<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended October 31, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ________________ to ________________
Commission file number 0-25540
STB SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Texas 75-1855896
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1651 North Glenville Drive
Richardson, Texas 75081
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 234-8750
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $0.01 per share
(Title of class)
<PAGE>
Indicate by check mark whether the registrant (l) 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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value on January 27, 1997 of the registrant's voting
securities held by non-affiliates was $122,584,214.
Number of shares of registrant's Common Stock, par value $0.01 per share,
outstanding as of January 27, 1996: 4,521,394.
DOCUMENTS INCORPORATED BY REFERENCE
(a) Selected portions of the registrant's Annual Report to Shareholders
for the fiscal year ended October 31, 1996. - Part II
(b) Selected portions of the registrant's definitive Proxy Statement for
the 1997 Annual Meeting of Shareholders. - Part III
<PAGE>
PART I
ITEM 1. BUSINESS.
UNLESS THE CONTEXT OTHERWISE REQUIRES, THE TERM "COMPANY" OR "STB" WHEN
USED IN THIS REPORT REFERS TO STB SYSTEMS, INC., A TEXAS CORPORATION, AND ITS
CONSOLIDATED SUBSIDIARIES AND PRIOR AFFILIATES. THIS REPORT CONTAINS CERTAIN
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE FEDERAL SECURITIES LAWS.
ACTUAL RESULTS AND THE TIMING OF CERTAIN EVENTS COULD DIFFER MATERIALLY FROM
THOSE PROJECTED IN OR CONTEMPLATED BY THE FORWARD-LOOKING STATEMENTS DUE TO A
NUMBER OF FACTORS, INCLUDING WITHOUT LIMITATION THOSE SET FORTH UNDER "--RISK
FACTORS" BELOW.
INTRODUCTION
STB designs, manufactures and sells multimedia subsystem and specialized
technology products. The Company's multimedia subsystem products, which are
designed for use primarily in desktop personal computers ("PCs"), include a
full range of multimedia accelerators (formerly referred to as "graphics
adaptors" or "video graphics adaptors"), almost all of which are capable of
displaying full-motion video images on a monitor. These multimedia
accelerators enable users to take advantage of true-color graphics, 3D and
video features found in the latest PC operating systems, such as Microsoft
Windows 95 and Windows NT, and in multimedia applications and are designed
for use primarily in mid-range to high-end PCs. The Company's multimedia
subsystem product line also includes several complementary products,
including digital video products and sound cards. The Company's multimedia
subsystem products are sold to original equipment manufacturers ("OEMs") and,
to a lesser extent, to commercial customers, such as retailers, distributors
and direct-mail companies. The Company's OEM and commercial customers
include Gateway 2000, Dell Computer, Compaq Computer, IBM, CompUSA, Best Buy,
Computer City, Tech Data, Ingram Micro and Avnet.
STB's specialized technology products incorporate graphics technologies and
are usually designed to enable one computer to simultaneously control the
display of multiple monitors. These products are sold to customers for
specialized applications in a number of industries, including the financial
services, hospitality, factory automation, transportation and emergency response
industries. The Company's customers for specialized technology products include
Reuters and Citibank.
According to International Data Corporation ("IDC"), STB has increased its
market share to become the second largest independent supplier of multimedia
accelerators (based on units shipped), with an estimated 16.7% worldwide market
share in 1995.
INDUSTRY
According to Dataquest, an estimated 71.7 million PCs were expected to be
shipped worldwide in 1996, compared to 60.2 million units in 1995 and 47.9
million units in 1994. A substantial portion of the PCs shipped in recent
periods incorporate high performance
-1-
<PAGE>
Intel Pentium and Pentium Pro processors and support multimedia functionality,
including CD-ROM storage, higher-resolution graphics, digital video and audio
and, in some systems, hardware 3D and telecommunications. The evolution of
these multimedia-enabled PCs has been driven by the proliferation of higher
performance hardware, operating systems like Microsoft Windows 95 and Windows
NT, the popularity of the Internet and the growth in the number of consumer and
business applications featuring greater use of 3D graphics, video and sound.
Multimedia applications typically place significantly higher processing
demands on a PC's central processing unit ("CPU"), which can substantially
degrade system performance. The processing burden on the CPU can be reduced by
off-loading the multimedia-intensive processing functions to specialized video
graphics and other multimedia subsystems. This allows for significant
improvements in a PC's performance and can be achieved either through the
placement of subsystems on the motherboard or the use of add-in subsystems.
Motherboard implementations typically cost less but generally provide lower
levels of functionality and performance. While add-in subsystems cost slightly
more, they generally can support higher levels of functionality and provide a
higher degree of flexibility in PC configuration, which allows PC manufacturers
to more rapidly integrate new technologies into their product lines and to meet
a range of price and performance requirements.
The market continually demands more sophisticated multimedia products as
new technologies evolve and enter the mainstream. Intel's incorporation of the
MMX extended instruction set in its microprocessors, as well as efforts to
develop specifications for an accelerated graphics port ("AGP"), demonstrate the
demand for higher CPU functionality and better integration between the CPU and
the PC graphics subsystem. The incorporation of these architectural
enhancements, in addition to evolving standards such as MPEG-2 decompression,
Dolby Digital audio and DVD storage, are laying the foundation for using the PC
as an enabling platform for digital television, video teleconferencing and other
emerging multimedia capabilities.
The accelerating pace of technological advancement in the PC industry has
made it increasingly difficult for OEMs to devote the resources necessary for
the timely internal development of multimedia subsystems incorporating the
latest innovations. Furthermore, many OEMs are seeking to expand their product
lines in response to consumer demand for a broader range of price and
performance options. As a result, the Company believes OEMs increasingly are
choosing to outsource many of their component and subsystem needs to specialized
subsystem vendors with focused development efforts.
STRATEGY
The Company's goal is to become the leading supplier of multimedia
accelerators and certain other multimedia subsystems for PCs. The Company's
focus on the design, manufacture and sale of multimedia accelerators has earned
it a reputation for providing advanced graphics display solutions. With its
size and reputation, the Company has built relationships with chip suppliers
that allow it to obtain advance information about new
-2-
<PAGE>
developments in video controller chip technology. Additionally, close
relationships with many of its OEM customers better enable the Company to
determine what future performance features are most desired. The Company
believes that the strength of these relationships also places it in a strong
position to be the provider of choice to OEMs for a number of other
multimedia subsystem products. STB believes that it is positioned to compete
effectively by using its knowledge of technological advances and customer
desires, together with its own value-added development of software drivers
and utilities, to provide high-quality multimedia accelerators and other
multimedia subsystems to the PC marketplace on a timely, cost-effective
basis. The Company also seeks to take advantage of its expertise gained in
developing multimedia subsystem products to develop its specialized
technology products.
The major elements of the Company's strategic plan are as follows:
FOCUS ON MULTIMEDIA ACCELERATOR MARKET AND EMERGING MULTIMEDIA SUBSYSTEM
OPPORTUNITIES. The Company intends to continue focusing its efforts on the
multimedia accelerator market, where it has consistently demonstrated an ability
to introduce innovative multimedia accelerators designed to satisfy rapidly
evolving and increasingly demanding performance standards. Furthermore, the
Company believes that it can leverage its strong OEM relationships and
technological and manufacturing expertise to be the provider of choice to OEMs
for other multimedia subsystem products.
CONTINUED FOCUS ON OEM SALES CHANNEL. The Company has continued to focus
on the OEM sales channel, as evidenced by a significant increase in sales
within this channel during fiscal 1996 and the fact that approximately 81% of
the Company's revenues during the fiscal year were derived from sales to
OEMs. The expansion of the Company's business with several established OEM
customers, such as Gateway 2000, as well as the recent addition of several
new OEM customers, including Dell Computer, Compaq Computer and IBM,
demonstrate the success of the Company's commitment to meeting the needs of
OEMs. Historically, the Company has provided OEMs with mid-range multimedia
accelerators. The Company recently has commenced delivery of high-end
multimedia accelerators and other multimedia subsystem products in an effort
to expand its product offerings to the OEM market.
CONTROL OF MANUFACTURING. The Company believes that it is the only major
independent supplier of multimedia accelerators that manufactures its own
products rather than outsourcing its manufacturing operations. The Company
believes that having its own manufacturing facility in Juarez, Mexico enables it
to maintain lower manufacturing costs, meet expedited customer delivery
schedules, quickly adjust to changes in product orders, achieve shorter
production cycles and accommodate modified or unusual design specifications,
while at the same time ensuring product quality and reliability.
CONTROLLER CHIP INDEPENDENCE. Unlike some of its competitors, the Company
designs its products after evaluating controller chips produced by a number of
leading suppliers. The selection of a controller chip is based on competitive
factors including cost,
-3-
<PAGE>
performance, compatibility and reliability of supply. The Company believes
that purchasing rather than internally developing controller chips allows it
to consistently develop products incorporating the latest technological
advances. Moreover, the Company is able to leverage the substantial
expenditures made by developers of controller chips, achieve component
flexibility and decrease the time and expense required to develop new
products. See "--Risk Factors--Dependence on Suppliers."
MINIMIZE DESIGN-TO-MARKET CYCLES. By capitalizing on the foregoing
elements of its strategy, STB is able to design, manufacture, test and ship new
products in relatively short amounts of time, which is particularly important
for obtaining, maintaining and strengthening relationships with its OEM
customers, who also must operate under short design-to-market cycles.
SELECTIVELY PURSUE OTHER SALES CHANNELS. In addition to focusing on the
OEM sales channel, the Company intends to continue its efforts to further
penetrate the commercial market. The Company believes that the high quality,
low cost standards that it must meet for its OEM customers better position it to
provide competitive products in the commercial market. The Company believes
that increasing awareness of the STB brand, created in part by its penetration
in the OEM sales channel, has strengthened its position in the commercial
market. This strength is demonstrated by the Company's substantial increase in
commercial channel sales during fiscal 1996 and by the addition of significant
retailers such as Best Buy to its customer base. The Company also seeks to take
advantage of its expertise gained in developing multimedia subsystem products to
develop its specialized technology products. The Company believes it is one of
the largest suppliers of specialized technology products in the world and
intends to continue marketing these products to current customers, as well as to
new customers in the same and other targeted industries.
BRING NEW TECHNOLOGIES TO THE MARKETPLACE. The Company's experienced
software and hardware engineers provide STB with industry-leading expertise.
The Company intends to continue applying this expertise to respond quickly to
customer requirements, anticipate trends and advances in its industry and expand
its product line to take advantage of new technology applications. In
particular, the Company believes that its video graphics expertise places it in
a strong position to develop competitive products employing the most advanced
digital video and audio technologies, including TV tuner cards, DVS products and
DVD products.
PRODUCTS
The Company divides its products into two categories: multimedia subsystem
products and specialized technology products. From its entry-level to its most
sophisticated products, the Company offers customers products that enhance the
video and audio capabilities for an increasingly broad range of PC
configurations and applications.
-4-
<PAGE>
MULTIMEDIA SUBSYSTEM PRODUCTS
The Company's multimedia subsystem products include a full range of
multimedia accelerators at various price points, as well as other multimedia
subsystem products. The Company's current major products include the following:
- -------------------------------------------------------------------------------
PRODUCT NAME DESCRIPTION STATUS
- -------------------------------------------------------------------------------
MULTIMEDIA ACCELERATORS
- -------------------------------------------------------------------------------
Powergraph64 Entry-level 2D multimedia accelerator Mature
Video using either 1MB or 2MB of EDO DRAM
- -------------------------------------------------------------------------------
Powergraph 3D Consumer 3D multimedia accelerator Shipping
using 2MB of EDO DRAM
- -------------------------------------------------------------------------------
Lightspeed 128 High performance 2D multimedia accelerator Shipping
using either 2MB or 2.25MB of MDRAM (Multi-
bank DRAM)
- -------------------------------------------------------------------------------
Velocity 3D Workstation 3D multimedia accelerator using Shipping
4MB of EDO VRAM, upgradable to 8MB using 4MB
of EDO DRAM
- -------------------------------------------------------------------------------
OTHER MULTIMEDIA SUBSYSTEM PRODUCTS
- -------------------------------------------------------------------------------
Soundrage 32 Plug and play wavetable sound card with 32 Shipping
voice synthesis
- -------------------------------------------------------------------------------
Soundrage 32 3D Soundrage 32 with special audio effects, Shipping
such as 3D sound
- -------------------------------------------------------------------------------
TV Tuner Card TV tuner product allowing TV playback, Shipping
video capture, video conferencing and
Intercast support on the multimedia PC
system
- -------------------------------------------------------------------------------
DVS MPEG-2 video/audio decoder for displaying Newly
compressed television programming from Introduced
satellite or cable signal
- -------------------------------------------------------------------------------
DVD MPEG-2 video and Dolby Digital audio Under
decoder for playback of DVD format Development
multimedia applications
- -------------------------------------------------------------------------------
Video Enhanced multimedia accelerator with Under
Teleconferencing camera interface, compression/decompression Development
capability and user interface software
- -------------------------------------------------------------------------------
-5-
<PAGE>
The Company anticipates that its multimedia subsystem product line will
continue to evolve based upon its assessment of strategic multimedia
opportunities and the continuing demand for new generations of video and
audio solutions from OEMs and end-users. The Company's multimedia subsystem
products tend to have relatively short life cycles, reflecting the dynamic
nature of technological development within the PC industry. OEMs introduce
new system configurations as often as twice a year, and the Company must
introduce its new products to comply with OEMs' schedules. The life cycle
for a multimedia accelerator typically is 6 to 9 months (plus a few
additional months of sales of certain of such products in the commercial
market).
MULTIMEDIA ACCELERATORS. Almost all of the Company's multimedia
accelerators are capable of displaying full-motion video images on a monitor.
A multimedia accelerator consists of a printed circuit board configured with
a video controller chip, memory chips and software drivers and utilities.
The Company believes that optimal graphics enhancement and video display
require custom software and hardware design that maximize the performance and
features of a PC system. The Company distinguishes its products from those
of its competitors through its innovative proprietary software drivers and
utilities and through the hardware design of its multimedia accelerators.
The Company incorporates its proprietary STB Vision software on all of its
multimedia accelerator products. STB, Vision software supports various chip
sets, with a consistent interface that supports multiple languages, including
German, English, French, Dutch, Polish, Japanese, Italian and Spanish, and
enhances the performance of a multimedia accelerator.
The Company's multimedia accelerator product line is comprised of
products with varying degrees of performance based on display speed,
resolution, color depth and 2D/3D capability. The display speed of a
multimedia accelerator is determined primarily by the controller chip and
software drivers, while display resolution and color depth are determined
primarily by the amount of display memory. The Company offers a large family
of multimedia accelerators that are compatible with the bus architectures
prevalent in today's market.
By offering a complete line of multimedia accelerators, the Company can
better establish and build relationships with OEMs. The Company currently
offers a high-end multimedia accelerator that has 3D capability and 4
megabytes of EDO (extended data out) VRAM (video random access memory) and 4
megabytes of EDO DRAM (dynamic random access memory). The Company offers a
number of mid-range products, including products with 2D and 3D capability,
which generally contain from 1 to 2 megabytes of EDO DRAM memory or 2 to 2.5
megabytes of MDRAM memory. The Company's entry-level multimedia accelerators
generally perform at slower speeds but produce industry standard display
resolution and color depth. Although entry-level products generate only a
small portion of the Company's overall revenue and profit, they allow the
Company to offer a complete line of multimedia accelerators.
-6-
<PAGE>
OTHER MULTIMEDIA SUBSYSTEM PRODUCTS. In addition to multimedia
accelerators, the Company also offers complementary multimedia subsystem
products that incorporate emerging technologies.
- SOUND CARDS. A sound card, or "audio adapter," converts digital audio
information into high-fidelity, stereo-quality sound. A sound card
incorporates an audio controller chip, memory chips and software
drivers and utilities in configurations designed to produce high
quality sound. The Company began shipping sound card products in July
1996 in response to OEM customer demand for this additional product
offering. The Company believes that its sound cards are an important
complement to its video display products. The sale of sound cards
accounted for 4.6% of net sales in fiscal 1996.
- TV TUNER CARDS. The Company's TV tuner cards are capable of receiving
analog television broadcasts or cable transmissions and producing a
full-motion television display on a PC monitor. One important feature
of these products is their ability to take advantage of Intel
Intercast, which broadcasts information similar to a web page within
an analog transmission signal. These products are sold through the
OEM channel, and are available through retailers such as CompUSA,
Best Buy and Computer City. The Company's Video Rage TV tuner/video
graphics subsystem is used in Gateway 2000's Destination PC/TV product
line.
- DVS PRODUCTS. The Company's DVS products are capable of receiving
MPEG-2 encoded data from a satellite source or other medium and
displaying the data on a PC or TV monitor to produce full-screen,
full-motion video images. The Company's DVS products are intended to
be used in conjunction with products of satellite entertainment
providers, such as Direct TV and Echostar. The Company began limited
production of DVS products in the fourth quarter of fiscal 1996.
In addition to the multimedia subsystem products that the Company currently
offers, it is currently developing the following products:
- DVD PRODUCTS. DVD products are capable of producing broadcast quality
video and audio playback of the digital information stored on DVD
disks. DVD disks are capable of storing seven or more times more data
than a CD-ROM disk of the same physical size. It is therefore
anticipated that DVD will become the medium of choice for various
entertainment and multimedia products that require increasing amounts
of data storage capacity. The Company believes that its knowledge of
MPEG-2 video and Dolby Digital audio standards gained in developing
its DVS products provides it with much of the expertise needed to
produce DVD products. The Company has not received any orders for
these products to date.
-7-
<PAGE>
- VIDEO TELECONFERENCING PRODUCTS. The Company is developing products
that are capable of capturing, compressing and transmitting full-
motion video images, while simultaneously receiving, decompressing and
displaying full-motion video images. These products are intended for
the consumer and corporate markets and will provide fully synchronized
video and audio teleconferencing capabilities for PC systems. The
Company has not received any orders for these products to date.
The Company's multimedia subsystem products (other than multimedia
accelerators and sound cards) are still in the early, limited production stage
or are in development. There can be no assurance that such products can be
produced in profitable quantities, if at all. The Company anticipates that it
will continue to expend efforts to develop these and other potential products.
See "--Risk Factors--Entry Into New Product Markets."
SPECIALIZED TECHNOLOGY PRODUCTS
The Company's specialized technology products are characterized by their
incorporation of complex technologies, relatively low unit sales volumes and
relatively high unit prices and gross profit margins. The Company's specialized
technology products are sold primarily to resellers and corporate customers for
specialized applications in a number of industries, including the financial
services, hospitality, factory automation, transportation and emergency response
industries. Most specialized technology products are designed to enable a
single computer to control the display of more than one monitor. The use of the
Company's multi-monitor specialized technology products in certain
configurations can allow one computer to control up to 32 monitors. The Company
believes it is one of the largest suppliers of multi-monitor products in the
world.
The Company offers two families of multi-monitor multimedia accelerator
products distinguished by the resolution of the monitors with which they are
designed to be used. The MVP family of products is used with high-resolution
monitors, and the Channel family is used with low-resolution, television-type
monitors. An important component that the Company incorporates into the MVP is
its "virtual screen" software driver and Mediator utility. This software driver
allows multiple monitors to act as a single screen, displaying numerous
"windows" of information through only one computer. The Mediator utility allows
the user to control the placement of applications on the available displays.
Many financial institutions employ this capability in their trading rooms, where
large amounts of information must be continuously available to traders. The
Company has made technological advances to its existing MVP product line,
including the introduction of new products, such as full motion digital video
scalers and five video/TV tuner input ports, which are based on the PCI bus
standard and new video graphics drivers and utilities. Channel products are
used in applications, such as airport arrival and departure displays, where
lower cost and larger display size are more important than clarity of display.
Channel products are also used to facilitate the selection of on-demand
programming for hotel room televisions.
-8-
<PAGE>
The Company also recently introduced several specialized technology
products that incorporate digital video features that meet the MPEG-2
decompression standard and may or may not incorporate a multimedia accelerator.
These products, some of which have multi-monitor control capability, may be used
for applications such as video-on-demand, storing video data for viewing at a
later time and receiving MPEG-2 encoded material over direct broadcast satellite
or advanced technology cable. There can be no assurance that such products can
be produced in profitable quantities, if at all. See "--Risk Factors--Entry
Into New Product Markets."
Listed below are the principal industries and applications for the
Company's specialized technology products:
INDUSTRY APPLICATION
-------- -----------
Financial services Support of simultaneous display of multiple data
sources on multiple monitors from a single PC for use
by financial traders
Hospitality Control of display on hotel room televisions to allow
guests to view movie choices, review bill prior to
checking out and obtain other information
Factory automation Dual-monitor graphical man-machine interface for
factory machinery
Transportation Flight arrival and departure information
Emergency response 911 emergency call center displays to allow the operator
to follow multiple calls simultaneously, plus view a map
of the emergency location on a separate monitor
DESIGN AND DEVELOPMENT
The timely development and introduction of new products is essential to
meeting the performance requirements of OEM customers as well as reinforcing the
Company's competitive position in STB's other sales channels. The Company works
closely with its OEM customers and suppliers to develop new products that
satisfy specific OEM product requirements, such as performance and display
features. The Company's software and hardware engineers design, develop and
test the new product prototype, selecting the most appropriate controller chip,
memory chips and other components for the product.
Operating compatibility of the Company's products is critical for customer
acceptance. STB's compatibility lab personnel ensure that the new product can
function properly in a variety of PC system configurations and with most popular
commercial application software and operating systems. The compatibility lab
also compares the test performance of the Company's products against that of
competitors' products. In addition, STB sends product
-9-
<PAGE>
prototypes to OEM customers for performance and compatibility testing and to
the Federal Communications Commission (the "FCC") and to the Cenelec branch
of the European Economic Community ("EEC") for "CE Certification." See
"--Government Regulations." After any necessary modifications are made to a
product, it is released for production.
The Company's design and development personnel have enabled STB to
repeatedly deliver the latest technologies to the OEM market. The Company
also has won numerous top awards from recognized industry magazines,
including PC Magazine, PC World, Windows Magazine, PC Professional,
Multimedia World, InfoWorld and New Media Magazine.
The Company believes that the strength of its engineering resources is
critical to its competitiveness. The Company has substantially increased its
engineering and technical resources, so that as of December 31, 1996 it had a
total engineering staff of 67, including 39 engineers. In particular, the
Company added 13 software engineers during the period ended December 31,
1996, bringing the total number of software engineers to 24 as of December
31, 1996. The Company has also established software engineering centers in
Houston, Texas and Eugene, Oregon and has made commitments to open an
engineering design center in Ireland in fiscal 1997. The Company's
engineering resources are critical to its strength in responding quickly to
customer requirements, anticipating trends and advances in its industry and
expanding its product line to take advantage of new technology applications.
See "--Products" and "--Risk Factors--Dependence on Key Personnel." The
Company anticipates that it will continue to increase its engineering resources
in the future.
SUPPLIERS
The Company believes that its close relationships with its component
suppliers are essential to producing low-cost, innovative products and
maintaining short design-to-market cycles. The Company's primary products,
multimedia accelerators, are printed circuit boards that contain a number of
components, including a video controller chip, memory chips, logic chips,
capacitors and resistors. The video controller chip, which regulates the
information that is displayed on the PC monitor, and the memory chip, which
stores graphics information for display, are the most important components in
determining the functions and manufacturing cost of a multimedia accelerator.
The Company's other multimedia subsystem products generally contain
components similar to those found on an STB multimedia accelerator but with
different types of controller chips.
The Company purchases memory chips from a number of manufacturers,
including Hyundai, Mosel/Vitelic, NEC, Toshiba, IBM and Samsung. Memory chips
generally are less expensive if purchased directly from the manufacturer, but
manufacturers sometimes do not produce sufficient quantities of memory chips
to satisfy market demand. In times of restricted supply of memory chips,
manufacturers may allocate the sale of their memory chips to customers based,
among other factors, upon purchase volumes and the customer's
creditworthiness. The Company's ability to purchase from distributors, and
possibly on the spot market, provides an alternative, but more costly, source
-10-
<PAGE>
of supply if the Company cannot obtain necessary supplies from memory chip
manufacturers. See "--Risk Factors--Dependence on Suppliers."
The Company purchases controller chips directly from a number of suppliers,
including S3, Cirrus Logic, Tseng Labs, Brooktree, SGS Thompson, Advanced Micro
Devices and Zoran. These controller chips typically include related software
drivers, which the Company's software engineers often enhance for use in STB
products. In addition to controller chips and the related software drivers,
several other components that are used in the Company's products are obtained
from single or limited sources. The Company has no guaranteed supply
arrangements with any of its suppliers, and there can be no assurance that
current suppliers will be able to meet its requirements. While the Company
believes that with respect to its single and limited source components it could
obtain similar products from other sources, it likely would be required to pay
significantly more for such products, alter product designs to use alternative
products or reduce or delay its production of the related products. As a result
of delays in the delivery of components, lack of available components or the
lack of compatible software drivers from component vendors, the Company has in
the past experienced difficulty in meeting its own scheduled shipment dates to
customers, and such difficulties could recur. See "--Risk Factors--Dependence
on Suppliers."
The Company's unit component costs tend to be volatile, and a significant
increase or decrease in unit component costs may have a significant effect on
the Company's results of operations. The Company may experience component cost
increases in the future, which could have a negative effect upon gross profit
margins and gross profits. See "--Risk Factors--Dependence on Suppliers" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations."
MANUFACTURING
STB considers its ability to manufacture high quality products at a low
cost to be critical to its competitiveness. STB began manufacturing at its
facility in Juarez, Mexico in 1988 and presently conducts substantially all of
its manufacturing operations at this ISO 9002 certified facility. STB believes
that by operating its own manufacturing facility the Company has a competitive
advantage in terms of its ability to respond quickly to changing customer needs
and to control product quality. The Company's manufacturing facility is located
in Juarez, Mexico to benefit from low labor and shipping costs, as well as
proximity to the Company's headquarters in Richardson, Texas. The Company has
increased its monthly manufacturing capacity in Mexico from approximately
120,000 boards at the beginning of fiscal 1995 to approximately 400,000 boards
as of the end of fiscal 1996, depending on product mix. This increase in
manufacturing capacity has been achieved primarily through the addition of new
high-volume surface-mount technology ("SMT") equipment, as well as through
upgrading existing equipment. The Company believes that the addition of this
equipment has increased not only its manufacturing capacity but also the speed
and efficiency of its manufacturing operations. With this additional equipment,
the Company believes its manufacturing capacity is sufficient for its current
level of operations.
-11-
<PAGE>
Nevertheless, the Company recently entered into a lease for a larger facility
near its present manufacturing facility, which should enable the Company to
significantly increase its manufacturing capacity. See "Properties," "--Risk
Factors--Management of Growth" and "--Risk Factors--Single Manufacturing
Facility."
The Company emphasizes a comprehensive quality control program at each step
in the manufacturing process. The manufacturing process involves both automated
and manual placement and soldering of components on the circuit board. After
final assembly is completed, each product unit undergoes an elevated temperature
burn-in, a process simulating a PC environment in which the product is placed in
an oven and connected to an electrical source for several hours. After each
product has been burned-in, it is placed through a series of diagnostic tests to
detect defects. The Company believes its comprehensive testing procedures
significantly contribute to its ability to satisfy its customers' stringent
product performance and reliability requirements. The Company offers a limited
warranty ranging from 15 to 39 months for products sold to OEMs, a two-year
limited warranty on its specialized technology products and a limited lifetime
warranty on products sold to commercial customers.
While the Company conducts substantially all of its manufacturing
operations at its facility in Juarez, Mexico, it maintains a smaller facility at
its Richardson, Texas headquarters for the development and testing of prototypes
and the first-run testing of new products. The Company also maintains a
separate facility in Richardson, Texas for technical support and product repair.
In addition, the Company burns-in and functionally tests a small portion of its
products assembled in Mexico at its Richardson, Texas facilities.
STB provides contract assembly services for third parties, providing
incremental gross profit and contributing to the absorption of overhead by
increasing utilization of manufacturing capacity. Revenues from these assembly
services constituted approximately 2% of the Company's net sales for fiscal
1996.
SALES AND MARKETING
SALES. The Company presently sells its products in North America, most
countries in Europe and certain countries in the Pacific Rim. United States
sales accounted for approximately 80% of the Company's net sales in fiscal 1996.
The Company organizes its Richardson, Texas-based North American sales
force on the basis of its three sales channels. The OEM sales force coordinates
the efforts of the Company's independent sales representatives and provides
direct sales coverage of selected OEMs. The commercial market sales force
focuses on marketing and sales to retailers, distributors and direct mail
companies. The specialized technology sales force coordinates its efforts with
the Company's engineering staff to create interest among prospects and customers
and to determine product features.
The Company's North American sales force generally operates in tandem with
the Company's independent sales representative network. These sales
representatives typically
-12-
<PAGE>
are retained based on relationships they have with potential customers. The
Company believes that the services of independent sales representatives are
important to obtaining and maintaining relationships with certain OEM and
commercial customers. The Company's independent sales representatives
generally do not sell products competitive with those products that they
handle for the Company. The Company generally does not utilize independent
sales representatives for its specialized technology products.
The Company's European sales force, which is headquartered in London, is
responsible for OEM, commercial and specialized technology product sales in the
region. The European sales force has more direct sales coverage responsibility
than the North American sales force because STB employs fewer European
independent sales representatives. The Company's marketing and sales efforts
for countries outside of North America and Europe are coordinated from STB's
Richardson, Texas offices.
The Company's net sales to OEMs, the commercial market and specialized
technology customers represented approximately 81%, 11% and 6% of the
Company's total net sales in fiscal 1996. The Company's top three customers
accounted for approximately 60% of net sales during fiscal 1996, and net
sales to Gateway 2000 accounted for approximately 47% of the Company's net
sales for the fiscal year. The Company recently has increased its marketing
efforts in the commercial market. The Company believes that its recent
increase in commercial channel sales is attributable to these increased
efforts. The Company sells products to the commercial market through
specialty retailers, such as CompUSA, Best Buy and Computer City, and to
commercial distributors, such as Tech Data, Ingram Micro and Avnet. The
Company sells its specialized technology products primarily to resellers and
corporate customers in the financial services, hospitality, factory
automation, transportation and emergency response industries, which include
customers such as Reuters and Citibank.
The Company generally allows returns in the form of stock rotations only of
products sold through the commercial channel. The Company's current stock
rotation policies typically permit a commercial channel customer to return
approximately 10% of products purchased from STB within the previous 90 days if
it places an order for other STB products of equal or greater value. The
Company usually is able to resell returned products. In addition, the Company
typically provides price protection to commercial channel customers in the form
of credits for price reductions on products remaining in customer inventories.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operation--Overview" and "--Risk Factors--Stock Rotation and Price Protection
Risks."
The Company currently sells all its products at prices denominated in U.S.
dollars, but expects to sell its products in other currencies in the future,
thereby increasing its currency exposure risk. Additionally, a substantial
portion of the Company's manufacturing labor costs are incurred in Mexican
pesos. See "--Risk Factors--International Operations."
MARKETING. STB promotes its products to OEM customers and specialized
technology customers primarily through the efforts of the Company's sales force
and sales
-13-
<PAGE>
representatives. The Company believes such direct promotion enables it to
develop products that are more in line with customers' needs and with market
trends. The Company supplements these efforts through the promotion of its
products at industry trade shows. The Company's commercial channel marketing
efforts include advertising in recognized industry trade magazines and
cooperative promotional efforts with retailers and commercial distributors.
TECHNICAL SUPPORT
The Company believes that providing technical support to its customers is
essential to its ongoing competitiveness. The Company maintains a toll-free
telephone line in the United States for technical support of its specialized
technology products and for its multimedia accelerator products and other
multimedia subsystem products sold in the commercial market. The Company also
maintains electronic bulletin board systems in Richardson, Texas and London,
England to provide customers with new software drivers and utilities's that
update the capabilities of the Company's products. The Company's technical
support group provides the software on disk at a nominal charge to customers who
are unable to obtain updates through the electronic bulletin board system. The
Company's policy of providing updates allows products to maintain compatibility
with new versions of software and increases the useful life of these products.
The Company also devotes significant efforts to the preparation of user manuals
and other product documentation that are informative and easy to understand.
COMPETITION
The market for the Company's products is highly competitive. The Company
competes with independent manufacturers of brand name multimedia subsystem
products, as well as contract manufacturers and certain OEM manufacturing
operations that produce multimedia subsystem products. See "--Industry." The
Company's major competitors in the multimedia subsystem product market include
Diamond Multimedia, ATI Technologies, Number Nine Visual Technology, Matrox,
Miro, Elsa, Creative Labs, Ensoniq, CEI, Hauppauge and Aztec. In the
specialized technology product market, the Company's major competitors include
ColorGraphics, Datapath and Miro.
In addition to its major competitors, certain of the Company's suppliers
sell controller chips directly to OEMs for use in internally produced multimedia
accelerators, other multimedia subsystems or on motherboards. If one or more of
the Company's significant OEM customers were to commence or increase internal
production of multimedia accelerators or other multimedia subsystems, the
Company's results of operations could be negatively impacted. Furthermore, a
number of significant OEM s currently integrate video controller chips on the
motherboard of their PCs. If one or more of the Company's significant OEM
customers begins to incorporate video controller chips or other controller chips
onto motherboards rather than using the Company's products, the Company's
results of operations could be negatively impacted. See "--Risk Factors--
Dependence on Multimedia Accelerator Market; Migration to Motherboard."
-14-
<PAGE>
The Company competes in its markets on the basis of a number of factors,
including the compatibility, reliability, price and performance of its products,
its ability to reach the market quickly with new products, its ability to meet
customer delivery and reliability requirements, the quality of its technical
support and its ability to develop and maintain relationships with customers and
suppliers. Many of the Company's competitors and potential competitors have
greater financial, marketing, manufacturing and technical resources than the
Company. In addition, some of the Company's competitors manufacture their own
controller chips, which in certain circumstances may provide these competitors
with an advantage over the Company. Furthermore, while the Company believes it
is the only supplier of brand name multimedia accelerators that produces its own
products, some of STB's competitors internally manufacture other multimedia
subsystem products, such as sound cards and TV tuner cards. The rapid pace of
change in the Company's industry places a premium on factors that include the
knowledge and experience of a company's management, engineers and other
personnel and their ability to develop and improve products. The Company has
substantially increased its engineering resources over the last year and
believes that its ability to continue adding new engineers to its staff in the
future will affect its competitiveness. See "--Risk Factors--Dependence on Key
Personnel."
INTELLECTUAL PROPERTY
The Company's success depends in part upon its proprietary technology,
consisting of both its software drivers and utilities and its hardware designs.
The Company relies upon copyright, trademark and trade secret laws to protect
its proprietary technology. The Company generally also enters into
nondisclosure agreements with persons to whom it reveals its proprietary
information, such as OEMs that the Company works with concerning future
products. There can be no assurance that the Company's present protective
measures will be adequate to prevent misappropriation of its technology or
independent third party development of the same or similar technology. Many
foreign jurisdictions offer less protection of intellectual property rights than
the United States, and there can be no assurance that the protection provided to
the Company's proprietary technology by the laws of the United States or foreign
jurisdictions will be sufficient to protect the Company's technology. See
"--Risk Factors--Proprietary Technology." While the Company's competitive
position may be affected by its ability to protect its proprietary information,
the Company believes that the rapid pace of technological change in the
multimedia accelerator industry will cause other factors to be more significant
in maintaining the Company's competitive position. These factors include the
technical expertise, knowledge and innovative skill of the Company's management
and technical personnel, name recognition, the timeliness and quality of support
services provided by the Company and its ability to rapidly develop, produce,
enhance and market innovative products.
STB generally enters into nondisclosure agreements with suppliers of
components for its products in connection with discussions regarding forthcoming
features of those components. The Company also commonly enters into licensing
agreements with suppliers of components that the Company desires to incorporate
into its products.
-15-
<PAGE>
The Company has filed one United States patent application and a
corresponding international patent application under the Patent Cooperation
Treaty for an invention associated with the Company's MPEG-2 related products.
The Company also has a United States trademark registration for the STB logo,
and owns common law trademark rights with respect to certain other trademarks.
It is common in the computer industry for companies to assert intellectual
property infringement claims against other companies. As a consequence, the
Company indemnifies some OEM customers in certain respects against intellectual
property claims relating to STB's products. The Company presently is unaware of
any material intellectual property claims pending against it. If an
intellectual property claim were brought against the Company and one of the
Company's products were found to be infringing upon the rights of others, the
Company could be required to pay infringement damages, pay licensing fees,
modify its products so that they are not infringing or discontinue offering
products that were found to be infringing, any of which could materially
adversely affect the Company and its results of operations. In addition, the
assertion of such claims against one or more of the Company's vendors could
adversely affect the availability from those vendors of components used by the
Company. See "--Risk Factors--Intellectual Property Infringement Claims."
GOVERNMENT REGULATIONS
The Company's business is regulated by federal, state, local and foreign
authorities. The products produced by the Company are subject to approval by
the FCC and the EEC to assure that they do not interfere with the frequencies of
other consumer electronics products. The Company installs certain filter
circuitry on its products to prevent them from disturbing other frequencies in
compliance with FCC and EEC regulations. To date, regulations applicable to the
Company's business have had no material effect on the Company's capital
expenditures, earnings or competitive position. Although historically the
Company has not experienced material delays in obtaining FCC or EEC approval of
any of its products, relatively recent government budget constraints have caused
delays in obtaining approval of certain of the Company's products. The Company
believes that any delay in obtaining approvals could, in turn, result in delays
in making certain shipments on a timely basis.
The Company's relationships with its employees at its Mexican manufacturing
facility are regulated by the Mexican Federal Labor Law, which contains detailed
provisions regarding minimum employment conditions and specifies rights that
must be provided to all employees in Mexico. Other Mexican federal laws require
employers to make contributions to the Mexican Social Security System and to
establish and make regular contributions, in specified amounts, to individual
retirement savings and housing accounts at a commercial bank for all employees.
In addition, Mexican federal law requires the payment of substantial severance
amounts in the event of the termination of a Mexican employee. Although Mexican
laws governing employment relationships are extensive, aggregate labor costs at
the Company's Mexican facility are nevertheless significantly less than labor
costs would be at a similar facility in the United States. There can be no
assurance, however, that these laws
-16-
<PAGE>
will not be amended or supplemented in the future to increase the
compensation required to be paid to Mexican employees or the costs of
compliance with such laws or that any such change would not have a material
adverse effect on the Company and its results of operations.
The Company's Mexican manufacturing operations are subject to regulation by
various Mexican environmental agencies. In order to ensure compliance, the
Company regularly monitors changes in Mexican environmental laws, and
representatives of environmental agencies periodically inspect the Company's
Mexican facility.
The Company spent approximately $19,000 in order to comply with Mexican
environmental regulations in fiscal 1996 and anticipates that it will spend
approximately $35,000 in each of fiscal 1997 and 1998.
BACKLOG
As of December 31, 1996, the Company's backlog was approximately $23.5
million, as compared to approximately $25.6 million at December 31, 1995. The
Company includes in its backlog accepted purchase orders with respect to which a
delivery schedule has been specified for product shipment within 60 days. The
Company's business is characterized by short-term order and shipment schedules,
and backlog tends to fluctuate substantially from month to month. Generally,
orders constituting backlog are subject to changes in delivery schedule or to
cancellation at the option of the purchaser. The Company's agreements with its
customers typically specify penalties for cancellation of orders within 60 days
prior to shipment. Other factors, including the Company's inability to obtain
components in sufficient quantities, may result in delays in shipment or
cancellation of orders included in backlog. See "--Risk Factors--Dependence on
Suppliers." Therefore, although backlog is useful for scheduling production,
backlog as of any particular date should not be considered a reliable measure of
sales for the current or any future period.
EMPLOYEES
As of December 31, 1996, the Company employed 1,551 individuals, of whom
1,297 were employed in operations, 67 in engineering, 60 in sales and marketing
and 127 in administration and finance. Included in the foregoing figures are
1,310 employees in Mexico. Competition for personnel in the PC industry is
intense. The Company believe's that its future success will depend in part on
its ability to continue to attract and retain highly skilled technical,
marketing and management personnel. None of the Company's employees is
represented by a labor union or is subject to a collective bargaining agreement.
The Company believes that its relations with its employees are good. See
"--Government Regulations."
-17-
<PAGE>
SEASONALITY
The Company's quarterly operating results vary significantly depending on
factors such as the timing of large customer orders, timing of new product
introductions, adequacy of component supply, changes in component costs,
variations in the Company's product 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.
RISK FACTORS
This report contains certain forward-looking statements within the meaning
of the federal securities laws. Actual results and the timing of certain events
could differ materially from those projected in or contemplated by the forward-
looking statements due to a number of factors, including, without limitation,
those set forth below and elsewhere in this report. In addition to the other
information in this report, the following factors, which may affect the
Company's current position and future prospects, should be considered carefully
in evaluating the Company and an investment in the Common Stock of the Company.
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
-18-
<PAGE>
Discussion and Analysis of Financial Condition and Results of Operations-
Selected Quarterly Operating Results" and "--Seasonality."
DEPENDENCE ON SUPPLIERS. Several components used in the Company's products
are obtained from single or limited sources and, in instances in which component
manufacturers do not allocate a sufficient supply of components to meet the
Company's needs, the Company must obtain such components from distributors or on
the spot market at a higher cost. The Company has no guaranteed supply
arrangements with any of its suppliers, and there can be no assurance that
current suppliers will be able to meet its requirements. The Company believes
that with respect to its single and limited source components, it could obtain
similar components from other sources but likely would be required to pay
significantly more for such products, alter product designs to use alternative
components (which would cause significant delays) or reduce its production of
the related 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. See "--Suppliers."
-19-
<PAGE>
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.
See "--Industry."
TECHNOLOGICAL CHANGE AND NEW PRODUCTS. The market for the Company's
products is characterized by short product life cycles, rapidly changing
technology, evolving industry standards and frequent introductions of new
products. OEMs introduce new system configurations as often as twice a year,
and the life cycles of the Company's 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
-20-
<PAGE>
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. See "--Sales and Marketing--Sales." The loss or reduction of
the business of Gateway 2000 or one or more of the Company's other major
customers would have a material adverse effect on the Company and its results of
operations. In addition, the Company's future success will depend significantly
upon the success of its customers, particularly its OEM customers. The Company
has no long-term commitments or contracts with its customers. While a number of
the Company's OEM customers have achieved strong PC sales in recent periods,
such customers, and the PC industry in general are subject to dynamic
competitive conditions. In particular, the loss of sales by the Company's OEM
customers to other OEMs or a decrease in the popularity of desktop PCs that
incorporate the Company's products would adversely affect the Company and its
results of operations.
CHANGE IN PRODUCT OR SALES CHANNEL MIX. The Company offers two broad
categories of products: multimedia subsystem products that are sold to OEMs and
the commercial market and specialized technology products that are sold to
resellers and corporate customers in certain industries. Sales of 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
-21-
<PAGE>
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" and "--Products."
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. See "--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" and
"--Sales and Marketing--Sales."
COMPETITION. The markets for the Company's products are highly
competitive. The Company has competitors specifically dedicated to the
multimedia subsystem market or specific segments within that market. Companies
in related markets also offer products with
-22-
<PAGE>
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 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. See "--Competition."
DEPENDENCE ON KEY PERSONNEL. The Company's success depends upon the
services of its management, sales, marketing and engineering personnel. While
the Company has entered into employment agreements with a number of such
personnel, the loss of the services of one or more of such personnel could have
a material adverse effect on the Company and its results of operations. See
"Executive Compensation--Executive Compensation and Other Matters--Employment
Agreements." The success of the Company will depend, in part, on its ability to
retain its key management, sales, marketing and engineering personnel and to
attract other personnel to satisfy the Company's current and future needs.
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.
-23-
<PAGE>
MANAGEMENT OF GROWTH. The Company has experienced rapid growth, and future
growth may require larger quantities of components, additional marketing, sales
and engineering personnel, additional manufacturing equipment and improved
operating, financial and administrative controls, any of which could require
significant additional capital expenditures. The Company may experience
difficulty securing adequate quantities of components or additional
manufacturing equipment, attracting or retaining skilled personnel, improving
infrastructure and information systems or overcoming other difficulties
associated with growth. In addition, gross profit margins derived from initial
orders with new OEM customers are frequently lower than the Company's typical
gross profit margins. There can be no assurance that the Company will be able
to manage any future growth successfully or that difficulties in doing so will
not have a material adverse effect on the Company and its results of operations.
SINGLE MANUFACTURING FACILITY. The Company's primary manufacturing
facility is located in Juarez, Mexico. Since the Company is substantially
dependent on this single manufacturing facility, a disruption of the Company's
manufacturing operations at this facility would have a material adverse effect
on the Company and its results of operations. Such disruption could result from
various factors, including a labor dispute, human error, governmental or
political risks or a natural disaster such as an earthquake, tornado, fire or
flood. In addition, in comparison to those of its competitors that do not
maintain their own manufacturing facilities, the Company incurs higher relative
fixed overhead and labor costs as a result of operating its own manufacturing
facility. Any failure to generate the level of product revenues needed to
absorb these overhead and labor costs would have a material adverse effect on
the Company and its results of operations. See "--Manufacturing."
INTERNATIONAL OPERATIONS. A substantial portion of the Company's
manufacturing operations are carried out in Mexico. The Company's export sales
(which primarily consist of European sales) were approximately 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
-24-
<PAGE>
could increase the Company's manufacturing costs and adversely affect the
Company and its results of operations. See "--Manufacturing" and "--Sales
and Marketing."
DEPENDENCE ON SALES REPRESENTATIVES AND DISTRIBUTORS. The Company markets
and distributes a significant portion of its products in the United States to
OEM customers and commercial channel customers through independent sales
representatives and distributors. The Company's sales representatives work in
tandem with the Company's sales force and are organized by customer account.
The services of an independent sales representative are important in obtaining
and maintaining a customer relationship. The Company's distributors resell the
Company's products to retailers and other resellers in the commercial market.
The Company's agreements with its sales representatives and distributors are
cancelable upon 30-days' notice. There can be no assurance that future sales by
sales representatives or distributors will continue at present levels. The loss
of one or more sales representatives or distributors, or the decision by one or
more distributors to reduce the number of the Company's products offered or to
carry the product lines of the Company's competitors, could have a material
adverse effect on the Company and its results of operations. See "--Sales and
Marketing."
PROPRIETARY TECHNOLOGY. The Company's success partially depends upon its
proprietary technology, consisting of its software drivers and utilities and, to
a lesser extent, its hardware designs. The Company relies upon copyright and
trade secret laws and agreements with its suppliers and customers to protect its
proprietary technology. There can be no assurance that the Company's present
protective measures will be adequate to prevent misappropriation of its
technology or independent third party development of the same or similar
technology. Many foreign jurisdictions offer less protection of intellectual
property rights than the United States, and there can be no assurance that the
protection provided to the Company's proprietary technology by the laws of the
United States or foreign jurisdictions will be sufficient to protect the
Company's technology. See "--Intellectual Property."
The Company has and may in the future find it necessary or desirable to
procure licenses from third parties relating to current or future products or
technologies, but there can be no assurance that the Company will continue to be
able to obtain such licenses or other rights or, if it is able to obtain them,
that it will be able to do so on commercially acceptable terms. The Company
could be placed at a disadvantage if its competitors obtain licenses with lower
royalty fee payments or other terms more favorable than those received by the
Company. If the Company or its suppliers were unable to obtain licenses
relating to current or future products or technologies, the Company could be
forced to market products without certain technological features. The Company's
inability to obtain licenses necessary to use certain technology or its
inability to obtain such licenses on competitive terms could have a material
adverse effect on the Company and its results of operations. See
"--Intellectual Property."
INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS. It is common in the computer
industry for companies to assert intellectual property infringement claims
against other companies. As
-25-
<PAGE>
a consequence, the Company indemnifies some OEM customers in certain respects
against intellectual property claims relating to its products. If an
intellectual property claim were to be brought against the Company and the
Company were found to be infringing upon the rights of others, the Company
could be required to pay infringement damages, pay licensing fees, modify its
products so that they are not infringing or discontinue offering products
that were found to be infringing, any of which could materially adversely
affect the Company and its results of operations.
If an intellectual property claim were to be brought against one or more of
the Company's suppliers and the supplier were found to be infringing upon the
rights of others, the supplier could be enjoined from further shipments of its
products to the Company, which could materially adversely affect the Company and
its results of operations.
STOCK MARKET VOLATILITY. There has been significant volatility in the
market price of the Company's Common Stock, as well as in the market price of
securities of technology-based companies. Factors such as announcements of new
products by the Company or its competitors, variations in the Company's
quarterly operating results or general economic or stock market conditions
unrelated to the Company's operating performance may have a significant impact
on the market price of the Common Stock. See "Market for Registrant's Common
Equity and Related Stockholder Matters."
SHARES ELIGIBLE FOR FUTURE SALE. The Company currently has outstanding
4,521,394 shares of Common Stock, of which 3,063,051 shares are currently freely
tradeable. The executive officers and directors and the Founding Shareholders
of the Company, who beneficially own 1,535,343 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 substantial
portion of the shares held by such beneficial owners may be sold into the public
market effectively free of any significant restrictions. See "Certain
Relationships and Related Transactions--Right of First Refusal." 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 2. PROPERTIES.
The Company leases a 56,100 square foot facility in Richardson, Texas
(16,200 square feet of which are subleased to the Company pursuant to a sublease
that commenced November 1, 1996 and expires October 31, 1998) that serves as its
headquarters and as a site for product development and testing. The Company
also leases an additional
-26-
<PAGE>
approximately 11,700 square foot facility that is near its headquarters in
Richardson, Texas and is used for technical support and product repair. The
foregoing leases both expire in December 1998. The Company currently leases
a 79,100 square foot manufacturing facility in Juarez, Mexico, and recently
entered into a lease for an approximately 125,000 square foot manufacturing
facility on an adjacent site that would provide increased space and improved
layout for manufacturing operations, as well as options to acquire additional
space. The term of the new lease is ten years from the date that the new
facility is available for the Company's occupancy (plus four optional renewal
periods of five years each). The Company has negotiated an extension of its
current lease covering the 79,100 square foot Juarez facility to cover the
period through the occupancy date of its new facility. See
"Business--Manufacturing."
Additionally, the Company leases 6,900 square feet of storage space in El
Paso, Texas, under a lease expiring in December 1997, a software development
office in Houston, Texas under a lease expiring in May 1999, a software
development office in Eugene, Oregon under a lease on a month-to-month basis,
and sales offices in London and Paris under leases expiring in October 1998 and
December 2004, respectively. The Company also maintains a Munich sales office
under a lease on a month-to-month basis. The Company also maintains product
inventories in Austin, Texas and Shannon, Ireland under bonded warehouse
arrangements in order to permit the timely delivery of certain products to
nearby customers. The Company has made commitments to open an engineering
design center in Ireland in fiscal 1997. The Company believes that its existing
facilities are well maintained and in good operating condition and, together
with those facilities that it plans to open in fiscal 1997, are adequate for its
present and anticipated levels of operations.
ITEM 3. LEGAL PROCEEDINGS.
The Company is a party from time to time to certain legal proceedings
arising in the ordinary course of its business. Although the amount of any
liability that could arise with respect to these proceedings cannot be predicted
accurately, in the opinion of the Company any liability that might result from
such claims will not have a material adverse effect on the financial position of
the Company.
A plaintiff class action denoted TEICH V. STB SYSTEM, INC., ET. AL,
(Citation No. 95-9681-G) was filed on September 6, 1995 in the Texas State
District Court of Dallas County against the Company and certain of its officers
and directors. The complaint alleged that the Registration Statement for the
Company's initial public offering, which was declared effective on February 14,
1995, contained false and misleading statements of material facts and omitted to
state material facts. The complaint asserted claims under Section 11 and 12(2)
of the Securities Act of 1933 and Section 581-33 of the Texas Securities Act on
behalf of a purported class of persons who purchased or otherwise acquired the
Company's Common Stock during the period February 14, 1995 through May 25, 1995.
The complaint sought unspecified damages. The defendants deny the allegations
in the complaint and have defended this action vigorously. In August 1996, the
trial court dismissed the complaint for want of prosecution. The deadline for
the plaintiffs to file a motion with the trial court to
-27-
<PAGE>
reinstate the complaint has passed. The plaintiffs have an additional period
within which to appeal this dismissal.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of the Company's shareholders during the
fourth quarter of fiscal 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock has traded on the NASDAQ National Market under
the symbol "STBI" since February 14, 1995. At January 27, 1997, there were
approximately 35 record holders of the Company's Common Stock, although the
Company believes that the number of beneficial owners of its Common Stock is
substantially greater. The following table sets forth the high and low sale
prices of the Company's Common Stock for the quarters indicated, as reported by
the NASDAQ National Market:
HIGH LOW
------- -------
Fiscal 1996
Fourth quarter................................... $ 25.88 $ 12.25
Third quarter.................................... $ 18.50 $ 10.25
Second quarter................................... $ 11.25 $ 8.13
First quarter.................................... $ 12.25 $ 7.38
Fiscal 1995
Fourth quarter................................... $ 13.38 $ 7.75
Third quarter.................................... $ 11.75 $ 6.75
Second quarter (from February 14, 1995).......... $ 15.50 $ 10.50
The Company intends to retain any future earnings for use in its business
and does not intend to pay cash dividends in the foreseeable future. The
payment of future dividends, if any, will be at the discretion of the
Company's Board of Directors and will depend, among other things, upon future
earnings, operations, capital requirements, restrictions in future financing
agreements, the general financial condition of the Company and general
business conditions. The Company's Revolving Credit Facility permits the
Company to pay dividends of up to 25% of its annual net income. See
"Management's Discussion and Analysis of financial Conditions and Results of
Operations--Liquidity and Capital Resources."
Prior to its initial public offering, the Company declared a dividend
(the "S Corporation Distribution") in an amount equal to its undistributed S
corporation earnings through the date immediately prior to the completion of
the initial public offering, or approximately $4.2 million (the "Undistributed
S Corporation Earnings"), approximately one-
-28-
<PAGE>
half of which was paid in cash to William E. Ogle, Mark S. Sims and William D.
Balthaser, Jr. (the "Founding Shareholders") out of the proceeds of the
Company's initial public offering. The remaining half of the S Corporation
Distribution was distributed to the Founding Shareholders in the form of
promissory notes providing for 12 equal monthly payments of both principal and
interest and bearing interest at 9%, the prime rate in effect on the date of
issuance (the "Founding Shareholder Notes"). The Company paid $1,427,208 and
$713,604 in fiscal 1995 and fiscal 1996, respectively, from cash generated from
operations in connection with its obligations under the Founding Shareholder
Notes. The final payment on the remaining outstanding balance under the
Founding Shareholder Notes was made in February 1996.
ITEM 6. SELECTED FINANCIAL DATA.
This information is set forth under the caption "Selected Consolidated
Financial Data" for each of the five years in the period ended October 31, 1996,
of the Company's 1996 Annual Report to Shareholders, which portion of such
Annual Report is filed herein as Exhibit 13 and incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
This information is set forth under the caption "Management's Discussion
and Analysis of Financial Condition and Results of Operations" of the Company's
1996 Annual Report to Shareholders, which portion of such Annual Report is filed
herein as Exhibit 13 and incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements of the Company including the independent
accountant's report thereon of the Company's 1996 Annual Report to
Shareholders, which financial statements are filed herein as Exhibit 13, are
incorporated herein by reference.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information set forth under the captions "Election of Directors" and
"Executive Officers of the Company" of the Company's definitive Proxy Statement
for the Company's 1997 Annual Meeting of Shareholders is incorporated herein by
reference.
-29-
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
The information set forth under the caption "Executive Compensation and
Other Matters" of the Company's definitive Proxy Statement for the Company's
1997 Annual Meeting of Shareholders is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information set forth under the caption "Outstanding Capital Stock and
Stock Ownership of Directors, Certain Executive Officers and Principal
Shareholders" of the Company's definitive Proxy Statement for the Company's 1997
Annual Meeting of Shareholders is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information set forth under the caption "Certain Transactions" of the
Company's definitive Proxy Statement for the Company's 1997 Annual Meeting of
Shareholders is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. The following financial statements are incorporated by reference
from the Company's 1996 Annual Report to Shareholders, which
financial statements are filed herein as Exhibit 13:
Report of Independent Accountants.
Consolidated Balance Sheets dated October 31, 1996 and 1995.
Consolidated Statement of Operations for the three years ended
October 31, 1996.
Consolidated Statement of Changes in Shareholders' Equity for
the three years ended October 31, 1996.
Consolidated Statement of Cash Flows for the three years ended
October 31, 1996.
Notes to Consolidated Financial Statements.
-30-
<PAGE>
2. Consolidated Financial Statement Schedule Page
----
Report of Independent Accountants on
Financial Statement Schedule. S-1
Consolidated Valuation and Qualifying
Accounts. S-2
All other schedules for which provision is made in the applicable
accounting regulation of the Securities & Exchange Commission are
not required under the related instructions or are inapplicable
and therefore have been omitted.
3. The following documents are filed or incorporated by reference
as exhibits to this Report:
2 Share Exchange Agreement dated December 16, 1994 by and among
the Company and the shareholders of STB Assembly, Inc.
(incorporated by reference to Exhibit 2 to the Company's
Registration Statement on Form S-1 (Registration No.
33-87612))
3.1 Amended and Restated Articles of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-1 (Registration No.
33-87612))
3.2 Amended and Restated Bylaws of the Company (incorporated by
reference to Exhibit 3.2 to the Company's Registration
Statement on Form S-1 (Registration No. 33-87612))
4.1 Specimen of Common Stock Certificate (incorporated by
reference to Exhibit 4.1 to the Company's Registration
Statement on Form S-1 (Registration No. 33-87612))
4.2 Amended and Restated Articles of Incorporation and Bylaws of
the Company (see Exhibits 3.1 and 3.2)
4.3 Right of First Refusal Agreement dated December 16, 1994 by
and among the Company and Messrs. Ogle, Balthaser and Sims
(incorporated by reference to Exhibit 4.3 to the Company's
Registration Statement on Form S-1 (Registration No.
33-87612))
-31-
<PAGE>
10.1 Lease Agreement dated December 6, 1988 by and between STB de
Mexico S.A. de C.V. (formerly known as Industrias Fronterizas
de Chihuahua, S.A. de C.V.) (a subsidiary of the Company, as
lessee) and Complejo Industrial Fuentes, S.A. de C.V (as
lessor), including an Agreement for Modification dated
February 25, 1994 by and between the same parties
(incorporated by reference to Exhibit 10.1 to the Company's
Registration Statement on Form S-1 (Registration No.
33-87612))
10.2 Lease Agreement, as amended, dated July 8, 1986 by and
between the Company (as lessee) and Central Park Associates,
Ltd. (as lessor) (incorporated by reference to Exhibit 10.2
to the Company's Registration Statement on Form S-1
(Registration No. 33-87612))
10.3 Intentionally omitted.
10.4 Loan and Security Agreement dated December 21, 1993 by and
between Sanwa Business Credit Corporation and STB Systems,
Inc. (incorporated by reference to Exhibit 10.4 to the
Company's Registration Statement on Form S-1 (Registration
No. 33-87612))
10.5 First Amendment to Loan and Security Agreement dated October
14, 1994 by and between Sanwa Business Credit Corporation and
the Company (incorporated by reference to Exhibit 10.5 to the
Company's Registration Statement on Form S-1 (Registration
No. 33-87612))
10.6 Second Amendment to Loan and Security Agreement dated
December 9, 1994 by and between Sanwa Business Credit
Corporation and the Company (incorporated by reference to
Exhibit 10.6 to the Company's Registration Statement on
Form S-1 (Registration No. 33-87612))
10.7 Amended and Restated Support Agreements dated October 14,
1994 from each of Messrs. Ogle, Balthaser and Sims to Sanwa
Business Credit Corporation (incorporated by reference to
Exhibit 10.7 to the Company's Registration Statement on
Form S-1 (Registration No. 33-87612))
10.8 Depository Account Agreement dated December 21, 1993 by and
among Sanwa Business Credit Corporation, Bank One, Texas,
N.A. and the Company (incorporated by reference to Exhibit
10.8 to the Company's Registration Statement on Form S-1
(Registration No. 33-87612))
-32-
<PAGE>
10.9 Trademark Security Agreement dated December 21, 1993 by and
between Sanwa Business Credit Corporation and the Company
(incorporated by reference to Exhibit 10.9 to the Company's
Registration Statement on Form S-1 (Registration No.
33-87612))
10.10 Contingent Payment Agreement dated October 17, 1994 by and
between Sanwa Business Credit Corporation and the Company
(incorporated by reference to Exhibit 10.10 to the Company's
Registration Statement on Form S-1 (Registration No.
33-87612))
10.11 Collateral Agency Agreement dated November 30, 1994 by and
among STB de Mexico, S.A. de C.V. (formerly known as
Industrias Fronterizas de Chihuahua, S.A. de C.V.), Sanwa
Business Credit Corporation and the Company (incorporated by
reference to Exhibit 10.11 to the Company's Registration
Statement on Form S-1 (Registration No. 33-87612))
*10.12 Company's Stock Option Plan for Non-Employee Directors
(incorporated by reference to Exhibit 10.12 to the Company's
Registration Statement on Form S-1 (Registration No.
33-87612))
*10.13 Company's 1995 Long Term Incentive Plan (incorporated by
reference to Exhibit 10.13 to the Company's Registration
Statement on Form S-1 (Registration No. 33-87612))
10.14 Intentionally omitted.
10.15 Tax Allocation and Indemnification Agreement dated December
16, 1994 by and among the Company and Messrs. Ogle,
Balthaser and Sims (incorporated by reference to Exhibit
10.15 to the Company's Registration Statement on Form S-1
(Registration No. 33-87612))
*10.16 Founding Shareholder Note by and between the Company and
William E. Ogle (incorporated by reference to Exhibit 10.16
to the Company's Annual Report on Form 10-K for the fiscal
year ended October 1, 1995)
*10.17 Agreements by and between Breedlove Wesneski & Co. (and one
of its affiliates) and the Company dated July 16, 1993,
April 6, 1994 and October 18, 1994 (incorporated by
reference to Exhibit 10.17 to the Company's Registration
Statement on Form S-1 (Registration No. 33-87612))
10.18 Intentionally omitted.
10.19 Intentionally omitted.
10.20 Intentionally omitted.
-33-
<PAGE>
10.21 Agreement dated September 9, 1994, by and between the
Company and Gateway 2000, Inc. (incorporated by reference
to Exhibit 10.21 to the Company's Registration Statement on
Form S-1 (Registration No. 33-87612))
10.22 Third Amendment to Loan and Security Agreement dated
February 8, 1995 by and between Sanwa Business Credit
Corporation and the Company (incorporated by reference to
Exhibit 10.22 to the Company's Registration Statement on
Form S-1 (Registration No. 33-87612))
*10.23 Indemnification Agreement dated February 8, 1995 by and
between William E. Ogle and the Company (incorporated by
reference to Exhibit 10.23 to the Company's Registration
Statement on Form S-1 (Registration No. 33-87612))
*10.24 Indemnification Agreement dated February 8, 1995 by and
between Randall D. Eisenbach and the Company (incorporated
by reference to Exhibit 10.24 to the Company's Registration
Statement on Form S-1 (Registration No. 33-87612))
*10.25 Indemnification Agreement dated February 8, 1995 by and
between James L Hopkins and the Company (incorporated by
reference to Exhibit 10.25 to the Company's Registration
Statement on Form S-1 (Registration No. 33-87612))
*10.26 Indemnification Agreement dated February 8, 1995 by and
between Mark S. Sims and the Company (incorporated by
reference to Exhibit 10.26 to the Company's Registration
Statement on Form S-1 (Registration No. 33-87612))
*10.27 Indemnification Agreement dated February 8, 1995 by and
between William D. Balthaser Jr. and the Company
(incorporated by reference to Exhibit 10.27 to the
Company's Registration Statement on Form S-1 (Registration
No. 33-87612))
*10.28 Indemnification Agreement dated February 8, 1995 by and
between James J. Byrne and the Company (incorporated by
reference to Exhibit 10.28 to the Company's Registration
Statement on Form S-1 (Registration No. 33-87612))
-34-
<PAGE>
*10.29 Indemnification Agreement dated February 8, 1995 by and
between Lawrence E. Wesneski and the Company (incorporated
by reference to Exhibit 10.29 to the Company's Registration
Statement on Form S-1 (Registration No. 33-87612))
*10.30 Indemnification Agreement dated February 8, 1995 by and
between J. Shane Long and the Company (incorporated by
reference to Exhibit 10.30 to the Company's Registration
Statement on Form S-1 (Registration No. 33-87612))
10.31 Underwriting Agreement by and among the Company, Messrs.
Balthaser and Sims (the selling shareholders) and Rauscher
Pierce Refsnes, Inc. and Sutro & Co. Incorporated
(incorporated by reference to Exhibit 10.31 to the Company's
Annual Report on Form 10-K for the fiscal year ended
October 31, 1995)
10.32 Lease Agreement dated June, 1995, by and between the Company
(as lessee) and Springcreek Place, Ltd. (as lessor)
(incorporated by reference to Exhibit 10.32 to the Company's
Annual Report on Form 10-K for the fiscal year ended October
31, 1995)
10.33 Lease Agreement dated December 19, 1994, by and between the
Company (as lessee) and 50 Walter Jones Blvd., Inc. (as
lessor) (incorporated by reference to Exhibit 10.33 to the
Company's Annual Report on Form 10-K for the fiscal year
ended October 31, 1995)
10.34 Fourth Amendment to Loan and Security Agreement dated
January 5, 1996, by and between Sanwa Business Credit
Corporation and the Company (incorporated by reference to
Exhibit 10.34 to the Company's Annual Report on Form 10-K or
the fiscal year ended October 31, 1995)
*10.35 Founding Shareholder Note by and between the Company and
William D. Balthaser, Jr. (incorporated by reference to
Exhibit 10.35 to the Company's Annual Report on Form 10-K
for the fiscal year ended October 31, 1995)
*10.36 Founding Shareholder Note by and between the Company and
Mark S. Sims (incorporated by reference to Exhibit 10.36 to
the Company's Annual Report on Form 10-K for the fiscal year
ended October 31, 1995)
-35-
<PAGE>
10.37 Addendum to Lease Agreement dated March 7, 1996 by and
between the Company (as lessee) and Springcreek Place, Ltd.
(as lessor) (incorporated by reference to Exhibit 10.37 to
the Company's Quarterly Report on Form 10-Q for the quarter
ended January 31, 1996)
*10.38 STB Systems, Inc. 1995 Employee Stock Option Purchase Plan
(as amended) (incorporated by reference to Exhibit 10.38 to
the Company's Quarterly Report on Form 10-Q for the quarter
ended January 31, 1996)
10.39 Lease Agreement dated April 18, 1996 by and between the
Company (as lessee) and I Cypresswood Building (as lessor)
(incorporated by reference to Exhibit 10.39 to the Company's
Quarterly Report on Form 10-Q for the quarter ended April
30, 1996)
10.40 Sublease Agreement dated August 1996 by and between ADC
Telecommunications, Inc. (as sublessor) and the Company (as
sublessee) (incorporated by reference to Exhibit 10.40 to
the Company's Registration Statement on Form S-1
(Registration No. 333-14313))
10.41 Lease Contract dated October 4, 1996 by and between STB de
Mexico, S.A. de C.V. (as lessee) and Complejo Industrial
Fuentes, S.A. de C.V. (as lessor) (incorporated by reference
to Exhibit 10.41 to the Company's Registration Statement on
Form S-1 (Registration No. 333-14313))
*10.42 Employment Agreement dated November 1, 1996 by and between
the Company and William E. Ogle (incorporated by reference
to Exhibit 10.42 to the Company's Registration Statement on
Form S-1 (Registration No. 333-14313))
*10.43 Employment Agreement dated November 1, 1996 by and between
the Company and Randall D. Eisenbach (incorporated by
reference to Exhibit 10.43 to the Company's Registration
Statement on Form S-1 (Registration No. 333-14313))
*10.44 Employment Agreement dated November 1, 1996 by and between
the Company and James L. Hopkins (incorporated by reference
to Exhibit 10.44 to the Company's Registration Statement on
Form S-1 (Registration No. 333-14313))
-36-
<PAGE>
*10.45 Employment Agreement dated November 1, 1996 by and between
the Company and J. Shane Long (incorporated by reference to
Exhibit 10.45 to the Company's Registration Statement on
Form S-1 (Registration No. 333-14313))
10.46 Modification Agreement dated October 4, 1996 by and between
STB de Mexico, S.A. de C.V. and Complejo Industrial Fuentes,
S.A. de C.V. (relating to the Lease Agreement filed as
Exhibit 10.1 hereto) (incorporated by reference to Exhibit
10.46 to the Company's Registration Statement on Form S-1
(Registration No. 333-14313))
*10.47 Amended and Restated Profit Sharing Incentive Plan
(incorporated by reference to Exhibit 10.47 to the Company's
Registration Statement on Form S-1 (Registration No.
333-14313))
10.48 Lease Agreement by and between the Company and Banc One
Leasing Corporation dated October 30, 1996, together with
related attachments (incorporated by reference to Exhibit
10.48 to the Company's Registration Statement on Form S-1
(Registration No. 333-14313))
11.1 Computation of Earnings Per Common Share and Common
Equivalent Share
13 Selected portions of the Company's Annual Report to
Shareholders for fiscal year ended October 31, 1996
21 Subsidiaries of the Company
(a) STB Assembly, Inc., a Texas corporation
(b) STB de Mexico, S.A. de C.V., a Mexican corporation
(c) Maquilados Continentales de Chihuahua, a Mexican
corporation (an inactive shell corporation)
23 Consent of Price Waterhouse LLP
24 Powers of Attorney (included on first signature page)
27 Financial Data Schedule
-------------------
* Management contract or compensatory plan or arrangement.
-37-
<PAGE>
The Company will furnish a copy of any exhibit listed above
to any shareholder without charge upon written request to
Mr. Bryan F. Keyes, Treasurer, 1651 North Glenville Drive,
Richardson, Texas 75081.
(b) No reports on Form 8-K were filed during the last quarter of the
period covered by this Report.
-38-
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each of STB Systems, Inc., a Texas
corporation, and the undersigned directors and officers of STB Systems, Inc.,
hereby constitutes and appoints William E. Ogle, Randall D. Eisenbach and Bryan
F. Keyes, or any one of them, its or his true and lawful attorney-in-fact and
agent, for it or him and in its or his name, place and stead, in any and all
capacities, with full power to act alone, to sign any and all amendments to this
Report, and to file each such amendment to the Report, with all exhibits
thereto, and any and all other documents in connection therewith, with the
Securities and Exchange Commission, hereby granting unto said attorney-in-fact
and agent full power and authority to do and perform any and all acts and things
requisite and necessary to be done in and about the premises as fully to all
intents and purposes as it or he might or could do in person, hereby ratifying
and confirming all that said attorney-in-fact and agent may lawfully do or cause
to be done by virtue hereof.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
STB SYSTEMS, INC.
By: /s/ William E. Ogle
------------------------------
William E. Ogle
Chairman of the Board
and Chief Executive Officer
Dated: January 28, 1997
-39-
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the Company
in the capacities indicated on January 28, 1997.
SIGNATURE TITLE
--------- -----
/s/ William E. Ogle Chairman of the Board of Directors
- ------------------------------------ and Chief Executive Officer
William E. Ogle (Principal Executive Officer)
/s/ Randall D. Eisenbach Executive Vice President, Chief
- ------------------------------------ Operating Officer, Assistant
Randall D. Eisenbach Secretary and Director
/s/ James L. Hopkins Chief Financial Officer, Vice President
- ------------------------------------ of Strategic Marketing and Director
James L. Hopkins
/s/ Bryan F. Keyes Director of Legal and Finance,
- ------------------------------------ Secretary and Treasurer (Principal
Bryan F. Keyes Financial and Accounting Officer)
/s/ J. Shane Long Vice President of Sales and
- ------------------------------------ Marketing and Director
J. Shane Long
/s/ Lawrence E. Wesneski Director
- ------------------------------------
Lawrence E. Wesneski
/s/ James J. Byrne Director
- ------------------------------------
James J. Byrne
-40-
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
----------------------------
To the Board of Directors and
Shareholders of STB Systems, Inc.
Our audits of the consolidated financial statements referred to in our report
dated December 2, 1996 appearing in the 1996 Annual Report to Shareholders of
STB Systems, Inc. (which report and consolidated financial statements are
incorporated by reference in this Annual Report on Form 10-K) also included
an audit of the Financial Statement Schedules listed in Item 14(a) of this
Form 10-K. In our opinion, the Financial Statement Schedule presents fairly,
in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
PRICE WATERHOUSE LLP
Dallas, Texas
December 2, 1996
S-1
<PAGE>
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
FISCAL BALANCE AT CHARGED TO BALANCE
YEAR BEGINNING COSTS AND AT END
ENDED DESCRIPTION OF YEAR EXPENSES DEDUCTIONS OF YEAR
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
31-Oct-94 Allowance for Bad Debts 295,000 383,270 315,145 363,125
Allowance for Obsolete Inventory 630,000 607,525 612,525 625,000
31-Oct-95 Allowance for Bad Debts 363,125 231,040 145,092 449,073
Allowance for Obsolete Inventory 625,000 692,830 317,830 1,000,000
31-Oct-96 Allowance for Bad Debts 449,073 489,837 607,078 331,832
Allowance for Product Returns and
Price Protection 45,000 405,000 175,000 275,000
Allowance for Obsolete Inventory 1,000,000 1,928,013 1,528,013 1,400,000
</TABLE>
S-2
<PAGE>
EXHIBIT INDEX
EXHIBIT
-------
2 Share Exchange Agreement dated December 16, 1994 by and among the
Company and the shareholders of STB Assembly, Inc. (incorporated
by reference to Exhibit 2 to the Company's Registration Statement
on Form S-1 (Registration No. 33-87612))
3.1 Amended and Restated Articles of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-1 (Registration No. 33-87612))
3.2 Amended and Restated Bylaws of the Company (incorporated by
reference to Exhibit 3.2 to the Company's Registration Statement
on Form S-1 (Registration No. 33-87612))
4.1 Specimen of Common Stock Certificate (incorporated by reference
to Exhibit 4.1 to the Company's Registration Statement on Form
S-1 (Registration No. 33-87612))
4.2 Amended and Restated Articles of Incorporation and Bylaws of the
Company (see Exhibits 3.1 and 3.2)
4.3 Right of First Refusal Agreement dated December 16, 1994 by and
among the Company and Messrs. Ogle, Balthaser and Sims
(incorporated by reference to Exhibit 4.3 to the Company's
Registration Statement on Form S-1 (Registration No. 33-87612))
10.1 Lease Agreement dated December 6, 1988 by and between STB de Mexico
S.A. de C.V. (formerly known as Industrias Fronterizas de Chihuahua,
S.A. de C.V.) (a subsidiary of the Company, as lessee) and Complejo
Industrial Fuentes, S.A. de C.V (as lessor), including an Agreement
for Modification dated February 25, 1994 by and between the same
parties (incorporated by reference to Exhibit 10.1 to the Company's
Registration Statement on Form S-1 (Registration No. 33-87612))
10.2 Lease Agreement, as amended, dated July 8, 1986 by and between the
Company (as lessee) and Central Park Associates, Ltd. (as lessor)
(incorporated by reference to Exhibit 10.2 to the Company's
Registration Statement on Form S-1 (Registration No. 33-87612))
10.3 Intentionally Omitted
10.4 Loan and Security Agreement dated December 21, 1993 by and between
Sanwa Business Credit Corporation and STB Systems, Inc. (incorporated
by reference to Exhibit 10.4 to the Company's Registration Statement
on Form S-1 (Registration No. 33-87612))
<PAGE>
EXHIBIT
-------
10.5 First Amendment to Loan and Security Agreement dated October 14, 1994
by and between Sanwa Business Credit Corporation and the Company
(incorporated by reference to Exhibit 10.5 to the Company's
Registration Statement on Form S-1 (Registration No. 33-87612))
10.6 Second Amendment to Loan and Security Agreement dated December 9, 1994
by and between Sanwa Business Credit Corporation and the Company
(incorporated by reference to Exhibit 10.6 to the Company's
Registration Statement on Form S-1 (Registration No. 33-87612))
10.7 Amended and Restated Support Agreements dated October 14, 1994 from
each of Messrs. Ogle, Balthaser and Sims to Sanwa Business Credit
Corporation (incorporated by reference to Exhibit 10.7 to the
Company's Registration Statement on Form S-1 (Registration No.
33-87612))
10.8 Depository Account Agreement dated December 21, 1993 by and among
Sanwa Business Credit Corporation, Bank One, Texas, N.A. and the
Company (incorporated by reference to Exhibit 10.8 to the Company's
Registration Statement on Form S-1 (Registration No. 33-87612))
10.9 Trademark Security Agreement dated December 21, 1993 by and between
Sanwa Business Credit Corporation and the Company (incorporated by
reference to Exhibit 10.9 to the Company's Registration Statement on
Form S-1 (Registration No. 33-87612))
10.10 Contingent Payment Agreement dated October 17, 1994 by and between
Sanwa Business Credit Corporation and the Company (incorporated by
reference to Exhibit 10.10 to the Company's Registration Statement on
Form S-1 (Registration No. 33-87612))
10.11 Collateral Agency Agreement dated November 30, 1994 by and among STB
de Mexico, S.A. de C.V. (formerly known as Industrias Fronterizas de
Chihuahua, S.A. de C.V.), Sanwa Business Credit Corporation and the
Company (incorporated by reference to Exhibit 10.11 to the Company's
Registration Statement on Form S-1 (Registration No. 33-87612))
*10.12 Company's Stock Option Plan for Non-Employee Directors (incorporated
by reference to Exhibit 10.12 to the Company's Registration Statement
on Form S-1 (Registration No. 33-87612))
*10.13 Company's 1995 Long Term Incentive Plan (incorporated by reference to
Exhibit 10.13 to the Company's Registration Statement on Form S-1
(Registration No. 33-87612))
10.14 Intentionally Omitted
<PAGE>
EXHIBIT
-------
10.15 Tax Allocation and Indemnification Agreement dated December 16, 1994
by and among the Company and Messrs. Ogle, Balthaser and Sims
(incorporated by reference to Exhibit 10.15 to the Company's
Registration Statement on Form S-1 (Registration No. 33-87612))
*10.16 Founding Shareholder Note by and between the Company and William E.
Ogle (incorporated by reference to Exhibit 10.16 to the Company's
Annual Report on Form 10-K for the fiscal year ended October 1, 1995)
*10.17 Agreements by and between Breedlove Wesneski & Co. (and one of its
affiliates) and the Company dated July 16, 1993, April 6, 1994 and
October 18, 1994 (incorporated by reference to Exhibit 10.17 to the
Company's Registration Statement on Form S-1 (Registration No.
33-87612))
10.18 Intentionally Omitted
10.19 Intentionally Omitted
10.20 Intentionally Omitted
10.21 Agreement dated September 9, 1994, by and between the Company and
Gateway 2000, Inc. (incorporated by reference to Exhibit 10.21 to
the Company's Registration Statement on Form S-1 (Registration No.
33-87612))
10.22 Third Amendment to Loan and Security Agreement dated February 8, 1995
by and between Sanwa Business Credit Corporation and the Company
(incorporated by reference to Exhibit 10.22 to the Company's
Registration Statement on Form S-1 (Registration No. 33-87612))
*10.23 Indemnification Agreement dated February 8, 1995 by and between
William E. Ogle and the Company (incorporated by reference to
Exhibit 10.23 to the Company's Registration Statement on Form S-1
(Registration No. 33-87612))
*10.24 Indemnification Agreement dated February 8, 1995 by and between
Randall D. Eisenbach and the Company (incorporated by reference to
Exhibit 10.24 to the Company's Registration Statement on Form S-1
(Registration No. 33-87612))
*10.25 Indemnification Agreement dated February 8, 1995 by and between
James L. Hopkins and the Company (incorporated by reference to
Exhibit 10.25 to the Company's Registration Statement on Form S-1
(Registration No. 33-87612))
*10.26 Indemnification Agreement dated February 8, 1995 by and between Mark
S. Sims and the Company (incorporated by reference to Exhibit 10.26
to the Company's Registration Statement on Form S-1 (Registration No.
33-87612))
*10.27 Indemnification Agreement dated February 8, 1995 by and between
William D. Balthaser Jr. and the Company (incorporated by reference to
Exhibit 10.27 to the Company's Registration Statement on Form S-1
(Registration No. 33-87612))
<PAGE>
EXHIBIT
-------
*10.28 Indemnification Agreement dated February 8, 1995 by and between
James J. Byrne and the Company (incorporated by reference to Exhibit
10.28 to the Company's Registration Statement on Form S-1
(Registration No. 33-87612))
*10.29 Indemnification Agreement dated February 8, 1995 by and between
Lawrence E. Wesneski and the Company (incorporated by reference to
Exhibit 10.29 to the Company's Registration Statement on Form S-1
(Registration No. 33-87612))
*10.30 Indemnification Agreement dated February 8, 1995 by and between J.
Shane Long and the Company (incorporated by reference to Exhibit 10.30
to the Company's Registration Statement on Form S-1 (Registration No.
33-87612))
10.31 Underwriting Agreement by and among the Company, Messrs. Balthaser and
Sims (the selling shareholders) and Rauscher Pierce Refsnes, Inc. and
Sutro & Co. Incorporated (incorporated by reference to Exhibit 10.31
to the Company's Annual Report on Form 10-K for the fiscal year ended
October 31, 1995)
10.32 Lease Agreement dated June, 1995, by and between the Company (as
lessee) and Springcreek Place, Ltd. (as lessor) (incorporated by
reference to Exhibit 10.32 to the Company's Annual Report on Form 10-K
for the fiscal year ended October 31, 1995)
10.33 Lease Agreement dated December 19, 1994, by and between the Company
(as lessee) and 50 Walter Jones Blvd., Inc. (as lessor) (incorporated
by reference to Exhibit 10.33 to the Company's Annual Report on Form
10-K for the fiscal year ended October 31, 1995)
10.34 Fourth Amendment to Loan and Security Agreement dated January 5, 1996,
by and between Sanwa Business Credit Corporation and the Company
(incorporated by reference to Exhibit 10.34 to the Company's Annual
Report on Form 10-K or the fiscal year ended October 31, 1995)
*10.35 Founding Shareholder Note by and between the Company and William D.
Balthaser, Jr. (incorporated by reference to Exhibit 10.35 to the
Company's Annual Report on Form 10-K for the fiscal year ended
October 31, 1995)
*10.36 Founding Shareholder Note by and between the Company and Mark S. Sims
(incorporated by reference to Exhibit 10.36 to the Company's Annual
Report on Form 10-K for the fiscal year ended October 31, 1995)
10.37 Addendum to Lease Agreement dated March 7, 1996 by and between the
Company (as lessee) and Springcreek Place, Ltd. (as lessor)
(incorporated by reference to Exhibit 10.37 to the Company's Quarterly
Report on Form 10-Q for the quarter ended January 31, 1996)
<PAGE>
EXHIBIT
-------
*10.38 STB Systems, Inc. 1995 Employee Stock Option Purchase Plan (as
amended) (incorporated by reference to Exhibit 10.38 to the Company's
Quarterly Report on Form 10-Q for the quarter ended January 31, 1996)
10.39 Lease Agreement dated April 18, 1996 by and between the Company (as
lessee) and I Cypresswood Building (as lessor) (incorporated by
reference to Exhibit 10.39 to the Company's Quarterly Report on Form
10-Q for the quarter ended April 30, 1996)
10.40 Sublease Agreement dated August 1996 by and between ADC
Telecommunications, Inc. (as sublessor) and the Company (as sublessee)
(incorporated by reference to Exhibit 10.40 to the Company's
Registration Statement on Form S-1 (Registration No. 333-14313))
10.41 Lease Contract dated October 4, 1996 by and between STB de Mexico,
S.A. de C.V. (as lessee) and Complejo Industrial Fuentes, S.A. de C.V.
(as lessor) (incorporated by reference to Exhibit 10.41 to the
Company's Registration Statement on Form S-1 (Registration No.
333-14313))
*10.42 Employment Agreement dated November 1, 1996 by and between the Company
and William E. Ogle (incorporated by reference to Exhibit 10.42 to the
Company's Registration Statement on Form S-1 (Registration No.
333-14313))
*10.43 Employment Agreement dated November 1, 1996 by and between the Company
and Randall D. Eisenbach (incorporated by reference to Exhibit 10.43
to the Company's Registration Statement on Form S-1 (Registration No.
333-14313))
*10.44 Employment Agreement dated November 1, 1996 by and between the Company
and James L. Hopkins (incorporated by reference to Exhibit 10.44 to
the Company's Registration Statement on Form S-1 (Registration No.
333-14313))
*10.45 Employment Agreement dated November 1, 1996 by and between the Company
and J. Shane Long (incorporated by reference to Exhibit 10.45 to the
Company's Registration Statement on Form S-1 (Registration No.
333-14313))
10.46 Modification Agreement dated October 4, 1996 by and between STB de
Mexico, S.A. de C.V. and Complejo Industrial Fuentes, S.A. de C.V.
(relating to the Lease Agreement filed as Exhibit 10.1 hereto)
(incorporated by reference to Exhibit 10.46 to the Company's
Registration Statement on Form S-1 (Registration No. 333-14313))
<PAGE>
EXHIBIT
-------
*10.47 Amended and Restated Profit Sharing Incentive Plan (incorporated by
reference to Exhibit 10.47 to the Company's Registration Statement on
Form S-1 (Registration No. 333-14313))
10.48 Lease Agreement by and between the Company and Banc One Leasing
Corporation dated October 30, 1996, together with related attachments
(incorporated by reference to Exhibit 10.48 to the Company's
Registration Statement on Form S-1 (Registration No. 333-14313))
11.1 Computation of Earnings Per Common Share and Common Equivalent Share
13 Selected portions of the Company's Annual Report to Shareholders for
fiscal year ended October 31, 1996
21 Subsidiaries of the Company
(a) STB Assembly, Inc., a Texas corporation
(b) STB de Mexico, S.A. de C.V., a Mexican corporation
(c) Maquilados Continentales de Chihuahua, a Mexican corporation
(an inactive shell corporation)
23 Consent of Price Waterhouse LLP
24 Powers of Attorney (included on first signature page)
27 Financial Data Schedule
--------------------
* Management contract or compensatory plan or arrangement. The
Company will furnish a copy of any exhibit listed above to any
shareholder without charge upon written request to Mr. Bryan F.
Keyes, Treasurer, 1651 North Glenville Drive, Richardson, Texas
75081.
<PAGE>
EXHIBIT 11.1
STB SYSTEMS, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
FOR THE YEARS ENDED OCTOBER 31, 1996 AND 1995
- ------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
1996 1995
----------------------
PRO FORMA
Net income (loss) $ 6,077 $ 1,998
Pro forma adjustment to general and
administrative expenses 220
Pro forma adjustment to reflect interest on
Founding Shareholder Notes (52)
Pro forma adjustment to reflect federal
income taxes (483)
----------------------
Net income (loss), as adjusted $ 6,077 $ 1,683
----------------------
----------------------
PRIMARY:
Weighted average number of shares outstanding 4,502,692 3,672,161
Additional weighted average shares to reflect
pro forma adjustment for distribution of
S Corp earnings 74,234
Additional weighted average shares from
assumed exercise of dilutive stock options,
net of shares assumed to be repurchased with
exercise proceeds 44,064 -
----------------------
Net income (loss) per share $ 1.34 $ 0.45
----------------------
----------------------
FULLY DILUTIVE
Weighted average number of shares outstanding 4,502,692 3,672,161
Additional weighted average shares to reflect
pro forma adjustment for distribution of
S Corp earnings 74,234
Additional weighted average shares from assumed
exercise of dilutive stock options, net of
shares assumed to be repurchased with
exercise proceeds 202,921 -
----------------------
Net income (loss) per share $ 1.29 $ 0.45
----------------------
----------------------
<PAGE>
TABLE OF CONTENTS
15 Selected Consolidated Financial Data
17 Management's Discussion and Analysis
of Financial Condition and Results of Operations
21 Independent Accountants' Report
22 Consolidated Balance Sheet
23 Consolidated Statement
of Operations
24 Consolidated Statement
of Cash Flows
25 Consolidated Statement
of Changes in Shareholders' Equity
26 Notes to Consolidated Financial Statements
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data of the
Company. The selected consolidated statement of operations and consolidated
balance sheet data of the Company for the fiscal years ended October 31,
1996, 1995, 1994, 1993 and 1992 are derived from the Company's Consolidated
Financial Statements that were audited by Price Waterhouse LLP, independent
accountants, whose report for the fiscal years ended October 31, 1996, 1995
and 1994 is included herein. The pro forma data set forth below, as of and
for the year ended October 31, 1995, is unaudited.
The Selected Consolidated Financial Data set forth below should be read in
conjunction with, and are qualified in their entirety by, the Consolidated
Financial Statements and related Notes, and other financial information
included herein.
<TABLE>
(In thousands except per share amounts)
Year Ended October 31,
1996 1995 1994 1993 1992
-------------------------------------------------
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Net sales $180,155 $129,603 $89,836 $39,236 $27,786
Cost of sales 144,879 110,129 73,213 30,726 20,901
-------------------------------------------------
Gross profit 35,276 19,474 16,623 8,510 6,885
-------------------------------------------------
Operating expenses:
Research and development 4,428 2,719 1,795 1,079 914
Sales and marketing 10,986 7,437 5,529 3,835 3,139
General and administrative 9,486 6,172 5,190 2,810 2,735
-------------------------------------------------
Total operating expenses 24,900 16,328 12,514 7,724 6,788
-------------------------------------------------
Income from operations 10,376 3,146 4,109 786 97
Interest expense, net 1,113 818 588 226 197
-------------------------------------------------
Income (loss) before income tax 9,263 2,328 3,521 560 (100)
-------------------------------------------------
Provision for income tax (1) 3,186 330 - - -
Net income (loss) $ 6,077 $ 1,998 $ 3,521 $ 560 $ (100)
-------------------------------------------------
-------------------------------------------------
Net income per share $ 1.34
--------
--------
Pro forma data (unaudited):
Pro forma adjustments (2) (315)
--------
Pro forma net income $ 1,683
--------
--------
Pro forma net income per share (3) $ 0.45
--------
--------
</TABLE>
<PAGE>
<TABLE>
(In thousands except per share amounts)
As of October 31,
1996 1995 1994 1993 1992
-------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital $ 25,192 $ 21,621 $ 4,373 $ 1,480 $ 1,423
Total assets 65,629 57,539 23,651 14,777 8,039
Accounts payable-trade 19,538 17,731 8,710 8,446 4,046
Short-term bank borrowings, 12,465 12,138 6,793 3,679 1,614
including current maturities
Long-term debt 1,000 1,982 2,164 38 37
Total shareholders' equity 29,597 23,362 4,196 2,088 1,829
</TABLE>
(1) The Company operated as an S corporation from November 1, 1986 until
February 20, 1995, at which time the Company became fully subject to
federal and state income taxes.
(2) Reflects certain pro forma adjustments assuming (a) the company's profit-
sharing allocation to employees had been reduced from 25% to 10% of income
before taxes (as calculated prior to profit sharing expenses) effective
November 1, 1994; (b) the portion of indebtedness evidenced by the
Founding Shareholder Notes issued to the Founding Shareholders relating
to approximately one-half of the Undistributed S Corporation Earnings, or
$2.04 million, had been outstanding effective November 1, 1994 and bearing
interest at 9% per annum; and (c) the Company had been treated as a C
corporation rather than as an S corporation for federal and state income
tax purposes, effective November 1, 1994 (and assuming an effective tax
rate of approximately 33%).
(3) Pro forma net income per share is based on the Company's weighted average
number of shares outstanding, plus the common equivalent number of shares
that the Company would have had to issue to distribute to the Founding
Shareholders $2.04 million, which amount equals approximately one-half of
the Undistributed S Corporation Earnings at October 31, 1994.
<PAGE>
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 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 it products to original equipment manufacturers ("OEMs"),
the commercial market and the specialized technology market. Multimedia
subsystem products are sold both to OEMs as subsystems for their PC products
and to the commercial market. Sales of multimedia accelerators and other
multimedia subsystems 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 unit volumes and higher gross profit
margins than the sale of similar products to OEMs. Although sales volumes of
specialized technology products are relatively low, the Company realizes
higher gross profit margins from the sale of these products than from the
sale of multimedia subsystem products. The Company began shipping significant
unit volumes of certain new multimedia subsystem products (products other
than multimedia accelerators) to OEM customers in the third quarter of fiscal
1996. The Company is not yet in a position to forecast the effect that the
sale of these new products will have upon the Company's results of operations.
For the fiscal year 1996, sales of the Company's products to OEMs represented
approximately 81% (of which approximately 4.5% is comprised of sales of new
multimedia subsystem products. Sales to the commercial market represented
approximately 11% of total net sales and sales to specialized technology
product markets constituted approximately 6%. The Company has experienced
substantial growth in each of its sales channels in recent periods. The
balance of total net sales was derived primarily from third party assembly
services, which comprised approximately 2% of total net sales for fiscal year
1996. Export sales of the Company's products, which are made through all of
the Company's sales channels, have grown more moderately in recent periods,
and as a result, declined as a percentage of net sales from 24% in fiscal
1995 to 20% in fiscal 1996.
The Company recognizes revenue upon shipment of its products. For products
sold through the commercial channel, the Company generally allows returns in
the form of stock rotation and price protection in the form of credits. The
Company's current stock rotation policies permit a commercial channel
customer to return approximately 10% of products purchased within the
previous 90 days if 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. STB typically provides
price protection to commercial channel customers in the form of credits for
price reductions on products remaining in customer inventories at the time
of the price reduction. The Company maintains reserves related to these
programs, which it believes are adequate.
The Company has no guaranteed supply arrangements with any of its suppliers.
The Company obtains most of the primary components of its products,
consisting mainly of controller chips and memory chips, directly from the
component manufacturers. The prices of such components can change
significantly from time to time. In the past the Company has experienced,
and may in the future experience, increases in its unit component costs
without being able to increase the price of the related products. Such an
increase in component costs could negatively impact the Company's gross
profit margins and results of operations. In particular, occasional world
wide shortages of DRAM and other memory and controller chips and
international tariff disputes have in the past resulted in substantial unit
component cost increases that have materially adversely affected the
Company's gross profit margins and its results of operations. In recent
periods, a decline in the price of memory chips, together with the Company's
inventory management practices and other factors, has contributed to
improved gross profit margins. Although it is not possible to accurately
forecast the prices of memory chips or other components, the Company believes
that memory chip prices have recently stabilized and in certain instances
increased.
The Company's total gross profit margins and gross profits will likely
fluctuate from period to period as a result of the factors identified above,
among others. In particular, the Company's total gross profit margins and
gross profits will be substantially affected by the Company's product mix,
sales channel mix, component costs and competitive pricing pressures on the
Company's products. See "Risk Factors--Potential for Fluctuating Operating
Results; Seasonality."
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain items from the Company's Consolidated
Statements of Operations as a percentage of revenues from continuing
operations:
Percentage of Net Sales
Year Ended October 31,
1996 1995 1994
-----------------------
Net sales 100.0% 100.0% 100.0%
Cost of sales 80.4% 85.0% 81.5%
-----------------------
Gross profit 19.6% 15.0% 18.5%
-----------------------
Operating expenses:
Research & development 2.4% 2.1% 2.0%
Sales & marketing 6.1% 5.7% 6.2%
General & administrative 5.3% 4.8% 5.8%
-----------------------
Total operating expenses 13.8% 12.6% 14.0%
-----------------------
Income from operations 5.8% 2.4% 4.5%
Interest expense, net 0.6% 0.6% 0.7%
-----------------------
Income before income tax 5.2% 1.8% 3.8%
Provision for income tax (1) 1.8% 0.3% 0.0%
-----------------------
Net income 3.4% 1.5% 3.8%
-----------------------
-----------------------
Pro forma data (unaudited):
Pro forma adjustments (2) -0.2%
-------
Pro forma net income 1.3%
-------
-------
(1) The Company operated as an S corporation from November 1, 1986 until
February 20, 1995, at which time the Company became fully subject to federal
and state income taxes.
(2) Reflects certain pro forma adjustments assuming (a) the Company's profit-
sharing allocation to employees had been reduced from 25% to 10% of income
before taxes (as calculated prior to profit sharing expenses) effective
November 1, 1994; (b) the portion of indebtedness evidenced by the Founding
Shareholder Notes issued to the Founding Shareholders relating to
approximately one-half of the Undistributed S Corporation Earnings, or $2.04
million, had been outstanding effective November 1, 1994 and bearing
interest at 9% per annum; and (c) the Company had been treated as a
C corporation rather than as an S corporation for federal and state income
tax purposes, effective November 1, 1994 (and assuming an effective tax rate
of approximately 33%).
FISCAL YEAR ENDED OCTOBER 31, 1996
COMPARED TO FISCAL YEAR ENDED
OCTOBER 31, 1995
NET SALES. Net sales increased by $50.6 million, or 39.0%, from $129.6
million in fiscal 1995 to $180.2 million in fiscal 1996. This increase in
revenues was achieved primarily as a result of a 58% increase in unit volume
shipments, and despite a significant decrease in the average unit sales price
of the Company's products. This increase resulted primarily from continuing
growth in sales of the Company's products to established OEM customers, as
well as to new OEM customers. The Company also experienced continued growth
in the commercial channel from sales of the Company's products to new
commercial customers and increased sales to established customers. Sales in
the specialized technology market experienced moderate growth, primarily as
a result of increased sales to existing customers.
GROSS PROFIT. Gross profit increased by $15.8 million, or 81.1%, to $35.3
million in fiscal 1996, as compared to $19.5 million in fiscal 1995. For the
period, gross profit margin increased to 19.6% from 15.0%. The increase in
gross profit margin resulted primarily from economies of scale resulting from
higher production volumes, as well as from lower memory chip prices.
Increased sales of higher margin products sold in the commercial channel and
increased specialized technology product sales also contributed to the
increase in gross profit margin.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased by $1.7 million, or 62.8%, to $4.4 million in fiscal 1996, as
compared to $2.7 million in fiscal 1995. This increase resulted from
additional staffing and related expenses associated with new product
development, software development and continued enhancement and support of
the Company's existing products. Research and development expenses as a
percentage of net sales increased from 2.1% to 2.4%, for the period.
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased by $3.5
million, or 47.7%, to $11.0 million in fiscal 1996, as compared to $7.4
million in fiscal 1995. This increase resulted primarily from additions to
the Company's sales staff in both the domestic and international sales forces
and increased commission payments due to higher sales levels. Increased
trade show expense, advertising and promotional efforts to support the higher
sales levels in the commercial channel and specialized technology product
sales also contributed to the increase. For the period, sales and marketing
expense as a percentage of net sales increased from 5.7% in 1995 to 6.1% in
1996.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by $3.3 million, or 53.7%, to $9.5 million in fiscal 1996, as
compared to $6.2 million in fiscal 1995. General and administrative expenses,
excluding profit sharing expense, increased by $2.8 million, or 49.9%, to
$8.5 million in fiscal 1996, as compared to $5.7 million in fiscal 1995. The
<PAGE>
increase is due primarily to increased occupancy costs, insurance expenses
and increased personnel, legal and data processing expenses associated with
the Company's growth.
NET INCOME. As a result of the foregoing factors, net income increased by
$4.1 million, or 205%, to $6.1 million in fiscal 1996, as compared to $2.0
million in fiscal 1995.
FISCAL YEAR ENDED OCTOBER 31, 1995
COMPARED TO FISCAL YEAR ENDED
OCTOBER 31, 1994
NET SALES. Net sales increased by $39.8 million, or 44.3%, from $89.8 million
in fiscal 1994 to $129.6 million in fiscal 1995. This increase resulted
primarily from continuing growth in sales of the Company's products to OEMs
and from growth in sales of the Company's products in the commercial channel.
GROSS PROFIT. Gross profit increased by $2.9 million, or 17.2%, from $16.6
million in fiscal 1994 to $19.5 million in fiscal 1995. During the period,
gross profit as a percentage of net sales declined from 18.5% to 15.0%. The
decline in gross profit margin resulted primarily from decreasing margins on
sales of multimedia accelerators to OEMs due to pricing pressures from the
Company's competitors and, to a lesser degree, from a decline in sales volume
of higher margin multi-monitor products that more than offset an increase in
sales volume of higher margin retail products.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased by $924,000, or 51.5%, from $1.8 million in fiscal 1994 to $2.7
million in fiscal 1995. This increase resulted from increased staffing and
equipment requirements associated with the continuing enhancement and support
of the Company's existing products and the development of new products.
During the period, the expenses as a percentage of net sales increased from
2.0% to 2.1%.
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased by $1.9
million, or 34.5%, from $5.5 million in fiscal 1994 to $7.4 million in fiscal
1995. The increase resulted from additions to the Company's sales staff,
increased advertising expenses and increased trade show and travel expenses.
During the period, the expenses as a percentage of net sales decreased from
6.2% in 1994 to 5.7%.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by $982,000, or 18.9%, from $5.2 million in fiscal 1994 to $6.2
million in fiscal 1995. During this period, expenses as a percentage of net
sales declined from 5.8% to 4.8%. General and administrative expenses,
exclusive of profit sharing expenses, increased by $1.7 million, or 41.8%,
from $4.0 million in fiscal 1994 to $5.7 million in fiscal 1995, due
primarily to expenses associated with the Company's growth, including
increased personnel expenses and increased facility, equipment and insurance
expenses. The Company's profit sharing allocation to employees, which
amounted to 25% of income before taxes (as calculated prior to profit sharing
expenses) in fiscal 1994, was reduced to 10% of income before taxes following
the first quarter of fiscal 1995 concurrently with the completion of the
Company's initial public offering.
NET INCOME. As a result primarily of the factors discussed in the paragraphs
above that address net sales and gross profit, net income decreased by $1.5
million, or 43.3%, to $2.0 million in fiscal 1995 as compared to fiscal 1994.
SEASONALITY
The Company's quarterly operating results may vary significantly depending on
factors such as the timing of large customer orders, timing of new product
introductions, adequacy of component supply, changes in component costs,
variations in the Company's product 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 entire 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital and liquidity needs are for financing
inventory and accounts receivable and, to a lesser degree, purchasing
manufacturing and other equipment. The Company has financed these
requirements, and its operations, generally through a combination of cash
generated from operations, bank borrowings and proceeds from the Company's
initial public offering. As a result of the Company's rapid growth in recent
years, its capital requirements have increased substantially. The Company
recognizes that future growth will require additional capital, particularly
to support increased working capital needs, engineering and other staffing
expenses, promotional expenses, manufacturing facilities and equipment
requirements. The Company believes its various sources of available financing
will be adequate to meet its capital requirements for the foreseeable future.
The Company generated cash from operations of $3.5 million in fiscal 1996,
resulting primarily from increased net income and a reduction in inventory
costs along with increased accounts payable, partially offset by increased
accounts receivable as a result of higher sales, compared to fiscal 1995,
where net cash used in operations was $15.8 million. The Company's working
capital was $25.2 million at October 31, 1996, compared to $21.6 million at
October 31, 1995. Cash and cash equivalents was $3.4 million and $4.2 million
at October 31, 1996 and 1995, respectively.
<PAGE>
In fiscal 1996, the Company invested $3.1 million in capital equipment,
compared with net purchases of equipment aggregating $2.5 million during
fiscal 1995. The Company's investment in equipment is primarily attributable
to manufacturing equipment additions and upgrades of existing equipment to
support the increased demand for the Company's products. During the fourth
quarter of fiscal 1996, the Company installed four new surface-mount
technology assembly lines at its manufacturing facility in Juarez, Mexico, at
an approximate cost totaling $4.2 million. This equipment was financed
through traditional lease financing arrangements. The Company expects that
additional capital expenditures for similar types of equipment may be
necessary to support future customer demand and production requirements.
The Company currently has a $25 million line of credit under a revolving
credit facility (the "Revolving Credit Facility"), which includes a $2.0
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. As of October 31, 1996 the Company had $11.8 million and $1.5
million outstanding under the Revolving Credit Facility and the Mezzanine
Facility, respectively. Principal amounts outstanding under the Revolving
Credit Facility bear interest at the rate of prime plus .75%. During the
first quarter of fiscal 1996, the interest rate on the principal amounts
outstanding under the Mezzanine Facility was reduced from prime plus 3% to
prime plus .75%. The Mezzanine Facility is payable in 48 monthly installments
in the amount of $41,667 plus interest, which began December 1, 1995. The
Revolving Credit Facility agreement provides for a minimum monthly interest
charge of $25,000, which can be satisfied through the accrual of interest
under both the Revolving Credit Facility and the Mezzanine Facility.
Availability under the Revolving Credit Facility is calculated on formulas
derived from accounts receivable and inventory balances as defined by the
Revolving Credit Facility agreement. All indebtedness under these facilities
mature on November 1, 1999. Commencing December 1, 1995, the company was
required to make the first of 48 successive monthly installments of principal
in the amount of $41,667 each, together with accrued interest.
In accordance with the provisions of a contingent payment agreement executed
in connection with the Revolving Credit and Mezzanine Facilities, the Company
was obligated to pay the lender a one-time fee equal to one percent (1%) of
the product of six times the Company's earnings before income taxes,
interest, depreciation and amortization for the fiscal year preceding the
fiscal year in which the payment is made. The Company paid this fee in
September 1996, in the amount of $250,234.
FORWARD LOOKING INFORMATION
All statements other than statements of historical fact contained in this
Annual Report, including statements in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations" concerning the
Company's financial position and liquidity, results of operations, prospects
for continued growth, component and other costs, ability to maintain or
improve unit volumes, net sales or profit margins and other matters are
forward-looking statements. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, no
assurance can be given that such expectations will prove correct. Factors
that could cause the Company's results to differ materially for the results
discussed in or contemplated by such forward-looking statements include the
risks described under "Risk Factors" in Part I of the Company's Annual Report
on Form 10-K for the fiscal year ended October 31, 1996, as filed with the
Securities and Exchange Commission. Such risks include, without limitation,
the risks associated with the potential for fluctuating operating results,
dependence on suppliers and the multimedia accelerator market, rapid
technology change and short product life cycles, dependence on key customers
and the PC market, changes in product or sales channel mix, entry into new
product markets, price protection and stock rotation policies, intense
competition, dependence on key personnel, difficulties in managing growth,
reliance on a single manufacturing facility, international operations and
dependence on sales representatives and distributors and various proprietary
technology matters. All forward-looking statements in this Annual Report are
expressly qualified in their entirety by the cautionary statements in this
paragraph, in "Risk Factors" and elsewhere in this Annual Report.
<PAGE>
REPORT OF PRICE WATERHOUSE LLP, INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
STB Systems, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of changes in shareholders' equity and
of cash flows present fairly, in all material respects, the consolidated
financial position of STB Systems, Inc. and subsidiaries at October 31, 1996
and 1995, and the results of their operations and their cash flows for each
of the three years in the period ended October 31, 1996, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted
our audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PRICE WATERHOUSE LLP
- ---------------------------
Price Waterhouse LLP
Dallas, Texas
December 2, 1996
<PAGE>
STB SYSTEMS, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
October 31, 1996 and 1995
(in thousands except share and per share amounts)
1996 1995
---------------------
ASSETS
Current Assets:
Cash and cash equivalents $3,420 $4,162
Accounts receivable - trade, net of allowance for
doubtful accounts of $332 and $449 28,032 20,634
Inventories, net 27,148 27,875
Other current assets 1,348 869
---------------------
Total current assets 59,948 53,540
---------------------
Property and equipment, net 5,231 3,397
Other assets 450 602
---------------------
Total assets $65,629 $57,539
---------------------
---------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term debt $11,760 $11,411
Accounts payable - trade 19,538 17,731
Notes payable to related parties - 700
Accrued wages, commissions and bonuses 1,144 559
Other accrued liabilities 1,609 791
Current portion of long-term liabilities 705 727
---------------------
Total current liabilities 34,756 31,919
---------------------
Long-term liabilities:
Long-term notes payable 1,000 1,500
Obligations under capital leases and other
long-term liabilities 276 758
---------------------
Total long-term liabilities 1,276 2,258
---------------------
Shareholders' equity:
Preferred stock, 2,000,000 shares authorized,
none issued or outstanding - -
Common stock, $.01 par value, 20,000,000 shares
authorized, 4,513,598 and 4,500,000 shares issued
and outstanding 45 45
Additional paid-in capital 22,318 22,160
Retained earnings 7,479 1,402
---------------------
29,842 23,607
Treasury stock, 35 shares, at cost (245) (245)
---------------------
Total shareholders' equity 29,597 23,362
---------------------
Total liabilities and shareholders' equity $65,629 $57,539
---------------------
---------------------
The accompanying notes are an integral part of these financial statements.
<PAGE>
STB SYSTEMS, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
For the Years Ended October 31, 1996, 1995 and 1994
(in thousands except share and per share amounts)
1996 1995 1994
--------------------------------
Net sales $180,155 $129,603 $89,836
Cost of sales 144,879 110,129 73,213
--------------------------------
Gross profit 35,276 19,474 16,623
--------------------------------
Operating expenses:
Research and development 4,428 2,719 1,795
Sales and marketing 10,986 7,437 5,529
General and administrative 9,486 6,172 5,190
--------------------------------
Total operating expenses 24,900 16,328 12,514
--------------------------------
Income from operations 10,376 3,146 4,109
Interest expense, net 1,113 818 588
--------------------------------
Income before income taxes 9,263 2,328 3,521
Provision for income taxes 3,186 330 -
--------------------------------
Net income $6,077 $1,998 $3,521
--------------------------------
Net income per share $1.34
----------
Weighted average shares outstanding 4,546,756
----------
Pro forma data: (unaudited)
Net income $1,998
Pro forma adjustment to general and
administrative expenses 220
Pro forma adjustment to reflect interest
on Founding Shareholder Notes (52)
Pro forma adjustment to reflect federal
income taxes (483)
-----------
Pro forma net income $1,683
-----------
Pro forma net income per share $0.45
-----------
Weighted average shares outstanding
used in the pro forma net income per
share calculation 3,746,395
-----------
The accompanying notes are an integral part of these financial statements.
<PAGE>
STB SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Years Ended October 31, 1996, 1995 and 1994
(dollars in thousands)
<TABLE>
1996 1995 1994
----------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 6,077 $ 1,998 $ 3,521
Adjustments to reconcile net income to
net cash flow from operating activities:
Depreciation and amortization 1,252 733 395
Deferred tax asset - - (45)
Changes in assets and liabilities:
Accounts receivable - trade (7,397) (9,542) (4,132)
Inventories, net 727 (17,923) (3,294)
Other current assets (479) (347) 31
Other assets 151 2 (304)
Accounts payable - trade 1,807 9,029 264
Accrued wages, commissions, and
bonuses 585 (182) 514
Other accrued liabilities 817 453 49
----------------------------
Net cash provided by (used in)
operating activities 3,540 (15,779) (3,001)
----------------------------
Cash flows from investing activities:
Purchases of property and equipment (3,086) (2,470) (1,434)
Proceed from sale of property and equipment - - 48
----------------------------
Net cash used in investing activities (3,086) (2,470) (1,386)
----------------------------
Cash flows from financing activities:
Borrowings (payments) on short-term debt (351) 4,727 3,042
Payments on Founding Shareholder Notes - (1,340) -
Borrowings on long-term debt - 436 2,278
Payments against long-term debt (1,003) - (81)
Issuance of common stock, net of issue costs 158 21,678 -
Distribution of S Corporation earnings - (2,082) -
Payment of dividends - (1,285) (990)
----------------------------
Net cash provided by(used in) financing
activities (1,196) 22,134 4,249
----------------------------
Net increase (decrease) in cash and
cash equivalents (742) 3,885 (138)
Cash and cash equivalents at beginning of
period 4,162 277 415
----------------------------
Cash and cash equivalents at end of period $ 3,420 $ 4,162 $ 277
----------------------------
</TABLE>
Supplemental disclosure of cash flow information:
- Cash paid for interest in 1996, 1995 and 1994 was $1,243, $1,023, and $553,
respectively.
- Accrued and unpaid dividends at October 31, 1994 were $433
- Amounts relating to the Contingent Payment (see Note 6) included in
other assets were $150, $220 and $276 at October 31, 1996, 1995 and 1994,
respectively. Long-term liabilities include $276 at October 31, 1995 and
1994 related to the Contingent Payment.
The accompanying notes are an integral part of these financial statements.
<PAGE>
STB SYSTEMS, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the years ended October 31, 1996, 1995 and 1994
(dollars in thousands)
<TABLE>
Common Stock Additional Treasury Stock
------------------- paid-in Retained ----------------
Shares Amount capital earnings Shares Amount Total
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, OCTOBER 31, 1993 2,500,000 $25 $502 $ 1,805 35 ($245) $ 2,087
Dividends declared (1,413) (1,413)
Cumulative translation gain 1 1
Net Income 3,521 3,521
--------------------------------------------------------------------------
BALANCE, OCTOBER 31, 1994 2,500,000 25 502 3,914 35 (245) 4,196
Dividends declared (851) (851)
Establishment of deferred tax asset 455 455
Distribution of S Corporation earnings (4,122) (4,122)
Net proceeds from initial public
offering 2,000,000 20 21,658 21,678
Cumulative translation gain 8 8
Net Income 1,998 1,998
--------------------------------------------------------------------------
BALANCE, OCTOBER 31, 1995 4,500,000 45 22,160 1,402 35 (245) 23,362
Issuance of common stock 13,598 158 158
Net Income 6,077 6,077
--------------------------------------------------------------------------
BALANCE, OCTOBER 31, 1996 4,513,598 $45 $22,318 $ 7,479 35 ($245) $29,597
--------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
NOTE 1 - DESCRIPTION OF BUSINESS AND
SIGNIFICANT ACCOUNTING POLICIES
STB Systems, Inc. develops, manufactures and sells a wide selection of
graphics adapters and specialized technology products designed 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.
Principles of consolidation - In conjunction with the Stock Offering (see
Note 2), STB Assembly, Inc. became a wholly owned subsidiary of STB Systems,
Inc. Consequently, the accompanying financial statements, which include the
historical accounts of STB Systems, Inc. and STB Assembly, Inc. (collectively
referred to as the "Company"; see also Note 2) have been consolidated for
fiscal years 1996 and 1995 and combined for fiscal 1994. STB Assembly, Inc.
has two majority owned subsidiaries, STB de Mexico and Maquilados
Continentales de Chihuahua ("MCC"). STB de Mexico is a Mexican corporation
operated as a maquiladora and performs assembly services for STB Systems,
Inc. As of December 1992, MCC became an inactive entity. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Minority interests in the subsidiaries are insignificant for financial
reporting purposes.
Cash and cash equivalents - Cash equivalents are short-term, highly liquid
investments that are both readily convertible to known amounts of cash and so
near to their maturity that they present insignificant risk of changes in
value because of changes in interest rates. Investments with initial
maturities of three months or less qualify under this definition.
Revenue recognition and accounts receivable - The Company recognizes revenue
from product sales upon shipment. Sales to original equipment manufacturers
("OEMs") account for a significant portion of the Company's sales. The
Company offers its OEM customers a limited warranty for a period of typically
15 to 36 months. Costs associated with the warranty program are accrued when
revenue is recognized and are determined on the basis of estimated future
costs to fulfill the warranty commitment.
Stock rotation returns, under specified conditions, are allowed to certain
retail customers for recently purchased products, provided an equivalent
dollar amount of other products is purchased at the time of the return. Also,
under the terms of some of the agreements, in the event the Company reduces
its selling prices, the retail customers receive price protection credit for
the difference between the original purchase price of product remaining in
specified levels of their inventories and the Company's reduced price for
such products. Sales adjustments resulting from stock rotation returns and
price protection programs are made as determined by management and have
historically been minor. Management's estimates of the costs associated with
the price protection and stock rotation programs are based on the Company's
historical experience with such arrangements and its evaluation of current
exposure resulting from these policies. The Company's sales are presented
net of stock rotation returns and price adjustments. The Company
participates in cooperative advertising programs with certain distributors.
These programs are used by the Company to reimburse distributors for certain
forms of advertising. In general, the programs allow distributors credits up
to a specified percentage of net purchases. The Company's costs associated
with these programs are accrued at the time of sale and are included in sales
and marketing expenses.
Inventories - Inventories are valued at the lower of cost or market. Cost is
determined on a first-in, first-out basis using a moving weighted average
methodology.
Property and equipment - Property and equipment are stated at cost.
Depreciation is computed for financial statement purposes using an
accelerated method over the estimated useful lives of the assets, which range
from three to five years. Amortization of assets recorded under capital
leases is included in depreciation expense. Depreciation and amortization
expense for each of the years ended October 31, 1996, 1995 and 1994 was
$1,252,000, $733,000 and $395,000, respectively.
Research and development - Research and development costs are charged to
expense as incurred.
Income taxes - Effective February 21, 1995 and in connection with the Company's
initial public offering ("Stock Offering"), the Company adopted Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes"
(SFAS 109) on a prospective basis (see Note 2). Under the asset and liability
method of SFAS 109, deferred tax assets and liabilities are recognized for
the future tax consequences attributable to temporary differences between the
financial statement carrying amounts and the tax basis of existing assets and
liabilities measured using estimated tax rates expected to apply to taxable
income in the years in which the temporary differences are expected to be
recovered or settled.
Prior to the Stock Offering (see Note 2), the Company had been treated for
federal and certain state income tax purposes as an S Corporation under
Subchapter S of the Internal Revenue Code of 1986, as amended. As a result,
the income of the Company for federal and certain state income tax purposes
was included in the income tax returns of the individual shareholders
("Founding Shareholders"). Accordingly, prior to February 21, 1995, no
recognition of federal and certain state income taxes has been given in the
accompanying financial statements. Prior to the conversion to C Corporation
status, in connection with the Stock Offering, the Company paid dividends to
its shareholders in an amount equal to the taxable earnings of the Company
multiplied by the current personal income tax rate.
Accounting for Stock-based Compensation - In October 1995, Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-based
Compensation" (SFAS 123) was issued. This
<PAGE>
statement requires the fair value of stock options and other stock-based
compensation issued to employees to either be included as compensation
expense in the statement of operations, or the pro forma effect on net income
and earnings per share of such compensation expense to be disclosed in the
footnotes to the Company's financial statements commencing with the Company's
1997 fiscal year. This Company expects to adopt SFAS 123 on a disclosure
basis only. As such, implementation of SFAS 123 is not expected to impact the
Company's consolidated balance sheet or statement of operations.
Financial Instruments - As of October 31, 1996 and 1995 the fair values of
the Company's revolving credit balance and the fair values of the Company's
fixed-rate debt approximates the related carrying values.
Pro forma net income and net income per share (unaudited) - Pro forma net
income and net income per share have been determined assuming that (1) the
Company had adopted the revised profit sharing plan effective November 1,
1994 (see Note 9), (2) the Founding Shareholder Notes in the aggregate amount
of $2,040,000 had been outstanding since November 1, 1994 bearing interest at
9% per annum (see Note 5), and (3) the Company had been taxed as a C
corporation for federal and certain state income tax purposes since November
1, 1994 (see Note 10).
Pro forma net income per share has been computed using the weighted average
number of common shares outstanding after giving retroactive effect to the
stock split (see Note 2). Common equivalent shares are also increased to
reflect the number of shares which would have been necessary to fund the
$2.04 million distribution paid to the Founding Shareholders from the
proceeds of the Stock Offering of the Company's common stock (see Note 5).
NOTE 2 - STOCK SPLIT, REORGANIZATION
AND STOCK OFFERING
Effective December 20, 1994, the Company consummated a common stock split at
a ratio of 8,333 to one which resulted in common stock with $.01 par value,
20,000,000 shares authorized, 2,500,000 shares issued and outstanding prior
to the Stock Offering (see below). The stock split, which was effected in the
form of a stock dividend, has been given retroactive effect in the
accompanying financial statements.
STB Systems, Inc. entered into a Share Exchange Agreement on December 16,
1994 with the shareholders of STB Assembly, Inc., providing for the issuance
of STB Systems, Inc. common stock in exchange for the outstanding common
stock of STB Assembly, Inc. on a one-for-333 basis immediately prior to
consummation of the Stock Offering. For purposes of these consolidated
financial statements, these shares are treated as outstanding for all periods
presented. As STB Systems, Inc. and STB Assembly, Inc. were under common
control, there was no change in basis for financial reporting purposes as a
result of the Share Exchange Agreement. As a result of the reorganization,
STB Assembly, Inc. became a wholly owned subsidiary of STB Systems, Inc.
Effective February 20, 1995, STB Systems, Inc. terminated its S Corporation
status and became a C Corporation and as a result, the Company became subject
to all federal and state taxes pursuant to the C Corporation rules of the
Internal Revenue Code.
On December 16, 1994, the Board of Directors of the Company authorized an
initial public offering of the Company's common stock ("Stock Offering").
Accordingly, the Company filed a Registration Statement on Form S-1 with the
Securities and Exchange Commission for the sale of common stock. On February
14, 1995, 2,000,000 shares of common stock were offered to the public at a
price of $12.00 per share. Proceeds from the Company's Stock Offering
totalled $24,000,000, net of $2,322,000 of Stock Offering expenses. The
Company's stock is listed on the NASDAQ National Market under the symbol
"STBI".
NOTE 3 - INVENTORIES
Inventories at October 31 consist of the following:
(in thousands)
1996 1995
-------------------
Raw materials $10,667 $15,599
Work-in-process 14,358 8,156
Finished goods 2,123 4,120
-------------------
Inventories, net $27,148 $27,875
-------------------
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment at October 31 consist of the following:
(in thousands)
1996 1995
-------------------
Furniture & equipment $ 8,614 $ 5,822
Leasehold improvements 628 419
-------------------
9,242 6,241
Less: accumulated
depreciation (4,011) (2,844)
-------------------
Property & equipment,
net $ 5,231 $ 3,397
-------------------
NOTE 5 - SHORT TERM DEBT AND NOTES
PAYABLE TO RELATED PARTIES
On January 5, 1996, the Company increased its borrowing capacity under its
revolving credit facility ("Revolving Credit Facility") from $13,000,000 to
$25,000,000. The Revolving Credit Facility is with a bank, payable upon
demand, with interest at prime plus .75% (9.0% at October 31, 1996).
Outstanding balances under the Revolving Credit Facility were $11,760,000 and
$11,411,000, at October 31,
<PAGE>
1996 and 1995, respectively. All indebtedness under the Revolving Credit
Facility matures on November 1, 1999.
Availability under the Revolving Credit Facility is subject to limitations
determined by the Company's borrowing base, which is calculated based on
eligible accounts receivable and inventory, as defined in the Revolving
Credit Facility agreement.
On February 20, 1995 the Company issued notes payable aggregating $2,040,000
to the Founding Shareholders to be repaid within 12 months of the date of
issue with interest at 9%. As of October 31, 1996 the notes had been paid in
full, and $700,000 was outstanding on the notes at October 31, 1995.
NOTE 6 - LONG-TERM LIABILITIES
Long-term liabilities at October 31 consist of the following:
(In thousands)
1996 1995
-------------------
Mezzanine Facility, interest at
prime plus .75%, (prime plus 3%
prior to January 5, 1996) payable
in monthly installments of interest
only through November 1, 1995
and principal and interest from
December 1, 1995 through
November 1,1999, collateralized
by certain assets of the Company $ 1,500 $ 2,000
Contingent Payment (see below) - 276
Other loans, interest at 9.8%,
payable in monthly installments
of principal and interest through
July 1997, collateralized by
certain assets of the Company 4 9
Obligations under capital leases 477 700
-------------------
1,981 2,985
Less: current portion (705) (727)
-------------------
Long-term liabilities $ 1,276 $ 2,258
-------------------
In accordance with the provisions of a contingent payment agreement
("Contingent Payment") executed in connection with the Revolving Credit and
Mezzanine Facilities, the Company is obligated to pay the lender a one-time
fee equal to one percent (1%) of the product of six (6) times the Company's
earnings before income taxes, interest, depreciation and amortization for the
year immediately preceding the year in which the payment is made.
Accordingly, the Company paid the Contingent Payment on September 30, 1996,
which, based on fiscal 1995 earnings amounted to $250,000. The Company had
the option to pay this fee on any date following the successful completion
of an initial public offering up to October 17, 1996, at which time the fee
payment date was at the option of the lender. The Company originally recorded
a liability and related asset of $276,000 at October 31, 1994. The asset is
being amortized to interest expense over the term of the related debt as a
yield adjustment.
The combined aggregate amount of maturities for all longterm borrowings,
excluding obligations under capital leases, for each of the five years
following October 31, 1996 are:
Years ending October 31, (In thousands)
1997 $504
1998 500
1999 500
2000 -
2001 and thereafter -
------
$1,504
The Company leases certain equipment under capital leases. Future minimum
lease payments under capital leases and the present value of the minimum
capital lease payments at October 31, 1996 are:
Years ending October 31, (In thousands)
1997 $ 244
1998 153
1999 95
2000 64
2001 -
------
556
Less: amount representing interest (79)
------
Present value of the minimum
capital lease payments $ 477
------
NOTE 7 - COMMITMENTS
AND CONTINGENCIES
The Company leases office space and equipment under various noncancelable
operating lease agreements extending through 1999. Rental expense for each of
the years ended October 31, 1996, 1995 and 1994 was $856,000, $773,000, and
$660,000, respectively. At October 31, 1996, future minimum lease payments
for such operating leases are:
Years ending October 31, (In thousands)
1997 $1,644
1998 1,484
1999 1,139
2000 51
2001 39
------
Total $4,357
------
<PAGE>
The Company installed four new surface-mount assembly lines at its facility
in Juarez, Mexico during the fourth quarter of fiscal 1996, at a total cost
of $4.2 million. This equipment was financed by a traditional capital lease
arrangement. Under the capital lease arrangement, the Company must make 36
monthly payments of $83,000 followed by two consecutive twelve month optional
renewel terms.
In September 1995, a class action lawsuit was filed against the Company
alleging the prospectus and Registration Statement for the Stock Offering
contained false and materially misleading facts, and omitted to state
material facts. The members of the class seek unspecified damages. The
Company denies the allegations. No formal discovery has yet been undertaken,
and the Company intends to vigorously defend its position. In the opinion of
management, this lawsuit is not likely to result in any loss that would have
a material adverse effect on the Company's operating results or financial
condition.
NOTE 8 - MAJOR CUSTOMERS
Sales to major customers, as a percentage of net sales, were as follows for
each of the years ended October 31:
Customer 1996 1995 1994
--------------------------------------
A 47% 42% 40%
B - 10% 6%
C 8% - 4%
Net sales to customers within the United States and to customers in foreign
countries were as follows for each of the years ended October 31:
(In thousands)
1996 1995 1994
------------------------------
United States $144,761 $ 98,742 $76,560
Europe 32,654 30,000 12,445
Other 2,740 861 831
------------------------------
$180,155 $129,603 $89,836
------------------------------
NOTE 9 - EMPLOYEE BENEFIT PLAN
AND PROFIT SHARING PLAN
The Company has a 401(K) plan for all full-time employees. The plan provides
for the Company to make contributions of up to 25% of the amount of an
employee's contribution, but not more than 1% of an employee's total cash
compensation. The Company incurred expense of $43,000, $34,000 and $28,000 in
the years ended October 31, 1996, 1995 and 1994, respectively, for its
contributions to this plan. On January 1, 1997, the Company modified the
existing plan, increasing its contribution to 50% of the employee's
contribution, up to 2% of the employee's total cash compensation.
The Company's profit sharing plan provides for a portion of the Company's
income before taxes to be paid as additional compensation to participants in
this plan. Concurrent with the Stock Offering, the profit sharing percentage
was reduced from 25% to 10%. Employees meeting eligibility requirements
participate in the plan. The Company incurred compensation expense of
$991,000, $503,000 and $1,195,000 in the years ended October 31, 1996, 1995
and 1994, respectively, as a result of the Company's obligations under the
profit sharing plan.
NOTE 10 - CHANGE IN S CORPORATION STATUS AND INCOME TAXES
Immediately preceeding the Stock Offering (see Note 2), STB Systems, Inc.
terminated its S Corporation status, and accordingly, the Company is subject
to federal and state income taxes.
The Company paid cash distributions to its Founding Shareholders in the
aggregate amounts of $1,285,000 and $990,000 for fiscal years 1995 and 1994
respectively. Following the Stock Offering, the Company made final
distributions of the Company's undistributed S Corporation earnings to its
Founding Shareholders. Such undistributed S Corporation earnings aggregated
$4,100,000. The Company paid approximately onehalf of the undistributed S
Corporation earnings from the proceeds of the Stock Offering, and the
remainder in the form of Founding Shareholder Notes. As of October 31, 1996,
these notes had been repaid in full.
As a result of the termination of its S Corporation status, the Company is
required to provide deferred income taxes for cumulative temporary
differences between income for financial and income tax reporting purposes at
the date of termination. A deferred tax asset of $455,000 was recorded at the
date of change in tax status resulting primarily from differing methods of
recognizing inventory reserves and bad debt allowances for financial and
income tax reporting purposes. The deferred tax assets at October 31 is
composed of the following and included in other current assets in the
consolidated balance sheets:
(In thousands)
1996 1995
---------------------
Bad debt reserves $ 113 $ 153
Inventory reserves 476 340
Depreciation 62 55
Various expense accruals 408 80
---------------------
Deferred tax asset $ 1,059 $ 628
---------------------
<PAGE>
Provision for Income Taxes - The components of the income tax provision for
the C Corporation period for the years ended October 31, 1996 and 1995 are as
follows:
(In thousands)
1996 1995
----------------
Current provision
Federal $ 3,536 $ 485
State 81 18
----------------
3,617 503
----------------
Deferred benefit
Federal (431) (173)
State - -
----------------
(431) (173)
----------------
Provision for income taxes $ 3,186 $ 330
----------------
A reconciliation of taxes based on the federal statutory rate of 34% and the
provision for income taxes is summarized as follows for the years ended October
31:
1996 1995
----------------
Income taxes at the federal statutory rate 34.0% 34.0%
S Corporation earnings - (17.5%)
State income taxes, net of federal benefit - .5%
Other, net .4% (2.8%)
----------------
Provision for income taxes 34.4% 14.2%
----------------
NOTE 11 - RELATED PARTY TRANSACTIONS
In July 1993, the Company entered into an agreement with a financial
consulting firm to provide advisory services and arrange certain credit
facilities for the Company. The president of this firm, who is also an equity
holder in the firm, serves as a member to the Company s board of directors.
The Company incurred costs of $58,000 and $138,000 for each of the years
ended October 31, 1996 and 1994, respectively, related to these services.
In April 1994, this financial consulting firm agreed to provide certain
advisory services, including services relating to the Stock Offering. A flat
fee of $150,000 was paid to the firm in connection with the Stock Offering.
The Company recognized costs of $133,000 and $17,000 with respect to these
services in the years ended October 31, 1995 and 1994, respectively.
A business consulting firm has provided consulting services to the Company
since March 1990, for which the Company incurred fees of $25,000 and $104,000
in the years ended October 31, 1995 and 1994, respectively. A general partner
in this consulting firm is an officer of the Company and a member of the
Company s board of directors.
NOTE 12 - STOCK PLANS
The Company's 1995 Long Term Incentive Plan provides for the granting of
incentive stock options and non-qualified stock options to purchase common
stock, stock appreciation rights, restricted stock and performance units to
key executives and other key employees of the Company. The plan authorized
850,000 shares of common stock to be used for stock options, stock
appreciation rights, or restricted stock. All options vest at the rate of 20%
per year on each of the first five anniversaries of the date of grant. At
October 31, 1996, options to purchase 81,300 shares were exercisable. The
plan will terminate on December 31, 2004. Stock option activity during fiscal
1996 is as follows:
Number Option Price
of Shares Range per Share
----------------------------
Balance at October 31, 1994 - -
Granted 478,000 $12.00 - $13.88
Terminated (56,500) $12.00 - $13.75
Exercised - -
----------------------------
Balance at October 31, 1995 421,500 $12.00 - $13.88
----------------------------
Granted 409,500 $ 9.25 - $23.38
Terminated (20,000) $10.38 - $12.00
Exercised (11,000) $12.00 - $12.00
----------------------------
Balance at October 31, 1996 800,000 $ 9.25 - $23.38
----------------------------
Employee Stock Purchase Plan - The 1995 Employee Stock Option Purchase Plan
provides a method whereby eligible employees may purchase common stock
through voluntary payroll deductions, not to exceed 10% of the employee's
base salary. Payroll deductions are made over a twelve month period. At the
end of the deduction period, employees will have a subsequent twelve month
period during which they may either exercise their options in whole or in
part, or withdraw their funds with interest at a rate determined by the Stock
Option Committee. The purchase price under the plan will be determined by the
Stock Option Committee, however, the option price will not be less than 85%
of the fair market value of the common stock on the date the option is
granted or, such price will not be less than 85% of the fair market value of
the Common Stock on the date the option is exercised. As of October 31, 1996,
2,598 shares have been issued under this plan.
<PAGE>
NOTE 13 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(In thousands)
<TABLE>
31-Oct 31-Jul 30-Apr 31-Jan 31-Oct 31-Jul 30-Apr 31-Jan
Three Months Ended 1996 1996 1996 1996 1995 1995 1995 1995
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $48,122 $42,537 $44,592 $44,905 $39,832 $25,663 $33,370 $30,738
Gross profit 10,996 8,616 8,403 7,262 6,117 3,550 4,712 5,095
Net income(loss) 2,131 1,380 1,351 1,214 941 (497)
Net income(loss)
per share $0.45 $0.30 $0.30 $0.27 $0.21 $(0.11)
Pro forma net income 410 828
Pro forma net income per share $0.10 $0.31
</TABLE>
<PAGE>
EXHIBIT 21
21 Subsidiaries of the Company
(a) STB Assembly, Inc., a Texas corporation
(b) STB de Mexico, S.A. de C.V., a Mexican corporation
(c) Maquilados Continentales de Chihuahua, a Mexican corporation
(an inactive shell corporation)
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Annual Report on
Form 10-K of our report dated December 2, 1996, which appears in
the 1996 Annual Report to Shareholders of STB Systems, Inc., which is
incorporated by reference in STB Systems, Inc.'s Annual Report on Form 10-K
for the year ended October 31, 1996. We also consent to the incorporation by
reference of our report on the Financial Statement Schedule, which appears in
such Annual Report on Form 10-K.
PRICE WATERHOUSE LLP
Dallas, Texas
January 28, 1997
<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 ANNUAL
REPORT ON FORM 10K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> OCT-31-1996
<CASH> 3,420
<SECURITIES> 0
<RECEIVABLES> 28,364
<ALLOWANCES> 332
<INVENTORY> 27,148
<CURRENT-ASSETS> 59,948
<PP&E> 9,242
<DEPRECIATION> 4,011
<TOTAL-ASSETS> 65,629
<CURRENT-LIABILITIES> 34,756
<BONDS> 0
0
0
<COMMON> 45
<OTHER-SE> 29,552
<TOTAL-LIABILITY-AND-EQUITY> 65,629
<SALES> 180,155
<TOTAL-REVENUES> 180,155
<CGS> 144,879
<TOTAL-COSTS> 144,879
<OTHER-EXPENSES> 24,900
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,113
<INCOME-PRETAX> 9,263
<INCOME-TAX> 3,186
<INCOME-CONTINUING> 6,077
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,077
<EPS-PRIMARY> 1.34
<EPS-DILUTED> 1.29
</TABLE>
