<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-25540
STB SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Texas 75-1855896
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1651 North Glenville Drive, Richardson, Texas 75081
(Address of principal executive offices)
(972) 234-8750
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Number of Shares Outstanding as of
Title of each class: March 14, 1997:
Common Stock, $.01 par value 4,544,490
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STB SYSTEMS, INC.
INDEX
PAGE
PART I FINANCIAL INFORMATION NUMBER
Item 1 Consolidated Financial Statements (unaudited) :
Consolidated Balance Sheet at January 31, 1997
and October 31, 1996 2
Consolidated Statement of Operations for the
quarter ended January 31, 1997 and 1996 3
Consolidated Statement of Cash Flows for the three
months ended January 31, 1997 and 1996 4
Notes to Consolidated Financial Statements 5
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 6-9
PART II OTHER INFORMATION
Item 1 Legal Proceedings 9
Items 2 through 4 have been omitted since the registrant has no
reportable events in relation to these items.
Item 5 Other Information - Business Risks 9-13
Item 6 Exhibits and Reports on Form 8-K 13
Signatures 14
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STB SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
JANUARY 31, OCTOBER 31,
1997 1996
--------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 3,736 $ 3,420
Accounts receivable - trade, net of allowance
for doubtful Accounts of $436 and $332 27,365 28,032
Inventories, net 26,690 27,148
Other current assets 1,609 1,348
--------------------------
Total current assets 59,400 59,948
Property and equipment, net 5,896 5,231
Other assets 417 450
--------------------------
Total assets $ 65,713 $ 65,629
--------------------------
--------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term debt $ 13,906 $ 11,760
Accounts payable - trade 15,054 19,538
Accrued wages, commissions and bonuses 1,036 1,144
Other accrued liabilities 1,972 1,609
Current portion of long-term liabilities 681 705
--------------------------
Total current liabilities 32,649 34,756
--------------------------
Long-term liabilities:
Long-term notes payable 875 1,000
Obligations under capital leases and other
long-term liabilities 241 76
--------------------------
Total long-term liabilities 1,116 1,276
--------------------------
Shareholders' equity:
Preferred stock, 2,000,000 shares authorized,
none issued or outstanding - -
Common stock, $.01 par value, 20,000,000 shares
authorized, 4,521,394 and 4,513,598 shares
issued and outstanding 45 45
Additional paid-in capital 22,417 22,318
Retained earnings 9,731 7,479
--------------------------
32,193 29,842
Treasury stock, 35 shares, at cost (245) (245)
--------------------------
Total shareholders' equity 31,948 29,597
--------------------------
Total liabilities and shareholders' equity $ 65,713 $ 65,629
--------------------------
--------------------------
The accompanying notes are an integral part of these financial statements.
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STB SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
- -----------------------------------------------------------------------------
(DOLLARS IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
THREE MONTHS ENDED
JANUARY 31,
1997 1996
--------------------------
Net sales $ 48,092 $ 44,905
Cost of sales 37,459 37,643
--------------------------
Gross profit 10,633 7,262
--------------------------
Operating expenses:
Research and development 1,238 773
Sales and marketing 3,286 2,413
General and administrative 2,383 1,897
--------------------------
Total operating expenses 6,907 5,083
--------------------------
Income from operations 3,726 2,179
Interest expense, net 376 333
--------------------------
Income before income taxes 3,350 1,846
Provision for income taxes 1,098 632
--------------------------
Net income $ 2,252 $ 1,214
--------------------------
--------------------------
Net income per share $ 0.47 $ 0.27
--------------------------
--------------------------
Weighted average shares outstanding 4,787,743 4,500,000
--------------------------
--------------------------
The accompanying notes are an integral part of these financial statements.
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STB SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
- -----------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED
JANUARY 31,
1997 1996
----------------------
Cash flows from operating activities:
Net income $ 2,252 $ 1,214
Adjustments to reconcile net income to net cash
From operating activities:
Depreciation and amortization 420 240
Changes in assets and liabilities:
Accounts receivable - trade 667 1,467
Inventories 457 1,241
Other current assets (260) 452
Other assets 33 (399)
Accounts payable - trade (4,483) 150
Accrued wages, commissions, and bonuses (109) 121
Other accrued liabilities 365 146
----------------------
Net cash provided by (used in) operating
activities (658) 4,632
----------------------
Cash flows from investing activities -
Purchases of property and equipment (1,085) (250)
----------------------
Cash flows from financing activities:
Borrowings on(payments of) short-term debt 2,145 (2,565)
Payments on Founding Shareholder Notes - (523)
Payments on long-term debt (185) (227)
Issuance of common stock, net of issue costs 99 -
----------------------
Net cash provided by(used in) financing activities 2,059 (3,315)
----------------------
Net increase in cash and cash equivalents 316 1,067
Cash and cash equivalents at beginning of period 3,420 4,162
----------------------
Cash and cash equivalents at end of period $ 3,736 $ 5,229
----------------------
----------------------
The accompanying notes are an integral part of these financial statements
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STB SYSTEMS, INC.
Notes To Consolidated Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
STB Systems, Inc. develops, manufactures and sells a wide selection of
multimedia accelerators, other multimedia subsystems products and
specialized technology products for use in mid-range and high-end personal
computers ("PCs"). STB Assembly, Inc. is a wholly-owned subsidiary and
provides manufacturing services to STB Systems, Inc.
The accompanying financial statements include the consolidated accounts of
STB Systems, Inc. and STB Assembly, Inc. (collectively referred to as the
"Company"). STB Assembly, Inc. has two majority owned subsidiaries, STB de
Mexico S.A. de C.V. ("STB de Mexico") and Maquilados Continentales de
Ciudad Juarez, S.A. de C.V. ("MCC"). STB de Mexico is a Mexican
corporation operated as a maquiladora and performs assembly services for
STB Systems, Inc. MCC entered into an agreement in January 1990 to provide
subcontract manufacturing services for STB Systems, Inc. As of December
1992, MCC became an inactive entity. All significant intercompany accounts
and transactions have been eliminated in consolidation. Minority interests
in the subsidiaries are insignificant for financial reporting purposes.
The financial information presented herein should be read in conjunction
with the Company's annual consolidated financial statements for the year
ended October 31, 1996. The foregoing unaudited interim consolidated
financial statements reflect all adjustments (all of which are of a normal
recurring nature) which are, in the opinion of management, necessary for a
fair presentation of the results of the interim periods. The results for
the interim periods are not necessarily indicative
of the results to be expected for the year.
2. INVENTORIES
Inventories at January 31, 1997 and October 31, 1996 consist of the
following:
(in thousands)
January 31, 1997 October 31, 1996
---------------- ----------------
Raw materials $ 10,762 $ 10,667
Work-in-process 11,978 14,358
Finished goods 3,950 2,123
---------------- ----------------
Totals $ 26,690 $ 27,148
---------------- ----------------
3. SHORT TERM DEBT
On January 5, 1996, the Company increased its existing revolving credit
facility ("Revolving Credit Facility") from $13,000,000 to $23,000,000. At
January 31, 1997, $13,906,000 was outstanding under this credit facility.
All indebtedness under the Revolving Credit Facility matures on November 1,
1999.
Availability under the Revolving Credit Facility is subject to limitations
determined by the Company's borrowing base, which is calculated based upon
eligible accounts receivable and inventory as defined in the Revolving
Credit Facility agreement.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company currently sells two broad categories of products, which the
Company refers to as multimedia subsystem products and specialized technology
products. The Company's multimedia subsystem product line includes a wide
selection of multimedia accelerators designed for use in mid-range to
high-end personal computers (PCs) and also features several complementary
products, including digital video products and sound cards. STB's
specialized technology products incorporate graphics technologies and are
primarily designed to enable one computer to simultaneously control the
display of multiple monitors.
The Company sells its products to original equipment manufacturers (OEM's),
the commercial market, and the specialized technology market. Multimedia
subsystem products are sold both to OEMs as subsystems for their PC products
and to the commercial market. Sales of multimedia accelerators and other
multimedia subsystem products to OEMs are characterized by higher unit
volumes and lower gross profit margins. Sales of multimedia products to the
commercial market are characterized by modest volumes and higher gross profit
margins than the sale of similar products to OEMs. Although sales of
specialized technology products are relatively low, the Company realizes
higher gross profit margins from the sale of these products than from the
sale of multimedia subsystem products. The Company began shipping
significant unit volumes of certain new multimedia products (products other
than multimedia accelerators) in the third quarter of the 1996 fiscal year.
Revenues generated from the sale of these multimedia subsystem products have
been characterized as OEM channel sales in the discussion below. The Company
is not yet in a position to forecast the effect that the sales of these new
products will have upon the Company's results of operations.
Sales of the Company's products to OEMs represented approximately 81% (of
which approximately 4.5% was comprised of sales of new multimedia subsystem
products) of total net sales for the fiscal year 1996. Sales to the
commercial market and the specialized technology market represented
approximately 11% and 6%, respectively. The balance of total net sales was
derived primarily from third party assembly services, which accounted for
approximately 2% of total net sales in fiscal year 1996. The Company's total
gross profit margins and gross profits will likely fluctuate from period to
period as a result of the Company's product mix, sales channel mix, component
costs and competitive pricing pressures on the Company's products.
The Company recognizes revenue upon shipment of its products. For products
sold through the commercial channel, the Company generally allows returns in
the form of stock rotation and price protection in the form of credits. The
Company's current stock rotation policies permits a commercial channel
customer to return recently purchased products, provided that the customer
places an order for other Company products of equal or greater value. The
Company has historically been able to resell products returned through the
stock rotation program. The Company also provides price protection to
commercial channel customers in the form of credits for price reductions on
products remaining in inventories at the time of the price reduction. The
Company maintains reserves related to these programs, which it believes are
adequate.
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<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain items from the Company's consolidated
statement of operations as a percentage of net sales from continuing
operations:
PERCENTAGE OF NET SALES
THREE MONTHS ENDED
JANUARY 31,
1997 1996
-------------------------
Net sales 100.0% 100.0%
Cost of sales 77.9% 83.8%
-------------------------
Gross profit 22.1% 16.2%
-------------------------
Operating expenses:
Research and development 2.6% 1.7%
Sales and marketing 6.8% 5.4%
General and administrative 5.0% 4.2%
-------------------------
Total operating expenses 14.4% 11.3%
-------------------------
Income from operations 7.7% 4.9%
Interest expense, net 0.7% 0.7%
-------------------------
Income before income taxes 7.0% 4.2%
Provision for income taxes 2.3% 1.4%
-------------------------
Net income 4.7% 2.8%
-------------------------
-------------------------
QUARTER ENDED JANUARY 31, 1997 COMPARED TO QUARTER ENDED JANUARY 31, 1996.
Net Sales. Net sales increased by $3.2 million, or 7.1%, from $44.9 million
in the first quarter of fiscal 1996 to $48.1 million in the first quarter of
fiscal 1997. This increase resulted primarily from continuing growth in
sales of the Company's products to the commercial channel, offset somewhat by
declining unit prices due to continuing decreases in the cost of memory.
For the first quarter of fiscal 1997, OEM channel sales of $36.2 million
represented approximately 75% of total net sales, compared to OEM channel
sales of $38.0 million, representing approximately 85% of total net sales,
for the first quarter of fiscal 1996. Domestic shipments to OEMs remained
strong during the first quarter of fiscal 1997. The Company's sales into the
retail channel increased by $5.7 million, or 205%, from $2.8 million in the
first quarter of fiscal 1996 to $8.5 million in the first quarter of fiscal
1997. Sales of specialized technology products increased by $555,000, or
23%, from $2.4 million in the first quarter of fiscal 1996 to $3.0 million in
the first quarter of fiscal 1997.
Gross Profit. Gross profit increased by $3.3 million, or 46%, from $7.3
million in the first quarter of fiscal 1996 to $10.6 million in the first
quarter of fiscal 1997. During the period, gross profit as a percentage of
net sales increased from 16.2% to 22.1%. The increase in the amount of gross
profit resulted primarily from increases in sales volumes of the Company's
products, partially offset by decreasing unit prices. The increase in gross
profit as a percentage of net sales resulted primarily from the economies of
scale resulting from higher production volumes and increased operating
efficiencies. In addition, increased revenues and margins from the
commercial channel also contributed to the overall higher margin percentage.
The gross profit margin for the quarter however, was down slightly from the
22.9% achieved during the previous quarter. The decline was due to modest
increases in overall manufacturing costs combined with lower overall overhead
absorption resulting from lower production volumes during the holiday season.
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Research and Development Expenses. Research and development expenses
increased by $465,000, or 60.2%, from $773,000 in the first quarter of fiscal
1996 to $1.2 million in the first quarter of fiscal 1997. This increase
resulted from increased staffing levels at the Company's corporate office and
Eugene, Oregon design center and the initial staffing of the recently
established engineering office in Belfast, Northern Ireland. Expenses
associated with the development of new products as well as the continuing
enhancement and support of the Company's existing products also contributed
to the increase in research and development expenses. During the periods,
the expenses as a percentage of net sales increased from 1.7% to 2.6%.
Sales and Marketing Expenses. Sales and marketing expenses increased by
$873,000, or 36.2%, from $2.4 million in the first quarter of fiscal 1996 to
$3.3 million in the first quarter of fiscal 1997. This increase in expenses
resulted primarily from additional staffing and commissions paid as a result
of higher sales. Increased expenses associated with the incremental sales
and promotional activities in the commercial and specialized technology
channels also attributed to the increased expenses. During the periods, the
expenses as a percentage of net sales increased from 5.4% to 6.8%.
General and Administrative Expenses. General and administrative expenses
increased by $486,000, or 25.6%, from $1.9 million in the first quarter of
fiscal 1996 to $2.4 million in the first quarter of fiscal 1997. This
increase in the amount of general and administrative expenses was due
primarily to expenses associated with the Company's growth, including
increased personnel expenses, occupancy costs, data processing costs and
other operating expenses. During the periods, these expenses as a percentage
of net sales increased from 4.2% to 5.0%.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital and liquidity needs are for financing
inventory and accounts receivable and manufacturing equipment expenditures.
The Company has financed these requirements, and its operations, generally,
through a combination of cash generated from operations, trade credit from
vendors, bank borrowings and the Company's initial public offering. 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.
Cash used in operating activities was $658,000 in the first three months of
fiscal 1997 resulting primarily from reductions in accounts payable,
partially offset by net income and reductions in inventory and accounts
receivable, compared to cash generated from operating activities of $4.6
million in the first three months of fiscal 1996. Working capital was $26.7
million at January 31, 1997, compared to $25.2 million at October 31, 1996,
and cash was $3.7 million at January 31, 1997, compared to $3.4 million at
October 31, 1996.
The Company's investment in equipment totaled $1.1 million in the first three
months of fiscal 1997, compared with net purchases of equipment of $250,000
in the first three months of fiscal 1996. The investments in equipment are
primarily for manufacturing equipment additions and upgrades of existing
equipment to support the increased demand for the Company's products from
existing as well as new customers and to a lesser degree for upgrades of the
systems and equipment used at the Company's corporate offices. The Company
expects that additional capital expenditures for similar types of equipment
will be required to support future customer demand and product requirements.
The Company currently has an available line of credit of $25 million under a
secured revolving credit facility (the "Revolving Credit Facility") which
includes a $2 million term loan (the "Mezzanine Facility"). During fiscal
1996, the Company increased the size of its Revolving Credit Facility by $10
million to its current level. At January 31, 1997, $13.9 million and $1.4
million was outstanding under the Revolving Credit Facility and the Mezzanine
Facility, respectively. Principal amounts under both the Revolving Credit
Facility and the Mezzanine Facility bear interest at the rate of prime plus
.75%. The Revolving Credit Facility agreement provides for a minimum monthly
interest charge of $25,000, which can be satisfied by interest accrued
pursuant to both the Revolving Credit Facility and the Mezzanine Facility.
Availability under the
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Revolving Credit Facility is subject to limitations determined by the
Company's borrowing base, which is calculated based on eligible accounts
receivable and inventory, as defined in the Revolving Credit Facility
agreement. All indebtedness under these facilities matures on November 1,
1999.
On February 14, 1995, the Company completed an initial public offering (the
Offering) of 2.0 million shares of Common Stock. Proceeds from the Offering
totaled $21.7 million, net of underwriters' discounts and other Offering
expenses totalling $2.3 million. The Company applied a portion of the
Offering proceeds to reduce indebtedness owed under the Revolving Credit
Facility by $5.5 million and to repay $3.0 million in trade debt. In
addition, just prior to the Offering, the Company issued notes to its
founding shareholders in the principal amount of $2.0 million representing a
portion of the dividend distribution of the Company's undistributed S
Corporation earnings. These notes provide for twelve equal monthly payments
of principal and interest to the founding shareholders, the final payment of
which was made in February, 1996. The remaining portion of the Company's
undistributed S Corporation earnings in the amount of $2.1 million was paid
to the founding shareholders from the Offering proceeds.
SEASONALITY
The Company's quarterly operating results vary significantly depending on
factors such as the timing of new product introductions, adequacy of
component supply, changes in component costs, variations in the Company's
product mix, seasonal promotions by the Company and its customers and
competitive pricing pressures. Because the timing of these factors may vary,
the results of any particular quarter may not be indicative of results for
the full year or any future period. In addition, the PC market generally
experiences weaker sales during the summer months. Although the Company has
experienced sales growth for each year since fiscal 1990, there can be no
assurance that this growth will continue on a quarterly or annual basis.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company was served notice of the filing of a plaintiff class action
lawsuit on September 6, 1995 in the 134th Judicial District Court of Dallas
County, Texas against the Company and certain officers and directors of the
Company. The alleged class of Plaintiffs consisted of all persons who
purchased shares of the Company's stock on the open market between February
14, 1995 and May 25, 1995. The Plaintiffs, who sought unspecified damages,
allege that the Company's Registration Statement and Prospectus in its
initial public offering contained false and materially misleading statements.
The Company and the individual defendants deny the Plaintiffs' allegations
and have defended this action.
In August, 1996, the trial court dismissed the compliant for want of
prosecution. The deadline for the plaintiffs to file a motion with the trial
court to reinstate the compliant has passed. The plaintiffs have had an
additional period within which to appeal this dismissal. This additional
period has now passed without any such appeal being filed.
ITEM 5. OTHER INFORMATION - FOREWORD LOOKING INFORMATION; BUSINESS RISKS
All statements other than statements of historical fact contained in this
report are forward-looking statements within the meaning of the federal
securities laws. These forward-looking statements involve risks and
uncertainties, and the Company's actual results may differ materially from
the results discussed in the forward-looking statements. Factors that might
cause such a difference include, but are not limited to, the risks described
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 amended, and those discussed
below.
POTENTIAL FOR FLUCTUATING OPERATING RESULTS
The Company's historical operating results have fluctuated significantly from
period to period, and will likely fluctuate in the future. Fluctuations
result from a wide variety of factors, including the timing and availability
of components, changes in product mix and pricing, the timing of customer
orders, new product developments or introductions, production interruptions
and product reviews and other media coverage. The Company's quarterly
results are also subject to seasonal fluctuations, with generally weaker
fiscal third quarter results. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Seasonality". In addition, as
all of the Company's products are sold for use in PCs, the Company's sales
and operating results are influenced significantly by fluctuations in the PC
market.
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DEPENDENCE ON SUPPLIERS
Several components used in the Company's products are obtained from single or
limited sources and, in instances where the component manufacturer does not
allocate a sufficient supply of components to meet the Company's needs, the
Company must obtain specific components from distributors or on the spot
market at a higher cost. 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, lack of available components, or the lack of
available software drivers from component vendors, the Company has in the
past experienced difficulty in meeting certain product shipment dates to
customers, which in some instances has resulted in a loss of business. It is
likely that delays in delivery of components, shortages of components and the
lack of available software drivers will continue to occur in the future, and
such delays, or inconsistencies in the quality or reliability of components
or related software, could materially adversely affect the Company and its
results of operations.
In addition, significant increases in the prices of components, such as
graphics controller chips or memory chips, occur from time to time, and often
the Company is not able to adjust the price of its products accordingly. In
the past, both occasional worldwide shortages of DRAM video memory and
international tariff disputes have resulted in substantial component cost
increases that have materially adversely affected the Company and its results
of operations.
DEPENDENCE ON KEY CUSTOMERS
The Company's top three customers accounted for 55.5% and 59.7% of net sales
during fiscal years 1995 and 1996, respectively. In recent years, Gateway
2000 has been the Company's top customer, although STB's other significant
customers have changed from period to period. The loss or reduction of the
business of Gateway 2000 or one or more of the Company's other major
customers would have a material adverse effect on the Company's 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
customer. 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.
DEPENDENCE ON MULTIMEDIA ACCELERATION MARKET -- MIGRATION TO MOTHERBOARDS
Substantially all of the Company's net sales are derived from the sale of
multimedia accelerators. Multimedia accelerators generally are used in
higher end PCs offering the latest technology and performance features, while
graphics circuitry usually is included on the motherboard of entry-level PC
models. An increase in the number or percentage of manufactured PCs that
incorporate graphics circuitry on the motherboard, 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 affect the Company's business. In addition,
it is possible that graphics circuitry could be incorporated into the CPU,
which could materially adversely affect the Company and its results of
operations.
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<PAGE>
NEW PRODUCTS AND TECHNOLOGICAL CHANGE
The market for the Company's products is characterized by short product life
cycles, rapidly changing technology, evolving industry standards and frequent
introductions of new products. The Company's success depends upon market
acceptance of its existing products and its ability to enhance its existing
products and its ability to continually develop and introduce new products
and features to meet changing customer requirements. 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 could 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.
INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS
It is common in the computer industry for companies to assert intellectual
property infringement claims against other companies. As a consequence, the
Company indemnifies some OEM customers in certain respects against
intellectual property claims relating to its products. If an intellectual
property claim were to be brought against the Company and the Company was
found to be infringing upon the rights of others, the Company could be
required to pay infringement damages, pay licensing fees, modify its products
so that they are not infringing or discontinue offering products that were
found to be infringing, any of which could materially adversely affect the
Company and its results of operations.
If an intellectual property claim were to be brought against one or more of
the Company's suppliers and the supplier was found to be infringing upon the
rights of others, the supplier could be enjoined from further shipments of
its products to the Company which could materially adversely affect the
Company and its results of operations.
ENTRY INTO NEW PRODUCT MARKETS
While the Company's business historically has focused on the design,
manufacture and sales of multimedia accelerators, in the third quarter of
fiscal 1996 the Company first began shipping significant unit volumes of new
multimedia subsystem products and has announced other new multimedia
subsystem products expected to be introduced in the near future. 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.
INTERNATIONAL OPERATIONS
The Company is subject to the general risks of conducting business
internationally, including unexpected changes in regulatory requirements,
fluctuations in currency exchange rates, delays resulting from difficulty in
obtaining export licenses for certain technology, 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
-11-
<PAGE>
in the future or require the Company to modify its current business
practices. The Company currently sells its products at prices denominated in
U.S. dollars and an increase in the value of the U.S. dollar relative to
foreign currencies could make the Company's products more expensive and
potentially less competitive in foreign markets. The Company expects to sell
a portion of its products in the future at prices denominated in other
currencies and will therefore increase its currency exposure risk. In
addition, a substantial portion of the Company's manufacturing labor costs
are paid in Mexican pesos, so any decrease in the value of the U.S. dollar
relative to the Mexican peso could increase the Company's manufacturing costs
and adversely affect the Company and its results of operations.
PRICE PROTECTION AND STOCK ROTATION RISKS
As is common practice in this 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"
DEPENDENCE ON KEY PERSONNEL
The Company's success depends upon the services of its management, sales,
marketing and engineering personnel. While the Company has entered into
employment agreements with a number of such personnel, the loss of the
services of one or more of such personnel could have a material adverse
effect on the Company and its results of operations. The success of the
Company will depend, in part, on its ability to retain its key management,
sales, marketing and engineering personnel and to attract other personnel to
satisfy the Company's current and future needs. There is substantial
competition for such personnel in the computer industry, and the inability to
retain key personnel or to attract additional personnel to satisfy the
Company's needs could have a material adverse effect on the Company and its
results of operations.
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 on the Company and its
results of operations.
DEPENDENCE ON SALES REPRESENTATIVES AND DISTRIBUTORS
The Company markets and distributes a significant portion of its products in
the United States to OEM customers and commercial channel customers through
independent sales representatives and distributors. The Company's sales
representatives work in tandem with the Company's sales force and are
organized by customer account. The services of an independent sales
representative are important in obtaining and maintaining a customer
relationship. The Company's distributors resell the Company's products to
retailers and other resellers in the commercial market. The Company's
agreements with its sales representatives and
-12-
<PAGE>
distributors are cancelable upon 30-days' notice. There can be no assurance
that future sales by sales representatives or distributors will continue at
present levels. The loss of one or more sales representatives or
distributors, or the decision by one or more distributors to reduce the
number of the Company's products offered or to carry the product lines of the
Company's competitors, could have a material adverse effect on the Company
and its results of operations.
PROPRIETARY TECHNOLOGY
The Company's success partially depends upon its proprietary technology,
consisting of its software drivers and utilities and, to a lesser extent, its
hardware designs. The Company relies upon copyright and trade secret laws
and agreements with its suppliers and customers to protect its proprietary
technology. There can be no assurance that the Company's present protective
measures will be adequate to prevent misappropriation of its technology or
independent third party development of the same or similar technology. Many
foreign jurisdictions offer less protection of intellectual property rights
than the United States, and there can be no assurance that the protection
provided to the Company's proprietary technology by the laws of the United
States or foreign jurisdictions will be sufficient to protect the Company's
technology.
The Company has and may in the future find it necessary or desirable to
procure licenses from third parties relating to current or future products or
technologies, but there can be no assurance that the Company will continue to
be able to obtain such licenses or other rights or, if it is able to obtain
them, that it will be able to do so on commercially acceptable terms. The
Company could be placed at a disadvantage if its competitors obtain licenses
with lower royalty fee payments or other terms more favorable than those
received by the Company. If the Company or its suppliers were unable to
obtain licenses relating to current or future products or technologies, the
Company could be forced to market products without certain technological
features. The Company's inability to obtain licenses necessary to use
certain technology or its inability obtain such licenses on competitive terms
could have a material adverse effect on the Company and its results of
operations.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number
-------
11.1 Computation of Earnings Per Common Share and Common
Equivalent Share
27.1 Financial Data Schedule
(b) Current Reports on Form 8-K
There were no reports filed on Form 8-K during the quarterly
period ended January 31, 1997.
-13-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STB SYSTEMS, INC.
Dated: March 17, 1997 By: /s/ William E. Ogle
---------------------------------------
President and Chief Executive Officer
Dated: March 17, 1997 By: /s/ Bryan F. Keyes
---------------------------------------
Bryan F. Keyes, Treasurer and
Director of Legal
-14-
<PAGE>
STB SYSTEMS, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
(UNAUDITED)
----------------------------------------------------------------------
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
THREE MONTHS ENDED
JANUARY 31,
1997 1996
-------------------------
-------------------------
-------------------------
Net income $ 2,252 $ 1,214
-------------------------
-------------------------
PRIMARY:
Weighted average number of shares
outstanding 4,514,846 4,500,000
Additional weighted average shares
from assumed exercise of dilutive
stock options, net of shares assumed
to be repurchased with exercise
proceeds $ 272,897 -
-------------------------
Net income per share $ 0.47 $ 0.27
-------------------------
-------------------------
FULLY DILUTIVE
Weighted average number of shares
outstanding 4,514,846 4,500,000
Additional weighted average shares
from assumed exercise of dilutive
stock options, net of shares assumed
to be repurchased with exercise
proceeds 388,857 -
-------------------------
Net income per share $ 0.46 $ 0.27
-------------------------
-------------------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF STB SYSTEMS, INC. INCLUDED IN ITS QUARTERLY
REPORT ON FORM 10Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> JAN-31-1997
<CASH> 3,736
<SECURITIES> 0
<RECEIVABLES> 27,801
<ALLOWANCES> (436)
<INVENTORY> 26,690
<CURRENT-ASSETS> 59,400
<PP&E> 10,329
<DEPRECIATION> (4,433)
<TOTAL-ASSETS> 65,713
<CURRENT-LIABILITIES> 32,649
<BONDS> 0
0
0
<COMMON> 45
<OTHER-SE> 31,903
<TOTAL-LIABILITY-AND-EQUITY> 65,713
<SALES> 48,092
<TOTAL-REVENUES> 48,092
<CGS> 37,459
<TOTAL-COSTS> 37,459
<OTHER-EXPENSES> 6,907
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 376
<INCOME-PRETAX> 3,350
<INCOME-TAX> 1,098
<INCOME-CONTINUING> 2,252
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,252
<EPS-PRIMARY> .47
<EPS-DILUTED> .46
</TABLE>
