<PAGE>
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, 1997
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)
(972) 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 11, 1997:
Common Stock, $.01 par value 4,603,904
<PAGE>
STB SYSTEMS, INC.
INDEX
PAGE
PART I FINANCIAL INFORMATION NUMBER
Item 1 Consolidated Financial Statements (unaudited) :
Consolidated Balance Sheets at April 30, 1997
and October 31, 1996 2
Consolidated Statements of Operations for the
quarters ended April 30, 1997 and 1996 3
Consolidated Statements of Operations for the
six months ended April 30, 1997 and 1996 4
Consolidated Statements of Cash Flows for the
six months ended April 30, 1997 and 1996 5
Notes to Consolidated Financial Statements 6-7
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-12
PART II OTHER INFORMATION
Item 1 Has been omitted since the registrant has no
reportable events in relation to these items.
Item 2 Changes in Securities 12
Item 3 Has 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 12-13
Item 5 Other Information - Forward-Looking Information;
Business Risks 13-19
Item 6 Exhibits and Reports on Form 8-K 19
Signatures 20
-1-
<PAGE>
STB SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
- ------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
APRIL 30, OCTOBER 31,
1997 1996
========================
ASSETS
Current Assets:
Cash and cash equivalents $ 2,579 $ 3,420
Accounts receivable - trade, net of
allowance for doubtful Accounts
of $530 and $332 36,508 28,032
Inventories, net 24,819 27,148
Other current assets 1,678 1,348
---------------------
Total current assets 65,584 59,948
Property and equipment, net 7,091 5,231
Other assets 2,008 450
---------------------
Total assets $74,683 $65,629
=====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term debt $18,455 $11,760
Accounts payable - trade 16,037 19,538
Accrued wages, commissions and bonuses 1,035 1,144
Other accrued liabilities 1,803 1,609
Current portion of long-term liabilities 659 705
---------------------
Total current liabilities 37,989 34,756
---------------------
Long-term Liabilities:
Long-term notes payable 750 1,000
Obligations under capital leases and
other long-term liabilities 207 276
---------------------
Total long-term liabilities 957 1,276
---------------------
Shareholders' Equity:
Preferred stock, 2,000,000 shares
authorized, none issued or Outstanding - -
Common stock, $.01 par value, 20,000,000
shares authorized, 4,585,715 and 4,513,598
shares issued and outstanding 46 45
Additional paid-in capital 23,788 22,318
Retained earnings 12,148 7,479
---------------------
35,982 29,842
Treasury stock, 35 shares, at cost (245) (245)
---------------------
Total shareholders' equity 35,737 29,597
---------------------
Total liabilities and shareholders' equity $74,683 $65,629
=====================
The accompanying notes are an integral part of these financial statements.
-2-
<PAGE>
STB SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
- ------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
THREE MONTHS ENDED
APRIL 30,
1997 1996
=======================
Net sales $ 48,700 $ 44,592
Cost of sales 36,922 36,189
-----------------------
Gross profit 11,778 8,403
-----------------------
Operating expenses:
Research and development 1,556 1,018
Sales and marketing 3,637 2,587
General and administrative 2,408 2,470
-----------------------
Total operating expenses 7,601 6,075
-----------------------
Income from operations 4,177 2,328
Interest expense, net 383 278
-----------------------
Income before income taxes 3,794 2,050
Provision for income taxes 1,376 699
-----------------------
Net income $ 2,418 $ 1,351
=======================
Net income per share $ 0.49 $ 0.30
=======================
Weighted average shares outstanding 4,916,554 4,500,114
=======================
The accompanying notes are an integral part of these financial statements.
-3-
<PAGE>
STB SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
- ------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
SIX MONTHS ENDED
APRIL 30,
1997 1996
=======================
Net sales $ 96,792 $ 89,497
Cost of sales 74,381 73,832
-----------------------
Gross profit 22,411 15,665
-----------------------
Operating expenses:
Research and development 2,794 1,792
Sales and marketing 6,923 5,000
General and administrative 4,791 4,378
-----------------------
Total operating expenses 14,508 11,170
-----------------------
Income from operations 7,903 4,495
Interest expense, net 759 599
-----------------------
Income before income taxes 7,144 3,896
Provision for income taxes 2,474 1,330
-----------------------
Net income $ 4,670 $ 2,566
=======================
Net income per share $ 0.96 $ 0.57
=======================
Weighted average shares outstanding 4,856,626 4,500,045
=======================
The accompanying notes are an integral part of these financial statements.
-4-
<PAGE>
STB SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
- ------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
SIX MONTHS ENDED
APRIL 30,
1997 1996
======================
Cash flows from operating activities:
Net income $ 4,670 $ 2,566
Adjustments to reconcile net income to net cash
From operating activities:
Depreciation and amortization 940 506
Changes in assets and liabilities:
Accounts receivable - trade (8,476) (895)
Inventories, net 2,329 6,278
Other current assets (330) 634
Other assets (1,558) (550)
Accounts payable - trade (3,501) (5,739)
Accrued wages, commissions, and bonuses (109) 305
Other accrued liabilities 194 (48)
----------------------
Net cash provided by (used in)
operating activities (5,841) 3,057
----------------------
Cash flows from investing activities -
Purchases of property and equipment (2,800) (852)
----------------------
Cash flows from financing activities:
Borrowings on (payments of) short-term debt 6,695 (2,949)
Payment of Founding Shareholder Notes - (700)
Payment of long-term debt (365) (407)
Issuance of common stock, net of issue costs 1,470 -
----------------------
Net cash provided by (used in) financing
activities 7,800 (4,056)
----------------------
Net decrease in cash and cash equivalents (841) (1,851)
Cash and cash equivalents at beginning of period 3,420 4,162
----------------------
Cash and cash equivalents at end of period $ 2,579 $ 2,311
======================
The accompanying notes are an integral part of these financial statements.
-5-
<PAGE>
STB SYSTEMS, INC.
Notes To Consolidated Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
STB Systems, Inc. develops, manufactures and sells a wide selection of
multimedia accelerators, other multimedia subsystem products and
specialized technology products for use in mid-range and high-end 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., STB Assembly, Inc. and Symmetric Simulation Systems,
Inc. (see Note 2), (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 that 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, 1996. The foregoing unaudited interim consolidated
financial statements reflect all adjustments (all of which are of a normal
recurring nature) which are, in the opinion of management, necessary for a
fair presentation of the results of the interim periods. The results for
the interim periods are not necessarily indicative of the results to be
expected for the year.
2. ACQUISITION
During the quarter ended April 30, 1997, STB Systems, Inc. acquired all of
the outstanding shares of Symmetric Simulation Systems, Inc. ("Symmetric").
Symmetric designs and builds high-end 3D graphics acceleration products for
use in applications such as computer-aided design, product visualization
and animation. As a result of the acquisition, the Company recorded
goodwill in the amount of $1,648,000 which is included in Other assets.
Unamortized goodwill at April 30, 1997 was $1,628,000.
3. INVENTORIES
Inventories at April 30, 1997 and October 31, 1996 consist of the
following:
(in thousands)
April 30, 1997 October 31, 1996
-------------- ----------------
Raw materials $ 9,087 $ 10,667
Work-in-process 10,708 14,358
Finished goods 5,024 2,123
-------------- ----------------
Totals $ 24,819 $ 27,148
-------------- ----------------
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<PAGE>
4. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued FAS No.
128, "Earnings per share", (SFAS 128). The Company will adopt SFAS 128,
which establishes standards for computing and presenting earnings per share
(EPS), in the first quarter of fiscal 1998. This statement requires dual
presentation of basic and diluted EPS on the face of the income statement
for entities with complex capital structures and requires a reconciliation
of the numerator and denominator of the basic EPS computation to the
numerator and denominator of the diluted EPS computation. Basic EPS
excludes the effect of potentially dilutive securities while diluted EPS
reflects the potential dilution that would occur if securities or other
contracts to issue common stock were exercised, converted into or resulted
in the issuance of common stock. The following table sets forth the basic
and diluted EPS computation, on a pro forma basis, as required by SFAS 128:
Three months Six months
ended ended
April 30, 1997 April 30, 1997
-------------- --------------
Net income $ 2,418 $ 4,670
===========================
BASIC (Pro forma)
Weighted average number of shares outstanding 4,554,885 4,534,533
---------------------------
Basic net income per share $ 0.53 $ 1.03
===========================
DILUTED (Pro forma)
Weighted average number of shares outstanding 4,554,885 4,534,533
Additional weighted average shares from
assumed exercise of dilutive stock options,
net of shares assumed to be repurchased
with exercise proceeds 361,669 322,093
---------------------------
Diluted net income per share $ 0.49 $ 0.96
===========================
-7-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company currently sells two broad categories of products which the Company
refers to as multimedia subsystem products and specialized technology products.
The Company's multimedia subsystem product line includes a wide selection of
multimedia accelerators designed for use in mid-range to high-end personal
computers (PCs) and also features several complementary products, including
digital video products and sound cards. STB's specialized technology products
incorporate graphics technologies and are primarily designed to enable one
computer to simultaneously control the display of multiple monitors.
The Company sells its products to original equipment manufacturers (OEM's), the
commercial market, and the specialized technology market. Multimedia subsystem
products are sold both to OEMs as subsystems for their PC products and to the
commercial market. Sales of multimedia accelerators and other multimedia
subsystem products to OEMs are characterized by higher unit volumes and lower
gross profit margins. Sales of multimedia products to the commercial market are
characterized by modest volumes and higher gross profit margins than the sale of
similar products to OEMs. Although sales of specialized technology products are
relatively low, the Company realizes higher gross profit margins from the sale
of these products than from the sale of multimedia subsystem products. The
Company began shipping significant unit volumes of certain new products, other
than multimedia accelerators, in the third quarter of the 1996 fiscal year.
Revenues generated from the sale of these multimedia subsystem products have
been characterized as OEM channel sales in the discussion below. The Company is
not yet in a position to forecast the effect that the sales of these new
products will have upon the Company's future results of operations.
Sales of the Company's products to OEMs represented approximately 81% (of which
approximately 4.5% was comprised of sales of new multimedia subsystem products)
of total net sales for the fiscal year 1996. Sales to the commercial market and
the specialized technology market represented approximately 11% and 6%,
respectively. The balance of total net sales was derived primarily from third
party assembly services, which accounted for approximately 2% of total net sales
in fiscal year 1996. The Company's total gross profit margins and gross profits
will likely fluctuate from period to period as a result of the Company's product
mix, sales channel mix, component costs and competitive pricing pressures on the
Company's products.
The Company recognizes revenue upon shipment of its products. For products sold
through the commercial channel, the Company generally allows returns in the form
of stock rotation and price protection in the form of credits. The Company's
current stock rotation policies permit a commerical channel customer to return
recently purchased products, provided that the customer places an order for
other Company products of equal or greater value. The Company has historically
been able to resell products returned through the stock rotation program. The
Company also provides price protection to commercial channel customers in the
form of credits for price reductions on products remaining in inventories at the
time of the price reduction. The Company maintains reserves related to these
programs, which it believes are adequate.
During the quarter ended April 30, 1997 the Company acquired all of the
outstanding shares of Symmetric Simulation Systems, Inc., ("Symmetric").
Symmetric designs and builds high-end 3D graphics acceleration technology used
in applications such as computer-aided design, product visualization,
architectural walkthroughs and multimedia authoring. The Company believes that
the Symmetric product line compliments the Company's existing products and
establishes the Company in the high-end 3D market. The Company is not yet in a
position to forecast the effect, if any, the acquisition of Symmetric will have
upon the Company's future results of operations. See "Changes in Securities"
and "Note 2 to Notes to Consolidated Financial Statements".
-8-
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain items from the Company's consolidated
statement of operations as a percentage of net sales from continuing operations:
<TABLE>
Percentage of Net Sales Percentage of Net Sales
Three Months Ended Six Months Ended
April 30, April 30,
1997 1996 1997 1996
======================= =======================
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 75.8% 81.2% 76.8% 82.5%
Gross profit 24.2% 18.8% 23.2% 17.5%
Operating expenses:
Research and development 3.2% 2.3% 2.9% 2.0%
Sales and marketing 7.5% 5.8% 7.2% 5.6%
General and administrative 4.9% 5.5% 4.9% 4.9%
Total operating expenses 15.6% 13.6% 15.0% 12.5%
Income from operations 8.6% 5.2% 8.2% 5.0%
Interest expense, net 0.8% 0.6% 0.8% 0.7%
Income before income taxes 7.8% 4.6% 7.4% 4.3%
Provision for income taxes 2.8% 1.6% 2.6% 1.4%
Net income 5.0% 3.0% 4.8% 2.9%
</TABLE>
QUARTER ENDED APRIL 30, 1997 COMPARED TO QUARTER ENDED APRIL 30, 1996.
Net Sales. Net sales increased by $4.1 million, or 9.2%, from $44.6 million in
the second quarter of fiscal 1996 to $48.7 million in the second quarter of
fiscal 1997. This increase resulted primarily from continuing growth in sales
of the Company's products to all channels, to its four largest OEM's and to its
specialized technology customers and to a lesser extent due to increased unit
sales to its commerical channel customers, offset somewhat by decreasing unit
prices. During the quarter, sales of Symmetric products accounted for $842,000,
or 1.7%, of total net sales.
For the second quarter of fiscal 1997, OEM channel sales of $38.6 million
represented approximately 80% of total net sales, compared to OEM channel sales
of $35.6 million, representing approximately 80% of total net sales, for the
second quarter of fiscal 1996. Domestic shipments to OEMs remained strong during
the second quarter of fiscal 1997. The Company's sales into the retail channel
increased by $462,000, or 10%, from $4.5 million in the second quarter of fiscal
1996 to $4.9 million in the second quarter of fiscal 1997. Sales of specialized
technology products increased by $335,000, or 10%, from $3.1 million in the
second quarter of fiscal 1996 to $3.4 million in the second quarter of fiscal
1997.
Gross Profit. Gross profit increased by $3.4 million, or 40%, from $8.4 million
in the second quarter of fiscal 1996 to $11.8 million in the second quarter of
fiscal 1997. During the period, gross profit as a percentage of net sales
increased from 18.8% to 24.2%. The increase in the amount of gross profit
resulted primarily from increases in sales volumes of the Company's products,
partially offset by decreasing unit prices. The increase in gross profit as a
percentage of net sales resulted primarily from the economies of scale resulting
from higher OEM production volumes and increased operating efficiencies. In
addition, increased revenues and margins from the specialized technology market
and from sales of Symmetric's products also contributed to the overall higher
margin percentage.
-9-
<PAGE>
Research and Development Expenses. Research and development expenses increased
by $538,000, or 52.8%, from $1.0 million in the second quarter of fiscal 1996 to
$1.5 million in the second quarter of fiscal 1997. This increase resulted from
increased staffing levels at the Company's corporate office, the Houston, Texas
and Eugene, Oregon design centers and the recently established design center in
Belfast, Northern Ireland. Other expenses associated with the development of
new products as well as the continuing enhancement and support of the Company's
existing products also contributed to the increase in research and development
expenses. During the periods, research and development expenses as a percentage
of net sales increased from 2.3% to 3.2%.
Sales and Marketing Expenses. Sales and marketing expenses increased by $1.0
million, or 40.6%, from $2.6 million in the second quarter of fiscal 1996 to
$3.6 million in the second quarter of fiscal 1997. This increase in expenses
resulted primarily from additional staffing and commissions paid as a result of
higher sales levels. Increased expenses associated with the Company's
incremental sales, including travel costs, advertising and promotional efforts
in the commercial and specialized technology channels and the international
market also contributed to the increased expenses. During the periods, the
expenses as a percentage of net sales increased from 5.8% to 7.5%.
General and Administrative Expenses. General and administrative expenses
decreased by $62,000, or 2.0%, from $2.5 million in the second quarter of fiscal
1996 to $2.4 million in the second quarter of fiscal 1997. This decrease in the
amount of general and administrative expenses was due primarily to reduced
insurance costs and professional fees, as well as an increase in the allocation
of certain costs related to the Mexican manufacturing operation to cost of goods
sold, partially offset by slight increases in expenses associated with the
Company's growth, including occupancy costs and increased staffing and related
expenses. During the periods, these expenses as a percentage of net sales
decreased from 5.5% to 4.9%.
SIX MONTHS ENDED APRIL 30, 1997 COMPARED TO SIX MONTHS ENDED APRIL 30, 1996.
Net Sales. Net sales increased by $7.3 million, or 8.2%, from $89.5 million in
the first six months of fiscal 1996 to $96.8 million in the first six months of
fiscal 1997. This increase resulted primarily from continuing growth in sales
of the Company's products to the commercial channel and the specialized
technology market.
For the first six months of fiscal 1997, OEM channel sales of $73.3 million
represented approximately 76% of total net sales, compared to OEM channel
sales of $73.3 million, representing approximately 82% of total net sales,
for the first six months of fiscal 1996. The Company's sales into the retail
channel increased by $7.5 million, or 108%, from $6.9 million in the first
six months of fiscal 1996 to $14.4 million for the same period of fiscal
1997. Sales of specialized technology products increased by $528,000, or
9.0%, from $5.6 million in the first six months of fiscal 1996 to $6.1
million in the first six months of fiscal 1997. Third party assembly
services along with sales of Symmetric products accounted for remaining sales
for the period.
Gross Profit. Gross profit increased by $6.7 million, or 43%, from $15.7
million in the first six months of fiscal 1996 to $22.4 million in the first
six months of fiscal 1997. During the period, gross profit as a percentage
of net sales increased from 17.5% to 23.2%. The increase in the amount of
gross profit resulted from increases in sales volumes of the Company's
products, partially offset by decreasing unit prices. The increase in gross
profit as a percentage of net sales resulted primarily from the economies of
scale due to higher production volumes and increased operating efficiencies.
In addition, increased revenues and margins from the commercial channel and
the specialized technology market also contributed to the overall higher
margin percentage.
Research and Development Expenses. Research and development expenses
increased by $1.0 million, or 55.9%, from $1.8 million in the first six
months of fiscal 1996 to $2.8 million for the same period of fiscal 1997.
This increase resulted from increased staffing levels at the Company's
corporate office and design centers located in Houston, Texas, and Eugene,
Oregon, and the recently established design center in Belfast, Northern
Ireland. Expenses associated with the development of new products as well as
the continuing enhancement and support of the Company's existing products
also contributed to the increase in research and development expenses.
During the periods, the expenses as a percentage of net sales increased from
2.0% to 2.9%.
-10-
<PAGE>
Sales and Marketing Expenses. Sales and marketing expenses increased by $1.9
million, or 38.5%, from $5.0 million in the first six months of fiscal 1996
to $6.9 million in the first six months of fiscal 1997. This increase in
expenses resulted primarily from additional staffing and commissions paid as
a result of the Company's growth and higher sales levels. Expenses
associated with the Company's incremental sales, including travel costs,
advertising and promotional efforts in the commercial and specialized
technology channels and the international market also contributed to the
increased expenses. During the periods, the expenses as a percentage of net
sales increased from 5.6% to 7.2%.
General and Administrative Expenses. General and administrative expenses
increased by $413,000, or 9.4%, from $4.4 million in the first six months of
fiscal 1996 to $4.8 million in the first six months of fiscal 1997. This
slight increase in the amount of general and administrative expenses was due
primarily to expenses associated with the Company's growth, increased
staffing and occupancy costs, partially offset by an increase in the
allocation of certain costs related to the Mexican manufacturing operation to
cost of goods sold. During the periods, these expenses as a percentage of net
sales remained unchanged at 4.9%.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital and liquidity needs are for financing
inventory and accounts receivable and 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 initial public 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 and believes
these to be adequate to meet its capital requirements for the foreseeable
future.
Cash used in operating activities was $5.8 million in the first six months of
fiscal 1997, primarily attributable to reductions in accounts payable and
increased accounts receivable resulting from increased sales, partially
offset by net income and reductions in inventory. Cash provided by operating
activities was $3.0 million in the first six months of fiscal 1996. Working
capital was $27.6 million at April 30, 1997, compared to $25.2 million at
October 31, 1996, and cash was $2.6 million at April 30, 1997, compared to
$3.4 million at October 31, 1996.
The Company's investment in equipment totaled $2.8 million in the first six
months of fiscal 1997, compared with net purchases of equipment of $852,000
in the first six months of fiscal 1996. The investments in equipment are
primarily for manufacturing equipment additions and upgrades of existing
equipment to support the increased production volumes as a result of 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 future customer demand and product
requirements.
The Company currently has an available line of credit of $25 million under a
secured revolving credit facility (the "Revolving Credit Facility") which
includes a $2 million term loan (the "Mezzanine Facility"). During fiscal
1996, the Company increased the size of its Revolving Credit Facility by $10
million to its current level. At April 30, 1997, $18.5 million and $1.25
million was outstanding under the Revolving Credit Facility and the Mezzanine
Facility, respectively. Principal amounts under both the Revolving Credit
Facility and the Mezzanine Facility bear interest at the rate of prime plus
.75%. The Revolving Credit Facility agreement provides for a minimum monthly
interest charge of $25,000, which can be satisfied by interest accrued
pursuant to both the Revolving Credit Facility and the Mezzanine Facility.
Availability under the Revolving Credit Facility is subject to limitations
determined by the Company's borrowing base, which is calculated based on
eligible accounts receivable and inventory, as defined in the Revolving
Credit Facility agreement. All indebtedness under these facilities matures on
November 1, 1999.
-11-
<PAGE>
SEASONALITY
The Company's quarterly operating results vary significantly depending on
factors such as the timing of new product introductions, adequacy of
component supply, changes in component costs, variations in the Company's
product mix, seasonal promotions by the Company and its customers and
competitive pricing pressures. Because the timing of these factors may vary,
the results of any particular quarter may not be indicative of results for
the full year or any future period. In addition, the PC market generally
experiences weaker sales during the summer months. Although the Company has
experienced sales growth for each year since fiscal 1990, there can be no
assurance that this growth will continue on a quarterly or annual basis.
PART II OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
(a) The Company increased the number of authorized shares of its Common Stock
from 20,000,000 to 25,000,000. See ITEM 4 below.
(c) On March 18, 1997, the Company acquired all of the outstanding capital
stock of Symmetric Simulation Systems, Inc. ("Symmetric") in exchange for
cash and shares (the "Shares") of the Company's Common Stock. The Shares
were issued to Symmetric's shareholders without registration in reliance on
the exemption contained in Section 3(b) of the Securities Act of 1933, as
amended, and Rule 505 promulgated thereunder. The Shares were issued to
fewer than 35 persons, and the value of the acquisition was less than
$5,000,000. In addition, each of the certificates representing the Shares
issued in connection with the transaction contained a restrictive legend,
and each person to whom the Shares were issued furnished investment
representations to the Company. No underwriters participated in the
transaction. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Overview" and Note 2 to "Notes to
Consolidated Financial Statements".
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting of shareholders was held on April 17,
1997, at the Omni Hotel, 701 East Campbell Road, Richardson, Texas at 3:00 P.M.
At the meeting, the Company's shareholders elected seven directors to
serve until the 1998 annual meeting of shareholders. The vote counts were as
follows:
Affirmative Withheld
----------- --------
William E. Ogle 4,064,135 116,850
Randall D. Eisenbach 4,064,135 116,850
James L. Hopkins 4,064,135 116,850
J. Shane Long 4,063,085 117,900
Lawrence E. Wesneski 4,064,135 116,850
James J. Byrne 4,067,735 113,250
Dennis G. Sabo 4,067,535 113,450
In addition, the Company's shareholders also voted on four other proposals as
follows:
1. The approval of amendments to the Company's 1995 Long Term Incentive
Plan which would raise the number of shares of Common Stock reserved
for issuance under the Plan and increase the Board of Directors
discretion in the administration of the Incentive Plan. The vote
counts were as follows:
Affirmative Against Abstain
----------- --------- -------
3,016,219 1,039,579 91,725
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<PAGE>
2. The approval of an amendment of the Company's Stock Option Plan for
Non-Employee Directors. This amendment authorizes the Board of
Directors to use discretion whether options should be awarded, timing
of the option award, number of shares, exercise of and vesting
schedule. The vote counts were as follows:
Affirmative Against Abstain
----------- --------- -------
3,009,482 1,079,417 92,086
3. The approval of an amendment to Article Four of the Articles of
Incorporation to increase the number of authorized shares of Common
Stock from 20,000,000 to 25,000,000. The vote counts were as follows:
Affirmative Against Abstain
----------- --------- -------
3,843,181 253,575 84,229
4. The Board of Directors of the Company have approved a proposal to
change the state of Incorporation of the Company from Texas to
Delaware, subject to the approval of the shareholders by a 2/3 margin.
The vote counts were as follows:
Affirmative Against Abstain
----------- --------- -------
2,187,727 988,369 28,325
ITEM 5. OTHER INFORMATION - FORWARD LOOKING INFORMATION; BUSINESS RISKS
All statements other than statements of historical fact contained in this
report are forward-looking statements within the meaning of the federal
securities laws. These forward-looking statements involve risks and
uncertainties, and the Company's actual results may differ materially from
the results discussed in the forward-looking statements. Factors that might
cause such a difference include, but are not limited to, the risks described
below.
POTENTIAL FOR FLUCTUATING OPERATING RESULTS: SEASONALITY. The Company's
historical operating results have fluctuated significantly from period to
period and will likely fluctuate in the future. Fluctuations result from a
wide variety of factors, including the timing and availability of components,
changes in product mix and pricing, the timing of customer orders, new
product developments or introductions, production interruptions, product
reviews and other media coverage, changes in sales channel mix and product
returns or price protection claims from customers. Many of these factors are
beyond the control of the Company. The volume and timing of orders received
during a quarter are difficult to forecast. Customers generally order on an
as-needed basis. Consequently, the Company historically has operated with a
relatively small backlog. Moreover, as sometimes occurs in the PC industry,
a disproportionate percentage of the Company's net sales in any quarter may
be generated in the last month of a quarter. As a result, a shortfall in
sales in any quarter as compared to expectations may not be identifiable
until the end of the quarter. The Company's gross profit margins are impacted
by product sales cycles, sales channel mix, product mix, pricing pressures,
the availability and cost of components from the Company's suppliers and
general economic conditions. The Company's markets are characterized by
intense ongoing competition and a trend of declining average selling prices.
Accordingly, the Company's margins may decline in the future from the levels
experienced to date. In addition, the Company's margins may be adversely
affected by shortages in the availability of key components for the Company's
products, as well as by fluctuations in the value of certain foreign
currencies. The Company's quarterly results are also subject to seasonal
fluctuations, with generally weaker fiscal third quarter results. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Selected Quarterly Operating Results" and "--Seasonality."
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<PAGE>
DEPENDENCE ON SUPPLIERS. Several components used in the Company's
products are obtained from single or limited sources and, in instances in
which component manufacturers do not allocate a sufficient supply of
components to meet the Company's needs, the Company must obtain such
components from distributors or on the spot market at a higher cost. The
Company has no guaranteed supply arrangements with any of its suppliers, and
there can be no assurance that current suppliers will be able to meet its
requirements. The Company believes that with respect to its single and
limited source components, it could obtain similar components from other
sources but likely would be required to pay significantly more for such
products, alter product designs to use alternative components (which would
cause significant delays) or reduce its production of the related multimedia
accelerators. As a result of delays in the delivery of components or lack of
available components, the Company in the past has experienced difficulty in
meeting certain product shipment dates to customers, which in some instances
has resulted in a loss of business. In addition, software drivers, which are
essential to product performance, are included with some of these single and
limited source components. In the past, the Company has experienced delays
in the delivery of its products due to the inadequacy or the incompatibility
of software drivers provided by component suppliers or developed internally.
It is likely that delays in delivery of components, shortages of components
and problems with software drivers will continue to occur in the future, and
such delays or problems would materially adversely affect the Company and its
results of operations. Additionally, in its attempt to counter actual or
perceived component shortages, the Company may overpurchase certain
components, resulting in excess inventory or, in the event of inventory
obsolescence or a decline in the market value of such inventory, causing
inventory write-offs against the Company's operating results.
Significant increases in the prices of components, such as graphics
controller chips or memory chips, occur from time to time, and often the
Company is not able to quickly adjust the price of its products accordingly.
Occasional worldwide shortages of DRAM and other memory and controller chips
and international tariff disputes have resulted in substantial component cost
increases in the past that have materially adversely affected the Company and
its results of operations.
The Company relies upon outside suppliers to continue to develop,
introduce and manufacture in sufficient volumes controller chips, memory
chips and other components. Moreover, the technology of these components
must compare favorably in terms of functionality, features and price with the
offerings of other manufacturers, including competitors of the Company that
have internally developed computer chips or manufacturing expertise. The
Company's dependence on single and limited source suppliers, and the risks
associated with any delay or shortfall in supply, are exacerbated by the
short life cycles which characterize multimedia subsystem products.
DEPENDENCE ON MULTIMEDIA ACCELERATOR MARKET; MIGRATION TO MOTHERBOARDS.
A substantial portion of the Company's net sales is derived from the sale of
multimedia accelerators. According to Jon Peddie Associates, approximately
66% of all graphics controller chips manufactured in the 12-month period
ended September 30, 1996, were incorporated onto multimedia accelerators, and
approximately 34% were incorporated onto motherboards. Multimedia
accelerators generally are used in higher-end PCs offering the latest
technology and performance features. However, as a given functionality
becomes technologically stable and widely accepted by PC users, it typically
migrates to the PC motherboard. The Company anticipates that such migration
could occur with respect to the functionality provided by certain of its
current products. In this regard, Intel Corporation's MMX instruction set
and the expanded operating systems provided by Microsoft Corporation
incorporate several functions that traditionally have been performed by
multimedia accelerators. In addition, single chip solutions are currently
available that provide 16-bit sound functionality for implementation directly
onto PC motherboards. As a result of this tendency of technology to migrate
to the PC motherboard, the Company's success is largely dependent on its
ability to continue to develop products that incorporate new and rapidly
evolving technologies that manufacturers have not yet fully incorporated onto
PC motherboards. While the Company believes that a market will continue to
exist for add-in subsystems that provide advanced functionalities and offer
flexibility in systems configuration, there can be no assurance that the
incorporation of new functionalities onto PC motherboards will not adversely
affect the market for the Company's products. An increase in the number or
percentage of PCs that incorporate graphics circuitry on the motherboard at
the expense of add-in multimedia accelerators, an increase in the number or
percentage of multimedia accelerators manufactured internally by OEMs or a
decrease in PC sales volumes would effectively shrink the market for the
Company's products and could materially adversely effect the Company's
business.
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<PAGE>
TECHNOLOGICAL CHANGE AND NEW PRODUCTS. The market for the Company's
products is characterized by short product life cycles, rapidly changing
technology, evolving industry standards and frequent introductions of new
products. OEMs introduce new system configurations as often as twice a year,
and the life cycles of the Company's multimedia accelerators typically range
from 6 to 9 months (plus a few additional months of sales of certain of such
products in the commercial market). If the Company does not successfully
introduce new products within a given product cycle, the Company's sales will
be adversely affected for that cycle and possibly for subsequent cycles. Any
such failure could also impair the Company's brand name, reputation and
relationships with its OEM customers. The Company's success depends upon
market acceptance of its existing products, its ability to enhance its
existing products and its ability to continually develop and introduce new
products and features to meet changing customer requirements. Each new
product cycle presents new opportunities for current or prospective
competitors of the Company to gain market share. The Company's competitors
include manufacturers of products that directly compete with the Company's
products, as well as competitors that can produce products that have a
similar functionality to the Company's products. For instance, Intel
Corporation has added new functionalities, such as MMX, to its controller
chips to enhance the power of the CPU of a PC to manage the display features
of a PC. Similarly, Microsoft Corporation is introducing new versions of its
operating systems with features, such as Direct 3D, that increase the
capability of its operating systems to control a PC's display features.
Moreover, because of the short product life cycles and the long lead times
for many components used in the Company's products, the Company may not be
able to quickly reduce its production or inventory levels in response to
unexpected shortfalls in sales or, conversely, to increase production in
response to unexpected demand. There can be no assurance of the continued
acceptance of the Company's existing products or that the Company will be
successful in enhancing its existing products or identifying, developing,
manufacturing or marketing new products. Delays in developing new products
or enhancements or the failure of such products or enhancements to gain
market acceptance would materially adversely affect the Company and its
results of operations.
Sales of individual products and product lines are typically
characterized by declines in volumes, pricing and margins toward the end of
the product's life cycle, the precise timing of which may be difficult to
predict. As new products are planned and introduced, the Company attempts to
monitor closely the inventory of older products (and older components) and to
phase out their manufacture in a controlled manner. Nevertheless, the
Company could experience unexpected reductions in sales of older generation
products as customers anticipate new products. These reductions could give
rise to additional charges for obsolete or excess inventory, returns of older
generation products by retailers or commercial distributors or substantial
price protection claims. To the extent that the Company is unsuccessful in
managing product transitions, its business and operating results would be
materially adversely affected.
DEPENDENCE ON KEY CUSTOMERS AND DESKTOP PC MARKET. The Company's top
three customers accounted for 55.5% and 59.7% of net sales during fiscal 1995
and fiscal 1996, respectively. In recent years, Gateway 2000 has been the
Company's top customer, although STB's other significant customers have
changed from period to period. The loss or reduction of the business of
Gateway 2000 or one or more of the Company's other major customers would have
a material adverse effect on the Company and its results of operations. In
addition, the Company's future success will depend significantly upon the
success of its customers, particularly its OEM customers. The Company has no
long-term commitments or contracts with its customers. While a number of the
Company's OEM customers have achieved strong PC sales in recent periods, such
customers, and the PC industry in general are subject to dynamic competitive
conditions. In particular, the loss of sales by the Company's OEM customers
to other OEMs or a decrease in the popularity of desktop PCs that incorporate
the Company's products would adversely affect the Company and its results of
operations.
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<PAGE>
CHANGE IN PRODUCT OR SALES CHANNEL MIX. The Company offers two broad
categories of products: multimedia subsystem products that are sold to OEMs
and the commercial market and specialized technology products that are sold
to resellers and corporate customers in certain industries. Sales of
multimedia accelerators to OEMs, which currently account for substantially
all of the Company's OEM multimedia subsystem product sales, are
characterized by relatively high unit volumes and relatively low gross profit
margins. The Company began shipping significant unit volumes of certain new
multimedia subsystem products (i.e., other than multimedia accelerators) to
OEM customers in the third quarter of its 1996 fiscal year but is not yet in
a position to forecast the effect that the sale of these new products will
have on it results of operations. Sales to the commercial market are
characterized by modest volumes and moderate gross profit margins. Sales of
the Company's specialized technology products are characterized by relatively
low unit volumes and relatively high gross profit margins. The Company's
sales to OEMs, the commercial market and specialized technology products
customers represented approximately 81%, 11% and 6% of the Company's total
net sales during fiscal 1996. In the event the Company experiences a shift
in the type of products that it is able to sell or a shift in the sales
channels into which such products are sold, its results of operations could
be materially adversely affected. In particular, a decrease in sales of
multimedia subsystem products to the commercial market or in sales of
specialized technology products could result in a disproportionately greater
decrease in the Company's gross profit. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Overview".
ENTRY INTO NEW PRODUCT MARKETS. While the Company's business
historically has focused on the design, manufacture and sale of multimedia
accelerators, in the third quarter of fiscal 1996 the Company first began
shipping significant unit volumes of new multimedia subsystem products.
There are numerous risks inherent in the entry into new product markets,
including the reallocation of limited management, engineering and capital
resources to unproven product ventures, a greater likelihood for encountering
technical problems and a greater likelihood that the market will not accept
the Company's new products or the PCs into which they are incorporated. The
failure of one or more of such products, or any negative effects upon the
Company's core multimedia accelerator business, could materially adversely
affect the Company and its results of operations.
PRICE PROTECTION AND STOCK ROTATION RISKS. As is common practice in its
industry, the Company's arrangements with its commercial customers generally
allow customers, in the event of a price decrease, credit equal to the
difference between the price originally paid and the new decreased price on
units in the customers' inventories on the date of the price decrease. In
addition, commercial customers generally have the right to return slow-moving
or excess inventory for product credit up to an agreed upon percentage of
shipments within specified time periods. While the Company establishes
reserves to cover these practices, there can be no assurance that these
reserves will be sufficient or that any future price protection claims or
returns will not have a material adverse effect on the Company and its
results of operations, particularly because results are heavily dependent on
products for which the Company has little or no operating history. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview".
COMPETITION. The markets for the Company's products are highly
competitive. The Company has competitors specifically dedicated to the
multimedia subsystem market or specific segments within that market.
Companies in related markets also offer products with functions similar to
the Company's products. For example, the Company's suppliers sell video
graphics controller chips directly to OEMs for use in internally produced
multimedia accelerators or on motherboards. Increased sales of competitive
products could result in price reductions by the Company or loss of its
market share, which would materially adversely affect the Company and its
results of operations. In addition, the Company's OEM customers could
commence or increase internal production of
-16-
<PAGE>
multimedia accelerators or other multimedia subsystems. Furthermore, the
Company's markets are expected to become increasingly competitive as
multimedia functions continue to converge and companies that previously
supplied products providing distinct functions (for example, companies in the
sound board and telephony markets) emerge as competitors across broader
product categories. The Company also anticipates that as the breadth of its
product lines expand, the markets in which it competes and the number of
competitors against which it competes also will expand. There can be no
assurance that the Company will be able to continue to compete successfully
in its markets or that it will be able to compete successfully against
current and new competition as these markets continue to evolve. Many of the
Company's current and potential competitors design and manufacture some of
their own product components. While the Company believes that its controller
chip independence enables it to select from among the most advanced
components available, there may be instances in which these internally
developed components have better features and performance characteristics
than those available from third party vendors. Furthermore, the Company
believes that certain of its current and potential competitors compete
largely on the basis of price, which may result in significant price
competition, lower margins for the Company's products or otherwise affect the
market for the Company's products. Certain of the Company's current and
potential competitors also are located in foreign jurisdictions that may have
lower labor costs, impose significantly lower taxes than the United States or
levy duties on product imports. Many of the Company's current and potential
competitors have greater financial, marketing, manufacturing and
technological resources than the Company. There can be no assurance that the
Company will be able to continue to compete successfully with its existing
competitors or with new competitors.
DEPENDENCE ON KEY PERSONNEL. The Company's success depends upon the
services of its management, sales, marketing and engineering personnel.
While the Company has entered into employment agreements with a number of
such personnel, the loss of the services of one or more of such personnel
could have a material adverse effect on the Company and its results of
operations. The success of the Company will depend, in part, on its ability
to retain its key management, sales, marketing and engineering personnel and
to attract other personnel to satisfy the Company's current and future needs.
There is substantial competition for such personnel in the computer industry,
and the inability to retain key personnel or to attract additional personnel
to satisfy the Company's needs could have a material adverse effect on the
Company and its results of operations.
MANAGEMENT OF GROWTH. The Company has experienced rapid growth, and
future growth may require larger quantities of components, additional
marketing, sales and engineering personnel, additional manufacturing
equipment and improved operating, financial and administrative controls, any
of which could require significant additional capital expenditures. The
Company may experience difficulty securing adequate quantities of components
or additional manufacturing equipment, attracting or retaining skilled
personnel, improving infrastructure and information systems or overcoming
other difficulties associated with growth. In addition, gross profit margins
derived from initial orders with new OEM customers are frequently lower than
the Company's typical gross profit margins. There can be no assurance that
the Company will be able to manage any future growth successfully or that
difficulties in doing so will not have a material adverse effect on the
Company and its results of operations.
SINGLE MANUFACTURING FACILITY. The Company's primary manufacturing
facility is located in Juarez, Mexico. Since the Company is substantially
dependent on this single manufacturing facility, a disruption of the
Company's manufacturing operations at this facility would have a material
adverse effect on the Company and its results of operations. Such disruption
could result from various factors, including a labor dispute, human error,
governmental or political risks or a natural disaster such as an earthquake,
tornado, fire or flood. In addition, in comparison to those of its
competitors that do not maintain their own manufacturing facilities, the
Company incurs higher relative fixed overhead and labor costs as a result of
operating its own manufacturing facility. Any failure to generate the level
of product revenues needed to absorb these overhead and labor costs would
have a material adverse effect on the Company and its results of operations.
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<PAGE>
INTERNATIONAL OPERATIONS. A substantial portion of the Company's
manufacturing operations are carried out in Mexico. The Company's export
sales (which primarily consist of European sales) were approximately 20% of
net sales in fiscal 1996. The Company is subject to the general risks of
conducting business internationally, including unexpected changes in
regulatory requirements, fluctuations in currency exchange rates, delays
resulting from difficulty in obtaining export licenses for certain
technology, state imposed restrictions on the repatriation of funds, tariffs
and other barriers and restrictions and the burdens of complying with a
variety of foreign laws. In addition, the Company is subject to general
geopolitical risks, such as political instability and changes in diplomatic
and trade relationships, in connection with its international operations.
Although the Company has not to date experienced any material adverse effect
on its operations as a result of such factors, there can be no assurance that
such factors will not materially adversely impact the Company and its results
of operations in the future or require the Company to modify its current
business practices. The Company currently sells its products at prices
denominated in U.S. dollars, and an increase in the value of the U.S. dollar
relative to foreign currencies could make the Company's products more
expensive and potentially less competitive in foreign markets. The Company
expects to sell a portion of its products in the future at prices denominated
in other currencies and will therefore increase its currency exposure risk.
In addition, a substantial portion of the Company's manufacturing labor costs
are paid in Mexican pesos, so any decrease in the value of the U.S. dollar
relative to the Mexican peso could increase the Company's manufacturing costs
and adversely affect the Company and its results of operations.
DEPENDENCE ON SALES REPRESENTATIVES AND DISTRIBUTORS. The Company
markets and distributes a significant portion of its products in the United
States to OEM customers and commercial channel customers through independent
sales representatives and distributors. The Company's sales representatives
work in tandem with the Company's sales force and are organized by customer
account. The services of an independent sales representative are important in
obtaining and maintaining a customer relationship. The Company's
distributors resell the Company's products to retailers and other resellers
in the commercial market. The Company's agreements with its sales
representatives and distributors are cancelable upon 30-days' notice. There
can be no assurance that future sales by sales representatives or
distributors will continue at present levels. The loss of one or more sales
representatives or distributors, or the decision by one or more distributors
to reduce the number of the Company's products offered or to carry the
product lines of the Company's competitors, could have a material adverse
effect on the Company and its results of operations.
PROPRIETARY TECHNOLOGY. The Company's success partially depends upon its
proprietary technology, consisting of its software drivers and utilities and,
to a lesser extent, its hardware designs. The Company relies upon copyright
and trade secret laws and agreements with its suppliers and customers to
protect its proprietary technology. There can be no assurance that the
Company's present protective measures will be adequate to prevent
misappropriation of its technology or independent third party development of
the same or similar technology. Many foreign jurisdictions offer less
protection of intellectual property rights than the United States, and there
can be no assurance that the protection provided to the Company's proprietary
technology by the laws of the United States or foreign jurisdictions will be
sufficient to protect the Company's technology.
The Company has and may in the future find it necessary or desirable to
procure licenses from third parties relating to current or future products or
technologies, but there can be no assurance that the Company will continue to
be able to obtain such licenses or other rights or, if it is able to obtain
them, that it will be able to do so on commercially acceptable terms. The
Company could be placed at a disadvantage if its competitors obtain licenses
with lower royalty fee payments or other terms more favorable than those
received by the Company. If the Company or its suppliers were unable to
obtain licenses relating to current or future products or technologies, the
Company could be forced to market products without certain technological
features. The Company's inability to obtain licenses necessary to use
certain technology or its inability to obtain such licenses on competitive
terms could have a material adverse effect on the Company and its results of
operations.
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<PAGE>
INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS. It is common in the computer
industry for companies to assert intellectual property infringement claims
against other companies. As a consequence, the Company indemnifies some OEM
customers in certain respects against intellectual property claims relating
to its products. If an intellectual property claim were to be brought
against the Company and the Company were found to be infringing upon the
rights of others, the Company could be required to pay infringement damages,
pay licensing fees, modify its products so that they are not infringing or
discontinue offering products that were found to be infringing, any of which
could materially adversely affect the Company and its results of operations.
If an intellectual property claim were to be brought against one or more
of the Company's suppliers and the supplier were found to be infringing upon
the rights of others, the supplier could be enjoined from further shipments
of its products to the Company, which could materially adversely affect the
Company and its results of operations.
STOCK MARKET VOLATILITY. There has been significant volatility in the
market price of the Company's Common Stock, as well as in the market price of
securities of technology-based companies. Factors such as announcements of
new products by the Company or its competitors, variations in the Company's
quarterly operating results or general economic or stock market conditions
unrelated to the Company's operating performance may have a significant
impact on the market price of the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE. The executive officers and directors
and the Founding Shareholders of the Company, who beneficially own a
substantial portion of the outstanding shares of Common Stock, are free to
sell the shares beneficially owned by them, subject to compliance with the
Securities Act of 1933, as amended (the "Securities Act"), including Rule 144
promulgated thereunder, and the terms of a Right of First Refusal Agreement,
to which certain of such shares are subject. A large portion of the shares
held by such beneficial owners may be sold into the public market effectively
free of any significant restrictions. No prediction can be made as to the
effect, if any, that market sales of the above shares or the availability of
such shares for future sale will have on the market price of shares of Common
Stock prevailing from time to time. Future sales of substantial amounts of
Common Stock by existing shareholders could adversely affect the prevailing
market price of the Common Stock and the Company's ability to raise
additional capital.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number
-------
3.1 Articles of Amendment to Articles of Incorporation
of the Company
10.1 Letter Agreement with Sanwa Business Credit
Corporation dated April 9, 1997
10.2 Company's 1995 Long Term Incentive Plan, as amended
(incorporated by reference to Appendix A of the
Company's definitive Proxy Statement for the 1997
Annual Meeting of Shareholders)
10.3 Company's Stock Option Plan for Non-Employee Directors,
as amended (incorporated by reference to Appendix B to
the Company's definitive Proxy Statement for the 1997
Annual Meeting of Shareholders)
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, 1997.
-19-
<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 16, 1997 By: /s/ WILLIAM E. OGLE
------------------------------
President and Chief Executive
Officer
Dated: June 16, 1997 By: /s/ BRYAN F. KEYES
------------------------------
Bryan F. Keyes, Treasurer and
Director of Legal and Finance
-20-
<PAGE>
EXHIBIT INDEX
Exhibit Description
Number ------------
- -------
3.1 Articles of Amendment to Articles of Incorporation of the
Company
10.1 Letter Agreement with Sanwa Business Credit Corporation
dated April 9, 1997
10.2 Company's 1995 Long Term Incentive Plan, as amended
(incorporated by reference to Appendix A of the
Company's definitive Proxy Statement for the 1997
Annual Meeting of Shareholders)
10.3 Company's Stock Option Plan for Non-Employee Directors,
as amended (incorporated by reference to Appendix B to
the Company's definitive Proxy Statement for the 1997
Annual Meeting of Shareholders)
11.1 Computation of Earnings Per Common Share and Common
Equivalent Share
27.1 Financial Data Schedule
<PAGE>
ARTICLES OF AMENDMENT
TO THE ARTICLES OF INCORPORATION
OF
STB SYSTEMS, INC.
Pursuant to the provisions of Article 4.04 of the Texas Business
Corporation Act, the undersigned corporation adopts the following Articles of
Amendment to its Articles of Incorporation:
ARTICLE I.
The name of the corporation is STB SYSTEMS, INC.
ARTICLE II.
The following amendment to the corporation's Articles of Incorporation was
adopted by the shareholders of the corporation on April 17, 1997:
ARTICLE FOUR of the Articles of Incorporation is amended and restated to
read in its entirety as follows:
"ARTICLE FOUR
AUTHORIZED SHARES. The aggregate number of shares of capital stock that
the corporation shall have authority to issue is twenty-seven million
(27,000,000) shares, of which twenty-five million (25,000,000) shares shall
be designated as "Common Stock" and two million (2,000,000) shares shall be
designated as "Preferred Stock." All of such shares shall be of the par
value of $.01 per share.
<PAGE>
COMMON STOCK.
a. DIVIDENDS. Subject to the preferential rights, if any, of the
Preferred Stock, the holders of shares of Common Stock shall be entitled to
receive, when and if declared by the Board of the Directors, out of the
assets of the corporation which are by law available therefor, dividends
payable either in cash, in property, or in shares of Common Stock or other
securities of the corporation.
b. VOTING RIGHTS. At every annual or special meeting of shareholders of
the corporation, every holder of Common Stock shall be entitled to one
vote, in person or by proxy, for each share of Common Stock standing in his
or her name on the books of the corporation.
c. LIQUIDATION, DISSOLUTION OR WINDING UP. In the event of any voluntary
or involuntary liquidation, dissolution, or winding up of the affairs of
the corporation, after payment or provision for payment of the debts and
other liabilities of the corporation and of the preferential amounts, if
any, to which the holders of the Preferred Stock may be entitled, the
holders of all outstanding shares of Common Stock shall be entitled to
share ratably in the remaining net assets of the corporation.
PREFERRED STOCK. The Board of Directors is authorized, subject to the
limitations prescribed by law, to provide for the issuance of shares of
Preferred Stock in one or more series, to establish the number of shares to
be included in each such series, and to fix the designations, powers,
preferences and rights of the shares of each such series and any
qualifications, limitation, or restrictions thereof."
-2-
<PAGE>
ARTICLE III.
The number of shares of the corporation outstanding at the time of such
adoption was four million five hundred thirty-three thousand four hundred forty-
seven (4,533,447) shares of Common Stock and no shares of Preferred Stock, and
the number of shares entitled to vote thereon was four million five hundred
thirty-three thousand four hundred forty-seven (4,533,447).
ARTICLE IV.
The number of shares voted for the foregoing amendment was three million
eight hundred forty-three thousand one hundred eighty-one (3,843,181); and the
number of shares voted against such amendment was two hundred fifty-three
thousand five hundred seventy-five (253,575).
DATED: May 22, 1997.
STB SYSTEMS, INC.
By: \s\ Bryan F. Keyes
-------------------------------
Bryan F. Keyes, Secretary
<PAGE>
April 9, 1997
STB Systems, Inc.
1651 North Glenville
Richardson, Texas 75081
Re: Loans (the "LOANS") from Sanwa Business Credit Corporation ("LENDER")
to STB Systems, Inc. ("BORROWER")
Gentlemen:
Reference is hereby made to that certain Loan and Security Agreement,
dated as of December 21, 1993, executed by Lender and Borrower (as amended,
modified or restated from time to time, the "LOAN AGREEMENT"). Capitalized
terms used herein, to the extent not otherwise defined herein, shall have the
same meaning as in the Loan Agreement.
Lender and Borrowers hereby agree to amend the Loan Agreement as follows:
(1) SECTION 1 of the Loan Agreement is hereby amended by adding the
following definitions, to be inserted in the proper alphabetical
order:
"1.20A 'ELIGIBLE FOREIGN ACCOUNTS' shall mean those Accounts
owing from an Account Debtor located outside the United States and
included in an Accounts Report which, as of the date of such Accounts
Report and at all times thereafter, (i) are owing from either Gateway
2000, Inc., Compaq Computer Corporation, Dell Computer Corporation or
International Business Machines Corporation located in a country rated
investment grade, (ii) do not violate the negative covenants and other
provisions of this Agreement and do satisfy the affirmative covenants,
warranties and other provisions of this Agreement and (iii) Lender, in
its sole and absolute credit judgment, which credit judgment shall be
exercised in good faith, deems to be Eligible Foreign Accounts."
(2) SECTION 2.1 of the Loan Agreement is hereby amended and restated
in its entirety to read as follows:
"(A) REVOLVING LOAN. Lender will make available for Borrower's
use from time to time during the term of this Agreement, upon Borrower's
request therefor, a revolving line of credit consisting of advances
against Eligible
<PAGE>
STB Systems, Inc.
April 9, 1997
Accounts and Eligible Inventory (the "REVOLVING LOAN") in an
aggregate principal amount not to exceed, at any time outstanding,
the lesser of (i) the difference of (a) Twenty-Five Million and
No/100 Dollars ($25,000,000.00) (the "REVOLVING CREDIT AMOUNT"),
MINUS (b) the amount of the Term Loan outstanding at such date, or
(ii) the amount of the Borrowing Base. As used in this Agreement,
"BORROWING BASE" shall mean and, at any particular time and from time
to time, be equal to the sum of (i) up to eighty percent (80%) (or
such lesser percentage as Lender may, at any time and from time to
time, determine in the exercise of its reasonable credit judgment) of
the net amount (after deduction of such reserves as Lender deems
proper and necessary) of Eligible Accounts, provided that the portion
of the Borrowing Base comprised of Eligible Accounts owing from
Account Debtors located outside the United States other than Eligible
Foreign Accounts shall not at any time exceed Three Million and
No/100 Dollars ($3,000,000.00), PLUS (ii) up to fifty percent (50%)
(or such lesser percentage as lender may, at any time and from time
to time, determine in the exercise of its reasonable credit judgment)
of the net amount of Eligible Foreign Accounts, provided that the
portion of the Borrowing Base comprised of Eligible Foreign Accounts
shall not at any time exceed Three Million and No/100 Dollars
($3,000,000.00), plus (iii) up to thirty percent (30%) (or such
lesser percentage as Lender may, at any time and from time to time,
determine in the exercise of its reasonable credit judgment) of the
aggregate value of Eligible Inventory (determined on the basis of the
lower of cost or market value, both net of such reserves as Lender
deems proper and necessary), provided that the portion of the
Borrowing Base comprised of Eligible Inventory shall not at any time
exceed the lesser of (a) Three Million Five Hundred Thousand and No/100
Dollars ($3,500,000.00) or (b) twenty percent (20%) of the aggregate
amount of the Borrowing Base. The Revolving Loan shall be repayable
as provided in SECTION 4.2."
(3) SECTION 3.1(D) of the Loan Agreement is hereby amended and
restated in its entirety to read as follows:
"(D) If the Individual Account is owing from an account
debtor located outside the United States and is not an Eligible
Foreign Account, such Account is insured by the FCIA under a policy
collaterally assigned to Lender and duly acknowledged by the FCIA;"
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
STB Systems, Inc.
April 9, 1997
In order to induce Lender to execute this letter and agree to the
foregoing amendments to the Loan Agreement, the Borrower hereby indicates its
acceptance and agreement to each provision of this letter by its agreement
and acceptance at the end of this letter.
Yours very truly,
SANWA BUSINESS CREDIT
CORPORATION
By: /s/ JOHN P. THACKER
---------------------------------
Name: John P. Thacker
-------------------------------
Title: Vice President
-------------------------------
AGREED AND ACCEPTED
effective as of the date
of this letter:
STB SYSTEMS, INC.
By: /s/ BRYAN F. KEYES
------------------------------
Title: Treasurer
----------------------------
Name: Bryan F. Keyes
----------------------------
<PAGE>
Exhibit 11.1
STB SYSTEMS, INC. and SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON and COMMON EQUIVALENT SHARE
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income $ 2,418 $ 1,351 $ 4,670 $ 2,566
--------- --------- --------- ---------
--------- --------- --------- ---------
PRIMARY:
Weighted average number of shares outstanding 4,554,885 4,500,000 4,534,533 4,500,000
Additional weighted average shares from assumed exercise of dilutive
stock options, net of shares assumed to be repurchased with exercise proceeds 361,669 114 322,093 45
--------- --------- --------- ---------
Net income per share $ 0.49 $ 0.30 $ 0.96 $ 0.57
--------- --------- --------- ---------
--------- --------- --------- ---------
FULLY DILUTIVE
Weighted average number of shares outstanding
Additional weighted average shares from assumed exercise of dilutive 4,554,885 4,500,000 4,534,533 4,500,000
stock options, net of shares assumed to be repurchased with exercise proceeds
Net income per share 361,669 236 322,093 167
--------- --------- --------- ---------
$ 0.49 $ 0.30 $ 0.96 $ 0.57
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements of STB Systems, Inc. included in its quarterly
report on form 10Q and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> APR-30-1997
<CASH> 2,579
<SECURITIES> 0
<RECEIVABLES> 37,038
<ALLOWANCES> (530)
<INVENTORY> 24,819
<CURRENT-ASSETS> 65,584
<PP&E> 12,077
<DEPRECIATION> (4,986)
<TOTAL-ASSETS> 74,683
<CURRENT-LIABILITIES> 37,989
<BONDS> 0
0
0
<COMMON> 46
<OTHER-SE> 35,691
<TOTAL-LIABILITY-AND-EQUITY> 74,683
<SALES> 96,792
<TOTAL-REVENUES> 96,792
<CGS> 74,381
<TOTAL-COSTS> 74,381
<OTHER-EXPENSES> 14,508
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 759
<INCOME-PRETAX> 7,144
<INCOME-TAX> 2,474
<INCOME-CONTINUING> 4,670
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,670
<EPS-PRIMARY> .96
<EPS-DILUTED> .96
</TABLE>
