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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-25540
STB SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
TEXAS 75-1855896
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1651 North Glenville Drive, Richardson, Texas 75081
(Address of principal executive offices)
(214)234-8750
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
---- ----
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Number of Shares Outstanding as of
Title of each class: June 14, 1996:
Common Stock, $.01 par value 4,504,251
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STB SYSTEMS, INC.
INDEX
PAGE
PART I FINANCIAL INFORMATION NUMBER
Item 1 Consolidated Financial Statements (unaudited):
Consolidated Balance Sheet at April 30, 1996
and October 31, 1995 2
Consolidated Statement of Operations for the
quarter ended April 30, 1996 and 1995 3
Consolidated Statement of Operations for the six
months ended April 30, 1996 and 1995 4
Consolidated Statement of Cash Flows for the six
months ended April 30, 1996 and 1995 5
Notes to Consolidated Financial Statements 6-7
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 7-10
PART II OTHER INFORMATION
Item 1 Legal Proceedings 11
Items 2 and 3 have been omitted since the registrant has no
reportable events in relation to these items.
Item 4 Submission of Matters to a Vote of Security Holders 11
Item 5 Other Information - Business Risks 11-12
Exhibit Index 13
Signatures 14
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STB SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(dollars in thousands)
APRIL 30, OCTOBER 31,
1996 1995
----------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 2,311 $ 4,162
Accounts receivable - trade, net of allowance for
doubtful accounts of $535 and $449 21,528 20,634
Inventories, net 21,597 27,875
Other current assets 235 869
---------- ---------
Total current assets 45,671 53,540
Property and equipment, net 3,744 3,397
Other assets 1,152 602
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Total assets $ 50,567 $ 57,539
---------- ---------
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term debt $ 8,462 $ 11,411
Accounts payable - trade 11,992 17,731
Accrued wages, commissions and bonuses 864 559
Notes payable to related parties - 700
Other accrued liabilities 743 791
Current portion of long-term liabilities 731 727
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Total current liabilities 22,792 31,919
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Long-term liabilities:
Long-term notes payable 1,250 1,500
Obligations under capital leases and other
long-term liabilities 597 758
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Total long-term liabilities 1,847 2,258
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Shareholders' equity:
Preferred stock, 2,000,000 shares authorized,
none issued or outstanding - -
Common stock, $.01 par value, 20,000,000 shares
authorized, 4,500,000 shares issued and outstanding 45 45
Additional paid-in capital 22,160 22,160
Retained earnings 3,968 1,402
---------- ---------
26,173 23,607
Treasury stock, 35 shares, at cost (245) (245)
---------- ---------
Total shareholders' equity 25,928 23,362
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Total liabilities and shareholders' equity $ 50,567 $ 57,539
---------- ---------
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The accompanying notes are an integral part of these financial statements
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STB SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(dollars in thousands except per share amounts)
THREE MONTHS ENDED
APRIL 30,
1996 1995
-------------------------
Net sales $ 44,592 $ 33,370
Cost of sales 36,189 28,658
-------------------------
Gross profit 8,403 4,712
Operating expenses:
Research and development 1,018 735
Sales and marketing 2,587 1,761
General and administrative 2,470 1,449
-------------------------
Total Operating Expenses 6,075 3,945
-------------------------
Income from operations 2,328 767
Interest expense, net 278 144
-------------------------
Income before income taxes 2,050 623
Provision for income taxes 699 127
-------------------------
Net income $ 1,351 $ 496
Pro forma data:
Pro forma adjustment to general
and administrative expenses - -
Pro forma adjustment to reflect interest
on Founding Shareholder Notes (11)
Pro forma adjustment to reflect
federal income taxes (75)
-------------------------
Net income (Pro forma for 1995) $ 1,351 $ 410
-------------------------
-------------------------
Net income per share (Pro forma for 1995) $ 0.30 $ 0.10
-------------------------
-------------------------
Weighted average shares outstanding
used in the net income per share
calculation (Pro forma for 1995) 4,500,114 4,104,475
Supplemental pro forma net income per share $ 0.10
-----------
-----------
Weighted average shares used in the
supplemental pro forma net income per
share calculation 4,223,669
The accompanying notes are an integral part of these financial statements.
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STB SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(dollars in thousands except per share amounts)
SIX MONTHS ENDED
APRIL 30,
1996 1995
-------------------------
Net sales $ 89,497 $ 64,108
Cost of sales 73,832 54,301
-------------------------
Gross profit 15,665 9,807
Operating expenses:
Research and development 1,792 1,338
Sales and marketing 5,000 3,308
General and administrative 4,378 3,094
-------------------------
Total Operating Expenses 11,170 7,740
-------------------------
Income from operations 4,495 2,067
Interest expense, net 599 386
-------------------------
Income before income taxes 3,896 1,681
Provision for income taxes 1,330 127
-------------------------
Net income $ 2,566 $ 1,554
Pro forma data:
Pro forma adjustment to general
and administrative expenses 220
Pro forma adjustment to reflect interest
on Founding Shareholder Notes (52)
Pro forma adjustment to reflect
federal income taxes (483)
-------------------------
Net income (Pro forma for 1995) $ 2,566 $ 1,239
-------------------------
-------------------------
Net income per share (Pro forma for 1995) $ 0.57 $ 0.37
-------------------------
-------------------------
Weighted average shares outstanding
used in the net income per share
calculation (Pro forma for 1995) 4,500,045 3,379,172
Supplemental pro forma net income per share $ 0.34
-----------
-----------
Weighted average shares used in the
supplemental pro forma net income per
share calculation 3,694,624
The accompanying notes are an integral part of these financial statements.
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STB SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(dollars in thousands)
SIX MONTHS ENDED
APRIL 30,
1996 1995
-------------------
Cash flows from operating activities:
Net income $ 2,566 $ 1,554
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 506 334
Deferred tax asset - 455
Translation gain(loss) (1) 9
Changes in assets and liabilities:
Accounts receivable - trade (895) (2,636)
Inventories 6,278 (6,850)
Other current assets 634 (97)
Other assets (550) (443)
Accounts payable - trade (5,738) 2,311
Accrued wages, commission, and bonuses 305 (164)
Other accrued liabilities (48) 374
-------------------
Net cash used in operating activities 3,057 (5,153)
-------------------
Cash flows from investing activities -
Purchases of property and equipment (852) (1,301)
-------------------
Cash flows from financing activities:
Borrowings (payments) on short-term debt (3,649) (448)
Payments against long-term debt (407) (7)
Issuance of common stock, net of issue costs 19,436
Payment of dividends (3,085)
-------------------
Net cash provided by financing activities (4,056) 15,896
-------------------
Net increase (decrease) in cash and cash equivalents (1,851) 9,442
Cash and cash equivalents at beginning of period 4,162 277
-------------------
Cash and cash equivalents at end of period $ 2,311 $ 9,719
-------------------
-------------------
The accompanying notes are an integral part of these financial statements.
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STB SYSTEMS, INC.
Notes To Consolidated Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
STB Systems, Inc. develops, manufactures and sells video
graphics adapters used in IBM-compatible personal computers
("PCs"). STB Assembly, Inc. is a wholly-owned subsidiary and
provides manufacturing services to STB Systems, Inc.
The accompanying financial statements include the
consolidated accounts of STB Systems, Inc. and STB Assembly, Inc.
(collectively referred to as the "Company"). STB Assembly, Inc.
has two majority owned subsidiaries, STB de Mexico S.A. de C.V.
("STB de Mexico") and Maquilados Continentales de Ciudad Juarez,
S.A. de C.V. ("MCC"). STB de Mexico is a Mexican corporation
operated as a maquiladora and performs assembly services for STB
Systems, Inc. MCC entered into an agreement in January 1990 to
provide subcontract manufacturing services for STB Systems, Inc.
As of December 1992, MCC became an inactive entity. All
significant intercompany accounts and transactions have been
eliminated in consolidation. Minority interests in the
subsidiaries are insignificant for financial reporting purposes.
The financial information presented herein should be read in
conjunction with the Company's annual consolidated financial
statements for the year ended October 31, 1995. The foregoing
unaudited interim consolidated financial statements reflect all
adjustments (all of which are of a normal recurring nature) which
are, in the opinion of mangement, necessary for a fair
presentation of the results of the interim periods. The results
for the interim periods are not necessarily indicative of the
results to be expected for the year.
2. COMPLETION OF REORGANIZATION AND INITIAL PUBLIC OFFERING
STB Systems, Inc. entered into a Share Exchange Agreement on
December 16, 1994 with the shareholders of STB Assembly, Inc.
providing for the issuance of STB Systems, Inc. common stock in
exchange for the outstanding common stock of STB Assembly, Inc. on
a 1-for-8,333 basis immediately prior to consummation of an
initial public offering (the "Offering"). For purposes of these
consolidated financial statements, these shares are treated as
outstanding for all periods presented. As STB Systems, Inc. and
STB Assembly, Inc. were under common control, no change in basis
resulted for financial reporting purposes as a result of the Share
Exchange Agreement.
On February 21, 1995, STB Systems, Inc. terminated its S
Corporation status, and on February 22, 1995, the Company
completed its initial public offering of 2.0 million shares of
Common Stock. Net proceeds from the Offering totaled $21.7
million, net of underwriters' discounts and other offering
expenses totaling $2.3 million.
3. PRO FORMA NET INCOME AND NET INCOME PER SHARE
Prior to the Offering, STB Systems, Inc. had been treated for
federal and certain state income tax purposes as an S Corporation
under Subchapter S of the Internal Revenue Code of 1986, as amended. As
a result, the income of STB Systems, Inc. for federal and certain state
income tax purposes was included in the income tax returns of the
individual shareholders ("Founding Shareholders"). Accordingly, prior to
February 21, 1995, no recognition of federal and certain state income
taxes has been given in the accompanying financial statements. Prior to
the conversion to C Corporation status, in connection with the
Offering, STB Systems, Inc. paid dividends to its shareholders in an
amount equal to the taxable earnings of STB Systems, Inc. multiplied by
the current personal income tax rate.
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3. PRO FORMA NET INCOME AND NET INCOME PER SHARE (CONTINUED)
Pro forma net income and net income per share have been
determined assuming that (1) the Company had adopted a revised
profit sharing plan effective November 1, 1994, (2) the Founding
Shareholder Notes in the aggregate amount of $2,040,000 had been
outstanding since November 1, 1994 bearing interest at 7.75% per
annum, and (3) the Company had been taxed as a C Corporation for
federal and certain state income tax purposes since November 1,
1994.
Pro forma net income per share has been computed using the weighted
average number of common shares outstanding after giving retroactive
effect to the stock split of 8,333 shares for one effective December 20,
1994 referred to in note 2. above. The common equivalent shares are also
increased to reflect the number of shares which would have been necessary
to fund the $2,040,000 distribution paid to the Founding Shareholders
from the proceeds of the Offering of the Company's common stock.
Supplemental pro forma net income per share is based on the
weighted average number of shares of common stock used in the
calculation of pro forma net income per share, plus the common
equivalent shares which were necessary to repay the $5,500,000 of bank
indebtedness outstanding under the Company's Revolving Credit
Facility from the proceeds of the Offering.
4. INVENTORIES
Inventories at April 30, 1996 and October 31, 1995 consist of the
following:
(in thousands)
APRIL 30, 1996 OCTOBER 31, 1995
-------------- -----------------
Raw Materials $ 10,458 $ 15,599
Work-in-process 9,134 8,156
Finished goods 2,005 4,120
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Totals $ 21,597 $ 27,875
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5. SHORT TERM DEBT
On January 5, 1996, the Company increased its existing revolving
credit facility ("Revolving Credit Facility") from $13,000,000 to
$23,000,000. At April 30, 1996, $8,462,000 was outstanding under this
credit facility. All indebtedness under the Revolving Credit Facility
matures on November 1, 1999.
Availability under the Revolving Credit Facility is subject to
limitations determined by the Company's borrowing base, which is
calculated based upon eligible accounts receivable and inventory as
defined in the Revolving Credit Facility agreement.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company develops, manufactures and sells computer subsystems
("graphics adapters") used primarily in IBM-compatible desktop personal
computers to process and enhance graphics and video images. The Company
derives substantially all of its revenues from the sale of graphics
adapters. The Company recognizes revenue upon shipment of its products.
The Company sells two broad categories of graphics adapters
products, which the Company refers to as "video graphics adapter
products" and "multi-monitor adapter products". Video graphics adapter
products are sold both to original equipment manufacturers ("OEMs") as
subsystems for their PC products and to the retail market. Sales of
video graphics adapter products to OEMs are characterized by higher unit
volumes and lower gross profit margins. Sales of video graphics adapter
products to the retail market are characterized by
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modest volumes and higher gross profit margins than the sale of similar
products to OEMs. Although multi-monitor adapter product volumes are
relatively low, the Company realizes higher gross profit margins from
the sale of multi-monitor adapter products than from the sale of video
graphic adapter products. The Company has also begun offering a new
line of multimedia products, but is not yet in a position to forecast
the effect these products will have upon the Company's results of
operations. The Company's total gross profit margin will likely
fluctuate from period to period as a result of changes in the Company's
product mix and sales channels.
The Company focuses on the sale of its products to OEMs, multi-monitor and
specialized technology markets, and the retail market. Primarily as a result of
significant increases in OEM sales volumes, the Company's net sales and income
from operations have increased rapidly in recent periods. Sales of video
graphics adapters to OEMs represented 78% and 75% of total net sales in fiscal
years 1995 and 1994 respectively. Video graphics adapter sales to retail
customers represented 12% and 11% of total net sales in fiscal years 1995 and
1994 respectively, and multi-monitor and specialized technology market sales
represented 7% and 12% of total net sales, respectively, in these periods. The
balance of total net sales in these periods was derived primarily from the
provision of third party assembly services, which accounted for approximately 3%
of total net sales in fiscal year 1995.
STB Systems, Inc. operated as an S Corporation from November 1, 1986 until
February 21, 1995, at which time the Company became fully subject to federal and
state income taxes.
RESULTS OF OPERATIONS
The following table sets forth certain items from the Company's combined
statements of operations as a percentage of net sales from continuing
operations:
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
1996 1995 1996 1995
----------------- -----------------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 81.2% 85.9% 82.5% 84.7%
--------------- ------------------
Gross profit 18.8% 14.1% 17.5% 15.3%
Operating expenses:
Research and development 2.3% 2.2% 2.0% 2.1%
Sales and marketing 5.8% 5.3% 5.6% 5.2%
General and administrative 5.5% 4.3% 4.9% 4.8%
--------------- ------------------
Total Operating Expenses 13.6% 11.8% 12.5% 12.1%
Income from operations 5.2% 2.3% 5.0% 3.2%
Interest expense, net 0.6% 0.4% 0.7% 0.6%
--------------- ------------------
Income before income taxes 4.6% 1.9% 4.3% 2.6%
Provision for income taxes 1.6% 0.6% 1.4% 0.2%
--------------- ------------------
Net income 3.0% 1.3% 2.9% 2.4%
--------------- ------------------
--------------- ------------------
Pro forma adjustment to general
and administrative expenses 0.0% 0.0% 0.0% 0.3%
Pro forma adjustment to reflect
interest on Founding Shareholder
Notes 0.0% 0.0% 0.0% -0.1%
Pro forma adjustment to reflect
federal income taxes 0.0% -0.2% 0.0% -0.8%
--------------- ------------------
Pro forma net income 3.0% 1.1% 2.9% 1.8%
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QUARTER ENDED APRIL 30, 1996 COMPARED TO QUARTER ENDED APRIL 30, 1995.
Net Sales. Net sales increased by $11.2 million, or 33.5%, from $33.4
million in the second quarter of fiscal 1995 to $44.6 million in the second
quarter of fiscal 1996. This increase resulted primarily from continuing growth
in sales of the Company's products to original equipment manufacturers ("OEMs").
For the second quarter of fiscal 1996, OEM channel sales of $35.6 million
represented approximately 80% of total net sales, compared to OEM channel sales
of $25.9 million representing approximately 78% of total net sales, for the
second quarter of fiscal 1995. Domestic shipments to OEMs remained strong
during the second quarter of fiscal 1996, offsetting continued soft demand in
the international arena, primarily Europe, during this period. The Company's
sales into the retail channel increased by $1.2 million, or 35% from $3.3
million in the second quarter of fiscal 1995 to $4.5 million in the second
quarter of fiscal 1996. Sales of multi-monitor products increased by $1.2
million, or 64% from $1.9 million in the second quarter of fiscal 1995 to $3.1
million in the second quarter of fiscal 1996.
Gross Profit. Gross profit increased by $3.7 million, or 78%, from $4.7
million in the second quarter of fiscal 1995 to $8.4 million in the second
quarter of fiscal 1996. During the period, gross profit as a percentage of net
sales increased from 14.1% to 18.8%. The increase in the amount of gross profit
resulted primarily from significant increases in sales volumes of the Company's
products. The increase in gross profit as a percentage of net sales resulted
primarily from increasing margins on sales of video graphic adapters to OEMs due
to improved DRAM prices and availability and the economies of scale resulting
from higher production volumes. In addition, increased revenues from the retail
and multi-monitor channels contributed to the higher margin percentage.
However, as graphics technology moves toward more exotic types of memory such
as MDRAM, WRAM, High Speed EDO VRAM, SGRAM, and Synchronous DRAM, no
assurances can be given that these conditions will continue. Management
believes that fluctuations in memory pricing and availability could again
result in industry shortages and price pressures on the Company's products.
Research and Development Expenses. Research and development expenses
increased by $283,000, or 38.5%, from $735,000 in the second quarter of fiscal
1995 to $1.0 million in the second quarter of fiscal 1996. This increase
resulted from increased staffing and equipment requirements associated with the
continuing enhancement and support of the Company's existing products as well as
the development of new products. During the periods, expenses as a percentage
of net sales increased slightly from 2.2% to 2.3%.
Sales and Marketing Expenses. Sales and marketing expenses increased by
$826,000, or 47.0%, from $1.8 million in the second quarter of fiscal 1995 to
$2.6 million in the second quarter of fiscal 1996. During the periods, the
expenses as a percentage of net sales increased from 5.3% to 5.8%. This
increase resulted primarily from additions to the Company's sales staff,
increased commissions paid as a result of higher sales and increased advertising
expenses and trade shows.
General and Administrative Expenses. General and administrative
expenses increased by $1.0 million, or 70%, from $1.5 million in the second
quarter of fiscal 1995 to $2.5 million in the second quarter of fiscal 1996.
During the periods, these expenses as a percentage of net sales increased
from 4.3% to 5.5%. These increases were due primarily to expenses associated
with the Company's growth, including increased personnel expenses and other
operating expenses including insurance premiums, legal expenses, and
facility costs.
SIX MONTHS ENDED APRIL 30, 1996 COMPARED TO SIX MONTHS ENDED APRIL 30, 1995.
Net Sales. Net sales increased by $25.4 million, or 39.6%, from $64.1
million in the first six months of fiscal 1995 to $89.5 million in the first
six months of fiscal 1996. This increase resulted primarily from continuing
growth in sales of the Company's products to original equipment manufacturers
("OEMs").
During the first six months of fiscal 1996, OEM channel sales of $73.3
million represented approximately 82% of total net sales, compared to OEM
channel sales of $52.7 million representing approximately 82% of total net
sales, for the first six months of fiscal 1995. Domestic shipments to OEMs
remained strong during the first six months of fiscal 1996, offsetting
continued soft demand in the international arena, primarily Europe, during
this period. The Company's sales into the retail channel increased by $1.8
million, or 36% from $5.1 million in the first six months of fiscal 1995 to
$6.9 million in the first six months of fiscal 1996. Sales of multi-monitor
products increased by $1.8 million, or 48% from $3.8 million in the first six
months of fiscal 1995 to $5.6 million in the first six months of fiscal 1996.
Gross Profit. Gross profit increased by $5.9 million, or 59.7%, from
$9.8 million in the first six months of fiscal 1995 to $15.7 million in the
first six months of fiscal 1996. During the periods, gross profit as a
percentage of net sales increased from 15.3% to 17.5%. The increase in the
amount of gross profit resulted primarily from significant increases in
sales volumes of the Company's products. The increase in gross profit as a
percentage of net sales resulted primarily from increasing margins on sales
of video graphic adapters to OEMs due to improved DRAM prices and
availability and the economies of scale resulting from higher production
volumes. In addition, increased revenues from the retail and multi-monitor
channels contributed to the higher margin percentage. However, as graphics
technology moves toward more exotic types of memory such as MDRAM, WRAM, High
Speed EDO VRAM, SGRAM, and Synchronous DRAM, no assurances can be given that
these conditions will continue. Management believes that fluctuations in
memory pricing and availability could again result in industry shortages and
price pressures on the Company's products.
Research and Development Expenses. Research and development expenses
increased by $454,000 or 33.9%, from $1.3 million in the first six months of
fiscal 1995 to $1.8 million in the first six months of fiscal 1996. This
increase resulted from increased staffing and equipment requirements
associated with the continuing enhancement and support of the Company's
products and the development of new products. During the periods, expenses
as a percentage of net sales declined slightly from 2.1% to 2.0%.
Sales and Marketing Expenses. Sales and marketing expenses increased by
$1.7 million, or 51.1%, from $3.3 million in the first six months of fiscal
1995 to $5.0 million in the first six months of fiscal 1996. This increase
resulted primarily from additions to the Company's sales staff, increased
commissions paid as a result of higher sales and increased advertising
expenses and trade shows. During the periods, the expenses as a percentage of
net sales increased form 5.2% to 5.6%.
General and Administrative Expenses. General and administrative expenses
increased by $1.3 million, or 41.5%, from $3.1 million in the first six
months of fiscal 1995 to $4.4 million in the first six months of fiscal 1996.
During these periods, expenses as a percentage of net sales increased from
4.8% to 4.9%. General and administrative expenses, exclusive of profit
sharing expenses, increased by $1.7 million, or 64.2%, from $2.7 million in
the first six months of fiscal 1995 to $4.4 million in the first six months
of fiscal 1996, due primarily to expenses associated with the Company's
growth, including increased personnel expenses and other expenses including
insurance premiums, legal expenses, and facility costs. The Company's profit
sharing allocation to employees,which amounted to 25% of income before taxes
(as calculated prior to profit sharing expenses) in the first quarter of
fiscal 1995, was reduced to 10% of income before taxes for the second quarter
of fiscal 1995. As a result of this reduction, which is offset by higher
levels of profitability, profit sharing expense decreased by $13,000 or 3%,
from $435,000 in the first six months of fiscal 1995 to $422,000 in the first
six months of fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital and liquidity needs are its component
purchase and inventory requirements, as well as the need to finance accounts
receivable and, to a lesser degree, manufacturing equipment expenditures. The
Company has financed these requirements, and its operations generally, through a
combination of cash generated from operations, trade credit from vendors, bank
borrowings and the Company's Offering. As a result of the Company's rapid
growth in recent years, its capital resource requirements have increased
substantially. The Company has addressed these increasing requirements through
each of its sources of financing.
Cash generated from continuing operations was $3.1 million in the first
six months of fiscal 1996 resulting primarily from a reduction in inventories,
offset by a reduction in accounts payable, compared to $5.2 million used in
the first six months of fiscal 1995. Working capital was $22.9 million at
April 30, 1996, compared to $21.6 million at October 31, 1995, and cash was
$2.3 million at April 30, 1996, compared to $4.2 million at October 31, 1995.
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Amounts invested in equipment totaled $852,000 in the first six months of
fiscal 1996, compared with net purchases of equipment of $1.3 million in the
first six months of fiscal 1995. The amounts invested in equipment are
primarily for manufacturing equipment additions and upgrades of existing
equipment to support the demand for the Company's products from existing as well
as new customers. The Company expects that additional capital expenditures for
similar types of equipment will be required to support continued growth and
demand for the Company's products.
The Company currently has lines of credit of up to $25 million under a
secured revolving credit facility (the "Revolving Credit Facility") which
includes a $2 million term loan (the "Mezzanine Facility"). The Company
recently increased the size of its Revolving Credit Facility by $10 million
to its current level. At April 30, 1996, the Company had outstanding $8.4
million and $1.7 million under the Revolving Credit Facility and the Mezzanine
Facility, respectively. In connection with the Company's Offering, the
Company's bank reduced the interest rate of the Revolving Credit Facility
from prime plus 1.75% to prime plus 0.75% and has agreed that the minimum
monthly interest requirement of $25,000 called for by the Revolving Credit
Facility can be satisfied by interest accrued pursuant to both the Revolving
Credit Facility and the Mezzanine Facility. In return, the Company agreed to
more restrictive standards in its financial covenants and to pay the bank a
$100,000 fee for restructuring the Company's bank facilities. The interest
rate on the Mezzanine Facility was reduced from prime plus 3% to prime plus
0.75% in the first quarter of fiscal 1996.
On February 22, 1995, the Company completed an initial public offering of
2.0 million shares of Common Stock. Proceeds from the Offering totaled $21.7
million, net of underwriters' discounts and other Offering expenses totalling
$2.3 million. The Company applied a portion of the Offering proceeds to reduce
indebtedness owed under the Revolving Credit Facility by $5.5 million and to
repay $3.0 million in trade debt. In addition, just prior to the Offering, the
Company issued notes to its founding shareholders in the principal amount of
$2.0 million representing a portion of the dividend distribution of the
Company's undistributed S Corporation earnings. These notes provide for twelve
equal monthly payments of principal and interest to the founding shareholders,
the final payment of which was made in February, 1996. The remaining portion of
the Company's undistributed S Corporation earnings in the amount of $2.1 million
was paid to the founding shareholders from the Offering proceeds.
The Company believes that the net proceeds from the Offering, together with
cash generated from operations and available borrowings under the Revolving
Credit Facility, will provide adequate funds for the Company's anticipated needs
for the foreseeable future.
SEASONALITY
The Company's quarterly operating results vary significantly depending
on factors such as the timing of new product introductions, adequacy of
component supply, changes in component costs, variations in the Company's
product mix, seasonal promotions by the Company and its customers and
competitive pricing pressures. Because the timing of these factors may vary,
the results of any particular quarter may not be indicative of results for
the full year or any future period. In addition, the PC market generally
experiences weaker sales during the summer months. Although the Company has
experienced sales growth for each year since fiscal 1990, there can be no
assurance that this growth will continue on a quarterly or annual basis.
-10-
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company has been served notice of the filing of a class action lawsuit
on September 6, 1995 in the 134th Judicial District Court of Dallas County,
Texas against it and three executive officers and directors of the Company.
The alleged class of Plaintiffs consists of all persons who purchased shares of
the Company's stock on the open market between February 14, 1995 and May 24,
1995. The Plaintiffs, who seek unspecified damages, allege that the Company's
Registration Statement and Prospectus in its initial public offering contained
false and materially misleading statements. The Company and the individual
defendants deny the Plaintiffs' allegations and are vigorously defending this
action.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting of shareholders was held on March 7, 1996,
at the Clarion Hotel, 1981 North Central Expressway, Richardson, Texas at
2:00 P.M.
At the meeting, the Company's shareholders elected six directors to serve
until the 1997 annual meeting of shareholders. The vote counts were as follows:
AFFIRMATIVE WITHHELD
----------- --------
William E. Ogle 4,408,308 24,120
Randall D. Eisenbach 4,408,308 24,120
James L. Hopkins 4,407,508 24,920
J. Shane Long 4,407,458 24,970
Lawrence E. Wesneski 4,407,508 24,920
James J. Byrne 4,407,008 25,420
At the meeting, the Company's shareholders also approved an amendment to
the 1995 Employee Stock Option Purchase Plan to clarify the Stock Option
Committee's authority to designate from time to time the subsidiaries of the
Company whose employees will be eligible to be granted options pursuant to
such plan. The vote count was as follows:
AFFIRMATIVE AGAINST ABSTAIN
----------- ------- -------
4,339,358 76,270 13,400
ITEM 5. OTHER INFORMATION - BUSINESS RISKS
In evaluating an investment in shares of common stock of the Company,
investors should carefully consider, among other investment considerations, each
of the following business risks that may affect the Company's current position
and future prospects.
POTENTIAL FOR FLUCTUATING OPERATING RESULTS
The Company's historical operating results have fluctuated significantly
from period to period, and will likely fluctuate in the future. Fluctuations
result from a wide variety of factors, including the timing and
availability of components, changes in product mix and pricing, the timing of
customer orders, new product developments or introductions, production
interruptions and product reviews and other media coverage. The Company's
quarterly results are also subject to seasonal fluctuations, with generally
weaker fiscal third quarter results. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Seasonality". In addition, as
all of the Company's products are sold for use in PCs, the Company's sales and
operating results are influenced significantly by fluctuations in the PC market.
DEPENDENCE ON SUPPLIERS
Several components used in the Company's products are obtained from single
or limited sources and, in instances where the component manufacturer does not
allocate a sufficient supply of components to meet
-11-
<PAGE>
the Company's needs, the Company must obtain specific components from
distributors or on the spot market at a higher cost. In addition to certain
components, certain software drivers used in the Company's products are also
obtained from single or limited sources. The Company has no guaranteed
supply arrangements with any of its suppliers, and there can be no assurance
that current suppliers will be able to meet its requirements. While the
Company believes that with respect to its single source components it could
obtain similar products from other sources, it likely would be required to
pay significantly more for such products, alter product designs to use
alternative products or reduce its production of the related graphics
adapters. As a result of delays in the delivery of components, lack of
available components, or the lack of available software drivers from
component vendors, the Company has in the past experienced difficulty in
meeting certain product shipment dates to customers, which in some instances
has resulted in a loss of business. It is likely that delays in delivery of
components, shortages of components and the lack of available software
drivers will continue to occur in the future, and such delays, or
inconsistencies in the quality or reliability of components or related
software, could materially adversely affect the Company and its results of
operations.
In addition, significant increases in the prices of components, such as
graphics controller chips or memory chips, occur from time to time, and often
the Company is not able to adjust the price of its products accordingly. In the
past, both occasional worldwide shortages of DRAM video memory and international
tariff disputes have resulted in substantial component cost increases. It is
likely that the Company will experience component cost increases in the future.
DEPENDENCE ON KEY CUSTOMERS
The Company's top six customers accounted for 68.4% and 64.4% of net sales
during fiscal years 1994 and 1995, respectively. Historically, Gateway 2000 has
been the Company's most significant customer. The loss or reduction of the
business of Gateway 2000 or one or more of the Company's other major customers
would have a material adverse effect on the Company's results of operations. In
addition, the Company's future success will depend significantly upon the
success of its customers, particularly its OEM customers.
DEPENDENCE ON GRAPHICS ADAPTER MARKET
Substantially all of the Company's net sales are derived from the sale of
graphics adapters. Graphics adapters generally are used in higher end PCs
offering the latest technology and performance features, while graphics
circuitry usually is included on the motherboard of entry-level PC models. An
increase in the number or percentage of manufactured PCs that incorporate
graphics circuitry on the motherboard, an increase in the number or percentage
of graphics adapters manufactured by OEMs or a decrease in PC sales volumes
would effectively shrink the market for the Company's products and could
materially adversely affect the Company's business. In addition, it is possible
that graphics circuitry could be incorporated into the CPU, which could
materially adversely affect the Company and its results of operations.
NEW PRODUCTS AND TECHNOLOGICAL CHANGE
The market for the Company's products is characterized by short product life
cycles, rapidly changing technology, evolving industry standards and frequent
introductions of new products. The Company's success depends upon market
acceptance of its existing products and its ability to enhance its existing
products and to continually develop and introduce new products and features
to meet changing customer requirements. There can be no assurance that the
Company will be successful in enhancing its existing products or identifying,
developing, manufacturing or marketing new products. Delays in developing
new products or enhancements or the failure of such products or enhancements
to gain market acceptance could materially adversely affect the Company and
its results of operations.
INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS
It is common in the computer industry for companies to assert intellectual
property infringement claims against other companies. As a consequence, the
Company indemnifies some OEM customers in certain respects against intellectual
property claims relating to its products. If an intellectual property claim
were to be brought against the Company and the Company was found to be
infringing upon the rights of others, the Company could be required to pay
infringement damages, pay licensing fees, modify its products so that they are
not infringing or discontinue offering products that were found to be
infringing, any of which could materially adversely affect the Company and its
results of operations.
-12-
<PAGE>
If an intellectual property claim were to be brought against one or more of
the Company's suppliers and the supplier was found to be infringing upon the
rights of others, the supplier could be enjoined from further shipments of its
products to the Company which could materially adversely affect the Company and
its results of operations.
INTERNATIONAL OPERATIONS
The Company is subject to the general risks of conducting business
internationally, including unexpected changes in regulatory requirements,
fluctuations in currency exchange rates, delays resulting from difficulty in
obtaining export licenses for certain technology, tariffs and other barriers and
restrictions and the burdens of complying with a variety of foreign laws. In
addition, the Company is subject to general geopolitical risks, such as
political instability and changes in diplomatic and trade relationships, in
connection with its international operations. Although the Company has not to
date experienced any material adverse effect on its operations as a result of
such factors, there can be no assurance that such factors will not materially
adversely impact the Company and its results of operations in the future or
require the Company to modify its current business practices. The Company
currently sells its products at prices denominated in U.S. dollars and an
increase in the value of the U.S. dollar relative to foreign currencies could
make the Company's products more expensive and potentially less competitive in
foreign markets. The Company expects to sell a portion of its products in the
future at prices denominated in other currencies and will therefore increase its
currency exposure risk.
For further discussion of additional business risks or investment
considerations, see Part I, pages 1 through 15 of the Company's Annual Report
- - -Form 10-K for the fiscal year ended October 31, 1995 and "Risk Factors"
contained in the Company's Registration Statement on Form S-1 as filed with
the Securities and Exchange Commission on February 14, 1995 (Registration
No. 33-87612).
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER
-------
10.39 Lease Agreement dated April 18, 1996 by and
between the Company (as lessee) and I Cypresswood
Building (as lessor)
11.1 Computation of Earnings Per Common Share and
Common Equivalent Share
27.1 Financial Data Schedule
(b) Current Reports on Form 8-K
There were no reports filed on Form 8-K during the quarterly
period ended April 30, 1996.
-13-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STB SYSTEMS, INC.
Dated: June 14, 1996 By: /s/ William E. Ogle
----------------------------------------
President and Chief Executive Officer
Dated: June 14, 1996 By: /s/ Bryan F. Keyes
----------------------------------------
Bryan F. Keyes, Treasurer, Director of
Legal and Finance and Chief Accounting
Officer
-14-
<PAGE>
STATE OF TEXAS:
COUNTY OF HARRIS:
LEASE AGREEMENT
By this office lease agreement Landlord hereby leases to Tenant and
Tenant leases from Landlord, upon the terms and conditions herein contained,
the Leased Premises described below, and Landlord and Tenant, in
consideration of the mutual covenants and agreements herein and other good
and valuable consideration, agree as follows:
ARTICLE 1. PARTIES
The parties to this agreement are:
1.1 I CYPRESSWOOD BUILDING, ("Landlord"), whose address for all
purposes herein is: 9950 Cypresswood, Suite 200, Houston, Texas
77070
1.2 STB SYSTEMS, INC., A TEXAS CORPORATION, ("Tenant"), whose
address for all purposes herein is: 9950 Cypresswood Drive, Suite
110, Houston, Texas 77070
ARTICLE 2. LEASED PREMISES
2.1 Landlord leases to Tenant and Tenant leases from Landlord
approximately 2,290 square feet of rentable office space ("Tenant's
Rentable Area"), located on the 1st floor of the building located at 9950
Cypresswood Dr., Houston, Harris County, Texas, (Leased Premises). A legal
description of the property on which the Building is located is attached
heretoas Exhibit A. A floor plan of the Leased Premises is attached hereto
as Exhibit B.
2.2 Landlord shall have sole control over the parking of
automobiles and other vehicles and shall have the right to designate and
restrict parking and building service areas.
2.3 At the request and expense of Landlord, Tenant may be
relocated to other space of equal or larger size within the building BUT ONLY
UPON WRITTEN CONSENT BY TENANT. In the event of such relocation this Lease
agreement shall continue in effect with no change in the terms or conditions
but with the new location substituted in Article 2, Section 2.1 hereof.
Landlord shall pay the reasonable expenses of moving and reconstruction of
all improvements.
<PAGE>
ARTICLE 3. TERM
3.1 This lease agreement shall be for 36 months ( beginning on
May 15, 1996 ("Commencement Date"), and ending at 11:59 p. m. on May 14,
1999 unless terminated earlier by another provision of this lease
agreement ("Primary Term"). ESTIMATED OCCUPANCY DATE IS MAY 6, 1996. (TWO
WEEKS FOLLOWING LEASE EXECUTION)
3.2 Notwithstanding the dates specified for the Primary Term, if
Landlord, for any reason other than delay caused by Tenant, cannot deliver
possession of the Leased Premises to Tenant on the above date, this lease
agreement shall not be void or voidable, nor shall Landlord be liable to
Tenant for any loss or damage resulting therefrom, nor shall the term of this
lease agreement be extended by such delay, but in that event there shall be
an abatement of rent covering the period between the beginning of the term
and the date that Landlord can deliver possession. PROVIDED TENANT HAS GIVEN
LANDLORD ALL REQUIRED IMPROVEMENTS PRIOR TO 4-20-96. IN THE EVENT LANDLORD
IS UNABLE TO DELIVER POSSESSION OF THE LEASED PREMISES TO TENANT BY JULY 1,
1996, TENANT SHALL HAVE THE OPTION FOR THIRTY DAYS THEREAFTER TO TERMINATE
THIS LEASE AGREEMENT EFFECTICE MAY 6, 1996 BY GIVING LANDLORD WRITTEN NOTICE
OF TENANT'S ELECTION TO TERMINATE.
3.3 Landlord and Tenant have agreed to a schedule of work to be
performed on the Leased Premises by Landlord (the Workletter) attached to
this lease agreement as Exhibit C. Landlord will use best efforts to have the
Leased premises substantially completed by the commencement date, but
Landlord's obligations to do so are contingent upon Tenant's furnishing
information and completing work which Tenant has agreed to provide within the
time agreed upon in the workletter.
3.4 If the Leased premises are not ready for occupancy by the
Commencement Date, and if the delay is due to Landlord's failure to complete
work required of Landlord under the terms of the Workletter, abatement of
rent shall be Tenant's sole and only remedy at law or in equity and shall
constitute full settlement of all claims that Tenant might otherwise have
against landlord by reason of the leased premises not being ready for
occupancy on the commencement date. At landlord's option the lease agreement
expiration may be extended so as to give effect to the full term of the this
lease agreement as stated in Article 3, section 3.1 hereof.
3.5 Upon occupancy Tenant shall execute and deliver to Landlord
upon demand a letter accepting the Leased Premises and acknowledging
possession of the Leased Premises.
3.6 Should the Primary Term commence on a day other than the first
day of a calendar month, then the rental for any partial month during the
term hereof shall be prorated upon a daily basis.
3.7 Should Tenant or any of Tenant's successors in interest vacate
or hold over (see Article 24.) on leased premises, Tenant is required to
notify Landlord thirty (30) days in advance.
<PAGE>
ARTICLE 4. RENT
4.1 For the term of this lease, Tenant shall pay to Landlord
without deduction or offset at such place as Landlord designates, the sum of
NINETY TWO THOUSAND SEVEN HUNDRED AND FORTY FIVE DOLLARS AND 00/100
($92,745.00) payable in monthly installments of $2,576.25 , (Base Rent).
4.2 Landlord hereby acknowledges payment by Tenant of the sum of
TWO THOUSAND FIVE HUNDRED SEVENTY SIXY DOLLARS AND 25/100 ($ 2,576.25
)REpresenting payment of rental through the first calendar month of this
lease agreement. The next installment of rent shall be due and payable on
JUNE 1, 1996 .
4.3 Each monthly installment shall be payable on the first day of
each month. Any installments of rent or other sums due by Tenant shall bear
interest at the maximum non-usurious rate of interest from the date due until
the date paid. Any payment not made WITHIN FIVE (5) BUSINESS DAYS OF when
due shall be accompanied by a late charge equal to ten percent (10%) of the
amount of the payment due.
4.4 In addition to the foregoing rental, Tenant shall pay to
Landlord as additional rental all agreed upon charges for any services,
goods, or materials furnished to Tenant by Landlord at Tenant's request which
are not required to be furnished by Landlord under this lease agreement.
Payment shall be made within FIFTEEN (15) days after Landlord renders a
statement therefor to Tenant.
ARTICLE 5. SECURITY DEPOSIT
Tenant has paid landlord $ 2,576.25 as a deposit ("Security
Deposit") Upon Tenants default or non compliance with any term or provisions
hereof, without prejudice to any other remedy,Landlord may use all or part of
the Security Deposit to make good any arrears of rent and any other
damage,injury expense or liability caused to Landlord by Tenant's default or
non compliance with this lease agreement. Upon demand, Tenant shall deposit
with landlord such additional amount as may be required to increase the
remaining amount of the security deposit, if any to the original amount
thereof. The Security Deposit shall not bear interest or be considered an
advance payment of rental or a measure of Landlord's damages in case of
default by Tenant.
ARTICLE 6. RENTAL ESCALATION AFTER OCCUPANCY
6.1 The base operating expense shall be $5.50 per square foot.
6.2 For purposes of determining rental escalation, the term "lease
year" shall mean the calendar year.
6.3 All operating expenses shall be determined in accordance with
generally accepted accounting principles, consistently applied, and as used
herein, the term "operating expenses" shall mean all expenses, costs, and
disbursements (but not replacement of capital investment items) of every kind
and nature which Landlord shall pay or become obligated to pay because of or in
connection with the ownership and operation of the
<PAGE>
Building and parking facilities including, but not limited to the following:
(a) Wages and salaries of all employees engaged in opera- tion and
maintenance of the Building; employer's F.I.C.A. taxes, unemploy- ment taxes
or insurance, and any other taxes which may be levied on such wages and
salaries; the cost of disability and hospitalization insurance and pension or
retirement benefits for such employees.
(b) All supplies and materials used in operation and main- tenance
of the Building and equipment.
(c) All public utilities including, but not limited to, water,
sewer, electricity, gas, and all expenses of heating, lighting,
air-conditioning, and ventilating excluding those billed directly to tenants.
(d) All janitorial service, maintenance, and service agreements on
equipment, landscape maintenance, security service, window cleaning, and
elevator maintenance.
(e) Premiums and other charges for casualty, rental abatement, and
liability insurance applicable to the Building and Landlord's personal
property used in connection therewith.
(f) All taxes and assessments and governmental charges whether
federal, state, county, or municipal, and whether by taxing districts or
authorities presently taxing the Leased Premises or by others, subsequently
created, and any other taxes and assessments attributable to the Building or
its operation excluding, however, federal and state taxes on income.
(g) Repairs, general maintenance, and alterations to the Building
(excluding alterations attributable solely to tenants of the Building other
than Tenant).
(h) A reasonable amortization charge for any capital expenditure
incurred to affect a reduction in the operating expenses of the Building or
as may be required by governmental authority. Landlord will provide such
documentation to justify such capital expenditure as Tenant may reasonably
require.
(i) A reasonable management fee for the operation of the Building.
(j) Legal and accounting fees and expenses incurred directly in
connection with the managing, operating and maintaining the Building and
parking facilities.
The total of such expenses shall be divided by the total rentable
area of the Building to arrive at the operating expense per square foot for
that calendar year ("Current Operating Expense").
6.4 Rental escalation shall occur in any month in which the Current
Operating Expense exceeds the Base Operating Expense. The amount of rental
escalation to be paid by Tenant shall be the amount of such excess multiplied by
the number of square feet in Tenant's Rentable Area.
<PAGE>
In addition to the payment of Base Rent, Tenant shall pay monthly in advance,
as additional rent, the rental escalation for the current month as estimated
by Landlord.
6.5 Within ninety (90) days after the close of each calendar year,
Landlord shall give written notice to Tenant, which notice shall also contain
or be accompanied by a computation of (a) Current Operating Expense for the
year allocated proportionately to Tenant's Rentable Area, (b) the excess (if
any) of such allocated Current Operating Expense over Base Operating Expense
for the year, (c) an accounting for rental escalation paid by Tenant during
that calendar year, and (d) the amount of additional rental escalation due by
Tenant to Landlord or the amount of overpayment made by Tenant to Landlord as
the case may be. If additional monies are due by Tenant to Landlord, such
monies shall be paid within thirty (30) days of such accounting. If monies
are due by Landlord to Tenant, such monies shall be paid within thirty (30)
days of such accounting. If this lease agreement commences or terminates at
any time other than the first day of a calendar year, Tenant's share shall be
prorated according to the number of days of the lease term during the
commencement or termination year as the case may be.
At Tenant's expense, Tenant shall have the right at all reasonable
times to audit Landlord's books and records relating to this lease agreement
and to examine Landlord's operating expenses at the Building for any year for
which additional rental payments are due.
ARTICLE 7. IMPROVEMENTS
7.1 Landlord shall install in the leased premises building
standard improvements. Landlord's improvements shall be of the type, quality
or capacity specified in the plans and specifications for the building. All
improvements designated herein shall be the property of Landlord during the
term of this lease agreement and shall remain the property of Landlord upon
termination of this Lease Agreement.
7.2 Landlord shall pay for architectural drawings, plans and
specifications and shall pay the cost of building standard improvements UP TO
$5.50 PER SQUARE FOOT. Tenant shall pay for all improvements over and above
building standard improvements due and payable prior to construction.
ESTIMATED OVER STANDARD ITEMS ARE $700.00.
7.3 Landlord will provide preliminary floor plans which include
the Leased Premises and will assist tenant in preparing working drawings
setting out the improvements to be installed in the Leased premises. Upon
final approval of floor layout plan by tenant and before proceeding with the
work, landlord will submit to tenant an estimate of the cost on any worked
based on the approved floor layout plan, if any, which is over and above that
portion of improvements to be installed by Landlord and will obtain Tenant's
written request that such work be done. Tenant shall pay landlord, upon
initiation of work, the full estimated cost of such improve- ments over and
above the portion thereof which Landlord is required to pay
<PAGE>
for plus an additional 15% for overhead and supervision. Upon completion of
the improvements, Tenant shall pay the additional cost or Landlord shall
refund the overpayment to Tenant. All alterations, additions or improve-
ments upon the leased premises including partitions, made by either party,
shall become the property of Landlord and shall remain upon and be
surrendered with the leased premises upon the expiration of this lease
agreement without disturbance or injury.
7.4 Tenant shall not install, maintain or display any sign,
symbol, or identifying mark in or on the building or that may be visible from
the outside of the building without the prior written approval of Landlord.
ARTICLE 8. USE
8.1 The Leased Premises shall be used and occupied for the
purposes of ordinary general office use and for no other use without
Landlord's prior written consent.
8.2 Tenant's occupancy of the Leased premises shall be conclusive
acknowledgement by Tenant that the Leased Premises are then in good state of
repair and in the condition called for under this lease agreement.
8.3 Tenant shall comply promptly with all federal, state, county,
municipal, and other laws, statutes, ordinances, rules, regulations, orders,
and requirements regulating the use ,condition or occupancy by Tenant of the
leased premises.
8.4 Tenant shall not use or permit the use of the Leased Premises
in any manner which will tend to create waste or any nuisance or will tend to
interfere with, annoy, or disturb Landlord in Landlord's management or any
Tenant, sublessee, or other occupant of the Building. Tenant agrees to
comply with all reasonable rules and regulations that Landlord may adopt from
time to time for the operation, protection, and welfare of the Building its
facilities, and its occupants and visitors.
The present rules and regulations are attached as Exhibit D. Any future
rules and regulations shall become a part of this lease agreement upon
delivery of a copy to Tenant in accordance with the notice provisions of this
lease agreement. Landlord shall not have any liability to Tenant for any
failure of any other tenant(s) of the Building to comply with such rules and
regulations. In the event of a conflict between the provisions of this lease
agreement and any such rules and regulations, the provisions of this lease
agreement shall take priority.
8.5 Tenant shall not do or permit to be done anything which would
cause Landlord's fire and extended coverage insurance to be canceled or the
rate increased. If Landlord's rates are increased because of Tenant's
activities, Tenant shall pay the difference.
<PAGE>
ARTICLE 9. ALTERATIONS, ADDITIONS, AND IMPROVEMENTS
9.1 Tenant shall not make any alterations, additions, or
improvements to the Leased Premises without the prior written consent of
Landlord, such consent not to be unreasonably withheld or delayed. Land-
lord approved floor plan configuration will be acceptable at termination of
lease. No safes or fireproof file cabinets may be installed without
Landlord's prior written consent and the payment of any costs required for
structural reinforcing. Notwithstanding any other provisions of paragraph
9.1, Tenant shall have the right at all times to erect or install other
furniture and fixtures provided that Tenant complies with all applicable
governmental laws, ordinances, and regulations and the attached work letter.
If Tenant is not then in default upon the termination of this lease
agreement, Tenant shall have the right to remove such items provided that
Tenant shall pay for the cost to repair any damage caused by such removal.
If Landlord gives such prior consent, such work shall be performed
at Tenant's expense by workmen or contractors of Landlord or by workmen or
contractors of Tenant who shall have been approved in advance by Landlord,
and shall be performed in such a manner and upon such terms, conditions and
times satisfactory to and approved in advance in writing by Landlord. In any
instance where Landlord grants such consent, it shall be contingent and
conditioned upon Tenant and those contractors, laborers, materialmen, and
others furnishing labor or materials for Tenant working in harmony and not
interfering with Landlord or with contractors, laborers, materialmen, or
others furnishing labor or materials to Landlord or to any other tenant. The
consent granted by Landlord to Tenant may be withdrawn immediately and
without notice of any kind if any one or more persons furnishing labor or
materials for Tenant shall cause any disharmony with or shall interfere with
such other persons.
9.2 Tenant may remove Tenant's trade fixtures, office supplies, and
movable furniture and equipment not attached to the Leased Premises including,
but not limited to Tenant's security system, provided tenant promptly repairs
all damage caused by such removal prior to the termination of the term of this
lease agreement. All other property at the Leased Premises and any alterations
or additions to the Leased Premises (including wall-to-wall carpeting, paneling,
or other wall covering) and any other article attached or affixed to the floor,
wall, EXCEPT FOR TENANT'S TELEPHONE SYSTEM, or ceiling of the lease agreement
Leased Premises shall become the property of Landlord at Land- lord's option,
and shall remain upon and be surrendered with the Leased Premises as a part
thereof at the termination of this lease agreement, Tenant hereby waiving all
rights to any payment or compensation there- for. If however, Landlord so
requests in writing Tenant shall prior to termination of this Lease Agreement,
remove any and all such alterations, additions, fixtures, equipment and property
placed or installed by tenant in the leased premises and repair any damages
caused by such removal.
<PAGE>
9.3 Tenant shall pay, when due, all claims for labor or materials
furnished or alleged to have been furnished Tenant at the Leased Premises,
which claims are or may be secured by any mechanic's or materialman's lien
against the Leased Premises or any interest therein. Tenant shall give
Landlord not less than ten (10) days written notice prior to the commencement
of any work in or on the Leased Premises, and Tenant, at Landlord's request,
shall furnish Landlord with recordable waivers of liens from all persons
performing work or furnishing materials or supplies to the Leased Premises.
ARTICLE 10. TAXES ON TENANT'S PROPERTY
Tenant shall be liable for all taxes levied or assessed against
personal property, furniture, or fixtures placed by Tenant in the Leased
Premises. If any such taxes for which Tenant is liable are levied or
assessed against Landlord or Landlord's property and if Landlord elects to
pay the same or if the assessed value of Landlord's property is increased by
inclusion of personal property, furniture, or fixtures placed by Tenant in
the Leased Premises, and Landlord pays taxes based on such increase, Tenant
shall pay to Landlord upon demand that part of such taxes for which Tenant is
primarily liable hereunder.
ARTICLE 11. LANDLORD'S LIEN
11.1 In addition to any statutory landlord's lien, landlord shall
have at all times, a valid security interest SUBORDINATE TO ANY LIEN HELD BY
A LENDER OF TENANT FOR PURCHASE MONEY FINANCING OR OTHERWISE OF TENANT'S
PERSONAL PROPERTY LOCATED ON THE LEASED PREMISES. to secure payment of all
rentals and other sums of money becoming due here under from Tenant, and to
secure payment of any damages or loss which landlord may suffer by reason of
the breach by Tenant of any covenant, agreement or condition contained
herein, upon all goods, wares, equipment, fixtures, furniture, improve-
ments, and other personal property of Tenant presently or which may hereafter
be situated on the Lease Premises, and all proceeds therefrom, and such
property shall not be removed without the consent of the Landlord until all
arrearage in rent as well as any and all other sums of money then due and to
be due to Landlord hereunder shall first have been paid and discharged and
all the covenants, agreements and conditions hereof have been fully complied
with and performed by Tenant.
11.2 Under the occurrence of an event of default by Tenant,
Landlord may,in addition to any other remedies provided herein, after giving
reasonable notice of the intent to take possession and giving opportunity for
a hearing thereon, enter upon the Leased Premises and take possession of any
and all goods, wares, equipment, fixtures, furniture improvements, and other
personal property of Tenant situated on the Leased Premises, without
liability for trespass or conversion, and sell the same at public or private
sale, with or without having such property at the sale, after giving Tenant
reasonable notice of the time and place of any public sale or of the time
after which any private sale is to be made, at which sale Landlord or the
assigns of Landlord may purchase unless otherwise prohibited by law.
<PAGE>
11.3 Unless otherwise provided by law, and without intending to
exclude any other manner of giving Tenant reasonable notice, the require-
ment of reasonable notice shall be met if such notice is given at least five
(5) days before the time of sale.
11.4 The proceeds from any such disposition, less any and all
expenses connected with the taking of possession, holding and selling of the
property (including reasonable attorney's fees and other expenses), shall be
applied as a credit against the indebtedness secured by the security interest
granted in this article. Any surplus shall be paid to tenant or as otherwise
required by law and Tenant shall pay any deficiencies forthwith.
11.5 Upon request by Landlord, Tenant agrees to execute and deliver
to Landlord a financing statement in form sufficient to perfect the security
interest of Landlord in the aforementioned property and proceeds thereof
under the provisions of the Uniform Commercial Code in force in the State of
Texas PROVIDED TENANTS LENDER GIVES CONSENT AND THE LIEN IS SUBORDINATE TO
THE EXISTING LIEN OF SAID LENDER. The security interest herein granted is
addition and supplementary to the statutory lien for rent.
ARTICLE 12. MAINTENANCE AND SURRENDER
12.1 Except as otherwise provided herein, Landlord shall provide
for the cleaning and maintenance of all common areas of the Building, but
shall not be required to make any improvements or repairs of any kind to the
Leased Premises except as provided on Exhibit "C" attached hereto,or as
necessary repairs to the walls, roof, parking areas, capital equipment and
structural elements of the Building; provided, however, that if such repairs
are necessitated by the acts or omissions of Tenant, or by the agents,
employees, customers, invitees, or visitors of Tenant, then Tenant shall bear
the cost of such repairs and shall pay Landlord the full cost thereof plus an
additional fifteen percent (15%) for overhead and supervision.
12.2 So long as Tenant is not in default hereunder, Landlord shall
furnish the Leased Premises during reasonable and usual business hours the
following services:
(a) Air-conditioning as reasonably required for comfortable use in
occupancy under normal business office operations from 7:00 a.m. to 6:00 p.m.
Monday through Friday and 8:00 a.m. to 12:00 p.m. on Saturdays except for
holidays. Air-conditioning during other hours on such days and on Sundays
and legal holidays shall be subject to additional charges. The cost of
$25.00 per hour shall be paid by Tenant to Landlord. Whenever machines or
equipment which generate unusual heat are used in the Leased Premises and
affect temperature otherwise maintained by the Building air-conditioning
system, Landlord reserves the right to install supple- mentary
air-conditioning units in the Leased Premises and the cost thereof plus
fifteen percent (15%) for overhead and supervision. Tenant shall also pay for
the cost of operation and maintenance thereof. Such charges shall be paid
within ten (10) days of billing, and all requests for additional service must
be in writing and given to Landlord twenty-four (24) hours in
<PAGE>
advance.
(b) Electricity as required for light fixtures installed by
Landlord, and electricity as required for incidental office use such as
typewriters, calculating machines, and machines of similar low electrical
consumption during normal business office operations. Landlord shall have
the right to meter and to charge for excessive consumption.
(c) Hot and cold water for drinking, levorotary, and toilet
purposes at those points of supply provided for the general use of all
tenants of the Building.
(d) Janitor service in and about Leased Premises five (5) days per
week and such window washing; provided, however, Tenant shall pay the
additional costs attributable to the cleaning of improvements within the
Leased Premises other than building standard improvements. A schedule of
janitorial services to be provided by Landlord is attached hereto and
designated as Exhibit E, reference to which is here made for all purposes.
(e) Passenger elevators, subject to building rules and regulations.
(f) Draperies or other type coverings of exterior windows as
determined by Landlord. Landlord reserves the right to install, main- tain,
and operate uniform window coverings in all windows, either exterior or
interior.
(g) Maintenance of building standard lighting fixtures furnished
by Landlord and replacement of ballasts and defective lamps and incandescent
bulb replacement in all public areas.
(h) Daily maintenance service in and about public areas, five (5)
days a week, as determined by Landlord.
(i) Men's and women's restrooms on each floor of the Building.
12.3 Tenant shall pay to Landlord, monthly as billed, such charges as
may be metered separately or as Landlord's engineer may compute for any
electric or other utility service utilized by Tenant for extra lighting or
other electrical service not standard for the Building or for computers, data
processing equipment, or other electrical equipment with power requirements
of more than .25 kilowatts per hour at rated capacity or a voltage other than
120 volts single phase.
12.4 No interruption or malfunction of any such services beyond
the reasonable control of Landlord shall constitute an eviction or
disturbance of Tenant's use and possession of the Leased Premises or the
Building or a breach by Landlord of any of Landlord's obligations hereunder
or render Landlord liable for damages or entitle Tenant to be relieved from
any of Tenant's obligations hereunder (including the obligation to pay rent)
or grant Tenant any right of setoff or recoupment. However, in the event of
any such interruption, Landlord shall use reasonable diligence to restore
such service.
<PAGE>
12.5 Notwithstanding any provision hereof to the contrary, to the
extent that any laws, ordinances or governmental rules and regulations by
their terms purport to set standards for heating and cooling tempera- tures
or for energy consumption, or to supersede or override contractual rights and
obligations, they shall take precedence over and shall limit Landlord's
obligations hereunder.
12.6 Tenant shall maintain and keep the interior of the Leased
Premises in good repair and condition at Tenant's expense, and Tenant shall
not commit or allow any waste or damage to be committed on any portion of the
Leased Premises. At Tenant's expense, and with prior Tenant written approval
Landlord may repair or replace any damage done to the Leased Premises, normal
wear and tear excepted, caused by Tenant, Tenant's agents, employees,
licensees, invitees, or visitors and Tenant shall pay to Landlord on demand
the cost thereof plus fifteen per cent (15%) for overhead and supervision.
12.7 If Tenant fails to pay promptly any installment of rent or
additional rent as same becomes due as herein provided, Landlord, upon not
less than (10) ten days notice, may discontinue furnishing all or any part of
the services described in this article, and no such discontinuance shall be
deemed an eviction or disturbance of Tenant's use of Leased Premises or
render Landlord liable for damages.
12.8 Tenant shall, throughout the lease term, preserve the Leased
Premises and keep the same free from waste or nuisance, and at the
termination of this lease agreement shall deliver up the Leased Premises in a
clean and sanitary condition in good repair and condition, reasonable wear
and tear, and damage by fire, tornado, or other casualty excepted.
Reasonable wear and tear is defined in "Exhibit F" attached hereto. In the
event Tenant should neglect to reasonably maintain the Leased Premises,
Landlord shall have the right, but not the obligation to cause repairs or
corrections to be made, and any reasonable costs therefor shall be payable by
Tenant as additional rental on demand.
ARTICLE 13. DAMAGE, DESTRUCTION, AND CONDEMNATION
13.1 If all or a substantial portion of the Leased Premises or of
the Building shall be damaged or destroyed by fire, hurricane, tornado, or
other casualty, then Landlord shall have the election to terminate this Lease
or to repair and reconstruct the Leased Premises and the Building to
substantially the same condition as existed immediately prior to such damage
or destruction. Landlord shall give Tenant notice of such election within
sixty (60) days from the date of such damage or destruction.
13.2 In any of the aforesaid circumstances, rental shall abate
proportionately during the period and to the extent that the Leased Premises
are unfit for use by Tenant in the ordinary conduct of Tenant's business. If
this lease agreement is terminated, Landlord shall refund to Tenant the
unaccrued prepaid rent less any sum then owed to Landlord by Tenant. If
Landlord has elected to repair and reconstruct the Leased Premises, then the
Lease term shall be extended by a period of time equal to the period of such
repair and reconstruction. HOWEVER, IF THE LEASED PREMISES IS NOT AVAILABLE
TO BE RE-OCCUPIED BY TENANT WITHIN 180 DAYS OF
<PAGE>
THE NOTICE OF SUCH ELECTION BY LANDLORD, THE REMAINING TERM OF THE LEASE
AGREEMENT WILL BE TERMINATED EFFECTIVE AS OF THE DATE OF THE CASUALTY.
13.3 If during the term of this lease agreement (including any
extension or renewal) all or a portion of the Leased Premises should be taken
for any public or quasipublic use under any governmental law, ordinance, or
regulation, or by right of eminent domain, or should be sold to the
condemning authority under threat of condemnation, at the option of Landlord,
this lease agreement shall terminate and the rent shall be abated during the
unexpired portion of this lease agreement, effective as of the date of the
taking of said Leased Premises by the condemning authority. Landlord shall
receive the entire award from any such taking, and Tenant shall have no claim
thereto, or for the value of any unexpired term of this Lease Agreement.
13.4 Landlord and the agents and representatives of Landlord shall
have the right to enter into and upon any and all parts of the Leased
Premises at all reasonable hours (a) to inspect same or clean or make repairs
or alterations or additions as Landlord may deem necessary (but without any
obligation to do so, except as expressly provided for herein), or (b) to show
the Leased Premises to prospective tenants, purchasers, or lenders; and
Tenant shall not be entitled to any abatement or reduction of rent by reason
thereof, nor shall such be deemed to be an actual or constructive eviction.
ARTICLE 14. INDEMNITY
14.1 Except as to injury, death or property damage resulting from
the negligence of Landlord for which Landlord is legally liable, Tenant shall
indemnify and save Landlord harmless from all claims (including costs and
expenses of defending against such claims) (a) TO THE EXTENT arising or
alleged to arise from any act or omission of Tenant or Tenant's agents,
employees or contractors or (b) TO THE EXTENT resulting from any injury to
any person or damage to the property of any person occurring in the Leased
Premises. Tenant shall use and occupy the Leased Premises and other
facilities of the Building and parking facilities at Tenant's own risk and
hereby releases Landlord and Landlord's agents and employees, from all claims
for any damage or injury to the full extent permitted by law.
14.2 If either Landlord or Tenant sustains a loss by reason of
fire or other casualty which is a type of risk covered by such party's fire
and extended coverage insurance policy and such fire or casualty is caused in
whole or in part by acts or omissions of the other party or the agents,
servants or employees of such other party, then, to the extent that the party
sustaining such loss is compensated for such loss by insurance proceeds, such
party shall have no right of recovery against the other party or agents,
servants or employees of the other party, and no third party shall have any
right of recovery by way of subrogation or assignment or otherwise.
14.3 Landlord shall not be responsible or liable to Tenant, or to
the employees, agents, customers, or invitees of Tenant for bodily injury
(fatal or nonfatal) or property damage occasioned by the acts or
<PAGE>
omissions of any other tenant or of another tenant's employees, agents,
contractors, customers, or invitees.
ARTICLE 15. ASSIGNMENT AND SUBLEASE
15.1 Tenant shall not have the right except with the prior written
consent of Landlord, which consent shall not be unreasonably withheld or
delayed, to assign this lease agreement or any interest herein, or to sublet
the Leased Premises or any portion thereof. If such consent shall be
granted, each assignee must assume in writing all of Tenant's obligations
under this lease agreement and Tenant shall remain liable for each and every
obligation under this lease agreement.
15.2 If Tenant desires to assign this lease agreement or sublet
the Leased Premises or any part thereof, Tenant shall give Landlord written
notice of such desire at least FORTY-FIVE (45) days prior to the date Tenant
desires to make such assignment or sublease. Landlord shall have fifteen
(15) days following receipt of such notice to notify Tenant in writing that
Landlord elects either to permit Tenant to assign or sublet such space,
subject, however, to Landlord's written approval of the designated assignee
or sublessee (but no other), or to refuse to consent to Tenant's assignment
or subleasing such space and to continue this lease agreement in full force
and effect as to the entire Lease Premises.If Landlord should fail to notify
Tenant in writing of such election within said fifteen (15) day period,
Landlord shall be deemed to have refused to give such consent. If Landlord
consents to an assignment or sublease such assignee must enter into a lease
agreement with Landlord and accept the terms hereof and undertake joint and
several liability with Tenant. Tenant will remain jointly and severally
liable along with each permitted assignee or sublessee and Landlord shall be
permitted to enforce the provisions hereof directly against Tenant without
proceeding in any way against any other person.
15.3 If the rent to be payable by a sublessee under any such
permitted sublease exceeds the rental payable under this lease agreement,
then Tenant shall pay Landlord one hundred percent (100%) all such excess
rental and other consideration received by Tenant within ten (10) days
following receipt thereof by Tenant.
15.4 Whenever Landlord consents to any assignment, sublease or
other transfer, Landlord may require Tenant to pay Landlord a reasonable sum
as attorneys' fees incurred as a result of such action and may require such
sublessee or assignee to pay Landlord a reasonable sum for Landlords
assistance in moving the sublessee or assignee in and out of the Leased
Premises and the building, but Landlord shall not be obligated to provide
such assistance.
15.5 Landlord is expressly given the right to assign any or all of
Landlord's interest, rights, or obligations under the terms of this lease
agreement.
<PAGE>
ARTICLE 16. LANDLORD'S INSURANCE
Landlord shall pay for and maintain a policy or policies of
insurance insuring the Building against loss or damage by fire, explosion, or
other hazard and contingencies for the full replacement value thereof;
provided that Landlord shall not be obligated to insure any furniture,
equipment, machinery, goods or supplies of Tenant or any additional
improvements which Tenant may construct within the Leased Premises. If the
annual premiums charged Landlord for such casualty insurance exceed the
standard premium rates because the nature of Tenant's operations results in
extra-hazardous exposure, then upon receipt of appropriate premium invoices
Tenant shall reimburse Landlord on demand for such increases in such premiums.
ARTICLE 17. TENANT'S INSURANCE
17.1 At Tenant's sole cost and expense, Tenant shall maintain
comprehensive general liability insurance including, but not limited to,
personal injury coverage and Tenant shall provide Landlord with a Certificate
of Insurance evidencing minimum protection of not less than $1,000,000 in the
event of bodily injury or death to any number of persons in any one
occurrence, and with limits of not less than $100,000 for property damage in
any one occurrence, and such policies shall name Landlord as an additional
insured.
17.2 At Tenant's sole cost and expense, Tenant shall insure
Tenant's personal property for such amounts and coverage as Tenant may elect,
and except as otherwise provided herein, Landlord shall have no obligation to
insure any of Tenant's personal property.
ARTICLE 18. WAIVER OF SUBROGATION RIGHTS
Tenant and Landlord hereby mutually release each other from
liability and waive all right of recovery against each other for any loss
from perils insured against under their respective insurance policies,
including any extended coverage and endorsements thereto; provided however,
that this article shall be inapplicable if it would have the effect, but only
to the extent it would have the effect, of invalidating any insurance
coverage of Landlord or Tenant.
ARTICLE 19. DEFAULT
Each of following events shall be deemed to be Events of Default by
Tenant under this lease agreement:
(a) Tenant shall fail to pay WITHIN FIVE (5) DAYS OF WHEN DUE
any installment of the rent hereby reserved or any other sum of money due to
Landlord pursuant hereto.
(b) Payment of rent due on a first day of a month shall
not have been received by Landlord on or before the tenth day of that
month.
<PAGE>
(c) Payment of any other sum shall not have been RECEIVED by
Landlord on or before FIFTEEN(15) DAYS following billing by Landlord.
(d) Tenant shall fail to comply with any term, provision, or
covenant of this lease agreement, other than the payment of rent, and shall
not cure that failure within ten (10) days after written notice thereof to
Tenant.
(e) Tenant shall make an assignment for the benefit of
creditors.
(f) Tenant shall file a petition under any section or chapter
of the National Bankruptcy Act, as amended, or under any similar law or
statute of the United States or any state thereof or Tenant shall be adjudged
to be bankrupt or insolvent in proceedings filed by or against Tenant
thereunder and such adjudication shall not be vacated or set aside or stayed
within the time permitted by law.
(g) A receiver or trustee shall be appointed for all or
substantially all of the assets of Tenant and that receivership shall not be
terminated or stayed within six (6) months.
(h) Tenant shall desert the Leased Premises for a period of
thirty (30) or more days.
ARTICLE 20. WAIVER OF DEFAULT
No waiver by the parties hereto of any default or breach of any
term, condition, or covenant of this lease agreement shall be deemed to be
waiver of any other breach of the same or any other term, condition, or
covenant contained herein.
ARTICLE 21. REMEDIES
21.1 Upon the occurrence of any event of default specified in
Article 19, Landlord shall have the option to pursue any one or more of the
following remedies without any notice or demand whatsoever, not specifi-
cally provided for herein:
(a) Terminate this lease agreement, in which event Tenant shall
immediately surrender the Leased Premised to Landlord, and if Tenant fails to do
so, then without prejudice to any other remedy which Landlord may have for
possession or arrearage in rent, Landlord may enter upon and take possession of
the Leased Premises and expel or remove Tenant. Provided such action is in
accordance with the applicable Texas law, this may be done, by self help if
necessary, without Landlord being liable for prosecution or any claim of damages
therefor and Tenant shall pay to Landlord on demand the amount of all loss and
damage which Landlord may suffer by reason or such termination, whether through
inability to relet the Leased Premises on satisfactory terms or otherwise.
<PAGE>
(b) Enter upon and take possession of the Leased Premises and
expel or remove Tenant and any other person who may be occupying the Lease
Premises or any part thereof, by self help if necessary, provided such action
is in accordance with the applicable Texas law, without being liable for
prosecution or any claim for damages, and if Landlord so elects, relet the
Leased Premises on such terms as Landlord shall deem advisable and receive
the rent therefor and Tenant shall pay to Landlord on demand any deficiency
that may arise by reason of such reletting.
(c) Enter upon the Leased Premises, by self help if necessary
without being liable for prosecution or any claim for damages therefor, and
do whatever Tenant is obligated to do under the terms of this Lease Agreement
and Tenant shall reimburse Landlord on demand for any expenses which Landlord
may incur in thus effecting compliance with Tenant's obligations under this
Lease Agreement, and Landlord shall not be liable for any damages resulting
to Tenant from such action.
(d) Alter locks and other security devised on the Leased
Premises with or without having terminated this lease agreement.
21.2 No re-entry or taking possession of the Leased Premises by
Landlord shall be construed as an election on part of Landlord to termi-
nate this Lease Agreement, unless a written notice of such intention is given
to Tenant by Landlord. Notwithstanding any such reletting or reentry to
taking possession, Landlord may at any time thereafter elect to terminate
this Lease Agreement for a previous default.
21.3 Pursuit of any of the foregoing remedies shall not preclude
pursuit of any of the other remedies herein provided or any other remedies
provided by law, nor shall pursuit of any remedy herein provided constitute a
forfeiture or waiver of any rent due to Landlord hereunder or of any damages
accruing to Landlord by reason of the violation of any of the terms,
provisions, and covenants herein contained. Landlord's acceptance of rent
following an event of default hereunder shall not be construed as Landlord's
waiver of such event of default. No waiver by Landlord of any violation or
breach of any of the terms, provisions, and covenants herein contained shall
be deemed or construed to constitute a waiver of any other violation or
breach of any of the terms, provisions, and covenants herein contained.
Forbearance by Landlord to enforce one or more of the remedies herein
provided upon an event of default shall not be deemed or construed to
constitute a waiver of such default.
21.4 The loss or damage that Landlord may suffer by reason of
termination of this Lease Agreement or the deficiency from any reletting as
provided for above shall include all leasing commissions and fees, expenses
of repossession, and any repairs or remodeling undertaken by Landlord
following repossession. Should Landlord at any time terminate this Lease
Agreement for any default, in addition to any other remedy Landlord may have,
Landlord may recover from Tenant all damages (including reasonable attorney's
fees) Landlord may incur by reason of such default, including costs of
recovering the Leased Premises and the value at the time of such termination
of the excess, if any, of the amount of rent and charges
<PAGE>
equivalent to rent reserved in this lease agreement for the remainder of the
stated term over the then reasonable rental value of the Leased Premises for
the remainder of the term, all of which amounts shall be immediately payable
by Tenant to Landlord.
21.5 No act or thing done by Landlord or Landlord's agents during
the term hereby granted shall be deemed an acceptance of a surrender of the
Leased Premises, and no agreement to accept a surrender of the Leased
Premises shall be valid unless the same is made in writing and subscribed by
Landlord.
21.6 If Landlord repossesses the Leased Premises following an
event of default, Landlord shall not have any obligation to relet or attempt
to relet the Leased Premises or any portion thereof, and in the event of any
reletting, Landlord may relet all or any portion thereof to any tenant(s) for
any period(s), upon any terms, for any rental, and for any use or purpose.
21.7 In no event shall Tenant be entitled to any excess of any
rent obtained by Landlord's reletting the Leased Premises or any part thereof
for an amount over and above the rental herein reserved.
ARTICLE 22. RIGHTS AND REMEDIES CUMULATIVE
The rights and remedies provided by this lease agreement are
cumulative and the use of any one right or remedy by either party shall not
preclude or waive the right of a party to use any or all other remedies.
Said rights and remedies are given in addition to any other rights the
parties may have by law, statute, ordinance, or otherwise.
ARTICLE 23. MORTGAGES
Tenant accepts this lease agreement and the Leased Premises in
their entirety subject to any deeds of trust, security interests, or
mortgages which might now or hereafter constitute a lien upon the Building or
improvements therein or on the Leased Premises and to zoning ordinances and
other building or fire ordinances and governmental regulations relating to
the use of the property. Tenant shall at any time hereafter, on demand,
execute any estoppel letters or certificates, instruments, releases, or other
documents that may be required by Landlord or by any purchases or by any
prospective purchases of the Building or by any mortgagee for the purpose of
confirming the status of this lease agreement or for subjecting and
subordinating this lease agreement to the lien of any such deed of trust,
security interest, or mortgage. With respect to any deed of trust, security
interest, or mortgage hereinafter constituting a lien on the Building,
improvements therein, or the Leased Premises. Landlord at Landlord's sole
option shall have the right to waive the applicability of this article so
that this lease agreement will not be subject and subordinate to any such
deed of trust, security interest, or mortgage.
<PAGE>
ARTICLE 24. HOLDING OVER
Should Tenant or any of Tenant's successors in interest hold over
the Leased Premises, or any part thereof, after the expiration of the term of
this lease agreement, unless otherwise agreed in writing, such holding over
shall constitute and construed as tenancy from month to month only, at a
rental equal to 150% of the rent (base and cumulative escalation) payable for
the last month of the term of this lease agreement. The inclusion of the
preceding sentence shall not be construed as Landlord's consent for Tenant to
hold over. Tenant is required to notify Landlord thirty (30) days in advance
should Tenant desire to hold over.
ARTICLE 25. NOTICES AND ADDRESSES
25.1 Any notice, demand, election or other communication which any
party hereto shall desire or be required to give pursuant to the provision of
this lease agreement shall be sent (unless otherwise expressly indicated
elsewhere in this lease agreement) by registered or certified mail, return
complete when said receipt is signed and dated by addressee, said notice
being delivered to the addresses set forth in Article 1 or to any other place
designated in writing with notice given in like manner by either party or by
the successors or transferees of such party.
25.2 The time period in which a response to any such notice,
demand, or request must be given shall commence to run from the date received
by the addressee or on the third calendar day following its mailing. Actual
notice, in lieu of the foregoing provisions, may be given by hand delivery to
the addressee. Notice also may be given to Tenant by delivering a copy
thereof to the Leased Premises and such notice shall be effective on the day
of such delivery.
ARTICLE 26. PARTIES BOUND
This lease agreement shall be binding upon and insure to the
benefit of the parties hereto and their respective heirs, executors,
administrators, legal representatives, successors, and assigns where
permitted by this agreement.
ARTICLE 27. TEXAS LAW TO APPLY
This lease agreement shall be construed under and in accordance
with the laws of the State of Texas, and all obligations of the parties
created hereunder are to be performed in Harris County, Texas.
ARTICLE 28. PRIOR AGREEMENTS SUPERSEDED
This lease agreement constitutes the sole and only agreement of the
parties hereto and supersedes any prior understandings or written or oral
agreements between the parties respecting this subject matter.
<PAGE>
ARTICLE 29. LEGAL CONSTRUCTION
In case any one or more of the provisions contained in this lease
agreement shall be held to be invalid, illegal, or unenforceable in any
respect, such invalidity, illegality, or unenforceability shall not affect
any other provisions hereof and this lease agreement shall be construed as if
such invalid, illegal, or unenforceable provision had never been contained
herein.
ARTICLE 30. SHORT FORM LEASE AGREEMENT
Upon request by Landlord, Tenant shall execute a short form lease
agreement in recordable form setting forth the essential elements of this
Standard Texas Office Building lease agreement including, but not limited to,
the names of the parties, the term of the lease agreement, and the
description of the Leased Premises.
ARTICLE 31. GENDER
Words of any gender used in this lease agreement shall be held and
construed to include any other gender, and words in the singular number shall
be held to include the plural, unless the context otherwise requires.
ARTICLE 32. FORCE MAJEURE
Neither Landlord nor Tenant shall be required to perform any term,
condition, or covenant in this lease agreement so long as such performance is
delayed or prevented by force majeure, which shall mean acts of God, labor
disputes (whether lawful or not), material or labor short- ages, restrictions
by any government authority, riots, floods, and any other cause not
reasonably within the control of Landlord or Tenant and which by the exercise
of due diligence Landlord or Tenant is unable, wholly or in part, to prevent
or overcome.
ARTICLE 33. JOINT AND SEVERAL LIABILITY
If there is more than one Tenant, the obligations hereunder imposed
upon Tenant shall be joint and several.
ARTICLE 34. ATTORNEY'S FEES
In the event a party breaches any of the terms of this lease
agreement the defaulting party shall pay the reasonable attorney's fees
incurred by the prevailing party.
ARTICLE 35. TIME OF THE ESSENCE
Time is of the essence in this lease agreement.
ARTICLE 36. AMENDMENT
No amendment, modification, or alteration of the terms hereof shall be
binding upon a party unless it shall be in writing, dated subse- quent to the
date hereof, and executed by such party.
<PAGE>
ARTICLE 37. ADDITIONAL PROVISIONS
The additional provisions contained on the attached Exhibit F, and
signed or initialed by Landlord and Tenant, are incorporated in this lease
agreement for all purposes.
ARTICLE 38. CONSEQUENTIAL DAMAGES
Under no circumstances whatsoever shall either party ever be liable
for consequential or special damages.
ARTICLE 39. LIMITATION OF LANDLORD'S PERSONAL LIABILITY
All covenants of Landlord shall be binding upon Landlord and
Landlord's successors and assigns only with respect to breaches occurring
their respective ownership of Landlord`s interest in the Building and the
property on which it is located. Notwithstanding any provisions hereof to
the contrary, Tenant and each and every successor and permitted assignee and
sublessee of Tenant shall look solely to Landlord's interest in the Building
and the property on which it is located for the recovery or satisfaction of
any judgment against Landlord and Landlord's successors and assigns. No
judgment, order or execution entered in any suit, action or proceeding shall
be taken against Landlord or any other person holding by, through or under
Landlord for the purpose of obtaining any satisfaction or payment of any
claims arising hereunder from other than such person's interest in the
Building and the property on which it is located. The provisions of this
Article are not intended to limit any right that Tenant may have (a) with
respect to injunctive relief, (b) or to institute actions not involving the
personal liability of Landlord to respond in monetary damages from assets
other than Landlord's interest in the Building and the property on which it
is located, or (c) any suit or action involving only intentional torts of
Landlord.
ARTICLE 40. TENANT ESTOPPEL LETTER
Prior to entering into possession of the Leased Premises and
occupying any portion thereof and, after entering into such possession,
within five (5) days following one or more requests of Landlord, Tenant shall
sign, acknowledge and deliver to Landlord an estoppel certificate certifying
that this lease agreement is unmodified and is in full force and effect (or
if modified, is in full force and effect as so modified), that offsets
thereto known to Tenant (if such is the case), the date to which rent has
been paid, and such additional facts concerning this lease agreement as
Landlord may reasonably request. The form and substance of the certificate
currently used by Landlord is attached hereto as Exhibit G.
<PAGE>
ARTICLE 41. DELETED
ARTICLE 42. PEACEFUL ENJOYMENT
Subject to the other provisions hereof and provided that Tenant
shall pay timely all sums due hereunder and shall perform fully and timely
all of the covenants and obligations herein imposed upon and undertaken by
Tenant, Tenant shall and may peacefully have, hold and enjoy the Leased
Premises during the term hereof. Upon the termination of this lease, however
it may occur, Tenant shall peaceably and quietly yield up and surrender to
Landlord the possession of the Leased Premises without disturbance or
molestation thereof, and upon Lessor's request, shall execute and deliver an
instrument in recordable form evidencing the termination hereof.
ARTICLE 43. EXECUTION
The parties having agreed as above, this lease agreement is dated for
reference on 18th April, 1996.
LANDLORD:
ONE CYPRESSWOOD BUILDING
BY: /s/ Dan E. Hand
-------------------------------
TENANT:
STB Systems, Inc.
A Texas Corporation
BY: /s/ Bryan F. Keyes
-------------------------------
Bryan F. Keyes, Treasurer
<PAGE>
EXHIBIT A
Proposed Chase Wood Crossing
2.0755 Acres
(90,408 Square Feet)
James Winn Survey, A-833
Harris County, Texas
METES & BOUNDS
A parcel of land containing 2.0755 Acres (90,408 Square Feet) lying in the
James Winn Survey, A-833, Harris County, Texas, and more particularly being
out of that certain tract described as 29.3024 acres in instrument of record
at Clerk's File No. J 197474, Film Code No. 062-88-1410, Official Public
Records of Real Property, Harris County, Texas, said 2.0755 acres (90,408
Square Feet) being more particularly described by metes and bounds as follows:
COMMENCING for reference at a point making the intersection of the easterly
right-of-way line of F.M. 149 (180' R.O.W.) and the most southerly northerly
line of said 29.3024 acres;
THENCE N 88 DEG. 23' 35" E, 763.37 feet along said most southerly northerly
line to the POINT OF BEGINNING of the tract herein described;
THENCE N 88 DEG. 23' 35" E, 290.05 feet to a point for corner;
THENCE S 02 DEG. 39' 21" E, 264.24 feet to a point in a curve on the
northerly right-of-way line of Cypresswood Drive (100 feet wide);
THENCE 218.22 feet along said right-of-way line of said Cypresswood Drive
following the arc of a curve to the right, having a radius of 1,950.00 feet
and subtending a central angle of 06 DEG. 24' 42" to the point of tangency
of said curve (chord S 65 DEG. 48' 32" W, 218.10 feet);
THENCE S 69 DEG. 00' 53" W, 41.67 feet along said right-of-way line of said
Cypresswood Drive to a point for corner;
THENCE N 20 DEG. 59' 07" W, 151.24 feet to a point for corner;
THENCE N 02 DEG. 39' 21" W, 219.14 feet to the POINT OF BEGINNING and
continuing 2.0755 acres (90,408 Square Feet) of land.
JOHN J. PEPE, CONSULTING ENGINEERS, INC.
[SEAL]
/s/ SALIM A. JOUBRAN
----------------------------------------
Salim A. Joubran
Texas Registration No. 3334
<PAGE>
STB SYSTEMS, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
(UNAUDITED)
- - -----------------------------------------------------------------------------
(dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
1996 1995 1996 1995
------------------------- -------------------------
PRO FORMA PRO FORMA
<S> <C> <C> <C> <C>
Net income $ 1,351 $ 496 $ 2,566 $ 1,554
Pro forma adjustment to general and
administrative expenses - 220
Pro forma adjustment to reflect interest
on Founding Shareholder Notes (11) (52)
Pro forma adjustment to reflect federal
income taxes (75) (483)
----------- ----------- ----------- -----------
Net income, as adjusted $ 1,351 $ 410 $ 2,566 $ 1,239
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
PRIMARY
Weighted average number of shares outstanding 4,500,000 4,028,090 4,500,000 3,251,381
Additional weighted average shares to reflect pro forma
adjustment for distribution of S Corp earnings 44,201 111,966
Additional weighted average shares from assumed exercise
of dilutive stock options, net of shares assumed to be
repurchased with exercise proceeds 114 32,184 45 15,825
----------- ----------- ----------- -----------
Net income per share $ 0.30 $ 0.10 $ 0.57 $ 0.37
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
FULLY DILUTIVE
Weighted average number of shares outstanding 4,500,000 4,028,090 4,500,000 3,251,381
Additional weighted average shares to reflect pro forma
adjustment for distribution of S Corp earnings 44,201 111,966
Additional weighted average shares from assumed exercise
of dilutive stock options, net of shares assumed to be
repurchased with exercise proceeds 236 32,184 167 15,825
----------- ----------- ----------- -----------
Net income per share $ 0.30 $ 0.10 $ 0.57 $ 0.37
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-END> APR-30-1996
<CASH> 2,311
<SECURITIES> 0
<RECEIVABLES> 22,063
<ALLOWANCES> (535)
<INVENTORY> 21,597
<CURRENT-ASSETS> 45,671
<PP&E> 7,071
<DEPRECIATION> (3,327)
<TOTAL-ASSETS> 50,567
<CURRENT-LIABILITIES> 22,792
<BONDS> 0
0
0
<COMMON> 45
<OTHER-SE> 25,883
<TOTAL-LIABILITY-AND-EQUITY> 50,567
<SALES> 89,497
<TOTAL-REVENUES> 89,497
<CGS> 73,832
<TOTAL-COSTS> 73,832
<OTHER-EXPENSES> 11,170
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 599
<INCOME-PRETAX> 3,896
<INCOME-TAX> 1,330
<INCOME-CONTINUING> 2,566
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,566
<EPS-PRIMARY> .57
<EPS-DILUTED> .57
</TABLE>
