<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 JULY 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: September 12, 1997:
Common Stock, $.01 par value 6,963,709
<PAGE>
STB SYSTEMS, INC.
INDEX
PAGE
PART I FINANCIAL INFORMATION NUMBER
Item 1 Consolidated Financial Statements (unaudited):
Consolidated Balance Sheets at July 31, 1997
and October 31, 1996 2
Consolidated Statements of Operations for the
quarters ended July 31, 1997 and 1996 3
Consolidated Statements of Operations for the
nine months ended July 31, 1997 and 1996 4
Consolidated Statements of Cash Flows for the
nine months ended July 31, 1997 and 1996 5
Notes to Consolidated Financial Statements 6-7
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-12
PART II OTHER INFORMATION
Items 1 through 4 Have been omitted since the registrant has no
reportable events in relation to these items.
Item 5 Other Information - Forward-Looking Information;
Business Risks 12-18
Item 6 Exhibits and Reports on Form 8-K 18
Signatures 19
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<PAGE>
STB SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
JULY 31, OCTOBER 31,
1997 1996
-----------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 3,545 $ 3,420
Accounts receivable - trade, net of allowance for
doubtful accounts of $495 and $332 30,496 28,032
Inventories, net 28,649 27,148
Other current assets 2,273 1,348
--------------------
Total current assets 64,963 59,948
Property and equipment, net 7,600 5,231
Other assets 1,953 450
--------------------
Total assets $74,516 $65,629
--------------------
--------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term debt $15,756 $11,760
Accounts payable - trade 16,466 19,538
Accrued wages, commissions and bonuses 1,016 1,144
Other accrued liabilities 1,387 1,609
Current portion of long-term liabilities 645 705
--------------------
Total current liabilities 35,270 34,756
--------------------
Long-term Liabilities:
Long-term notes payable 625 1,000
Obligations under capital leases and other long-term
liabilities 173 276
--------------------
Total long-term liabilities 798 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, 6,913,252 and 6,770,397 shares issued
and outstanding 69 68
Additional paid-in capital 24,010 22,295
Retained earnings 14,614 7,479
--------------------
38,693 29,842
Treasury stock, 35 shares, at cost (245) (245)
--------------------
Total shareholders' equity 38,448 29,597
--------------------
Total liabilities and shareholders' equity $74,516 $65,629
--------------------
--------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE>
STB SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
- ------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
THREE MONTHS ENDED
JULY 31,
1997 1996
-----------------------
Net sales $ 42,019 $ 42,537
Cost of sales 29,594 33,921
-----------------------
Gross profit 12,425 8,616
-----------------------
Operating expenses:
Research and development 1,673 1,182
Sales and marketing 3,775 2,847
General and administrative 2,819 2,214
-----------------------
Total operating expenses 8,267 6,243
-----------------------
Income from operations 4,158 2,373
Interest expense, net 426 271
-----------------------
Income before income taxes 3,732 2,102
Provision for income taxes 1,263 722
-----------------------
Net income $ 2,469 $ 1,380
-----------------------
-----------------------
Net income per share $ 0.33 $ 0.20
-----------------------
-----------------------
Weighted average shares outstanding 7,513,066 6,886,955
-----------------------
-----------------------
The accompanying notes are an integral part of these financial statements.
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<PAGE>
STB SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
- ------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
NINE MONTHS ENDED
JULY 31,
1997 1996
-----------------------
Net sales $ 138,811 $ 132,034
Cost of sales 103,975 107,753
-----------------------
Gross profit 34,836 24,281
-----------------------
Operating expenses:
Research and development 4,468 2,975
Sales and marketing 10,698 7,847
General and administrative 7,609 6,591
-----------------------
Total operating expenses 22,775 17,413
-----------------------
Income from operations 12,061 6,868
Interest expense, net 1,185 869
-----------------------
Income before income taxes 10,876 5,999
Provision for income taxes 3,737 2,052
-----------------------
Net income $ 7,139 $ 3,947
-----------------------
-----------------------
Net income per share $ 0.97 $ 0.58
-----------------------
-----------------------
Weighted average shares outstanding 7,342,467 6,756,359
-----------------------
-----------------------
The accompanying notes are an integral part of these financial statements.
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STB SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
- ------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
NINE MONTHS ENDED
JULY 31,
1997 1996
--------------------
Cash flows from operating activities:
Net income $ 7,139 $ 3,947
Adjustments to reconcile net income to net cash
From operating activities:
Depreciation and amortization 1,626 831
Changes in assets and liabilities:
Accounts receivable - trade (2,464) (1,441)
Inventories, net (1,501) 7,410
Other current assets (925) 540
Other assets (1,503) (497)
Accounts payable - trade (3,072) (1,807)
Accrued wages, commissions, and bonuses (128) 403
Other accrued liabilities (222) 356
--------------------
Net cash provided by (used in) operating
activities (1,050) 9,742
--------------------
Cash flows from investing activities -
Purchases of property and equipment (3,998) (1,940)
--------------------
Cash flows from financing activities:
Borrowings on (payments of) short-term debt 3,996 (7,293)
Payment of Founding Shareholder Notes - (592)
Borrowings on (payments of) long-term debt (539) 53
Issuance of common stock, net of issue costs 1,716 -
--------------------
Net cash provided by (used in) financing
activities 5,173 (7,832)
--------------------
Net increase (decrease) in cash and cash
equivalents 125 (30)
Cash and cash equivalents at beginning of period 3,420 4,162
--------------------
Cash and cash equivalents at end of period $ 3,545 $ 4,132
--------------------
--------------------
The accompanying notes are an integral part of these financial statements
-5-
<PAGE>
STB SYSTEMS, INC.
Notes To Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
STB Systems, Inc. develops, manufactures and sells a wide selection of
multimedia accelerators, other multimedia subsystem products and
specialized technology products for use in mid-range and high-end personal
computers ("PCs"). STB Assembly, Inc. is a wholly-owned subsidiary and
provides manufacturing services to STB Systems, Inc. Symmetric Simulation
Systems, Inc. (see Note 2), also a wholly-owned subsidiary of STB Systems,
Inc., designs high-end 3D graphics acceleration products.
The accompanying financial statements include the consolidated accounts of
STB Systems, Inc., STB Assembly, Inc. and Symmetric Simulation Systems,
Inc. (see Note 2), (collectively referred to as the "Company"). STB
Assembly, Inc. has two majority owned subsidiaries, STB de Mexico S.A. de
C.V. ("STB de Mexico") and Maquilados Continentales de Ciudad Juarez, S.A.
de C.V. ("MCC"). STB de Mexico is a Mexican corporation operated as a
maquiladora that performs assembly services for STB Systems, Inc. MCC
entered into an agreement in January 1990 to provide subcontract
manufacturing services for STB Systems, Inc. As of December 1992, MCC
became an inactive entity. All significant intercompany accounts and
transactions have been eliminated in consolidation. Minority interests in
the subsidiaries are insignificant for financial reporting purposes.
The financial information presented herein should be read in conjunction
with the Company's annual consolidated financial statements for the year
ended October 31, 1996. The foregoing unaudited interim consolidated
financial statements reflect all adjustments (all of which are of a normal
recurring nature) which are, in the opinion of management, necessary for a
fair presentation of the results of the interim periods. The results for
the interim periods are not necessarily indicative of the results to be
expected for the year.
2. Acquisition
During the quarter ended April 30, 1997, STB Systems, Inc. acquired all of
the outstanding shares of Symmetric Simulation Systems, Inc. ("Symmetric").
Symmetric designs and builds high-end 3D graphics acceleration products for
use in applications such as computer-aided design, product visualization
and animation. As a result of the acquisition, the Company recorded
goodwill in the amount of $1,648,000 which is included in other assets.
Unamortized goodwill at July 31, 1997 was $1,609,000.
3. Inventories
Inventories at July 31, 1997 and October 31, 1996 consist of the following:
(in thousands)
July 31, 1997 October 31, 1996
------------- ----------------
Raw materials $14,930 $10,667
Work-in-process 10,290 14,358
Finished goods 3,429 2,123
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Totals $28,649 $27,148
------- -------
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<PAGE>
4. Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued FAS No.
128, "Earnings Per Share", (SFAS 128). The Company will adopt SFAS 128,
which establishes standards for computing and presenting earnings per share
(EPS), in the first quarter of fiscal 1998. This statement requires dual
presentation of basic and diluted EPS on the face of the income statement
for entities with complex capital structures and requires a reconciliation
of the numerator and denominator of the basic EPS computation to the
numerator and denominator of the diluted EPS computation. Basic EPS
excludes the effect of potentially dilutive securities while diluted EPS
reflects the potential dilution that would occur if securities or other
contracts to issue common stock were exercised, converted into or resulted
in the issuance of common stock. The following table sets forth the basic
and diluted EPS computation, on a pro forma basis, as required by SFAS 128:
Nine Months Nine months
ended Ended
July 31,1997 July 31,1996
------------- -------------
Net income $ 7,139 $ 3,947
-------------------------
-------------------------
BASIC (Pro forma)
Weighted average number of shares outstanding 6,814,085 6,751,178
-------------------------
Basic net income per share $ 1.05 $ .58
-------------------------
-------------------------
DILUTED (Pro forma)
Weighted average number of shares outstanding 6,814,085 6,751,178
Additional weighted average shares from assumed
exercise of dilutive stock options, net of shares
assumed to be repurchased with exercise proceeds 528,382 73,168
-------------------------
Diluted net income per share $ 0.97 $ 0.58
-------------------------
-------------------------
5. Stock Split
During the quarter ended July 31, 1997, the Company declared a
three-for-two split of the Company's common stock. The stock split was
effected in the form of a stock dividend on July 17, 1997, and resulted
in the issuance of 2,302,674 additional shares. Share and per share
amounts in the accompanying financial statements have been retroactively
adjusted to reflect the stock split.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company currently sells two broad categories of products: 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 such as DVD products, PC/TV convergence subsystem 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 have typically been characterized by
higher unit volumes and lower gross profit margins. Sales of multimedia
products to the commercial market have typically been 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 has realized higher gross profit margins from the sale of these
products than from the sale of multimedia subsystem products.
Sales of the Company's products to OEMs represented approximately 81% of
total net sales for the fiscal year 1996. Sales to the commercial market and
the specialized technology market represented approximately 11% and 6%,
respectively. The balance of total net sales was derived primarily from
third party assembly services, which accounted for approximately 2% of total
net sales in fiscal year 1996. The Company's total gross profit margins and
gross profits will likely fluctuate from period to period as a result of the
Company's product mix, sales channel mix, component costs and competitive
pricing pressures on the Company's products.
The Company recognizes revenue upon shipment of its products. For products
sold through the commercial channel, the Company generally allows returns in
the form of stock rotation and price protection in the form of credits. The
Company's current stock rotation policies permit a 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 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 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 result 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.
During the quarter ended April 30, 1997 the Company acquired all of the
outstanding shares of Symmetric Simulation Systems, Inc., ("Symmetric").
Symmetric designs and builds high-end 3D graphics acceleration technology used
in applications such as computer-aided design, product visualization,
architectural walkthroughs and multimedia authoring. The Company believes that
the Symmetric product line complements the Company's existing products and
establishes the Company in the high-end 3D market. See "Note 2 to Notes to
Consolidated Financial Statements".
-8-
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain items from the Company's
consolidated statements of operations as a percentage of net sales:
Percentage of Net Sales Percentage of Net Sales
Three Months Ended Nine Months Ended
July 31, July 31,
1997 1996 1997 1996
------------------------------------------------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 70.4% 79.7% 74.9% 81.6%
------------------------------------------------
Gross profit 29.6% 20.3% 25.1% 18.4%
------------------------------------------------
Operating expenses:
Research and development 4.0% 2.8% 3.2% 2.3%
Sales and marketing 9.0% 6.7% 7.7% 5.9%
General and administrative 6.7% 5.2% 5.5% 5.0%
------------------------------------------------
Total operating expenses 19.7% 14.7% 16.4% 13.2%
------------------------------------------------
Income from operations 9.9% 5.6% 8.7% 5.2%
Interest expense, net 1.0% 0.6% 0.9% 0.7%
------------------------------------------------
Income before income taxes 8.9% 5.0% 7.8% 4.5%
Provision for income taxes 3.0% 1.7% 2.7% 1.5%
------------------------------------------------
Net income 5.9% 3.3% 5.1% 3.0%
------------------------------------------------
------------------------------------------------
QUARTER ENDED JULY 31, 1997 COMPARED TO QUARTER ENDED JULY 31, 1996.
Net Sales. Net sales decreased by $0.5 million, or 1.2% to $42.0 million
in the third quarter of fiscal 1997 from $42.5 million in the third quarter of
fiscal 1996. This decrease resulted primarily from reductions in average unit
selling prices, which were brought on by price competition in the commercial
channel, increased unit shipments of lower priced OEM products and shipments of
a low-cost wavetable audio product. Unit volume for the third quarter of fiscal
1997 increased by 22% over the third quarter of fiscal 1996. Revenue from sales
of the Company's products in the commercial channel declined by 53%, due to
lower unit sales and average selling prices attributable to price competition
and softness in that channel, while sales to the specialized technology market
increased by 92% due to increased shipments to several customers.
For the third quarter of fiscal 1997, OEM channel sales of $32.0 million
represented approximately 76% of total net sales, compared to OEM channel sales
of $32.4 million, representing approximately 76% of total net sales, for the
third quarter of fiscal 1996. The Company's sales into the commercial channel
decreased by $3.5 million to $3.1 million in the third quarter of fiscal 1997,
from $6.6 million in the third quarter of fiscal 1996. Sales of specialized
technology products increased by $2.3 million to $4.8 million in the third
quarter of fiscal 1997, from $2.5 million in the third quarter of fiscal 1996.
Gross Profit. Gross profit increased by $3.8 million, or 44% to $12.4
million in the third quarter of fiscal 1997 from $8.6 million in the third
quarter of fiscal 1996. Gross profit as a percentage of net sales increased
to 29.6% from 20.3%. The increase in the amount of gross profit and the
increase in gross profit as a percentage of net sales resulted primarily from
increased sales to the specialized technology market which is characterized by
higher gross profit margins and from increases in unit volumes of the Company's
products, substantially offset by decreasing unit prices. In addition, due to
declines in component costs and greater manufacturing efficiencies, the
Company's production cost per unit declined somewhat faster than the rate of
decline in average selling prices. The Company does not anticipate that this
level of gross profit margin is sustainable in the future.
-9-
<PAGE>
Research and Development Expenses. Research and development expenses increased
by $491,000, or 41.5%, to $1.7 million in the third quarter of fiscal 1997 from
$1.2 million in the third quarter of fiscal 1996. This increase resulted from
increased staffing levels at the Company's corporate office, the Houston, Texas
and Eugene, Oregon design centers and the recently established design center in
Belfast, Northern Ireland. Other expenses associated with the development of
new products as well as the continuing enhancement and support of the Company's
existing products also contributed to the increase. During the periods,
research and development expenses as a percentage of net sales increased to 4.0%
from 2.8%. The Company expects that its research and development expenses will
increase in absolute dollars in future periods.
Sales and Marketing Expenses. Sales and marketing expenses increased by
$1.0 million, or 32.6%, to $3.8 million in the third quarter of fiscal 1997 from
$2.8 million in the third quarter of fiscal 1996. This increase in expenses
resulted from additional staffing primarily of field application engineers and
sales support for OEM customers. Increased expenses, including travel costs,
advertising and promotional efforts in the commercial channel, the specialized
technology channel and the international market also contributed to the
increased expenses. During the periods, the expenses as a percentage of net
sales increased to 9.0% from 6.7%.
General and Administrative Expenses. General and administrative expenses
increased by $605,000, or 27.3%, to $2.8 million in the third quarter of
fiscal 1997 from $2.2 million in the third quarter of fiscal 1996. This
increase in the amount of general and administrative expenses was due
primarily to expenses associated with the Company's growth, including
occupancy costs and increased staffing and related expenses, partially offset
by an increase in the allocation of certain costs related to its Mexican
manufacturing operations to cost of goods sold. During the periods, these
expenses as a percentage of net sales increased to 6.7% from 5.2%.
NINE MONTHS ENDED JULY 31, 1997 COMPARED TO NINE MONTHS ENDED JULY 31, 1996.
Net Sales. Net sales increased by $6.8 million, or 5.1%, to $138.8 million
in the first nine months of fiscal 1997 from $132.0 million for the same
period of fiscal 1996. This increase resulted primarily from continuing
growth in sales of the Company's products to the commercial channel and the
specialized technology market.
For the first nine months of fiscal 1997, OEM channel sales of $105.3
million represented approximately 77% of total net sales, compared to OEM
channel sales of $103.1 million, representing approximately 78% of total net
sales, for the first nine months of fiscal 1996. The Company's sales into the
commercial channel increased by $4.0 million, or 30%, to $17.5 million for the
first nine months of fiscal 1997 from $13.5 million for the same period of
fiscal 1996. Sales of specialized technology products increased by $2.9
million, or 36%, TO $11.0 million in the first nine months of fiscal 1997 from
$8.1 million in the first nine months of fiscal 1996. Third party assembly
services accounted for remaining sales for the period.
Gross Profit. Gross profit increased by $10.5 million, or 43%, to $34.8
million in the first nine months of fiscal 1997 from $24.3 million for the same
period of fiscal 1996. During the period, gross profit as a percentage of net
sales increased to 25.1% from 18.4%. The increase in the amount of gross profit
and the increase in gross profit as a percentage of net sales resulted primarily
from increased sales to the specialized technology market and sales of the
Company's products to the commercial channel, which are characterized by higher
gross profit margins. In addition, due to declines in component costs and
greater manufacturing efficiencies, the Company's production cost per unit
declined somewhat faster than the rate of decline in average selling prices.
Research and Development Expenses. Research and development expenses increased
by $1.5 million, or 50.2%, to $4.5 million for the first nine months of fiscal
1997 from $3.0 million for the same period of fiscal 1996. This increase
resulted from increased staffing levels at the Company's corporate office and
design centers located in Houston, Texas, Eugene, Oregon, and 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. During the periods, research and development
expenses as a percentage of net sales increased to 3.2% from 2.3%.
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<PAGE>
Sales and Marketing Expenses. Sales and marketing expenses increased by
$2.9 million, or 36.3%, to $10.7 million in the first nine months of fiscal 1997
from $7.8 million in the first nine months of fiscal 1996. This increase in
expenses resulted from additional staffing and commissions paid as a result of
the Company's growth and higher sales levels. Increased expenses, including
travel costs, as well as increased advertising and promotional efforts,
primarily in the specialized technology channel, the commercial channel and the
international market also contributed to the overall increase in sales and
marketing expense during the period. During the periods, the expenses as a
percentage of net sales increased to 7.7% from 5.9%.
General and Administrative Expenses. General and administrative expenses
increased by $1.0 million, or 15.4%, to $7.6 million in the first nine months of
fiscal 1997 from $6.6 million in the first nine months of fiscal 1996. This
increase in the amount of general and administrative expenses was due primarily
to expenses associated with the Company's growth, increased staffing and
occupancy costs, partially offset by an increase in the allocation of certain
costs related to the Mexican manufacturing operation to cost of goods sold.
During the periods, these expenses as a percentage of net sales increased to
5.5% from 5.0%.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital and liquidity needs are for inventory and
accounts receivable financing and manufacturing equipment expenditures. The
Company has financed its operations, through a combination of cash generated
from operations, trade credit from vendors, bank borrowings and proceeds from
its initial public offering. As a result of the Company's rapid growth in
recent years, its capital resource requirements have increased substantially.
The Company has addressed these increasing requirements through each of its
sources of financing and believes these to be adequate to meet its capital
requirements for the next twelve months, although the Company may consider
expanding its capital resources through additional debt or equity financings.
Cash used in operating activities was $1.1 million in the first nine months
of fiscal 1997, primarily attributable to reductions in accounts payable and to
a lesser degree, increases in accounts receivable and inventory. Cash provided
by operating activities was $9.7 million in the first nine months of fiscal
1996, resulting primarily from a decrease in inventory balances. Working
capital was $29.7 million at July 31, 1997, compared to $25.2 million at October
31, 1996, and cash was $3.5 million at July 31, 1997, compared to $3.4 million
at October 31, 1996.
Cash used in investing activities totaled $4.0 million in the first nine
months of fiscal 1997, compared with $1.9 million in the first nine months of
fiscal 1996, due to purchases of equipment. The investments in equipment are
primarily for manufacturing equipment additions and upgrades of existing
equipment to support increased production volumes. 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 July 31, 1997, $15.8 million and $1.1 million was
outstanding under the Revolving Credit Facility and the Mezzanine Facility,
respectively. Principal amounts under both the Revolving Credit Facility and
the Mezzanine Facility bear interest at the rate of prime plus .75%. The
Revolving Credit Facility agreement provides for a minimum monthly interest
charge of $25,000, which can be satisfied by interest accrued pursuant to both
the Revolving Credit Facility and the Mezzanine Facility. Availability under
the Revolving Credit Facility is subject to limitations determined by the
Company's borrowing base, which is calculated based on eligible accounts
receivable and inventory, as defined in the Revolving Credit Facility agreement.
All indebtedness under these facilities matures on November 1, 1999.
-11-
<PAGE>
The Company has entered into a contract to purchase undeveloped land in
Richardson, Texas upon which it intends to build a new headquarters facility.
This contract is subject to a number of contingencies that must be satisfied
prior to closing on the purchase of such land. Based upon the acreage the
Company expects to purchase under the contract, the purchase price will be
approximately $2.0 million, and will likely be primarily funded through
external financing sources.
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 5. OTHER INFORMATION - FORWARD LOOKING INFORMATION; BUSINESS RISKS
All statements other than statements of historical fact contained in this report
are forward-looking statements within the meaning of the federal securities
laws. These forward-looking statements involve risks and uncertainties, and the
Company's actual results may differ materially from the results discussed in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, the risks described below.
POTENTIAL FOR FLUCTUATING OPERATING RESULTS; SEASONALITY
The Company's historical operating results have fluctuated significantly
from period to period, and will likely fluctuate in the future. Fluctuations
result from a wide variety of factors, including the timing and availability of
components, changes in product mix and pricing, the timing of customer orders,
new product developments or introductions, production interruptions, product
reviews and other media coverage, changes in sales channel mix and product
returns or price protection claims from customers. Many of these factors are
beyond the control of the Company. The volume and timing of orders received
during a quarter are difficult to forecast. Customers generally order on an
as-needed basis. Consequently, the Company historically has operated with a
relatively small backlog. Moreover, as sometimes occurs in the PC industry,
a disproportionate percentage of the Company's net sales in any quarter may
be generated in the last month of the 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 "Managements Discussion and Analysis of Financial Condition and Results
of Operations" - "Seasonality."
-12-
<PAGE>
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 such components from distributors or 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 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 may experience such changes in the
future, which could adversely affect the Company's results of operations in any
given period.
The Company relies upon outside suppliers to continue to develop, introduce and
manufacture in sufficient volumes controller chips, memory chips and other
components. Moreover, the technology of these components must compare favorably
in terms of functionality, features and price with the offerings of other
manufacturers, including competitors of the Company that have internally
developed computer chips or manufacturing expertise. The Company's dependence
on single and limited source suppliers, and the risks associated with any delay
or shortfall in supply, are exacerbated by the short life cycles which
characterize multimedia subsystem products.
DEPENDENCE ON MULTIMEDIA ACCELERATION MARKET - MIGRATION TO MOTHERBOARDS
A substantial portion 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.
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. Moreover, Intel's announced acquisition of Chips
and Technologies, if consummated, could eventually result in increased migration
of graphics functionality to the motherboard. 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.
-13-
<PAGE>
TECHNOLOGY 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 products in the commercial market). If the Company does
not successfully introduce new products within a given product cycle, the
Company's sales will be adversely affected for that cycle and possibly for
subsequent cycles. Any such failure could also impair the Company's brand
name, reputation and relationships with its OEM customers. The Company's
success depends upon market acceptance of its existing products, its ability
to enhance its existing products and its ability to continually develop and
introduce new products and features to meet changing customer requirements.
Each new product cycle presents new opportunities for current or prospective
competitors of the Company to gain market share. The Company's competitors
include manufacturers of products that directly compete with the Company's
products, as well as competitors that can produce products that have a
similar functionality to the Company's products. For instance, Intel
Corporation has added new functionalities, such as MMX, to its controller
chips to enhance the power of the CPU of a PC to manage the display features
of a PC. Similarly, Microsoft Corporation is introducing new versions of its
operating systems with features, such as Direct 3D, that increase the
capability of its operating systems to control a PC's display features.
Moreover, because of the short product life cycles and the long lead times
for many components used in the Company's products, the Company may not be
able to quickly reduce its production or inventory levels in response to
unexpected shortfalls in sales or conversely to increase production in
response to unexpected demand. There can be no assurance of the continued
acceptance of the Company's existing products or identifying, developing,
manufacturing or marketing new products. Delays in developing new products or
enhancements or the failure of such products or enhancements to gain market
acceptance would materially adversely affect the Company and its results of
operations.
Sales of individual products and product lines are typically characterized by
declines in volumes, pricing and margins toward the end of the product's life
cycle, the precise timing of which may be difficult to predict. As new products
are planned and introduced, the Company attempts to monitor closely the
inventory of older products (and older components) and to phase out their
manufacture in a controlled manner. Nevertheless, the Company could experience
unexpected reductions in sales of older generation products as customers
anticipate new products. These reductions could give rise to additional charges
for obsolete or excess inventory, returns of older generation products by
retailers or commercial distributors or substantial price protection claims. To
the extent that the Company is unsuccessful in managing product transitions, its
business and operating results would be materially adversely affected.
DEPENDENCE ON KEY CUSTOMERS AND DESKTOP PC MARKET
The Company's top three customers accounted for 55.5% and 59.7% of net sales
during fiscal 1995 and fiscal 1996, respectively. In recent years, Gateway 2000
has been the Company's top customer, although STB's other significant customers
have changed from period to period. The loss or reduction of 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.
-14-
<PAGE>
CHANGE IN PRODUCT OR SALES CHANNEL MIX
The Company offers two broad categories of products: multimedia subsystem
products that are sold to OEMs and the commercial market and specialized
technology products that are sold to resellers and corporate customers in
certain industries. Sales of multimedia accelerators to OEMs, which
currently account for substantially all of the Company's OEM multimedia
subsystem product sales, are characterized by relatively high unit volumes
and relatively low gross profit margins. 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%, respectively, of the
Company's total net sales during fiscal 1996. In the event the Company
experiences a shift in the type of products that it is able to sell or a
shift in the sales channels into which such products are sold, its results of
operations could be materially adversely affected. In particular, a decrease
in sales of multimedia subsystem products to the commercial market or in
sales of specialized technology products could result in a disproportionately
greater decrease in the Company's gross profit. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Overview".
ENTRY INTO NEW PRODUCT MARKETS
While the Company's business historically has focused on the design,
manufacture and sales of multimedia accelerators, in the third quarter of
fiscal 1996 the Company first began shipping significant unit volumes of new
multimedia subsystem products. Further, the Company first began shipping DVD
products in the third quarter of fiscal 1997. There are numerous risks
inherent in the entry into new product markets, including the reallocation of
limited management, engineering and capital resources to unproven product
ventures, a greater likelihood for encountering technical problems and a
greater likelihood that the market will not accept the Company's new products
or the PCs into which they are incorporated. The failure of one or more of
such products, or any negative effects upon the Company's core multimedia
accelerator business, could materially adversely affect the Company and its
results of operations.
PRICE PROTECTION AND STOCK ROTATION RISKS
As is common practice in its industry, the Company's arrangements with its
commercial customers generally allow customers, in the event of a price
decrease, credit equal to the difference between the price originally paid and
the new decreased price on units in the customers' inventories on the date of
the price decrease. In addition, commercial customers generally have the right
to return slow-moving or excess inventory for product credit up to an agreed
upon percentage of shipments within specified time periods. While the Company
establishes reserves to cover these practices, there can be no assurance that
these reserves will be sufficient or that any future price protection claims or
returns will not have a material adverse effect on the Company and its results
of operations, particularly because results are heavily dependent on products
for which the Company has little or no operating history. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations - -
Overview".
COMPETITION
The markets for the Company's products are highly competitive. The Company has
competitors specifically dedicated to the multimedia subsystem market or
specific segments within that market. Companies in related markets also offer
products with functions similar to the Company's products. For example, the
Company's suppliers sell video graphics controller chips directly to OEMs for
use in internally produced multimedia accelerators or on motherboards.
Increased sales of competitive products could result in price reductions by the
Company or loss of its market share, which would materially adversely affect the
Company and its results of operations. In addition, the Company's OEM customers
could commence or increase internal production of multimedia accelerators or
other multimedia subsystems. Furthermore, the Company's markets are expected to
-15-
<PAGE>
become increasingly competitive as multimedia functions continue to converge
and companies that previously supplied products providing distinct functions
(for example, companies in the soundboard and telephony markets) emerge as
competitors across broader product categories. The Company also anticipates
that as the breadth of its product lines expand, the markets in which it
competes and the number of competitors against which it competes also will
expand. There can be no assurance that the Company will be able to continue to
compete successfully in its markets or that it will be able to compete
successfully against current and new competition as these markets continue to
evolve. Many of the Company's current and potential competitors design and
manufacture some of their own product components. While the Company believes
that its controller chip independence enables it to select from among the most
advanced components available, there may be instances in which these internally
developed components have better features and performance characteristics than
those available from third party vendors. Furthermore, the Company believes
that certain of its current and potential competitors compete largely on the
basis of price, which may result in significant price competition, lower margins
for the Company's products or otherwise affect the market for the Company's
products. Certain of the Company's current and potential competitors also are
located in foreign jurisdictions that may have lower labor costs, impose
significantly lower taxes than the United States or levy duties on product
imports. Many of the Company's current and potential competitors have greater
financial, marketing, manufacturing and technological resources than the
Company. There can be no assurance that the Company will be able to continue to
compete successfully with its existing competitors or with new competitors.
DEPENDENCE ON KEY PERSONNEL
The Company's success depends upon the services of its management, sales,
marketing and engineering personnel. While the Company has entered into
employment agreements with a number of such personnel, the loss of the services
of one or more of such personnel could have a material adverse effect on the
Company and its results of operations. The success of the Company will
depend, in part, on its ability to retain its key management, sales, marketing
and engineering personnel and to attract other personnel to satisfy the
Company's current and future needs. There is substantial competition for
such personnel in the computer industry, and the inability to retain key
personnel or to attract additional personnel to satisfy the Company's needs
could have a material adverse effect on the Company and its results of
operations.
MANAGEMENT OF GROWTH
The Company has experienced rapid growth, and future growth may require larger
quantities of components, additional marketing, sales and engineering personnel,
additional manufacturing equipment and improved operating, financial and
administrative controls, any of which could require significant additional
capital expenditures. The Company may experience difficulty securing adequate
quantities of components or additional manufacturing equipment, attracting or
retaining skilled personnel, improving infrastructure and information systems or
overcoming other difficulties associated with growth. In addition, gross profit
margins derived from initial orders with new OEM customers are frequently lower
than the Company's typical gross profit margins. There can be no assurance that
the Company will be able to manage any future growth successfully or that
difficulties in doing so will not have a material adverse effect on the Company
and its results of operations.
SINGLE MANUFACTURING FACILITY
The Company's primary manufacturing facility is located in Juarez, Mexico.
The Company is currently in the process of expanding this facility and
transitioning to new or reconfigured manufacturing equipment. 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 difficulties
associated with the transition to new or reconfigured manufacturing
equipment, or 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.
-16-
<PAGE>
INTERNATIONAL OPERATIONS
A substantial portion of the Company's manufacturing operations are carried
out in Mexico. The Company's export sales (which primarily consist of European
sales) were approximately 20% of net sales in fiscal 1996. The Company is
subject to the general risks of conducting business internationally, including
unexpected changes in regulatory requirements, fluctuations in currency exchange
rates, delays resulting from difficulty in obtaining export licenses for certain
technology, state imposed restrictions on the repatriation of funds, tariffs and
other barriers and restrictions and the burdens of complying with a variety of
foreign laws. In addition, the Company is subject to general geopolitical
risks, such as political instability and changes in diplomatic and trade
relationships, in connection with its international operations. Although the
Company has not to date experienced any material adverse effect on its
operations as a result of such factors, there can be no assurance that such
factors will not materially adversely impact the Company and its results of
operations in the future or require the Company to modify its current business
practices. The Company currently sells its products at prices denominated in
U.S. dollars and an increase in the value of the U.S. dollar relative to foreign
currencies could make the Company's products more expensive and potentially less
competitive in foreign markets. The Company expects to sell a portion of its
products in the future at prices denominated in other currencies and will
therefore increase its currency exposure risk. In addition, a substantial
portion of the Company's manufacturing labor costs are paid in Mexican pesos, so
any decrease in the value of the U.S. dollar relative to the Mexican peso could
increase the Company's manufacturing costs and adversely affect the Company and
its results of operations.
DEPENDENCE ON SALES REPRESENTATIVES AND DISTRIBUTORS
The Company markets and distributes a significant portion of its products in the
United States to OEM customers and commercial channel customers through
independent sales representatives and distributors. The Company's sales
representatives work in tandem with the Company's sales force and are organized
by customer account. The services of an independent sales representative are
important in obtaining and maintaining a customer relationship. The Company's
distributors resell the Company's products to retailers and other resellers in
the commercial market. The Company's agreements with its sales representatives
and distributors are cancelable upon 30-days' notice. There can be no
assurance that future sales by sales representatives or distributors will
continue at present levels. The loss of one or more sales representatives or
distributors, or the decision by one or more distributors to reduce the number
of the Company's products offered or to carry the product lines of the
Company's competitors, could have a material adverse effect on the Company and
its results of operations.
PROPRIETARY TECHNOLOGY
The Company's success partially depends upon its proprietary technology,
consisting of its software drivers and utilities and, to a lesser extent, its
hardware designs. The Company relies upon copyright and trade secret laws and
agreements with its suppliers and customers to protect its proprietary
technology. There can be no assurance that the Company's present protective
measures will be adequate to prevent misappropriation of its technology or
independent third party development of the same or similar technology. Many
foreign jurisdictions offer less protection of intellectual property rights than
the United States, and there can be no assurance that the protection provided to
the Company's proprietary technology by the laws of the United States or foreign
jurisdictions will be sufficient to protect the Company's technology.
The Company has and may in the future find it necessary or desirable to
procure licenses from third parties relating to current or future products or
technologies, but there can be no assurance that the Company will continue to
be able to obtain such licenses or other rights or, if it is able to obtain
them, that it will be able to do so on commercially acceptable terms. The
Company could be placed at a disadvantage if its competitors obtain licenses
with lower royalty fee payments or other terms more favorable than those
received by the Company. If the Company or its suppliers were unable to
obtain licenses relating to current or future products or technologies, the
Company could be forced to market products without certain technological
features. The Company's inability to obtain licenses necessary to use
certain technology or its inability to obtain such licenses on competitive
terms could have a material adverse effect on the Company and its results of
operations.
-17-
<PAGE>
INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS
It is common in the computer industry for companies to assert intellectual
property infringement claims against other companies. As a consequence, the
Company indemnifies some OEM customers in certain respects against intellectual
property claims relating to its products. If an intellectual property claim
were to be brought against the Company and the Company 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.
STOCK MARKET VOLATILITY
There has been significant volatility in the market price of the Company's
Common Stock, as well as in the market price of securities of technology-based
companies. Factors such as announcements of new products by the Company or its
competitors, variations in the Company's quarterly operating results or general
economic or stock market conditions unrelated to the Company's operating
performance may have a significant impact on the market price of the Common
Stock.
SHARES ELIGIBLE FOR FUTURE SALE
The executive officers and directors and the Founding Shareholders of the
Company, who beneficially own a substantial portion of the outstanding shares of
Common Stock, are free to sell the shares beneficially owned by them, subject to
compliance with the Securities Act of 1933, as amended (the "Securities Act"),
including Rule 144 promulgated thereunder, and the terms of a Right of First
Refusal Agreement, to which certain of such shares are subject. A large
portion of the shares held by such beneficial owners may be sold into the
public market effectively free of any significant restrictions. No
prediction can be made as to the effect, if any, that market sales of the
above shares or the availability of such shares for future sale will have on
the market price of shares of Common Stock prevailing from time to time.
Future sales of substantial amounts of Common Stock by existing shareholders
could adversely affect the prevailing market price of the Common Stock and
the Company's ability to raise additional capital.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Number
--------------
10.1 Second Addendum to Lease Agreement dated March 7, 1996, by
and between the Company (as lessee) and Springcreek Place,
Ltd. (as lessor)
11.1 Computation of Earnings Per Common Share and Common
Equivalent Share
27.1 Financial Data Schedule
(b) Current Reports on Form 8-K
There were no reports filed on Form 8-K during the quarterly
period ended July 31, 1997.
-18-
<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: September 15, 1997 By: /s/ William E. Ogle
------------------------------------
President and Chief Executive Officer
Dated: September 15, 1997 By: /s/ Bryan F. Keyes
------------------------------------
Bryan F. Keyes, Treasurer and Director of
Legal and Finance
-19-
<PAGE>
SECOND ADDENDUM TO LEASE AGREEMENT
BETWEEN STB SYSTEMS, INC. (TENANT) AND
SPRINGCREEK PLACE, LTD. (LANDLORD)
All the terms and conditions set forth in the original lease agreement
executed in June 1995 and the First Addendum executed on March 7, 1996
between STB Systems, Inc. (Tenant) and Springcreek Place, Ltd. (Landlord)
will remain in effect with the following exceptions:
I. Tenant agrees to expand their present occupancy to include the two spaces
located at 1800 N. Glenville, Suites 101 and 102 amounting to 9,400 square
feet.
II. Tenant will take occupancy on 9-15-97 and the lease will expire on
12-31-98. The present tenant's lease expires on 8-31-97 and STB may begin
construction of any improvements to the space upon them vacating the lease
premises prior to 9-15-97.
III. The new monthly rental will be $13,876.82/mo. This figure includes
$5,839/mo base rent plus $204.49/mo. CAM on the existing space (Suite 136),
plus $7,833.33/mo. for the expansion space (Suites 101 and 102). The base
year will remain the same for Suite 136, but will be 1997 for suites 101 &
102.
IV. Tenant will not have the right to cancel this lease agreement with
notice on either the old or new space.
V. Tenant accepts the lease space on a totally "as is" basis.
If this is acceptable, please execute this document on the line below. Once
executed this Second Addendum should be attached to the original lease
agreement and the First Addendum and it will become a part of that document.
ACCEPTED BY TENANT: Bryan F. Keyes, Treasurer DATE: 7/15/97
------------------------ --------------
STB Systems, Inc.
ACCEPTED BY LANDLORD: John Dryden DATE: 7/21/97
------------------------ --------------
Springcreek Place, Ltd.
<PAGE>
STB SYSTEMS, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
(UNAUDITED)
- --------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31, JULY 31,
1997 1996 1997 1996
------------------------ ------------------------
<S> <C> <C> <C> <C>
Net income $ 2,469 $ 1,380 $ 7,139 $ 3,947
------------------------ ------------------------
------------------------ ------------------------
PRIMARY:
Weighted average number of shares outstanding 6,901,280 6,753,507 6,814,085 6,751,178
Additional weighted average shares from assumed exercise
of dilutive stock options, net of shares assumed to be
repurchased with exercise proceeds 611,786 133,448 528,382 5,181
------------------------ ------------------------
Net income per share $ 0.33 $ 0.20 $ 0.97 $ 0.58
------------------------ ------------------------
------------------------ ------------------------
FULLY DILUTIVE
Weighted average number of shares outstanding 6,901,280 6,753,507 6,814,085 6,751,178
Additional weighted average shares from assumed exercise
of dilutive stock options, net of shares assumed to be
repurchased with exercise proceeds 700,283 133,448 715,606 73,168
------------------------ ------------------------
Net income per share $ 0.32 $ 0.20 $ 0.95 $ 0.58
------------------------ ------------------------
------------------------ ------------------------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF STB SYSTEMS, INC. INCLUDED IN ITS QUARTERLY
REPORT ON FORM 10Q AND IS QUALIFIED IN ITS ENTIRETY BE REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> JUL-31-1997
<CASH> 3,545
<SECURITIES> 0
<RECEIVABLES> 30,991
<ALLOWANCES> (495)
<INVENTORY> 28,649
<CURRENT-ASSETS> 64,963
<PP&E> 13,213
<DEPRECIATION> (5,613)
<TOTAL-ASSETS> 74,516
<CURRENT-LIABILITIES> 35,270
<BONDS> 0
0
0
<COMMON> 69
<OTHER-SE> 38,379
<TOTAL-LIABILITY-AND-EQUITY> 74,516
<SALES> 138,811
<TOTAL-REVENUES> 138,811
<CGS> 103,975
<TOTAL-COSTS> 103,975
<OTHER-EXPENSES> 22,775
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,185
<INCOME-PRETAX> 10,876
<INCOME-TAX> 3,737
<INCOME-CONTINUING> 7,139
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,139
<EPS-PRIMARY> .97
<EPS-DILUTED> .95
</TABLE>
