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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A No. 1
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported):
February 20, 1998
STB SYSTEMS, INC.
(Exact name of Registrant as Specified in its Charter)
TEXAS 0-25540 75-18558962
(State or Other Jurisdiction (Commission File (IRS Employer
of Incorporation) Number) Identification No.)
1651 NORTH GLENVILLE DRIVE 75081
RICHARDSON, TEXAS (Zip Code)
(Address of Principal Executive Offices)
(972) 234-8750
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if change since last report)
Index to Exhibits appears on page 46 herein.
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ITEM 5. OTHER EVENTS.
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE KNOWN AND
UNKNOWN RISKS AND UNCERTAINTIES. WHEN USED IN THIS REPORT, THE WORDS
"ANTICIPATES," "BELIEVES," "ESTIMATES," "INTENDS," "PLANS" AND SIMILAR
EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. THE COMPANY'S
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY SUCH
FORWARD-LOOKING STATEMENTS AS A RESULT OF FACTORS SET FORTH HEREIN. SUCH
FACTORS INCLUDE, BUT ARE NOT LIMITED TO, THE CAUTIONARY STATEMENTS SET FORTH
UNDER THE CAPTIONS "STOCK SPLIT," "RISK FACTORS," "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS"
HEREIN. ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS REPORT ARE BASED
ON INFORMATION AVAILABLE TO THE COMPANY ON THE DATE HEREOF, AND THE COMPANY
ASSUMES NO OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS.
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STOCK SPLIT
On February 20, 1998, STB Systems, Inc. (the "Company") effected a
previously announced 3-for-2 stock split in the form of a stock dividend
payable to shareholders of record on February 11, 1998. On February 23,
1998, the Company reported its results for the first quarter of fiscal 1998
and announced its plans to commence a public offering covering up to
3,000,000 shares of Common Stock of which 2,775,000 shares will be offered
by the Company and 225,000 shares will be offered by certain selling
shareholders. An aggregate of up to 450,000 additional shares may be offered
by the Company and the selling shareholders to cover over-allotments, if any.
A copy of the press release referencing the stock split, announcing the
results for the first quarter of fiscal 1998 and announcing the planned
offering is included as an exhibit to this report and is incorporated herein
by reference.
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RISK FACTORS
POTENTIAL FOR FLUCTUATING OPERATING RESULTS; SEASONALITY
The Company's results of operations have fluctuated significantly in the
past and are expected to continue to fluctuate in the future as a result of a
number of factors, many of which are beyond the Company's control. These factors
include, but are not limited to: the timely introduction by the Company of new
or enhanced products and the market acceptance of these products; the Company's
ability to introduce and market products in accordance with its OEM customers'
design requirements and design cycles; changes in demand for functionality of
the Company's products and the products of its OEM customers; the gain or loss
of significant OEM customers; the volume and timing of significant customer
orders received during the period; the availability, pricing and timeliness of
component delivery for the Company's products; increased competition from
existing competitors and new entrants to the market; the timing of new product
announcements or product introductions by the Company's competitors; product
obsolescence, management of product transitions and unanticipated delays or
problems in the introduction or production of products by the Company or its OEM
customers; product reviews and other media coverage; anticipated and
unanticipated decreases in average selling prices of the Company's products;
changes in the mix of products sold by its OEM and other customers; changes in
the pricing policies of the Company, its suppliers and customers; management of
inventory by the Company and its customers; changes in the Company's sales
channel mix or in the sourcing strategies of its OEM customers; and product
returns or price protection charges by customers. Because a significant portion
of the Company's business has been and is expected to continue to be derived
from orders placed by a limited number of larger OEM customers, any gain or loss
or variations in the timing of such orders can cause significant fluctuations in
the Company's operating results. Anticipated orders from customers may fail to
materialize and delivery schedules may be deferred or canceled for a number of
reasons, including changes in specific customer requirements. 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 operates with a
relatively small backlog. Moreover, as is common in the PC industry, a
disproportionate percentage of the Company's net sales in any quarter have
historically been, and are expected in the future to be, generated in the last
month of a quarter. As a result, a shortfall in sales in any quarter as compared
to expectations may not be identifiable until near the end of the quarter.
The Company's gross profit margins are affected by a number of factors,
including sales channel mix, product mix, pricing pressures, the availability
and cost of components from the Company's suppliers, level of absorption of
fixed manufacturing costs, product cycles and general economic conditions.
Moreover, the Company operates its own manufacturing facility. As a result, the
Company incurs relatively high fixed overhead and labor costs compared with
those of its competitors that outsource their manufacturing requirements. Any
failure to generate the level of product revenues needed to absorb such fixed
overhead and labor costs will have a material adverse effect on the Company's
business, financial condition and
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results of operations. In addition, the Company has experienced in the past
and may experience in the future excess demand for its products from its OEM
customers and has elected in the past and may elect in the future to pay its
employees overtime and purchase components on the spot market at prices
higher than would have been available if the Company had purchased such
components in advance in order to meet its production requirements. Such
activities have resulted in the past and may result in the future in lower
gross margins for the additional products being manufactured. The Company's
markets are characterized by intense competition and its products typically
have a limited life cycle (usually six to nine months) and declining average
unit selling prices over time. Accordingly, the Company's margins may decline
from current levels with respect to its existing product lines. In addition,
the Company's margins may be materially 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 expenditures for research and development, selling and
marketing, and general and administrative functions are based in part on future
revenue projections. The Company may be unable to adjust spending in a timely
manner in response to any unanticipated declines in revenues. Any failure to
adjust spending in a timely manner may have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company's quarterly results are also subject to seasonal fluctuations,
with generally weaker fiscal third quarter results.
As a result of the factors listed above and other factors, the Company
believes that period-to-period comparisons of its operating results must not be
relied upon as an indication of future performance. In particular, the
Comapny has recently experienced consistent growth in its annual unit sales
volumes and annual revenues and has reported nine consecutive quarters of
record net income. There can be no assurance that the Company's recent
growth in unit sales volumes, revenues or net income will be sustainable or
will not decline.
DEPENDENCE ON SUPPLIERS
The Company has in the past obtained and expects in the future to obtain
several of the components used in its products from single or limited sources
and, in instances in which component manufacturers have not or do not
allocate a sufficient supply of components to meet the Company's needs, the
Company has obtained in the past and may obtain in the future such components
from distributors or on the spot market at a higher cost. The Company has no
guaranteed supply arrangements with any of its suppliers, and there can be no
assurance that current suppliers will be able to meet the Company's current
or future component requirements. From time to time, the Company has relied,
and in the future expects to rely, substantially upon a limited number of
sole source suppliers for multimedia controller chips, which can, in large
part, determine the performance of a multimedia subsystem. In the event that
the Company experiences difficulty obtaining a particular multimedia
controller chip, the Company could be forced to pay higher prices for
comparable multimedia controller chips, alter product designs to use
alternative and potentially inferior components, reduce its production of the
related product, or delay product shipment schedules. The Company believes
that with respect to its current single and limited source components, it
generally 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
and could require product recertification from the Company's OEM customers)
or reduce its production of the related products; however, no assurance can
be given with respect to the availability of alternative sources for single
and limited source components in future products. The Company has from time
to time experienced difficulty meeting certain product shipment dates to
customers as a result of various causes, including component delivery delays,
component availability shortages, system compatability difficulties and
supplier product quality deficiencies, which in some instances has resulted
in impaired margins, reduced production volumes, strained customer relations
and a loss of business. In addition, software drivers, which are essential to
the performance of substantially all of the Company's
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products, are included with some of these single and limited source components.
The Company has from time to time experienced product delivery delays due to the
inadequacy or the incompatibility of software drivers provided by component
suppliers or developed internally by the Company. The Company expects that
component delivery delays, component shortages, system compatability
difficulties, supplier product quality deficiencies and software driver problems
will continue to occur in the future, and such delays or problems could have a
material adverse effect on the Company's business, financial condition and
results of operations. Additionally, in an effort to counter actual or perceived
component shortages, the Company may overpurchase certain components. Excess
inventory resulting from such overpurchases, obsolescence or a decline in the
market value of such inventory, could result in inventory write-offs, which
would have a material adverse effect on the Company's business, financial
condition and results of operations.
Significant increases in the prices of components, such as controller chips
or memory chips, have occurred from time to time, and the Company has not always
been able to increase its products' prices accordingly. Worldwide shortages of
controller chips or memory chips and international tariff disputes have resulted
from time to time in substantial component cost increases that have had a
material adverse effect on the Company's business, financial condition and
results of operations. There can be no assurance that such price increases will
not take place in the future, or that such price increases will not have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company relies upon its suppliers to continue to develop, introduce and
manufacture controller chips, memory chips and other components in sufficient
volumes to satisfy the Company's requirements. These components must compare
favorably in terms of functionality, performance and price with competitive
offerings from other manufacturers, including competitors of the Company that
have internally developed computer chips or manufacturing expertise. Any failure
by the Company to continue to obtain components from its suppliers that are
competitive in terms of functionality, performance and price with the components
that are available to its competitors would have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Business--Suppliers."
CUSTOMER CONCENTRATION; DEPENDENCE ON PC MARKET
The Company's three largest OEM customers accounted for approximately 76% of
net sales during the 1998 first fiscal quarter, with Gateway 2000, Inc.
("Gateway 2000"), Dell Computer Corporation ("Dell") and Compaq Computer
Corporation ("Compaq") accounting for approximately 40%, 32% and 4%,
respectively, of the Company's net sales for such period. The Company's three
largest OEM customers accounted for approximately 66% of net sales in fiscal
year 1997, with Gateway 2000, Dell and Compaq accounting for approximately 35%,
20% and 11%, respectively, of the Company's net sales for such period.
Historically, Gateway 2000 has been the Company's largest customer, while Dell
and Compaq have become more significant customers in recent periods. The
Company's other significant customers have changed from period to period. See
"Business--Sales and Marketing--Sales."
The Company has no long-term commitments or contracts with any of its
customers. Any reduction of business from Gateway 2000, Dell or Compaq or the
loss of Gateway 2000, Dell or Compaq as a major customer would have a material
adverse effect on the Company's business, financial condition and results of
operations. Due to their purchasing power, the Company's OEM customers are able
to exert significant pressure on the prices of the Company's products, which
could impair the Company's gross profit margins and have a material adverse
effect on the Company's business, financial condition and results of operations.
In addition, the Company believes that its future prospects will largely depend
from time to time upon the success of a limited number of key component
suppliers (currently, its graphics controller chip suppliers) and a few major
OEM customers (currently, Gateway 2000, Dell and Compaq). Because a limited
number of major OEMs currently ship the majority of the PCs produced, the number
of potential customers that the Company can target is currently limited. There
can be no assurance that the Company will be successful in maintaining its
existing relationships with its major OEM customers or in securing additional
major OEM customers and there can be no assurance that the Company will be able
to retain or
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increase the volume or profitability of products currently manufactured by the
Company for such customers. Any failure by the Company to retain its existing
OEM customers, or establish profitable relationships with additional major OEM
customers, or to maintain and increase the volume and profitability of the
products manufactured for such customers would have a material adverse effect on
the Company's business, financial condition and results of operations.
Substantially all of the Company's revenues are currently derived from
products sold for use in PCs, and the Company expects to continue to derive
substantially all of its revenues from the sale of products for use in PCs.
The PC market is characterized by rapidly changing technology, evolving
industry standards, frequent new product introductions and fierce price
competition, all of which contribute to short product life cycles and regular
reductions of average selling prices over the life of a specific product.
Although the PC market has grown substantially in recent years and continued
growth is currently forecasted, there can be no assurance that such growth
will continue. A reduction in sales of PCs, or a reduction in the growth
rate of such sales, would likely reduce demand for the Company's products.
Moreover, such changes in demand could be large and sudden. Since PC
manufacturers often build inventories during periods of anticipated growth,
they may be left with excess inventories if growth slows or if they have
incorrectly forecasted product transitions. In such cases, PC manufacturers
may abruptly suspend substantially all purchases of additional products from
suppliers such as the Company until the excess inventory has been absorbed.
Any reduction in demand for PCs generally, or for particular products that
incorporate the Company's multimedia subsystem or specialized technology
products, would have a material adverse effect on the Company's business,
financial condition and results of operations.
DEPENDENCE ON MULTIMEDIA ACCELERATOR SUBSYSTEM MARKET; MIGRATION TO MOTHERBOARDS
A substantial majority of the Company's net sales are derived from the sale
of multimedia accelerator subsystems. According to Jon Peddie Associates, an
independent industry research firm, approximately 69% of all graphics controller
chips manufactured in the twelve month period ended September 30, 1997 were
incorporated onto multimedia accelerator subsystems, and approximately 31% were
incorporated onto motherboards. Generally, multimedia accelerator subsystems 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
expects this trend to continue with respect to the functionality provided by
many of its current products, notably, in the near term, with respect to its
low-end multimedia accelerator subsystems. In this regard, the MMX instruction
set from Intel Corporation ("Intel") and the expanded capabilities provided by
the Direct X Applications Programming Interfaces ("APIs") from Microsoft
Corporation ("Microsoft") have increased the capability of its operating systems
to control display features that have traditionally been performed by multimedia
accelerator subsystems. In addition, single chip solutions currently are
available that provide 16-bit sound functionality for implementation directly
onto PC motherboards. As a result of this tendency of technology to migrate to
the PC motherboard, the Company's prospects are 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 and to develop PC motherboard products that incorporate multimedia
accelerator subsystems and other features demanded by the PC motherboard market.
In response to this trend of migration, the Company is now actively seeking
orders from OEMs for PC motherboards that incorporate STB's graphics circuitry,
but there can be no assurance that the Company will secure any such orders or
that, if it secures any such orders, it could produce such PC motherboards in
profitable quantities, if at all. The Company has no prior experience designing,
developing or marketing PC motherboards, and there can be no assurance that the
Company will be successful in developing this business. While the Company
believes that a market will continue to exist in the near term for add-in
subsystems that provide advanced functionalities and offer flexible systems
configuration, there can be no assurance that the incorporation of multimedia
functions onto PC motherboards will not have a material adverse effect on the
market for the Company's add-in subsystems. In addition, OEMs may choose to
develop multimedia accelerator subsystems internally rather than purchase such
products from external suppliers. An increase in the number or percentage of PCs
that incorporate graphics circuitry on the motherboard at the expense of add-in
multimedia accelerator subsystems, an increase in the number or percentage of
multimedia accelerator subsystems manufactured
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internally by OEMs, or a decrease in PC sales volumes could effectively shrink
the market for the Company's current products, which would have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business--Industry."
LIMITED PRODUCT LIFE CYCLE; RAPID TECHNOLOGICAL CHANGE; MANAGEMENT OF PRODUCT
TRANSITIONS
The market for the Company's products is characterized by short product life
cycles, evolving industry standards and frequent introductions of new products.
The Company's major OEM customers typically introduce new system configurations
as often as twice per year, and the life cycles of the Company's multimedia
accelerator subsystems typically range from six to nine months. The Company's
failure to successfully introduce new products within a given product cycle
could have a material adverse effect on the Company's business, financial
condition and results of operations 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 and have a longer term material adverse
effect on the Company's business, financial condition and results of operations.
The Company submits most of its products for compatibility and performance
testing to the Microsoft Windows Hardware Quality Lab ("WHQL"). WHQL
certification typically requires up to several weeks to complete and entitles
the Company to claim that a particular product is "Designed for Microsoft
Windows". The Company's OEM customers typically require the Company's products
to be Designed for Microsoft Windows prior to making volume purchases. There can
be no assurance that the Company will receive WHQL certification for any
particular future product in a timely fashion, and any failure to receive WHQL
certification could have a material adverse effect on the Company's business,
financial condition and results of operations.
The PC industry in general, and the market for the Company's multimedia
subsystem products in particular, is characterized by rapidly changing
technologies, evolving industry standards, rapid changes in customer
requirements and fierce price competition. The Company's prospects depend 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 has added new functionalities, such as the MMX instruction
set, to its controller chips to enhance the power of the central processing unit
(the "CPU") to manage the display features of a PC. Similarly, Microsoft is
introducing new versions of its operating systems with features, such as the
Direct 3D API, that increase the capability of its operating systems to control
a PC's display features. Moreover, Intel's recently completed acquisition of
Chips and Technologies, Inc. as well as Intel's introduction of the i740
graphics controller chip could accelerate migration of graphics functionality to
the motherboard or onto the CPU. The introduction of products embodying new
technologies and the emergence of new industry standards and practices can
significantly impair the average selling prices of the Company's multimedia
subsystem and other products, or render such products unmarketable or obsolete.
In the event that the Company's products are unable to support or interface with
these new products, standards and technologies in a timely manner, demand for
the Company's products could be reduced significantly, which would have a
material adverse effect on the Company's business, financial condition and
results of operations.
Because of the short product life cycles and the long lead times for many
components used in the Company's products, the Company may not be able to
quickly reduce its production or inventory levels in response to unexpected
shortfalls in sales or, conversely, to increase production in response to
unexpected demand. There can be no assurance of the continued acceptance of the
Company's existing products or that the Company will be successful in enhancing
its existing products or identifying, developing, manufacturing or marketing new
products, such as PC motherboards and the recently introduced flat panel display
products. Delays in developing new products or product enhancements or the
failure of such
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products or product enhancements to gain market acceptance would have a material
adverse effect on the Company's business, financial condition and results of
operations.
Sales of individual products and product lines are typically characterized
by declines in unit volumes, pricing and margins towards 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 has
experienced from time to time in the past, and expects to experience from time
to time in the future, unexpected reductions in sales of older products as
customers anticipate new products. These reductions have in the past and may in
the future give rise to additional charges for obsolete or excess inventory,
returns of older products by retailers or commercial distributors or substantial
price protection claims. The Company's failure to successfully manage product
transitions could have a material adverse effect on its business, financial
condition and results of operations.
COMPETITION
The market for the Company's products is intensely competitive and the
Company expects competition to increase. The Company competes with independent
manufacturers of brand name multimedia subsystem products, as well as contract
manufacturers and certain OEM manufacturing operations that produce multimedia
subsystem products. The Company's major competitors in the multimedia subsystems
market include Diamond Multimedia Systems, Inc., ATI Technologies, Inc., Matrox
Graphics, Inc., ELSA GmbH, AccelGraphics, Inc., Creative Labs, Inc., CEI, Inc.,
Number Nine Visual Technology Corporation, and Hauppauge ComputerWorks, Inc. In
the specialized technology product market, the Company's major competitors
include Colorgraphic Communication Corporation, Datapath Ltd. and Appian
Graphics Corp.
In addition to its major competitors, certain of the Company's suppliers
sell graphics controller chips directly to OEMs for use in internally produced
multimedia accelerator subsystems, other multimedia subsystems or on
motherboards. If one or more of the Company's significant OEM customers were to
commence or increase internal production of multimedia accelerator subsystems or
other multimedia subsystems, the Company's business, financial condition and
results of operations could be materially adversely affected. Furthermore,
several major OEMs currently integrate graphics controller chips on the
motherboard of their PCs. If one or more of the Company's major OEM customers
begin to incorporate graphics controller chips or other controller chips onto
motherboards rather than incorporating the Company's products, the Company's
business, financial condition and results of operations could be materially
adversely affected. See "--Dependence on Multimedia Accelerator Subsystem
Market; Migration to Motherboards."
The Company expects Intel to continue to invest heavily in research and
development and new manufacturing facilities in order to maintain its
position as one of the largest manufacturers of motherboards, and to promote
its product offerings through extensive advertising campaigns designed to
increase brand loyalty by PC users. Intel may, in the future, develop
multimedia subsystems or multimedia-enabled motherboards using its i740 3D
graphics processor, or other graphics controllers, which could directly
compete with products that the Company may develop. In addition, Intel exerts
significant influence over the 3D graphics industry due to the widespread
acceptance of its microprocessor architecture and its development of new
interface architectures such as the Advanced Graphics Port ("AGP") bus. Any
significant modifications by Intel to the AGP or future graphics interface
architectures could render the Company's products obsolete, incompatible or
less competitive. Any broad-scale introduction of multimedia subsystems or
multimedia-enabled motherboards or significant modifications to the graphics
interface bus by Intel which the Company is unable to access, and which
consequently render the Company's products less competitive or reduces their
potential market, could have a material adverse effect on the Company's
business, financial condition and results of operations.
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The Company competes in its markets on the basis of a number of factors,
including the price, performance, reliability and compatibility of its products,
its ability to reach the market quickly with new products, its ability to meet
customer delivery and reliability requirements, the quality of its technical
support and its ability to develop and maintain relationships with customers and
suppliers. Many of the Company's competitors and potential competitors have
greater financial, marketing, manufacturing and technical resources than the
Company. In addition, some of the Company's competitors manufacture their own
controller chips, which provide these competitors with a significant advantage
over the Company when their internally produced controller chips cost less or
maintain higher price/performance levels than the controller chips available to
the Company from independent suppliers. Furthermore, while the Company believes
it is the only supplier of brand name multimedia accelerator subsystems that
manufactures its own products, some of the Company's competitors internally
manufacture other multimedia subsystems, such as sound cards and PC/TV cards.
The rapid pace of change in the industry and in the markets in which the Company
competes places a premium on the knowledge and experience of a company's
management, engineers and other personnel, and their ability to continuously
develop, enhance and transition new products. The Company believes that
increasing its hardware and software engineering staff is an important factor to
its future competitiveness. See "Business--Competition."
PRODUCT CONCENTRATION
Historically, a substantial majority of the Company's net sales have been
derived from sales of multimedia accelerator subsystems and, from time to time,
a substantial majority of the Company's net sales in a given fiscal quarter have
been derived from the sale of a single or a limited number of multimedia
accelerator subsystems. Factors that increase the probability of a single or a
limited number of products accounting for a substantial majority of sales during
a given fiscal quarter may include one or more of the following factors: the
development and timely introduction of new or enhanced products by the Company
that meet OEM design requirements and design cycles and achieve wide market
acceptance; the selection of key components (such as multimedia controller
chips) at the design stage that provide the Company's products with distinct
advantages compared with the key components available to its competitors; the
availability of key components (such as multimedia controller chips) in
sufficient quantities to meet production schedules once the Company commences
manufacturing its products; favorable product reviews and other media coverage;
the volume and timing of significant customer orders received during the period;
and product obsolescence, maturation, or mismanagement of product transitions by
the Company's competitors. Because the market for the Company's products is
characterized by short product life cycles, evolving industry standards and
frequent introductions of new products, however, the Company's product offerings
may change significantly from quarter to quarter. There can be no assurance that
a product which was an industry leader and a major source of revenue and gross
profit in one fiscal quarter will not be rendered less competitive or obsolete
in a subsequent fiscal quarter. Moreover, in any given quarter, one or more of
the Company's competitors may introduce an industry dominating product for one
or more of the same factors noted above. Accordingly, the Company's future
prospects largely depend upon its ability to continuously develop and
introduce new products that generate sufficient net sales to replace net sales
from existing products as they mature. Any inability to develop and introduce
new products that compete favorably in the marketplace and meet customer
demand in future fiscal periods will have a material adverse effect on the
Company's business, financial condition and results of operations.
SINGLE MANUFACTURING FACILITY
The Company's sole manufacturing facility is located in Juarez, Mexico. The
Company recently relocated a portion of its manufacturing operations to an
adjacent, larger building, thus expanding the overall facility square footage,
and transitioned to new or reconfigured manufacturing equipment. Since the
Company is substantially dependent on this single manufacturing facility, any
disruption of the Company's manufacturing operations at this facility would have
a material adverse effect on the
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Company's business, financial condition and results of operations. Such
disruption could result from various factors, including difficulties in
attracting and retaining qualified manufacturing employees, difficulties
associated with the transition to new, reconfigured or upgraded manufacturing
equipment, 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's business,
financial condition and results of operations. See "Business--Manufacturing."
MANAGEMENT OF GROWTH
The Company has recently experienced rapid growth and consequently has
increased its expenditures in a number of areas and made certain long-term
commitments (such as the expansion of production lines at its Juarez
manufacturing facility and the forthcoming relocation of its corporate
headquarters to a larger facility in Richardson, Texas), a number of which would
be difficult to reduce quickly in the event of a reduction in the rate of growth
or a decrease in the Company's business. In the event that the Company
experiences further growth, such growth will place additional strain on the
Company's management and operations, including its sales, customer support,
research and development, and finance and administrative operations and require
larger quantities of components, additional personnel and 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 management 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, which could reduce the Company's overall
gross profit margin. There can be no assurance that the Company will be able to
manage future changes in the size of its business successfully or that
difficulties in doing so will not have a material adverse effect on the
Company's business, financial condition and results of operations.
CHANGE IN PRODUCT OR SALES CHANNEL MIX
The Company offers two broad categories of products: multimedia subsystems
that are primarily sold to major OEMs and, to a lesser degree, to commercial
customers, and specialized technology products that are primarily sold to
resellers, the workstation groups of OEMs and corporate customers in certain
industries. Sales of multimedia accelerator subsystems to OEMs, which currently
account for a substantial majority of the Company's net sales of OEM multimedia
subsystems, are characterized by relatively high unit volumes and relatively low
gross profit margins. Sales of the Company's multimedia subsystems to the
commercial market are characterized by relatively 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 net sales to OEMs, the commercial market and specialized
technology customers represented approximately 85%, 9% and 5% of the Company's
total net sales in the 1998 first fiscal quarter, and approximately 79%, 12% and
8% of the Company's total net sales in fiscal year 1997. Shifts in the mix of
products sold or in the sales channels into which such products are sold could
have a material adverse effect on the Company's business, financial condition
and results of operations. In particular, a decrease in sales of multimedia
subsystems to the commercial market or in sales of specialized technology
products could result in a disproportionately greater decrease in the Company's
gross profit margin because sales of multimedia subsystems in the commercial
market and sales of specialized technology products currently have higher gross
profit margins than sales of multimedia subsystem products to the Company's OEM
customers. On the other hand, any decrease in the volume of multimedia
subsystems sold to the Company's OEM customers would significantly reduce total
net sales, which would also have a material adverse effect on the Company's
business, financial condition and results
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<PAGE>
of operations. See "Business--Products" and "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 primarily on the
design, manufacture and sale of multimedia accelerator subsystems, the Company
commenced commercial shipments of its DVD decoder subsystems in the 1997 third
fiscal quarter and its flat panel display products in the 1998 first fiscal
quarter. Further, as a substantial number of PCs incorporate graphics circuitry
on the motherboard (particularly in lower cost PCs), the Company is now actively
soliciting orders for such motherboards from OEMs and, in the event that the
Company secures any orders, the Company plans to undertake the design,
manufacture and sale of motherboards incorporating the Company's multimedia
accelerator subsystem capabilities. See "Business--Products." There are numerous
risks inherent in the entry into new product markets, including the reallocation
of limited management, engineering and capital resources to unproven product
ventures, a greater likelihood of encountering technical problems and a greater
likelihood that the Company's new products (or the PCs into which they are
incorporated) will not gain market acceptance. In addition, a new product line,
like the Company's line of flat panel display products, requires significant
investment in long-lead time inventories as well as certain manufacturing
equipment. The failure of one or more of such products, or any adverse effect
such new products may have upon the Company's reputation in its core multimedia
accelerator subsystem business as a result of such failure, could have a
material adverse effect on the Company's business, financial condition and
results of operations.
PROPRIETARY TECHNOLOGY; INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS
The Company's success depends in part upon its proprietary technology,
including, in particular, its software drivers and utilities and its hardware
designs. The Company primarily relies upon copyright and trade secret laws and
agreements with its suppliers and customers to protect its proprietary
technology, and occasionally seeks patent protection on selected inventions. The
Company generally also enters into non-disclosure agreements with persons to
whom it reveals its proprietary information, such as OEMs that the Company works
with, concerning future products. There can be no assurance that the Company's
present protective measures will be adequate to prevent misappropriation of its
technology or independent third party development of the same or similar
technology. Many foreign jurisdictions offer less protection of intellectual
property rights than the United States, and there can be no assurance that the
protection provided to the Company's proprietary technology by the laws of the
United States or foreign jurisdictions will be sufficient to protect the
Company's technology.
The Company has in the past and may in the future find it necessary or
desirable to procure licenses from third parties relating to current or future
products or technologies; however, 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 or customers 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's business, financial
condition and results of operations.
It is common in the PC 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. Several OEM customers recently sent
the Company notices of potential indemnity claims based upon a notice of
infringement such OEM customers had received from a patent owner relating to the
asserted infringement of his patent. Subsequently, the patent owner filed patent
infringement lawsuits in the U.S. and elsewhere against several
12
<PAGE>
of such OEM customers and a number of other major PC systems manufacturers. The
Company provides multimedia subsystems to its OEM customers for use in such OEM
customers' products that are alleged to infringe on the patent owner's rights.
Based upon the Company's preliminary evaluation of the patent, it does not
believe the infringement claims are meritorious as to its products sold to its
customers. However, pursuant to such indemnity agreements or in the event the
Company is directly sued, the Company may be required to dedicate significant
management time and expense to defending itself or assisting its OEM customers
in their defense of this or other infringement claims, whether meritorious or
not, which could have a material adverse effect on the Company's business,
financial condition and results of operations. If this or another intellectual
property claim were to be brought against the Company, or one or more of its OEM
customers, and the Company, or one or more of its OEM customers, were found to
be infringing upon the rights of others, the Company could be required to pay
infringement damages, pay licensing fees, modify its products so that they are
not infringing or discontinue offering products that were found to be
infringing, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Business--Intellectual Property."
If an intellectual property claim were to be brought against one or more of
the Company's suppliers and the supplier were found to be infringing upon the
rights of others, the supplier could be enjoined from further shipments of its
products to the Company, which could have a material adverse effect on the
Company's business, financial condition and results of operations.
DEPENDENCE ON KEY PERSONNEL; NEED FOR ADDITIONAL PERSONNEL
The Company's prospects depend largely upon the services of its management,
sales, marketing and engineering personnel. While the Company has entered into
employment agreements with a number of its officers and key personnel, the loss
of the services of one or more of such personnel could have a material adverse
effect on the Company's business, financial condition and results of operations.
The prospects of the Company also depend 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 skilled personnel in the PC industry (and, in
particular, multimedia hardware and software engineers), and the failure to
retain key personnel or to attract additional personnel to satisfy the Company's
needs could have a material adverse effect on the Company's business, financial
condition and results of operations.
POTENTIAL FUTURE ACQUISITIONS
The Company has in the past pursued, and may in the future pursue,
acquisitions of product lines, technologies or businesses. Future acquisitions
by the Company may result in the use of significant amounts of cash, potentially
dilutive issuances of equity securities, incurrence of debt and amortization
expenses related to goodwill and other intangible assets, each of which could
have a material adverse effect on the Company's business, financial condition
and results of operations. In addition, acquisitions involve numerous risks,
including difficulties in the assimilation of the operations, technologies and
products acquired, the diversion of management's attention from other business
concerns, the risks of entering markets in which the Company has limited or no
prior experience, and the potential loss of key employees. There are currently
no negotiations, commitments or agreements with respect to any acquisition. In
the event that an acquisition does occur, such acquisition may have a material
adverse effect on the Company's business, financial condition and results of
operations.
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<PAGE>
INTERNATIONAL OPERATIONS
Substantially all of the Company's manufacturing operations are carried out
in Juarez, Mexico. The Company's export sales (which primarily consist of
European sales) were approximately 26% and 27% of net sales in the 1998 first
fiscal quarter and fiscal year 1997, respectively. 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 the restrictions and 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 to date the Company
has not experienced any material adverse effects on its business, financial
condition or results of operations as a result of such factors, there can be no
assurance that such factors will not have such effects in the future, or require
the Company to modify its 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. Any decrease in the value of the U.S. dollar relative to
the Mexican peso would increase the Company's manufacturing costs, which could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business--Manufacturing" and "--Sales and
Marketing."
PRICE PROTECTION AND STOCK ROTATION RISKS
As is common practice in its industry, the Company's arrangements with its
commercial customers generally allow such 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 equal 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's business,
financial condition and results of operations. See "Business-- Sales and
Marketing--Sales" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Overview."
ENVIRONMENTAL REGULATIONS
The Company is subject to a variety of local, state, federal and foreign
governmental regulations relating to the storage, discharge, handling, emission,
generation, manufacture and disposal of toxic or other hazardous substances used
to manufacture the Company's products. The failure to comply with current or
future regulations could result in the imposition of substantial fines on the
Company, suspension of production, alteration of its manufacturing processes or
cessation of operations and have a material adverse effect on the Company's
business, financial condition and results of operations.
POTENTIAL LIABILITY CLAIMS
The Company's purchase agreements with its major OEM customers typically
contain provisions that require the Company to indemnify the OEM customer and
any end-users for potential product liability claims. Although the Company has
not experienced product liability claims to date, there can be no assurance that
the Company will not become subject to such claims in the future. A successful
product liability claim against the Company could have a material adverse effect
on its business, financial condition and results of operations.
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<PAGE>
HEADQUARTERS RELOCATION
The Company recently commenced construction of a new 210,000 square foot
headquarters facility near its current location in Richardson, Texas and it is
anticipated that this facility will be completed by December 1998. In connection
with the transition to its new headquarters, the Company may experience
interruptions in certain aspects of its operations, including but not limited
to, those relating to its various engineering, sales and administrative
functions. There can be no assurance that any such interruptions, or other
consequences arising out of the Company's transition to its new headquarters,
will not have a material adverse effect on the Company's business, financial
condition or results of operations. In addition, pursuant to the terms of its
new headquarters lease, the Company will incur additional occupancy expense. The
amount of this additional occupancy expense will be dependent on prevailing
interest rates. Moreover, the Company will bear the economic risk upon the sale
of such facility. If this facility is sold for less than the amount of the
underlying debt on the facility then outstanding, the Company would be required
to cover any shortfall, which could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Business--Properties."
YEAR 2000 COMPLIANCE
The Company uses a significant number of computer software programs and
operating systems in its internal operations, including applications used in
financial business systems and various administration functions, and also
includes software programs in its products. To the extent that these software
applications contain code that is unable to appropriately interpret the upcoming
calendar year 2000, some level of modification or possible replacement of such
source code or applications will be necessary. The Company is still analyzing
its software applications and, to the extent they are not fully year 2000
compliant, the costs necessary to update software or potential systems
interruptions may have a material adverse effect on the Company's business,
financial condition and results of operations. Furthermore, there can be no
assurance that the Company's customers and suppliers are or will be year 2000
compliant. The failure of the Company's customers and suppliers to achieve year
2000 compliance could have a material adverse effect on the Company's business,
financial condition and results of operations.
NO INTENTION TO PAY DIVIDENDS
Since the Company's initial public offering in February 1995, it has not
declared or paid any cash dividends on its Common Stock or other securities, and
does not anticipate paying any cash dividends in the foreseeable future. The
Company intends to retain any earnings for use in its business. The decision to
pay dividends in the future will be at the discretion of the Board of Directors
and will depend, among other things, upon future earnings, operations, capital
requirements, restrictions in financing agreements, the general financial
condition of the Company and general business conditions. The Company's existing
revolving credit facility prohibits the Company from paying cash dividends.
NEED FOR ADDITIONAL CAPITAL
The Company requires substantial working capital to fund its business,
particularly to finance its inventory and accounts receivable and for capital
expenditures. The Company's future capital requirements will depend on many
factors, including the rate of revenue growth, if any; the Company's financial
condition; any need to expand the Company's manufacturing capacity; the timing
and extent of spending to support research and development programs; the
expansion of selling and marketing and administrative activities; the timing
of new product
15
<PAGE>
introductions and product enhancements; and the level of market acceptance of
the Company's products. The Company expects that it may need to raise additional
equity or debt financing in the future. There can be no assurance that
additional equity or debt financing, if required, will be available on
acceptable terms or at all. If the Company is unable to obtain such additional
capital, the Company may be required to reduce the scope of its planned
product development, manufacturing expansion or selling and marketing
activities, which would have a material adverse effect on the Company's
business, financial condition and results of operations. In the event that the
Company does raise additional equity financing, the investors in this offering
and the Company's existing shareholders could experience substantial dilution.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources."
ANTI-TAKEOVER MEASURES
The Company is a Texas corporation and is therefore subject to the
provisions of the Texas Business Corporation Act, including the terms of the
Texas Business Combination Law ("TBCL") that became effective on September 1,
1997. In general, the TBCL prohibits a Texas "issuing public corporation" (such
as the Company) from engaging in a "business combination" with any shareholder
who is a beneficial owner of 20% or more of the corporation's outstanding stock
for a period of three years after such shareholder's acquisition of a 20%
ownership interest, unless: (i) the board of directors of the corporation
approves the transaction or the shareholder's acquisition of shares prior to the
acquisition or (ii) two-thirds of the unaffiliated shareholders of the
corporation approve the transaction at a shareholders' meeting. The TBCL may
have the effect of inhibiting a non-negotiated merger or other business
combination involving the Company. The Company is subject to the terms of the
TBCL, unless its shareholders or directors take action electing not to be
governed by its terms (which action is not currently contemplated). The Company
is also a party to certain agreements that could be deemed to have an
anti-takeover effect.
The Company's Board of Directors has the authority to issue up to 2,000,000
shares of preferred stock in one or more series and to determine the price,
rights, preferences and privileges of those shares without any further vote or
action by the Company's shareholders. The rights of the holders of Common Stock
of the Company are subject to, and may be adversely affected by, the rights of
the holders of any shares of preferred stock which may be issued in the
future. While the Company has no present intention to issue shares of
preferred stock, such issuance, while providing desirable flexibility in
connection with possible acquisitions and other corporate purposes, could have
the effect of making it more difficult for a third party to acquire a majority
of the outstanding voting stock of the Company. In addition, such preferred
stock may have other rights, including economic rights senior to the Common
Stock, and as a result, the issuance thereof could have a material adverse
effect on the market value of such Common Stock.
STOCK PRICE VOLATILITY
The trading price of the Company's Common Stock has in the past and may in
the future be subject to wide fluctuations in response to factors such as actual
or anticipated variations in the Company's operating results; announcements of
technological innovations by the Company or its competitors; new products,
contracts or OEM design wins by the Company or its competitors; developments
with respect to patents, copyrights or proprietary rights; changes in
recommendations or financial estimates by securities analysts; conditions and
trends in the PC and technology industries; adoption of new accounting standards
affecting the Company's industry; general market conditions and other factors.
Further, the stock market has experienced in recent months and may continue in
the future to experience extreme price and volume fluctuations that particularly
affect the market prices of equity securities of high technology companies and
that often are unrelated or disproportionate to the operating performance of
such companies. The trading
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<PAGE>
prices of many high technology companies' stocks have recently been at or near
historical highs and reflect price to earnings ratios that are substantially
above historical levels. There can be no assurance that these trading prices and
price to earnings ratios will be sustained. These broad market fluctuations, as
well as general economic, political and market conditions, may adversely affect
the market price of the Company's Common Stock. In the past, following periods
of volatility in the market price of a company's stock, securities class action
litigation has often been instituted against the issuing company. There can be
no assurance that such litigation will not occur in the future with respect to
the Company. Such litigation could result in substantial costs and would at a
minimum divert management's attention and resources, which could have a material
adverse effect on the Company's business, financial condition and results of
operations. Any adverse determination in such litigation could also subject the
Company to significant liabilities.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
STB designs, manufactures and sells multimedia subsystem and specialized
technology products, primarily for use in desktop PCs. These products supplement
a PC's CPU to enhance multimedia performance and accelerate the computationally
intensive operations and processing requirements necessary to perform advanced
multimedia applications. The Company focuses primarily on the sale of its
products to major OEMs and works closely with its component suppliers and OEM
customers to develop products that are responsive to technological trends and
consumer demand. STB manufactures substantially all of its products at its ISO
9002 certified facility in Juarez, Mexico, which the Company believes enables it
to respond more quickly to changing customer needs, maintain product quality and
achieve economies of scale.
The Company currently sells multimedia subsystems and specialized technology
products. The Company's multimedia subsystem product line includes a wide
selection of multimedia accelerator subsystems (also referred to as "graphics
add-in cards") designed primarily for use in mid to high-end PCs as well as
several complementary products, including DVD decoder subsystems, PC/TV
convergence subsystems and sound cards. STB's specialized technology products
include products designed to enable a single computer to control the display of
up to 32 monitors and a recently introduced line of flat panel display products.
The Company sells its products to OEM customers, the commercial market and
the specialized technology market. The Company sells its multimedia subsystems
primarily to major OEMs and, to a lesser extent, the commercial market. The
Company's OEM customers accounted for approximately 85%, 79% and 81% of total
net sales for the 1998 first fiscal quarter, fiscal year 1997 and fiscal year
1996, respectively. The Company's three largest OEM customers accounted in the
aggregate for approximately 76%, 66% and 59% of the Company's total net sales
for the 1998 first fiscal quarter, fiscal year 1997 and fiscal year 1996,
respectively. Sales of multimedia subsystems to the commercial market accounted
for approximately 9%, 12% and 11% of total net sales for the 1998 first fiscal
quarter, fiscal year 1997 and fiscal year 1996, respectively, and sales of
specialized technology products accounted for approximately 5%, 8% and 6% of
total net sales for the 1998 first fiscal quarter, fiscal year 1997 and fiscal
year 1996, respectively. The balance of total net sales was derived primarily
from third party contract assembly services, which comprised approximately 1%,
1% and 2% of total net sales for the 1998 first fiscal quarter, fiscal year 1997
and fiscal year 1996, respectively. Export sales of the Company's products,
which are made through all of the Company's sales channels, were 26% of net
sales in the 1998 first fiscal quarter as compared to 27% in fiscal year 1997
and 20% in fiscal year 1996. The Company has no long-term commitments or
contracts with any of its customers and the loss of any of the Company's key
customers could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Risk Factors-- Customer
Concentration; Dependence on PC Market."
Sales of multimedia accelerator subsystems and other multimedia subsystems
to OEMs have typically been characterized by relatively high unit volumes and
relatively low gross profit margins. Sales of multimedia subsystem products to
the commercial market are characterized by relatively modest unit 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. Shifts in the mix of
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products sold or in the sales channels into which such products are sold could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Risk Factors-- Change in Product Mix or Sales
Channel." In addition, a substantial majority of the Company's net sales have
been derived from sales of multimedia accelerator subsystems and, from time to
time, a substantial majority of the Company's net sales in a given fiscal
quarter have been derived from the sale of a single or a limited number of
multimedia accelerator subsystems. See "Risk Factors--Product Concentration."
The markets for the Company's products in general, and its multimedia
accelerator subsystems in particular, are characterized by short product life
cycles, evolving industry standards and frequent introductions of new
products. See "Risk Factors--Limited Product Life Cycle; Rapid Technological
Change; Management of Product Introductions."
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 has placed 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
customer inventories at the time of the price reduction. The Company maintains
reserves related to these sales programs, which it believes are adequate. See
"Risk Factors--Price Protection and Stock Rotations."
The Company has no guaranteed supply arrangements with any of its suppliers.
The Company obtains most of the primary components for its current 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 products incorporating such components. Such an
increase in component costs could impair the Company's gross profit margins and
results of operations. In particular, occasional worldwide shortages of memory
and controller chips and international tariff disputes have in the past resulted
in substantial component cost increases that have had a material adverse effect
on the Company's gross profit margins and its results of operations. In recent
periods, a decline in the price of memory chips, together with improved
inventory management practices and other factors, has contributed to improved
gross profit margins. The Company's total gross profit margins and gross profits
will likely continue to 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. See "Risk Factors--Dependence on
Suppliers" and "--Change in Product or Sales Channel Mix."
In recent periods, the Company's business has been strongly influenced by
the following trends: the growth of the PC market in general; the ability of
several major PC manufacturers to expand their respective market shares of the
PC market in general; the Company's ability to establish and expand OEM
relationships with several of these major PC manufacturers; the expansion of the
market for multimedia subsystems and, in particular, the market for multimedia
accelerator subsystems; the ability of the Company to identify and source key
components, such as graphics controller chips, that enable the Company's
products to compete effectively with its competitors; and the Company's ability
to design, develop and manufacture successive generations of multimedia
accelerator subsystems that secure design wins with major OEM customers and
achieve wide market acceptance. Although the Company is currently attempting to
diversify its product offerings, expand its existing OEM customer relationships,
establish new OEM customer relationships and expand sales into the commercial
market, there can be no assurance that the Company will be successful with
respect to any of these efforts. The failure by the Company to further diversify
its product offerings and to expand its distribution channels could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Risk Factors--Customer Concentration; Dependence on
PC Market," "--Dependence on Multimedia Accelerator Market; Migration to
Motherboards," "--Dependence on Suppliers" and "--Limited Product Life Cycle;
Rapid Technological Change; Management of Product Transitions."
During the fiscal quarter ended April 30, 1997, the Company acquired all of
the outstanding shares of Symmetric Simulation Systems, Inc. ("Symmetric"), a
designer and builder of high-end 3D graphics acceleration subsystems used in
applications such as computer-aided design, product visualization,
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architectural walk-throughs and multimedia authoring. The Company believes
that the Symmetric product line complements the Company's existing products
and enables the Company to market products to the high-end 3D market.
RESULTS OF OPERATIONS
The following table sets forth certain items from the Company's Consolidated
Statements of Operations as a percentage of net sales:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED OCTOBER 31, JANUARY 31,
------------------------------------- ------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net sales......................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales..................................... 85.0 80.4 74.9 77.9 79.4
----- ----- ----- ----- -----
Gross profit...................................... 15.0 19.6 25.1 22.1 20.6
----- ----- ----- ----- -----
Operating expenses:
Research and development........................ 2.1 2.4 3.4 2.6 3.0
Sales and marketing............................. 5.7 6.1 7.4 6.8 5.6
General and administrative...................... 4.8 5.3 5.3 5.0 4.1
----- ----- ----- ----- -----
Total operating expenses.......................... 12.6 13.8 16.1 14.4 12.7
----- ----- ----- ----- -----
Income from operations............................ 2.4 5.8 9.0 7.7 7.9
Interest expense, net............................. 0.6 0.6 0.8 0.7 0.7
----- ----- ----- ----- -----
Income before income taxes........................ 1.8 5.2 8.2 7.0 7.2
Provision for income taxes(1)..................... 0.3 1.8 2.8 2.3 2.4
----- ----- ----- ----- -----
Net income........................................ 1.5% 3.4% 5.4% 4.7% 4.8%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
- ------------------------
(1) The Company operated as an S corporation from November 1, 1986 until
February 21, 1995, at which time the Company became fully subject to federal
and state income taxes.
THREE MONTHS ENDED JANUARY 31, 1998 COMPARED TO THREE MONTHS ENDED JANUARY 31,
1997
NET SALES. Net sales increased to $78.8 million in the 1998 first fiscal
quarter from $48.1 million in the 1997 first fiscal quarter, representing an
increase of 63.8%. Unit volume for the 1998 first fiscal quarter increased by
64.6% over the 1997 first fiscal quarter, while the Company's average unit
selling prices remained essentially unchanged. OEM channel sales increased to
approximately $66.2 million in the 1998 first fiscal quarter from $34.7 million
in the 1997 first fiscal quarter, representing an increase of 90.9%. Sales
growth in the OEM channel was primarily the result of increased demand for the
Company's Velocity 128 multimedia accelerator. See "Risk Factors--Product
Concentration." Commercial channel sales decreased to $7.4 million in the 1998
first fiscal quarter from $9.4 million in the 1997 first fiscal quarter, a
decrease of 21.5%, primarily due to limited controller chip availability for the
Velocity 128 multimedia accelerator resulting from unexpected OEM product demand
increases. Sales in the specialized technology market increased to $4.1 million
in the 1998 first fiscal quarter from $2.7 million in the 1997 first fiscal
quarter, or 53.3%, which was primarily a result of increased sales to OEM
customers for financial services workstations.
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GROSS PROFIT. Gross profit consists of net sales less cost of sales. Cost
of sales primarily consists of the cost of materials and manufacturing costs
associated with the production of the Company's products. Gross profit increased
to $16.2 million in the 1998 first quarter from $10.6 million in the 1997 first
quarter, representing an increase of 52.5%. During the period, gross profit as a
percentage of net sales decreased to 20.6% in the 1998 first fiscal quarter from
22.1% in the 1997 first fiscal quarter. The increase in the amount of gross
profit resulted primarily from increases in sales volumes of the Company's
products (and, in particular, the Company's Velocity 128 multimedia
accelerator), partially offset by decreasing unit prices. The decrease in gross
profit as a percentage of net sales resulted primarily from (i) an increase in
the percentage of sales to the OEM market, which typically is characterized by
lower gross profit margins, and (ii) increased component costs due to a
temporary shortage in memory component supply resulting from higher product
demand and (iii) increased overtime labor costs caused by the higher rates of
production necessary to meet increased product demand. These increases were
partially offset by the economies of scale resulting from higher production
volumes and increased operating efficiencies. Gross margins are expected to
continue to fluctuate as a result of sales channel, product mix and other
factors. See "Risk Factors--Potential for Fluctuating Operating Results;
Seasonality" and "--Dependence on Suppliers."
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
primarily consist of compensation and associated expenses relating to
engineering personnel, development tool expenses, prototyping expenses and
product enhancement expenses. Research and development expenses increased to
$2.3 million in the 1998 first fiscal quarter from $1.2 million in the 1997
first fiscal quarter, representing an increase of 88.9%. Research and
development expenses as a percentage of net sales increased to 3.0% in the 1998
first fiscal quarter from 2.6% in the 1997 first fiscal quarter. The increase in
research and development expenses on a dollar and percentage basis resulted from
increased staffing at the Company's corporate headquarters and at each of the
design centers in Houston, Texas; Eugene, Oregon; and the recently established
design center in Belfast, Northern Ireland. Other expenses associated with the
development of new products, increased expenses associated with software and
driver development also contributed to the increase in research and development
expenses.
SALES AND MARKETING EXPENSES. Sales and marketing expenses primarily
consist of personnel and related overhead expenses for sales, marketing and
customer support activities, promotional and advertising expenses, and
commissions paid to independent sales representatives. Sales and marketing
expenses increased to $4.4 million in the 1998 first fiscal quarter from $3.3
million in the 1997 first fiscal quarter, representing an increase of 34.6%.
Sales and marketing expenses as a percentage of net sales decreased to 5.6% in
the 1998 first fiscal quarter from 6.8% in the 1997 first fiscal quarter,
primarily due to increases in net sales at a rate faster than that of sales and
marketing expenses. The increase in sales and marketing expenses resulted
primarily from additional staffing and commissions paid as a result of higher
sales, partially offset by decreases in commissions paid to independent sales
representatives. Increased expenses for advertising and promotional programs in
the commercial channel, the specialized technology channel and the international
market also contributed to the increased expenses.
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GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
primarily consist of personnel and related overhead expenses for management,
finance, management information systems activities, legal and human resources,
as well as expenses associated with occupancy and other general operating
expenses. General and administrative expenses increased to $3.2 million in the
1998 first fiscal quarter from $2.4 million in the 1997 first fiscal quarter,
representing an increase of 35.8%. General and administrative expenses as a
percentage of net sales decreased to 4.1% in the 1998 first fiscal quarter from
5.0% in the 1997 first fiscal quarter. The increase in the amount of general and
administrative expenses was primarily due to increased expenses associated with
the Company's growth, including increased staffing, occupancy and other general
operating expenses. Increased employee profit sharing, as a result of higher
earnings, also contributed to the increase in general and administrative
expenses. The Company recently commenced construction of a new headquarters
facility that it plans to occupy in the 1999 first fiscal quarter. The terms of
the lease relating to the new headquarters facility provide for increased
occupancy expense from current levels and are subject to adjustment based on
prevailing interest rates. See "--Liquidity and Capital Resources."
INTEREST EXPENSE, NET. Interest expense, net primarily consists of the
interest expense associated with the Company's Revolving Credit Facility,
Mezzanine Facility (as defined below) and capital leases, offset partially by
the interest income earned on the Company's cash and cash equivalents. Interest
expense, net increased to approximately $518,000 in the 1998 first fiscal
quarter from approximately $376,000 in the 1997 first fiscal quarter,
representing an increase of 37.8%. The increase in the amount of interest
expense, net was primarily related to an increase in the average total debt and
obligations under capital leases outstanding during the 1998 first fiscal
quarter compared to the 1997 first fiscal quarter.
FISCAL YEAR ENDED OCTOBER 31, 1997 COMPARED TO FISCAL YEAR ENDED OCTOBER 31,
1996
NET SALES. Net sales increased to $199.5 million in fiscal year 1997 from
$180.2 million in fiscal year 1996, representing an increase of 10.7%. Unit
volume for fiscal year 1997 increased by 27.4% over fiscal year 1996, while the
Company's average unit selling prices continued to decline primarily as a result
of declines in component costs. OEM channel sales increased to $153.5 million in
fiscal year 1997 from approximately $145.5 million in fiscal year 1996,
representing an increase of 5.5%. Sales growth in the OEM channel was primarily
the result of increased sales to existing customers. Commercial channel sales
increased to $23.9 million in fiscal year 1997 from $19.8 million in fiscal year
1996, representing an increase of 20.8%. This moderate increase in sales to the
commercial channel primarily resulted from increased sales to existing
customers. Sales in the specialized technology market increased to $15.2 million
in fiscal year 1997 from $10.9 million in fiscal year 1996, representing an
increase of 38.9%. This increase was primarily due to increased sales to
existing customers, as well as recent sales of products to the workstation
groups of certain OEM customers.
GROSS PROFIT. Gross profit increased to $50.0 million in fiscal year 1997
from $35.3 million in fiscal year 1996, representing an increase of 41.9%. For
the period, gross profit as a percentage of net sales increased to 25.1% in
fiscal year 1997 from 19.6% in fiscal year 1996. The increase in the amount of
gross profit primarily resulted from increases in sales volumes of the Company's
products, partially offset by declining average selling prices. The increase in
gross profit margin resulted primarily from increased sales of higher margin
specialized technology products and, to a lesser degree, increased sales to the
commercial channel. In addition, declines in component costs, economies of scale
resulting from higher production volumes and greater manufacturing efficiencies
with respect to the manufacture and sale of the Company's multimedia accelerator
subsystems, partially offset by decreasing unit prices, also contributed to the
increase in gross profit margin.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased to $6.7 million in fiscal year 1997 from $4.4 million in fiscal year
1996, representing an increase of 52.2%. This increase primarily resulted from
additional engineering staffing at the Company's headquarters in Richardson,
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Texas, as well as its design centers in Houston, Texas and Eugene, Oregon.
During 1997, the Company expanded its research and development efforts by
establishing and staffing a design center in Belfast, Northern Ireland. Expenses
associated with new product development, software development and continued
enhancement and support of the Company's existing products also contributed to
the increase. Research and development expenses as a percentage of net sales
increased to 3.4% in fiscal year 1997 from 2.4% in fiscal year 1996.
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased to
$14.8 million in fiscal year 1997 from $11.0 million in fiscal year 1996,
representing an increase of 34.6%. Sales and marketing expenses as a percentage
of net sales increased to 7.4% in fiscal year 1997 from 6.1% in fiscal year
1996. Sales and marketing expenses increased primarily due to additional
staffing and commissions paid as a result of the Company's growth and higher
sales levels, and increased travel and operating costs. Increased trade show
expenses, and increased advertising and promotional expenses in the commercial
channel, the specialized technology market and the international market also
contributed to the overall increase in sales and marketing expenses.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to $10.6 million in fiscal year 1997 from $9.5 million in fiscal year
1996, representing an increase of 11.9%. For fiscal year 1997 and fiscal year
1996, general and administrative expenses as a percentage of net sales remained
unchanged at 5.3%. The absolute dollar increase in general and administrative
expenses was primarily due to increased expenses associated with the Company's
growth, including increased staffing and related expenses and data processing
costs, partially offset by an increase in the allocation of certain costs
related to the Juarez manufacturing operation to cost of goods sold. Facility
expansion at the Company's headquarters and related occupancy costs, including
rent and insurance, also contributed to the overall absolute increase in general
and administrative expenses. As a result of the increase in operating income,
the expenses associated with the Company's profit sharing plan also increased.
INTEREST EXPENSE, NET. Interest expense, net increased to $1.6 million in
fiscal year 1997 from $1.1 million in fiscal year 1996, representing an increase
of 48.2%. This increase was primarily a result of higher average total debt
outstanding during fiscal 1997 compared to fiscal 1996.
FISCAL YEAR ENDED OCTOBER 31, 1996 COMPARED TO FISCAL YEAR ENDED OCTOBER 31,
1995
NET SALES. Net sales increased to $180.2 million in fiscal year 1996 from
$129.6 million in fiscal year 1995, representing an increase of 39.0%. This
increase in revenues was achieved primarily as a result of a 58.0% increase in
unit volume shipments, and despite a significant decrease in the average unit
sales price of the Company's products. This increase also resulted from
continuing growth in sales of the Company's products to established OEM
customers, as well as to new OEM customers. The Company also experienced
continued growth in the commercial channel from sales of the Company's products
to new commercial customers and increased sales to established customers. Sales
in the specialized technology market experienced moderate growth, primarily as a
result of increased sales to existing customers.
GROSS PROFIT. Gross profit increased to $35.3 million in fiscal year 1996
from $19.5 million in fiscal year 1995, representing an increase of 81.1%. Gross
profit margin increased to 19.6% in fiscal year 1996 from 15.0% in fiscal year
1995. The increase in the amount of gross profit primarily resulted from
increases in sales volumes of the Company's products, partially offset by
declining average selling prices. The increase in gross profit margin primarily
resulted from economies of scale resulting from higher production volumes, as
well as from lower memory chip prices. Increased sales of higher margin products
sold in the commercial channel and increased specialized technology product
sales also contributed to the increase in gross profit margin.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased to $4.4 million in fiscal year 1996 from $2.7 million in fiscal year
1995, representing an increase of 62.9%. Research and
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development expenses as a percentage of net sales increased to 2.4% in fiscal
year 1996 from 2.1% in fiscal year 1995. The dollar increase in
research and development expenses primarily resulted from additional staffing
and related expenses associated with new product development, software
development and continued enhancement and support of the Company's existing
products.
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased to
$11.0 million in fiscal year 1996 from $7.4 million in fiscal year 1995,
representing an increase of 47.7%. Sales and marketing expenses as a
percentage of net sales increased to 6.1% in fiscal year 1996 from 5.7% in
fiscal year 1995. The dollar increase in sales and marketing expenses largely
resulted from additions to the Company's domestic and international sales
forces and increased commissions paid for higher sales levels. Increased
trade show expenses, advertising and promotional efforts to support the
higher sales levels in the commercial and specialized technology product
sales also contributed to the increase.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to $9.5 million in fiscal year 1996 from $6.2 million in fiscal
year 1995, representing an increase of 53.7%. General and administrative
expenses as a percentage of net sales increased to 5.3% in fiscal year 1996
from 4.8% in fiscal year 1995. The dollar and percentage increase in general
and administrative expenses were largely due to increased occupancy costs,
insurance expenses, and personnel, legal and data processing expenses
associated with the Company's growth.
INTEREST EXPENSE, NET. Interest expense, net increased to $1.1 million in
fiscal year 1996 from approximately $818,000 in fiscal year 1995, representing
an increase of 36.1%. This increase was primarily a result of higher average
total debt outstanding during fiscal year 1996 compared to fiscal year 1995.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital and liquidity needs are for financing
inventory and accounts receivable and for manufacturing and other equipment
expenditures. The Company has financed generally these capital and liquidity
needs and its operations through a combination of cash generated from
operations, trade credit from vendors, bank borrowings and the net proceeds from
its initial public offering. As a result of the Company's rapid growth in recent
years, its capital requirements have increased substantially. Future growth, if
any, will require additional capital, particularly to support increased working
capital needs, staffing requirements, promotional expenses, and manufacturing
facilities and equipment requirements.
Cash used in operating activities of $3.9 million in fiscal year 1997 was
primarily attributable to increases in inventory and accounts receivable as a
result of higher sales, partially offset by increases in net income and accounts
payable. Cash used in operating activities was approximately $462,000 in the
1998 first fiscal quarter, which resulted largely from increases in inventory
and accounts receivable as a result of higher sales, partially offset by
increases in net income and accounts payable. At October 31, 1997, the Company's
working capital was $31.4 million, compared to $35.8 million at January 31,
1998. Cash and cash equivalents was $3.9 million and $3.4 million at October 31,
1997 and January 31, 1998, respectively.
The Company invested $9.6 million in capital equipment in fiscal year
1997, and an additional $442,000 during the 1998 first fiscal quarter. The
Company's investment in equipment is primarily attributable to manufacturing
equipment additions and upgrades of existing equipment to support the
increased demand for and complexity of the Company's products. During the
1998 first fiscal quarter, the Company completed a move to a new 137,000
square foot manufacturing facility in Juarez, Mexico, immediately adjacent to
its previous facility. The Company has retained one-half of its previous
facility for expansion, with an option to occupy, vacate or sublease the
remaining half. During the 1997 fourth fiscal quarter, the Company installed
two new high-speed surface-mount technology ("SMT") assembly lines at its new
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facility, at a total cost of approximately $6.3 million. This equipment was
financed by two separate operating leases. During the 1996 fourth fiscal
quarter, the Company installed four additional SMT assembly lines, at an
approximate total cost of $4.2 million. This equipment was also financed through
operating lease financing arrangements. The Company's aggregate obligations
under all such equipment lease financing arrangements totaled approximately $9.5
million at October 31, 1997 and approximately $9.1 million at January 31, 1998.
The Company expects that additional capital expenditures for similar types of
equipment may be necessary to support additional future customer demand and
production requirements, although there can be no assurance in this regard.
The Company has a $40.0 million Revolving Credit Facility, as well as a $3.0
million term loan (the "Mezzanine Facility"). As of January 31, 1998, the
Company had $23.0 million and $2.9 million outstanding under the Revolving
Credit Facility and the Mezzanine Facility, respectively. The principal amount
outstanding under the Revolving Credit Facility bears interest at LIBOR plus 175
basis points (7.367% at January 31, 1998). The principal amount outstanding
under the Mezzanine Facility bears interest at LIBOR plus 250 basis points
(8.126% at January 31, 1998) and is payable in 60 monthly installments of
principal and interest, which began on November 1, 1997. Availability under the
Revolving Credit Facility is calculated using formulas based on eligible
accounts receivable as defined by the Revolving Credit Facility Agreement. The
indebtedness under the Revolving Credit Facility matures on November 21, 1999
and the indebtedness under the Mezzanine Facility matures on November 1, 2002.
In December 1997, the Company entered into a five year agreement to
construct and lease a new corporate headquarters in Richardson, Texas.
Construction on the 210,000 square foot facility began in December 1997, and the
total cost is estimated to be approximately $22.8 million (including land). The
lessor has agreed to fund the cost of the land and construction of the building
(subject to reductions based on certain conditions in the lease agreement). The
Company plans to occupy the facility during the 1999 first fiscal quarter with
rental payments commencing upon occupancy. The Company estimates that its
monthly rent for this facility will be approximately $225,000 for the four year
period following completion of the facility. This amount is in excess of the
current facilities expense, as local rental rates have increased and the Company
is increasing the square footage of its corporate headquarters. The lease
agreement also provides that the amount of lease payments are subject to
adjustment based upon prevailing interest rates. As a consequence, an increase
in prevailing interest rates will increase the Company's facilities expense. The
Company is currently exploring strategies to hedge this interest rate exposure.
The Company also is seeking opportunities to sublease that portion of its new
headquarters facility which the Company does not expect to utilize immediately
following its occupancy of the new facility. The monthly rent currently paid for
the Company's headquarters facility will be eliminated with the move to the new
facility. At the end of the lease for the new facility, the Company may elect to
either renew the lease, pay off the underlying debt on the facility or cause the
building to be sold. In the event of a sale, the proceeds will be used to retire
the underlying debt with any excess to be paid to the Company. The Company is
responsible for any outstanding balance due on the underlying obligation after
the sale of the facility. See "Risk Factors-- Headquarters Relocation."
From time to time, the Company evaluates acquisitions of businesses,
products or technologies that complement the Company's business. Any such
transactions, if consummated, may use a portion of the Company's working capital
or require the issuance of securities, which may result in further dilution to
the Company's shareholders. See "Risk Factors--Potential Future Acquisitions."
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RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("FAS 123"), encourages, but does not require,
companies to record compensation cost for stock-based employee compensation
plans at fair value. The Company has elected to continue to account for stock-
based compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"), and related interpretations. Accordingly, compensation cost for
stock options is measured as the excess, if any, of the fair market value of the
Company's stock at the date of the grant over the amount the employee must pay
to acquire such stock.
In February 1997, FAS 128 was issued. FAS 128 specifies the computation,
presentation and disclosure requirements for earnings per share ("EPS") for
entities with publicly held common stock or potential common stock. FAS 128
simplifies the standards for computing EPS previously found in Accounting
Principles Board Opinion No. 15, "Earnings per Share" ("APB 15"), and makes them
comparable to international EPS standards. It replaces the presentation of
primary EPS with a presentation of basic EPS. It also requires dual presentation
of basic and diluted EPS on the face of the statement of operations for all
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. FAS 128 is effective for financial
statements issued for periods ending after December 15, 1997, including interim
periods; earlier application is not permitted. FAS 128 requires restatement of
all prior-period EPS data presented. The Company adopted FAS 128 as of and for
the year ending October 31, 1998.
In June 1997, Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("FAS 130"), was issued. FAS 130 establishes
standards for reporting and display of comprehensive income and its components
(revenues, expenses, gains, and losses) in a full set of general-purpose
financial statements. It mandates that all items required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. FAS 130 is effective for fiscal years beginning after
December 15, 1997. The Company will adopt FAS 130 in the year ending October 31,
1999. Reclassification of financial statements for earlier periods provided for
comparative purposes is required upon adoption.
In June 1997, Statement of Financial Accounting Standards No. 131,
"Disclosure About Segments of an Enterprise and Related Information" ("FAS
131"), was issued. FAS 131 establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. FAS 131 is effective for financial statements for periods
beginning after December 15, 1997. The Company will adopt FAS 131 in the year
ending October 31, 1999.
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BUSINESS
INTRODUCTION
STB designs, manufactures and sells multimedia subsystems and specialized
technology products, primarily for use in desktop PCs. These products supplement
a PC's central processing unit to enhance multimedia performance and accelerate
the computationally intensive operations and processing requirements necessary
to perform advanced multimedia applications. The Company focuses primarily on
the sale of its products to major OEMs, and works closely with its component
suppliers and OEM customers to develop products that are responsive to
technological trends and consumer demand. STB manufactures substantially all of
its products at its ISO 9002 certified facility in Juarez, Mexico, which the
Company believes enables it to respond more quickly to changing customer needs,
maintain product quality and achieve economies of scale.
The Company's multimedia subsystem product line includes a wide selection of
multimedia accelerator subsystems (also referred to as "graphics add-in cards")
designed primarily for use in mid to high-end PCs. STB's multimedia accelerator
subsystems enable users to take advantage of true-color graphics, 3D and other
video features found in the latest PC operating systems (such as Microsoft
Windows 95 and Windows NT) and in multimedia applications. The Company sells its
multimedia subsystem products to major OEMs and, to a lesser extent, to
commercial customers, such as retailers, distributors and direct-mail companies.
The Company is broadening its relationships with OEMs beyond the sale of
multimedia accelerator subsystems to include the sale of other complementary
multimedia subsystems, such as DVD decoder subsystems, PC/TV convergence
subsystems and sound cards, and is evaluating the production of motherboards
that incorporate multimedia capabilities. Sales of multimedia subsystems to OEMs
represented approximately 85% and 79% of the Company's total net sales for the
1998 first fiscal quarter and the fiscal year ended October 31, 1997,
respectively. STB's OEM and commercial customers include Gateway 2000, Dell,
Compaq, International Business Machines Corporation ("IBM"), Best Buy Co., Inc.
("Best Buy"), CompUSA Inc. ("CompUSA"), Tech Data Corporation, Ingram Micro,
Inc. and Merisel, Inc.
STB's specialized technology products include products designed to enable a
single computer to control the display of up to 32 monitors and a recently
introduced line of flat panel display products. These products apply proprietary
software and hardware designs to industry standard components to deliver
solutions tailored to customers' needs. STB sells its specialized technology
products primarily to resellers, the workstation groups of OEMs and corporate
customers for specialized applications in the financial services, hospitality,
factory automation, transportation and emergency response industries. Customers
for STB's specialized technology products include Reuters Limited, Compaq and
LodgeNet Entertainment Corporation.
INDUSTRY
According to Dataquest, an estimated 97.3 million PCs will be shipped
worldwide in 1998, compared to 83.1 million units in 1997 and 70.9 million units
in 1996. A substantial portion of the PCs shipped in recent periods incorporate
high performance Intel Pentium, Pentium Pro and Pentium II processors and
support multimedia functionality, including CD-ROM storage and playback,
high-resolution graphics, digital video and audio and, in most systems, hardware
3D acceleration and telecommunications. The evolution of these
multimedia-enabled PCs has been driven by the proliferation of high performance
hardware, operating systems like Microsoft Windows 95 and Windows NT, the
popularity of the Internet and the growth in the number of consumer and business
applications featuring greater use of graphics, video and sound.
The PC market continually demands more sophisticated multimedia products as
new technologies evolve and enter the mainstream. Intel's incorporation of the
MMX extended instruction set in its microprocessors, as well as its recent
introduction and support of the Accelerated Graphics Port ("AGP"),
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reflect the demand for higher CPU multimedia functionality and better
integration between the CPU and the multimedia subsystem. These architectural
enhancements, in combination with evolving digital standards such as MPEG-2
decompression, Dolby Digital audio and DVD storage, are establishing the PC as
the enabling platform for digital television, video teleconferencing and other
emerging multimedia capabilities.
Multimedia applications typically place substantial processing demands on
a PC's CPU, often degrading system performance. The processing burden on the
CPU can be reduced by offloading the computationally intensive multimedia
processing functions to specialized graphics and other multimedia subsystems.
This allows the PC's CPU to address other functions and improves the PC's
overall performance. Offloading multimedia processing functions can be
achieved either through the placement of subsystems on the motherboard or the
use of add-in subsystems. Motherboard implementations are typically less
expensive, but currently most motherboards provide lower levels of
functionality and performance than multimedia subsystems. Currently, add-in
subsystems are more expensive, but generally support higher levels of
functionality and provide a higher degree of flexibility in PC configuration
because PC manufacturers can stabilize their motherboard configurations and
add multimedia subsystems that suit end-user demands. Consequently, using
add-in subsystems, PC manufacturers can more rapidly integrate new
technologies into their product lines and meet a range of price and
performance requirements.
Historically, PC manufacturers continuously have introduced more powerful
PCs while maintaining relatively constant prices. Recently, PC manufacturers
introduced PCs at lower price points, in particular below $1,000. OEMs are able
to meet some of the cost requirements for the lower cost PC market by reducing
the complexity of their products. To this end, OEMs have begun to integrate
functionality previously provided by separate subsystems, including multimedia
subsystems, onto the motherboard.
The accelerating pace of technological advancement and the demand by
consumers for more functionality have required OEMs to deliver technological
innovation to the market more quickly. Consequently, PC manufacturers must
introduce new PC models to the market more frequently. Accelerating
time-to-market demands have made it more difficult for OEMs to devote the
resources necessary for the timely internal development of multimedia
subsystems incorporating the latest innovations. Furthermore, many OEMs are
expanding their product lines in response to consumer demand for a broader
range of price and performance options. As a result, many OEMs have recently
expanded their product lines by outsourcing their multimedia subsystem
development needs to those suppliers able to meet their time-to-market and
performance requirements with high quality, cost-effective solutions.
SOLUTION
STB delivers to its customers innovative multimedia subsystems and
specialized technology products designed to meet increasing performance
requirements at cost-effective prices and on a timely basis. By working
closely with component suppliers and OEM customers, the Company is able to
develop innovative products that are responsive to product development trends
and consumer demands. As OEM customers communicate desired features for next
generation products, STB uses its close supplier relationships and its
technical and marketing expertise to determine the most appropriate
components to meet required price and performance specifications. By
maintaining direct control over production, the Company believes it can
respond more quickly to changing customer needs and better control quality
and costs. The Company believes that the combination of its strong
relationships with leading-edge graphics controller chip suppliers and its
OEM customers, coupled with software and hardware design expertise and
in-house manufacturing capabilities, enables the Company to deliver to its
customers a time-to-market advantage over competing solutions.
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STRATEGY
The Company's goal is to become the leading supplier of multimedia
accelerator subsystems and certain other multimedia subsystems for PCs. The
major elements of the Company's strategy are as follows:
- CONTINUED FOCUS ON OEM CUSTOMERS AND OEM SALES CHANNEL. The Company
focuses on its OEM customers, and, in particular, several of the largest
OEMs, as evidenced by significant increases in net sales within this
channel and the proportion of net sales within this channel during the
past several years. During fiscal year 1997, approximately 79% of the
Company's net sales were realized through its OEM channel, with Gateway
2000, Dell and Compaq accounting for 35%, 20% and 11% of net sales,
respectively. The Company believes that by developing and maintaining
close relationships with leading PC OEMs, it is better able to anticipate
the demands of its OEM customers, understand market trends and accelerate
product development to address the requirements of its customers.
- CONTINUED FOCUS ON MULTIMEDIA ACCELERATOR SUBSYSTEM MARKET AND OTHER
EMERGING MULTIMEDIA OPPORTUNITIES. The Company intends to continue to
focus its efforts on the multimedia accelerator subsystem market, where it
has consistently demonstrated its ability to introduce multimedia
accelerator subsystems designed to satisfy rapidly evolving and
increasingly demanding performance standards. Furthermore, the Company
intends to leverage its strong relationships with leading-edge graphics
controller chip suppliers and its OEM customers, its software and hardware
expertise, and its in-house manufacturing capabilities to become the
provider of choice to OEMs for other multimedia subsystem products such as
DVD decoder subsystems, PC/TV convergence products and sound cards. In
addition, the Company is actively soliciting orders for motherboards that
incorporate graphics circuitry. In the event that the Company secures an
order, the Company will undertake to design, develop and manufacture
motherboards that deliver multimedia capabilities.
- VALUE-ADDED ENGINEERING EXPERTISE. The Company's experienced software and
hardware engineers provide STB with industry-leading design expertise. The
Company intends to apply its engineering expertise to respond more quickly
to customer requirements, anticipate trends and advances in its industry
and expand its product line to take advantage of new technology
applications. During the past several years, the Company's products have
won industry awards from numerous publications including PC MAGAZINE, PC
WORLD, WINDOWS MAGAZINE, PC PROFESSIONAL and PC COMPUTING.
- CONTROL OF MANUFACTURING. The Company believes that it is the only major
independent supplier of multimedia accelerator subsystems that
manufactures all of its own products rather than outsourcing its
manufacturing operations. The Company believes that having its own
manufacturing facility incorporating automated SMT in Juarez, Mexico
enables it to maintain lower manufacturing costs, meet expedited customer
delivery schedules, adjust quickly to changes in product orders, achieve
shorter production cycles and accommodate modified or unusual design
specifications, while at the same time ensuring product quality and
reliability. The Company is in the process of expanding its Juarez plant
to increase its production capacity.
- SELECTIVE PURSUIT OF ADDITIONAL SALES CHANNELS. In addition to expanding
its OEM sales channel, the Company intends to continue its efforts to
further penetrate the commercial market. The Company believes that its
experience in meeting the standards that its OEM customers demand better
positions the Company to provide competitive products in the commercial
market. The Company believes that increasing awareness of the STB brand
name, due in part to its penetration into the OEM sales channel, has
strengthened its position in the commercial market. The Company also seeks
to leverage its expertise acquired by developing and manufacturing
multimedia subsystem products in order to develop and manufacture its
specialized technology products. The Company believes it is one of the
world's largest suppliers of specialized technology products and intends
to
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continue marketing these products to current customers, as well as to new
customers in the same and other targeted industries.
- CONTROLLER CHIP INDEPENDENCE. Unlike some of its competitors, the Company
designs its products after evaluating controller chips produced or under
development by a number of leading suppliers. The selection of a
controller chip is based on competitive factors including performance,
cost, compatibility and reliability of supply. The Company believes that
outsourcing rather than internally designing, developing and manufacturing
controller chips allows it to consistently develop products incorporating
the latest technological advances. Moreover, similar to some of the
reasons driving the Company's OEM customers to purchase subsystems from
the Company, STB is able to leverage the substantial expenditures made by
developers of controller chips, achieve component flexibility and decrease
the time and expense required to develop new products.
PRODUCTS
The Company divides its products into two categories: multimedia subsystem
products and specialized technology products. From its entry-level to its most
sophisticated products, the Company offers its customers products that enhance
the graphics, video and audio capabilities for an increasingly broad range of PC
configurations and applications.
MULTIMEDIA SUBSYSTEM PRODUCTS
The Company's multimedia subsystem products include a full range of
multimedia accelerator subsystems at various price points, as well as other
multimedia subsystem products.
MULTIMEDIA ACCELERATOR SUBSYSTEMS. Substantially all of the Company's
multimedia accelerator subsystems are capable of displaying full-motion video
images on a PC. A typical multimedia accelerator subsystem consists of a printed
circuit board configured with a graphics controller chip, memory chips and
software drivers and utilities. The Company believes that optimal graphics
enhancement and video display require custom software and hardware design that
maximize the performance and features of a PC system. The Company distinguishes
its products from those of its competitors through its proprietary software
drivers and utilities and through the hardware design of its multimedia
accelerator subsystems. The Company incorporates its proprietary STB Vision
software utility on many of its multimedia accelerator subsystem products. STB
Vision supports various chipsets, with a consistent interface that supports
multiple languages, including English, German, French, Dutch, Polish, Japanese,
Italian and Spanish, and enhances the performance of a multimedia accelerator
subsystem.
The Company's multimedia accelerator subsystem product line is comprised of
products with varying degrees of performance based on display speed, resolution,
color depth and 2D/3D capability. The display speed of a multimedia accelerator
subsystem is determined primarily by the graphics controller chip and software
drivers, while display resolution and color depth are determined primarily by
the amount of display memory. The Company offers a wide array of multimedia
accelerator subsystems that are compatible with the bus architectures prevalent
in today's market.
By offering a complete line of multimedia accelerator subsystems, the
Company can better establish and build relationships with OEMs. The Company
currently offers a high-end professional multimedia accelerator subsystem
product line that features a choice of several types of rasterization engines
(devices that generate a 2D image from a 3D geometrical model) from 3Dlabs Inc.,
Ltd. ("3Dlabs"), memory ranging from 8MB to 40MB and separate geometry
co-processors. This product line is optimized to support the Windows NT
operating system and OpenGL 3D graphics and is targeted at customers with the
most demanding 3D requirements, such as simulation, 3D modeling and animation
development.
The Company also offers multimedia accelerator subsystem products targeted
at mainstream customers. The top of STB's mainstream product line is the
Velocity 128, which has 4MB of Synchronous
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Graphics RAM ("SGRAM") and incorporates the NVIDIA Corporation ("NVIDIA") RIVA
128 graphics controller chip. The Company offers a number of mid-range products,
including products with 2D and 3D graphics capability, which generally contain
from 1MB to 4MB of EDO or Synchronous DRAM ("SDRAM") memory. For fiscal year
1997, approximately 63% of the multimedia accelerator subsystems shipped by the
Company had hardware-assisted 3D capability and in the 1998 first fiscal quarter
approximately 89% of the multimedia accelerator subsystems shipped by the
Company had hardware-assisted 3D capability.
OTHER MULTIMEDIA SUBSYSTEM PRODUCTS. In addition to multimedia accelerator
subsystems, the Company offers complementary multimedia subsystem products that
incorporate various emerging technologies.
- DVD DECODER SUBSYSTEMS. During the 1997 third fiscal quarter, STB began
shipping to OEMs products designed to enable the use of DVD drives in PCs.
The DVD is a 5 1/4-inch diameter disk that looks almost identical to the
CD-ROM. However, due to advances in recording technology, the capacity for
the DVD is greater than 4,770 megabytes, as compared to 680 megabytes on
the CD-ROM. Full motion video and audio data that is recorded on the DVD
is compressed using the MPEG-2 standard, and the audio data is digital
data using Dolby Digital processing. This video and audio data must be
processed as it goes from the DVD drive to the PC memory. STB provides the
DVD decoder subsystem that is required to process this data. At least one
of STB's first two DVD decoder subsystem products, DVD Theater and Impact
DVD, is used by Gateway 2000, Dell and Compaq. Since the drive mechanism
for the DVD is very similar to current CD-ROM drives, the cost of these
high-capacity drives will likely approach that of the CD-ROM drives during
late 1998. Since DVD drives can read current CD-ROMs, industry analyst
International Data Corporation ("IDC") predicts that the DVD will begin
replacing the CD-ROM during 1998 and will gain market share relative to
the CD-ROM over the coming years. According to IDC, approximately 2.3
million DVD drives were sold into the PC market in 1997 and approximately
83.8 million units will be sold into the PC market in the year 2000.
- PC/TV CONVERGENCE SUBSYSTEMS. The Company's PC/TV convergence subsystems
are capable of receiving analog television broadcasts or cable
transmissions and producing a full-motion television display on a PC
monitor. One important feature of these products is that they allow users
to access Intel Intercast, which broadcasts within an analog television
transmission signal and provides Internet-like information to supplement
television programs. These products are sold through the Company's OEM
channel and through commercial retailers such as Best Buy and CompUSA. The
Company's Video Rage II television tuner/multimedia accelerator is used in
Gateway 2000's Destination PC/TV product line.
- SOUND CARDS. A sound card, or "audio adapter add-in board," converts
digital audio information into high-fidelity, stereo-quality sound. A
sound card incorporates an audio controller chip, memory chips and
software drivers and utilities in configurations designed to produce high
quality sound. The Company began shipping sound card products in July 1996
in response to OEM customer demand for this additional product offering.
The Company believes that its sound cards complement its multimedia
accelerator subsystem products.
The Company anticipates that its multimedia subsystem product line will
continue to evolve based upon its assessment of strategic multimedia
opportunities and the continuing demand for new generations of video and audio
solutions from OEMs and end-users. The Company's multimedia subsystem products
tend to have relatively short life cycles, reflecting the dynamic nature of
technological development within the PC industry. Historically, OEMs have
introduced new system configurations as often as twice a year, and the Company
must design, develop, manufacture and deliver its new products to comply with
OEMs' schedules. The life cycle for a multimedia accelerator subsystem typically
is six to nine months (plus a few additional months of sales for certain
products in the commercial market).
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A substantial number of PCs incorporate graphics circuitry on the
motherboard, particularly in lower cost PCs. The Company is actively soliciting
orders for such motherboards from OEMs and, in the event that the Company
secures an order, the Company will undertake to design, develop and manufacture
motherboards that deliver multimedia capabilities. There can be no assurance
that the Company will obtain any such orders or, if it does secure any orders,
such products can be produced in profitable quantities, if at all. The Company
anticipates that it will continue to expend efforts with respect to motherboards
and other potential products. See "Risk Factors--Entry Into New Product
Markets."
The Company's current major multimedia accelerator subsystems and other
multimedia subsystem products include the following:
<TABLE>
<CAPTION>
PRODUCT NAME DESCRIPTION STATUS
<S> <C> <C>
PROFESSIONAL 3D MULTIMEDIA ACCELERATOR SUBSYSTEMS
Glyder MP High performance professional 3D multimedia accelerator Shipping
subsystem with dual 3Dlabs GLINT MX graphics processors
and GAMMA geometry co-processor using 8MB of VRAM and
32MB of DRAM
Glyder MX High performance professional 3D multimedia accelerator Shipping
subsystem with a 3Dlabs GLINT MX graphics processor and
GAMMA co-processor using 8MB of VRAM and from 8MB to 32MB
of DRAM
Glyder TX Gold Mid-range professional 3D multimedia accelerator Shipping
subsystem with a 3Dlabs GLINT TX graphics processor with
8MB of VRAM plus 8MB of DRAM
Glyder Max - II Entry-level professional 3D multimedia accelerator Shipping
subsystem with a 3Dlabs Permedia II graphics processor
with 8MB of SGRAM
3D MULTIMEDIA ACCELERATOR SUBSYSTEMS
Velocity 128 Upper mid-range multimedia accelerator subsystem with 128 Shipping
bit architecture with an NVIDIA RIVA 128 graphics
processor using 4MB of 128 bit SGRAM
Velocity 3D Upper mid-range multimedia accelerator subsystem with an Mature
S3 ViRGE VX graphics processor using 4MB or 8MB of EDO
RAM
Nitro 3D Mid-range multimedia accelerator subsystem with an S3 Shipping
ViRGE GX graphics processor using either 2MB or 4MB of
SDRAM
Powergraph 64 3D Entry-level multimedia accelerator subsystem with an S3 Mature
ViRGE graphics processor using either 2MB or 4MB of SDRAM
</TABLE>
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<TABLE>
<CAPTION>
PRODUCT NAME DESCRIPTION STATUS
<S> <C> <C>
2D MULTIMEDIA ACCELERATOR SUBSYSTEMS
Lightspeed 128 Mid-range multimedia accelerator subsystem with a Tseng Mature
Labs ET6000 graphics processor using 2 or 2.25 MB of
SDRAM
Nitro 64 Video Entry level multimedia accelerator subsystem with a Mature
Cirrus Logic CL5446 graphics processor using either 1 MB
or 2MB of EDO DRAM
Powergraph 64 Video Entry level multimedia accelerator subsystem with an S3 Mature
Trio V2 graphics processor using either 1 MB or 2MB of
EDO DRAM
DVD DECODER SUBSYSTEMS
DVD Theater An all hardware DVD solution using an IBM Shipping
Microelectronics MPEG decoder chip
Impact DVD A hybrid hardware/software DVD solution using a Chromatic Shipping
Research Mpact M1 media processor supporting software for
MPEG-2 and Dolby Digital audio decoding
PC/TV CONVERGENCE SUBSYSTEMS
Video Rage II 3D multimedia accelerator subsystem using STB's "Hub" Shipping
architecture with television tuner, TV output and
optional DVD module (similar to DVD Theater)
TV-PCI TV tuner adapter with the capability of receiving cable Shipping
or over-the-air analog television broadcasts
SOUND CARDS
Wave Up Audio wavetable, upgrade card for incorporation on Shipping
certain Intel-logic motherboards
</TABLE>
SPECIALIZED TECHNOLOGY PRODUCTS
The Company's specialized technology products apply proprietary software
and hardware designs to industry standard components to deliver tailored
solutions for specific problems, and are characterized by significantly lower
unit sales volumes and relatively higher unit prices and gross profit margins
than the Company's multimedia subsystem products. The Company's specialized
technology products are sold primarily to resellers, the workstation groups
of OEMs and corporate customers for specialized applications in a number of
industries, including the financial services, hospitality, factory
automation, transportation and emergency response industries. The Company's
specialized technology products include products designed to enable a single
computer to control the display of up to 32 monitors. In addition, STB also
recently introduced a line of flat panel display products. The Company
believes it is currently one of the world's largest suppliers of
multi-monitor products.
The Company offers two families of multi-monitor multimedia accelerator
subsystem products distinguished by the resolution of the monitors with which
they are designed to be used. The MVP family of products is used with
high-resolution monitors, and the Channel family is used with low-resolution,
television-type monitors. An important component that the Company incorporates
into the MVP family of products is its "virtual screen" software driver (which
enables multiple monitors to act as a single screen, displaying numerous
"windows" of information through only one computer) and its Mediator utility
(which
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enables the user to control the placement of applications on the available
displays). Several financial institutions presently employ this capability in
their trading rooms, where large amounts of information must be continuously
available to traders. The Company has made several technological advances to its
existing MVP product line, including the introduction of full motion digital
video scalers, live video/TV tuner input ports (based on the PCI bus standard)
and new video graphics drivers and utilities. Channel products are used in
applications, such as airport arrival and departure displays, where lower cost
and larger display size are more important than clarity of display. Channel
products are also used to facilitate the selection of on-demand programming for
hotel room televisions.
The Company began shipping the Galileo 15, its first flat panel display
product, during the first fiscal quarter of 1998. The Galileo 15 is a 15-inch,
thin film transistor ("TFT") display. This flat panel display product consists
of (i) a multimedia accelerator subsystem that includes special circuitry to
transmit graphics and video data to digital flat panels, (ii) a receiver card to
receive the transmitted information, (iii) STB's custom driver and utility
software to allow the display subsystem to work with Windows NT and Windows 9X
and (iv) the flat panel display housed in STB's proprietary housing and mounting
system. Flat panel display products offer several advantages over cathode ray
tube ("CRT") glass monitors. In particular, flat panel display products are much
thinner, (two to six inches thick as compared to the foot or more required for
CRTs), generate less heat than CRTs and cause less strain on the user's eyes.
Flat panel display systems are currently three to five times more expensive than
an equivalent CRT system but are expected to decline in price in 1998 and 1999.
The Company also recently introduced several specialized technology products
that incorporate digital video features that meet the MPEG-2 decompression
standard and in some cases incorporate a multimedia accelerator subsystem. These
products, some of which have multi-monitor control capability, enable
applications such as video-on-demand, storing video data for viewing at a later
time and receiving MPEG-2 encoded material over direct broadcast satellite or
advanced technology cable. There can be no assurance that such products can be
produced in profitable quantities, if at all. See "Risk Factors--Entry Into New
Product Markets."
Listed below are the principal industries and applications for the Company's
specialized technology products:
<TABLE>
<CAPTION>
INDUSTRY APPLICATION
<S> <C>
Financial services Support of simultaneous display of multiple data sources on multiple
monitors from a single PC for use by financial traders
Hospitality Control of display on hotel room televisions to allow guests to view
movie choices, review bill prior to checking out and obtain other
information
Factory automation Dual-monitor graphical man-machine interface for factory machinery
Transportation Flight arrival and departure information
Emergency response "911" emergency call center displays to allow the operator to follow
multiple calls simultaneously, plus view a map of the emergency
location on a separate monitor
</TABLE>
In addition, on occasion, STB provides contract assembly services for third
parties, adding incremental gross profit and contributing to the absorption of
overhead by increasing utilization of manufacturing capacity. Revenues from
these contract assembly services constituted approximately 1% of the Company's
net sales in fiscal year 1997.
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DESIGN AND DEVELOPMENT
The timely development and introduction of new products is essential to
meeting the performance requirements of OEM customers and reinforcing the
Company's competitive position in its other sales channels. The Company works
closely with its suppliers and OEM customers to develop new products that
satisfy specific OEM product requirements, such as performance and display
features. The Company's software and hardware engineers design, develop and test
the new product prototypes, selecting the most appropriate graphics controller
chips, memory chips and other components for the Company's products. The
Company's design and development personnel have enabled STB to repeatedly
deliver the latest technologies to the OEM market.
In order to achieve customer acceptance for its products, the Company must
ensure that its products can function properly in a variety of PC system
configurations and with most popular commercial application software and
operating systems. In addition to ensuring that the Company's products work in a
variety of configurations and with most applications, STB's compatibility lab
also compares the test performance of the Company's products against that of
competitors' products. STB submits most of its products for compatibility and
performance testing to Microsoft's WHQL. WHQL certification typically requires
up to several weeks to complete and entitles the Company to claim that a
particular product is "Designed for Microsoft Windows." The Company's OEM
customers typically require the Company's products to be Designed for Microsoft
Windows prior to making volume purchases. STB also sends product prototypes to
OEM customers for performance and compatibility testing and to the Federal
Communications Commission (the "FCC") and the Cenelec branch of the European
Economic Community (the "EEC") for "CE Certification." See "--Government
Regulations." After any necessary modifications are made to a product, it is
released for production.
The Company believes that the strength of its engineering resources is
critical to its competitiveness. The Company has substantially increased its
engineering and technical resources, so that as of January 31, 1998 it had a
total engineering staff of 92, including 16 hardware engineers and 43 software
engineers. The Company also has established software engineering centers in
Houston, Texas; Eugene, Oregon; and Belfast, Northern Ireland and plans to open
a software engineering center in Austin, Texas in the 1998 second fiscal
quarter. The Company's engineering resources are critical to its strength in
responding quickly to customer requirements, anticipating trends and advances in
its industry and expanding its product line to access new technologies and
applications. See "--Products" and "Risk Factors--Dependence on Key Personnel."
The Company has won numerous awards from recognized industry magazines,
including PC MAGAZINE, PC WORLD, WINDOWS MAGAZINE, PC PROFESSIONAL AND PC
COMPUTING. STB's Velocity 128 product has received greater recognition from
industry publications than any other product in Company history. The Velocity
128 recently won the PC MAGAZINE Editor's Choice award for business computing,
primarily as a result of its versatility, with outstanding performance in 3D
graphics plus video acceleration. In addition, PC Computing gave the Velocity
128 its five star award, plus the prestigious Most Valuable Product award for
the best product of its class for 1997. In addition to the excellent results in
the U.S. trade press, the Velocity 128 has won awards in graphics subsystem
reviews from PC WELT in Germany, PC ACHAT and WINDOWS NEWS in France, COMPUTER
BUYER and PERSONAL COMPUTER WORLD in the U.K., and CHIP in Italy.
SUPPLIERS
The Company believes its close relationships with its component suppliers
are essential to producing low-cost, innovative products and maintaining short
design-to-market cycles. The Company's primary products, multimedia accelerator
subsystems, are printed circuit boards that contain a number of components,
including a graphics controller chip, memory chips, logic chips, capacitors and
resistors. The graphics controller chip, which regulates the information that is
displayed on the PC monitor, and the memory chip, which stores graphics
information for display, are the most important components in
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<PAGE>
determining the functions and manufacturing cost of a multimedia accelerator.
The Company's other multimedia subsystem products generally contain components
comparable to those found on an STB multimedia accelerator subsystem but with
different types of controller chips.
The Company purchases various types of controller chips directly from sole
suppliers, including S3, Incorporated ("S3"), Cirrus Logic, Inc., 3Dlabs, nVIDIA
and IBM. These controller chips typically include related software drivers,
which the Company's software engineers often enhance for use in STB products. In
addition to controller chips and their related software drivers, several other
components that are used in the Company's products are obtained from single or
limited sources. The Company has no guaranteed supply arrangements with any of
its suppliers, and there can be no assurance that current suppliers will be able
to meet its requirements. While the Company believes that with respect to its
single and limited source components it could, in most cases, obtain similar
products from other resources, it likely would be required to pay significantly
more for such products, alter product designs to use alternative products or
reduce or delay its production of the related products. As a result of delays in
the delivery of components, lack of available components or the lack of
compatible software drivers from component vendors, the Company has in the past
experienced difficulty meeting its own scheduled shipment dates to customers,
and such difficulties are likely to recur. See "Risk Factors--Dependence on
Suppliers."
The Company purchases memory chips from a number of manufacturers, including
IBM, Mosel Vitelic, Hyundai Electronics Industries Co., Ltd., Samsung
Electronics Co., Ltd. and Toshiba Corporation. Memory chips are less expensive
if purchased directly from the manufacturer, but manufacturers sometimes do not
produce sufficient quantities of memory chips to satisfy market demand. In times
of restricted supply of memory chips, manufacturers have in the past, and may in
the future, allocate the sale of their memory chips to customers based, among
other factors, upon purchase volumes and the customer's creditworthiness. The
Company's ability to purchase memory chips from distributors, and possibly on
the spot market, provides an alternative, but more costly, source of supply if
the Company cannot obtain necessary supplies from memory chip manufacturers. See
"Risk Factors--Dependence on Suppliers."
The Company's unit component costs tend to be volatile, and a significant
increase or decrease in unit component costs may have a significant effect on
the Company's results of operations. The Company may experience component cost
increases in the future, which could have a negative effect upon gross profit
margins and gross profits. See "Risk Factors--Dependence on Suppliers."
MANUFACTURING
STB considers its ability to manufacture high quality products at a low
cost to be critical to its competitiveness. STB began manufacturing at its
facility in Juarez, Mexico in 1988 and presently conducts substantially all
of its manufacturing operations at this ISO 9002 certified facility. STB
believes that by operating its own manufacturing facility, it is able to
respond more quickly to changing customer needs and better control product
quality and cost. By locating its manufacturing facility in Juarez, Mexico, the
Company benefits from low labor and shipping costs, as well as proximity to
its headquarters in Richardson, Texas. The Company has increased its
manufacturing capacity in Mexico to approximately 500,000 boards per month,
depending on product mix and complexity. This increase in manufacturing
capacity has been achieved primarily through the addition of new high-volume
automated SMT equipment capable of manufacturing double-sided products, as
well as through existing equipment upgrades. The Company believes that the
addition of this equipment has increased not only its manufacturing capacity
but also the speed and efficiency of its manufacturing operations. With this
additional equipment, the Company believes its manufacturing capacity is
sufficient for its current level of operations. Nevertheless, the Company is
currently installing additional high-volume automated SMT equipment, with
capabilities to manufacture double-sided circuit-boards to further increase
its manufacturing capacity. In addition, the Company recently relocated a
portion of its manufacturing operations to a larger facility adjacent to its
present manufacturing facility,
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which should provide the Company with the ability to further increase its
manufacturing capacity, if necessary. See "--Properties" and "Risk
Factors--Single Manufacturing Facility."
The Company emphasizes a comprehensive quality control program at each step
in the manufacturing process. The manufacturing process involves both automated
and manual placement and soldering of components onto the circuit board. After
final assembly is completed, each product unit undergoes an elevated temperature
burn-in, a process simulating a PC environment in which the product is placed in
an oven and connected to an electrical source for several hours. After each
product has been burned-in, it is placed through a series of diagnostic tests to
detect defects. The Company believes its comprehensive testing procedures
contribute significantly to its ability to satisfy customers' stringent product
performance and reliability requirements. The Company generally offers a limited
warranty ranging from 15 to 39 months on multimedia subsystems sold to OEMs, a
five-year limited warranty on its specialized technology products and a limited
lifetime warranty on multimedia subsystems sold to commercial customers.
While the Company conducts substantially all of its manufacturing operations
at its facility in Juarez, Mexico, it also maintains a smaller facility at its
Richardson, Texas headquarters to develop and test prototypes and for first-run
testing of new products. The Company also maintains a separate facility in
Richardson, Texas for technical support and product repair. In addition, the
Company burns-in and functionally tests a small portion of its products
assembled in Mexico at its Richardson, Texas facilities.
SALES AND MARKETING
SALES. The Company presently sells its products in North America, most
countries in Europe and certain countries in the Pacific Rim. U.S. sales
accounted for approximately 74% and 73% of the Company's net sales in the 1998
first fiscal quarter and fiscal year 1997, respectively.
The Company organizes its Richardson, Texas based North American sales force
on the basis of its three sales channels. The OEM sales force provides direct
sales coverage of selected OEMs. The commercial market sales force focuses on
marketing and sales to retailers, distributors and direct mail companies, and
also coordinates the efforts of the Company's independent sales representatives
for the commercial channel. The specialized technology sales force coordinates
its efforts with the Company's engineering staff to create interest among
prospects and customers and to determine product features.
The Company's North American sales force generally operates in tandem with
the Company's independent sales representative network in the commercial market.
These sales representatives typically are retained based on relationships they
have with potential customers. The Company believes that the services of
independent sales representatives are important for obtaining and maintaining
relationships with certain commercial customers. The Company's independent sales
representatives generally do not sell products that compete with those products
they handle for the Company. In general, the Company does not utilize
independent sales representatives for its OEM or specialized technology
products.
The Company's European sales force, headquartered in London, is responsible
for OEM, commercial and specialized technology product sales in the region. The
European sales force has greater direct sales coverage responsibility than the
North American sales force because STB employs fewer European independent sales
representatives. The Company's marketing and sales efforts for countries outside
of North America and Europe are coordinated from STB's Richardson, Texas
offices.
The Company's net sales to OEMs, the commercial market and specialized
technology customers represented approximately 85%, 9% and 5% of the Company's
total net sales in the 1998 first fiscal quarter, and approximately 79%, 12% and
8% of the Company's total net sales in fiscal year 1997. The Company's top three
customers accounted for approximately 76% of net sales during the 1998 first
fiscal quarter, with Gateway 2000, Dell and Compaq accounting for approximately
40%, 32% and 4%, respectively, of the Company's net sales for such period. The
Company's top three customers accounted
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for approximately 66% of net sales during fiscal year 1997, with Gateway 2000,
Dell and Compaq accounting for approximately 35%, 20% and 11%, respectively, of
the Company's net sales for such period. In the commercial segment, the Company
recently has increased its marketing efforts in the distribution segment of the
commercial market. The Company attributes the recent increase in its commercial
channel sales to its increased focus on distributors. The Company sells products
to the commercial market through specialty retailers, such as Best Buy and
CompUSA, and commercial distributors, such as Tech Data Corporation, Ingram
Micro, Inc. and Merisel, Inc. The Company sells its specialized technology
products primarily to resellers, the workstation groups of OEMs and corporate
customers in the financial services, hospitality, factory automation,
transportation and emergency response industries, which include customers such
as Reuters Limited, Compaq and LodgeNet Entertainment Corporation.
The Company generally allows returns in the form of stock rotations only of
products sold to commercial customers such as distributors and retailers. The
Company's current stock rotation policies typically permit a commercial channel
customer to return approximately 10% of the products purchased from STB within
the previous 90 days if it concurrently places an order for other STB products
of equal or greater value. The Company usually is able to resell returned
products. In addition, the Company typically provides price protection to
commercial customers in the form of credits for price reductions on products
remaining in customer inventories at the time price protection is granted. See
"Risk Factors--Stock Rotation and Price Protection Risks" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Overview."
The Company currently sells all its products at prices denominated in U.S.
dollars, but expects to sell its products in other currencies in the future,
thereby increasing its currency exposure risk. Additionally, a substantial
portion of the Company's manufacturing labor costs are incurred in Mexican
pesos. See "Risk Factors--International Operations."
MARKETING. STB promotes its products to OEM customers and specialized
technology customers primarily through the efforts of the Company's sales force.
The Company believes such direct promotion enables it to develop products that
are more in line with its customers' requirements and market trends. The Company
supplements these efforts by promoting its products at industry trade shows. The
Company's commercial channel marketing efforts include advertising in recognized
industry trade magazines and cooperative promotional efforts with retailers and
commercial distributors.
TECHNICAL SUPPORT
The Company believes that providing technical support to its customers is
essential to its ongoing competitiveness. The Company maintains a toll-free
telephone line in the U.S. to provide technical support for purchasers of its
specialized technology products as well as for purchasers of its multimedia
subsystems sold in the commercial market. STB also maintains electronic bulletin
board systems in Richardson, Texas and London, England to provide customers with
new software drivers and utilities that update the capabilities of the Company's
products. The Company's technical support group provides the software on disk at
a nominal charge to customers who are unable to obtain updates through the
electronic bulletin board system. STB provides software driver and utility
updates for its products to maintain compatibility with new versions of
software, increasing their useful life. The Company also prepares user manuals
and other product documentation that it believes are informative and easy to
understand.
COMPETITION
The market for the Company's products is intensely competitive and the
Company expects competition to increase. The Company competes with independent
manufacturers of brand name multimedia subsystem products, as well as contract
manufacturers and certain OEM manufacturing operations that produce multimedia
subsystem products. The Company's major competitors in the multimedia subsystems
market include Diamond Multimedia Systems, Inc., ATI Technologies, Inc., Matrox
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Graphics, Inc., ELSA GmbH, AccelGraphics, Inc., Creative Labs, Inc., CEI, Inc.,
Number Nine Visual Technology Corporation, and Hauppauge Computer Works, Inc. In
the specialized technology product market, the Company's major competitors
include Colorgraphic Communication Corporation, Datapath Ltd., and Appian
Graphics Corp.
In addition to its major competitors, certain of the Company's suppliers
sell graphics controller chips directly to OEMs for use in internally produced
multimedia accelerator subsystems, other multimedia subsystems or on
motherboards. If one or more of the Company's significant OEM customers were to
commence or increase internal production of multimedia accelerator subsystems or
other multimedia subsystems, the Company's business, financial condition and
results of operations could be materially adversely affected. Furthermore,
several major OEMs currently integrate graphics controller chips on the
motherboard of their PCs. If one or more of the Company's major OEM customers
begins to incorporate graphics controller chips or other controller chips onto
motherboards rather than incorporating the Company's products, the Company's
business, financial condition and results of could be operations materially
adversely affected. See "Risk Factors--Dependence on Multimedia Accelerator
Market; Migration to Motherboards."
The Company expects Intel to continue to invest heavily in research and
development and new manufacturing facilities in order to maintain its
position as one of the largest manufacturers of motherboards, and to promote
its product offerings through extensive advertising campaigns designed to
increase brand loyalty by PC users. Intel may, in the future, develop
multimedia subsystems or multimedia-enabled motherboards using its i740 3D
graphics processor, or other graphics controllers, which could directly
compete with products that the Company may develop. In addition, Intel exerts
significant influence over the 3D graphics industry due to the widespread
acceptance of its microprocessor architecture and its development of new
interface architectures such as the AGP bus. Any significant modifications by
Intel to the AGP or future graphics interface architectures could render the
Company's products obsolete, incompatible or less competitive. Any
broad-scale introduction of multimedia subsystems or multimedia-enabled
motherboards or significant modifications to the graphics interface bus by
Intel which the Company is unable to access, and which consequently renders
the Company's products less competitive or reduces their potential market,
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company competes in its markets on the basis of a number of factors,
including the functionality, performance, price reliability and compatibility
of its products, its ability to reach the market quickly with new products,
its ability to meet customer delivery and reliability requirements, the
quality of its technical support and its ability to develop and maintain
relationships with customers and suppliers. Many of the Company's competitors
and potential competitors have greater financial, technical, manufacturing,
marketing, distribution and other resources, greater name recognition and
market presence, and lower cost structures and larger customer bases than the
Company. In addition, some of the Company's competitors manufacture their own
controller chips, which provides these competitors with a significant
advantage over the Company when the internally produced controller chips cost
less or maintain higher price and performance levels than the controller
chips available to the Company from independent suppliers. Furthermore, while
the Company believes it is the only supplier of brand name multimedia
accelerator subsystems that manufactures its own products, some of STB's
competitors internally manufacture other multimedia subsystems, such as sound
cards and PC/TV cards. The rapid pace of change in the industry and markets
in which the Company competes places a premium on the knowledge and
experience of a company's management, engineers and other personnel, and
their ability to continuously develop, enhance and transition new products.
The Company has continued to increase its engineering resources and believes
that its ability to continue adding new engineers to its staff in the future
will affect its competitiveness. See "Risk Factors-- Competition."
INTELLECTUAL PROPERTY
The Company's success depends in part upon its proprietary technology,
including, in particular, its software drivers and utilities and its hardware
designs. The Company primarily relies upon copyright, trademark and trade
secret laws to protect its proprietary technology, and occasionally seeks
patent protection on selected inventions. The Company generally also enters
into nondisclosure agreements with persons to whom it reveals its proprietary
information, such as OEMs that the Company works with, concerning future
products. There can be no assurance that the Company's present protective
measures will be adequate to prevent misappropriation of its technology or
independent third party development of the same or similar technology. Many
foreign jurisdictions offer less protection of intellectual property rights
than the U.S., and there can be no assurance that the protection provided to
the Company's proprietary technology by the laws of the U.S. or foreign
jurisdictions will be sufficient to protect the Company's technology. See
"Risk Factors--Proprietary Technology; Intellectual Property Infringement
Claims." While the Company's competitive position may be affected by its
ability to protect its proprietary information, the Company believes that the
rapid pace of technological change in the multimedia accelerator market will
cause other factors to be more significant in maintaining the Company's
competitive position. These factors include the technical expertise,
knowledge and innovative
40
<PAGE>
skill of the Company's management and technical personnel, name recognition,
timeliness and quality of support services provided by the Company and its
ability to rapidly develop, produce, enhance and market innovative products.
STB generally enters into nondisclosure agreements with suppliers of
components for its products in connection with discussions regarding forthcoming
features of those components. The Company also commonly enters into source code
licensing agreements with suppliers of components that the Company desires to
incorporate into its products.
The Company has pending certain utility and design patent applications on
its flat panel PC monitor products. The Company also has a United States
trademark registration for the STB logo, and claims common law trademark rights
with respect to certain other trademarks.
It is common in the computer industry for companies to assert intellectual
property infringement claims against other companies. As a consequence, the
Company indemnifies some of its OEM customers in certain respects against
intellectual property claims relating to STB's products used by these OEM
customers. If an intellectual property claim were brought against an OEM
customer or the Company and an OEM customer or 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. In addition, the assertion of such claims against one or
more of the Company's vendors could adversely affect the availability from those
vendors of components used by the Company.
Based upon the Company's contractual indemnity of certain of its OEM
customers, several of such customers recently sent the Company notices of
potential indemnity claims as a result of a notice of infringement these OEM
customers had received from a patent owner relating to the asserted infringement
of his patent. Subsequently, the patent owner filed patent infringement lawsuits
in the United States and elsewhere against several of such OEM customers and a
number of other major PC systems manufacturers. The Company provides multimedia
subsystems to such OEM customers for use in their products that are alleged to
infringe on such patent owner's rights. Based upon the Company's preliminary
evaluation of the patent, it does not believe the infringement claims are
meritorious. See "Risk Factors-- Proprietary Technology; Intellectual Property
Infringement Claims."
LEGAL PROCEEDINGS
The Company is a party from time to time to certain legal proceedings
arising in the ordinary course of its business. Although the amount of any
liability that could arise with respect to these proceedings cannot be predicted
accurately, the Company believes any liability that might result from any
existing claims will not have a material adverse effect on the financial
position of the Company.
GOVERNMENT REGULATIONS
The Company's business is regulated by federal, state, local and foreign
authorities. Products produced by the Company are subject to approval by the FCC
and the EEC to assure that they do not interfere with the frequencies of other
consumer electronics products. The Company installs certain filter circuitry on
its products to prevent them from disturbing other frequencies in compliance
with FCC and EEC regulations. To date, regulations applicable to the Company's
business have had no material adverse effect on the Company's business,
financial condition and results of operations. Although historically the Company
has not experienced material delays in obtaining FCC or EEC approval for any of
its products, occasional government budget constraints have caused delays in
obtaining required approval for certain of the Company's products. The Company
believes that any delay in obtaining such approvals could, in turn, result in
delays in making certain shipments on a timely basis and have a material adverse
effect on the Company's business, financial condition and results of operations.
41
<PAGE>
The Company's relationships with its employees at its Mexican manufacturing
facility are regulated by the Mexican Federal Labor Law, which contains detailed
provisions regarding minimum employment conditions and specifies rights that
must be provided to all employees in Mexico. Other Mexican federal laws require
employers to make contributions to the Mexican Social Security System and to
establish and make regular contributions, in specified amounts, to individual
retirement savings and housing accounts at a commercial bank for all employees.
In addition, Mexican federal law requires the payment of substantial severance
amounts, relative to employees' wages, in the event of the termination of a
Mexican employee. Although Mexican laws governing employment relationships are
extensive, aggregate labor costs at the Company's Mexican facility are less than
labor costs would be at a similar facility in the United States. There can be no
assurance, however, that these laws will not be amended or supplemented in the
future to increase the compensation required to be paid to Mexican employees or
the costs of compliance with such laws or that any such change would not have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company's Mexican manufacturing operations are subject to regulation by
various Mexican environmental agencies. In order to ensure compliance, the
Company regularly monitors changes in Mexican environmental laws, and
representatives of environmental agencies periodically inspect the Company's
Mexican facility.
BACKLOG
As of January 31, 1998, the Company's backlog was approximately $43.9
million, as compared to approximately $21.2 million at January 31, 1997. The
Company includes in its backlog accepted purchase orders with respect to which a
delivery schedule has been specified for product shipment within 60 days. The
Company's business is characterized by short-term order and shipment schedules,
and backlog tends to fluctuate substantially from month to month. Generally,
orders constituting backlog are subject to changes in delivery schedule or to
cancellation at the option of the purchaser. The Company's agreements with its
customers typically specify penalties for cancellation of orders within 60 days
prior to shipment. Other factors, including the Company's inability to obtain
components in sufficient quantities, may result in delays in shipment or
cancellation of orders included in backlog. See "Risk Factors--Dependence on
Suppliers." Therefore, although backlog is useful for scheduling production,
backlog as of any particular date should not be considered a reliable measure of
sales for the current or any future period.
EMPLOYEES
As of January 31, 1998, the Company employed 2,689 individuals, of whom
2,282 were employed in operations, 92 in engineering, 76 in sales and marketing
and 239 in administration and finance. Included in the foregoing figures are
2,363 employees in Mexico. Competition for personnel in the PC industry is
intense. The Company believes that its future success will depend in part on its
ability to continue to attract and retain highly skilled technical, marketing
and management personnel. None of the Company's employees is represented by a
labor union or is subject to a collective bargaining agreement. The Company
believes that its relations with its employees are good. See "Risk
Factors--Dependence on Key Personnel; Need for Additional Personnel" and
"--Single Manufacturing Facility."
PROPERTIES
The Company leases a 68,400 square foot facility in Richardson, Texas
(16,200 square feet of which are subleased to the Company pursuant to a sublease
that commenced November 1, 1996 and expires October 31, 1998) that serves as its
headquarters and as a site for product development and testing. The Company also
leases an approximately 21,100 square foot facility located near its
headquarters in Richardson, Texas that is used for technical support, product
development and product repair. The foregoing leases both expire in December
1998.
42
<PAGE>
The Company recently commenced construction of a new 210,000 square foot
headquarters facility in Richardson, Texas to address recent and anticipated
growth requirements. The Company expects that this facility will be completed in
December 1998. At that time, the various operations conducted at its current
facilities in Richardson will be consolidated at the new facility. See "Risk
Factors--Headquarters Relocation" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
The Company currently leases a 79,100 square foot manufacturing facility in
Juarez, Mexico, and recently undertook occupancy of a new 136,800 square foot
manufacturing facility under lease on an adjacent site that provides increased
space and improved layout for manufacturing operations, as well as options to
acquire additional space. The term of the new lease will expire in November 2007
(plus four optional renewal periods of five years each). The Company has
negotiated an extension of its current lease covering the 79,100 square foot
Juarez facility to extend the lease on one-half of the space through June 30,
1998 and through December 31, 1999 for the remainder of the space. See
"Business-- Manufacturing."
Additionally, the Company leases 6,900 square feet of storage space in El
Paso, Texas, under a lease expiring in March 1998. The Company anticipates
replacing this storage space with a 20,800 square foot packaging and shipping
facility, also in El Paso, under a lease expiring in April 2003. The Company
also leases a software development office in Houston, Texas under a lease
expiring in May 1999, a software development office in Eugene, Oregon under a
lease expiring in February 2000, a software development office in Belfast,
Northern Ireland under a lease expiring in April 2006, and sales offices in
London, Paris and Austin under leases expiring in September 2012, December 2004
and April 1998, respectively. The Company also maintains product inventories in
various locations under bonded warehouse arrangements in order to permit the
timely delivery of certain products to nearby customers.
The Company believes that its existing facilities are well maintained and in
good operating condition and, following completion of construction of the
Company's new headquarters facility, are adequate for its present and
anticipated levels of operations.
43
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(c) The following exhibit is filed as part of this Report:
Exhibit
Number Description
------- -----------
99 Press Release dated February 23, 1998.
44
<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 hereunto duly authorized.
STB SYSTEMS, INC.
/s/ Bryan F. Keyes
----------------------------------
Bryan F. Keyes
Vice President of Administration
and General Counsel
Date: March 2, 1998
45
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
99 Press Release dated February 23, 1998.
46
<PAGE>
NEWS RELEASE
STB NEWS RELEASE
STB Systems, Inc. NEWS RELEASE
- -------------------------------------------------------------------------------
FOR IMMEDIATE RELEASE
FOR MORE INFORMATION, CONTACT:
- -----------------------------
STB Systems, Inc.
Bryan F. Keyes
Vice President of Administration
(972) 234-8750 (Ext. 2238)
STB SYSTEMS, INC. REPORTS RECORD RESULTS FOR THE
FIRST QUARTER OF FISCAL 1998
RICHARDSON, TEXAS (FEBRUARY 23, 1998)---STB SYSTEMS, INC. (NASDAQ-STBI), a
leading developer of multimedia accelerators and other multimedia subsystem
products, today announced revenues and earnings for the first quarter of the
1998 fiscal year.
As previously reported, the Company has declared a 3 for 2 stock split to
be effected in the form of a stock dividend which was distributed on February
20, 1998. The earnings per share amounts discussed below for both the current
quarter and the same quarter for the prior year reflect the effect of the stock
split.
For the quarter ended January 31, 1998, net income was $3.8 million or
$.33 diluted net income per share on net sales of $78.8 million compared to net
income of $2.3 million or $.21 diluted net income per share on net sales of
$48.1 million for the first quarter of fiscal 1997. There were 11.4 million
diluted weighted average shares outstanding for the fiscal 1998 first quarter,
compared to 10.7 million diluted weighted average shares for same quarter of
fiscal 1997.
For the quarter, OEM channel sales were particularly strong as shipments
to the Company's two largest customers exceeded customer forecasts. In high
demand was the Company's award-winning, nVidia based, Velocity 128 graphics
accelerator.
Quarterly unit volume increased 64.7% compared to the first quarter of
fiscal 1997, while revenues for the quarter were $78.8 million, up $30.6
million or 63.8% over the first quarter of the 1997 fiscal year. Revenues for
the quarter increased by $18.1 million or 29.8% compared to the immediately
preceding quarter.
The gross profit margin for the quarter was 20.6% compared to 22.1% posted
during the first quarter of fiscal 1997, and down from the 25.1% achieved
during the previous quarter. The reduction in gross profit margin for the
first quarter compared to the same quarter a year ago was primarily
attributable to increased overall OEM unit volumes, offset by modest increases
in channel sales and relatively level specialized technology sales. The gross
profit margin was also impacted as a result of premium prices paid for SGRAM on
the spot market and added factory labor costs to meet above forecasted demands
by our customer base. When compared to the previous quarter, the gross profit
margin declined due to lower levels of sales to the OEM channel in that
quarter.
- MORE -
1651 North Glenville - Richardson, Texas 75081 - (972) 234-8750
Fax (972) 234-1306 - BBS (972) 437-9615
<PAGE>
"We are pleased to report our ninth consecutive quarter of record profit,"
said William E. Ogle, STB's Chairman and Chief Executive Officer. "We were
able to meet our OEM customers upside demands on short notice for our products.
The recognition by the marketplace of STB's award-winning Velocity 128 product
has also been particularly gratifying," Ogle added.
The Company's commercial channel revenues increased modestly over 4th
quarter of 1997, but down slightly from the same quarter of fiscal 1997.
Although channel demand was strong, shipments were below expectations due to
limited controller chip availability resulting from the unexpected OEM upside
demand.
Revenues from the Specialized Technology Group increased by 53% over the
same quarter of fiscal 1997, although flat with the preceding quarter. During
the quarter, the Company successfully launched the first production units of
the Galileo flat panel display systems. In addition, the MVP product line for
workstations also performed well.
During the quarter, STB's Velocity 128 garnered the coveted "Editor's
Choice Award" from PC MAGAZINE. Overall during the quarter, STB's products
continued to be recognized in various publications, receiving a total of 23
different awards.
In addition, the Company announced today that it plans to commence a
public offering covering up to 3,000,000 shares of Common Stock, of which
2,775,000 shares will be offered by STB and 225,000 shares will be offered by
certain selling shareholders. An aggregate of up to 450,000 additional shares
may be offered by STB and the selling shareholders to cover over-allotments, if
any. Net proceeds to STB from the offering will be used to reduce indebtedness
and for general corporate purposes. The foregoing share numbers give effect to
a 3-for-2 split of STB's Common Stock effected on February 20, 1998.
A registration statement relating to the shares covered by the offering
will be filed with the Securities and Exchange Commission shortly. The
offering of these shares may only be made by means of a prospectus complying
with applicable securities laws. The shares may not be sold nor may offers to
buy be accepted prior to the time the registration statement becomes effective.
This release shall not constitute an offer to sell or the solicitation of any
offer to buy nor shall there be any sale of the shares in any state in which
such offer, solicitation or sale would be unlawful prior to registration or
qualification under the securities laws of any such state.
STB Systems, Inc. (Nasdaq-STBI) designs, manufactures and sells multimedia
accelerators and other multimedia subsystem products for use primarily in
desktop personal computers. STB has established a history of designing award-
winning graphics controllers and writing specialized video drivers which
provide maximum software performance and compatibility. STB is one of the
largest suppliers of multimedia accelerators worldwide, as ranked by
International Data Corporation (IDC), and is registered as ISO 9002 compliant.
Founded in 1981 and headquartered in Richardson, Texas, STB Systems, Inc., also
has facilities in Houston (Texas), El Paso (Texas), Austin (Texas), Eugene
(Oregon), Juarez (Mexico), Belfast (Northern Ireland), London (UK), and Paris
(France).
- MORE -
<PAGE>
This press release contains forward-looking statements as that term is
defined in the Private Securities Litigation Reform Act of 1995. Such
statements are based on management's current expectations and are subject to a
number of factors and uncertainties which could cause actual results to differ
materially from those described herein. Such factors are described in "Risk
Factors" in the Company's Annual Report on Form 10-K for its 1997 fiscal year
and Quarterly Report on Form 10-Q for its third quarter July 31, 1997 as filed
with the Securities and Exchange Commission.
STB SYSTEMS, INC. and SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except share and per share data)
<TABLE>
Three Months Ended
January 31, 1998 January 31, 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Net Sales $ 78,758 $ 48,092
Cost of Sales 62,542 37,459
----------- -----------
Gross Profit 16,216 10,633
Research & Development 2,338 1,238
Sales & Marketing 4,424 3,286
General & Administrative 3,235 2,383
----------- -----------
Total Operating Expenses 9,997 6,907
Income from Operations 6,219 3,726
Interest Income (Expense) (518) (376)
----------- -----------
Income (Loss) Before Taxes 5,701 3,350
Provision for Income Taxes 1,896 1,098
----------- -----------
Net income $ 3,805 $ 2,252
Basic income per common share* $ .36 ** $ .22
Weighted average shares outstanding 10,461,695 10,158,549
Diluted net income per share* $ .33 ** $ .21
Weighted average shares outstanding 11,388,554 10,730,624
</TABLE>
* all per share amounts have been adjusted for a 3 for 2 stock split effective
February 20, 1998.
** all per share amounts have been adjusted for a 3 for 2 stock split
effective February 20, 1998 and a 3 for 2 stock split effective
July 17, 1997.
- MORE -
<PAGE>
STB SYSTEMS, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands)
<TABLE>
January 31, 1998 October 31, 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Current Assets:
Cash and Cash Equivalents $ 3,391 $ 3,869
Accounts Receivable 49,806 47,208
Inventories 45,811 41,295
Other Current Assets 2,659 1,970
-------- -------
Total Current Assets 101,667 94,342
Long Term Assets 14,100 15,212
Current Liabilities:
Short Term Debt 23,000 21,520
Accounts Payable 38,938 36,801
Accrued Expenses and
Other Current Liabilities 3,928 4,660
-------- -------
Total Current Liabilities 65,866 62,981
Long Term Liabilities 2,538 3,111
Total Stockholders' Equity $ 47,363 $43,462
</TABLE>
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