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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-25540
STB SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
TEXAS 75-1855896
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3400 WATERVIEW PARKWAY, RICHARDSON, TEXAS 75080
(Address of principal executive offices)
(972) 234-8750
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Title of each class: Number of Shares Outstanding as of
Common Stock, $.01 par value March 17, 1999:
12,606,787
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STB SYSTEMS, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
<S> <C> <C>
PART I FINANCIAL INFORMATION 3
Item 1 Consolidated Financial Statements (Unaudited): 3
Consolidated Balance Sheets at January 31, 1999
and October 31, 1998 3
Consolidated Statements of Operations for the
three months ended January 31, 1999 and 1998 4
Consolidated Statements of Comprehensive Income
for the three months ended January 31, 1999 and 1998 4
Consolidated Statements of Cash Flows for the
three months ended January 31, 1999 and 1998 5
Notes to Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
Item 3 Has been omitted since the registrant has no
reportable events in relation to this item
PART II OTHER INFORMATION 13
Items 1, 3 and 4 Have been omitted since the registrant has
no reportable events in relation to these items
Item 2 Changes in Securities and Use of Proceeds 13
Item 5 Other Information - Risk Factors 13
Item 6 Exhibits and Reports on Form 8-K 21
Signatures
</TABLE>
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PART I FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
STB SYSTEMS, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
- -------------------------------------------------------------------------------
(Dollars in thousands except per share data)
<TABLE>
<CAPTION>
January 31, October 31,
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 31,866 $ 30,639
Accounts receivable - trade, net of allowance
for doubtful accounts of $582 and $520 39,841 32,508
Inventories, net 51,628 48,993
Other current assets 12,783 6,444
----------- -----------
Total current assets 136,118 118,584
Property and equipment, net 11,060 11,586
Other assets 1,594 5,142
----------- -----------
Total assets $ 148,772 $ 135,312
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term debt $ 18,500 $ --
Accounts payable - trade 24,466 32,050
Accrued wages, commissions and bonuses 302 694
Other accrued liabilities 1,072 1,534
Current portion of long-term liabilities 599 587
----------- -----------
Total current liabilities 44,939 34,865
----------- -----------
Long-term Liabilities:
Obligations under capital leases and other
long-term liabilities 1,941 2,095
----------- -----------
Total long-term liabilities 1,941 2,095
----------- -----------
Shareholders' Equity:
Preferred stock, 2,000,000 shares authorized,
none issued or outstanding -- --
Common stock, $.01 par value, 25,000,000 shares
authorized, 13,303,587 and 13,302,687 shares issued,
respectively 133 133
Additional paid-in capital 82,879 82,875
Unrealized gain on equity securities 3,394 --
Retained earnings 20,119 19,977
----------- -----------
106,525 102,985
Treasury stock, 696,800 shares, at cost (4,633) (4,633)
----------- -----------
Total shareholders' equity 101,892 98,352
----------- -----------
Total liabilities and shareholders' equity $ 148,772 $ 135,312
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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STB SYSTEMS, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
-----------------------------------------------------------------------------
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
Three months ended
January 31,
1999 1998
------------ ------------
<S> <C> <C>
Net sales $ 65,729 $ 78,758
Cost of sales 55,833 62,542
------------ ------------
Gross profit 9,896 16,216
------------ ------------
Operating expenses:
Research and development 2,701 2,338
Sales and marketing 4,009 4,424
General and administrative 3,077 3,235
------------ ------------
Total operating expenses 9,787 9,997
------------ ------------
Income from operations 109 6,219
Interest (income) expense, net (113) 518
------------ ------------
Income before income taxes 222 5,701
Provision for income taxes 80 1,896
------------ ------------
Net income $ 142 $ 3,805
============ ============
Net income per share:
Basic $ 0.01 $ 0.36
============ ============
Diluted $ 0.01 $ 0.33
============ ============
Weighted average shares outstanding:
Basic 12,606,161 10,461,695
============ ============
Diluted 12,781,621 11,388,554
============ ============
</TABLE>
STB SYSTEMS, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
-----------------------------------------------------------------------------
(Dollars in thousands)
<TABLE>
<CAPTION>
Three months ended
January 31,
1999 1998
------------ ------------
<S> <C> <C>
Net income $ 142 $ 3,805
------------ ------------
Other comprehensive income, net of tax:
Unrealized gains on securities 3,394 --
------------ ------------
Other comprehensive income 3,394 --
------------ ------------
Comprehensive Income $ 3,536 $ 3,805
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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STB SYSTEMS, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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(Dollars in thousands)
<TABLE>
<CAPTION>
Three months ended
January 31,
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 142 $ 3,805
Adjustments to reconcile net income to net cash
From operating activities:
Depreciation and amortization 1,357 660
Changes in assets and liabilities:
Accounts receivable - trade (7,333) (2,598)
Inventories (2,635) (4,516)
Other current assets (2,945) (689)
Other assets 3,548 894
Accounts payable - trade (7,584) 2,136
Accrued wages, commissions, and bonuses (392) (530)
Other accrued liabilities (462) 376
------------ ------------
Net cash used in operating activities (16,304) (462)
------------ ------------
Cash flows from investing activities -
------------ ------------
Purchases of property and equipment (831) (442)
------------ ------------
Cash flows from financing activities:
Borrowings on short-term debt 18,500 1,480
Payments on long-term debt (142) (1,150)
Issuance of common stock, net of issue costs 4 96
------------ ------------
Net cash provided by financing activities 18,362 426
------------ ------------
Net increase (decrease) in cash and cash equivalents 1,227 (478)
Cash and cash equivalents at beginning of period 30,639 3,869
------------ ------------
Cash and cash equivalents at end of period $ 31,866 $ 3,391
============ ============
</TABLE>
Supplemental disclosure of non-cash information:
- - Unrealized gain on equity securities available-for-sale was $3,394 for the
three months ended January 31, 1999.
The accompanying notes are an integral part of these
consolidated financial statements
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STB SYSTEMS, INC.
Notes To Consolidated Financial Statements
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
STB Systems, Inc. develops, manufactures and sells a wide selection of
multimedia accelerator subsystems, other multimedia subsystem products and
specialized technology products for use in mid-range and high-end personal
computers ("PCs"). STB Assembly, Inc. is a wholly-owned subsidiary and provides
manufacturing services to STB Systems, Inc. Symmetric Simulation Systems, Inc.,
also a wholly-owned subsidiary of STB Systems, Inc., designs high-end 3D
graphics acceleration products for use in applications such as computer-aided
design, product visualization and animation.
The accompanying financial statements include the consolidated accounts of STB
Systems, Inc., STB Assembly, Inc. and Symmetric Simulation Systems, Inc.,
(collectively referred to as the "Company" or "STB"). STB de Mexico S.A. de C.V.
("STB de Mexico"), a majority owned subsidiary of STB Assembly, Inc., is a
Mexican corporation operated as a maquiladora and performs assembly services for
STB Systems, Inc. All significant intercompany accounts and transactions have
been eliminated in consolidation. Minority interests in STB de Mexico are
insignificant for financial reporting purposes.
The financial information presented herein should be read in conjunction with
the Company's annual consolidated financial statements for the year ended
October 31, 1998. The foregoing unaudited interim consolidated financial
statements reflect all adjustments (all of which are of a normal recurring
nature) which are, in the opinion of management, necessary for a fair
presentation of the results of the interim periods. The results for the interim
periods are not necessarily indicative of the results to be expected for the
year.
During the third quarter of fiscal 1998, the Company invested $3 million in
nVIDIA, a supplier. The investment was in the form of a Convertible Subordinated
Note. On January 15, 1999, the Note converted into 428,572 shares of common
stock of the supplier, based on a conversion factor of $7.00 per common share.
Subsequent to the conversion, the supplier completed an initial public offering
at a price of $12.00 per common share. At January 31, 1999, the closing price on
the stock was $19.00. The securities are classified as available-for-sale, and
accordingly, the unrealized gain of $3,394,000, net of tax, has been included in
comprehensive income.
On December 14, 1998, the Company announced it had entered into a definitive
merger agreement with 3Dfx Interactive, Inc., ("3Dfx") whereby, in a
stock-for-stock purchase transaction, STB shareholders will receive 0.65 shares
of 3Dfx common stock for each share of STB common stock. The merger is expected
to close in April 1999, subject to customary regulatory approvals and approvals
by the shareholders of both 3Dfx and STB.
NOTE 2 - INVENTORIES
Inventories at January 31, 1999 and October 31, 1998 consisted of the following
(in thousands):
<TABLE>
<CAPTION>
January 31, 1999 October 31, 1998
---------------- ----------------
<S> <C> <C>
Raw materials $ 35,489 $ 30,757
Work-in-process 13,014 17,267
Finished goods 7,725 6,169
---------------- ----------------
Inventories, gross 56,228 54,193
Reserve for obsolescence (4,600) (5,200)
---------------- ----------------
Inventories, net $ 51,628 $ 48,993
---------------- ----------------
</TABLE>
NOTE 3 - SHORT-TERM DEBT
The Company has a $40 million revolving credit facility ("Revolving Credit
Facility") with a bank. The Revolving Credit Facility bears interest at LIBOR
plus 175 basis points (6.689% at January 31, 1999). At January 31, 1999 the
Company had $18.5 million outstanding under the Revolving Credit Facility.
Availability under the Revolving Credit Facility is subject to limitation
determined by the Company's borrowing base, which is calculated based on
eligible accounts receivable, as defined in the Revolving Credit Facility
Agreement.
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NOTE 4 - STOCK SPLIT
On January 27, 1998, the Company declared a three-for-two split of the Company's
common stock. The stock split was effected in the form of a stock dividend on
February 20, 1998, to shareholders of record on February 11, 1998. Share and per
share amounts in the accompanying consolidated financial statements have been
retroactively adjusted to reflect the stock split.
NOTE 5 - EARNINGS PER SHARE
The following table sets forth the reconciliation of the numerators and
denominators of the basic and diluted EPS computations:
<TABLE>
<CAPTION>
Three months ended
January 31,
1999 1998
----------- -----------
<S> <C> <C>
Net income (in thousands) $ 142 $ 3,805
=========== ===========
BASIC
Weighted average number of shares outstanding 12,606,161 10,461,695
=========== ===========
Net income per share $ 0.01 $ 0.36
=========== ===========
DILUTED
Weighted average number of shares outstanding 12,606,161 10,461,695
Additional weighted average shares from assumed
exercise of dilutive stock options, net of shares
assumed to be repurchased with exercise proceeds 175,460 926,859
----------- -----------
Dilutive weighted average shares outstanding 12,781,621 11,388,554
=========== ===========
Net income per share $ 0.01 $ 0.33
=========== ===========
</TABLE>
Options to purchase 1,289,000 and 20,625 shares of common stock were outstanding
during the three months ended January 31, 1999 and 1998, respectively, but were
not included in the computation of diluted EPS because the options' exercise
prices were greater than the average market price during the period. These
options range in price from $7.00 to $15.08 per share for the three months ended
January 31, 1999 and from $21.27 to $25.67 per share for the three months ended
January 31, 1998.
A warrant to purchase up to 210,000 shares of the Company's common stock was
outstanding at January 31, 1999. The right to exercise the warrant is contingent
upon the occurrence of specific events. These events had not occurred at January
31, 1999, and accordingly these shares were not considered outstanding and were
not included in the computation of diluted earnings per share.
NOTE 6 - SECONDARY OFFERING
On February 25, 1998 the Company filed a registration statement on Form S-3 to
offer 3,000,000 shares of its common stock to the public in a secondary
offering. On March 20, 1998, the offering was completed and of the shares being
offered, 2,775,000 shares were sold by the Company and 225,000 were sold by
certain selling shareholders. Net proceeds from the offering of $57.1 million
were used to reduce indebtedness outstanding under the Company's revolving
credit facility and the balance was retained for general corporate purposes.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This report contains certain forward-looking statements within the meaning of
the federal securities laws. Any statements contained herein - including without
limitation statements to the effect that STB or its management "believes,"
"expects," "anticipates," "plans," "may," "will," "projects," "continues" or
"estimates," or statements concerning "potential," or "opportunity" or other
variations thereof or comparable terminology or the negative thereof that are
not statements of historical fact should be considered forward-looking
statements. Actual results and the timing of certain events could differ
materially from those projected in or contemplated by the forward-looking
statements due to a number of factors, including without limitation those set
forth elsewhere herein under "Other Information - Risk Factors."
OVERVIEW
We currently sell two broad categories of products, multimedia subsystem
products and specialized technology products. Our multimedia subsystem product
line includes a wide selection of multimedia accelerators designed for use in
mid-range to high-end PCs. Our multimedia subsystem product line also features
several complementary products, including DVD decoder subsystems and PC/TV
convergence subsystems. Our specialized technology products incorporate graphics
technologies and are primarily designed to enable one computer to control
simultaneously the display of multiple monitors.
We sell our products to OEMs, the commercial market and the specialized
technology market. We sell multimedia subsystem products both to OEMs as
subsystems for their PC products and to the commercial market. Sales of
multimedia accelerators and other multimedia subsystems to OEMs typically
possess higher unit volumes and lower gross profit margins. Sales of multimedia
products
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to the commercial market typically have modest unit volumes and higher gross
profit margins than the sale of similar products to OEMs. Although sales volumes
of specialized technology products are relatively low, we realize higher gross
profit margins from the sale of these products than from the sale of multimedia
subsystem products.
For the three months ended January 31, 1999 and 1998, sales of our products to
OEMs represented approximately 71% and 85%, respectively, of total net sales.
Sales to the commercial market represented approximately 22% and 9% of total net
sales for the three months ended January 31, 1999 and 1998. Sales to specialized
technology product markets constituted approximately 6% of total net sales for
the first quarter ended January 31, 1999 and 5% of total net sales for the first
quarter ended January 31, 1998. We derived the balance of total net sales
primarily from third party assembly services. Third party assembly services
comprised approximately 1% of total net sales for the first quarter ended
January 31, 1999 and 1998. We export our products through all of our sales
channels. Export sales of our products have grown moderately in recent periods.
As a result, exports have increased as a percentage of net sales to 29% in the
first quarter ended January 31, 1999 from 25% in the first quarter ended January
31, 1998. Our total gross profit margins and gross profits will likely fluctuate
from period to period as a result of our product mix, sales channel mix,
component costs and the competitive pricing pressures on our products.
We recognize revenue upon shipment of our products. For products sold through
the commercial channel, we generally allow returns in the form of stock rotation
and price protection in the form of credits. Our current stock rotation policies
permit a commercial customer to return a portion of the products purchased
within specified time periods, if that customer places an order with us for
additional products of equal or greater value. We also provide 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.
We maintain reserves related to these programs, and we believe that such
reserves are adequate.
We have no guaranteed supply arrangements with any of our suppliers. We obtain
most of the primary components of our products directly from the component
manufacturers. The primary components of our products consist mainly of
controller chips and memory chips. The prices of such components can change
significantly from time to time. In the past we have experienced, and may in the
future experience, increases in our unit component costs without being able to
increase the price of the related products. Such an increase in component costs
could negatively impact our gross profit margins and results of operations. In
particular, occasional world-wide shortages of memory and controller chips and
international tariff disputes have in the past resulted in substantial unit
component cost increases that have materially adversely affected our gross
profit margins and our results of operations.
On December 13, 1998, we entered into the 3Dfx Merger Agreement. The 3Dfx Merger
Agreement provides for the merger of a newly formed, wholly-owned subsidiary of
3Dfx with and into STB (the "3Dfx Merger"). STB will be the surviving
corporation in the 3Dfx Merger and, upon consummation of the 3Dfx Merger, will
become a wholly-owned subsidiary of 3Dfx. If consummated, the combination of
3Dfx's and STB's operations will result in many significant changes in STB's
business and its related results of operations and financial condition. In
particular, the announcement and consummation of the merger may disrupt STB's
relationships with its suppliers, some of whom are competitors of 3Dfx. For
example, nVidia, which competes directly with 3Dfx, is a major supplier of STB
whose graphics chips were incorporated into STB products representing 63.9% of
STB's net sales in fiscal 1998 and 77% in the first quarter ended January 31,
1999 (approximately $170.1 million and $50.5 million in net sales,
respectively). As a result of the 3Dfx Merger, STB plans to continue to offer
for sale to its customers its current products that use nVidia graphics chips,
but does not expect to use nVidia's graphics chips on any new products. Unless
STB or the 3Dfx/STB combined company can persuade STB's existing customers that
are purchasing products using nVidia graphics chips to purchase new products
based on 3Dfx graphics chips, the revenue derived from sales to such customers
will be reduced significantly. Similarly, while no suppliers of graphics chips
to STB have as of the date of this report indicated to STB that they intend to
terminate their supplier relationship with STB, to the extent that any such
relationship is terminated or curtailed and STB cannot persuade its existing
customers who purchase products containing any of those supplier's chips to
purchase products containing 3Dfx chips then revenues could be reduced
significantly.
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RESULTS OF OPERATIONS
The following table sets forth certain items from the Company's Consolidated
Statements of Operations as a percentage of net sales from continuing
operations:
<TABLE>
<CAPTION>
Percentage of Net Sales
--------------------------
Three months ended
January 31,
1999 1998
----------- -----------
<S> <C> <C>
Net sales 100.0% 100.0%
Cost of sales 84.9% 79.4%
----------- -----------
Gross profit 15.1% 20.6%
----------- -----------
Operating expenses:
Research and development 4.1% 3.0%
Sales and marketing 6.1% 5.6%
General and administrative 4.7% 4.1%
----------- -----------
Total operating expenses 14.9% 12.7%
----------- -----------
Income from operations 0.2% 7.9%
Interest (income) expense, net -0.1% 0.7%
----------- -----------
Income before income taxes 0.3% 7.2%
Provision for income taxes 0.1% 2.4%
----------- -----------
Net income 0.2% 4.8%
=========== ===========
</TABLE>
THREE MONTHS ENDED JANUARY 31, 1999 COMPARED TO THREE MONTHS ENDED
JANUARY 31, 1998.
Net Sales. Net sales for the quarter were $65.7 million, compared to $78.8
million for the first quarter of fiscal 1998, representing a decrease of $13.1
million, or 16.5%. Unit volume for the first quarter of fiscal 1999 decreased by
24.0% from the first quarter of fiscal 1998, while the Company's overall average
unit selling prices increased slightly. OEM channel sales were approximately
$46.5 million in the first quarter of fiscal 1999, compared to approximately
$66.2 million in the first quarter of fiscal 1998, representing a decrease of
29.8%. The decline in OEM sales is primarily a result of slowing demand for the
Company's Velocity 4400 and other products from OEM customers late in the first
quarter. The Company believes this decline was primarily attributable to its
pending merger with 3Dfx, but expects that its launch of the 3Dfx Voodoo 3 in
the second quarter of fiscal 1999 will improve OEM sales. Commercial channel
sales increased to approximately $14.6 million in the first quarter of fiscal
1999 from approximately $7.4 million in the first quarter of fiscal 1998, an
increase of 98.3%. Sales growth in the commercial channel was primarily the
result of increased retail demand for the Company's award winning Velocity 4400
and the Black Magic Voodoo2 multimedia accelerators. See "Risk Factors - STB and
its shareholders face a number of risks related to the 3Dfx Merger." and "-STB
has significant product concentration..." Sales in the specialized technology
market decreased to approximately $4.0 million in the first quarter of fiscal
1999 from approximately $4.1 million in the first quarter of fiscal 1998, or
4.3%. The decline in specialized technology sales was primarily a result of
increased competition in the market.
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 decreased
to $9.9 million in the first quarter of fiscal 1999 from $16.2 million in the
first quarter of fiscal 1998, representing a decrease of 38.9%. The decrease in
the amount of gross profit resulted primarily from an increase in per unit fixed
manufacturing costs due to the decline in production volumes, as well as
increased product pricing pressures and an increase memory costs. During the
quarter, gross profit as a percentage of net sales decreased to 15.1% in the
first quarter of fiscal 1999 from 20.6% in the first quarter of fiscal 1998. The
decrease in gross profit as a percentage of net sales resulted primarily from
declining operating efficiencies as a result of decreased production volumes and
increased pricing pressure on the Velocity 4400 and the Black Magic Voodoo2.
Gross margins are expected to continue to fluctuate as a result of sales
channel, product mix and other factors. See "Risk Factors -STB's quarterly
operating results are subject to fluctuations..." and "-STB depends on a limited
number of suppliers... ."
Research and Development Expenses. Research and development expenses primarily
consist of employee compensation and associated expenses relating to engineering
personnel, development tool expenses, prototyping expenses and product
enhancement expenses. Research and development expenses increased to $2.7
million in the first quarter of fiscal 1999 from $2.3 million in the first
quarter of fiscal 1998, representing an increase of 15.5%. The increase in
research and development expenses on both a dollar and percentage basis resulted
primarily from increased staffing at the Company's corporate headquarters and
its design center in
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<PAGE> 10
Belfast, Northern Ireland. Expenses associated with driver support and
development, as well as other expenses associated with the development of new
products also contributed to the increase in research and development expenses.
Research and development expenses as a percentage of net sales increased to 4.1%
in the first quarter of fiscal 1999 from 3.0% in the first quarter of fiscal
1998.
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 decreased to
$4.0 million in the first quarter of fiscal 1999 from $4.4 million in the first
quarter of fiscal 1998, representing a decrease of 9.4%. The decrease in sales
and marketing expense resulted primarily from reductions in spending for
advertising and promotional programs, as well as decreased expenses associated
with trade show participation. However, due to the decline in net sales, sales
and marketing expenses as a percentage of net sales increased to 6.1% in the
first quarter of fiscal 1999 from 5.6% in the first quarter of fiscal 1998.
General and Administrative Expenses. General and administrative expenses
primarily consist of personnel and related overhead expenses for management,
finance, management information systems, legal and human resources, as well as
expenses associated with facilities and other general operating expenses.
General and administrative expenses decreased to $3.1 million in the first
quarter of fiscal 1999 from $3.2 million in the first quarter of fiscal 1998,
representing a decrease of 4.9%. The decrease in the amount of general and
administrative expenses was primarily a result of expense controls associated
with occupancy costs and other general operating expenses. Expenses associated
with the employee profit sharing program decreased as a result of the decline in
operating income. The Company recently completed construction of a new
headquarters facility and occupied the new space in the first fiscal quarter of
1999. The Company may experience short-term increased occupancy costs from
current levels as a result of expenses associated with the move and the new
facility. Due to the decline in net sales, general and administrative expenses
as a percentage of net sales increased to 4.7% in the first quarter of fiscal
1999 from 4.1% in the first quarter of fiscal 1998.
Interest (Income) 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. Net
interest income was approximately $113,000 in the first quarter of fiscal 1999,
compared to net interest expense of approximately $518,000 in the first quarter
of fiscal 1998. The decrease in the amount of net interest expense was primarily
attributable to the interest income earned on short-term investments associated
with the investment of the proceeds from the secondary offering and the
reduction of short-term debt.
SEASONALITY
Our quarterly operating results can vary significantly depending on factors such
as the timing of new product introductions, adequacy of component supply,
changes in component costs, variations in our product mix, seasonal promotions
by us and our customers and competitive pricing pressures. Because the timing of
these factors may vary, the results of any particular quarter may not be
indicative of results for the entire year or any future period. In addition, the
PC market generally experiences weaker sales during the summer months.
LIQUIDITY AND CAPITAL RESOURCES
Inventory and accounts receivable financing as well as manufacturing and
equipment expenditures constitute our principal capital and liquidity needs. We
have generally financed these requirements and our operations through a
combination of cash generated from operations, trade credit from vendors, bank
borrowings and the proceeds from our public offerings. Due to our rapid growth
in recent years and increased capital requirements, we completed a secondary
public offering of 2,775,000 shares of STB Common Stock during the second
quarter of fiscal 1998. We used the net proceeds from our secondary offering to
reduce indebtedness and retained the balance for general corporate purposes. We
recognize that future growth, if any, may 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 was $16.3 million in the first quarter of
fiscal 1999, primarily attributable to increases in accounts receivable, as a
result of higher sales during the first quarter of fiscal 1999, compared to the
fourth quarter of fiscal 1998. Decreases in accounts payable, and to a lesser
degree increases in inventory, also contributed to cash used in operations. Cash
used in operating activities was $462,000 in the first quarter of fiscal 1998,
resulting primarily from increases in inventory and accounts receivable, as a
result of higher sales, partially offset by increased earnings and increases in
accounts payable. At October 31, 1998, the Company's working capital amounted to
$83.7 million, compared to $91.1 million at January 31, 1999. Cash and cash
equivalents equaled $31.9 million and $30.6 million at January 31, 1999 and
October 31, 1998, respectively.
In the first quarter of fiscal 1999, we purchased $831,000 in capital equipment,
compared with net purchases of equipment aggregating $442,000 during the first
quarter of fiscal 1998. During the first quarter of fiscal 1998, we completed a
move to a new manufacturing facility in Juarez, Mexico, immediately adjacent to
our previous facility. We have retained one-half of the previous facility for
expansion. During the fourth quarter of fiscal 1997, we installed two new high
speed surface-mount assembly lines at our new facility, at a total cost of
approximately $6.3 million. We installed an additional line in the third quarter
of fiscal 1998, at a cost of approximately $2.9 million. We financed this
equipment through operating lease finance arrangements. During the fourth
quarter of fiscal 1996, we installed four surface-mount technology assembly
lines, at an approximate cost totaling $4.2 million. We financed this
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equipment through traditional operating lease financing arrangements also. Our
aggregate obligations under all such equipment lease financing arrangements
totaled approximately $8.4 million at January 31, 1999. We expect that
additional capital expenditures for similar types of equipment may be necessary
to support any additional future customer demand and production requirements.
We have a $40.0 million revolving credit facility ("Revolving Credit Facility"),
as well as a $3.0 million term loan ("Term Loan"). At January 31, 1999 we had
$18.5 million outstanding under the Revolving Credit Facility and $2.5 million
outstanding under the Term Loan. Principal amounts outstanding under the
Revolving Credit Facility bear interest at LIBOR plus 175 basis points (6.689%
at January 31, 1999). Amounts outstanding under the Term Loan bear interest at
LIBOR plus 250 basis points (7.439% at January 31, 1999) and are payable in 60
monthly installments of principal and interest. Payment of principal and
interest began November 1, 1997. Formulas based on eligible accounts receivable
determine availability under the Revolving Credit Facility. All indebtedness
under the Revolving Credit Facility matures on November 21, 1999 (subject to
renewal of the Revolving Credit Facility through such date), and indebtedness
under the Term Loan matures on November 1, 2002.
In December 1997, we 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 was completed in December 1998, and we completed our move
into the facility during that month. We estimate the total cost of the building
and the land to be approximately $22.8 million. The lessor agreed to fund the
cost of the land and construction of the building. Rental payments commenced
upon occupancy. We estimate that we will pay approximately $225,000 per month in
rent over a four-year period beginning in the first quarter of fiscal 1999. This
amount exceeds the expense of our previous headquarter facilities, because local
rental rates have increased and we have increased the square footage of our
corporate headquarters. The lease agreement also provides that the amount of the
lease payments is subject to adjustment based upon prevailing interest rates.
Consequently, an increase in prevailing interest rates will increase the expense
of our facilities. We have recently entered into an interest rate swap agreement
that fixes the interest rate on a majority of our lease obligation at 7.55%. We
are also seeking opportunities to sublease that portion of our new headquarters
that we do not expect to utilize immediately. At the end of the initial
five-year lease, we have the option to renew the lease for an additional five
years, pay off the underlying debt or cause the building to be sold. In the
event of a sale, the proceeds are to be used to retire the underlying debt. Any
excess will be paid to us. We are generally responsible for any remaining unpaid
balance owing on the underlying obligation after the sale of the facility, not
to exceed $17.2 million.
YEAR 2000 ASSESSMENT
State of Readiness: STB has performed a company-wide evaluation to assess the
ability of its products and its information technology ("IT") and non-IT systems
to properly function and execute transactions in the Year 2000. STB's Year 2000
Project is divided into three major sections: (a) Infrastructure, which includes
internal management information systems, computers, servers, networks to support
the business and any non-IT systems used in the operation of the business; (b)
Third party suppliers, which includes those suppliers that provide STB with
components that are used in the manufacture of its products; and (c) STB
products which includes those products that generate revenue for STB. The
Project has been divided into six phases: (1) Awareness and Communication; (2)
Inventory; (3) Assessment; (4) Renovation; (5) Testing; and (6) Rollout. As
discussed below, STB has substantially completed the first three phases of the
Year 2000 Project for its Infrastructure; the first phase for its Third Party
Suppliers and all phases for its Customer Products and Services. All phases of
the Year 2000 Project are expected to be completed by the third quarter of 1999.
Infrastructure: STB has completed an assessment of its IT and non-IT systems and
currently is in the renovation phase for these systems. STB has completed the
renovation of its IT hardware systems and expects to complete a renovation of
its various software systems by June 1999. The Renovation, Testing and Rollout
phases of the Project are expected to be complete by July 1999. STB has
distributed a letter to each of its vendors that supply systems or software for
its IT and non-IT systems to determine the systems' Year 2000 status. A majority
of the recipients have responded to the letter, and most of the respondents have
given assurances that their products and services are able to function in the
context of the Year 2000 Problem either currently or through upgrades to
existing systems. A majority of the total systems are either compliant currently
or have been upgraded. STB is assessing these responses and will continue to
communicate with vendors that are material to its operations to gain
satisfactory assurances. If such assurances are not obtained, STB will seek
alternatives, including contracting with other vendors.
Third Party Suppliers: STB has taken a inventory of the components supplied from
third party suppliers that are used in conjunction with its products. STB has
contacted significant third party suppliers in an effort to assess the state of
their Year 2000 readiness. To date, a majority of the recipients have responded
to the letter, and approximately 20% of the respondents have given assurances
that their products and services are able to function in the context of the Year
2000 Problem. Approximately 25% of those responding have not been willing to
certify the Year 2000 compliance of their products. STB is continuing to obtain
responses to the letter and at the same time is formulating a contingency plan
that includes identifying alternate suppliers in the event STB is unable to
obtain such assurances. Many of STB's components and services are obtained from
sources that are not the sole source for such items. Accordingly, STB believes
that alternative means are generally available that are Year 2000 compliant from
which to obtain components and services. Other than as described above, STB has
not undertaken to employ any independent verification or validation process to
determine its third party suppliers' state of Year 2000 readiness.
STB Products and Services: During 1998, all of STB's products that were produced
in the last five years were tested and confirmed as compliant. STB has
transmitted letters to its customers notifying them of their current year 2000
readiness status. In general, STB
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believes that the nature of the functionality of its products do not entail any
date type functions. Therefore STB believes that the products do not have any
Year 2000 performance implications.
Costs: To date, STB has spent approximately $170,000 relating to software,
training and labor costs for its Year 2000 Project, of which $100,000 was
incurred for replacement costs for non-compliant software systems as well as the
acceleration of replacement of certain other systems as a result of the Year
2000 Problem. STB currently estimates that its software, training and labor
costs through fiscal year 1999 relating to the Year 2000 Project will be
approximately $100,000. No assurances, however, can be given that these costs
will not exceed such amount or that STB will not have to use other sources for
these amounts. STB has to date only used internal resources to assess its Year
2000 risks and cost estimates and does not expect to use any independent
verification or validation process in this regard. None of STB's other IT
projects has been delayed due to STB's Year 2000 Project. Funds for the Year
2000 Project are expected to be paid for out of operations.
Risks: If STB does not successfully complete its Year 2000 Project, it could,
among other results, prevent it from receiving orders and delivering Year 2000
compliant goods to customers and prevent it from placing orders and receiving
sufficient quantities of supplies from vendors. This could have a material
effect on STB's ability to market, sell and implement its products, which could
have a material adverse effect on its financial condition and results of
operations. STB's most reasonably likely worst case Year 2000 scenario would
likely involve the failure of a critical supplier's products to be Year 2000
compliant, which could temporarily suspend the manufacture and delivery of STB's
related products while the problem was fixed or an alternate supply source was
identified. As indicated above, STB is formulating an informal contingency plan
that includes identifying alternate suppliers. In addition, as a result of Year
2000 concerns, the PC industry as a whole may experience declining growth rates
and a decreased demand for PCs and PC related products. There can be no
assurances that third parties will be Year 2000 compliant in a timely manner.
Contingency Plans: STB has to date experienced no significant Year 2000
problems. Although STB has not adopted a formal contingency plan, it is
currently assessing alternatives, which may be implemented in the event Year
20000 issues arise.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
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. STB 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. STB will adopt FAS 131 in the year ending October 31, 1999.
On March 4, 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position No. 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for Internal
Use ("SOP 98-1"). SOP 98-1 requires computer software costs related to internal
use software that are incurred in the preliminary project stage should be
expensed as services consumed in developing or obtaining internal-use computer
software; payroll and payroll-related costs for employees who are directly
associated with and who devote time to the internal-use computer software
project (to the extent of the time spent directly on the project); and interest
costs incurred when developing computer software for internal use should be
capitalized. SOP 98-1 is effective for financial statements for fiscal years
beginning after December 15, 1998. Accordingly, STB will adopt SOP 98-1 in its
financial statements for the year ending October 31, 1999. STB does not believe
the adoption of SOP 98-1 will have a material effect on its results of
operations or financial condition.
On June 15, 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (FAS 133). FAS 133 is effective for all
fiscal quarters of all fiscal years beginning after June 15, 1999 (November 1,
1999 for STB). FAS 133 requires that all derivatives instruments be recorded on
the balance sheet at their fair value. Changes in the fair value of derivatives
are recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge transaction
and, if it is, the type of hedge transaction. STB is currently evaluating
implementation of FAS 133 and the effects the statement will have on its
financial statements and disclosures. STB believes that, due to the current
limited use of derivative instruments, adoption of the statement will not have a
material effect on its results of operations, financial position, capital
resources or liquidity.
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PART II OTHER INFORMATION
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
In connection with our entry into the 3Dfx Merger Agreement, on December 13,
1998 we entered into the STB Stock Option Agreement pursuant to which we granted
to 3Dfx an option to purchase up to 1,890,883 shares of STB Common Stock. The
option was granted to 3Dfx as a condition to 3Dfx's entry into the 3Dfx Merger
Agreement, in reliance on the exemption from registration under Section 4(2) of
the Securities Act 1933. The issuance of the option did not involve a public
offering. See "Business-Proposed 3Dfx Merger" in our Annual Report on Form 10-K
for the year ended October 31, 1998 for further information with respect to the
terms under which the option may be exercised.
ITEM 5 OTHER INFORMATION-RISK FACTORS
This report contains certain forward-looking statements within the
meaning of the federal securities laws. STB's actual results and the timing of
certain events could differ greatly from those anticipated in these
forward-looking statements as a result of certain known and unknown factors,
including the risks faced by us described below. The risks and uncertainties
described below are not the only ones facing us. Additional risks and
uncertainties not presently known to us or that we do not currently believe are
important may also harm our business operations. If any of the following risks
actually occur, our business, our financial condition or our results of
operations could be seriously harmed. The following factors and other
information in this report should be considered carefully in evaluating STB and
an investment in the STB Common Stock.
STB AND ITS SHAREHOLDERS FACE A NUMBER OF RISKS RELATED TO THE 3DFX MERGER.
There are a number of specific risks associated with the proposed 3Dfx
Merger, including the following:
o 3Dfx and STB may encounter substantial difficulties
integrating the two companies' products, technologies,
research and development activities, administration, sales and
marketing and other aspects of operations in a timely manner.
The difficulties, costs and delays involved in integrating the
companies may arise from multiple possible sources and may
cause increased operating costs, lower then anticipated
financial performance or the loss of customers and employees.
The failure to successfully integrate 3Dfx and STB in a timely
manner could result in a failure of the resulting company (the
"Combined Company") to realize any of the anticipated benefits
of the 3Dfx Merger and could materially harm the business of
the Combined Company.
o 3Dfx and STB may lose customers or suppliers as a result of
the Merger. In particular, two of 3Dfx's largest customers,
Creative Labs, Inc. and Diamond Multimedia Systems, Inc.,
compete directly with STB. It is expected that as a result of
the 3Dfx Merger, sales to Creative Labs and Diamond will be
reduced significantly from prior levels and that such
customers may no longer continue to be significant customers
of the Combined Company. In addition, nVidia, which is a major
supplier of STB and whose graphic chips were incorporated into
STB products representing 63.9% of STB's net sales in fiscal
1998, competes directly with 3Dfx. After the merger, STB plans
to continue to sell to its customers its current products that
use nVidia graphics chips, but will not use nVidia's graphics
chips on any new products. Unless the Combined Company can
persuade STB's existing customers that are purchasing products
using nVidia or other graphics chips to purchase new products
based on 3Dfx graphics chips, STB's revenue contribution to
the Combined Company will be reduced significantly.
o The Combined Company will be dependent on a limited source of
chips and boards because both companies will be more
restricted in their ability to select products produced by
either STB's or 3Dfx's competitors. If either 3Dfx's chips or
STB's boards fail to meet the requirements of either
companies' customers, the business of the Combined Company
could be materially harmed.
o 3Dfx expects to lose relationships with key customers that
have supported 3Dfx's focus on the retail sales channel,
causing 3Dfx to rely on STB's distribution relationships,
which historically have not focused on retail sales.
o The 3Dfx Merger Agreement provides for a fixed exchange ratio
between shares of STB Common Stock and shares of 3Dfx Common
Stock As a result, if the market price of 3Dfx Common Stock
decreases or increases prior to the 3Dfx Merger, the market
value of 3Dfx Common Stock to be received by STB shareholders
in the 3Dfx Merger would correspondingly decrease or increase.
o The Combined Company's success following the 3Dfx Merger will
depend on the retention and integration of key personnel.
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o Upon consummation of the 3Dfx Merger, STB shareholders will
become 3Dfx shareholders. There are important differences
between the rights of STB and 3Dfx shareholders, including
differences due to the fact that STB is a Texas corporation
and 3Dfx is a California corporation. In addition, 3Dfx has
adopted a shareholder rights plan that, among other things,
may discourage certain types of transactions that may involve
an actual or threatened change of control of 3Dfx. STB has no
such plan.
o There will be substantial expenses resulting from the 3Dfx
Merger of approximately $4.5 million.
o Certain officers and directors of STB may be deemed to have
conflicts of interest with respect to the 3Dfx Merger.
o The closing of the 3Dfx Merger is subject to certain
conditions that may not be satisfied prior to the time of the
closing, which could prevent the 3Dfx Merger from being
consummated.
In addition, in the event of the consummation of the 3Dfx Merger, there
are a number of risks related to the business and operations of 3Dfx that will
affect the operations of the Combined Company, including a number of the same or
similar risks faced by STB that are identified below, as well as a number of
risks specific to 3Dfx, including 3Dfx's limited operating history, 3Dfx's
historical dependence on the retail distribution channel, 3Dfx's dependence on
independent manufacturers and other third parties (3Dfx has no manufacturing
capacity) and 3Dfx's dependence on third party developers and publishers of
software titles that operate with 3Dfx's chips. In the event the 3Dfx Merger is
not consummated, STB will face other risks, including the opportunity costs
associated with its pursuit of a business combination with 3Dfx.
STB'S QUARTERLY OPERATING RESULTS ARE SUBJECT TO FLUCTUATIONS CAUSED BY MANY
FACTORS, MANY OF WHICH ARE OUT OF ITS CONTROL.
STB's quarterly and annual results of operations have varied significantly
in the past and are likely to continue to vary in the future. These variations
are the result of a number of factors, many of which are beyond STB's control.
These factors include:
o The industry in which STB competes is always changing with the constant
introduction of new technologies, products and methods of doing business
o The ability of STB to successfully develop, introduce and market new or
enhanced products.
o The ability to introduce and market products in accordance with
specialized customer design requirements and short design cycles
o Changes in the relative volume of sales of various products with
sometimes significantly different margins
o Changes in demand for STB's products and its customers' products
o Frequent gains or losses of significant customers or strategic
relationships
o Unpredictable volume and timing of customer orders
o The availability, pricing and timeliness of delivery of components for
STB's products
o The timing of new product announcements or introductions by competitors
o Product obsolescence and the management of product transitions
o Production delays
o Decreases in the average selling prices of products
o Seasonal fluctuations in sales
Any one or more of the factors listed above or other factors could cause STB
to fail to achieve its revenue and profitability expectations. In particular,
the failure to meet market expectations could cause a sharp drop in STB's stock
price.
Most of STB's operating expenses are relatively fixed in the short term. STB
may be unable to rapidly adjust spending to compensate for any unexpected sales
shortfall, which could materially harm quarterly operating results. This is
especially true since STB operates its own manufacturing facility. As a result,
STB incurs relatively high fixed overhead and labor costs compared with those of
its competitors that outsource their manufacturing requirements. If STB fails to
generate the level of product revenues needed to absorb its fixed overhead and
labor costs, its business could be materially harmed.
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As a result of the above factors, STB believes that you should not rely on
period-to-period comparisons of results of operations as an indication of future
performance. The results of any one quarter are not indicative of results to be
expected for a full fiscal year.
STB OPERATES IN MARKETS THAT ARE INTENSELY AND INCREASINGLY COMPETITIVE, AND
SOME OF ITS COMPETITORS MAY HAVE BETTER RESOURCES WITH WHICH TO COMPETE.
The markets in which STB competes are intensely competitive and are likely
to become more competitive in the future. As a result, STB constantly and
increasingly risks losing customers to its competition. The competitive
environment also creates downward pressure on prices and requires higher
spending to address the competition, both of which tend to keep profit margins
lower. STB does not compete on the basis of price alone. STB believes that the
principal competitive factors for its products are:
o Product performance and quality
o Conformity to industry standard application programming interfaces, or
APIs
o Access to customers and distribution channels
o Manufacturing capabilities and cost of manufacturing
o Price
o Product support
o Ability to bring new products to the market in a timely way
Many of STB's current and potential competitors have substantially greater
financial, technical, manufacturing, marketing, distribution and other resources
than STB. These competitors may also have greater name recognition and market
presence, longer operating histories, greater market power and product breadth,
lower cost structures and larger customer bases than STB. As a result, such
competitors may be able to adapt more quickly to new or emerging technologies
and changes in customer requirements.
STB's primary competition consists of:
o Independent manufacturers of brand name graphics boards, including
Diamond Multimedia Systems, Inc., ATI Technologies, Inc., Matrox
Graphics, Inc., ELSA GmbH, Creative Labs, Inc., CEI Inc., Number Nine
Visual Technology Corporation, and Hauppauge ComputerWorks, Inc.
o Independent manufacturers of specialized technology products, including
Colorgraphic Communications Corporation, Datapath Ltd, and Matrox
Graphics, Inc.
In addition to STB's major competitors, certain of its suppliers sell
graphics chips directly to original equipment manufacturers, or OEMs, for use in
internally produced multimedia accelerator subsystems, other multimedia
subsystems or on motherboards. If one or more of STB's significant OEM customers
commences or increases internal production of multimedia accelerator subsystems
or other multimedia subsystems, STB's business could be materially harmed.
Furthermore, several major OEMs currently integrate graphics chips on the
motherboard of their personal computers. If one or more of STB's major OEM
customers begin to incorporate graphics controller chips or other controller
chips onto motherboards rather than incorporating STB's products, its business
could be materially harmed.
STB also faces competition from the makers of other personal computer
components and software that are increasingly providing graphics processing
capabilities.
STB DEPENDS ON THE PERSONAL COMPUTER AND GRAPHICS CHIPS MARKETS, WHICH ARE
RAPIDLY CHANGING, HIGHLY CYCLICAL AND VULNERABLE TO SHARP CHANGES IN DEMAND.
STB operates in markets that are constantly and rapidly changing and which
have in the past, and may in the future, experience significant downturns.
Substantially all of STB's revenues are currently derived from products sold for
use in personal computers. STB expects to continue to derive almost all of its
revenues from the sales of products for use in personal computers. The personal
computer and graphics chips markets have also grown substantially in recent
years. However, this growth may not continue. If the personal computer market
were to decline, STB would likely experience significantly reduced demand for
most or all of its products.
The personal computer and graphics chips industries are cyclical and have
been characterized by:
o Rapid technological change
o Evolving industry standards
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o Cyclical market patterns
o Frequent new product introductions and short product life cycles
o Significant price competition and price erosion
o Fluctuating inventory levels
o Alternating periods of over-capacity and capacity constraints
o Variations in manufacturing costs and yields
o Significant expenditures for capital equipment and product development
Changes in demand in the personal computer market could be large and sudden.
Since graphics board and personal computer 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, the manufacturers may abruptly stop purchasing additional inventory
from suppliers such as STB until the excess inventory has been used. This
suspension of purchases or any reduction in demand for personal computers
generally, or for particular products that incorporate STB's products, would
materially harm its business.
In addition, the personal computer market has in the past experienced
significant economic downturns at various times, characterized by lower product
demand and accelerated reduction of product prices. STB may experience
substantial period-to-period fluctuations in results of operations due to
general semiconductor industry conditions.
THE CAPABILITIES OF STB'S PRODUCTS ARE BEING PROVIDED BY PERSONAL COMPUTER
COMPONENTS AND OPERATING SYSTEMS THAT ARE NOT SOLD BY STB.
A majority of STB's net sales are derived from the sale of graphics boards.
However, there is a trend within the industry for graphics functionality to
migrate from the graphics board to other personal computer components or into
operating systems. This trend could significantly reduce the demand for STB's
products.
Based upon an independent industry newsletter published by Jon Peddie
Associates to which STB subscribes (for approximately $2,000 annually), STB
believes approximately 71% of all graphics controller chips manufactured in the
twelve month period ended June 30, 1998 were incorporated onto graphics boards,
and approximately 29% were incorporated onto motherboards. Graphics boards are
usually used in higher-end personal computers offering the latest technology and
performance features. However, as graphics functionality becomes technologically
stable and widely accepted by personal computer users, it typically migrates to
the personal computer motherboard. STB expects this trend to continue,
especially with respect to its low-end graphics boards. In this regard, the MMX
instruction set from Intel and the expanded capabilities provided by the Direct
X APIs from Microsoft have increased the capability of Microsoft's operating
systems to control display features that have traditionally been performed by
graphics boards. Similarly, Intel has announced new motherboard chips that will
incorporate graphics processing that has traditionally been accomplished by
specialized graphics processing chips on separate graphics boards. As a result
of these trends of technology migration, STB's success largely depends on its
ability to continue to develop products that incorporate new and rapidly
evolving technologies that manufacturers have not yet fully incorporated onto
personal computer motherboards or into operating systems.
STB HAS EXPERIENCED AND MAY CONTINUE TO EXPERIENCE GROWTH THAT PLACES
SIGNIFICANT STRAIN ON ITS RESOURCES.
Growth has placed, and is expected to continue to place, a significant
strain on STB's managerial, operational and financial resources, including its
sales, customer support, research and development, and finance and
administrative operations. As a result of this growth, STB may experience
difficulty securing adequate quantities of components or manufacturing
equipment. In addition, to the extent that new OEM customers are added, gross
profit margins derived from initial orders with new OEM customers are frequently
lower than STB's typical gross profit margins. This could reduce STB's overall
gross profit margin.
In response to its growth, STB has increased its expenditures and made
certain long-term spending commitments, such as the expansion of production
lines at its Juarez manufacturing facility and the relocation of its corporate
headquarters to a larger facility in Richardson, Texas. These expenditures would
be difficult to reduce quickly if STB's business declined. STB's inability to
effectively manage any future growth would materially harm its business.
IF STB DOES NOT CONTINUE TO DEVELOP AND MARKET NEW AND ENHANCED PRODUCTS, IT
WILL NOT BE ABLE TO SUCCESSFULLY COMPETE IN ITS MARKETS AND ITS AVERAGE SELLING
PRICES AND GROSS PROFITS WILL LIKELY DECLINE.
The markets for which STB's products are designed are intensely competitive
and are characterized by short product life cycles, rapidly changing technology,
evolving industry standards and declining average selling prices. As a result,
STB cannot succeed unless it consistently develops and markets new products. STB
believes this will require expenditures for research and development in the
future consistent with the historical research and development expenditures of
STB, taking into account efficiencies that may be
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achieved in integrating the companies' research and development organizations.
To succeed in this environment STB must anticipate the features and
functionality that customers will demand. STB must then incorporate those
features and functionality into products that meet the design requirements of
the personal computer market and the timing requirements of retail selling
seasons. The success of STB's new product introductions will depend on several
factors, including:
o Proper new product definition
o Timely completion and introduction of new product designs
o The ability of subcontractors and component manufacturers to effectively
design and implement the manufacture of new products
o Quality of new products
o Product performance as compared to competitors' products
o Market acceptance of STB's and its customers' products
o Competitive pricing of products
o Introduction of new products to the market within the limited time
window for original equipment manufacturer design cycles and retail
selling seasons
STB must also continue to develop new products in order to maintain average
selling prices and gross margins. As the markets for STB's products continue to
develop and competition increases, STB anticipates that product life cycles will
shorten and average selling prices will decline. In particular, average selling
prices and, in some cases, gross margins for STB's products will decline as
products mature. To do this, STB must successfully identify new product
opportunities and develop and bring new products to market in a timely manner.
The failure of STB to successfully develop and introduce new products and
achieve market acceptance for such products would materially harm STB's
business. STB has in the past experienced delays in completing development and
introduction of new products. Such delays in the future could materially harm
STB's business.
BECAUSE STB'S PRODUCTS HAVE SHORT PRODUCT LIFE CYCLES, STB MUST SUCCESSFULLY
MANAGE PRODUCT TRANSITIONS IN ORDER TO REMAIN COMPETITIVE.
STB's products have short product life cycles. Each new product cycle
creates risks that competitors of STB will gain market share. STB's major OEM
customers typically introduce new system configurations as often as twice a
year. The life cycles of STB's graphics boards typically range from six to nine
months. A failure by STB to successfully introduce new products within a given
product cycle could materially harm its business for that cycle and possibly for
subsequent cycles. Any such failure could also damage STB's brand name,
reputation and relationships with its customers and cause longer term harm to
its business.
STB's products have short product life cycles because the personal computer
market frequently undergoes transitions in which products rapidly incorporate
new features and performance standards on an industry-wide basis. STB's products
must be able to support the new features and performance levels being required
by personal computer manufacturers at the beginning of such a transition.
Otherwise, STB would likely lose business as well as the opportunity to compete
for new design contracts until the next product transition. Failing to develop
products with required features and performance levels or a delay as short as a
few months in bringing a new product to market could significantly reduce STB's
revenues for a substantial period. A revenue reduction of that nature would
likely materially harm STB's business.
SHORT PRODUCT LIFE CYCLE RISKS ARE WORSENED BY LONG COMPONENT LEAD TIMES.
The short product life cycles of STB's products also give rise to a number
of risks involving product and component inventories. These risks are heightened
by the fact that long lead times are required to acquire some components of
STB's products. STB may not be able to quickly reduce its production or
inventory levels in response to unexpected shortfalls in sales. This could leave
STB with significant and costly obsolete inventory. Long component lead times
could cause these inventory levels to be larger than they otherwise would be.
Long component lead times also may prevent STB from quickly taking advantage of
an unexpected new product cycle. This can lead to costly lost sales
opportunities and loss of market share.
STB'S PRODUCTS DEPEND UPON WHQL CERTIFICATION, WHICH MAY NOT BE GRANTED FOR
FUTURE PRODUCTS.
STB 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 STB to claim
that a particular product is "Designed for Microsoft Windows." STB's OEM
customers typically require STB's products to have this certification prior to
-17-
<PAGE> 18
making volume purchases. STB may not receive WHQL certification for future
products in a timely fashion. A failure to receive WHQL certification could
materially harm STB's business.
BECAUSE STB HAS SIGNIFICANT CUSTOMER CONCENTRATION, THE LOSS OF A MAJOR CUSTOMER
WILL SEVERELY REDUCE SALES.
STB's sales are highly concentrated among a limited number of customers that
do not have long term contractual commitments to purchase from STB. This
combination of customer concentration and lack of contractual commitments means
the loss or reduction in business of even a single customer could severely
reduce STB's sales.
STB's three largest original equipment manufacturers, or OEMs, customers
accounted for approximately 75% of net sales during fiscal 1998, with Gateway,
Inc., Dell Computer Corporation and Compaq Computer Corporation accounting for
approximately 39%, 31% and 5% of net sales for such period. Historically,
Gateway has been STB's largest customer, while Dell and Compaq have recently
become more significant customers. STB's other significant customers change from
period to period. STB expects that a small number of customers will continue to
account for a substantial portion of its revenues for the foreseeable future.
Another result of customer concentration and lack of long term purchasing
contracts is that STB's customers have significantly more power over STB to
influence the pricing of its products. This could reduce STB's gross margins and
harm its business.
STB HAS SIGNIFICANT PRODUCT CONCENTRATION, WHICH MEANS THAT POOR RESULTS FROM A
SINGLE PRODUCT COULD SEVERELY HARM ITS BUSINESS.
Historically, a majority of STB's net sales have come from sales of graphics
boards. Also, from time to time, a majority of STB's net sales in a fiscal
quarter have come from the sale of a single or a limited number of graphics
boards.
STB DEPENDS UPON A SINGLE MANUFACTURING FACILITY THAT IT OWNS AND OPERATES,
INCREASING STB'S RISKS IN THE EVENT OF MANUFACTURING DIFFICULTIES AND INCREASING
STB'S FIXED COSTS.
STB's sole manufacturing facility is located in Juarez, Mexico. Since STB is
dependent on this single manufacturing facility, any disruption of STB's
manufacturing operations at this facility would materially harm its business.
Such disruption could result from various factors, including difficulties in
attracting and retaining qualified manufacturing employees, difficulties
associated with the use of new, reconfigured or upgraded manufacturing
equipment, labor disputes, human error, governmental or political risks or a
natural disaster such as an earthquake, tornado, fire or flood.
In comparison to those of its competitors that do not maintain their own
manufacturing facilities, STB 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 materially harm STB's business.
CHANGES IN THE MIX OF STB'S PRODUCT SALES BY PRODUCT OR BY SALES CHANNEL COULD
SIGNIFICANTLY HARM STB'S SALES OR PROFIT MARGINS.
STB offers two broad categories of products: graphics boards and other
multimedia subsystems that are primarily sold to major original equipment
manufacturers, or 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 graphics boards to OEMs currently account for a substantial majority of STB's
net sales to OEMs. These sales are characterized by relatively high unit volumes
and relatively low gross profit margins. Sales of STB's graphics boards and
other multimedia subsystems to the commercial market are characterized by
relatively modest volumes and moderate gross profit margins. Sales of STB's
specialized technology products are characterized by relatively low unit volumes
and relatively high gross profit margins.
Shifts in the mix of products sold or in the sales channels into which such
products are sold could materially harm STB's business. In particular, a
decrease in sales of graphics boards and other multimedia subsystems to the
commercial market or in sales of specialized technology products could result in
a disproportionately greater decrease in STB's gross profit margin. This is
because sales of graphics boards and other multimedia subsystems in the
commercial market and sales of specialized technology products currently have
higher gross profit margins than sales of graphics boards and other multimedia
subsystem products to STB's OEM customers. On the other hand, any decrease in
the volume of graphics boards and other multimedia subsystems sold to STB's OEM
customers would significantly reduce total net sales. This would also materially
harm STB's business.
STB RELIES ON INTELLECTUAL PROPERTY THAT MAY NOT BE ADEQUATELY PROTECTED AND
THAT MAY BE EXPENSIVE TO PROTECT.
STB relies primarily on a combination of patent, mask work protection,
trademarks, copyrights, trade secret laws, employee and third-party
nondisclosure agreements and licensing arrangements to protect its intellectual
property. If these efforts are not sufficient to protect its intellectual
property, STB's business may be harmed. Many foreign jurisdictions offer less
protection of intellectual property rights than the United States. Therefore,
the protection provided to STB's proprietary technology by the laws of foreign
jurisdictions may not be sufficient to protect its technology.
It is common in the personal computer industry for companies to assert
intellectual property infringement claims against other companies. Therefore,
STB's products may become the target of infringement claims. If that were to
occur, STB may be required to spend significant time and money to defend its
products, redesign its products or develop or license a substitute technology.
Any of
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<PAGE> 19
those events could materially harm STB's business. Litigation by or against STB
could result in significant expense to STB and could divert the efforts of STB's
technical and management personnel, regardless of the outcome of such
litigation.
It is common in the personal computer industry for companies to assert
intellectual property infringement claims against other companies. As a result,
STB indemnifies some of its original equipment manufacturer, or OEM customers
against certain intellectual property claims relating to STB's products used in
OEM customers' products. Several OEM customers have sent STB notices of
potential indemnity claims based upon a notice of patent infringement.
Subsequently, the patent owner filed a patent infringement lawsuits in the U.S.
and elsewhere against several of such OEM customers and a number of other major
personal computer systems manufacturers. Based upon STB's preliminary evaluation
of the patent, it does not believe the infringement claims have merit as to its
products sold to its customers. However, even if the claims do not have merit,
STB may be required to dedicate significant management time and expense to
defending itself if it is directly sued, or assisting its OEM customers in their
defense of this or other infringement claims pursuant to such indemnity
agreements. This could materially harm STB's business.
STB HAS HAD TO RECORD EXPENSES FOR OBSOLETE INVENTORY, PRICE PROTECTION AND
STOCK ROTATIONS.
STB establishes reserves for obsolete inventory, which may be in the form of
components, work in process or finished goods. These reserves usually arise as a
result of price erosion in the marketplace or changes in technology. In fiscal
1998, STB recorded a relatively high expense for inventory obsolescence of $6.4
million, approximately half of which related to non-recurring charges and the
remainder of which related to normal obsolescence and manufacturing scrap
associated with continuing operations.
If there is a price decrease in STB's products, STB's credit arrangements
with its commercial customers generally allow such customers 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. This
practice is common in the industry. 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.
STB establishes reserves to cover these practices, and in fiscal 1998 recorded a
relatively high expense of $4.2 million for price protection. The increase in
this expense over the prior period was principally due to the delayed release of
certain products, which expense management believes is non-recurring in nature.
This product release delay was due to STB's inability to obtain an adequate
supply of memory chips, resulting in the need to price protect the products
shortly after their introduction.
High levels of expenses for obsolete inventory, price protection claims or
returns may materially harm STB's business.
A SECURITIES CLASS ACTION LAWSUIT HAS BEEN FILED AGAINST STB.
A securities class action lawsuit was filed on October 9, 1998 in Dallas
County, Texas against STB and certain of its officers and directors, along with
the underwriters who participated in STB's public offering on March 20, 1998.
The petition alleges that the registration statement for STB's secondary public
offering contained false and misleading statements of material facts and omitted
to state material facts, alleging that the registration statement failed to
disclose certain alleged STB product defects, alleged difficulties with some of
STB's major customers and STB's allegedly deteriorating financial performance.
The petition asserts claims under Sections 11, 12(a)(2) and 15 of the Securities
Act of 1933 and Sections 581-33A and 581-33F of the Texas Securities Act on
behalf of a purported class of persons who purchased or otherwise acquired STB's
common stock in the public offering. The petition seeks recission and/or
unspecified damages. STB denies the allegations in the petition and intends to
vigorously defend the lawsuit. In the event the plaintiffs in the lawsuit
prevail in connection with any of their claims, then, depending upon the
magnitude of damages and expenses incurred by STB and the extent to which such
damages and expenses are covered by insurance, the lawsuit could materially harm
STB or the combined company.
RISKS ASSOCIATED WITH YEAR 2000 COMPLIANCE.
STB uses a significant number of computer software programs and
operating systems in its internal operations. These include applications used in
financial business systems and various administration functions, and also
software programs in its products. If these software applications are unable to
appropriately interpret dates occurring in the upcoming calendar year 2000, some
level of modification or replacement of such software may be necessary. STB
believes that all of its existing products are year 2000 compliant and has
conducted or is conducting year 2000 compliance testing. Despite such belief,
STB's products may not be year 2000 compliant. If STB's products fail to
perform, including failures due to the onset of calendar year 2000 its business
would likely be materially harmed.
STB is currently evaluating its information technology for year 2000
compliance. This evaluation includes reviewing what actions are required to make
all internally used software systems year 2000 compliant as well as actions
necessary to make STB less vulnerable to year 2000 compliance problems
associated with third parties' systems. Such measures may not solve all year
2000 problems. Any year 2000 problems could materially harm STB's business. In
addition, STB's customers and suppliers may not be year 2000 compliant, which
could materially harm STB's business.
-19-
<PAGE> 20
STB DEPENDS ON A LIMITED NUMBER OF SUPPLIERS FROM WHOM STB DOES NOT HAVE A
GUARANTEE OF ADEQUATE SUPPLIES, INCREASING THE RISK THAT A LOSS OF OR PROBLEMS
WITH A SINGLE SUPPLIER COULD SIGNIFICANTLY HARM STB'S BUSINESS.
STB obtains several of the components used in its products from single or
limited sources. If component manufacturers do not allocate a sufficient supply
of components to meet STB's needs, STB may have to obtain these components from
distributors or on the spot market at a higher cost. STB has no guaranteed
supply arrangements with any of its suppliers, and current suppliers may not be
able to meet its current or future component requirements. From time to time,
STB relies substantially upon a limited number of sole source suppliers for
graphics chips, which can, in large part, determine the performance of a
graphics board.
If STB in the past experienced difficulty obtaining a particular graphics
chip, it was able to use comparable graphics chips. After the 3Dfx Merger, STB
may not be able to select other graphics chips because the graphics chip
suppliers are 3Dfx competitors. Even if other graphics chip suppliers would
supply STB as a 3Dfx subsidiary, these alternative components may cost
significantly more. Alteration of product designs to use alternative components
could cause significant delays and could require product recertification from
STB's OEM customers or reduce its production of the related products. Any of
these effects could materially harm STB's business.
From time to time STB has experienced difficulty meeting certain product
shipment dates to customers for various reasons. These reasons include component
delivery delays, component availability shortages, system compatibility
difficulties and supplier product quality deficiencies. In some instances
missing shipment dates has resulted in impaired margins, reduced production
volumes, strained customer relations and loss of business.
Software drivers, which are essential to the performance of nearly all of
STB's products, are included with some of STB's limited source components. From
time to time STB experiences product delivery delays due to the inadequacy or
the incompatibility of software drivers provided by component suppliers or
developed internally by STB. Delays in the delivery of components, component
shortages, system compatibility difficulties, supplier product quality
deficiencies and software driver problems will continue to occur in the future.
Such delays or problems could materially harm STB's business. Additionally, in
an effort to avoid actual or perceived component shortages, STB 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 materially harm STB's business.
INCREASES IN THE PRICES OF SUPPLIES CAN HARM STB'S BUSINESS.
Significant increases in the prices of components, such as graphics chips or
memory chips, have occurred in the past, and STB has not always been able to
increase its products' prices accordingly. Demand for STB's products has been
and will continue to be significantly affected by actual and anticipated changes
in the price and supply of SDRAM or other memory products. Large supplies of
SDRAMs in the Spring of 1998 resulted in significant price declines for such
components and lowered total graphics board costs on products that used the
components as compared to SGRAMs. Worldwide shortages of controller chips or
memory chips and international tariff disputes have resulted in substantial
component cost increases that have harmed STB's business. These price increases
may occur in the future, and may materially harm STB's business.
STB'S ENTRY INTO NEW PRODUCT MARKETS CAN DIVERT RESOURCES FROM STB'S CORE
BUSINESS AND EXPOSE STB TO RISKS INHERENT IN THOSE NEW MARKETS.
STB's business historically has focused primarily on the design, manufacture and
sale of graphics boards. However, STB from time to time undertakes new product
initiatives, such as DVD decoders and flat panel display products. There are
numerous risks inherent in entering into new product markets. These risks
include 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 STB's new products or the
personal computers into which they are incorporated will not gain market
acceptance. In addition, a new product line, like STB'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 STB's reputation
in its core graphics board business as a result of such failure, could
materially harm STB's business.
STB IS SUBJECT TO ENVIRONMENTAL REGULATIONS IN REGARDS TO ITS MANUFACTURING
FACILITY.
STB 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 its products. STB could be fined or suffer a suspension of
production, alteration of its manufacturing processes or cessation of operations
if it does not comply with any such regulation. If this occurs, STB's business
could be materially harmed.
-20-
<PAGE> 21
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Number
2.1 Agreement and Plan of Reorganization by and among 3Dfx Interactive,
Inc., Voodoo Merger Sub, Inc. and the Company dated as of December 13,
1998, and the related Stock Option Agreement (incorporated by reference
to Schedule 13D of 3Dfx Interactive, Inc. dated December 23, 1998 with
respect to the Company).
10.1 Employment Agreement dated November 1, 1996 by and between the Company
and William E. Ogle (incorporated by reference to Exhibit 10.42 to the
Company's Registration Statement on Form S-1 (Registration No.
333-14313)), as amended by that certain Amendment to Employment
Agreement for Executive Officer dated December 13, 1998 (incorporated
by reference to Exhibit 10.1 to the Company's Annual Report on Form
10-K for the year ended October 31, 1998).
10.2 Employment Agreement dated November 1, 1996 by and between the Company
and Randall D. Eisenbach (incorporated by reference to Exhibit 10.43 to
the Company's Registration Statement on Form S-1 (Registration No.
333-14313)), as amended by that certain Amendment to Employment
Agreement for Executive Officer dated December 13, 1998 (incorporated
by reference to Exhibit 10.2 to the Company's Annual Report on Form
10-K for the year ended October 31, 1998).
10.3 Employment Agreement dated November 1, 1996 by and between the Company
and James L. Hopkins (incorporated by reference to Exhibit 10.44 to the
Company's Registration Statement on Form S-1 (Registration No.
333-14313)), as amended by that certain Amendment to Employment
Agreement for Executive Officer dated December 13, 1998 (incorporated
by reference to Exhibit 10.3 to the Company's Annual Report on Form
10-K for the year ended October 31, 1998).
10.4 Employment Agreement dated November 1, 1996 by and between the Company
and J. Shane Long (incorporated by reference to Exhibit 10.45 to the
Company's Registration Statement on Form S-1 (Registration No.
333-14313)), as amended by that certain Amendment to Employment
Agreement for Executive Officer dated December 13, 1998 (incorporated
by reference to Exhibit 10.4 to the Company's Annual Report on Form
10-K for the year ended October 31, 1998).
10.5 Letter Agreement dated December 11, 1998 between the Company and Hoak
Breedlove Wesneski & Co. (incorporated by reference to Exhibit 10.42 to
the Company's Annual Report on Form 10-K for the year ended October 31,
1998).
27.1 Financial Data Schedule
(b) Current Reports on Form 8-K
None
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<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STB SYSTEMS, INC.
Dated: March 17, 1999 By: /s/ William E. Ogle
----------------------------------
President and Chief Executive Officer
Dated: March 17, 1999 By: /s/ T. Greg Dewitt
----------------------------------
T. Greg Dewitt, Director of Accounting
(Chief Accounting Officer)
-22-
<PAGE> 23
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
2.1 Agreement and Plan of Reorganization by and among 3Dfx Interactive,
Inc., Voodoo Merger Sub, Inc. and the Company dated as of December 13,
1998, and the related Stock Option Agreement (incorporated by reference
to Schedule 13D of 3Dfx Interactive, Inc. dated December 23, 1998 with
respect to the Company).
10.1 Employment Agreement dated November 1, 1996 by and between the Company
and William E. Ogle (incorporated by reference to Exhibit 10.42 to the
Company's Registration Statement on Form S-1 (Registration No.
333-14313)), as amended by that certain Amendment to Employment
Agreement for Executive Officer dated December 13, 1998 (incorporated
by reference to Exhibit 10.1 to the Company's Annual Report on Form
10-K for the year ended October 31, 1998).
10.2 Employment Agreement dated November 1, 1996 by and between the Company
and Randall D. Eisenbach (incorporated by reference to Exhibit 10.43 to
the Company's Registration Statement on Form S-1 (Registration No.
333-14313)), as amended by that certain Amendment to Employment
Agreement for Executive Officer dated December 13, 1998 (incorporated
by reference to Exhibit 10.2 to the Company's Annual Report on Form
10-K for the year ended October 31, 1998).
10.3 Employment Agreement dated November 1, 1996 by and between the Company
and James L. Hopkins (incorporated by reference to Exhibit 10.44 to the
Company's Registration Statement on Form S-1 (Registration No.
333-14313)), as amended by that certain Amendment to Employment
Agreement for Executive Officer dated December 13, 1998 (incorporated
by reference to Exhibit 10.3 to the Company's Annual Report on Form
10-K for the year ended October 31, 1998).
10.4 Employment Agreement dated November 1, 1996 by and between the Company
and J. Shane Long (incorporated by reference to Exhibit 10.45 to the
Company's Registration Statement on Form S-1 (Registration No.
333-14313)), as amended by that certain Amendment to Employment
Agreement for Executive Officer dated December 13, 1998 (incorporated
by reference to Exhibit 10.4 to the Company's Annual Report on Form
10-K for the year ended October 31, 1998).
10.5 Letter Agreement dated December 11, 1998 between the Company and Hoak
Breedlove Wesneski & Co. (incorporated by reference to Exhibit 10.42 to
the Company's Annual Report on Form 10-K for the year ended October 31,
1998).
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF STB SYSTEMS, INC. INCLUDED IN ITS QUARTERLY
REPORT ON FORM 10Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> JAN-31-1999
<CASH> 31,866
<SECURITIES> 8,143
<RECEIVABLES> 40,423
<ALLOWANCES> 582
<INVENTORY> 51,628
<CURRENT-ASSETS> 12,783
<PP&E> 18,978
<DEPRECIATION> 7,918
<TOTAL-ASSETS> 148,772
<CURRENT-LIABILITIES> 44,939
<BONDS> 0
0
0
<COMMON> 133
<OTHER-SE> 101,759
<TOTAL-LIABILITY-AND-EQUITY> 148,772
<SALES> 65,729
<TOTAL-REVENUES> 65,729
<CGS> 55,833
<TOTAL-COSTS> 55,833
<OTHER-EXPENSES> 9,787
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (113)
<INCOME-PRETAX> 222
<INCOME-TAX> 80
<INCOME-CONTINUING> 142
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 142
<EPS-PRIMARY> .01<F1>
<EPS-DILUTED> .01
<FN>
<F1>TAG 41 (EPS-PRIMARY) REPRESENTS BASIC EARNINGS PER SHARE, AS DEFINED BY SFAS
128.
</FN>
</TABLE>
