Blvd., Inc. (as lessor) (incorporated by reference to Exhibit 10.33 to the Company's Annual
Report on Form 10-K for the fiscal year ended October 31, 1995).
10.34 -- Fourth Amendment to Loan and Security Agreement dated January 5, 1996, by and between Sanwa
Business Credit Corporation and the Company (incorporated by reference to Exhibit 10.34 to the
Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1995).
10.35 -- Founding Shareholder Note by and between the Company and William D. Balthaser, Jr. (incorporated by
reference to Exhibit 10.35 to the Company's Annual Report on Form 10-K for the fiscal year ended
October 31, 1995).
10.36 -- Founding Shareholder Note by and between the Company and Mark S. Sims (incorporated by reference to
Exhibit 10.36 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31,
1995).
10.37 -- Addendum to Lease Agreement dated March 7, 1996 by and between the Company (as lessee) and
Springcreek Place, Ltd. (as lessor) (incorporated by reference to Exhibit 10.37 to the Company's
Quarterly Report on Form 10-Q for the quarter ended January 31, 1996).
10.38 -- STB Systems, Inc. 1995 Employee Stock Option Purchase Plan (as amended) (incorporated by reference
to Exhibit 10.38 to the Company's Quarterly Report on Form 10-Q for the quarter ended January 31,
1996).
10.39 -- Lease Agreement dated April 18, 1996 by and between the Company (as lessee) and I Cypresswood
Building (as lessor) (incorporated by reference to Exhibit 10.39 to the Company's Quarterly
Report on Form 10-Q for the quarter ended April 30, 1996).
10.40+ -- Sublease Agreement dated August 1996 by and between ADC Telecommunications, Inc. (as sublessor) and
the Company (as sublessee).
10.41* -- Lease Contract dated October 4, 1996 by and between STB de Mexico, S.A. de C.V. (as lessee) and
Complejo Industrial Fuentes, S.A. de C.V. (as lessor).
10.42+ -- Employment Agreement dated November 1, 1996 by and between the Company and William E. Ogle.
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ---------- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
10.43+ -- Employment Agreement dated November 1, 1996 by and between the Company and Randall D. Eisenbach.
10.44+ -- Employment Agreement dated November 1, 1996 by and between the Company and James L. Hopkins.
10.45+ -- Employment Agreement dated November 1, 1996 by and between the Company and J. Shane Long.
10.46* -- Modification Agreement dated October 4, 1996 by and between STB de Mexico, S.A. de C.V. and
Complejo Industrial Fuentes, S.A. de C.V. (relating to the Lease Agreement filed as Exhibit 10.1
hereto).
10.47+ -- Amended and Restated Profit Sharing Incentive Plan.
10.48* -- Lease Agreement by and between the Company and Banc One Leasing Corporation dated October 30, 1996,
together with related attachments.
10.49* -- Form of Selling Shareholder Indemnification Agreement between the Company and each of Messrs. Ogle,
Balthaser and Sims.
11.1 -- Computation of Earnings Per Common Share and Common Equivalent Share (incorporated by reference to
Exhibit 11.1 to the Company's Annual Report on Form 10-K for the year ended October 31, 1995 and
the Company's Quarterly Report on Form 10-Q for the quarter ended July 31, 1996).
21 -- Subsidiaries of the Company (incorporated by reference to Exhibit 21 to the Company's Annual Report
on Form 10-K for the fiscal year ended October 31, 1995).
23.1* -- Consent of Price Waterhouse LLP.
23.2+ -- Consent of Locke Purnell Rain Harrell (A Professional Corporation) (included in Exhibit 5.1).
24+ -- Powers of Attorney (included on signature page)
27 -- Financial Data Schedule (incorporated by reference to Exhibit 27 to the Company's Quarterly Report
on Form 10-Q for the quarter ended July 31, 1996).
</TABLE>
- ------------------------
*Filed herewith.
+Previously filed.
(b) Financial Statement Schedules.
The information required by Schedule II for the three years ended October
31, 1995 is incorporated herein by reference to the Company's Annual Report on
Form 10-K filed with the Securities and Exchange Commission for the fiscal year
ended October 31, 1995.
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission have been omitted because
they are not required under the related instructions, are not applicable or the
information has been provided in the Financial Statements or the notes thereto.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Company, the Company has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the Company
of expenses incurred or paid by a director, officer or controlling person of the
II-6
<PAGE>
Company in the successful defense of any action, suit or proceeding) is asserted
by any director, officer or controlling person in connection with the securities
being registered, the Company will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The Company hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Company pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Act shall be deemed to be part of this Registration Statement as
of the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of Prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Richardson, State of Texas, on this 11th day of November, 1996.
STB SYSTEMS, INC.
By: /s/ WILLIAM E. OGLE
---------------------------------------
William E. Ogle
CHAIRMAN OF THE BOARD OF DIRECTORS AND
CHIEF
EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
Chairman of the Board of
/s/ WILLIAM E. OGLE Directors and Chief
- ------------------------------ Executive Officer November 11, 1996
William E. Ogle (Principal Executive
Officer)
Executive Vice President,
/s/ RANDALL D. EISENBACH Chief Operating Officer,
- ------------------------------ Assistant Secretary and November 11, 1996
Randall D. Eisenbach Director
Chief Financial Officer,
/s/ JAMES L. HOPKINS Vice President of
- ------------------------------ Strategic Marketing and November 11, 1996
James L. Hopkins Director
Director of Legal and
/s/ BRYAN F. KEYES Finance, Secretary and
- ------------------------------ Treasurer (Principal November 11, 1996
Bryan F. Keyes Financial and Accounting
Officer)
/s/ J. SHANE LONG Vice President of Sales
- ------------------------------ and Marketing and November 11, 1996
J. Shane Long Director
/s/ JAMES J. BYRNE*
- ------------------------------ Director November 11, 1996
James J. Byrne
/s/ LAWRENCE E. WESNESKI*
- ------------------------------ Director November 11, 1996
Lawrence E. Wesneski
*By: /s/ BRYAN F. KEYES
-----------------------------------
Bryan F. Keyes
ATTORNEY-IN-FACT
II-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- --------- ------------------------------------------------------------------------------------
<C> <C> <S> <C>
1.1* -- Form of Underwriting Agreement by and among the Company, the Selling Shareholders
and the Underwriters.
2 -- Share Exchange Agreement dated December 16, 1994 by and among the Company and the
shareholders of STB Assembly, Inc. (incorporated by reference to Exhibit 2 to the
Company's Registration Statement on Form S-1 (Registration No. 33-8762)).
3.1 -- Amended and Restated Articles of Incorporation of the Company (incorporated by
reference to Exhibit 3.1 to the Company's Registration Statement on Form S-1
(Registration No. 33-8762)).
3.2 -- Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2
to the Company's Registration Statement on Form S-1 (Registration No. 33-8762)).
4.1 -- Specimen of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to
the Company's Registration Statement on Form S-1 (Registration No. 33-8762)).
4.2 -- Amended and Restated Articles of Incorporation and Bylaws of the Company (see
Exhibits 3.1 and 3.2) (incorporated by reference to Exhibit 4.2 to the Company's
Registration Statement on Form S-1 (Registration No. 33-8762)).
4.3 -- Right of First Refusal Agreement dated December 16, 1994 by and among the Company
and Messrs. Ogle, Balthaser and Sims (incorporated by reference to Exhibit 4.3 to
the Company's Registration Statement on Form S-1 (Registration No. 33-8762)).
5.1+ -- Opinion of Locke Purnell Rain Harrell (A Professional Corporation) as to the
legality of the Common Stock being issued.
10.1 -- Lease Agreement dated December 6, 1988 by and between STB de Mexico S.A. de C.V.
(formerly known as Industrias Fronterizas de Chihuahua, S.A. de C.V.) (subsidiary
of the Company, as lessee) and Complejo Industrial Fuentes, S.A. de C.V. (as
lessor), including an Agreement for Modification dated February 25, 1994 by and
between the same parties (incorporated by reference to Exhibit 10.1 to the
Company's Registration Statement on Form S-1 (Registration No. 33-8762)).
10.2 -- Lease Agreement, as amended, dated July 8, 1986 by and between the Company (as
lessee) and Central Park Associates, Ltd. (as lessor) (incorporated by reference
to Exhibit 10.2 to the Company's Registration Statement on Form S-1 (Registration
No. 33-8762)).
10.4 -- Loan and Security Agreement dated December 21, 1993 by and between Sanwa Business
Credit Corporation and STB Systems, Inc. (incorporated by reference to Exhibit
10.4 to the Company's Registration Statement on Form S-1 (Registration No.
33-8762)).
10.5 -- First Amendment to Loan and Security Agreement dated October 14, 1994 by and between
Sanwa Business Credit Corporation and the Company (incorporated by reference to
Exhibit 10.5 to the Company's Registration Statement on Form S-1 (Registration No.
33-8762)).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- --------- ------------------------------------------------------------------------------------
<C> <C> <S> <C>
10.6 -- Second Amendment to Loan and Security Agreement dated December 9, 1994 by and
between Sanwa Business Credit Corporation and the Company. (incorporated by
reference to Exhibit 10.6 to the Company's Registration Statement on Form S-1
(Registration No. 33-8762)).
10.7 -- Amended and Restated Support Agreements dated October 14, 1994 from each of Messrs.
Ogle, Balthaser and Sims to Sanwa Business Credit Corporation (incorporated by
reference to Exhibit10.7 to the Company's Registration Statement on Form S-1
(Registration No. 33-8762)).
10.8 -- Depository Account Agreement dated December 21, 1993 by and among Sanwa Business
Credit Corporation, Bank One, Texas, N.A. and the Company (incorporated by
reference to Exhibit 10.8 to the Company's Registration Statement on Form S-1
(Registration No. 33-8762)).
10.9 -- Trademark Security Agreement dated December 21, 1993 by and between Sanwa Business
Credit Corporation and the Company (incorporated by reference to Exhibit 10.9 to
the Company's Registration Statement on Form S-1 (Registration No. 33-8762)).
10.10 -- Contingent Payment Agreement dated October 17, 1994 by and between Sanwa Business
Credit Corporation and the Company (incorporated by reference to Exhibit 10.10 to
the Company's Registration Statement on Form S-1 (Registration No. 33-8762)).
10.11 -- Collateral Agency Agreement dated November 30, 1994 by and among STB de Mexico S.A.
de C.V. (formerly known as Industrias Fronterizas de Chihuahua, S.A. de C.V.),
Sanwa Business Credit Corporation and the Company (incorporated by reference to
Exhibit 10.11 to the Company's Registration Statement on Form S-1 (Registration
No. 33-8762)).
10.12 -- Company's Stock Option Plan for Non-Employee Directors (incorporated by reference to
Exhibit 10.12 to the Company's Registration Statement on Form S-1 (Registration
No. 33-8762)).
10.13 -- Company's 1995 Long Term Incentive Plan (incorporated by reference to Exhibit 10.13
to the Company's Registration Statement on Form S-1 (Registration No. 33-8762)).
10.14 -- Company's Profit Sharing Incentive Plan (incorporated by reference to Exhibit 10.14
to the Company's Registration Statement on Form S-1 (Registration No. 33-8762)).
10.15 -- Tax Allocation and Indemnification Agreement dated December 16, 1994 by and among
the Company and Messrs. Ogle, Balthaser and Sims (incorporated by reference to
Exhibit 10.15 to the Company's Registration Statement on Form S-1 (Registration
No. 33-8762)).
10.16 -- Founding Shareholder Note by and between the Company and William E. Ogle
(incorporated by reference to Exhibit 10.16 to the Company's Annual Report on Form
10-K for the fiscal year ended October 31, 1995).
10.17 -- Agreements by and between Breedlove Wesneski & Co. (and one of its affiliates) and
the Company dated July 16, 1993, April 6, 1994 and October 18, 1994 (incorporated
by reference to Exhibit 10.17 to the Company's Registration Statement on Form S-1
(Registration No. 33-8762)).
10.21 -- Agreement dated September 9, 1994, by and between the Company and Gateway 2000, Inc.
(incorporated by reference to Exhibit 10.21 to the Company's Registration
Statement on Form S-1 (Registration No. 33-8762)).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- --------- ------------------------------------------------------------------------------------
<C> <C> <S> <C>
10.22 -- Third Amendment to Loan and Security Agreement dated February 8, 1995 by and between
Sanwa Business Credit Corporation and the Company (incorporated by reference to
Exhibit 10.22 to the Company's Registration Statement on Form S-1 (Registration
No. 33-8762)).
10.23 -- Indemnification Agreement dated February 8, 1995 by and between William E. Ogle and
the Company (incorporated by reference to Exhibit 10.23 to the Company's
Registration Statement on Form S-1 (Registration No. 33-8762)).
10.24 -- Indemnification Agreement dated February 8, 1995 by and between Randall D. Eisenbach
and the Company (incorporated by reference to Exhibit 10.24 to the Company's
Registration Statement on Form S-1 (Registration No. 33-8762)).
10.25 -- Indemnification Agreement dated February 8, 1995 by and between James L. Hopkins and
the Company (incorporated by reference to Exhibit 10.25 to the Company's
Registration Statement on Form S-1 (Registration No. 33-8762)).
10.26 -- Indemnification Agreement dated February 8, 1995 by and between Mark S. Sims and the
Company (incorporated by reference to Exhibit 10.26 to the Company's Registration
Statement on Form S-1 (Registration No. 33-8762)).
10.27 -- Indemnification Agreement dated February 8, 1995 by and between William D. Balthaser
Jr. and the Company (incorporated by reference to Exhibit 10.27 to the Company's
Registration Statement on Form S-1 (Registration No. 33-8762)).
10.28 -- Indemnification Agreement dated February 8, 1995 by and between James J. Byrne and
the Company (incorporated by reference to Exhibit 10.28 to the Company's
Registration Statement on Form S-1 (Registration No. 33-8762)).
10.29 -- Indemnification Agreement dated February 8, 1995 by and between Lawrence E. Wesneski
and the Company (incorporated by reference to Exhibit 10.29 to the Company's
Registration Statement on Form S-1 (Registration No. 33-8762)).
10.30 -- Indemnification Agreement dated February 8, 1995 by and between J. Shane Long and
the Company (incorporated by reference to Exhibit 10.30 to the Company's
Registration Statement on Form S-1 (Registration No. 33-8762)).
10.31 -- Underwriting Agreement by and among the Company, Messrs. Balthaser and Sims (the
selling shareholders) and Rauscher Pierce Refsnes, Inc. and Sutro & Co.
Incorporated (incorporated by reference to Exhibit 10.31 to the Company's Annual
Report on Form 10-K for the fiscal year ended October 31, 1995).
10.32 -- Lease Agreement dated June, 1995, by and between the Company (as lessee) and
Springcreek Place, Ltd. (as lessor) (incorporated by reference to Exhibit 10.32 to
the Company's Annual Report on Form 10-K for the fiscal year ended October 31,
1995).
10.33 -- Lease Agreement dated December 19, 1994, by and between the Company (as lessee) and
50 Walter Jones Blvd., Inc. (as lessor) (incorporated by reference to Exhibit
10.33 to the Company's Annual Report on Form 10-K for the fiscal year ended
October 31, 1995).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- --------- ------------------------------------------------------------------------------------
<C> <C> <S> <C>
10.34 -- Fourth Amendment to Loan and Security Agreement dated January 5, 1996, by and
between Sanwa Business Credit Corporation and the Company (incorporated by
reference to Exhibit 10.34 to the Company's Annual Report on Form 10-K for the
fiscal year ended October 31, 1995).
10.35 -- Founding Shareholder Note by and between the Company and William D. Balthaser, Jr.
(incorporated by reference to Exhibit 10.35 to the Company's Annual Report on Form
10-K for the fiscal year ended October 31, 1995).
10.36 -- Founding Shareholder Note by and between the Company and Mark S. Sims (incorporated
by reference to Exhibit 10.36 to the Company's Annual Report on Form 10-K for the
fiscal year ended October 31, 1995).
10.37 -- Addendum to Lease Agreement dated March 7, 1996 by and between the Company (as
lessee) and Springcreek Place, Ltd. (as lessor) (incorporated by reference to
Exhibit 10.37 to the Company's Quarterly Report on Form 10-Q for the quarter ended
January 31, 1996).
10.38 -- STB Systems, Inc. 1995 Employee Stock Option Purchase Plan (as amended)
(incorporated by reference to Exhibit 10.38 to the Company's Quarterly Report on
Form 10-Q for the quarter ended January 31, 1996).
10.39 -- Lease Agreement dated April 18, 1996 by and between the Company (as lessee) and I
Cypresswood Building (as lessor) (incorporated by reference to Exhibit 10.39 to
the Company's Quarterly Report on Form 10-Q for the quarter ended April 30, 1996).
10.40+ -- Sublease Agreement dated August 1996 by and between ADC Telecommunications, Inc. (as
sublessor) and the Company (as sublessee).
10.41* -- Lease Contract dated October 4, 1996 by and between STB de Mexico, S.A. de C.V. (as
lessee) and Complejo Industrial Fuentes, S.A. de C.V. (as lessor).
10.42+ -- Employment Agreement dated November 1, 1996 by and between the Company and William
E. Ogle.
10.43+ -- Employment Agreement dated November 1, 1996 by and between the Company and Randall
D. Eisenbach.
10.44+ -- Employment Agreement dated November 1, 1996 by and between the Company and James L.
Hopkins.
10.45+ -- Employment Agreement dated November 1, 1996 by and between the Company and J. Shane
Long.
10.46* -- Modification Agreement dated October 4, 1996 by and between STB de Mexico, S.A. de
C.V. and Complejo Industrial Fuentes, S.A. de C.V. (relating to the Lease
Agreement filed as Exhibit 10.1 hereto).
10.47+ -- Amended and Restated Profit Sharing Incentive Plan.
10.48* -- Lease Agreement by and between the Company and Banc One Leasing Corporation dated
October 30, 1996, together with related attachments.
10.49* -- Form of Selling Shareholder Indemnification Agreement between the Company and each
of Messrs. Ogle, Balthaser and Sims.
11.1 -- Computation of Earnings Per Common Share and Common Equivalent Share (incorporated
by reference to Exhibit 11.1 to the Company's Annual Report on Form 10-K for the
year ended October 31, 1995 and the Company's Quarterly Report on Form 10-Q for
the quarter ended July 31, 1996).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- --------- ------------------------------------------------------------------------------------
<C> <C> <S> <C>
21 -- Subsidiaries of the Company (incorporated by reference to Exhibit 21 to the
Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1995).
23.1* -- Consent of Price Waterhouse LLP.
23.2+ -- Consent of Locke Purnell Rain Harrell (A Professional Corporation) (included in
Exhibit 5.1).
24+ -- Powers of Attorney (included on signature page)
27 -- Financial Data Schedule (incorporated by reference to Exhibit 27 to the Company's
Quarterly Report on Form 10-Q for the quarter ended July 31, 1996).
</TABLE>
- ------------------------
*Filed herewith.
+Previously filed.
<PAGE>
STB SYSTEMS, INC.
1,800,000 SHARES(1)
COMMON STOCK
UNDERWRITING AGREEMENT
November __, 1996
HAMBRECHT & QUIST LLC
COWEN & COMPANY
c/o Hambrecht & Quist LLC
One Bush Street
San Francisco, CA 94104
Ladies and Gentlemen:
STB Systems, Inc., a Texas corporation (herein called the Company),
proposes to issue and sell 1,500,000 shares of its authorized but unissued
Common Stock, $.01 par value (herein called the Common Stock), and the
shareholders of the Company named in Schedule II hereto (herein collectively
called the Selling Securityholders) propose to sell an aggregate of 300,000
shares of Common Stock of the Company (said 1,800,000 shares of Common Stock
being herein called the Underwritten Stock). The Selling Securityholders propose
to grant to the Underwriters (as hereinafter defined) an option to purchase up
to 270,000 additional shares of Common Stock (herein called the Option Stock and
with the Underwritten Stock herein collectively called the Stock). The Common
Stock is more fully described in the Registration Statement and the Prospectus
hereinafter mentioned.
The Company and the Selling Securityholders severally hereby confirm the
agreements made with respect to the purchase of the Stock by the several
underwriters, for whom you are acting, named in Schedule I hereto (herein
collectively called the Underwriters, which term shall also include any
underwriter purchasing Stock pursuant to Section 3(b) hereof). You represent
and warrant that you have been authorized by each of the other Underwriters to
enter into this Agreement on its behalf and to act for it in the manner herein
provided.
1. REGISTRATION STATEMENT. The Company has filed with the Securities and
Exchange Commission (herein called the Commission) a registration statement on
Form S-1 (No. 333-14313), including the related preliminary prospectus, for the
registration under the Securities Act of 1933, as amended (herein called the
Securities Act) of the Stock. Copies of such registration statement and of
____________
(1) Plus an option to purchase from the Selling Securityholders up to
270,000 additional shares to cover over-allotments.
<PAGE>
each amendment thereto, if any, including the related preliminary prospectus
(meeting the requirements of Rule 430A of the rules and regulations of the
Commission) heretofore filed by the Company with the Commission have been
delivered to you.
The term Registration Statement as used in this agreement shall mean such
registration statement, including all exhibits and financial statements, all
information omitted therefrom in reliance upon Rule 430A and contained in the
Prospectus referred to below, and any information deemed to be part thereof at
the time of effectiveness pursuant to Rule 434, in the form in which it became
effective, and any registration statement filed pursuant to Rule 462(b) of the
rules and regulations of the Commission with respect to the Stock (herein called
a Rule 462(b) registration statement), and, in the event of any amendment
thereto after the effective date of such registration statement (herein called
the Effective Date), shall also mean (from and after the effectiveness of such
amendment) such registration statement as so amended (including any Rule 462(b)
registration statement). The term Prospectus as used in this Agreement shall
mean the prospectus (including any prospectus subject to completion meeting the
requirements of Rule 430(a) or 430A of the Commission provided by the Company
with any term sheet meeting the requirements of Rule 434(b)) relating to the
Stock first filed with the Commission pursuant to Rule 424(b) and Rule 430A (or
if no such filing is required, as included in the Registration Statement) and,
in the event of any supplement or amendment to such prospectus after the
Effective Date, shall also mean (from and after the filing with the Commission
of such supplement or the effectiveness of such amendment) such prospectus as so
supplemented or amended. The term Preliminary Prospectus as used in this
Agreement shall mean each preliminary prospectus included in such registration
statement prior to the time it becomes effective.
The Registration Statement has been declared effective under the Securities
Act, and no post-effective amendment to the Registration Statement has been
filed as of the date of this Agreement. The Company has caused to be delivered
to you copies of each Preliminary Prospectus and has consented to the use of
such copies for the purposes permitted by the Securities Act.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SELLING
SECURITYHOLDERS.
(a) Each of the Company and William E. Ogle, a Selling Securityholder,
hereby represents and warrants as follows:
(i) Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation, has full power
and authority to own or lease its properties and conduct its business
as described in the Registration Statement and the Prospectus and as
being conducted, and is duly qualified as a foreign corporation and in
good standing in all jurisdictions in which the character of the
property owned or leased or the nature of the business transacted by it
makes qualification necessary (except where the failure to be so
qualified would not have a material adverse effect on the business,
properties, financial condition or results of operations of the Company
and its subsidiaries, taken as a whole).
(ii) Since the respective dates as of which information is given
in the Registration Statement and the Prospectus, there has not been
any materially adverse change in the business, properties, financial
condition or results of operations of the Company and its subsidiaries,
taken as a whole, whether or not arising from transactions in the
ordinary course of business, other than as set forth in the
Registration Statement and the Prospectus, and since such dates, except
in the ordinary course of business, neither the Company nor any of its
subsidiaries has
-2-
<PAGE>
entered into any material transaction not referred to in the Registration
Statement and the Prospectus.
(iii) The Registration Statement and the Prospectus comply, in all
material respects, with the provisions of the Securities Act and the rules
and regulations of the Commission thereunder as in effect on the date hereof;
on the Effective Date, the Registration Statement did not contain any untrue
statement of a material fact and did not omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein not misleading; and, on the Effective Date the Prospectus (including
any supplement thereto required under Canadian provincial laws in connection
with the offer and sale of the Stock in Canada) did not and, on the Closing
Date and any later date on which Option Stock is to be purchased, will not
contain any untrue statement of a material fact or omit to state any material
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; PROVIDED, HOWEVER,
that none of the representations and warranties in this subparagraph (iii)
shall apply to statements in, or omissions from, the Registration Statement
or the Prospectus made in reliance upon and in conformity with information
furnished in writing to the Company by or on behalf of the Underwriters
through you or by a Selling Securityholder expressly for use in the
Registration Statement or the Prospectus.
(iv) Any term sheet and prospectus subject to completion provided by the
Company to the Underwriters for use in connection with the offering and sale
of the Stock pursuant to Rule 434 under the Securities Act together are not
materially different from the prospectus included in the Registration
Statement as filed with the Commission (exclusive of any information deemed
to be a part thereof by virtue of Rule 434(d)).
(v) The Stock is duly and validly authorized, is (or, in the case of
shares of the Stock to be sold by the Company, will be, when issued and sold
to the Underwriters against payment therefor as provided herein) duly and
validly issued, fully paid and nonassessable and conforms to the description
thereof in the Prospectus. No further approval or authority of the
shareholders or the Board of Directors of the Company will be required for
the transfer and sale of the Stock to be sold by the Selling Securityholders
or the issuance and sale of the Stock as contemplated herein.
(vi) The Stock to be sold by the Selling Securityholders is listed for
trading on the Nasdaq National Market, and prior to the Closing Date the
Stock to be issued and sold by the Company will be authorized for listing by
the Nasdaq National Market upon official notice of issuance.
(vii) The Company and its subsidiaries have good and marketable
title to all material personal property owned by them, in each case free and
clear of all liens, encumbrances and defects except such as are described in
the Prospectus or such as do not materially affect the value of such property
and do not interfere with the use made and proposed to be made of such
property by the Company and its subsidiaries; and all real property and
buildings used in or necessary for the conduct of the business of the Company
and its subsidiaries are held by them under valid, subsisting and enforceable
leases with such exceptions as are not material and do not materially
interfere with the use made and proposed to be made of such property and
buildings by the Company and its subsidiaries.
-3-
<PAGE>
(viii) The Company has an authorized capitalization as set forth in
the Prospectus, all of the outstanding shares of capital stock of the Company
have been duly and validly authorized and issued, are fully paid and
nonassessable and conform to the description thereof contained in the
Prospectus and the number of issued and outstanding shares of Common Stock is
as set forth in the Prospectus; all of the issued shares of capital stock of
STB Assembly, Inc., a Texas corporation (herein called Assembly), STB de
Mexico, S.A. (formerly known as Industrias Fronterizas de Chihuahua, S.A. de
C.V.), a Mexican corporation (herein called IFC), and Maquilados
Continentales de Ciudad Juarez, S.A. de C.V., a Mexican corporation (herein
called MCCJ) (Assembly, IFC and MCCJ being the only subsidiaries of the
Company and being referred to collectively herein as the subsidiaries), have
been duly and validly authorized and issued, are fully paid and
non-assessable and (except for one share of common stock of IFC, representing
0.04% of the issued and outstanding capital stock of IFC) all the outstanding
capital stock of Assembly, IFC and MCCJ are owned directly or indirectly by
the Company, free and clear of all liens, encumbrances, equities or claims.
(ix) The Company has full power and authority to enter into this
Agreement and to issue, sell and deliver to the Underwriters the Stock to be
sold by it hereunder, and this Agreement has been duly authorized, executed
and delivered by the Company.
(x) The issue and sale by the Company to the Underwriters of the Stock
to be sold by it hereunder and the compliance by the Company with all of the
provisions of this Agreement and the consummation of the transactions herein
contemplated will not conflict with or result in a breach or violation of any
of the terms or provisions of, or constitute a default under, any indenture,
mortgage, deed of trust, loan agreement, sale/leaseback agreement or other
agreement or instrument to which the Company or any of its subsidiaries is a
party or by which the Company or any of its subsidiaries is bound or to which
any of the property or assets of the Company or any of its subsidiaries is
subject, nor will such action result in any violation of the provisions of
the Articles of Incorporation, as amended, or the Bylaws, as amended, of the
Company or any statute or any order, rule or regulation of any court or
government agency or body having jurisdiction over the Company or any of its
subsidiaries or any of their properties; and no consent, approval,
authorization, order, registration or qualification of or with any such court
or governmental agency or body is required for the issue and sale of the
Stock to be sold by the Company hereunder or the consummation by the Company
of the transactions contemplated by this Agreement, except the registration
under the Act of the Stock and such consents, approvals, authorizations,
registrations or qualifications as may be required under state securities or
Blue Sky laws or by the National Association of Securities Dealers, Inc. (the
NASD) in connection with the purchase and distribution of the Stock by the
Underwriters.
(xi) Except for the litigation styled TEICH V. STB SYSTEMS, INC. ET AL.,
filed on or about September 6, 1995 in the Texas State District Court of
Dallas County (Citation No. 95-9681-G), which has been fully disclosed to you
prior to the date hereof and is accurately described in the Registration
Statement and Prospectus, there are no legal or governmental proceedings
pending to which the Company or any of its subsidiaries is a party or of
which any property of the Company or any of its subsidiaries is the subject
which, if determined adversely to the Company or any of its subsidiaries,
would individually or in the aggregate have a material adverse effect on the
consolidated financial position, shareholders' equity or results of
operations of the Company and its subsidiaries, taken as a whole; and, to the
best of the Company's knowledge, no such proceedings are threatened or
contemplated by governmental authorities or threatened by others.
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<PAGE>
(xii) Price Waterhouse, who have certified financial statements of
the Company and its subsidiaries, are independent public accountants as
required by the Act and the rules and regulations of the Commission
thereunder.
(xiii) The pro forma financial information of the Company and its
subsidiaries included in the Registration Statement and Prospectus presents
fairly, in all material respects, the information shown therein, and the
assumptions used in the preparation thereof are reasonable.
(xiv) The Company and its subsidiaries, taken as a whole, own, or
possess adequate rights to use, all the patents, trademarks, service marks,
trade names and copyrights (herein called Intellectual Property) necessary
for the present and currently planned conduct of the business of the Company
and its subsidiaries, taken as a whole. To the best knowledge of the
Company, there is no infringement on the Intellectual Property rights of the
Company or its subsidiaries by others that could materially adversely affect
the business or condition, financial or otherwise, of the Company and its
subsidiaries, taken as a whole, and, to the best knowledge of the Company,
none of the activities engaged in by the Company or any of its subsidiaries
infringes or conflicts with Intellectual Property rights of others in a
manner that could materially adversely affect the business or condition,
financial or otherwise, of the Company and its subsidiaries, taken as a whole.
(xv) No person has any right to require the Company to register any
securities under the Securities Act and, except as disclosed in the
Prospectus, no person has any option, preemptive right or other right to
subscribe for or purchase any securities of the Company or of any subsidiary
of the Company.
(xvi) The Company has provided or made available to you originals or
complete and accurate copies of all agreements, contracts, corporate records,
financial statements, business plans, product literature and other
instruments and documents material to the business or operations of the
Company and its subsidiaries, taken as a whole, and has responded fully to
all requests for documents and information submitted to it by or for you, and
the Company has provided or made available to you all updates of or
supplements to any such document or information to the extent necessary to
reflect new developments or additional information relevant thereto.
(xvii) Except as otherwise fully disclosed to you prior to the date
hereof, the Company's results of operations during the fourth quarter of the
fiscal year ended October 31, 1996 are consistent in all material respects
with the anticipated results of operations for such quarter previously
provided to you by the Company, and no aspect of such performance requires
the modification or supplementation of any information contained in the
Registration Statement or any Preliminary Prospectus.
(xviii) No officer, director, nominee for director or shareholder of
the Company has any direct or indirect affiliation or association with any
NASD member, except that Lawrence E. Wesneski, a director of the Company, is
President and Chief Executive Officer and an equity owner of Hoak Breedlove
Wesneski & Co. (HBW), which is a member of the NASD. The Company's
transactions and relationships with HBW and its predecessors are fully and
accurately described in the Prospectus.
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<PAGE>
(xix) Except as disclosed in the Prospectus, no person has the right
to any payment (including without limitation any finder's fee) in connection
with the offering or sale of the Stock.
(xx) The Company has complied with all provisions of Section 517.075,
Florida Statutes (Chapter 92-198, Laws of Florida).
(b) Each of the Selling Securityholders hereby represents and warrants as
follows:
(i) Such Selling Securityholder has good and marketable title to all
the shares of Stock to be sold by such Selling Securityholder hereunder, free
and clear of all liens, encumbrances, equities, security interests and claims
whatsoever, with full right and authority to deliver the same pursuant to
this Agreement and the Power of Attorney (as hereinafter defined), and that
upon the delivery of and payment for such shares of the Stock hereunder, the
several Underwriters will receive good and marketable title thereto, free and
clear of all liens, encumbrances, equities, security interests and claims
whatsoever.
(ii) Such Selling Securityholder has full right, power and authority to
enter into this Agreement and the Power of Attorney (as defined herein) and
to sell, assign, transfer and deliver the Stock to be sold by such Selling
Securityholder hereunder, and this Agreement and the Power of Attorney have
each been duly executed and delivered by or on behalf of such Selling
Securityholder and are the legal, valid and binding agreements of such
Selling Securityholder, enforceable in accordance with their respective terms.
(iii) Such Selling Securityholder has granted a power of attorney
(herein called the Power of Attorney) to William E. Ogle and Bryan F. Keyes
(herein called the Attorneys-in-Fact) to purchase all requisite stock
transfer tax stamps, to sign this Agreement, to agree on the price at which
the shares of Stock being sold by such Selling Securityholder are to be sold
to the Underwriters, to deliver and accept payment for such Stock on behalf
of such Selling Securityholder, and to execute all instruments and documents,
and to take all actions, necessary to carry out the provisions of this
Agreement on behalf of such Selling Securityholder; prior to the date of this
Agreement, each Selling Securityholder has delivered to the Attorneys-in-Fact
a certificate or certificates in negotiable form evidencing the shares of
Stock (including Option Stock) to be sold by such Selling Securityholder, to
be held by the Attorneys-in-Fact until such time as the Attorneys-in-Fact
shall deliver such shares of Stock to the Underwriters in accordance with
this Agreement and the Power of Attorney or, if this Agreement is terminated
prior to such delivery, shall return such shares of Stock to the Selling
Securityholder. Such Selling Securityholder specifically agrees that the
shares of Stock represented by the certificates so held for such Selling
Securityholder are subject to the interests of the several Underwriters and
the Company, that the Power of Attorney is to that extent irrevocable, and
that the obligations of such Selling Securityholder shall not be terminated
by any act of such Selling Securityholder or by operation of law, whether by
the death or incapacity of such Selling Securityholder or the occurrence of
any other event; if any such death, incapacity or other such event should
occur before the delivery of such shares of Stock hereunder, certificates for
such shares of Stock shall be delivered by the Attorneys-in-Fact in
accordance with the terms and conditions of this Agreement as if such death,
incapacity or other event had not occurred, regardless of whether the
Attorneys-in-Fact shall have received notice of such death, incapacity or
other event.
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<PAGE>
(iv) All consents, approvals, authorizations and orders necessary for
the execution and delivery by such Selling Securityholder of this Agreement
and the Power of Attorney, and for the sale and delivery of the shares of
Stock to be sold by such Selling Securityholder hereunder, have been
obtained, and the sale of the shares of Stock to be sold by such Selling
Securityholder hereunder and the compliance by such Selling Securityholder
with all of the provisions of this Agreement and the Power of Attorney and
the consummation of the transactions herein contemplated will not conflict
with or result in a breach or violation of any of the terms or provisions of,
or constitute a default under, any statute, any indenture, mortgage, deed of
trust, loan agreement or other material agreement or instrument to which such
Selling Securityholder is a party or by which such Selling Securityholder is
bound or to which any of the property or assets of such Selling
Securityholder is subject, or any order, rule or regulation of any court or
governmental agency or body having jurisdiction over such Selling
Securityholder or the property of such Selling Securityholder.
(v) Such Selling Securityholder has not taken and will not take,
directly or indirectly, any action designed to cause or which might
reasonably be expected to cause or result in, stabilization or manipulation
of the price of the Common Stock.
(vi) Such Selling Securityholder has not retained or dealt with any
broker or finder, other than the Underwriters, with respect to the
transactions contemplated hereby.
(vii) To the extent that any statements or omissions made in the
Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto are made in reliance upon and in conformity
with written information furnished to the Company by such Selling
Securityholder expressly for use therein, such Preliminary Prospectus and the
Registration Statement did, and the Prospectus and any further amendments or
supplements to the Registration Statement and the Prospectus will, when they
become effective or are filed with the Commission, as the case may be,
conform in all material respects to the requirements of the Act and the rules
and regulations of the Commission thereunder and not contain any untrue
statement of a material fact or omit to state any material fact required to
be stated therein or necessary to make the statements therein not misleading.
(viii) Except as set forth in the Prospectus, such Selling
Securityholder does not own, beneficially or of record, and does not have any
option, preemptive right or other right to subscribe for or purchase, or any
claim against, any shares of capital stock or other securities of the Company
or of any subsidiary of the Company; such Selling Securityholder has no right
to require the Company to register under the Act any of the shares of Common
Stock owned by him.
(ix) Such Selling Securityholder has reviewed the Registration Statement
and Prospectus and, although such Selling Securityholder has not
independently verified the accuracy or completeness of all the information
contained therein, nothing has come to the attention of such Selling
Securityholder that would lead such Selling Securityholder to believe that:
(A) on the Effective Date, the Registration Statement contained any untrue
statement of a material fact or omitted to state any material fact required
to be stated therein or necessary in order to make the statements therein not
misleading; or (B) on the date of the Prospectus as set forth on the cover
page thereof the Prospectus contained or, on the Closing Date and any later
date on which Option Stock is to be purchased, will contain any untrue
statement of a material fact or omitted or will omit to state any material
fact necessary in order to make the
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<PAGE>
statements therein, in the light of the circumstances under which they
were made, not misleading.
3. PURCHASE OF THE STOCK BY THE UNDERWRITERS.
(a) On the basis of the representations and warranties and subject to the
terms and conditions herein set forth, the Company agrees to issue and sell
1,500,000 shares of the Underwritten Stock to the several Underwriters, each
Selling Securityholder agrees to sell to the several Underwriters the number of
shares of the Underwritten Stock set forth in Schedule II opposite the name of
such Selling Securityholder, and each of the Underwriters agrees to purchase
from the Company and the Selling Securityholders the respective aggregate number
of shares of Underwritten Stock set forth opposite its name in Schedule I. The
price at which such shares of Underwritten Stock shall be sold by the Company
and the Selling Securityholders and purchased by the several Underwriters shall
be $___ per share. The obligation of each Underwriter to the Company and each
of the Selling Securityholders shall be to purchase from the Company and the
Selling Securityholders that number of shares of the Underwritten Stock which
represents the same proportion of the total number of shares of the Underwritten
Stock to be sold by each of the Company and the Selling Securityholders pursuant
to this Agreement as the number of shares of the Underwritten Stock set forth
opposite the name of such Underwriter in Schedule I hereto represents of the
total number of shares of the Underwritten Stock to be purchased by all
Underwriters pursuant to this Agreement, as adjusted by you in such manner as
you deem advisable to avoid fractional shares. In making this Agreement, each
Underwriter is contracting severally and not jointly; except as provided in
paragraphs (b) and (c) of this Section 3, the agreement of each Underwriter is
to purchase only the respective number of shares of the Underwritten Stock
specified in Schedule I.
(b) If for any reason one or more of the Underwriters shall fail or
refuse (otherwise than for a reason sufficient to justify the termination of
this Agreement under the provisions of Section 8 or 9 hereof) to purchase and
pay for the number of shares of the Stock agreed to be purchased by such
Underwriter or Underwriters, the Company or the Selling Securityholders shall
immediately give notice thereof to you, and the non-defaulting Underwriters
shall have the right within 24 hours after the receipt by you of such notice
to purchase, or procure one or more other Underwriters to purchase, in such
proportions as may be agreed upon between you and such purchasing Underwriter
or Underwriters and upon the terms herein set forth, all or any part of the
shares of the Stock which such defaulting Underwriter or Underwriters agreed
to purchase. If the non-defaulting Underwriters fail so to make such
arrangements with respect to all such shares and portion, the number of
shares of the Stock which each non-defaulting Underwriter is otherwise
obligated to purchase under this Agreement shall be automatically increased
on a pro rata basis to absorb the remaining shares and portion which the
defaulting Underwriter or Underwriters agreed to purchase; PROVIDED, HOWEVER,
that the non-defaulting Underwriters shall not be obligated to purchase the
shares and portion which the defaulting Underwriter or Underwriters agreed to
purchase if the aggregate number of such shares of the Stock exceeds 10% of
the total number of shares of the Stock which all Underwriters agreed to
purchase hereunder. If the total number of shares of the Stock which the
defaulting Underwriter or Underwriters agreed to purchase shall not be
purchased or absorbed in accordance with the two preceding sentences, the
Company and the Selling Securityholders shall have the right, within 24 hours
next succeeding the 24-hour period above referred to, to make arrangements
with other underwriters or purchasers satisfactory to you for purchase of
such shares and portion on the terms herein set forth. In any such case,
either you or the Company and the Selling Securityholders shall have the
right to postpone the Closing Date determined as provided in Section 5 hereof
for not more than seven business days after the date originally fixed as the
Closing Date pursuant to said Section 5 in order that any necessary
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<PAGE>
changes in the Registration Statement, the Prospectus or any other documents
or arrangements may be made. If neither the non-defaulting Underwriters nor
the Company and the Selling Securityholders shall make arrangements within
the 24-hour periods stated above for the purchase of all the shares of the
Stock which the defaulting Underwriter or Underwriters agreed to purchase
hereunder, this Agreement shall be terminated without further act or deed and
without any liability on the part of the Company or the Selling
Securityholders to any non-defaulting Underwriter and without any liability
on the part of any non-defaulting Underwriter to the Company or the Selling
Securityholders. Nothing in this paragraph (b), and no action taken
hereunder, shall relieve any defaulting Underwriter from liability in respect
of any default of such Underwriter under this Agreement.
(c) On the basis of the representations, warranties and covenants herein
contained, and subject to the terms and conditions herein set forth, each of the
Selling Securityholders grants an option to the several Underwriters to
purchase, severally and not jointly, up to 90,000 shares in the aggregate of the
Option Stock from such Selling Securityholder at the same price per share as the
Underwriters shall pay for the Underwritten Stock. Said option may be exercised
only to cover over-allotments in the sale of the Underwritten Stock by the
Underwriters and may be exercised in whole or in part at any time (but not more
than once) on or before the thirtieth day after the date of this Agreement upon
written or telegraphic notice by you to the Attorneys-in-Fact setting forth the
aggregate number of shares of the Option Stock as to which the several
Underwriters are exercising the option and the date on which such shares of the
Option Stock are to be delivered, as determined by you but in no event earlier
than the date that the Underwritten Stock is delivered hereunder. Delivery of
certificates for the shares of Option Stock, and payment therefor, shall be made
as provided in Section 5 hereof. The number of shares of the Option Stock to be
purchased by each Underwriter shall be the same percentage of the total number
of shares of the Option Stock to be purchased by the several Underwriters as
such Underwriter is purchasing of the Underwritten Stock, as adjusted by you in
such manner as you deem advisable to avoid fractional shares. If the
Underwriters elect to purchase less than all 270,000 shares of Option Stock,
then one-third of the shares of Option Stock purchased by all the Underwriters
pursuant to such election shall be purchased from each of the Selling
Securityholders.
4. OFFERING BY UNDERWRITERS.
(a) The terms of the initial public offering by the Underwriters of the
Stock to be purchased by them hereunder shall be as set forth in the Prospectus.
The Underwriters may from time to time change the public offering price after
the closing of the initial public offering and increase or decrease the
concessions and discounts to dealers as they may determine.
(b) The information set forth in the last paragraph on the front cover
page, the last paragraph on the inside front cover page and under "Underwriting"
(excluding the last sentence of the sixth paragraph, regarding the Company's
indemnification of the Selling Securityholders) in the Registration Statement,
in any Preliminary Prospectus and in the Prospectus relating to the Stock filed
by the Company (insofar as such information relates to the Underwriters)
constitutes the only information furnished by the Underwriters to the Company
for inclusion in the Registration Statement, any Preliminary Prospectus, and
the Prospectus, and you on behalf of the respective Underwriters represent and
warrant to the Company that the statements made therein are correct.
5. DELIVERY OF AND PAYMENT FOR THE STOCK.
(a) Delivery of certificates for the shares of the Underwritten Stock and
the Option Stock (if the option granted by Section 3(c) hereof shall have been
exercised not later than 9:00 A.M., Dallas time, on the date two business days
preceding the Closing Date), and payment therefor, shall be made
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<PAGE>
at the office of Thompson & Knight, A Professional Corporation, 1700 Pacific
Avenue, Suite 3300, Dallas, Texas, at 9:00 a.m., Dallas time, on the fourth
business day after the date of this Agreement, or at such time on such other
day, not later than seven full business days after such fourth business day,
as shall be agreed upon in writing by the Company, the Selling
Securityholders and you. The date and hour of such delivery and payment
(which may be postponed as provided in Section 3(b) hereof) are herein called
the Closing Date.
(b) If the option granted by Section 3(c) hereof shall be exercised after
9:00 a.m., Dallas time, on the date two business days preceding the Closing
Date, delivery of certificates for the shares of Option Stock, and payment
therefor, shall be made at the office of Thompson & Knight, A Professional
Corporation, 1700 Pacific Avenue, Suite 3300, Dallas, Texas, at 9:00 a.m.,
Dallas time, on the third business day after the exercise of such option.
(c) Payment for the Stock purchased from the Company shall be made to the
Company or its order, and payment for the Stock purchased from each Selling
Securityholder shall be made payable to such Selling Securityholder or his
order, but delivered to the Attorneys-in-Fact, for the account of the Selling
Securityholders, in each case by one or more certified or official bank check or
checks in same day funds. Certificates for the Stock to be delivered to you
shall be registered in such name or names and shall be in such denominations as
you may request at least two business days before the Closing Date, in the case
of Underwritten Stock, and at least two business days prior to the purchase
thereof, in the case of the Option Stock. Certificates for the Underwritten
Stock will be made available to the Underwriters for inspection, checking and
packaging at the offices of Lewco Securities Corporation, 2 Broadway, New York,
New York 10004 on the business day prior to the Closing Date, and certificates
for the Option Stock will be made available for such purpose at such address by
3:00 p.m., New York time, on the business day preceding the date of purchase.
It is understood that you, individually and not on behalf of the
Underwriters, may (but shall not be obligated to) make payment to the Company
and the Selling Securityholders as stated above for shares to be purchased by
any Underwriter whose check shall not have been received by you on the Closing
Date or any later date on which Option Stock is purchased for the account of
such Underwriter. Any such payment by you shall not relieve such Underwriter
from any of its obligations hereunder.
6. FURTHER AGREEMENTS OF THE COMPANY. The Company covenants and agrees
as follows:
(a) The Company will (i) prepare and timely file with the
Commission under Rule 424(b) a Prospectus containing information
previously omitted at the time of effectiveness of the Registration
Statement in reliance on Rule 430A and (ii) file any amendment to the
Registration Statement or supplement to the Prospectus (including the
issuance or filing of any term sheet within the meaning of Rule 434)
only if (x) you shall previously have been advised and furnished with a
copy of such document, (y) you shall not have reasonably objected in
writing to the filing of such document and (z) such document is in
compliance with the Securities Act and the rules and regulations of the
Commission.
(b) The Company will promptly notify each Underwriter in the
event of (i) the request by the Commission for amendment of the
Registration Statement or for supplement to the Prospectus or for any
additional information, (ii) the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement, (iii)
the institution or notice of intended institution of any action or
proceeding for that purpose, (iv) the receipt by the Company of any
notification with respect to the suspension of the qualification of the
Stock
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for sale in any jurisdiction, or (v) the receipt by it of notice of the
initiation or threatening of any proceeding for such purpose. The Company
will make every reasonable effort to prevent the issuance of such a stop
order and, if such an order shall at any time be issued, to obtain the
withdrawal thereof at the earliest possible moment.
(c) The Company (i) on or before the Closing Date, will deliver to you
a signed copy of the Registration Statement as originally filed and of each
amendment thereto filed prior to the time the Registration Statement becomes
effective and, promptly upon the filing thereof, a signed copy of each
post-effective amendment, if any, to the Registration Statement (together
with, in each case, all exhibits thereto unless previously furnished to you)
and will also deliver to you, for distribution to the Underwriters, a
sufficient number of additional conformed copies of each of the foregoing
(but without exhibits) so that one copy of each may be distributed to each
Underwriter, (ii) as promptly as practicable, will deliver to you and send to
the several Underwriters, at such office or offices as you may designate, as
many copies of the Prospectus as you may reasonably request, and (iii)
thereafter from time to time during the period in which a prospectus is
required by law to be delivered by an Underwriter or dealer, likewise will
send to the Underwriters as many additional copies of the Prospectus and as
many copies of any supplement to the Prospectus and of any amended
prospectus, filed by the Company with the Commission, as you may reasonably
request for the purposes contemplated by the Securities Act.
(d) If at any time during the period in which a prospectus is required
by law to be delivered by an Underwriter or dealer any event relating to or
affecting the Company, or of which the Company shall be advised in writing by
you, shall occur as a result of which it is necessary, in the opinion of
counsel for the Company or of counsel for the Underwriters, to supplement or
amend the Prospectus in order to make the Prospectus not misleading in the
light of the circumstances existing at the time it is delivered to a
purchaser of the Stock, the Company will forthwith prepare and file with the
Commission a supplement to the Prospectus or an amended prospectus so that
the Prospectus as so supplemented or amended will not contain any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements therein, in the light of the circumstances
existing at the time such Prospectus is delivered to such purchaser, not
misleading. If the Underwriters shall propose to vary the terms of the
offering of the Stock by reason of changes in general market conditions or
otherwise, you will advise the Company in writing of the proposed variation,
and, if in the opinion either of counsel for the Company or of counsel for
the Underwriters such proposed variation requires that the Prospectus be
supplemented or amended, the Company will forthwith prepare and file with the
Commission a supplement to the Prospectus or an amended prospectus setting
forth such variation. The Company authorizes the Underwriters and all
dealers to whom any of the Stock may be sold by the several Underwriters to
use the Prospectus, as from time to time amended or supplemented, in
connection with the sale of the Stock in accordance with the applicable
provisions of the Securities Act and the applicable rules and regulations
thereunder for such period.
(e) Prior to the filing thereof with the Commission, the Company will
submit to you, for your information, a copy of any post-effective amendment
to the Registration Statement and any supplement to the Prospectus or any
amended prospectus proposed to be filed.
(f) The Company will cooperate, when and as requested by you, in the
qualification of the Stock for offer and sale under the securities or blue
sky laws of such jurisdictions as you may designate and, during the period in
which a prospectus is required by law to be delivered
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<PAGE>
by an Underwriter or dealer, in keeping such qualifications in good standing
under said securities or blue sky laws; PROVIDED, HOWEVER, that the Company
shall not be obligated to file any general consent to service of process or
to qualify as a foreign corporation in any jurisdiction in which it is not so
qualified. The Company will, from time to time, prepare and file such
statements, reports, and other documents as are or may be required to
continue such qualifications in effect for so long a period as you may
reasonably request for distribution of the Stock.
(g) During a period of two years commencing with the date hereof, the
Company will furnish to you, and to each Underwriter who may so request in
writing, copies of all periodic and special reports furnished to shareholders of
the Company and of all information, documents and reports filed with the
Commission.
(h) Not later than the 45th day following the end of the fiscal quarter
first occurring after the first anniversary of the Effective Date, the Company
will make generally available to its security holders an earning statement in
accordance with Section 11(a) of the Securities Act and Rule 158 thereunder.
(i) The Company agrees with the Underwriters to pay all costs and
expenses incident to the performance of the Company's and the Selling
Securityholders' obligations under this Agreement, including all costs and
expenses incident to (i) the preparation, printing and filing with the
Commission and the National Association of Securities Dealers, Inc. ("NASD")
of the Registration Statement, any Preliminary Prospectus and the Prospectus,
(ii) the furnishing to the Underwriters of copies of any Preliminary
Prospectus and of the several documents required by paragraph (c) of this
Section 6 to be so furnished, (iii) the copying of this Agreement and related
documents delivered to the Underwriters, (iv) the preparation, printing and
filing of all supplements and amendments to the Prospectus referred to in
paragraph (d) of this Section 6, (v) the furnishing to you and the
Underwriters of the reports and information referred to in paragraph (g) of
this Section 6 and (vi) the printing and issuance of stock certificates,
including the transfer agent's fees.
(j) The Company agrees to reimburse you, for the account of the several
Underwriters, for state or Canadian provincial blue sky, registration or private
placement fees and related disbursements (including counsel fees and
disbursements and cost of copying memoranda for the Underwriters) paid by or for
the account of the Underwriters or their counsel in qualifying the Stock under
state or provincial securities or blue sky laws and in the review of the
offering by the NASD.
(k) The provisions of paragraphs (i) and (j) of this Section are intended
to relieve the Underwriters from the payment of the expenses and costs which the
Company hereby agrees to pay and shall not affect any agreement which the
Company and the Selling Securityholders may make, or may have made, for the
sharing of any such expenses and costs. Without limiting the foregoing, all
fees and expenses of counsel for each Selling Securityholder and all
underwriters' discounts and commissions in respect of the sale of the Stock to
be sold hereunder by such Selling Securityholder shall be paid by such Selling
Securityholder.
(l) The Company and each of the Selling Securityholders hereby agrees
that, without the prior written consent of Hambrecht & Quist LLC on behalf of
the Underwriters, the Company or such Selling Securityholder, as the case may
be, will not, for a period of 90
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days following the commencement of the public offering of the Stock by
the Underwriters, directly or indirectly, (i) issue, sell, offer,
contract to sell, transfer the economic risk of ownership in, make any
short sale, pledge or otherwise transfer or dispose of any shares of
Common Stock or any securities convertible into or exchangeable or
exercisable for or any rights to purchase or acquire Common Stock,
whether any such transaction is to be settled by delivery of Common
Stock or such other securities, in cash or otherwise. The foregoing
sentence shall not apply to (A) the Stock to be sold to the Underwriters
pursuant to this Agreement, (B) shares of Common Stock issued by the
Company upon the exercise of options granted under the stock option
plans of the Company (herein called the Option Plans) or pursuant to the
Company's 1995 Employee Stock Option Purchase Plan (herein called the
Employee Plan), all as described in footnote (2) to the table under the
caption "Capitalization" and under the caption "Management" in the
Preliminary Prospectus, and (C) options to purchase Common Stock granted
under the Option Plans or deemed granted under the Employee Plan.
7. INDEMNIFICATION AND CONTRIBUTION.
(a) Subject to the provisions of paragraph (f) of this Section 7,
the Company and the Selling Securityholders jointly and severally agree
to indemnify and hold harmless each Underwriter and each person
(including each partner or officer thereof) who controls any Underwriter
within the meaning of Section 15 of the Securities Act from and against
any and all losses, claims, damages or liabilities, joint or several, to
which such indemnified parties or any of them may become subject under
the Securities Act, the Securities Exchange Act of 1934, as amended
(herein called the Exchange Act), or the common law or otherwise, and
the Company and the Selling Securityholders jointly and severally agree
to reimburse each such Underwriter and controlling person for any legal
or other expenses (including, except as otherwise hereinafter provided,
reasonable fees and disbursements of counsel) incurred by the respective
indemnified parties in connection with defending against any such
losses, claims, damages or liabilities or in connection with any
investigation or inquiry of, or other proceeding which may be brought
against, the respective indemnified parties, in each case arising out of
or based upon (i) any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement (including the
Prospectus as part thereof and any Rule 462(b) registration statement)
or any post-effective amendment thereto (including any Rule 462(b)
registration statement), or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, or (ii) any untrue statement
or alleged untrue statement of a material fact contained in any
Preliminary Prospectus or the Prospectus (as amended or as supplemented
if the Company shall have filed with the Commission any amendment
thereof or supplement thereto) or the omission or alleged omission to
state therein a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made,
not misleading; PROVIDED, HOWEVER, that (1) the indemnity agreements of
the Company and the Selling Securityholders contained in this paragraph
(a) shall not apply to any such losses, claims, damages, liabilities or
expenses if such statement or omission was made in reliance upon and in
conformity with information furnished as herein stated or otherwise
furnished in writing to the Company by or on behalf of any Underwriter
for use in any Preliminary Prospectus or the Registration Statement or
the Prospectus or any such amendment thereof or supplement thereto; (2)
the indemnity agreements of the Company and the Selling Securityholders
contained in this paragraph (a) with respect to any Preliminary
Prospectus shall not inure to the benefit of any Underwriter from whom
the person asserting any such losses, claims, damages, liabilities or
expenses purchased the Stock which is the subject thereof (or to the
benefit of any person controlling such Underwriter) if at or prior to
the written confirmation of the sale of such Stock a copy of the
Prospectus (or the Prospectus as amended or supplemented) was not sent
or delivered to such person and the untrue statement or omission of a
material fact contained in such
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<PAGE>
Preliminary Prospectus was corrected in the Prospectus (or the
Prospectus as amended or supplemented) unless the failure is the result
of noncompliance by the Company with paragraph (c) of Section 6 hereof;
and (3) each Selling Securityholder shall only be liable under this
paragraph with respect to (A) information pertaining to such Selling
Securityholder furnished by or on behalf of such Selling Securityholder
expressly for use in any Preliminary Prospectus or the Registration
Statement or the Prospectus or any such amendment thereof or supplement
thereto or (B) facts that would constitute a breach of any
representation or warranty of such Selling Securityholder set forth in
Section 2 hereof. The indemnity agreements of the Company and the
Selling Securityholders contained in this paragraph (a) and the
representations and warranties of the Company and the Selling
Securityholders contained in Section 2 hereof shall remain operative and
in full force and effect regardless of any investigation made by or on
behalf of any indemnified party and shall survive the delivery of and
payment for the Stock.
(b) Each Underwriter severally agrees to indemnify and hold
harmless the Company, each of its officers who signs the Registration
Statement on his own behalf or pursuant to a power of attorney, each of
its directors, each other Underwriter and each person (including each
partner or officer thereof) who controls the Company or any such other
Underwriter within the meaning of Section 15 of the Securities Act, and
each Selling Securityholder from and against any and all losses, claims,
damages or liabilities, joint or several, to which such indemnified
parties or any of them may become subject under the Securities Act, the
Exchange Act, or the common law or otherwise and to reimburse each of
them for any legal or other expenses (including, except as otherwise
hereinafter provided, reasonable fees and disbursements of counsel)
incurred by the respective indemnified parties in connection with
defending against any such losses, claims, damages or liabilities or in
connection with any investigation or inquiry of, or other proceeding
which may be brought against, the respective indemnified parties, in
each case arising out of or based upon (i) any untrue statement or
alleged untrue statement of a material fact contained in the
Registration Statement (including the Prospectus as part thereof and any
Rule 462(b) registration statement) or any post-effective amendment
thereto (including any Rule 462(b) registration statement) or the
omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading or (ii) any untrue statement or alleged untrue statement of a
material fact contained in the Prospectus (as amended or as supplemented
if the Company shall have filed with the Commission any amendment
thereof or supplement thereto) or the omission or alleged omission to
state therein a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made,
not misleading, if (in the case of clause (i) or (ii)) such statement or
omission was made in reliance upon and in conformity with information
furnished as herein stated or otherwise furnished in writing to the
Company by or on behalf of such indemnifying Underwriter for use in the
Registration Statement or the Prospectus or any such amendment thereof
or supplement thereto. The indemnity agreement of each Underwriter
contained in this paragraph (b) shall remain operative and in full force
and effect regardless of any investigation made by or on behalf of any
indemnified party and shall survive the delivery of and payment for the
Stock.
(c) Each party indemnified under the provision of paragraphs (a)
and (b) of this Section 7 agrees that, upon the service of a summons or
other initial legal process upon it in any action or suit instituted
against it or upon its receipt of written notification of the
commencement of any investigation or inquiry of, or proceeding against,
it in respect of which indemnity may be sought on account of any
indemnity agreement contained in such paragraphs, it will promptly give
written notice (herein called the Notice) of such service or
notification to the party or parties from whom indemnification may be
sought hereunder. No indemnification provided for in such paragraphs
shall be available to any party who shall fail so to give the Notice if
the party to whom such Notice was not given was unaware of the action,
suit, investigation, inquiry or proceeding to which the Notice would
have related and was
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<PAGE>
prejudiced by the failure to give the Notice, but the omission so to notify
such indemnifying party or parties of any such service or notification shall
not relieve such indemnifying party or parties from any liability which it or
they may have to the indemnified party for contribution or otherwise than on
account of such indemnity agreement. Any indemnifying party shall be
entitled at its own expense to participate in the defense of any action, suit
or proceeding against, or investigation or inquiry of, an indemnified party.
Any indemnifying party shall be entitled, if it so elects within a reasonable
time after receipt of the Notice by giving written notice (herein called the
Notice of Defense) to the indemnified party, to assume (alone or in
conjunction with any other indemnifying party or parties) the entire defense
of such action, suit, investigation, inquiry or proceeding, in which event
such defense shall be conducted, at the expense of the indemnifying party or
parties, by counsel chosen by such indemnifying party or parties and
reasonably satisfactory to the indemnified party or parties; PROVIDED,
HOWEVER, that (i) if the indemnified party or parties reasonably determine
that there may be a conflict between the positions of the indemnifying party
or parties and of the indemnified party or parties in conducting the defense
of such action, suit, investigation, inquiry or proceeding or that there may
be legal defenses available to such indemnified party or parties different
from or in addition to those available to the indemnifying party or parties,
then counsel for the indemnified party or parties, upon written notice to the
indemnifying parties, shall be entitled to conduct the defense to the extent
reasonably determined by such counsel to be necessary to protect the
interests of the indemnified party or parties and (ii) in any event, the
indemnified party or parties shall be entitled to have counsel chosen by such
indemnified party or parties participate in, but not conduct, the defense.
If, within a reasonable time after receipt of the Notice, an indemnifying
party gives a Notice of Defense and the counsel chosen by the indemnifying
party or parties is reasonably satisfactory to the indemnified party or
parties, the indemnifying party or parties will not be liable under
paragraphs (a) through (c) of this Section 7 for any legal or other expenses
subsequently incurred by the indemnified party or parties in connection with
the defense of the action, suit, investigation, inquiry or proceeding, except
that (A) the indemnifying party or parties shall bear the legal and other
expenses incurred in connection with the conduct of the defense as referred
to in clause (i) of the proviso to the preceding sentence and (B) the
indemnifying party or parties shall bear such other expenses as it or they
have authorized to be incurred by the indemnified party or parties. If,
within a reasonable time after receipt of the Notice, no Notice of Defense
has been given, the indemnifying party or parties shall be responsible for
any legal or other expenses incurred by the indemnified party or parties in
connection with the defense of the action, suit, investigation, inquiry or
proceeding.
(d) If the indemnification provided for in this Section 7 is
unavailable or insufficient to hold harmless an indemnified party under
paragraph (a) or (b) of this Section 7, then each indemnifying party, in lieu
of indemnifying such indemnified party, shall contribute to the amount paid
or payable by such indemnified party as a result of the losses, claims,
damages or liabilities referred to in paragraph (a) or (b) of this Section 7
(i) in such proportion as is appropriate to reflect the relative benefits
received by each indemnifying party from the offering of the Stock or (ii) if
the allocation provided by clause (i) above is not permitted by applicable
law, in such proportion as is appropriate to reflect not only the relative
benefits referred to in clause (i) above but also the relative fault of each
indemnifying party in connection with the statements or omissions that
resulted in such losses, claims, damages or liabilities, or actions in
respect thereof, as well as any other relevant equitable considerations. The
relative benefits received by the Company and the Selling Securityholders on
the one hand and the Underwriters on the other shall be deemed to be in the
same respective proportions as the total net proceeds from the offering of
the Stock received by the Company and the Selling Securityholders and the
total underwriting discount received by the Underwriters, as set forth in the
table on the cover page of the Prospectus, bear to the aggregate public
offering price of the Stock. Relative fault shall be determined by reference
to, among other things, whether the untrue or alleged
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<PAGE>
untrue statement of a material fact or the omission or alleged omission to
state a material fact relates to information supplied by each indemnifying
party and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such untrue statement or omission.
The parties agree that it would not be just and equitable if
contributions pursuant to this paragraph (d) were to be determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take into
account the equitable considerations referred to in the first sentence of
this paragraph (d). The amount paid by an indemnified party as a result of
the losses, claims, damages or liabilities, or actions in respect thereof,
referred to in the first sentence of this paragraph (d) shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in connection with investigation, preparing to defend or defending
against any action or claim which is the subject of this paragraph (d).
Notwithstanding the provisions of this paragraph (d), no Underwriter shall be
required to contribute any amount in excess of the underwriting discount
applicable to the Stock purchased by such Underwriter. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations
in this paragraph (d) to contribute are several in proportion to their
respective underwriting obligations and not joint.
Each party entitled to contribution agrees that upon the service of a
summons or other initial legal process upon it in any action instituted
against it in respect of which contribution may be sought, it will promptly
give written notice of such service to the party or parties from whom
contribution may be sought, but the omission so to notify such party or
parties of any such service shall not relieve the party from whom
contribution may be sought from any obligation it may have hereunder or
otherwise (except as specifically provided in paragraph (c) of this Section
7).
(e) Neither the Company nor the Selling Securityholders will, without
the prior written consent of each Underwriter, settle or compromise or
consent to the entry of any judgment in any pending or threatened claim,
action, suit or proceeding in respect of which indemnification may be sought
hereunder (whether or not such Underwriter or any person who controls such
Underwriter within the meaning of Section 15 of the Securities Act or Section
20 of the Exchange Act is a party to such claim, action, suit or proceeding)
unless such settlement, compromise or consent includes an unconditional
release of such Underwriter party and each such controlling person from all
liability arising out of such claim, action, suit or proceeding.
(f) The liability of each Selling Securityholder under such Selling
Securityholder's representations and warranties contained in Section 2 hereof
and under the indemnity and reimbursement agreements contained in the
provisions of this Section 7 and Section 11 hereof shall be limited to an
amount equal to the total net proceeds from the sale of the Stock sold by
such Selling Securityholder to the Underwriters. In addition, no Selling
Securityholder shall be liable under the indemnity and reimbursement
agreements of Sections 7 and 11 hereof unless and until the Underwriters have
made written demand on the Company for payment under such Sections which
shall not have been paid by the Company within 60 days after receipt of such
demand. The Company and the Selling Securityholders may agree, as among
themselves and without limiting the rights of the Underwriters under this
Agreement, as to the respective amounts of such liability for which they each
shall be responsible.
8. TERMINATION. This Agreement may be terminated by you at any time
prior to the Closing Date by giving written notice to the Company and the
Selling Securityholders if after the date
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<PAGE>
of this Agreement trading in the Common Stock shall have been suspended, or
if there shall have occurred (i) the engagement in major hostilities or an
escalation of major hostilities by the United States or the declaration of
war or a national emergency by the United States on or after the date hereof,
(ii) any outbreak of hostilities or other national or international calamity
or crisis or change in economic or political conditions if the effect of such
outbreak, calamity, crisis or change in economic or political conditions in
the financial markets of the United States would, in the Underwriters'
reasonable judgment, make the offering or delivery of the Stock
impracticable, (iii) suspension of trading in securities generally or a
material adverse decline in value of securities generally on the New York
Stock Exchange, the American Stock Exchange, or The Nasdaq Stock Market, or
limitations on prices (other than limitations on hours or numbers of days of
trading) for securities on either such exchange or system, (iv) the
enactment, publication, decree or other promulgation of any federal or state
statute, regulation, rule or order of, or commencement of any proceeding or
investigation by, any court, legislative body, agency or other governmental
authority which in the Underwriters' reasonable opinion materially and
adversely affects or will materially or adversely affect the business or
operations of the Company, (v) declaration of a banking moratorium by either
federal or New York State authorities or (vi) the taking of any action by any
federal, state or local government or agency in respect of its monetary or
fiscal affairs which in the Underwriters' reasonable opinion has a material
adverse effect on the securities markets in the United States. If this
Agreement shall be terminated pursuant to this Section 8, there shall be no
liability of the Company or the Selling Securityholders to the Underwriters
and no liability of the Underwriters to the Company or the Selling
Securityholders (in each case, including without limitation any liability for
loss of anticipated profits); PROVIDED, HOWEVER, that in the event of any
such termination the Company agrees to indemnify and hold harmless the
Underwriters from all costs or expenses incident to the performance of the
obligations of the Company and the Selling Securityholders under this
Agreement, including all costs and expenses referred to in paragraphs (i) and
(j) of Section 6 hereof.
9. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the
several Underwriters to purchase and pay for the Stock shall be subject to the
performance by the Company and by the Selling Securityholders of all their
respective obligations to be performed hereunder at or prior to the Closing Date
or any later date on which Option Stock is to be purchased, as the case may be,
and to the following further conditions:
(a) The Registration Statement shall have become effective; and
no stop order suspending the effectiveness thereof shall have been
issued and no proceedings therefor shall be pending or threatened by
the Commission.
(b) The legality and sufficiency of the sale of the Stock
hereunder and the validity and form of the certificates representing
the Stock, all corporate proceedings and other legal matters incident
to the foregoing, and the form of the Registration Statement and of the
Prospectus (except as to the financial statements contained therein),
shall have been approved at or prior to the Closing Date by Thompson &
Knight, A Professional Corporation, counsel for the Underwriters.
(c) You shall have received from Locke Purnell Rain Harrell (A
Professional Corporation), counsel for the Company; Lic. Jose Reyes
Ferring, Mexican counsel for the Company; and Joe French & Associates,
P.C., counsel for the Selling Securityholders, opinions addressed to
the Underwriters and dated the Closing Date, covering the matters set
forth in Annexes A, B and C hereto, respectively, and if Option Stock is
purchased at any date after the Closing Date, additional opinions from
each such counsel, addressed to the Underwriters and
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<PAGE>
dated such later date, confirming that the statements
expressed as of the Closing Date in such opinions remain valid as of such
later date.
(d) You shall be satisfied that (i) as of the Effective Date, the
statements made in the Registration Statement and the Prospectus were true
and correct, the Registration Statement did not contain any untrue statement
of a material fact and did not omit to state any material fact required to be
stated therein or necessary in order to make the statements therein not
misleading and the Prospectus did not contain any untrue statement of a
material fact or omit to state any material fact necessary in order to make
the statements therein, in light of the circumstances under which they were
made, not misleading, (ii) since the Effective Date, no event has occurred
which, in the opinion of counsel to the Company or counsel to the
Underwriters, should have been set forth in a supplement or amendment to the
Prospectus which has not been set forth in such a supplement or amendment,
(iii) since the respective dates as of which information is given in the
Registration Statement in the form in which it originally became effective
and the Prospectus contained therein, there has not been any material adverse
change or any development involving a prospective material adverse change in
or affecting the business, properties, financial condition or results of
operations of the Company and its subsidiaries, taken as a whole, whether or
not arising from transactions in the ordinary course of business, and, since
such dates, except in the ordinary course of business, neither the Company
nor any of its subsidiaries has entered into any material transaction not
referred to in the Registration Statement in the form in which it originally
became effective and the Prospectus contained therein, (iv) neither the
Company nor any of its subsidiaries has any material contingent obligations
which are not disclosed in the Registration Statement and the Prospectus, (v)
there are not any pending or known threatened legal proceedings to which the
Company or any of its subsidiaries is a party or of which property of the
Company or any of its subsidiaries is the subject which are material and
which are not disclosed in the Registration Statement and the Prospectus,
(vi) the representations and warranties of the Company and the Selling
Securityholders herein are true and correct in all material respects as of
the Closing Date or any later date on which Option Stock is to be purchased,
as the case may be, and (vii) there has not occurred any event specified in
the first sentence of Section 8 which, in your reasonable judgment, makes it
impracticable to make a public offering of the Stock.
(e) You shall have received on the Closing Date and on any later date
on which Option Stock is purchased a certificate, dated the Closing Date or
such later date, as the case may be, and signed by the President and the
Chief Financial Officer of the Company, stating that the respective signers
of said certificate have carefully examined the Registration Statement in the
form in which it originally became effective and the Prospectus contained
therein and any supplements or amendments thereto, and that the statements
included in clauses (i) through (vii) of paragraph (d) of this Section 9 are
true and correct.
(f) You shall have received from Price Waterhouse LLP, a letter or
letters, addressed to the Underwriters and dated the Closing Date and any
later date on which Option Stock is purchased, confirming that they are
independent public accountants with respect to the Company within the meaning
of the Securities Act and the applicable published rules and regulations
thereunder and based upon the procedures described in their letter delivered
to you concurrently with the execution of this Agreement (herein called the
Original Letter), but carried out to a date not more than three business days
prior to the Closing Date or such later date on which Option Stock is
purchased (i) confirming, to the extent true, that the statements and
conclusions set forth in the Original Letter are accurate as of the Closing
Date or such later date, as the case may be, and (ii) setting forth any
revisions and additions to the statements and
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<PAGE>
conclusions set forth in the Original Letter which are necessary to
reflect any changes in the facts described in the Original Letter since
the date of the Original Letter or to reflect the availability of more
recent financial statements, data or information. The letters shall
not disclose any change, or any development involving a prospective
change, in or affecting the business or properties of the Company or
any of its subsidiaries which, in your sole reasonable judgment, makes
it impractical or inadvisable to proceed with the public offering of
the Stock or the purchase of the Option Stock as contemplated by the
Prospectus.
(g) You shall have been furnished evidence in usual written or
telegraphic form from the appropriate authorities of the several
jurisdictions, or other evidence satisfactory to you, of the
qualification referred to in paragraph (f) of Section 6 hereof.
(h) Prior to the Closing Date, the Stock to be issued and sold by
the Company shall have been duly authorized for listing by the Nasdaq
National Market upon official notice of issuance.
(i) On or prior to the Closing Date, you shall have received from
all directors and executive officers of the Company agreements, in form
reasonably satisfactory to Hambrecht & Quist LLC, stating that without
the prior written consent of Hambrecht & Quist LLC on behalf of the
Underwriters, such person will not, for a period of 90 days following
the commencement of the public offering of the Stock by the
Underwriters, directly or indirectly, sell, offer, contract to sell,
transfer the economic risk of ownership in, make any short sale, pledge
or otherwise transfer or dispose of any shares of Common Stock or any
securities convertible into or exchangeable or exercisable for or any
rights to purchase or acquire Common Stock.
All the agreements, opinions, certificates and letters mentioned above
or elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if Thompson & Knight, A Professional Corporation,
counsel for the Underwriters, shall be satisfied that they comply in form and
scope.
In case any of the conditions specified in this Section 9 shall not be
fulfilled, this Agreement may be terminated by you by giving written notice
to the Company and to the Selling Securityholders. Any such termination
shall be without liability of the Company or the Selling Securityholders to
the Underwriters and without liability of the Underwriters to the Company or
the Selling Securityholders (in each case, including without limitation any
liability for loss of anticipated profits); PROVIDED, HOWEVER, that (i) in
the event of such termination, the Company agrees to indemnify and hold
harmless the Underwriters from all costs or expenses incident to the
performance of the obligations of the Company and the Selling Securityholders
under this Agreement, including all costs and expenses referred to in
paragraphs (i) and (j) of Section 6 hereof, and (ii) if this Agreement is
terminated by you because of any refusal, inability or failure on the part of
the Company or the Selling Securityholders to perform any agreement herein,
to fulfill any of the conditions herein, or to comply with any provision
hereof other than by reason of a default by any of the Underwriters, the
Company will reimburse the Underwriters severally upon demand for all
out-of-pocket expenses (including reasonable fees and disbursements of
counsel) that shall have been incurred by them in connection with the
transactions contemplated hereby.
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<PAGE>
10. CONDITIONS OF THE OBLIGATION OF THE COMPANY AND THE SELLING
SECURITYHOLDERS. The obligation of the Company and the Selling
Securityholders to deliver the Stock shall be subject to the conditions that
(a) the Registration Statement shall have become effective and (b) no stop
order suspending the effectiveness thereof shall be in effect and no
proceedings therefor shall be pending or threatened by the Commission.
In case either of the conditions specified in this Section 10 shall not
be fulfilled, this Agreement may be terminated by the Company and the Selling
Securityholders by giving written notice to you. Any such termination shall
be without liability of the Company and the Selling Securityholders to the
Underwriters and without liability of the Underwriters to the Company or the
Selling Securityholders (in each case, including without limitation any
liability for loss of anticipated profits); PROVIDED, HOWEVER, that in the
event of any such termination the Company agrees to indemnify and hold
harmless the Underwriters from all costs or expenses incident to the
performance of the obligations of the Company and the Selling Securityholders
under this Agreement, including all costs and expenses referred to in
paragraphs (i) and (j) of Section 6 hereof.
11. REIMBURSEMENT OF CERTAIN EXPENSES. In addition to their other
obligations under Section 7 of this Agreement (and subject, in the case of a
Selling Securityholder, to the provisions of paragraph (f) of Section 7), the
Company and the Selling Securityholders hereby jointly and severally agree to
reimburse on a quarterly basis the Underwriters for all reasonable legal and
other expenses incurred in connection with investigating or defending any
claim, action, investigation, inquiry or other proceeding arising out of or
based upon any statement or omission, or any alleged statement or omission,
described in paragraph (a) of Section 7 of this Agreement and in respect of
which the Underwriters have given to the Company or the Selling
Securityholders any Notice required by Section 7(c) (and provided the
Underwriters would be entitled to conduct the investigation or defense
thereof pursuant to Section 7(c)), notwithstanding the absence of a judicial
determination as to the propriety and enforceability of the obligations under
this Section 11 and the possibility that such payments might later be held to
be improper; PROVIDED, HOWEVER, that (i) to the extent any such payment is
ultimately held to be improper, the persons receiving such payments shall
promptly refund them and (ii) such persons shall provide to the Company, upon
request, reasonable assurances of their ability to effect any refund, when
and if due.
12. PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement shall
inure to the benefit of the Company, the Selling Securityholders and the
several Underwriters and, with respect to the provisions of Section 7 hereof,
the several parties (in addition to the Company, the Selling Securityholders
and the several Underwriters) indemnified under the provisions of said
Section 7, and their respective personal representatives, successors and
assigns. Nothing in this Agreement is intended or shall be construed to give
to any other person, firm or corporation any legal or equitable remedy or
claim under or in respect of this Agreement or any provision herein
contained. The term "successors and assigns" as herein used shall not
include any purchaser, as such purchaser, of any of the Stock from any of the
several Underwriters.
13. NOTICES. Except as otherwise provided herein, all communications
hereunder shall be in writing or by facsimile and, if to the Underwriters,
shall be mailed, transmitted by facsimile or delivered to Hambrecht & Quist
LLC, One Bush Street, San Francisco, California 94104; and if to the Company,
shall be mailed, transmitted by facsimile or delivered to it at its office,
1651 North Glenville Drive, Richardson, Texas 75081, Attention: Chief
Executive Officer; and if to the Selling Securityholders, shall be mailed,
transmitted by facsimile or delivered to the Selling Securityholders in care
of William E. Ogle and Bryan F. Keyes, Attorneys-in-Fact, at the Company's
address at such
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<PAGE>
office. Notwithstanding the foregoing, any notice delivered to a Selling
Securityholder, as an indemnifying or indemnified party, after the Closing
Date in accordance with Section 7 shall be addressed and delivered to such
Selling Securityholder at the Company's address as specified in this
paragraph, rather than to the Attorneys-in-Fact. All notices given by
facsimile shall be promptly confirmed by letter.
14. MISCELLANEOUS. The reimbursement, indemnification and contribution
agreements contained in this Agreement and the representations, warranties and
covenants in this Agreement shall remain in full force and effect regardless of
(a) any termination of this Agreement, (b) any investigation made by or on
behalf of any Underwriter or controlling person thereof, or by or on behalf of
the Company or the Selling Securityholders or their respective directors or
officers, and (c) delivery and payment for the Stock under this Agreement;
PROVIDED, HOWEVER, that if this Agreement is terminated prior to the Closing
Date, the provisions of paragraph (l) of Section 6 hereof shall be of no further
force or effect.
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
This Agreement shall be governed by, and construed in accordance with, the
laws of the State of California.
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<PAGE>
Please sign and return to the Company and to the Selling Securityholders
in care of the Company the enclosed duplicates of this letter, whereupon this
letter will become a binding agreement among the Company, the Selling
Securityholders and the several Underwriters in accordance with its terms.
Very truly yours,
STB SYSTEMS, INC.
By
----------------------------------------
William E. Ogle, Chief Executive Officer
and Chairman of the Board
SELLING SECURITYHOLDERS:
WILLIAM E. OGLE
WILLIAM D. BALTHASER, JR.
MARK S. SIMS
By
----------------------------------------
William E. Ogle, Individually and as
Attorney-in-Fact acting on
behalf of each of the other
Selling Securityholders
The foregoing Agreement is hereby confirmed
and accepted as of the date first above written.
HAMBRECHT & QUIST LLC
COWEN & COMPANY
By Hambrecht & Quist LLC
By
----------------------------------------------
, Managing Director,
Acting on behalf of the several Underwriters,
including themselves, named in Schedule I hereto.
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SCHEDULE I
UNDERWRITERS
NUMBER OF
SHARES OF
UNDERWRITTEN
STOCK TO BE
UNDERWRITERS PURCHASED
------------ ------------
Hambrecht & Quist LLC.....................................
Cowen & Company...........................................
------------
Total................................................ 1,800,000
------------
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<PAGE>
SCHEDULE II
SELLING SECURITYHOLDERS
NUMBER OF NUMBER OF SHARES
SHARES OF OF OPTION STOCK
UNDERWRITTEN TO BE SOLD IF
STOCK TO BE MAXIMUM OPTION
NAME OF SELLING SECURITYHOLDER SOLD EXERCISED
------------------------------ ------------ ----------------
William E. Ogle........................... 100,000 90,000
William D. Balthaser, Jr.................. 100,000 90,000
Mark S. Sims.............................. 100,000 90,000
------------ ----------------
Total................................ 300,000 270,000
------------ ----------------
------------ ----------------
<PAGE>
ANNEX A
MATTERS TO BE COVERED IN THE OPINION OF
LOCKE PURNELL RAIN HARRELL (A PROFESSIONAL CORPORATION),
COUNSEL FOR THE COMPANY
(i) the Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the State of Texas and has
full power and authority to own or lease its properties and conduct its
business as described in the Registration Statement;
(ii) the Company has no subsidiaries other than Assembly, IFC and
MCCJ; Assembly has been duly incorporated and is validly existing as a
corporation in good standing under the laws of its jurisdiction of
incorporation; all of the issued shares of capital stock of Assembly have
been duly and validly authorized and issued, are fully paid and
nonassessable, and such shares are owned directly by the Company, free and
clear of all liens, encumbrances, equities or claims; and to the best of such
counsel's knowledge, no options, warrants or other rights to purchase,
agreements or other obligations to issue or other rights to convert any
obligations into shares of capital stock or ownership interests in Assembly
are outstanding;
(iii) the authorized capital stock of the Company and the number of
issued and outstanding shares of such capital stock is as set forth under the
caption "Capitalization" in the Prospectus; proper corporate proceedings have
been taken validly to authorize such authorized capital stock; all of the
outstanding shares of such capital stock (including the shares of Stock, when
issued and paid for by the Underwriters) have been duly and validly issued
and are fully paid and nonassessable; and no preemptive rights of, or rights
of refusal in favor of, shareholders exist with respect to the Stock, or the
issue and sale thereof, pursuant to the Articles of Incorporation or Bylaws
of the Company and, to the knowledge of such counsel, there are no
contractual preemptive rights, rights of first refusal or rights of co-sale
which exist and have not been waived with respect to the Stock being sold by
the Selling Securityholders or the issue and sale of the Stock;
(iv) the Registration Statement has become effective under the
Securities Act and, to the best of such counsel's knowledge, no stop order
suspending the effectiveness of the Registration Statement or suspending or
preventing the use of the Prospectus is in effect and no proceedings for that
purpose have been instituted or are pending or contemplated by the Commission;
(v) the Registration Statement and the Prospectus (except as to the
financial statements and schedules and other financial data contained
therein, as to which such counsel need express no opinion) comply as to form
in all material respects with the requirements of the Securities Act and with
the rules and regulations of the Commission thereunder;
(vi) the information required to be set forth in the Registration
Statement in answer to Item 10 (insofar as it relates to such counsel) and
Items 9 and 11(c) (insofar as such information constitutes a summary of legal
matters) of Form S-1 is to the best of such counsel's knowledge accurately
and adequately set forth therein in all material respects or no response is
required with respect to such Items;
(vii) such counsel do not know of any franchises, contracts, leases,
documents or legal proceedings, pending or threatened, which in the opinion
of such counsel are of a character
<PAGE>
required to be described in the Registration Statement or the Prospectus or
to be filed as exhibits to the Registration Statement, which are not
described and filed (or incorporated by reference) as required;
(viii) the Underwriting Agreement has been duly authorized, executed and
delivered by the Company and is the legal, valid and binding agreement of the
Company enforceable in accordance with its terms (except to the extent the
enforceability of the indemnification and contribution provisions of Section
7 of the Underwriting Agreement may be limited by federal or state securities
laws or by public policy considerations as expressed in such laws as
construed by courts of competent jurisdiction, and except as enforceability
may be limited by bankruptcy, insolvency, reorganization, moratorium and
other laws affecting creditors' rights generally and by general principles of
equity);
(ix) the issue and sale by the Company of the shares of Stock sold by
the Company as contemplated by the Underwriting Agreement will not conflict
with, or result in a breach of, the Articles of Incorporation or Bylaws of
the Company or any of its subsidiaries or any agreement or instrument known
to such counsel to which the Company or any of its subsidiaries is a party or
any applicable law or regulation (assuming compliance with the securities
registration and qualification requirements under applicable state securities
or blue sky laws), or so far as is known to such counsel, any order, writ,
injunction or decree, of any jurisdiction, court or governmental
instrumentality;
(x) to the best of such counsel's knowledge, no holders of securities
of the Company have any rights to the registration of shares of Common Stock,
or other securities, because of the filing of the Registration Statement by
the Company;
(xi) no consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation by the Company
of the transactions contemplated in the Underwriting Agreement, except such
as have been obtained under the Securities Act and such as may be required
under state securities or blue sky laws or by the National Association of
Securities Dealers, Inc. in connection with the purchase and distribution of
the Stock by the Underwriters;
(xii) such counsel have no reason to believe that the Registration
Statement or the Prospectus (A) contains any untrue statement of a material
fact with respect to patents, trade secrets, trademarks, service marks or
other proprietary information or materials (herein called Intellectual
Property) owned or used by the Company, or the manner of its use thereof, or
(B) omits to state any material fact relating to Intellectual Property owned
or used by the Company, or the manner of its use thereof, that is required to
be stated in the Registration Statement or the Prospectus or is necessary to
make the statements therein not misleading; and
(xiii) to the best of such counsel's knowledge, there are no pending or
threatened legal or governmental proceedings or infringement claims relating
to Intellectual Property owned or used by the Company.
____________________________________
<PAGE>
In addition to the matters set forth above, counsel rendering the
foregoing opinion shall also include a statement to the effect that nothing
has come to the attention of such counsel that leads them to believe that the
Registration Statement (except as to the financial statements and schedules
and other financial and statistical data contained or incorporated by
reference therein, as to which such counsel need not express any opinion or
belief) at the Effective Date contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, that the Prospectus
(except as to the financial statements and schedules and other financial and
statistical data contained or incorporated by reference therein, as to which
such counsel need not express any opinion or belief) as of its date or at the
Closing Date (or any later date on which Option Stock is purchased),
contained or contains any untrue statement of a material fact or omitted or
omits to state a material fact necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
<PAGE>
ANNEX B
MATTERS TO BE COVERED IN THE OPINION OF
LIC. JOSE REYES FERRING,
MEXICAN COUNSEL FOR THE COMPANY
(i) each of IFC and MCCJ has been duly incorporated and is validly
existing as a corporation in good standing under the laws of its jurisdiction
of incorporation; and
(ii) all of the issued shares of capital stock of IFC and MCCJ have
been duly and validly authorized and issued, are fully paid and
nonassessable, and (except for one share of common stock of IFC, representing
0.04% of the issued and outstanding capital stock of IFC) all the outstanding
shares of capital stock of IFC and MCCJ are owned directly or indirectly by
the Company, free and clear of all liens, encumbrances, equities or claims.
<PAGE>
ANNEX C
MATTERS TO BE COVERED IN THE OPINION OF
JOE FRENCH & ASSOCIATES, P.C.,
COUNSEL FOR THE SELLING SECURITYHOLDERS
(i) the Power of Attorney has been duly executed and delivered by
each Selling Securityholder and constitutes a valid and binding agreement of
such Selling Securityholder enforceable in accordance with its terms (except
as enforceability may be limited by bankruptcy, insolvency, moratorium and
other laws affecting creditors' rights generally and by general principles of
equity);
(ii) the Underwriting Agreement has been duly executed and delivered
by or on behalf of each Selling Securityholder and is the legal, valid and
binding agreement of such Selling Securityholder enforceable in accordance
with its terms (except to the extent the enforceability of the
indemnification provisions of Section 7 of the Underwriting Agreement may be
limited by public policy considerations as expressed in the Act as construed
by courts of competent jurisdiction, and except as enforceability may be
limited by bankruptcy, insolvency, moratorium and other laws affecting
creditors' rights generally and by general principles of equity); and the
sale of the Stock to be sold by such Selling Securityholder hereunder and the
compliance by such Selling Securityholder with all of the provisions of the
Underwriting Agreement and the Power of Attorney and the consummation of the
transactions therein contemplated will not (a) conflict with the laws of the
State of Texas or the federal laws of the United States by which such Selling
Securityholder is bound, or (b) result in a breach or violation of any order,
rule or regulation known to such counsel of any court or governmental agency
or body which, to such counsel's knowledge, has jurisdiction over such
Selling Securityholder or the Common Stock of such Selling Securityholder;
(iii) no consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation of the
transactions contemplated by the Underwriting Agreement in connection with
the Stock to be sold by such Selling Securityholder hereunder, except such as
have been obtained under the Act and such as may be required by the NASD or
under state securities or Blue Sky laws in connection with the purchase and
distribution of such Stock by the Underwriters;
(iv) each Selling Securityholder is the sole record and beneficial
owner of the Stock to be sold by such Selling Securityholder pursuant to the
Underwriting Agreement; upon delivery of the Stock to be sold by such Selling
Securityholder thereunder, the Underwriters who purchase and pay for such
Stock will obtain good, valid and marketable title to such Stock, free of all
adverse claims, assuming the Underwriters purchase such Stock in good faith
and without notice of any such adverse claim within the meaning of the
Uniform Commercial Code; and
(v) except as set forth in the Prospectus, and to the best knowledge
of such counsel, none of the Selling Securityholders owns, beneficially or of
record, nor does any Selling Securityholder have any option granted by the
Company, preemptive right or other right to subscribe for or purchase from
the Company, or any claim against, any shares of capital stock or other
securities of the Company or of any subsidiary of the Company; and none of
the Selling Securityholders has any right to require the Company to register
under the Act any of the shares of Common Stock owned by him.
<PAGE>
LEASE CONTRACT ("CONTRACT") entered into by and between COMPLEJO
INDUSTRIAL FUENTES, S.A. DE C.V. represented herein by its
Chairman of the Board of Directors, Mr. Eduardo Fuentes Varela,
(hereinafter referred to as the "LANDLORD"), and by S.T.B. DE
MEXICO, represented herein by its Sole Administrator, Randall Don
Eisenbach, (hereinafter referred to as the "TENANT"), in
accordance with the following Recitals and Clauses:
RECITALS
I. The LANDLORD, hereby states that:
(a) It is a corporation duly incorporated and existing pursuant
to the laws of the Mexican United States, with its principal
place of business in Ciudad Juarez, Chihuahua, Mexico.
(b) It is the owner of a parcel of land with an area of
approximately 28,848.54 square meters (310,522.80 square feet
approximately), and a building to be constructed on it, with an
area of approximately 11,942.09 square meters (128,543.46 square
feet approximately), with address on Fuentes Sur Avenue without a
number, and located at Lot 7 and Lot 8 of Block E of Complejo
Industrial Fuentes in Ciudad Juarez, Chihuahua, Mexico, same
which is described in the blueprint attached to this CONTRACT as
Exhibit "A", which is considered as incorporated by reference
herein and becomes a part hereof, and which real property will
hereinafter be referred to as the "BUILDING" and the "LEASED
PROPERTY", indistinctly. For purposes of this CONTRACT, the terms
"BUILDING" and/or "LEASED PROPERTY" shall, in addition to those
descriptions set forth herein, include all improvements
constructed upon the LEASED PROPERTY, together with all of the
LANDLORD's rights, interests and appurtenances thereto belonging
or in any way incident or appertaining to the LEASED PROPERTY,
including all structures, fixtures, equipment and other
personalty of any nature now or hereafter situated, placed,
constructed or installed on the LEASED PROPERTY.
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(c) Studies relative to the evaluation and environmental impact
for construction will be performed on the LEASED PROPERTY, to the
satisfaction of the Secretaria del Medio Ambiente, Recursos
Naturales y Pesca (Ministry of the Environment, Natural Resources
and Fishery), the Procuraduria Federal de Proteccion al Ambiente
(Federal Agency for Protection of the Environment), and other
pertinent Mexican agencies, through which it has been established
that the LEASED PROPERTY falls within the allowable and
obligatory ecological criteria applicable to the installation and
use for which it is intended (MAQUILADORA INDUSTRY).
(d) It desires to lease the LEASED PROPERTY to the TENANT, under
the terms and conditions hereinafter set forth.
II. The TENANT states that:
(a) It is a corporation duly incorporated and existing pursuant
to the laws of the Mexican United States, as per deed Number
21,250, Volume 450, granted on the 9th day of the month of
November of 1988, before Mr. Carlos Bernanrdo Silveyra Sayto, in
Representation of Mr. Jose Reyes Estrada Aguirre,Notary Public
Number 18, in the Bravos Judicial District, State of Chihuahua,
Mexico.
(b) It wishes to lease the BUILDING under the terms of the
Protective Covenants and Restrictions attached to this CONTRACT
and made a part hereof as Exhibit "B", and under the terms and
conditions of this CONTRACT.
(c) Mr. Randall Don Eisenbach proves his personality by means of
deed Number 5949, Volume 136, granted on the 13th day of the
month of November of 1995, before Mr. Edmundo Castillo Acuna
Notary Public Number 16, in the Bravos Judicial District, State
of Chihuahua, Mexico.
III. Both parties declare that in the execution hereof there has
been no error, violence, bad faith nor duress amongst them, and
that their respective representatives have sufficient authority
to execute this CONTRACT, same authority which has not been
revoked, diminished or limited in any way.
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<PAGE>
HAVING STATED THE ABOVE THE PARTIES AGREE ON THE FOLLOWING:
CLAUSES:
FIRST.- THE LEASED PROPERTY.
The LANDLORD will deliver to the TENANT the temporary use and
possession of the LEASED PROPERTY which has been described in
Recital I, paragraph (b) of this contract, within a period of 12
months following the signing of this CONTRACT.
SECOND.- USE AND ENJOYMENT OF THE LEASED PROPERTY.
The LANDLORD represents that it has clear and complete rights
over the LEASED PROPERTY, and warrants that the TENANT shall have
the peacefUl use and quiet enjoyment of same.
THIRD.- DELIVERY OF THE LEASED PROPERTY.
The LANDLORD will deliver the LEASED PROPERTY to the TENANT,
complete and ready for occupancy, precisely on the date
stipulated for the commencement of the Initial Term of this
CONTRACT, presenting the studies relative to the evaluation and
environmental impact, as well as the one for soil use, for the
construction to which reference is made in paragraph (c) of
Recital (I) of this document. The construction shall be
completed by LANDLORD in good and workmanlike manner, in
substantial compliance with the general specifications reviewed
and approved by TENANT, and which are made a part of this
CONTRACT hereof as Exhibit "C". LANDLORD agrees to cause the
issuance of all certificates of occupancy, notices of completion,
permits and approvals, or their equivalent, as they are required
to be issued by the applicable governmental authorities relating
to the LEASED PROPERTY and the occupancy of same by TENANT, as
soon as legally permitted, following completion of construction.
The construction of the BUILDING by LANDLORD shall be considered
completed when (a) the work called for by the approved plans and
specifications has been completed in strict compliance therewith;
(b) all BUILDING facilities necessary for the use thereof by
TENANT as
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contemplated under this CONTRACT shall have been installed and ready
for occupancy and for their intended use; (c) all finishes and coatings
has been completed; (d) all equipment and property provided under the
plans and specifications has been installed or placed in or on the
BUILDING and is in good working condition; (e) all waste materials have
been removed, and all glass and other surfaces have been cleansed; (f)
all utilities to be used in the operation of the BUILDING be available
for contract and be susceptible for its use throughout the BUILDING;
and (g) certification and approval of the construction and BUILDING has
been given by the architect appointed by the TENANT and all other
required or necessary third persons.
Upon commencement of occupancy of the LEASED PROPERTY by TENANT, TENANT
shall be deemed to have accepted the same as suitable for the purposes
herein intended and to have acknowledged that the same complies Fully
with LANDLORD's covenants and obligations of construction herein except
for (a) any written exceptions or "punch list" items disclosed and
delivered to LANDLORD by TENANT within thirty (30) calendar days
following TENANT's assumption of occupancy in the LEASED PROPERTY, and
(b) any latent defects with respect to the BUILDING and construction,
all of the foregoing of which LANDLORD hereby agrees to cure and repair
within a period of time agreed by both parts immediately following
receipt of notice thereof LANDLORD agrees to permit TENANT at all
reasonable times and upon reasonable advance notice to inspect the
construction and improvements described above.
FOURTH.- CONTINGENCY FOR PAYMENT OF CONSTRUCTION.
In the event that for any cause imputable only and exclusively to
the TENANT, the BUILDING is not received by the TENANT all cost
and expense made by the LANDLORD on the planning, construction
and equipping of the BUILDING to be leased by the TENANT, based
on the advance of the construction, and until completion of the
BUILDING, shall be completely covered by the TENANT and/or the
Jointly Responsible S.T.B. Systems, Inc., plus a 15% ( Fifteen
percent) of the total amount generated until the day of the
notice thereof This Clause will cease from its legal effect until
the moment when the TENANT receives the LEASED PROPERTY under the
terms of Clauses Third and Twelfth of this instrument.
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FIFTH.- USE OF THE LEASED PROPERTY.
The TENANT shall use the LEASED PROPERTY for light industry
operations, warehousing and offices, and shall comply with the
Protective Covenants and Restrictions attached hereto as Exhibit
"B", as well as with all laws and regulations to provide for the
peaceful use thereof.
SIXTH.- LEASE PRICE AND GUARANTEE.
The TENANT shall pay during the first two years of the Initial
Term of this CONTRACT, as rent for the use and possession of the
LEASED PROPERTY, the net base amount of US $5.55 (FIVE DOLLARS
55/100), legal currency of the United States of America, per
square foot of construction per year, in twelve equal monthly
installments.
Starting the third year of the Initial Term, the rent to be paid
to the LANDLORD during the rest of this CONTRACT will be
increased annually by applying to the basic rate of $5.55 (FIVE
DOLLARS 55/100) legal currency of the United States of America,
an increase equal to the Consumer Price Index (CPI), All Urban
Consumer, U.S. City Average, published by the Department of Labor
of the United States of America, expressed as the percentage
increase occurred during the period of the 24 (twenty four)
months immediately preceding.
Thereafter the rent to be paid to the LANDLORD during the rest of
this CONTRACT will be increased on a yearly basis by applying, to
the basic rate (the one in effect at the time), a percentage
equal to the increase in the Consumer Price Index (CPI), All
Urban Consumer, U.S. City Average, published by the Department of
Labor of the United States of America, expressed as the
percentage increase occurred during the period of the 12 (twelve)
months immediately preceding.
The rental payments described herein will be made in advance on
the first day of each month, at the address of the LANDLORD, Ave.
Vicente Guerrero No. 6965, Cd. Juarez, Chihuahua, Mexico, at the
Accounting Department, without notice or demand or in the place
and to the person designated by LANDLORD in writing.
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Notwithstanding that the rental price is determined in Dollars,
currency of the United States of America, payment thereof may be
made in Pesos, Mexican currency, at the election of the TENANT,
provided the rate of exchange applied is equal to the Dollar sell
rate quoted by the Bank of Mexico through the information
published daily in the official Gazette of the Federation (Diario
Oficial de la Federacion) at the day of payment.
Should punctual payment of the rent as provided for in this
CONTRACT be defaulted, and should such default be continuing for
five (5) calendar days or more, interest will be caused over
those defaulted rental payments, calculated on a daily basis for
each day the full rental payment is past due and remains unpaid,
at an annual rate of five (5) percentual points over the Prime
Rate, as published on the Wall Street Journal, on the day payment
of the corresponding rental is made.
Under no circumstance can the TENANT hold back or deduct from the
rent amounts, be it for judicial or other reasons, and in no case
shall deductions be made for improvements or repairs to the
LEASED PROPERTY, but shall be paid in total in the manner and
terms agreed herein.
It is agreed by the TENANT that S.T.B. Systems, Inc., on 1651
North Glenville, P.O. Box 850957, Richardson, Texas, Zip Code
75085--0957, will be jointly liable and responsible, and at this
time they do hereby waive all benefits of order and exemption
provided by law, for the Fulfillment and compliance of all the
covenants, agreements and obligations assumed by TENANT herein,
in accordance with the terms of the Guarantee Agreement attached
to this CONTRACT as Exhibit "D", same which is incorporated by
reference hereto and forms a part hereof.
SEVENTH.- TAXES AND UTILITIES.
Starting on the date of the commencement of the LEASE under the
terms of the Third Clause of this CONTRACT, and during the effect
of it, THE TENANT shall be responsible of the corresponding
payments for the Value Added Tax and the Property Tax. Also, the
parties agree that in the future event a tax is levied on the
present CONTRACT or on the LEASED PROPERTY, such tax shall be
paid by THE TENANT.
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The parties, at their expense, as the case may be, may contest by
appropriate legal proceedings conducted in good faith and with
due diligence, the amount, validity or application, in whole or
in part, of any tax, assessment or charge which any other parties
are obligated to pay hereunder, provided that: (a) the
commencement of such proceeding shall suspend the collection
thereof\ (b) neither the LEASED PROPERTY nor any rent therefrom
nor any part thereof or interest therein, would be in any danger
of being sold, forfeited, attached or lost; and (c) if such
contest be finally resolved against the party which may
correspond, such party shall promptly pay the amount required to
be paid, together with all interest and penalties accrued
thereon. The parties shall cooperate with each other with respect
to any such contest.
The TENANT shall also directly contract and pay for all use of
utilities that it may require in its occupancy of the LEASED
PROPERTY. The LANDLORD represents that all necessary utilities,
including electricity, water, sewage, gas and telephone lines,
are available at the LEASED PROPERTY, but the parties agree that
the TENANT will be responsible for the hook-up and payment of
contract of all such utilities of which it will be the user
excluding the payment to the Junta Municipal de Agua y
Saneamiento for the right of usage, payment which shall be made
by the LANDLORD. LANDLORD agrees to do nothing which would
willfUlly and/or wrongfUlly stop or interrupt or cause stoppage
or interruption of the above-specified utility services.
EIGHTH.- MAINTENANCE AND PROTECTIVE COVENANTS.
During the Term of this lease, responsibility for maintenance,
repair and replacement for the LEASED PROPERTY shall be governed
by the "Protective Covenants and Restrictions" (Exhibit "B")
applicable to the Industrial Park in which the LEASED PROPERTY is
located, legally binding and enforceable upon all tenants and by
the following:
1. In addition to the construction and improvements referred to
in Clause THIRD hereof, the LANDLORD warrants and guarantees that
prior to the execution of this CONTRACT, it has performed all
repairs and installations to the BUILDING necessary to place it
in a condition suitable for their intended use by the TENANT, and
in consideration of such performance by LANDLORD, TENANT
represents that by occupancy of the BUILDING it has accepted the
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BUILDING and all installations in good and operable condition,
and in Full compliance with this Clause, except latent defects
and except as otherwise set forth in Clause THIRD of this
CONTRACT.
2. The LANDLORD shall at all times during the Lease Term or
during any extension thereof and at its own cost and expense,
effect all structural repairs that are not derived from the
negligence or bad faith of the TENANT and shall maintain the
BUILDING foundations, the structure of the floor slab, the
structure of exterior walls and the structure of the roof and the
complete roofing system in a watertight condition.
3. The TENANT shall maintain and effect, at its own cost and
expense, all non-structural repairs including the interior of the
BUILDING, the interior and exterior paint thereof, and all
electrical, water, gas, sewage, heating, ventilation and air
conditioning systems from their point of hook-up for access by
TENANT, as well as all landscaping, as of the date of
commencement of occupancy, except the guarantees including
equipment, installations and coverings only during the first year
of this CONTRACT; even in the event of the need for such repairs
has not arisen from the negligence or bad faith of the LANDLORD.
If the need for such repairs has arisen from the negligence or
bad faith of the LANDLORD, then the LANDLORD shall perform such
repairs at LANDLORD's own expense and immediately following
receipt of notice or request thereof.
4. The LANDLORD will transfer any and all warranties and
guarantees that apply to the LEASED PROPERTY, if available.
NINTH.- ALTERATIONS.
The TENANT may not change the basic structure, the external
appearance or utility services of the BUILDING, nor make any
major alterations thereto, without the express written
authorization of the LANDLORD. The TENANT is hereby authorized to
make minor alterations or modifications to the BUILDING, at its
own risk and expense, so long as they do not alter or impair the
structure of the BUILDING and shall give prior written notice to
the LANDLORD thereof. Minor alterations and modifications are
understood to be those that do not have an
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estimated cost in excess of 10% of the agreed monthly rent. Works that
have a cost in excess of the above value must abide by the rules
stipulated in the Eleventh Clause of the Protective Covenants and
Restrictions. All fixtures and/or equipment of whatsoever nature
installed in the LEASED PROPERTY by the TENANT during the Lease Term,
whether permanently affixed thereto or otherwise, shall continue to be
the property of the TENANT, and shall be removed by the TENANT at the
expiration or termination of this CONTRACT or any renewal or extension
thereto, unless the TENANT receives the written permission of the
LANDLORD, in advance, and in each specific case, that the improvements
may remain on said property upon the expiration of this CONTRACT
provided, however, that the TENANT neatly caps, cuts, covers over and
leaves in the walls or floors any wiring, piping, or conduit associated
with any improvements which the TENANT removes or the LANDLORD so
directs be removed. Should any wiring, piping or conduit be
incorporated to the walls or floors, TENANT will provide LANDLORD with
blueprints detailing the locations of said wiring, piping or conduit.
TENTH.- RESPONSIBILITY OF THE PARTIES.
1. The LANDLORD or the TENANT, respectively, shall be liable for
damages to the LEASED PROPERTY caused by their own fault or
negligence, or that of their agents, employees or visitors.
2. In the event that the TENANT is prevented by any cause
attributable to the LANDLORD, whether partially or completely,
from the use of the BUILDING, and said impediment of use can be
corrected in less than ninety (90) days from the date of its
occurrence, this CONTRACT will continue and the rent shall be
reduced by an amount which represents the unusable percentage of
the LEASED PROPERTY.
3. If the LEASED PROPERTY is damaged or destroyed by any cause
not attributable to the TENANT, the LANDLORD agrees to restore it
and put it in proper condition for the TENANT to use it for the
purposes agreed upon in this CONTRACT. However, if such
destruction is total, or exceeds fifty percent (50%) of the Full
value of the BUILDING and is originated by acts of God or force
majeure, or if it is reasonably expected that the
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destruction cannot be corrected within ninety (90) days from the date
of the occurrence, the TENANT shall have the right to terminate this
CONTRACT or request the LANDLORD, in writing, to rebuild the BUILDING.
However, the LANDLORD will have the right to refuse to rebuild the
BUILDING in this case, and in such event, this CONTRACT will terminate
without any liability or responsibility to either party hereto. If the
TENANT decides to terminate this CONTRACT under the circumstances above
described, the CONTRACT shall terminate and the TENANT shall be
released from any Further obligation hereunder. If the TENANT continues
to lease hereunder, the rent payable under this CONTRACT shall be
reduced by an amount which represents the unusable percentage of the
LEASED PROPERTY, as above mentioned, and the original amount of the
rent payable shall be restored to the LANDLORD in the same proportion
that the use of all the square footage leased is restored to the TENANT.
4. If the TENANT is prevented, by a cause attributable to the LANDLORD,
from using all or part of the LEASED PROPERTY, so that, in the TENANT's
opinion, the TENANT may not use the BUILDING for the purposes stated
herein, and the impediment to the TENANT's use of the LEASED PROPERTY
reasonably can be expected to continue for ninety (90) days or more,
TENANT shall have the right either to terminate this CONTRACT upon
written notice delivered to the LANDLORD, or require the LANDLORD in
writing to rebuild the damaged or destroyed portion of the LEASED
PROPERTY expeditiously at the LANDLORD's expense, or, if applicable, to
remove, on account and cost to the LANDLORD the impediment of use of
the BUILDING as requested by the TENANT. The LANDLORD shall indemnify
the TENANT in the amount of the damages caused to the TENANT, if the
impediment of use was caused due to the fault or negligence of the
LANDLORD.
ELEVENTH.- INSURANCE.
The parties to this CONTRACT specifically agree that:
1. During the Term of this LEASE, the TENANT, at its own expense,
shall obtain and keep in force insurance policies on behalf of
the parties hereto upon the LEASED PROPERTY, of the type and in
the amounts described below.
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(A) Insurance, which beneficiary shall be the LANDLORD, covering
any loss or damage to the LEASED PROPERTY caused by fire,
lightning, explosion, hurricane and hail, airplanes, vehicles,
smoke, earthquake, volcanic eruption, snow, flooding, strikes,
riots, vandalism and any other risks now or hereafter embraced by
the so-called "Extended Coverage" rider in Mexico, including
glass insurance, in amounts sufficient to prevent the LANDLORD or
the TENANT from becoming co-insurers under the terms of the
applicable policies, and in any event, and at all times, in an
amount not less than one hundred percent of the "Full insurable
value" of the BUILDING, which for purpose of this CONTRACT shall
be deemed to be the cost of replacing the BUILDING in dollars,
legal currency of the United States of America, plus excavations,
rubble removal, foundations and footings, and without any
deductions for physical depreciation of the BUILDING.
Such "full insurable value" shall be determined from time to time
but not more frequently than once every twelve months, following
any of the procedures described below, at the discretion of the
TENANT:
(i) through an appraisal carried out by an authorized
Mexican Bank or Insurance Company appointed by the TENANT,
which appraisal shall be paid for by the TENANT;
or
(ii) through an appraisal carried out by the LANDLORD
at LANDLORD's expense.
The TENANT is not obligated to maintain insurance coverage for an
amount greater than the Full insurable value of the LEASED
PROPERTY most recently determined pursuant to the provisions
hereof
(B) General public liability insurance, covering claims for
bodily injuries or death and/or property damage up to the maximum
amount of $ 250,000 (TWO HUNDRED FIFTY THOUSAND DOLLARS AND
00/100), legal currency of the United States of America, per
occurrence,
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(C) Insurance against loss or damage caused by:
(i) Boiler, compressor, or electric transformer
malfUnction; or
(ii) Internal explosion of any equipment installed in
the BUILDING which is part of the LEASED PROPERTY, in
such amounts as the LANDLORD, from time to time, may
reasonably require.
(D) Rental interruption insurance, on behalf of the LANDLORD,
for an amount equivalent to one (1) year of rentals, plus the
respective Value Added Tax.
2. All insurance provided for in this Clause shall be effected
under valid and enforceable policies issued by insurers
authorized to do business in Mexico.
3. All policies of insurance herein provided for shall name the
LANDLORD and the TENANT as the insured, to the extent of their
interests in the LEASED PROPERTY and to the extent that the
LANDLORD shall request.
4. Each insurance policy issued by the insurer shall contain an
agreement by the insurer that such policy shall not be canceled
without at least thirty (30) days prior notice to the LANDLORD
and to the TENANT and that any loss payable to the LANDLORD under
any such policy shall be so payable notwithstanding any act or
negligence of the TENANT.
5. In case of a casualty to the LEASED PROPERTY resulting in
damage or destruction to the BUILDING, the TENANT will promptly
give written notice thereof to the LANDLORD, and promptly shall
begin adjustment proceedings.
6. All insurance money paid on account of such damage or
destruction, less the actual cost, fees and expenses, if any,
incurred in connection with adjustment of the loss, shall be paid
to the LANDLORD or the TENANT, as their respective interests
shall appear under this CONTRACT, in order to restore the LEASED
PROPERTY, to its value, condition and character existing
immediately prior to such damage or destruction.
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<PAGE>
7. In effecting the replacement or rebuilding of the damaged or destroyed
BUILDING, the parties hereto shall look first to the proceeds of the
insurance covering such replacement or rebuilding, but if the amount
established in the policy should not cover the Full cost of rebuilding or
replacement of the BUILDING, the TENANT shall be responsible for the payment
of the difference, provided that the damage or destruction of the BUILDING is
caused by the negligent or willfUl misconduct of the TENANT, its employees,
suppliers, clients or visitors, and in no case the TENANT will pay the
difference in the event the damage is caused by nature.
TWELFTH.- TERM.
1. The initial term of this CONTRACT shall be for a period often (10) years,
binding upon both parties (the "Initial Term"), commencing on the date the
LEASED PROPERTY is delivered by the LANDLORD and received by the TENANT in
agreement (Initiation Date), with the understanding that the delivery date
for the LEASED PROPERTY shall not exceed twelve (12) months from the date
this CONTRACT is signed.
Should the LANDLORD complete and deliver the BUILDING to the TENANT before or
after the date previously established, the term of this CONTRACT shall be
considered as starting on the date of actual completion.
Notwithstanding the provisions hereof, in order to facilitate TENANT's
partial occupation of the LEASED PROPERTY in its areas of production,
restrooms, docks, compressor room, maintenance room, cafeteria, switchboard
room and substation, in order for the TENANT to proceed with the installation
of machinery and equipment and begin with the production operations at the
LEASED PROPERTY, being the beneficial occupancy the area described in Exhibit
"E" of this CONTRACT.
THE LANDLORD commits itself to deliver the beneficial area described before
to THE TENANT, 30 (thirty) calendar days before the formal delivery and
reception of the LEASED PROPERTY, regarding this 30 days, THE TENANT is freed
of any rent payment.
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Should the LANDLORD be delayed in delivering the BUILDING to the
TENANT, the LANDLORD shall pay the TENANT as compensation the
amount of US $400.00 (FOUR HUNDRED DOLLARS 00/100), for each day
of delay, provided that such delay is not attributable to the
TENANT, to acts of nature, or to causes beyond control of the
LANDLORD.
2. The TENANT shall have four (4) consecutive options to extend
the Initial Term of this CONTRACT for a period of five (5) years
each one. Such extension periods will begin on the day following
the expiration of the Initial Term, or any of the then current
extensions thereof, and if the TENANT desires to exercise such
option, it must do so by notifying the LANDLORD in writing at
least ninety (90) calendar days prior to the expiration of the
Initial Term or any of the then current extensions thereof
Should any of the options to extend the Initial Term of this
CONTRACT be exercised by the TENANT, the monthly rentals payable
by the TENANT to the LANDLORD pursuant to this CONTRACT, will
increase by a percentage equal to the increase of the CPI for the
previous year, on a yearly basis, as provided for in Clause Sixth
hereof, for each and every of the extension of the Initial Term
of this CONTRACT.
3. In the event the TENANT decides to end this CONTRACT prior to
the termination date of the lease, or any of the extension
periods as the case may be, due to causes not attributable to the
LANDLORD, the TENANT shall inform the LANDLORD in writing, with
at least 90 (ninety) days advance notice, with the TENANT
agreeing to pay the LANDLORD, as hereby established for
compensation and retribution, the amount required to complete the
total value of the lease to its termination date (Initial Term),
or that of the current extension period, except as provided in
the following paragraph.
4. THE LANDLORD is in conformity and authorizes the TENANT the
option to advance the termination of this contract within the
last two years of the Initial Term. In the Event that the TENANT
executes this option, THE TENANT is obligated to pay to the
LANDLORD as a conventional penalty in lieu of all other rents
otherwise owing to LANDLORD pursuant to this
14
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LEASE, the amount of US $0.05 per square foot per month of the BUILDING that
is being leased, from the time Notice thereof is made, until completion of
the Initial Term, with the written notice of the TENANT to the LANDLORD with
at least 90 days advance.
THIRTEENTH.- SUBLEASING.
The TENANT may not sublease the LEASED PROPERTY or assign this CONTRACT,
unless it obtains the prior written authorization from LANDLORD, and which
shall not be irrationally denied and provided the TENANT and its guarantor
remain responsible for the Fulfillment and compliance of all of its
obligations assumed herein before the LANDLORD.
In the event authorization to sublease is requested by TENANT and granted by
LANDLORD, such sublease arrangement shall in no case extend beyond the date
of termination of the Initial Term or the current extension thereof
Notwithstanding the provisions hereof, the parties agree that the TENANT may
sublease the Leased Property or assign this CONTRACT to any affiliate or
subsidiary of S.T.B. Systems, Inc. and that in such case it will notify the
LANDLORD, without the need or requiring any Further authorization from the
LANDLORD, in which case the provisions regarding guaranty and rental payments
referred to in the preceding paragraphs shall survive.
FOURTEENTH.- ASSIGNMENT OF RENT.
LANDLORD may assign the rentals derived herefrom to the financial
institutions of its choice for the purposes of securing Funds and the TENANT
and its guarantors who shall sign the notification and they also hereby agree
to cooperate with any and all reasonable requests for financial information
to comply with the needs to assess the financial strength of the TENANT and
its guarantor. Such procedures to process this information will be done so
under standard banking practices, with the highest practical level of
confidentiality being observed.
15
<PAGE>
FIFTEENTH.- SURRENDER OF THE LEASED PROPERTY.
The TENANT shall, on the last day of the Lease Term or any extension thereof,
or upon earlier termination, surrender and deliver the LEASED PROPERTY into
the possession and use of the LANDLORD, without delay, in good order,
condition and adequate maintenance, normal wear and tear excepted. All
signs, inscriptions, canopies and installations of like nature made by the
TENANT shall be removed at the time of the expiration of the Lease Term.
Both parties agree that prior to vacating the BUILDING, and with the purpose
of Fully satisfying the requirements for delivery of the LEASED PROPERTY, the
TENANT will inform the LANDLORD in writing, with 90 (ninety) days advance
notice, of the date of surrender and delivery, so that the LANDLORD may give
notice to the Secretaria del Medio Ambiente, Recursos Naturales y Pezca
(Ministry of the Environment, Natural Resources and Fishery), and the
Procuraduria Federal de Proteccion al Ambiente (Federal Agency for Protection
of the Environment), and order studies and evaluation be made for soil and
environmental impact, by technicians authorized by said institutions, with
the object of determining the degree of contamination found on the LEASED
PROPERTY relative to the soil and the environment, as a result of the
installations and use of the LEASED PROPERTY by the TENANT, with the
understanding that the expenditures generated by such studies will be borne
by the latter, and that the LEASED PROPERTY will only be accepted by the
LANDLORD once a letter of compliance is delivered in favor of the TENANT by
the aforementioned institutions, through which it is established that the
LEASED PROPERTY falls within the allowable and obligatory ecological criteria
applicable to the installation and use for which it is intended, Maquiladora
Industry.
All furniture, trade fixtures, machinery and business equipment installed by
the TENANT shall remain the property of the TENANT, unless otherwise agreed
upon by the parties in writing, and shall be removed by the TENANT at any
time during or at the end of the Lease Term, and the TENANT shall, at its own
expense, repair all damage beyond ordinary wear and tear resulting from the
installation or removal thereof.
16
<PAGE>
If at the expiration of the term of this lease or any then current extension
thereof, the TENANT does not vacate and delivers the use and possession of
the LEASED PROPERTY to the LANDLORD, the TENANT shall pay as new rent, the
amount of rent currently paid at such time, under the terms and conditions
established in Clause Sixth, plus an increase of 50% (FIFTY PERCENT) for each
month it continues to occupy the LEASED PROPERTY, and until it vacates and
yields the possession and use thereof to the LANDLORD.
The provisions of this Clause will not be considered as a waiver by the
LANDLORD of its right to repossess the LEASED PROPERTY as provided for
herein, nor will it be considered that the receipt of such payments or part
thereof, or any other act in apparent confirmation of tenancy will operate as
a waiver of the right of the LANDLORD to recuperate the LEASED PROPERTY.
Any personal property which remains in the LEASED PROPERTY after the
termination of this CONTRACT may, at the option of flu LANDLORD, be deemed to
have been abandoned and either may be retained by the LANDLORD as its
property or be disposed of without accountability, in such manner as the
LANDLORD may desire.
SIXTEENTH.- LANDLORD'S RIGHT TO PERFORM TENANT'S COVENANTS.
If the TENANT, at any time during the Term of this CONTRACT or its extension,
shall fail to perform any of its agreements made in this CONTRACT, the
LANDLORD, after ten (10) days following the delivery to the TENANT of written
notice of said failure (or without notice in case of emergency), and without
waiving or releasing the TENANT from any obligation of the TENANT contained
in this CONTRACT, may, but shall be under no obligation to perform any act
which the TENANT is required to perform under the terms of this CONTRACT, and
may enter upon the LEASED PROPERTY for that purpose and take all such actions
thereon as may be necessary therefor. All sums paid by the LANDLORD, and all
costs and expenses incurred by the LANDLORD in connection with the
performance of any such obligation of the TENANT shall be payable by the
TENANT to the LANDLORD on demand.
17
<PAGE>
SEVENTEENTH.- TENANT'S RIGHT TO PERFORM LANDLORD'S COVENANTS.
If the LANDLORD, at any time during the Term of this CONTRACT or its
extension, shall fail to perform any of its agreements made in this CONTRACT,
the TENANT, after ten (10) days following the delivery to the LANDLORD of
written notice of said failure (or without notice in the case of emergency),
and without waiving or releasing the LANDLORD from any obligation of the
LANDLORD contained in this CONTRACT, may, but shall be under no obligation to
perform any act which the LANDLORD is required to perform under this
CONTRACT, and may take all such actions on the BUILDING as may be necessary
therefor. All sums paid by the TENANT, and all reasonable costs and expenses
incurred by the TENANT in connection with the performance of any such
obligation of the LANDLORD, shall be payable by the LANDLORD to the TENANT on
demand.
EIGHTEENTH.- ENTRY ON LEASED PROPERTY BY LANDLORD.
The TENANT shall permit the LANDLORD and its authorized representatives to
enter the LEASED PROPERTY at all reasonable times during normal business
hours, upon reasonable advance notice of at least 24 hours, for the purpose
of inspecting the same and performing any work therein that may be required.
The LANDLORD shall exercise its authority under this provision in such a way
so as not to interfere with the business operations of the TENANT.
NINETEENTH.- HOLD HARMLESS.
The LANDLORD agrees to save, defend and hold TENANT harmless against any and
all liabilities, including penalties and interest, which TENANT is required
to pay due to any act or omission of LANDLORD, which directly or indirectly
results in such liability, penalty and/or interest. Furthermore, LANDLORD
covenants and agrees not to sue TENANT in the Future, provided TENANT duly
and timely meets its obligations hereunder.
The TENANT agrees to save, defend and hold LANDLORD harmless against any and
all liabilities, including penalties and interest, which LANDLORD is required
to pay due to any act or omission of TENANT, which directly or indirectly
results in such liability, penalty and/or interest.
18
<PAGE>
Furthermore, TENANT covenants and agrees not to sue LANDLORD in the future,
provided LANDLORD duly and timely meets its obligation hereunder.
TWENTIETH.- OPTION ON ADJACENT LAND.
LANDLORD will keep adjacent to the LEASE PROPERTY, a plot of land with an
area of approximately 19,672.00 square meters (approximately 211,756.000
square feet) as described herein in the blueprint attached hereto as Exhibit
"F" free from any liens and encumbrances, for the purpose of constructing an
expansion to the BUILDING, as provided herein. For the term of two (2) years
from the date of commencement of the Initial Term of this Agreement, the
TENANT shall have the right to exercise an option to lease for a minimum term
equal to the remaining period or an;y of the extensions of the CONTRACT, an
expanded production area up to 8,361.00 square meters (approximately
90,000.00 square feet) to be constructed by LANDLORD at LANDLORD's expense.
This option should be exercise in writing. Construction shall start at the
time this option is exercised and shall be completed in a term of twelve (12)
months. The characteristics and specifications of such expansion, will be the
same as those of the Leased Property, and the expansion shall be occupied by
the TENANT upon completion and acceptance of construction work. Said
expansion, once completed, will become part of the LEASED PROPERTY and
subject to all the terms hereof.
Once the term established in the preceding paragraph has expired, and until
completion of the tenth year of the Initial Term of this CONTRACT, the
LANDLORD grants the TENANT the right to preferential use of the land, right
which shall be executed within 30 calendar days after having received
notification from the LANDLORD (of its desire to construct a building on the
aforementioned adjacent land), in which case, construction of the expansion
shall be started upon execution of this option.
In order to establish the solid intention of the parties regarding the Option
to the Adjacent Land entered in this Clause, THE TENANT, by signing his
instrument, will pay as a deposit the amount of $55,000.00 (FIFTY FIVE
THOUSAND DOLLARS 00/100) legal currency of the United States of America, to
THE LANDLORD being the present Clause the most efficient legal way to
19
<PAGE>
give faith of delivery. With the understanding that the deposit of the amount
will be made in favor of the LANDLORD in a final manner in the event that the
TENANT does not exercise the Option to the Adjacent Land under the terms
stated in this Clause; if the TENANT exercises its Option to the Adjacent
Land, the amount of the deposit will be taken by the LANDLORD for rent
hereunder as part of the first payment generated once the construction of the
expansion is concluded, the aforementioned payment will include both
constructions, the new one and the existent one.
TWENTY-FIRST.- MODIFICATIONS TO CONTRACTUAL DOCUMENT.
Except as otherwise provided herein, no modification, release or discharge of
this CONTRACT, or waiver of any of the provisions hereof, shall be of any
force or effect except by an amendment hereto in writing signed by the
LANDLORD and the TENANT.
TWENTY-SECOND.- SOLE CONTRACTUAL DOCUMENT.
The parties agree that this CONTRACT contains all the covenants and
agreements between them, and therefore, this CONTRACT is the sole contractual
document executed by the parties, and supersedes any other contract or
agreement entered into by the parties hereto.
TWENTY-THIRD.- APPLICABLE LAW AND JURISDICTION.
This CONTRACT shall be interpreted in accordance with, and be
subject to the provisions of the Civil Code for the State of
Chihuahua, and both parties hereto submit to the jurisdiction of
the Courts of Ciudad Juarez, State of Chihuahua, Mexico,
expressly waiving any other jurisdiction that may correspond to
them due to their present or Future domiciles or due to any other
reason whatsoever.
TWENTY-FOURTH.- SUBORDINATION.
The TENANT agrees, at the request of the LANDLORD to subordinate this
CONTRACT (including any extension hereto) to any mortgage placed upon
the LEASED PROPERTY, provided that the mortgage holder agrees to
recognize the TENANT's rights under this CONTRACT, and provided further
that the mortgage holder agrees not to disturb the possession
20
<PAGE>
and other rights of the TENANT under this CONTRACT, so long as the TENANT
continues to perform its obligations hereunder. In the event the mortgage
holder acquires title to the LEASED PROPERTY through foreclosure proceedings
or otherwise, the mortgage holder agrees to accept the TENANT as tenant under
this CONTRACT, and to perform the LANDLORD's obligations hereunder (but only
while being owner of the LEASED PROPERTY), and the TENANT agrees to recognize
as LANDLORD such mortgage holder or any other person acquiring title to the
LEASED PROPERTY. The TENANT and the LANDLORD agree to execute and deliver all
appropriate instruments required to carry out the agreements contained herein.
TWENTY-FIFTH.- NOTICES.
All notices, demands and requests required under this CONTRACT and its
exhibits shall be in writing, and shall be deemed to have been properly given
if served personally or if sent by registered or certified mail, return
receipt requested, addressed to the LANDLORD or the TENANT, as the case may
be at their respective address last designated by notice to the other party
to this CONTRACT for that purpose. Until the LANDLORD and the TENANT shall
designate other addresses, their addresses shall be as follows:
LANDLORD: Complejo Industrial Fuentes, S.A. de C.V.
Ave. Vicente Guerrero # 6965
Ciudad Juarez, Chih.
Mexico C.P. 32320
TENANT: S.T.B. de Mexico, S.A. de C.V.
Vicente Guerrero Ave. No. 7470
Cd. Juarez, Chih., Mexico
C.P. 32320
21
<PAGE>
TWENTY-SIXTH.- TRANSLATION.
This CONTRACT is executed in two counterparts: one in the English language
and the other in Spanish language. In case of any discrepancy between the two
texts, the Spanish version shall prevail.
The parties hereto execute this CONTRACT in Ciudad Juarez, Chihuahua, on the
4th day of October 1996.
"THE LANDLORD" "THE TENANT"
COMPLEJO INDUSTRIAL FUENTES, S.T.B. DE MEXICO, S.A. DE C.V.
S.A. DE C.V.
BY: /s/ EDUARDO FUENTES VARELA BY: /s/ RANDALL DON EISENBACH
-------------------------- -------------------------
Mr. Eduardo Fuentes Varela Mr. Randall Don Eisenbach
Chairman of the Board of Sole Administrator
Directors
WITNESS: WITNESS:
/s/ FERNANDO RIOS /s/ JESUS TRILLO
----------------------- ------------------------
MR. FERNANDO RIOS MR. JESUS TRILLO
22
<PAGE>
MODIFICATION AGREEMENT EXECUTED BY THE PARTY OF THE FIRST PART, "COMPLEJO
INDUSTRIAL FUENTES S.A. DE C.V." REPRESENTED AT THIS ACT BY THE CHAIRMAN OF
ITS BOARD OF DIRECTORS MR. EDUARDO FUENTES VARELA, WHO HEREINAFTER SHALL BE
KNOWN AS "THE LESSOR" AND PARTY OF ThE SECOND PART, "S.T.B. DE MEXICO- S.A.
DE C.V.", REPRESENTED AT THIS ACT BY MR RANDALL DON EISENBACH WHO HEREINAFTER
FOR THE PURPOSES OF THIS AGREEMENT SHALL BE DESIGNATED AS "THE LESSEE", WHICH
ARE AGREEING TO THE FOLLOWING STATEMENTS AND CLAUSES:
STATEMENTS:
I.- Both parties do hereby represent the following:
a).- That on December 06, 1988 they executed a LEASING
CONTRACT and later, on February 25, 1994, they made a
MODIFYING AGREEMENT thereto as such was in their interest,
combining therein areas "A" and "B" of Edificio Fuentes II
(Fuentes Building II) located on Vicente Guerrero Avenue
Number 7470 (seven thousand four hundred and seventy) here
in Ciudad Juarez, Chihuahua, which is currently in effect.
b).- On October 4th, 1996 they executed a LEASING CONTRACT
by which THE LESSOR will build an Industrial Plant Unit to
be leased by THE LESSEE. This unit will be located at
Edificio Fuentes M (Fuentes Building XI) within Complejo
Industrial Fuentes here in Ciudad Juarez, Chihuahua. Average
deadline set for finishing construction of the building is
estimated to be approximately 12 (twelve) months, and the
Initial Term of said CONTRACT had been set to begin as soon
as THE LESSEE receives the LEASED PROPERTY.
<PAGE>
c).- Given the facts that are set forth in the above parts,
both parties desire to make some amendments to the currently
effective LEASING CONTRACT, and for such reason they are
hereby agreeing to the following:
CLAUSES:
FIRST.- By reason of execution of the LEASING CONTRACT mentioned in the
First Statement part b) of this instrument, both parties are hereby
agreeing to amend Clause Fourth of the MODIFYING AGREEMENT they made on
February 25, 1994, concerning the Term, so that the period of
effectiveness of the Initial Term of said CONTRACT may be extended until
the time the LEASED PROPERTY which is specified in part b) of the First
Statement of this instrument Is delivered by THE LESSOR and accepted by
THE LESSEE.
SECOND. - By reason of execution of the LEASING CONTRACT mentioned in the
First Statement part b) of this instrument, both parties are agreeing to
amend Clause Three of the Modifying Agreement they executed on February 25,
1994 concerning the Price, so that for the period to begin as of March 1,
1997 up to the time the LEASED PROPERTY specified in part b) of the First
Statement of this instrument is delivered and accepted, rent to be paid by
THE LESSEE shall be increased by applying the Accumulated Consumer Price
Index "CPI" published by the Department of Labor of the United States of
America to current rent which will become due from the 1st day of March, 1994
to the 28th day of February, 1997, at the current amount of $4.75 (FOUR
DOLLARS 75/100) legal tender of the United States of America per square foot
of building per year; which must be paid by it according to contractually
established terms and conditions.
THIRD.- In the event THE LESSEE either exercises or fails to exercise its
first right to extension with respect to the total leased area, or to just
one of the two areas making up the LEASED PROPERTY, identified as Fuentes
Building II, whether section "A" and/or "B", THE LESSOR shall grant THE
LESSEE a first priority right for leasing either the total area of THE LEASED
PROPERTY or whatever section of the real property on which it had not
exercised its
<PAGE>
right of extension, as the case may be, for a period of two years starting at
the time it becomes Fully vacated; under such circumstances and in the event
THE LESSOR has real potential for leasing said real property to a third
party, it must first notify THE LESSEE of the guidelines for leasing so that
the latter (THE LESSEE) may exercise its right of priority within a period
not to exceed fifteen days starting as of the time notification is given to
it by THE LESSOR, and it must agree to the conditions set forth in the
written notification provided; if upon expiration of this period THE LESSEE
has failed to state in writing its decision to lease said real property, this
right shall be held to have expired and therefore, THE LESSOR shall be able
to freely contract.
FOURTH. - Both parties are agreeing that any Clauses which have not been
amended shall still remain in effect as long as they are in agreement with
the purpose pursued in executing this instrument, and the meaning thereof
shall be construed according to this MODIFYING AGREEMENT.
THE ABOVE AGREEMENT WAS READ BY THE PARTIES, AND THEY ACCEPTED IT, AND AS
PROOF OF THEIR ACCEPTANCE THEY ARE SIGNING THIS AGREEMENT AT CIUDAD JUAREZ,
CHIHUAHUA, ON THE 4TH DAY OF OCTOBER OF NINETEEN HUNDRED AND NINETY SIX.
THE LESSOR THE LESSEE
COMPLEJO INDUSTRIAL FUENTES, S.T.B. DE MEXICO, S.A. DE C.V.
S.A. DE C.V.
/s/ EDUARDO FUENTES VARELA /s/ RANDALL DON EISENBACH
- ------------------------------------- ----------------------------------
MR EDUARDO FUENTES VARELA MR. RANDALL DON EISENBACH
CHAIRMAN OF THE BOARD OF SOLE ADMINISTRATOR
DIRECTORS
WITNESSES
/s/ FERNANDO RIOS H. /s/ JESUS M. TRILLO Q.
- ------------------------------------- ---------------------------------
MR. FERNANDO RIOS H. MR. JESUS M. TRILLO Q.
<PAGE>
MASTER LEASE AGREEMENT
[LOGO]
Banc One Leasing Corporation
This MASTER LEASE AGREEMENT is made, entered and dated as of October 30, 1996,
by and between:
LESSOR: LESSEE: STB SYSTEMS, INC.
BANC ONE LEASING CORPORATION 1651 N. GLENVILLE
2400 Corporate Exchange Drive RICHARDSON, TX 75081
Columbus, Ohio 43231
1. LEASE OF EQUIPMENT: Lessor leases to Lessee, and Lessee leases from Lessor,
all the property described in the Lease Schedules which are signed from time to
time by Lessor and Lessee.
2. CERTAIN DEFINITIONS: "Schedule" means each Lease Schedule signed by Lessee
and Lessor which incorporates the terms of this Master Lease Agreement, together
with all exhibits, riders, attachments and addenda thereto. "Equipment" means
the property described in each Schedule, together with all attachments,
additions, accessions, parts, repairs, improvements, replacements and
substitutions thereto. "Lease", "herein", "hereunder", "hereof" and similar
words mean this Master Lease Agreement and all Schedules, together with all
exhibits, riders, attachments and addenda to any of the foregoing, as the same
may from time to time be amended, modified or supplemented. "Prime Rate" means
the prime rate of interest announced from time to time as the prime rate by Bank
One, Columbus, NA; provided, that the parties acknowledge that the Prime Rate is
not intended to be the lowest rate of interest charged by said bank in
connection with extensions of credit. "Lien" means any security interest, lien,
mortgage, pledge, encumbrance, judgment, execution, attachment, warrant, writ,
levy, other judicial process or claim of any nature whatsoever by or of any
person. "Fair Market Value" means the amount which would be paid for an item of
Equipment by an informed and willing buyer (other than a used equipment or scrap
dealer) and an informed and willing seller neither under a compulsion to buy or
sell. "Lessor's Cost" means the invoiced price of any item of Equipment plus any
other cost to Lessor of acquiring an item of Equipment. All terms defined in the
Lease are equally applicable to both the singular and plural form of such terms.
3. LEASE TERM AND RENT: The term of the lease of the Equipment described in
each Schedule ("Lease Term") commences on the date stated in the Schedule and
continues for the term stated therein. As rent for the Equipment described in
each Schedule, Lessee shall pay Lessor the rent payments and all other amounts
stated in such Schedule, payable on the dates specified therein. All payments
due under the Lease shall be made in United States dollars at Lessor's office
stated in the opening paragraph or as otherwise directed by Lessor in writing.
4. ORDERING, DELIVERY, REMOVAL AND INSPECTION OF EQUIPMENT: If an event of
default occurs or if for any reason Lessee does not accept, or revokes its
acceptance of, equipment covered by a purchase order or purchase contract or if
any commitment or agreement of Lessor to lease equipment to Lessee expires,
terminates or is otherwise canceled, then automatically upon notice from Lessor,
any purchase order or purchase contract and all obligations thereunder shall be
assigned to Lessee and Lessee shall pay and perform all obligations thereunder.
Lessee agrees to pay, defend, indemnify and hold Lessor harmless from any
liabilities, obligations, claims, costs and expenses (including reasonable
attorney fees and expenses) of whatever kind imposed on or asserted against
Lessor in any way related to any purchase orders or purchase contracts. Lessee
shall make all arrangements for, and Lessee shall pay all costs of,
transportation, delivery, installation and testing of Equipment. The Equipment
shall be delivered to Lessee's premises stated in the applicable Schedule and
shall not be removed without Lessor's prior written consent. Lessor has the
right upon reasonable notice to Lessee to inspect the Equipment wherever
located. Lessor may enter upon any premises where Equipment is located and
remove it immediately, without notice or liability to Lessee, upon the
expiration or other termination of the Lease Term.
5. MAINTENANCE AND USE: Lessee agrees it will, at its sole expense: (a) repair
and maintain the Equipment in good condition and working order and supply and
install all replacement parts or other devices when required to so maintain the
Equipment or when required by applicable law or regulation, which parts or
devices shall automatically become part of the Equipment; (b) use and operate
the Equipment in a careful manner in the normal course of its business and only
for the purposes for which it was designed in accordance with the manufacturer's
warranty requirements, and comply with all laws and regulations relating to the
Equipment, and obtain all permits or licenses necessary to install, use or
operate the Equipment; and (c) make no alterations, additions, subtractions,
upgrades or improvements to the Equipment without Lessor's prior written
consent, but any such alterations, additions, upgrades or improvements shall
automatically become part of the Equipment. The Equipment will not be used or
located outside of the United States.
6. NET LEASE; NO EARLY TERMINATION: The Lease is a net lease. Lessee's
obligation to pay all rent and all other amounts payable under the Lease is
absolute and unconditional under any and all circumstances and shall not be
affected by any circumstances of any character including, without limitation,
(a) any setoff, claim, counterclaim, defense or reduction which Lessee may have
at any time against Lessor or any other party for any reason, or (b) any defect
in the condition, design or operation of, any lack of fitness for use of, any
damage to or loss of, or any lack of maintenance or service for any of the
Equipment. Each Schedule is a noncancelabIe lease of the Equipment described
therein and Lessee's obligation to pay rent and perform all other obligations
thereunder and under the Lease are not subject to cancellation or termination by
Lessee for any reason.
7. NO WARRANTIES BY LESSOR: LESSOR LEASES THE EQUIPMENT AS-IS, WHERE-IS, AND
WITH ALL FAULTS. LESSOR MAKES NO WARRANTIES OR REPRESENTATIONS, EXPRESS OR
IMPLIED, OF ANY KIND AS TO THE EQUIPMENT INCLUDING, WITHOUT LIMITATION: ITS
MERCHANTABILITY; ITS FITNESS FOR ANY PARTICULAR PURPOSE; ITS DESIGN, CONDITION,
QUALITY, CAPACITY, DURABILITY, CAPABILITY, SUITABILITY OR WORKMANSHIP; ITS NON-
INTERFERENCE WITH OR NON-INFRINGEMENT OF ANY PATENT, TRADEMARK, COPYRIGHT OR
OTHER INTELLECTUAL PROPERTY RIGHT; OR ITS COMPLIANCE WITH ANY LAW, RULE,
SPECIFICATION, PURCHASE ORDER OR CONTRACT PERTAINING THERETO. Lessor hereby
assigns to Lessee the benefit of any assignable manufacturer's or supplier's
warranties, but Lessor, at Lessee's written request, will cooperate with Lessee
in pursuing any remedies Lessee may have under such warranties. Any action taken
with regard to warranty claims against any manufacturer or supplier by Lessee
will be at Lessee's sole expense. LESSOR MAKES NO REPRESENTATIONS OR WARRANTIES,
EXPRESS OR IMPLIED OF ANY KIND AS TO THE FINANCIAL CONDITION OR FINANCIAL
STATEMENTS OF ANY PARTY OR AS TO THE TAX OR ACCOUNTING TREATMENT OR CONSEQUENCES
OF THE LEASE, THE EQUIPMENT OR THE RENTAL PAYMENTS.
8. INSURANCE: Lessee at its sole expense shall at all times keep each item of
Equipment insured against all risks of loss or damage from every cause
whatsoever for an amount not less than the greater of the full replacement value
or the Lessor's Cost of such item of Equipment. Lessee at its sole expense shall
at all times carry public liability and property damage insurance in amounts
satisfactory to Lessor protecting Lessee and Lessor from liabilities for
injuries to persons and damage to property of others relating in any way to the
Equipment. All insurers shall be reasonably satisfactory to Lessor. Lessee shall
deliver to Lessor satisfactory evidence of such coverage. Proceeds of any
insurance covering damage or loss of the Equipment shall be payable to Lessor as
loss payee and shall, at Lessor's option, be applied toward (a) the replacement,
restoration or repair of the Equipment, or (b) payment of the obligations of
Lessee under the Lease. Proceeds of any public liability or property insurance
shall be payable first to Lessor as additional insured to the extent of its
liability, then to Lessee. If an event of default occurs and is continuing, or
if Lessee fails to make timely payments due under Section 9 hereof, then Lessee
automatically appoints Lessor as Lessee's attorney-in-fact with full power and
authority in the place of Lessee and in the name of Lessee or Lessor to make
claim for, receive payment of, and sign and endorse all documents, checks or
drafts for loss or damage under any such policy. Each insurance policy will
require that the insurer give Lessor at least 30 days prior written notice of
any cancellation of such policy and will require that Lessor's interests remain
insured regardless of any act, error, omission, neglect or misrepresentation of
Lessee. The insurance maintained by Lessee shall be primary without any right of
contribution from insurance which may be maintained by Lessor.
9. LOSS AND DAMAGE: (a) Lessee bears the entire risk of loss, theft, damage or
destruction of Equipment in whole or in part from any reason whatsoever
("Casualty Loss"). No Casualty Loss to Equipment shall relieve Lessee from the
obligation to pay rent or from any other obligation under the Lease.
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9. LOSS AND DAMAGE (continued): In the event of Casualty Loss to any item of
Equipment, Lessee shall immediately notify Lessor of the same and Lessee shall,
if so directed by Lessor, immediately repair the same. If Lessor determines that
any item of Equipment has suffered a Casualty Loss beyond repair ("Lost
Equipment"), then Lessee, at the option of Lessor, shall: (1) Immediately
replace the Lost Equipment with similar equipment in good repair, condition and
working order free and clear of any Liens and deliver to Lessor a bill of sale
covering the replacement equipment, in which event such replacement equipment
shall automatically be Equipment under the Lease; or (2) On the rent payment
date which is at least 30 but no more than 60 days after the date of the
Casualty Loss, pay to Lessor all amounts then due and payable by Lessee under
the Lease for the Lost Equipment plus the Stipulated Loss Value for such Lost
Equipment as of the date of the Casualty Loss. Upon payment by Lessee of all
amounts due under the above clause (2), the lease of the Lost Equipment will
terminate and Lessor shall transfer to Lessee all of Lessor's right, title and
interest in such Equipment on an "as-is, where-is" basis with all faults,
without recourse and without representation or warranty of any kind, express or
implied.
(b) "Stipulated Loss Value" of any item of Equipment during its Lease Term
equals the present value discounted in arrears to the applicable date at the
applicable SLV Discount Rate of (1) the remaining rents and all other amounts
[including, without limitation, any balloon payment and, as to a terminal rental
adjustment clause ("TRAC") lease, the TRAC value stated in the Schedule, and any
other payments required to be paid by Lessee at the end of the applicable Lease
Term] payable under the Lease for such item on and after such date to the end of
the applicable Lease Term and (2) an amount equal to the Economic Value of the
Equipment. For any item of Equipment, "Economic Value" means the Fair Market
Value of the Equipment at the end of the applicable Lease Term as originally
anticipated by Lessor at the Commencement Date of the applicable Schedule:
provided, that Lessee agrees that such value shall be determined by the books of
Lessor as of the Commencement Date of the applicable Schedule. After the payment
of all rent due under the applicable Schedule and the expiration of the Lease
Term of any item of Equipment, the Stipulated Loss Value of such item equals the
Economic Value of such item. Stipulated Loss Value shall also include any Taxes
payable by Lessor in connection with its receipt thereof. For any item of
Equipment, "SLV Discount Rate" means an interest rate equal to the Prime Rate in
effect on the Commencement Date of the Schedule for such item minus two
percentage points.
10. TAX BENEFITS INDEMNITY. (a) The Lease has been entered into on the basis
that Lessor shall be entitled to such deductions, credits and other tax benefits
as are provided by federal, state and local income tax law to an owner of the
Equipment (the "Tax Benefits") including, without limitation: (1) modified
accelerated cost recovery deductions on each item of Equipment under Section 168
of the Code (as defined below) in an amount determined commencing with the
taxable year in which the Commencement Date of the applicable Schedule occurs,
using the maximum allowable depreciation method available under Section 168 of
the Code, using a recovery period (as defined in Section 168 of the Code)
reasonably determined by Lessor, and using an initial adjusted basis which is
equal to the Lessor's Cost of such item; (2) amortization of the expenses paid
by Lessor in connection with the Lease on a straight-line basis over the term of
the applicable Schedule; and (3) Lessor's federal taxable income will be subject
to the maximum rate on corporations in effect under the Code as of the
Commencement Date of the applicable Schedule.
(b) If on any one or more occasions (1) Lessor shall lose, shall not have
or shall lose the right to claim all or any part of the Tax Benefits, (2) there
shall be reduced, disallowed, recalculated or recaptured all or any part of the
Tax Benefits, or (3) all or any part of the Tax Benefits is reduced by a change
in law or regulation (each of the events described in subparagraphs 1, 2 or 3 of
this paragraph (b) will be referred to as a "Tax Loss"), then, upon 30 days
written notice by Lessor to Lessee that a Tax Loss has occurred, Lessee shall
pay Lessor an amount which, in the reasonable opinion of Lessor and after the
deduction of all taxes required to be paid by Lessor with respect to the receipt
of such amount, will provide Lessor with the same after-tax net economic yield
which was originally anticipated by Lessor as of the Commencement Date of the
applicable Schedule.
(c) A Tax Loss shall occur upon the earliest of: (1) the happening of any
event (such as disposition or change in use of an item of Equipment) which may
cause such Tax Loss; (2) Lessor's payment to the applicable taxing authority of
the tax increase resulting from such Tax Loss; or (3) the adjustment of Lessor's
tax return to reflect such Tax Loss.
(d) Lessor shall not be entitled to payment under this section for any Tax
Loss caused solely by one or more of the following events: (1) a disqualifying
sale or disposition of an item of Equipment by Lessor prior to any default by
Lessee; (2) Lessor's failure to timely or properly claim the Tax Benefits in
Lessor's tax return; (3) a disqualifying change in the nature of Lessor's
business or liquidation thereof; (4) a foreclosure by any person holding through
Lessor a security interest on an item of Equipment which foreclosure results
solely from an act of Lessor; or (5) Lessor's failure to have sufficient taxable
income or tax liability to utilize the Tax Benefits.
(e) "Code" shall mean the Internal Revenue Code of 1986, as amended. For
the purposes of this section 10, the term "Lessor" shall include any affiliate
group (within the meaning of section 1504 of the Code) of which Lessor is a
member for any year in which a consolidated income tax return is filed for such
affiliated group. Lessee's obligations under this section shall survive the
expiration, cancellation or termination of the Lease.
11. GENERAL TAX INDEMNITY: Lessee will pay, and will defend, indemnify and hold
Lessor harmless on an after-tax basis from, any and all Taxes (as defined below)
and related audit and contest expenses on or relating to (a) any of the
Equipment, (b) the Lease, (c) purchase, acceptance, ownership, lease,
possession, use, operation, transportation, return or other disposition of any
of the Equipment, and (d) rentals or earnings relating to any of the Equipment
or the Lease. "Taxes" means present and future taxes or other governmental
charges that are not based on the net income of Lessor, whether they are
assessed to or payable by Lessee or Lessor, including, without limitation (i)
sales, use, excise, licensing, registration, titling, franchise, business and
occupation, gross receipts, stamp and personal property taxes, (ii) levies,
imposts, duties, assessments, charges and withholdings, (iii) penalties, fines,
and additions to tax and (iv) interest on any of the foregoing. Unless Lessor
elects otherwise, Lessor will prepare and file all reports and returns relating
to any Taxes and will pay all Taxes to the appropriate taxing authority. Lessee
will reimburse Lessor for all such payments promptly on request. On or after any
applicable assessment/levy/lien date for any personal property Taxes relating to
any Equipment, Lessee agrees that upon Lessor's request Lessee shall pay to
Lessor the personal property Taxes which Lessor reasonably anticipates will be
due, assessed, levied or otherwise imposed on any Equipment during its Lease
Term. If Lessor elects in writing, Lessee will itself prepare and file all such
reports and returns, pay all such Taxes directly to the taxing authority, and
send Lessor evidence thereof. Lessee's obligations under this section shall
survive the expiration, cancellation or termination of the Lease.
12. GENERAL INDEMNITY: Lessee assumes all risk and liability for, and shall
defend, indemnify and keep Lessor harmless on an after-tax basis from, any and
all liabilities, obligations, losses, damages, penalties, claims, actions,
suits, costs and expenses, including reasonable attorney fees and expenses, of
whatsoever kind and nature imposed on, incurred by or asserted against Lessor,
in any way relating to or arising out of the manufacture, purchase, acceptance,
rejection, ownership, possession, use, selection, delivery, lease, operation,
condition, sale, return or other disposition of the Equipment or any part
thereof (including, without limitation, any claim for latent or other defects,
whether or not discoverable by Lessee or any other person, any claim for
negligence, tort or strict liability, any claim under any environmental
protection or hazardous waste law and any claim for patent, trademark or
copyright infringement). Lessee will not indemnify Lessor under this section for
loss or liability arising from events which occur after the Equipment has been
returned to Lessor or for loss or liability caused directly and solely by the
gross negligence or willful misconduct of Lessor. In this section, "Lessor" also
includes any director, officer, employee, agent, successor or assign of Lessor.
Lessee's obligations under this section shall survive the expiration,
cancellation or termination of the Lease.
13. PERSONAL PROPERTY: Lessee represents and agrees that the Equipment is, and
shall at all times remain, separately identifiable personal property. Upon
Lessor's request, Lessee shall furnish Lessor a landlord's and/or mortgagee's
waiver and consent to remove all Equipment. Lessor may display notice of its
interest in the Equipment by any reasonable identification. Lessee shall not
alter or deface any such indicia of Lessor's interest.
14. DEFAULT: Each of the following events shall constitute an event of default
under the Lease: (a) Lessee fails to pay any rent or other amount due under the
Lease within ten days of its due date; or (b) Lessee fails to perform or observe
any of its obligations in Sections 8, 18, or 22 hereof; or (c) Lessee fails to
perform or observe any of its other obligations in the Lease for more than 30
days after Lessor notifies Lessee of such failure; or (d) Lessee or any Lessee
affiliate defaults in the payment, performance or observance of any obligation
under any loan, credit agreement or other lease in which Lessor or any
subsidiary (direct or indirect) of Banc One Corporation (which is Lessor's
ultimate parent corporation) is the creditor or lessor; or (e) any statement,
representation or warranty made by Lessee in the Lease, in any Schedule or in
any document, certificate or financial statement in connection with the Lease
proves at any time to have been untrue or misleading in any material respect as
of the time when made; or (f) Lessee becomes insolvent or bankrupt, or Lessee
admits its inability to pay its debts as they mature, or Lessee makes an
assignment for the benefit of creditors, or Lessee applies for, institutes or
consents to the appointment of a receiver, trustee or similar official for
Lessee or any substantial part of its property or any such official is appointed
without Lessee's consent, or Lessee applies for, institutes or consents to any
bankruptcy, insolvency, reorganization, debt moratorium, liquidation, or similar
proceeding relating to Lessee or any substantial part of its property under the
laws of any jurisdiction or any such proceeding is instituted against Lessee
without stay or dismissal for more than 30 days, or Lessee commences any act
amounting to a business failure or a winding up of its affairs, or Lessee ceases
to do business as a going concern or (g) with respect to any guaranty, letter of
credit, pledge agreement, security agreement, mortgage, deed of trust, debt
subordination agreement or other credit enhancement or credit support agreement
(whether now existing of hereafter arising) signed or issued by any party in
connection with all or any part of Lessee's obligations under the Lease, the
party signing or issuing any such agreement defaults in its obligations
thereunder or any such agreement shall cease to be in full force and effect or
shall be declared to be null, void, invalid or unenforceable by the party
signing or issuing it; or (h) there shall occur in Lessors reasonable opinion
any material adverse change in the financial condition, business or operations
of Lessee.
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14. DEFAULT (continued)
As used in this section 14, the term "Lessee" also includes any guarantor
(whether now existing or hereafter arising) of all or any part of Lessee's
obligations under the Lease and/or any issuer of a letter of credit (whether
now existing or hereafter arising) relating to all or any part of Lessee's
obligations under the Lease, and the term "Lease" also includes any guaranty
or letter of credit (whether now existing or hereafter arising) relating to
all or any part of Lessee's obligations under the Lease.
15. REMEDIES. If any event of default exists, Lessor may exercise in any order
one or more of the remedies described in the lettered subparagraphs of this
section, and Lessee shall perform its obligations imposed thereby:
(a) Lessor may require Lessee to return any or all Equipment as provided
in the Lease.
(b) Lessor or its agent may repossess any or all Equipment wherever found,
may enter the premises where the Equipment is located and disconnect, render
unusable and remove it, and may use such premises without charge to store or
show the Equipment for sale.
(c) Lessor may sell any or all Equipment at public or private sale, with
or without advertisement or publication, may re-lease or otherwise dispose of it
or may use, hold or keep it.
(d) Lessor may require Lessee to pay to Lessor on a date specified by
Lessor, with respect to any or all Equipment (i) all accrued and unpaid rent,
late charges and other amounts due under the Lease on or before such date, plus
(ii) as liquidated damages for loss of a bargain and not as a penalty, and in
lieu of any further payments of rent, the Stipulated Loss Value of the Equipment
on such date, plus (iii) interest at the Overdue Rate on the total of the
foregoing ("Overdue Rate" means an interest rate per annum equal to the higher
of 18% or 2% over the Prime Rate, but not to exceed the highest rate permitted
by applicable law). The parties acknowledge that the foregoing money damage
calculation reasonably reflects Lessor's anticipated loss with respect to the
Equipment and the related Lease resulting from the event of default. If an event
of default under section 14(f) of this Master Lease Agreement exists, then
Lessee will be automatically liable to pay Lessor the foregoing amounts as of
the next rent payment date unless Lessor otherwise elects in writing.
(e) Lessee shall pay all costs, expenses and damages incurred by Lessor
because of the event of default or its actions under this section, including,
without limitation any collection agency and/or attorney fees and expenses, any
costs related to the repossession, safekeeping, storage, repair, reconditioning
or disposition of the Equipment and any incidental and consequential damages.
(f) Lessor may terminate the Lease and/or any or all Schedules, may sue to
enforce Lessee's performance of its obligations under the Lease and/or may
exercise any other right or remedy then available to Lessor at law or in equity.
Lessor is not required to take any legal process or give Lessee any notice
before exercising any of the above remedies. None of the above remedies is
exclusive, but each is cumulative and in addition to any other remedy available
to Lessor. Lessor's exercise of one or more remedies shall not preclude its
exercise of any other remedy. No action taken by Lessor shall release Lessee
from any of its obligations to Lessor. No delay or failure on the part of Lessor
to exercise any right hereunder shall operate as a waiver thereof, nor as an
acquiescence in any default, nor shall any single or partial exercise of any
right preclude any other exercise thereof or the exercise of any other right.
After any default, Lessor's acceptance of any payment by Lessee under the Lease
shall not constitute a waiver by Lessor of such default, regardless of Lessor's
knowledge or lack of knowledge at the time of such payment, and shall not
constitute a reinstatement of the Lease if the Lease has been declared in
default by Lessor, unless Lessor has agreed in writing to reinstate the Lease
and to waive the default.
If Lessor actually repossesses any Equipment, then it will use commercially
reasonable efforts under the then current circumstances to attempt to mitigate
its damages; provided, that Lessor shall not be required to sell, re-lease or
otherwise dispose of any Equipment prior to Lessor enforcing any of the remedies
described above. Lessor may sell or re-lease the Equipment in any manner it
chooses, free and clear of any claims or rights of Lessee and without any duty
to account to Lessee with respect thereto except as provided below. If Lessor
actually sells or re-leases the Equipment, it will credit the net proceeds of
any sale of the Equipment, or the net present value (discounted at the then
current Prime Rate) of the rents payable under any new lease of the Equipment,
against and up to (but not exceeding) the Stipulated Loss Value of the Equipment
and any other amounts Lessee owes Lessor, or will reimburse Lessee for and up to
(but not exceeding) Lessee's payment thereof. The term "net" as used above shall
mean such amount after deducting the costs and expenses described in clause (e)
above of this section. If Lessor elects in writing not to sell or re-lease any
Equipment, it will similarly credit or reimburse Lessee for Lessor's reasonable
estimate of such Equipment's Fair Market Value.
16. LESSOR'S RIGHT TO PERFORM: If Lessee fails to make any payment under the
Lease or fails to perform any of its other agreements in the Lease (including,
without limitation, its agreement to provide insurance coverage as stated in the
Lease), Lessor may itself make such payment or perform such agreement, and the
amount of such payment and the amount of the expenses of Lessor incurred in
connection with such payment or performance shall be deemed to be additional
rent, payable by Lessee on demand.
17. FINANCIAL REPORTS: Lessee agrees to furnish to Lessor: (a) annual financial
statements setting forth the financial condition and results of operation of
Lessee (financial statements shall include the balance sheet, income statement
and changes in financial position and all notes thereto) within 120 days of the
end of each fiscal year of Lessee; (b) quarterly financial statements setting
forth the financial condition and results of operation of Lessee within 60 days
of the end of each of the first three fiscal quarters of Lessee; and (c) such
other financial information as Lessor may from time to time reasonably request
including, without limitation, financial reports filed by Lessee with federal or
state regulatory agencies. All such financial information shall be prepared in
accordance with generally accepted accounting principles. If Lessee fails to
furnish the annual financial statements to Lessor within 30 days of Lessor's
written request, then Lessor may, at its option, charge Lessee a non-performance
fee equal to all the rentals due under the Lease for the then current month
(unless otherwise prohibited by law) and such fees shall be deemed to be
additional rent, payable by Lessee on demand.
18. NO CHANGES IN LESSEE: Lessee shall not: (a) liquidate, dissolve or suspend
business; (b) sell, transfer or otherwise dispose of all or a majority of its
assets, except that Lessee may sell its inventory in the ordinary course of its
business; (c) enter into any merger, consolidation or similar reorganization
unless it is the surviving corporation; (d) transfer all or any substantial part
of its operations or assets outside of the United States of America; or (e)
without 30 days advance written notice to Lessor, change its name or chief place
of business. Lessee shall at all times maintain a tangible net worth which is no
less than the greater of 75% of its tangible net worth as of the date of the
Master Lease Agreement or 75% of its highest tangible net worth thereafter.
19. LATE CHARGES: If any rent or other amount payable under the Lease is not
paid when due, then as compensation for the administration and enforcement of
Lessee's obligation to make timely payments, Lessee shall pay with respect to
each overdue payment on demand an amount equal to the greater of fifteen dollars
($15.00) or five percent (5%) of the each overdue payment (but not to exceed the
highest late charge permitted by applicable law) plus any collection agency fees
and expenses.
20. NOTICES; POWER OF ATTORNEY: (a) Service of all notices under the Lease
shall be sufficient if given personally or couriered or mailed to the party
involved at its respective address set forth herein or at such other address as
such party may provide in writing from time to time. Any such notice mailed to
such address shall be effective three days after deposit in the United States
mail with postage prepaid, (b) With respect to any power of attorney covered by
the Lease, the powers conferred on Lessor thereby: are powers coupled with an
interest; are irrevocable; are solely to protect Lessor's interests under the
Lease; and do not impose any duty on Lessor to exercise such powers. Lessor
shall be accountable solely for amounts it actually receives as a result of its
exercise of such powers.
21. ASSIGNMENT BY LESSOR: Lessor and any assignee of Lessor, with or without
notice to or consent of Lessee, may sell, assign, transfer or grant a security
interest in all or any part of Lessor's rights, obligations, title or interest
in the Equipment, the Lease, any Schedule or the amounts payable under the Lease
or any Schedule to any entity ("transferee"). The transferee shall succeed to
all of Lessor's rights in respect to the Lease (including, without limitation,
all rights to insurance and indemnity protection described in the Lease). Lessee
agrees to sign any acknowledgement and other documents reasonably requested by
Lessor or the transferee in connection with any such transfer transaction.
Lessee, upon receiving notice of any such transfer transaction, shall comply
with the terms and conditions thereof. Lessee agrees that it shall not assert
against any transferee any claim, defense, setoff, deduction or counterclaim
which Lessee may now or hereafter be entitled to assert against Lessor. Unless
otherwise agreed in writing, the transfer transaction shall not relieve Lessor
of any of it obligations to Lessee under the Lease and Lessee agrees that the
transfer transaction shall not be construed as being an assumption of such
obligations by transferee.
22. NO ASSIGNMENT, SUBLEASE OR LIEN BY LESSEE: LESSEE SHALL NOT DIRECTLY OR
INDIRECTLY, (a) MORTGAGE, ASSIGN, SELL, TRANSFER, OR OTHERWISE DISPOSE OF THE
LEASE OR ANY INTEREST THEREIN OR THE EQUIPMENT OR ANY PART THEREOF, OR (b)
SUBLEASE, RENT, LEND OR TRANSFER POSSESSION OR USE OF THE EQUIPMENT OR ANY
PART THEREFOR TO ANY PARTY, OR (c) CREATE, INCUR, GRANT, ASSUME OR ALLOW TO
EXIST ANY LIEN ON THE LEASE, ANY SCHEDULE, THE EQUIPMENT OR ANY PART THEREOF.
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23. EXPIRATION OF LEASE TERM: (a) At least 90 days (or earlier if otherwise
specified), but no more than 270 days prior to expiration of the Lease Term
of each Schedule, Lessee shall give Lessor written notice of its electing one
of the following options for all (but not less than all) of the Equipment
covered by such Schedule: return the Equipment under clause (b) below; or
purchase the Equipment under clause (c) below. The election of an option
shall be irrevocable. If Lessee fails to give timely notice of its election,
it shall be deemed to have elected to return the Equipment.
(b) If Lessee elects or is deemed to have elected to return the
Equipment at the expiration of the Lease Term of a Schedule or if Lessee is
obligated at any time to return the Equipment, then Lessee shall, at its sole
expense and risk, deinstall, disassemble, pack, crate, insure and return the
Equipment to Lessor (all in accordance with applicable industry standards) at
any location in the continental United States of America selected by Lessor.
The Equipment shall be in the same condition as when received by Lessee,
reasonable wear, tear and depreciation resulting from normal and proper use
excepted (or, if applicable, in the condition set forth in the Lease or the
Schedule), shall be in good operating order and maintenance as required by
the Lease, shall be certified as being eligible for any available
manufacturer's maintenance program, shall be free and clear of any Liens as
required by the Lease, shall comply with all applicable laws and regulations
and shall include all manuals, specifications, repair and maintenance records
and similar documents. Until Equipment is returned as required above, all
terms of the Lease shall remain in full force and effect including, without
limitation, obligations to pay rent and insure the Equipment; provided, that
after the expiration of any Schedule and before Lessee has completed its
return of the Equipment or its purchase option (if elected), the term of the
lease of the Equipment covered by such Schedule shall be month-to-month or
such shorter period as may be specified by Lessor.
(c) If Lessee gives Lessor timely notice of its election to purchase
Equipment, then on the expiration date of the applicable Schedule Lessee
shall purchase all (but not less than all) of the Equipment and shall pay to
Lessor the Fair Market Value of the Equipment plus all Taxes (other than
income taxes on Lessor's gains on such sale), costs and expenses incurred or
paid by Lessor in connection with such sale plus all accrued but unpaid
amounts due with respect to the Equipment and/or the Schedule. The Stipulated
Loss Value or Economic Value of any item of Equipment shall have no bearing
or influence on the determination of Fair Market Value under this clause (c).
Upon payment in full of the above amounts, and if no default has occurred and
is continuing under the Lease, Lessor shall transfer title to such Equipment
to Lessee "as-is, where-is" with all faults and without recourse to Lessor
and without any representation or warranty of any kind whatsoever by Lessor,
express or implied.
(d) For purposes of the purchase option of the Lease, the determination
of the Fair Market Value of any Equipment shall be determined (1) without
deducting any costs of dismantling or removal from the location of use, (2)
on the assumption that the Equipment is in the condition required by the
applicable return and maintenance provisions of the Lease and is free and
clear of any Liens as required by the Lease, and (3) shall be determined by
mutual agreement of Lessee and Lessor or, if Lessor and Lessee are not able
to agree on such value, by the Appraisal Procedure. "Appraisal Procedure"
means the determination of Fair Market Value by an independent appraiser
acceptable to Lessor and Lessee or, if the parties are unable to agree on an
acceptable appraiser, by averaging the valuation (disregarding the one which
differs the most from the other two) of three independent appraisers, the
first appointed by Lessor, the second appointed by Lessee and the third
appointed by the first two appraisers. For purposes of the "Remedies" section
of the Lease, the Fair Market Value shall be determined by Lessor in good
faith and any such valuation shall be on an "as-is, where is" basis without
regard to the first sentence of this clause (d). Lessee, at its sole expense,
shall pay all fees, costs and expenses of the above described appraisers.
24. GOVERNING LAW: THE INTERPRETATION, CONSTRUCTION AND VALIDITY OF THE
LEASE SHALL BE GOVERNED BY THE LAWS OF THE STATE OF OHIO. WITH RESPECT TO ANY
ACTION BROUGHT BY LESSOR AGAINST LESSEE TO ENFORCE ANY TERM OF THE LEASE,
LESSEE HEREBY IRREVOCABLY CONSENTS TO THE JURISDICTION AND VENUE OF ANY STATE
OR FEDERAL COURT IN THE FRANKLIN COUNTY, OHIO. WHERE LESSOR HAS ITS PRINCIPAL
PLACE OF BUSINESS AND WHERE PAYMENTS ARE TO BE MADE BY LESSEE.
25. MISCELLANEOUS: (a) Subject to the limitations herein, the Lease shall be
binding upon and inure to the benefit of the parties hereto and their
respective heirs, administrators, successors and assigns. (b) This Master
Lease Agreement and each Schedule may be executed in any number of
counterparts, which together shall constitute a single instrument. Only one
counterpart of each Schedule shall be marked "Lessor's Original" and all
other counterparts shall be marked "Duplicate". A security interest in any
Schedule may be created through transfer and possession only of the
counterpart marked "Lessor's Original". (c) Section and paragraph headings in
this Master Lease Agreement and the Schedules are for convenience only and
have no independent meaning. (d) The terms of the Lease shall be severable
and if any term thereof is declared unconscionable, invalid, illegal or void,
in whole or in part, the decision so holding shall not be construed as
impairing the other terms of the Lease and the Lease shall continue in full
force and effect as if such invalid, illegal, void or unconscionable term
were not originally included herein. (e) All indemnity obligations of Lessee
under the Lease and all rights, benefits and protections provided to Lessor
by warranty disclaimers shall survive the cancellation, expiration or
termination of the Lease. (f) Lessor shall not be liable to Lessee for any
indirect, consequential or special damages for any reason whatsoever. (g)
Each payment made by Lessee shall be applied by Lessor in such manner as
Lessor determines in its discretion which may include, without limitation,
application as follows: first, to accrued late charges; second, to accrued
rent; and third, the balance to any other amounts then due and payable by
Lessee under the Lease. (h) If the Lease is signed by more than one Lessee,
each of such Lessees shall be jointly and severally liable for payment and
performance of all of Lessee's obligations under the Lease.
26. ENTIRE AGREEMENT: THE LEASE REPRESENTS THE FINAL, COMPLETE AND ENTIRE
AGREEMENT BETWEEN THE PARTIES HERETO. THERE ARE NO ORAL OR UNWRITTEN
AGREEMENTS OR UNDERSTANDINGS AFFECTING THE LEASE OR THE EQUIPMENT. Lessee
agrees that Lessor is not the agent of any manufacturer or supplier, that no
manufacturer or supplier is an agent of Lessor, and that any representation,
warranty or agreement made by a manufacturer, supplier or their employees,
sales representatives or agents shall not be binding, on Lessor.
27. JURY WAIVER: ALL PARTIES TO THIS MASTER LEASE AGREEMENT WAIVE ALL RIGHTS
TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY ANY
PARTY AGAINST ANY OTHER PARTY ON ANY MATTER WHATSOEVER ARISING OUT OF, IN
CONNECTION WITH OR IN ANY WAY RELATED TO THIS MASTER LEASE AGREEMENT.
STB SYSTEMS, INC.
BANC ONE LEASING CORPORATION /s/ [NAME ILLEGIBLE]
----------------------------------------
(Name of Lessee)
Lessor
By: /s/ [NAME ILLEGIBLE] By: /s/ [NAME ILLEGIBLE]
-------------------------------- ----------------------------------
Title: Funding Authority Title: Chief Operating Officer
----------------------------- -------------------------------
Lessee's Witness: Craig Kennington
--------------------
Regardless of any prior, present or future oral agreement or course of
dealing, no term or condition of the Lease may be amended, modified, waived,
discharged, cancelled or terminated except by a written instrument signed by
the party to be bound: except Lessee authorizes Lessor to complete the
Acceptance Date of each Schedule and the serial numbers of any Equipment.
STB SYSTEMS, INC.
/s/ [NAME ILLEGIBLE]
-------------------------------------
(Name of Lessee)
By:
----------------------------------
Title:
-------------------------------
Page 4 of 4
<PAGE>
MASTER LEASE ADDENDUM
Dated October 30, 1996
Master Lease Agreement Dated As Of October 30, 1996
Lessee: STB Systems, Inc.
Reference is made to the above Master Lease Agreement ("Master Lease")
by and between Banc One Leasing Corporation ("Lessor") and the above lessee
("Lessee"). This Addendum modifies the terms and conditions of the Master
Lease. Unless otherwise defined herein, capitalized terms defined in the
Master Lease shall have the same meaning when used herein. As part of the
valuable consideration to induce the execution of the Master Lease, Lessor
and Lessee hereby agree as follows:
1. In addition to all other events of default set forth in section 14
of the Master Lease, any of the following events shall also be an event
default under the Master Lease:
(a) STB de Mexico, S.A. de C. V. fails for any reason to pay or perform
any of STB de Mexico, S.A. de C. V.'s obligations under any present or
future agreement or contract with Lessor or Lessee, including, without
limitation, any present or future guaranty, or sublease or bailment
agreement; or
(b) Lessee defaults in the payment or performance of any of Lessee's
obligations under any Material Indebtedness, provided, that "Material
Indebtedness" means (i) any obligations of Lessee to Sanwa Business Credit
Corporation under the Loan and Security Agreement dated as of December 21,
1993 or any replacement or substitution with Sanwa Business Credit
Corporation for said loan and security agreement, or (ii) any present or
future loan, lease or other extension of credit which has an unpaid
balance of $10,000,000.00 or more.
2. Lessor agrees that any notice under clause (c) of Section 14 of the
Master Lease shall be in writing.
3. Clause (h) of Section 14 of the Master Lease, which is the material
adverse change event of default, is deleted.
4. Clause (e) of Section 15 of the Master Lease is deleted and
replaced with the following:
"(e) Lessee shall pay all reasonable costs, expenses and damages incurred
by Lessor because of the event of default or its actions under this
section, including, without limitation any collection agency and/or
attorney fees and expenses, any costs related to the repossession,
safekeeping, storage, repair, reconditioning or disposition of the
Equipment."
5. On the same dates that Lessee is required to supply Lessor with
financial
Page 1 of 2
<PAGE>
statements under clauses (a) or (b) section 17 of the Master Lease, Lessee
agrees to supply Lessor with a certificate signed by a senior officer of
Lessee that Lessee is in compliance with all of its obligations under all
agreements relating to then current Material Indebtedness. The last sentence
of Section 17 of the Master Lease, which describes the fee payable for
Lessee's failure to deliver annual financial information, is deleted.
6. Clause (d) of Section 18 of the Master Lease is deleted and the
following sentence is added to said Section 18:
"At all times, Lessee shall be a corporation organized and in good standing
under the laws of a state of the United States of America, Lessee shall
have its corporate headquarters located in the United States of America and
Lessee shall undertake substantially all of its operations that are
conducted outside of the United States of America through subsidiaries or
affiliates that are owned and controlled no less than 50% by Lessee."
7. Section 19 of the Master Lease is deleted.
8. The fourth sentence of Section 21 of the Master Lease is deleted and
replaced with the following:
"Lessee, upon receiving notice of any such transfer transaction, shall
comply with the reasonable terms and conditions thereof."
9. In Section 24 of the Master Lease, the phrase "Franklin County, Ohio"
is deleted and replaced with the phrase "Dallas County, Texas".
10. Except as expressly amended by this Addendum and other written
instruments signed by the party to be bound, the Master Lease remains unchanged
and in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Addendum as of
the date referenced above.
STB SYSTEMS, INC. BANC ONE LEASING CORPORATION
(Lessee) (Lessor)
By: /s/ [Name Illegible] By: [Name Illegible]
------------------------------- -------------------------------
Title: Funding Authority Title: COO
---------------------------- ----------------------------
Page 2 of 2
<PAGE>
BANC ONE LEASING CORPORATION
SCHEDULE A-1 EQUIPMENT LEASED HEREUNDER
QUANTITY DESCRIPTION PAGE 1
- ---------- ---------------------------------------------------------------------
- ---------- ---------------------------------------------------------------------
"ALL PROPERTY DESCRIBED IN THE INVOICES IDENTIFIED BELOW WHICH PROPERTY MAY
BE GENERALLY DESCRIBED AS MANUFACTURING EQUIPMENT."
LOCATION: STB DE MEXICO
VICENTE GUERRERO 7470
CIUDAD JUAREZ, CHIHUHUA
MEXICO
COST: $4,235,997.50
VENDOR INVOICE # INVOICE AMT
- ------ --------- -----------
MPM 70414 $ 23,577.00
MPM 70562 $ 58,942.50
MPM 70563 $ 35,365.50
MPM 69568 $ 24,615.00
MPM 69989 $ 61,537.50
MPM 69990 $ 36,922.50
MPM 68917 $ 24,390.00
MPM 69510 $ 60,975.00
MPM 69511 $ 36,585.00
MPM 61627 $ 24,642.00
MPM 61813 $ 61,626.69
MPM 61814 $ 36,963.00
MPM 72570 $475,570.63
MPM 71660 $323,284.01
TOGETHER WITH ALL ATTACHMENTS, ADDITIONS, ACCESSIONS, PARTS, REPAIRS,
IMPROVEMENTS, REPLACEMENTS AND SUBSTITUTIoNS THERETO.
This Schedule A-1 is attached to and made a part of Lease Number 1000054536 and
constitutes a true and accurate description of the equipment.
Lessee:
STB SYSTEMS, INC.
- ---------------------------------------
By: [NAME ILLEGIBLE]
-----------------------------------
Date: October 30, 1996
---------------------------------
<PAGE>
BANC ONE LEASING CORPORATION
SCHEDULE A-1 EQUIPMENT LEASED HEREUNDER
QUANTITY DESCRIPTION PAGE 2
- ---------- ---------------------------------------------------------------------
- ---------- ---------------------------------------------------------------------
PANASONIC CS29547-001 $ 400,000.00
PANASONIC CS29547-002 $ 400,000.00
PANASONIC CS29547-003 $ 400,000.00
ZEVATECH 10312325 $1,443,931.17
TDK 280616 $ 307,070.00
TOGETHER WITH ALL ATTACHMENTS, ADDITIONS, ACCESSIONS, PARTS, REPAIRS,
IMPROVEMENTS, REPLACEMENTS AND SUBSTITUTIONS THERETO.
This Schedule A-1 is attached to and made a part of Lease Number 1000054536 and
constitutes a true and accurate description of the equipment.
Lessee:
STB SYSTEMS, INC.
- ---------------------------------------
By: [NAME ILLEGIBLE]
-----------------------------------
Date: October 30, 1996
---------------------------------
<PAGE>
SCHEDULE ADDENDUM
Dated October 30, 1996
Lease Schedule No. 1000054536 Dated October 30, 1996
Lessee: STB Systems, Inc.
Reference is made to the above Lease Schedule ("Schedule") and to the
Master Lease Agreement ("Master Lease") identified in the Schedule, which are by
and between Banc One Leasing Corporation ("Lessor") and the above lessee
("Lessee"). As used herein: "Lease" shall mean the Schedule and the Master
Lease, but only to the extent that the Master Lease relates to the Schedule; and
"Equipment" shall mean the equipment covered by the Schedule. This Schedule
Addendum amends and supplements the terms and conditions of the Lease. Unless
otherwise defined herein, capitalized terms defined in the Lease shall have the
same meaning when used herein. SOLELY FOR PURPOSES OF THE SCHEDULE, LESSOR AND
LESSEE AGREE AS FOLLOWS:
1. Notwithstanding anything to the contrary in the Lease, with respect to
the Schedule, Lessor consents to the sublease or bailment of the Equipment
described in the Schedule by Lessee as sublessor or bailor to STB de Mexico,
S.A. de C. V. as sublessee or bailee pursuant to the terms and conditions of a
Gratuitous Bailment Agreement and to the location of the Equipment covered by
the Schedule in the City of Ciudad Juarez, State of Chihuahua, Mexico; provided,
that (a) the Gratuitous Bailment Agreement must be satisfactory in form and
substance to Lessor (such satisfaction to be evidenced by Lessor's signature
thereon); and (b) STB de Mexico, S.A. de C. V. shall execute and deliver to
Lessor a guaranty which must be satisfactory in form and substance to Lessor
(such satisfaction to be evidenced by Lessor's signature thereon).
2. As used herein, "Political Risk Insurance" shall mean a policy of
insurance issued by National Union Fire Insurance Company of Pittsburgh, PA
("Insurance Company") which insures Lessee and Lessor (or Banc One Texas Leasing
Corporation or Bank One, Texas, NA as Lessor's assignee) against risks of
expropriation or deprivation of the Equipment by the government of the United
Mexican States ("Political Loss") as set forth in such policy of insurance
Lessee acknowledges that it has reviewed a copy of the Political Risk Insurance
policy.
(a) With respect to the Schedule, Lessor agrees that Lessee shall not be
required to carry any insurance against Political Loss under Section 8 of
the Master Lease or to pay the premiums for any insurance against Political
Loss that Lessor may deem desirable. Lessor agrees to acquire the Political
Loss Insurance and to pay the premiums for such Political Loss Insurance.
(b) If a Political Loss occurs, such event shall be deemed a Casualty Loss
under Section 9 of the Master Lease; provided, that (1) Lessee agrees to
continue to pay
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<PAGE>
rent and perform its other obligations under the Lease until the earlier
of the date that the Insurance Company pays the amounts due under the
Political Risk Insurance or the date that Lessor has exhausted its
rights and remedies under the Political Risk Insurance; (2) Lessor
agrees that it will pursue with reasonable diligence its rights against
the Insurance Company under the Political Risk Insurance; and (3)
notwithstanding anything to the contrary in Section 9 of the Master
Lease as it relates to the Schedule, within thirty (30) days of the
earlier of the date that the Insurance Company pays the amounts due
under the Political Risk Insurance or the date that Lessor has exhausted
its rights and remedies under the Political Risk Insurance, Lessee shall
pay to Lessor the Stipulated Loss Value of the Equipment affected by the
Political Loss less the aggregate of the amount that the Insurance
Company has paid to Lessor under the Political Risk Insurance and the
amount that the United Mexican States has paid to Lessor as a result of
the Political Loss.
3. With respect to clause (1) of Subsection 9(b) of the Master Lease,
Lessor and Lessee agree that: (i) remaining rents include all rents payable
under the Schedule as if Lessee had elected to renew the Lease Term for the
First Renewal Term and the Second Renewal Term as described in the Renew,
Purchase or Return Addendum to the Schedule; and (ii) no amount is due under the
Schedule as is described in the bracketed provisions of said clause (1). With
respect to clause (2) of Subsection 9(b) of the Master Lease, Lessor and Lessee
agree that Economic Value will be determined as of the end of the above-
described Second Renewal Term.
4. Notwithstanding anything to the contrary in paragraph A on the reverse
side of the Schedule, if Lessor executes and delivers the Schedule to Lessee and
if Lessor pays all of the suppliers of the Equipment the full Lessor's Cost of
the Equipment (the date as of which both of said events shall have occurred will
be called the "Funding Date"), then except as otherwise specified in writing by
Lessor to Lessee before said Funding Date, all conditions to the Schedule being
binding on Lessor will be deemed satisfied.
5. The out-of-pocket expenses described as being payable by Lessee in the
last sentence of paragraph B on the reverse side of the Schedule shall not
exceed $600.00.
6. With respect to clause (a) of Paragraph D on the reverse side of the
Schedule, the following phrase is deleted: "and is qualified to do business and
is in good standing under the laws of each other state in which the Equipment is
or will be located".
7. With respect to clause (c) of Paragraph D on the reverse side of the
Schedule, said representation is true and accurate except to the extent
enforcement is limited by State and Federal laws regarding bankruptcy,
insolvency or debt reorganization or other similar laws of general application
or the application of principles of equity.
Page 2
<PAGE>
8. In the event of any conflict between the terms of the Master Lease and
the terms of the Schedule as each is amended by its addenda, the terms of the
Schedule shall control.
9. Except as expressly amended or supplemented by this Addendum and other
instruments signed by Lessor, the Lease remains unchanged and in full force and
effect.
IN WITNESS WHEREOF, the parties hereto have executed this Addendum as of
the date referenced above.
STB Systems, Inc. Banc One Leasing Corporation
(Lessee) (Lessor)
By: /s/ [NAME ILLEGIBLE] By: /s/ [NAME ILLEGIBLE]
--------------------------- -----------------------------
Title: Chief Operating Officer Title: Funding Authority
------------------------ --------------------------
Page 3
<PAGE>
CORPORATE GUARANTY
Dated October 30, 1996
Lessee Name: STB Systems, Inc.
Master Lease Agreement Dated October 30, 1996
Equipment Cost: Up To $4,400,000.00
1. For valuable consideration, the receipt of which is hereby
acknowledged, STB DE MEXICO, S.A. DE C.V. (hereinafter called the
"undersigned" or "Guarantor") guarantees to BANC ONE LEASING CORPORATION
(hereinafter called "Lessor") the full and prompt performance by the lessee
identified above (hereinafter called "Lessee"), of all obligations which
Lessee now has or may hereafter have to Lessor, including but not limited to
obligations under equipment leases and promissory notes executed in
connection with anticipated equipment leases (including but not limited to
all present and future lease schedules and promissory notes under the Master
Lease identified above, with a total original equipment cost to the Lessor of
no more than the amount of the Equipment Cost set forth above), and
unconditionally guarantee the prompt payment when due (whether at scheduled
maturity, upon acceleration or otherwise) of any and all sums, indebtedness
and liabilities of whatsoever nature, due or to become due, direct or
indirect, absolute or contingent, now or hereafter at any time owed or
contracted by Lessee to Lessor, and all costs and expenses of and incidental
to collection of any of the foregoing, including reasonable attorneys' fees
(all of the foregoing hereinafter called "Obligations"). It is the
undersigned's express intention that this guaranty in addition to covering
all present Obligations of Lessee to Lessor, shall extend to all future
Obligations of Lessee to Lessor, whether or not such Obligations are reduced
or entirely extinguished and thereafter increased or are reincurred, whether
or not such Obligations are related to the Master Lease identified above,
whether or not such Obligations exceed the Equipment Cost identified above,
and whether or not such Obligations are specifically contemplated by the
undersigned, Lessee, and Lessor as of the date hereof.
2. This is an absolute and unconditional guarantee of payment and not of
collection. Lessor shall not be required, as a condition of the liability of the
undersigned, to resort to, enforce or exhaust any of its remedies against the
Lessee or any other party who may be liable for payment on any Obligation or to
resort to, marshall, enforce or exhaust any of its remedies against any leased
property or any property given or held as security for this Guaranty or any
Obligation.
3. The undersigned hereby waive and grant to Lessor, without notice to the
undersigned and without in any way affecting the liability of the undersigned,
the right at any time and from time to time, to extend other and additional
credit, leases, loans or financial accommodations to Lessee apart from the
Obligations, to deal in any manner as it shall see fit with any Obligation of
Lessee to Lessor and with any leased property or security for such Obligation,
including, but not limited to, (i) accepting partial payments on account of any
Obligation, (ii) granting extensions or renewals of all or any part of any
Obligation, (iii) releasing, surrendering, exchanging, dealing with, abstaining
from taking, taking, abstaining from perfecting, perfecting, or accepting
substitutes for any or all leased property or security which it holds or may
hold for any Obligation, (iv) modifying, waiving, supplementing or otherwise
changing any of the terms, conditions or provisions contained in any Obligation
and (v) the addition or release of any other party or person liable hereon,
liable on the Obligations or liable on any other guaranty executed to guarantee
any of Lessee's Obligations. The undersigned jointly and severally hereby agree
that any and all settlements, compromises,
Page 1
<PAGE>
compositions, accounts stated and agreed balances made in good faith between
Lessor and Lessee shall be binding upon the undersigned.
4. Every right, power and discretion herein granted to Lessor shall be for
the benefit of the successors or assigns of Lessor and of any transferee or
assignee of any Obligation covered by this Guaranty, and in the event any such
Obligation shall be transferred or assigned, every reference herein to Lessor
shall be construed to mean, as to such Obligation, the transferee or assignee
thereof. This Guaranty shall be binding upon each of the undersigned's
executors, administrators, heirs, successors and assigns.
5. This Guaranty shall continue in force for so long as Lessee shall be
obligated to Lessor, and thereafter until Lessor shall have actually received
written notice of the termination hereof from the undersigned, it being
contemplated that Lessee may borrow, lease, repay and subsequently borrow money
from or lease property from, or become obligated to, Lessor from time to time,
and the undersigned, not having given notice of the termination hereof as herein
provided for, shall be deemed to have permitted this Guaranty to remain in full
force and effect for the purpose of inducing Lessor to make further leases or
loans to Lessee; provided, however, no notice of termination of this Guaranty
shall affect in any manner the rights of Lessor arising under this Guaranty with
respect to the following: (a) any Obligation incurred by Lessee in connection
with the Master Lease identified above with a total equipment cost of no more
than the amount of the Total Equipment Cost set forth above, whether such
obligation is in the form of a lease or a promissory note; or (b) any Obligation
incurred by Lessee prior to receipt by Lessor of written notice of termination
or any Obligation incurred after receipt of such written notice pursuant to a
written agreement entered into by Lessor prior to receipt of such notice. The
undersigned expressly waive notice of the incurring by Lessee of any Obligation
to Lessor. The undersigned also waive presentment, demand of payment, protest,
notice of dishonor or nonpayment of or nonperformance of any Obligation.
6. The undersigned hereby waive any claims or rights which they might now
have or hereafter acquire against Lessee or any other person primarily or
contingently liable on any Obligation of Lessee, which claims or rights arise
from the existence or performance of the undersigned's obligations under this
Guaranty or any other guaranty or under any instrument or agreement with respect
to any leased property or any property constituting collateral or security for
this Guaranty or any other guaranty, including, without limitation, any right of
subrogation, reimbursement, exoneration, contribution, indemnification, or any
right to participate in any claim or remedy of Lessor or any other creditor
which the undersigned now has or hereafter acquires, whether such claim or right
arises in equity, under contract or statute, at common law, or otherwise.
7. Lessor's rights hereunder shall be reinstated and revived, and this
Guaranty shall be fully enforceable, with respect to any amount at any time paid
on account of the Obligations which thereafter shall be required to be restored
or returned by Lessor upon the bankruptcy, insolvency or reorganization of the
Lessee, the undersigned, or any other person, or as a result of any other fact
or circumstance, all as though such amount had not been paid.
8. The undersigned jointly and severally agree to pay to Lessor all costs
and expenses, including reasonable attorneys' fees, incurred by Lessor in the
enforcement or attempted enforcement of this Guaranty, whether or not suit is
filed in connection therewith, or in the exercise by Lessor of any right,
privilege, power or remedy conferred by this Guaranty.
9. The undersigned represent and warrant that they have relied exclusively
on their own independent investigation of Lessee, the leased property and the
collateral for their decision to
Page 2
<PAGE>
guarantee Lessee's Obligations now existing or thereafter arising. The
undersigned agree that they have sufficient knowledge of the Lessee, the
leased property, and the collateral to make an informed decision about this
Guaranty, and that Lessor has no duty or obligatiOn to disclose any
information in its possession or control about Lessee, the leased property,
and the collateral to the undersigned. The undersigned warrant to Lessor that
they have adequate means to obtain from the Lessee on a continuing basis
information concerning the financial condition of the Lessee and that they
are not relying on Lessor to provide such information either now or in the
future.
10. As long as any indebtedness under any of the Obligations remains
unpaid or any credit is available to Lessee under any of the Obligations, the
undersigned agree to furnish to Lessor: (a) annual financial statements setting
forth the financial condition and results of operation of the undersigned
(financial statements shall include balance sheet, income statement, changes in
financial position and all notes thereto) within 120 days of the end of each
fiscal year of the undersigned; (b) quarterly financial statements setting forth
the financial condition and results of operation of the undersigned within 60
days of the end of each of the first three fiscal quarters of the undersigned;
and (c) such other financial information as Lessor may from time to time request
including, without limitation, financial reports filed by the undersigned with
federal or state regulatory agencies.
11. No postponement or delay on the part of Lessor in the enforcement of
any right hereunder shall constitute a waiver of such right. The failure of any
person or entity to sign this Guaranty shall not discharge the liability of any
of the undersigned.
12. GUARANTOR HEREBY EXPRESSLY WAIVES THE BENEFITS ESTABLISHED BY ARTICLES
2709, 2710 AND 2712 OF THE CIVIL CODE FOR THE STATE OF CHIHUAHUA. LIKEWISE,
GUARANTOR EXPRESSLY WAIVES THE BENEFITS ESTABLISHED IN ARTICLES 2738, 2739,
2740, 2742 AND 2743 OF THE CIVIL CODE FOR THE STATE OF CHIHUAHUA, AUTHORIZING
LESSOR WITHOUT NOTICE OR DEMAND AND WITHOUT LIABILITY TO THE TERMS OF PARAGRAPHS
1, 2, 3, 4, 5, 6, 7, AND 8 OF THIS GUARANTY.
13. Any and all amounts required to be paid by the undersigned hereunder
shall be paid in lawful money of the United States of America strictly in
accordance with the terms and provisions of the Obligations, without set-off or
counterclaim and without deduction for and free and clear of any and all taxes,
levies, imposts, duties, fees, charges, deductions, withholdings, restrictions
or conditions of any nature now or hereafter imposed, levied, collected,
withheld or assessed with respect to the Obligations or this Guaranty or the
proceeds to the holder hereof by the country identified below or any other
country or any political subdivision or taxing authority or other agency thereof
or therein other than the United States of America or any of its political
subdivisions ("Foreign Taxes"). If any Foreign Taxes are required to be deducted
or withheld from any amounts payable to Lessor under this Guaranty, such amount
payable shall be increased to yield to Lessor (after payment of all Foreign
Taxes) the amount specified to be paid hereunder, reduced by the amount of any
foreign tax credit actually received and used by Lessor under the income tax
laws of the United States resulting from the payment of such Foreign Taxes.
Whenever any Foreign Tax is paid by the undersigned on behalf of Lessor, as
promptly as possible thereafter the undersigned shall send Lessor an official
receipt showing payment thereof, together with such additional documentary
evidence as may be required from time to time by Lessor. The obligation of the
undersigned hereunder to make payments in lawful money of the United States of
America shall not be discharged or satisfied by any tender or recovery pursuant
to any judgment expressed in or converted into any currency other than United
States Dollars EXCEPT TO THE EXTENT that any such tender or recovery shall
comply with mandatory laws of the United Mexican States which provide for
Page 3
<PAGE>
payment of obligations in the currency of the United Mexican States; provided,
that any such payment in currency of the United Mexican States shall be made at
the then current legal exchange rate in the United Mexican States if mandatory
laws of the United Mexican States require Lessor to accept such legal exchange
rate or, if permitted by the laws of the United Mexican States, at the then
current market exchange rate that results in the effective receipt by Lessor of
the full amount of United States Dollars expressed to be payable hereunder.
Undersigned's Country of Organization: United Mexican States
14. For purposes of this Guaranty and the resolution of disputes
hereunder, the parties irrevocably submit and consent to, and waive any
objection to, the jurisdiction and venue of the state or federal courts located
in Dallas County, Texas it being acknowledged and agreed that the subject matter
of the Lease is located in Dallas County, Texas. Venue for the enforcement of
any obligations contained herein shall lie in Dallas County, Texas and the
parties hereby waive the right to be sued elsewhere. The undersigned further
agree that final judgement against it in any such legal action, suit or
proceeding shall be conclusive and may be enforced in any other jurisdiction,
within or outside the United States of America, by suit on the judgment, a
certified or exemplified copy of which shall be conclusive evidence of the fact
and amount of its liability.
15. This Guaranty contains the entire agreement of the parties and
supersedes all prior agreements and understandings, oral or written, with
respect to the subject matter hereof. This Guaranty is not intended to replace
or supersede any other guaranty which the undersigned have entered into or may
enter into in the future. The undersigned may enter into additional guaranties
in the future which may or may not refer to the Master Lease identified above
and such guaranties are not intended to replace or supersede this Guaranty
unless specifically provided in that additional guaranty. The interpretation,
construction and validity of this guaranty shall be governed by the laws of the
State of Ohio in the United States of America.
[The next page is the signature page.]
Page 4
<PAGE>
ALL PARTIES TO THIS GUARANTY, INCLUDING GUARANTOR AND LESSOR, WAIVE ALL
RIGHTS TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY
ANY PARTY AGAINST ANY OTHER PARTY ON ANY MATTER WHATSOEVER ARISING OUT OF, IN
CONNECTION WITH OR IN ANY WAY RELATED TO THIS GUARANTY.
Guarantor:
STB DE MEXICO, S.A. DE C.V.
(Name of Guarantor)
By: /s/ [NAME ILLEGIBLE]
--------------------------------------
Title: Chief Operating Officer
-----------------------------------
Witness: Craig Kennington
---------------------------------
ACKNOWLEDGED BY:
STB SYSTEMS, INC. BANC ONE LEASING CORPORATION
(Lessee) (Lessor)
By: /s/ [NAME ILLEGIBLE] By: /s/ [NAME ILLEGIBLE]
----------------------------- -----------------------------
Title: Chief Operating Officer Title: Funding Authority
-------------------------- --------------------------
Page 5
<PAGE>
Renew, Purchase, or Return Addendum
(Fair Market Value or Stated Price)
Dated October 30, 1996
Master Lease Agreement Date: October 30, 1996
Lease Schedule Number 1000054536
Lessee Name: STB Systems, Inc.
Reference is made to the Master Lease Agreement identified above ("Master
Lease") and to the Lease identified above ("Lease"), which are by and between
Banc One Leasing Corporation ("Lessor") and the lessee identified above
("Lessee"). As used herein: "Lease" shall mean the Lease and the Master Lease,
but only to the extent that the Master Lease relates to the Lease; and
"Equipment" shall mean the equipment covered by the Lease. This Addendum
modifies the terms and conditions of the Lease. Unless otherwise defined herein,
capitalized terms defined in the Lease shall have the same meaning when used
herein. Solely for purposes of the Lease, Lessor and Lessee agree as follows:
1. Solely for purposes of the Lease and the Equipment, Lessor and Lessee
agree that on the Expiration Date (as defined below), Lessee SHALL either
purchase all, but not less than all, of the Equipment as provided in paragraph 2
below OR renew the Lease Term of the Lease as set forth in paragraph 4 below OR
return all, but not less than all, of the Equipment pursuant to paragraph 3
below. "Expiration Date" shall mean the expiration date of the initial Lease
Term as set forth in the Lease.
2. If Lessee elects to purchase the Equipment by giving Lessor written
notice of Lessee's intent to purchase the Equipment at least 30 days, but no
more than 90 days, prior to the Expiration Date, then on the Expiration Date
Lessee shall purchase all of the Equipment and shall pay to Lessor the Purchase
Price (as defined below). The "Purchase Price" shall be an amount equal to (a)
all rent, all Taxes (including, without limitation, all Taxes due in connection
with Lessor's receipt of the Purchase Price, but excluding income Taxes on
Lessor's gain on such sale) and all other amounts then due and payable by Lessee
under the Lease PLUS (b) the GREATER of the Fair Market Value (as defined in
Master Lease section 23(d) for purposes of Lessee's purchase option) of the
Equipment or the Minimum Value set forth below. If after sending the above
notice to Lessor, but prior to the Expiration Date, Lessee informs Lessor that
Lessee will not pay the Purchase Price, then Lessee shall automatically be
deemed to have elected to renew the Lease Term of the Equipment under
paragraph 4 below.
MINIMUM VALUE: 54.8% of the Lessor's Cost of the Equipment.
3. If Lessee elects to return the Equipment by giving Lessor written
notice of Lessee's intent to return the Equipment at least 90 days, but no more
than 270 days, prior to the Expiration Date, then on the Expiration Date Lessee
shall return the Equipment in compliance with paragraph
Page 1 of 4
<PAGE>
(b) of Section 23 of the Master Lease and pay to Lessor a return and
remarketing fee not to exceed 34.5% of the Lessor's Cost of the Equipment;
provided, that Lessee acknowledges and agrees that the return and remarketing
fee shall be determined BY LESSOR in its sole and absolute discretion and
that Lessee shall have no right to contest or appeal Lessor's determination
of the return and remarketing fee. If after sending the above notice to
Lessor, but at least 60 days prior to the Expiration Date, Lessee informs
Lessor that Lessee will not pay the return and remarketing fee determined by
Lessor, then Lessee shall automatically be deemed to have elected to renew
the Lease Term of the Equipment under paragraph 4 below.
4. If Lessee elects (or is deemed to have elected) to renew the Lease
Term of the Equipment or if Lessee fails to give timely notice under paragraphs
2 or 3 above, then on the Expiration Date the Lease Term of the Lease shall be
renewed and extended for an additional term as set forth below ("First Renewal
Term"). All provisions of the Lease and the Master Lease to the extent that it
relates to the Lease shall remain in full force and effect and shall apply
during the First Renewal Term, except that during the First Renewal Term, Lessee
shall pay, in the same manner as provided in the Lease, rent as set forth below
in consecutive monthly payments commencing with the first day of the First
Renewal Term and on the same day of each month thereafter until the entire First
Renewal Term rent is paid in full.
FIRST RENEWAL TERM: 12 months
FIRST RENEWAL RENT: $83,892.88 per month (excluding Taxes)
Notwithstanding anything to the contrary in the Lease, Lessee acknowledges
and agrees that on the Expiration Date, Lessee shall NOT have the return or
purchase options set forth in section 23 of the Master Lease and Lessee shall
only have the options set forth above.
5. If the Lease Term of the Lease is renewed under paragraph 4 above and
if Lessee pays and performs all of its obligations under the Lease through to
the First Renewal Expiration Date (as defined below), then at the First Renewal
Expiration Date, Lessee SHALL either purchase all, but not less than all, of the
Equipment as provided in paragraph 6 below OR renew the Lease Term of the Lease
as set forth in paragraph 8 below OR return all, but not less than all, of the
Equipment pursuant to paragraph 7 below. "First Renewal Expiration Date" shall
mean the expiration date of the First Renewal Term.
6. If Lessee elects to purchase the Equipment by giving Lessor written
notice of Lessee's intent to purchase the Equipment at least 30 days, but no
more than 90 days, prior to the First Renewal Expiration Date, then on the First
Renewal Expiration Date Lessee shall purchase all of the Equipment and shall pay
to Lessor the First Renewal Purchase Price (as defined below). The "First
Renewal Purchase Price" shall be an amount equal to (a) all rent, all Taxes
(including, without limitation, all Taxes due in connection with Lessor's
receipt of the First Renewal Purchase Price, but excluding income Taxes on
Lessor's gain on such sale) and all other amounts then due and payable by Lessee
under the Lease PLUS (b) the GREATER of the Fair Market Value (as defined in
Master Lease section 23(d) for purposes of Lessee's purchase option) of the
Equipment or the Minimum Value set forth below. If after sending the above
notice to Lessor, but prior to the First Renewal Expiration Date, Lessee informs
Lessor that Lessee will not pay the First Renewal
Page 2 of 4
<PAGE>
Purchase Price, then Lessee shall automatically be deemed to have elected to
renew the Lease Term of the Equipment under paragraph 8 below.
MINIMUM VALUE: 34.3% of the Lessor's Cost of the Equipment.
7. If Lessee elects to return the Equipment by giving Lessor written
notice of Lessee's intent to return the Equipment at least 90 days, but no more
than 270 days, prior to the First Renewal Expiration Date, then on the First
Renewal Expiration Date Lessee shall return the Equipment in compliance with
paragraph (b) of Section 23 of the Master Lease and pay to Lessor a return and
remarketing fee not to exceed 19.3% of the Lessor's Cost of the Equipment;
provided, that Lessee acknowledges and agrees that the return and remarketing
fee shall be determined BY LESSOR in its sole and absolute discretion and that
Lessee shall have no right to contest or appeal Lessor's determination of the
return and remarketing fee. If after sending the above notice to Lessor, but at
least 60 days prior to the First Renewal Expiration Date, Lessee informs Lessor
that Lessee will not pay the return and remarketing fee determined by Lessor,
then Lessee shall automatically be deemed to have elected to renew the Lease
Term of the Equipment under paragraph 8 below.
8. If Lessee elects (or is deemed to have elected) to renew the Lease
Term of the Equipment or if Lessee fails to give timely notice under paragraphs
6 or 7 above, then on the First Renewal Expiration Date the Lease Term of the
Lease shall be renewed and extended for an additional term as set forth below
("Second Renewal Term"). All provisions of the Lease and the Master Lease to the
extent that it relates to the Lease shall remain in full force and effect and
shall apply during the Second Renewal Term, except that during the Second
Renewal Term, Lessee shall pay, in the same manner as provided in the Lease,
rent as set forth below in consecutive monthly payments commencing with the
first day of the Second Renewal Term and on the same day of each month
thereafter until the entire Second Renewal Term rent is paid in full.
SECOND RENEWAL TERM: 12 months
SECOND RENEWAL RENT: $83,892.88 per month (excluding Taxes)
Notwithstanding anything to the contrary in the Lease, Lessee acknowledges and
agrees that on the First Renewal Expiration Date, Lessee shall not have the
return or purchase options set forth in section 23 of the Master Lease and
Lessee shall only have the options set forth above.
9. If the Lease Term of the Lease is renewed under paragraph 8 above and
if Lessee pays and performs all of its obligations under the Lease through to
the expiration of the Second Renewal Term, then at the expiration of the Second
Renewal Term: (a) Lessee shall have the return or purchase options as to the
Equipment set forth in section 23 of the Master Lease so long as Lessee complies
with the notice and other requirements of said section 23; and (b) Lessor
acknowledges that a return and remarketing fee such as is described in
paragraphs 3 or 7 of this Addendum shall not be payable by Lessee if Lessee
returns the Equipment in accordance with the terms of the Lease.
10. With respect to any sale of Equipment to Lessee under this Addendum,
such sale shall be on an "as-is, where-is" basis with all faults and without
recourse to Lessor and without any
Page 3 of 4
<PAGE>
representation or warranty of any kind whatsoever by Lessor, express or
implied. Lessor expressly re-affirms its disclaimers as set forth in section
7 of the Master Lease.
11. This Addendum is hereby made a part of the Lease. Except as expressly
amended hereby, the Lease and the Master Lease remain in full force and effect.
Lessee:
STB SYSTEMS, INC.
By: /s/ [NAME ILLEGIBLE]
---------------------------------
Title: COO
------------------------------
Lessor:
BANC ONE LEASING CORPORATION
By: /s/ [NAME ILLEGIBLE]
---------------------------------
Title: Funding Authority
------------------------------
Page 4 of 4
<PAGE>
LEASE
[LOGO] LEASE SCHEDULE NO. 1000054536
------------------
LESSOR: BANC ONE LEASING CORPORATION
LESSEE: STB SYSTEMS, INC.
-------------------------------------------------------------------------
1. GENERAL. Reference is made to the Master Lease Agreement dated as of
October 30, 1996, as amended from time to time ("Master Lease"), between the
above Lessee and Lessor. This Lease Schedule is signed and delivered under
the Master Lease. Unless otherwise defined herein, capitalized terms defined
in the Master Lease will have the same meaning when used in this Schedule.
2. LEASE. Lessor leases to Lessee, and Lessee leases from Lessor, all of the
property ("Equipment") described below:
<TABLE>
QUANTITY DESCRIPTION (NEW UNLESS SPECIFIED AS USED) LESSOR'S COST
- -------- ------------------------------------------ -------------
<S> <C> <C> <C>
"ALL PROPERTY DESCRIBED IN THE ATTACHED Equipment Cost 4,235,997.50
SCHEDULE A-1 AND INVOICES INDENTIFIED THEREIN," Documentation Fee 375.00
Sales Tax 0.00
TOTAL $4,236,372.50
-------------
</TABLE>
3. LEASE TERM AND RENT. The Lease Term for the Equipment begins on the
earlier of the Acceptance Date or the Commencement Date and continues for the
number of months after the Commencement Date as stated in the Lease Term box
below. The Acceptance Date is the date that Lessor accepts this Schedule as
stated below Lessor's signature. The Commencement Date is the / / 1st / / 5th
day of the month in which the Acceptance Date occurs.
- ---------- ----------------------- ----------------------------------
LEASE TERM NUMBER OF RENT PAYMENTS RENT PAYMENTS (EXCLUDING TAXES)
1 ADVANCE PAYMENT AT $83,892.88
36 35 MONTHLY PAYMENTS AT $83,892.88
36 Months
- ---------- ----------------------- ----------------------------------
RENT DUE DATES: On the Commencement Date and on the same day of each Month
thereafter until paid in full.
Total Advance Payment of $83,892.88 to be applied as follows:
$ 0.00 Security Deposit $ 83,892.88 First and Last _____ Rent Payment(s)
- ------ -----------
$ 0.00 Set-up/Filing/ $ 0.00 Other (Specify)
Search Fees
Lessee shall pay to Lessor all amounts stated above on the due dates stated
above, except that the Total Advance Payment is due on the Commencement Date.
There shall be added to each rent payment all applicable Taxes as in effect
from time to time.
4. TITLE TO EQUIPMENT; QUIET POSSESSION. Lessee agrees that Lessor is the
lawful owner of the Equipment and that good and marketable title to the
Equipment shall remain with Lessor at all times. Lessee at its sole expense
will protect and defend Lessor's good and marketable title to the Equipment
against all claims and demands whatsoever except for Liens created directly
by Lessor. This Schedule is intended to be a lease transaction. Lessee shall
have no right, title or interest in any of the Equipment except the right to
peacefully and quietly hold and use the Equipment in accordance with the
terms of the Lease during the Lease Term unless and until a default shall
occur.
5. TAX REPRESENTATIONS. Lessee represents and agrees that: (a) Lessee does
not have, and the Lease will not create for Lessee, any equity or ownership
interest in the Equipment; (b) the Equipment is not now, and will not be,
"tax-exempt use property" as defined in Code Section 168; (c) the Equipment
has been placed in service on the Acceptance Date.
6. LESSEE'S ASSURANCES. Lessee irrevocably and unconditionally: (a)
reaffirms all of the terms and conditions of the Master Lease and agrees that
the Master Lease remains in full force and effect; (b) agrees that the
Equipment is and will be used at all times solely for commercial purposes,
and not for personal, family or household purposes; and (c) incorporates all
of the terms and conditions of the Master Lease as if fully set forth in this
Schedule.
7. PURCHASE ORDERS AND ACCEPTANCE OF EQUIPMENT. Lessee agrees that (i)
Lessor has not selected, manufactured, sold or supplied any of the Equipment,
(ii) Lessee has selected all of the Equipment and its suppliers, and (iii)
Lessee has received a copy of, and approved, the purchase orders or purchase
contracts for the Equipment. AS BETWEEN LESSEE AND LESSOR, LESSEE AGREES
THAT: (a) LESSEE HAS RECEIVED, INSPECTED AND APPROVED ALL OF THE EQUIPMENT;
(b) ALL EQUIPMENT IS IN GOOD WORKING ORDER AND COMPLIES WITH ALL PURCHASE
ORDERS OR CONTRACTS AND ALL APPLICABLE SPECIFICATIONS; (c) LESSEE IRREVOCABLY
ACCEPTS ALL EQUIPMENT FOR PURPOSES OF THE LEASE "AS-IS, WHERE-IS" WITH ALL
FAULTS; AND (d) LESSEE UNCONDITIONALLY WAIVES ANY RIGHT THAT IT MAY HAVE TO
REVOKE ITS ACCEPTANCE OF THE EQUIPMENT.
8. MISCELLANEOUS:
LESSEE HAS READ AND UNDERSTOOD ALL OF THE TERMS OF THIS SCHEDULE, LESSEE
AGREES THAT THERE ARE NO ORAL OR UNWRITTEN AGREEMENTS WITH LESSOR REGARDING
THE EQUIPMENT OR THIS SCHEDULE. THIS SCHEDULE IS EXPRESSLY SUBJECT TO THE
TERMS AND CONDITIONS ON THE REVERSE SIDE OF THIS SCHEDULE.
Accepted By: STB SYSTEMS, INC.
------------------------------------------
BANC ONE LEASING CORPORATION (Name of Lessee)
By: /s/ [NAME ILLEGIBLE] By: /s/ [NAME ILLEGIBLE]
------------------------------ --------------------------------------
Title: Funding Authority Title: COO
--------------------------- -----------------------------------
Acceptance Date: Witness Signature: /s/ CRAIG KENNINGTON
----------------- -----------------------
White: Lessor's Original Yellow: Duplicate Pink: Duplicate
<PAGE>
ADDITIONAL TERMS AND CONDITIONS
The following terms and conditions are expressly made a part of and
incorporated in the Schedule on the front side hereof.
A. CONDITIONS. No lease of Equipment under this Schedule shall be
binding on Lessor, and Lessor shall have no obligation to purchase the
Equipment covered hereby, unless: (a) Lessor has received evidence of all
required insurance; (b) in Lessor's sole judgement, there has been no
material adverse change in the financial condition or business of Lessee or
any guarantor; (c) Lessee has signed and delivered to Lessor this Schedule,
which must be satisfactory to Lessor, and Lessor has signed and accepted this
Schedule; (d) no change in the Code or any regulation thereunder, which in
Lessor's sole judgment would adversely affect the economics to Lessor of the
lease transaction, shall have occurred or shall appear to be imminent; (e)
Lessor has received, in form and substance satisfactory to Lessor, such other
documents and information as Lessor shall reasonably request; and (f) Lessee
has satisfied all other reasonable conditions established by Lessor.
B. OTHER DOCUMENTS: EXPENSES: Lessee agrees to sign and deliver to
Lessor any additional documents deemed desirable by Lessor to effect the
terms of the Master Lease or this Schedule including, without limitation,
Uniform Commercial Code financing statements which Lessor is authorized to
file with the appropriate filing officers. Lessee hereby irrevocably appoints
Lessor as Lessee's attorney-in-fact with full power and authority in the
place of Lessee and in the name of Lessee to prepare, sign, amend, file or
record any Uniform Commercial Code financing statements or other documents
deemed desirable by Lessor to perfect, establish or give notice of Lessor's
interests in the Equipment or in any collateral as to which Lessee has
granted Lessor a security interest. The signing or filing of Uniform
Commercial Code financing statements and other recordings are undertaken as a
precaution only since the parties intend this Schedule to be a lease
transaction. Lessee shall pay upon Lessor's written request any actual
out-of-pocket costs and expenses paid or incurred by Lessor in connection
with the above terms of this section or the funding and closing of this
Schedule.
C. SECURITY DEPOSIT: As collateral for Lessee's obligations under the
Lease, Lessee hereby grants to Lessor a security interest in the sums
specified in this Schedule as a "Security Deposit". At its option, Lessor may
apply all or any part of said Security Deposit to cure any default of Lessee
under the Lease. If upon final termination of this Schedule, Lessee has
fulfilled all of the terms and conditions hereof, then Lessor shall pay to
Lessee upon Lessee's written request any remaining balance of the Security
Deposit for this Schedule, without interest.
D. REPRESENTATIONS AND WARRANTIES: Lessee represents and warrants
that: (a) Lessee is a corporation, partnership or proprietorship duly
organized, validly existing and in good standing under the laws of the state
of its organization and is qualified to do business and is in good standing
under the laws of each other state in which the Equipment is or will be
located; (b) Lessee has full power, authority and legal right to sign,
deliver and perform the Master Lease, this Schedule and all related documents
and such actions have been duly authorized by all necessary corporate,
partnership or proprietorship action; and (c) the Master Lease, this Schedule
and each related document has been duly signed and delivered by Lessee and
each such document constitutes a legal, valid and binding obligation of
Lessee enforceable in accordance with its terms.
<PAGE>
EXHIBIT 10.49
SCHEDULE 1
SELLING SHAREHOLDER INDEMNIFICATION AGREEMENT
This Selling Shareholder Indemnification Agreement (this "Agreement")
dated as of November ___, 1996 is between STB SYSTEMS, INC., a Texas
corporation (the "Company"), and each of William E. Ogle, William D.
Balthaser, Jr. and Mark S. Sims (collectively, the "Selling Shareholders").
WHEREAS, the Company expects to undertake a public offering (the
"Offering") of certain shares of its Common Stock, of which approximately
1,500,000 shares will comprise the portion to be offered by the Company and
approximately 300,000 shares will comprise the portion to be offered by the
Selling Shareholders (it being understood that the Selling Shareholders will
further grant an option to sell approximately 270,000 additional shares to
cover the underwriters' overallotment option);
WHEREAS, pursuant to the proposed terms of the Underwriting Agreement (the
"Underwriting Agreement") by and among the Company, the underwriters
participating in the Offering (the "Underwriters") and the Selling
Shareholders, the Underwriters are requiring that the Selling Shareholders
indemnify them against certain losses, claims, damages or liabilities arising
out of or based upon the contents of the Registration Statement relating to
the Offering or certain representations of the Selling Shareholders included
in the Underwriting Agreement;
WHEREAS, the Selling Shareholders have indicated to the Company that a
precondition to their participation in the Offering is the Company's
indemnification of the Selling Shareholders for their indemnification
obligations owed to the Underwriters under the Underwriting Agreement;
WHEREAS, the Board of Directors has given extensive consideration to the
contents of this Agreement and has determined that it is in the best
interests of the Company and its shareholders as a whole that the Company
indemnify the Selling Shareholders as requested, because the Board of
Directors believes that (i) the sale of shares by each of the Selling
Shareholders through a registered public offering will provide for a more
orderly sale of such stock to the public than would occur if such
shareholders were to sell such shares under Rule 144 (including consideration
that the market price for the Company's Common Stock is more likely to be
adversely affected by sales of stock under Rule 144 than through a registered
public offering), (ii) the sale of the shares by the Selling Shareholders
would increase the amount of Common Stock publicly held by persons not
affiliated with the Company, (iii) the Underwriters will be able to place the
shares to be sold by the Selling Shareholders with purchasers, such as
institutional investors, that the Company desires and (iv) the Selling
Shareholders would agree to execute a "lock-up agreement" with the
Underwriters, which would enhance the Company's ability to complete
negotiations with the Underwriters, as well as the Offering itself, and
facilitate a calm aftermarket in the Company's stock.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
set forth in this Agreement, the parties agree as follows:
<PAGE>
1. INDEMNITY. The Company agrees to indemnify each Selling Shareholder
to the extent that the Underwriters (including each person (including each
partner or officer thereof) who controls any Underwriter within the meaning
of Section 15 of the Securities Act of 1933, as amended) call upon any such
Selling Shareholder in his individual capacity to indemnify the Underwriters
under Section 7 of the Underwriting Agreement. The Company shall pay to any
Selling Shareholder any amount for indemnification in accordance with the
terms of Section 7 of the Underwriting Agreement at the same time as such
Selling Shareholder is obligated to pay any such amount to any Underwriter.
The right to indemnification as provided by this Agreement shall be
enforceable by any Selling Shareholder in any court of competent jurisdiction.
2. SUBROGATION. If the Company makes any payment under this Agreement,
the Company shall be subrogated to the extent of such payment to all of the
right of recovery of the Selling Shareholder to whom payment is made, who
shall execute all papers required and shall do everything that may be
necessary to secure such rights.
3. SEVERABILITY. Each of the provisions of this Agreement is a separate
and distinct agreement and independent of the others, so that if any such
provision shall be held to be invalid or unenforceable for any reason such
invalidity or unenforceability shall not affect the validity or
enforceability of the other provisions hereof.
4. NOTICE. Any notice, consent or other communication to be given under
this Agreement by any party to any other party shall be in writing and shall
be (a) personally delivered, (b) mailed by registered or certified mail,
postage prepaid with return receipt requested, (c) delivered by overnight
express delivery service or same-day local courier service or (d) delivered
by telex or facsimile transmission to the address set forth beneath the
signature of the parties below or at such other address as may be designated
by the parties from time to time in accordance with this Section. Notices
delivered personally, by overnight express delivery service or by local
courier service shall be deemed given as of actual receipt. Mailed notices
shall be deemed given three business days after mailing. Notices delivered by
telex or facsimile transmission shall be deemed given upon receipt by the
sender of the answerback (in the case of a telex) or transmission
confirmation (in the case of a facsimile transmission).
5. GOVERNING LAW. This Agreement shall be interpreted and enforced in
accordance with the laws of the State of Texas.
6. BINDING EFFECT; SUCCESSORS. This Agreement shall be binding upon
each Selling Shareholder and upon the Company, its successors and assigns and
shall inure to the benefit of each Selling Shareholder, its heirs, executors,
administrators, personal representatives and assigns and to the benefit of
the Company, its successors and assigns.
7. AMENDMENT. No amendment, modification, termination or cancellation
of this Agreement shall be effective unless in writing signed by both parties
hereto.
-2-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the date first above written.
STB SYSTEMS, INC.
By:
--------------------------------
Randall D. Eisenbach, Executive
Vice President and Chief Operating
Officer
1651 North Glenville Drive
Richardson, Texas 75081
Facsimile: (972) 437-9631
------------------------------------
William E. Ogle
c/o STB Systems, Inc.
1651 North Glenville Drive
Richardson, Texas 75081
Facsimile: (972) 437-9631
------------------------------------
William D. Balthaser, Jr.
c/o STB Systems, Inc.
1651 North Glenville Drive
Richardson, Texas 75081
Facsimile: (972) 437-9631
------------------------------------
Mark S. Sims
c/o STB Systems, Inc.
1651 North Glenville Drive
Richardson, Texas 75081
Facsimile: (972) 437-9631
-3-
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EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated December 11, 1995
relating to the financial statements of STB Systems, Inc., which appears in such
Prospectus. We also consent to the application of such report to the Financial
Statement Schedules for the three years ended October 31, 1995 listed under
items 16(b) of this Registration Statement when such schedules are read in
conjunction with the financial statements referred to in our report. The audits
referred to in such report also included these schedules. We also consent to the
references to us under the headings "Experts" and "Selected Consolidated
Financial Data" in such Prospectus. However, it should be noted that Price
Waterhouse LLP has not prepared or certified such "Selected Consolidated
Financial Data."
PRICE WATERHOUSE LLP
Dallas, Texas
November 11, 1996
