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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
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AMENDMENT NO. 1
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 0-25540
STB SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
TEXAS 75-1855896
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3400 WATERVIEW PARKWAY 75080
RICHARDSON, TEXAS (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (972) 234-8750
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $0.01 per share
(Title of class)
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
The aggregate market value on January 20, 1999 of the voting and non-voting
common equity held by non-affiliates of the registrant was $91,444,815.
Number of shares of registrant's Common Stock, par value $0.01 per share,
outstanding as of January 20, 1999: 12,606,787.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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ITEM 3. LEGAL PROCEEDINGS.
UNLESS THE CONTEXT OTHERWISE REQUIRES, THE TERM "STB," "WE" OR "US" WHEN
USED IN THIS REPORT REFERS TO STB SYSTEMS, INC., A TEXAS CORPORATION, AND ITS
CONSOLIDATED SUBSIDIARIES AND PRIOR AFFILIATES.
A securities class action lawsuit was filed on October 9, 1998 in Dallas
County, Texas against us and certain of our officers and directors, along with
the underwriters who participated in our secondary public offering on March 20,
1998. The petition alleges that the registration statement for our 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 product defects, alleged difficulties with some of
our major customers and our allegedly deteriorating financial performance. The
petition asserts claims under Sections 11, 12(a)(2), and 15 of the Securities
Act of 1933, as amended, 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 Common Stock in the public offering. The petition seeks
recission and/or unspecified damages. We deny the allegations in the petition
and intend 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 us and the extent to which such
damages and expenses are covered by insurance, the lawsuit could materially harm
us.
We are a party from time to time to certain other legal proceedings arising
in the ordinary course of our business. Although the amount of any liability
that could arise with respect to these proceedings cannot be predicted
accurately, in our opinion, any liability that might result from such claims
will not have a material adverse effect on our financial position.
ITEM 7. 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 UNDER "RISK FACTORS" IN STB'S ANNUAL REPORT ON FORM
10-K FOR THE YEAR ENDED OCTOBER 31, 1998.
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 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 fiscal years 1998 and 1997, sales of our products to OEMs
represented approximately 80% and 79%, respectively, of total net sales. Sales
to the commercial market represented approximately 12% of total net sales for
fiscal years 1998 and 1997. Sales to specialized technology product markets
constituted approximately 7% of total net sales for fiscal 1998 and 8% of total
net sales for fiscal 1997. We derived the
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balance of total net sales primarily from third party assembly services. Third
party assembly services comprised approximately 1% of total net sales for fiscal
years 1998 and 1997. 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 28% in fiscal
1998 from 27% in fiscal 1997. 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. In the event of the
consummation of the 3Dfx Merger, 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 is a
major supplier of STB and whose graphics chips were incorporated into STB
products representing 63.9% of STB's net sales in fiscal 1998 (approximately
$170.1 million net sales), competes directly with 3Dfx. As a result of the
merger, STB plans to continue to offer for sale to its customers its current
products that use nVidia graphics chips, but will not 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 our Consolidated
Statements of Operations as a percentage of net sales:
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
YEAR ENDED OCTOBER 31,
-------------------------------
1998 1997 1996
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<S> <C> <C> <C>
Net sales............................................................ 100.0% 100.0% 100.0%
Cost of sales........................................................ 83.4% 74.9% 80.4%
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Gross profit......................................................... 16.6% 25.1% 19.6%
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Operating expenses:
Research and development........................................... 4.0% 3.4% 2.4%
Sales and marketing................................................ 6.6% 7.4% 6.1%
General and administrative......................................... 4.8% 5.3% 5.3%
--------- --------- ---------
Total operating expenses............................................. 15.4% 16.1% 13.8%
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Income from operations............................................... 1.2% 9.0% 5.8%
Interest expense, net................................................ 0.2% 0.8% 0.6%
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Income before income taxes........................................... 1.0% 8.2% 5.2%
Provision for income taxes........................................... 0.3% 2.8% 1.8%
--------- --------- ---------
Net income........................................................... 0.7% 5.4% 3.4%
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FISCAL YEAR ENDED OCTOBER 31, 1998 COMPARED TO FISCAL YEAR ENDED OCTOBER 31,
1997
NET SALES. Net sales increased by $66.8 million, or 33.5%, from $199.5
million in fiscal 1997 to $266.3 million in fiscal 1998. This increase resulted
from continued growth in all sales channels. Unit volume for fiscal 1998
increased by 25.7% over fiscal 1997. Our overall average unit selling prices
increased slightly, primarily as a result of increased product performance and
complexity and higher memory configurations. OEM channel sales increased $58.9
million, or 38.3%, from approximately $153.5 million in fiscal 1997 to
approximately $212.4 million in fiscal 1998. Sales growth in the OEM channel
primarily resulted from increased sales to existing customers. Commercial
channel sales increased $8.9 million, or 37.1%, from approximately $23.9 million
in fiscal 1997 to approximately $32.8 million in fiscal 1998. This increase in
sales to the commercial channel resulted primarily from sales of the award
winning Velocity 128, as well as the Black Magic Voodoo 2 and Velocity 4400
multimedia accelerators to established customers. Sales in the specialized
technology market experienced moderate growth, increasing from approximately
$15.2 million in fiscal 1997 to approximately $16.9 million in fiscal 1998, an
increase of $1.7 million, or 11.3%. Unit volume for specialized technology
products increased approximately 24.2%, while average unit selling prices
declined slightly as a result of increased competition in the market. An
increase in sales to existing customers also contributed to the moderate
increase in sales of specialized technology products.
GROSS PROFIT. Gross profit decreased by $5.8 million, or 11.6%, to $44.2
million in fiscal 1998, as compared to $50.0 million in fiscal 1997. For the
period, gross profit as a percentage of net sales declined to 16.6% from 25.1%.
The decrease in the amount of gross profit margin resulted primarily from
increased pricing pressure in the commercial and OEM markets and to a lesser
degree, the 10.3% decline in average selling prices in the specialized
technology market from fiscal 1997 to fiscal 1998. The decrease in gross profit
as a percentage of net sales resulted primarily from increased pricing pressure
on the Company's products and a decrease in higher margin specialized technology
products as a percentage of total sales. Price protection credits granted during
the year ended October 31, 1998 were $4.2 million compared to $1.3 million
during the year ended October 31, 1997. The increase in price protection
resulted primarily
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from price protection credits granted in the fourth quarter of 1998 for the
Velocity 128 and Black Magic Voodoo 2 products, totaling approximately $2.2
million. Amounts charged to expense for potential excess and obsolete inventory
were $6.4 million and $2.2 million during the years ended October 31, 1998 and
1997, respectively. The relative increase in amounts charged to expense for
potential excess and obsolete inventory during 1998 was primarily related to
$3.2 million for non-recurring charges associated with components provided by a
supplier that did not meet specifications and a slow-moving inventory matter
specifically identified through routine obsolescence reviews by management.
Management believes these additional charges for excess and obsolete inventory
are considered unusual and non-recurring in nature and are not expected to
represent any trend which would have a material impact on future results of
operations. The increases in price protection credits granted and amounts
charged to expense for potential excess and obsolete inventory contributed to
the decrease in gross profit margin.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased by $4.1 million, or 60.1%, to $10.8 million in fiscal 1998, as
compared to $6.7 million in fiscal 1997. This increase resulted primarily from
increased staffing levels at our corporate headquarters in Richardson, Texas, as
well as at our design centers in Austin, Texas, Eugene, Oregon and Belfast,
Northern Ireland. Expenses associated with new product development, software and
driver development and continued enhancement and support of our existing
products also contributed to the increase. Research and development expenses as
a percentage of net sales increased from 3.4% in fiscal 1997 to 4.0% in fiscal
1998.
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased by
$2.9 million, or 19.8%, to $17.7 million in fiscal 1998, as compared to $14.8
million in fiscal 1997. This increase resulted from additional staffing and
commissions paid as a result of our growth and higher sales levels. A decrease
in commissions paid to independent sales representatives partially offset the
general increase in sales and marketing expenses. Increased advertising and
promotional expenses in the commercial channel, the specialized technology
market and the international market also contributed to the overall increase in
sales and marketing expense. Sales and marketing expense as a percentage of net
sales decreased from 7.4% in fiscal 1997 to 6.6% in fiscal 1998.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by $2.1 million, or 19.3%, to $12.7 million in fiscal 1998, as
compared to $10.6 million in fiscal 1997. The increase is due primarily to
expenses associated with our growth, including increased staffing, occupancy
costs and other general operating expenses. Expenses associated with data
processing, as well as increased goodwill amortization also contributed to the
overall increase in general and administrative expenses. General and
administrative expense as a percentage of net sales decreased from 5.3% in 1997
to 4.8% in 1998.
NET INCOME. As a result of the foregoing factors, net income decreased by
$9.0 million, or 83.9%, to $1.7 million in fiscal 1998, as compared to $10.7
million in fiscal 1997.
FISCAL YEAR ENDED OCTOBER 31, 1997 COMPARED TO FISCAL YEAR ENDED OCTOBER 31,
1996
NET SALES. Net sales increased by $19.3 million, or 10.7%, from $180.2
million in fiscal 1996 to $199.5 million in fiscal 1997. This increase result
from continued growth in all sales channels. Unit volume for fiscal 1997
increased by 27.4% over fiscal 1996. At the same time, our average unit selling
prices continued to decline primarily as a result of declines in component
costs. OEM channel sales increased $8.0 million, or 5.5%, from approximately
$145.5 million in fiscal 1996 to approximately $153.5 million in fiscal 1997.
Sales growth in the OEM channel resulted primarily from increased sales to
existing customers. Commercial channel sales increased $4.1 million, or 20.8%,
from approximately $19.8 million in fiscal 1996 to approximately $23.9 million
in fiscal 1997. This moderate increase in sales to the commercial channel
resulted primarily from increased sales to established customers. Sales in the
specialized technology market experienced significant growth, increasing from
approximately $10.9 million in fiscal 1996 to approximately $15.2 million in
fiscal 1997, an increase of $4.3 million, or 38.9%. Increased sales to existing
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customers and the sale of products to OEM workstation groups both contributed to
the increase in sales of specialized technology products.
GROSS PROFIT. Gross profit increased by $14.7 million, or 41.9%, to $50.0
million in fiscal 1997, as compared to $35.3 million in fiscal 1996. For the
period, gross profit as a percentage of net sales increased to 25.1% from 19.6%.
The increase in gross profit margin resulted primarily from increased sales of
higher margin specialized technology products and, to a lesser degree, increased
sales to the commercial channel. In addition, declines in component costs,
economies of scale resulting from higher production volumes and greater
manufacturing efficiencies also contributed to the increase in gross profit
margin. Decreasing unit sales prices partially offset the increase in gross
profit margins.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased by $2.3 million, or 52.2%, to $6.7 million in fiscal 1997, as compared
to $4.4 million in fiscal 1996. This increase resulted primarily from additional
staffing levels at our headquarters in Richardson, Texas, as well as at our
design centers in Houston, Texas and Eugene, Oregon. During 1997 we expanded our
research and development efforts by establishing and staffing a design center in
Belfast, Northern Ireland. Expenses associated with new product development,
software development and continued enhancement and support of our existing
products also contributed to the increase. Research and development expenses as
a percentage of net sales increased from 2.4% in fiscal 1996 to 3.4% in fiscal
1997.
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased by
$3.8 million, or 34.6%, to $14.8 million in fiscal 1997, as compared to $11.0
million in fiscal 1996. This increase resulted from additional staffing and
commissions paid as a result of our growth and higher sales levels, as well as
increased travel and operating costs. Increased trade show expense, as well as
increased advertising and promotional expenses in the commercial channel, the
specialized technology market and the international market also contributed to
the overall increase in sales and marketing expense. Sales and marketing expense
as a percentage of net sales increased from 6.1% in fiscal 1996 to 7.4% in
fiscal 1997.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by $1.1 million, or 11.9%, to $10.6 million in fiscal 1997, as
compared to $9.5 million in fiscal 1996. The increase resulted primarily from
expenses associated with our growth, including increased staffing and related
expenses and data processing costs. An increase in the allocation of certain
costs related to the Mexican manufacturing operation to cost of goods sold
partially offset the increase in general and administrative expenses. Facility
expansion at our headquarters and related occupancy costs, including rent and
insurance, also contributed to the overall increase in general and
administrative expenses. As a result of the increase in operating income,
expenses associated our profit sharing plan also increased. For the periods,
general and administrative expense as a percentage of net sales remained
unchanged at 5.3%.
NET INCOME. As a result of the foregoing factors, net income increased by
$4.7 million, or 77.2%, to $10.8 million in fiscal 1997, as compared to $6.1
million in fiscal 1996.
SEASONALITY
Our quarterly operating results vary significantly depending on factors such
as the timing of new product introductions, adequacy of component supply,
changes in component costs, variations in 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 and manufacturing and other
equipment expenditures constitute our principal capital and liquidity needs. We
have generally financed these requirements and our
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operations through a combination of cash generated from operations, trade credit
from vendors, bank borrowings and the proceeds from our public offerings. As a
result of our rapid growth in recent years and our 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 $148,000 in fiscal 1998, primarily
attributable to increases in inventory and other assets, as well as decreases in
accounts payable, partially offset by decreases in accounts receivable, as a
result of declining revenues late in the fourth quarter. Cash used in operating
activities was $3.9 million in fiscal 1997, 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 $31.4
million at October 31, 1997. Cash and cash equivalents equaled $30.6 million and
$3.9 million at October 31, 1998 and 1997, respectively.
In fiscal 1998, we invested $3.1 million in capital equipment, compared with
net purchases of equipment aggregating $9.6 million during fiscal 1997. Our
investment in equipment is primarily attributable to manufacturing equipment
additions and upgrades of existing equipment to support the increased demand for
our products. 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 equipment
through traditional lease financing arrangements also. Our aggregate obligations
under all such equipment lease financing arrangements totaled approximately $9.2
million at October 31, 1998 (see Note 8 of Notes to Consolidated Financial
Statements). 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 October 31,
1998, no amounts were outstanding under the Revolving Credit Facility and $2.7
million was outstanding under the Term Loan. Principal amounts outstanding under
the Revolving Credit Facility bear interest at LIBOR plus 175 basis points
(6.989% at October 31, 1998). Amounts outstanding under the Term Loan bear
interest at LIBOR plus 250 basis points 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 new Revolving Credit Facility. All indebtedness under the
Revolving Credit Facility matures on November 21, 1999, and indebtedness under
the Term Loan matures on November 1, 2002 (subject to renewal of the Revolving
Credit Facility through such date).
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
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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.
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
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of their current year 2000 readiness status. In general, STB 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
8
<PAGE>
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.
9
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of STB Systems, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in shareholders' equity and of
cash flows present fairly, in all material respects, the consolidated financial
position of STB Systems, Inc. and subsidiaries at October 31, 1998 and 1997, and
the results of their operations and their cash flows for each of the three years
in the period ended October 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
management of STB Systems, Inc.; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe our audits provide a reasonable
basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
/s/ PricewaterhouseCoopers LLP
Dallas, Texas
December 12, 1998, except as to Note 15,
which is as of January 15, 1999
10
<PAGE>
STB SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
OCTOBER 31, 1998 AND 1997
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............................................................... $ 30,639 $ 3,869
Accounts receivable--trade, net of allowance for doubtful accounts of $520 and $465..... 32,508 47,208
Inventories, net........................................................................ 48,993 41,295
Other current assets.................................................................... 6,444 1,970
---------- ----------
Total current assets.................................................................. 118,584 94,342
Property and equipment, net............................................................... 11,586 12,348
Other assets.............................................................................. 5,142 2,864
---------- ----------
Total assets.......................................................................... $ 135,312 $ 109,554
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term debt......................................................................... $ -- $ 21,520
Accounts payable--trade................................................................. 32,050 36,801
Accrued wages, commissions and bonuses.................................................. 694 1,466
Other accrued liabilities............................................................... 1,534 2,027
Current portion of long-term liabilities................................................ 587 1,167
---------- ----------
Total current liabilities............................................................. 34,865 62,981
---------- ----------
Long-term liabilities:
Long-term notes payable................................................................. -- 500
Obligations under capital leases and other long-term liabilities........................ 2,095 2,611
---------- ----------
Total long-term liabilities........................................................... 2,095 3,111
---------- ----------
Shareholders' equity:
Preferred stock, 2,000,000 shares authorized, none issued or outstanding................ -- --
Common stock, $.01 par value, 25,000,000 shares authorized, 13,302,687 and 10,452,473
shares issued, respectively........................................................... 133 105
Additional paid-in capital................................................................ 82,875 25,357
Retained earnings......................................................................... 19,977 18,245
---------- ----------
102,985 43,707
Treasury stock, 696,800 and 35 shares, respectively, at cost.............................. (4,633) (245)
---------- ----------
Total shareholders' equity................................................................ 98,352 43,462
---------- ----------
Total liabilities and shareholders' equity............................................ $ 135,312 $ 109,554
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
11
<PAGE>
STB SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED OCTOBER 31, 1998, 1997 AND 1996
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net sales............................................................... $ 266,270 $ 199,485 $ 180,155
Cost of sales........................................................... 222,018 149,439 144,879
------------ ------------ ------------
Gross Profit............................................................ 44,252 50,046 35,276
------------ ------------ ------------
Operating expenses:
Research and development.............................................. 10,794 6,740 4,428
Sales and marketing................................................... 17,717 14,788 10,986
General and Administrative............................................ 12,666 10,618 9,486
------------ ------------ ------------
Total operating expenses................................................ 41,177 32,146 24,900
------------ ------------ ------------
Income from operations.................................................. 3,075 17,900 10,376
Interest expense, net................................................... 439 1,649 1,113
------------ ------------ ------------
Income before income taxes.............................................. 2,636 16,251 9,263
Provision for income taxes.............................................. 904 5,481 3,186
------------ ------------ ------------
Net income.............................................................. $ 1,732 $ 10,770 $ 6,077
------------ ------------ ------------
------------ ------------ ------------
Net income per share:
Basic................................................................. $ 0.14 $ 1.05 $ 0.60
------------ ------------ ------------
------------ ------------ ------------
Diluted............................................................... $ 0.13 $ 0.97 $ 0.59
------------ ------------ ------------
------------ ------------ ------------
Weighted average shares outstanding:
Basic................................................................. 12,133,560 10,297,929 10,158,803
------------ ------------ ------------
------------ ------------ ------------
Diluted............................................................... 12,882,864 11,146,602 10,309,256
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
12
<PAGE>
STB SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED OCTOBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.................................................................... $ 1,732 $ 10,770 $ 6,077
Adjustments to reconcile net income to net cash flow from operating
activities:
Depreciation and amortization............................................... 3,885 2,550 1,252
Changes in assets and liabilities:
Accounts receivable--trade................................................ 14,700 (18,506) (7,397)
Inventories, net.......................................................... (7,698) (13,652) 727
Other current assets...................................................... (4,474) (621) (479)
Other assets.............................................................. (2,277) (763) 151
Accounts payable--trade................................................... (4,751) 15,543 1,807
Accrued wages, commissions, and bonuses................................... (772) 322 585
Other accrued liabilities................................................. (493) 419 817
---------- ---------- ---------
Net cash provided by (used in) operating activities..................... (148) (3,938) 3,540
---------- ---------- ---------
Cash flows from investing activities:
Purchases of property and equipment............................................. (3,124) (9,580) (3,086)
Investment in subsidiary........................................................ -- (236) --
---------- ---------- ---------
Net cash used in investing activities..................................... (3,124) (9,816) (3,086)
---------- ---------- ---------
Cash flows from financing activities:
Borrowings (payments) on short-term debt........................................ (21,520) 9,760 (351)
Borrowings on long-term debt.................................................... -- 3,000 --
Payments on long-term debt...................................................... (1,596) (703) (1,003)
Issuance of common stock, net of issue costs.................................... 474 1,218 158
Proceeds from secondary offering................................................ 57,104 -- --
Repurchase of common stock...................................................... (4,633) -- --
Tax benefit from exercise of stock options...................................... 213 928 --
---------- ---------- ---------
Net cash provided by(used in) financing activities.............................. 30,042 14,203 (1,196)
---------- ---------- ---------
Net increase (decrease) in cash and cash equivalents............................ 26,770 449 (742)
Cash and cash equivalents at beginning of period................................ 3,869 3,420 4,162
---------- ---------- ---------
Cash and cash equivalents at end of period...................................... $ 30,639 $ 3,869 $ 3,420
---------- ---------- ---------
---------- ---------- ---------
Supplemental disclosure of cash flow information:
--Cash paid for interest in 1998, 1997 and 1996 was $1,235, $1,640, and$1,243, respectively.
--Cash paid for income taxes in 1998, 1997 and 1996 was $3,400, $4,375 and $2,775, respectively.
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
13
<PAGE>
STB SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED OCTOBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TREASURY STOCK
------------------------- PAID-IN RETAINED --------------------
SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT TOTAL
------------ ----------- ----------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, OCTOBER 31, 1995................... 10,125,000 $ 102 $ 22,103 $ 1,402 35 $ (245) $ 23,362
Issuance of common stock.................... 30,596 0 158 158
Net Income.................................. 6,077 6,077
------------ ----- ----------- --------- --------- --------- ---------
BALANCE, OCTOBER 31, 1996................... 10,155,596 102 22,261 7,479 35 (245) 29,597
Issuance of common stock.................... 231,830 3 1,218 1,221
Investment in subsidiary.................... 65,047 950 950
Cumulative translation gain................. (4) (4)
Tax benefit from exercise of stock
options................................... 928 928
Net Income.................................. 10,770 10,770
------------ ----- ----------- --------- --------- --------- ---------
BALANCE, OCTOBER 31, 1997................... 10,452,473 105 25,357 18,245 35 (245) 43,462
Net proceeds from secondary offering........ 2,775,000 28 57,076 57,104
Issuance of common stock.................... 75,249 0 474 474
Retirement of treasury stock................ (35) (245) (35) 245 0
Common stock repurchase..................... 696,800 (4,633) (4,633)
Tax benefit from exercise of stock
options................................... 213 213
Net Income.................................. 1,732 1,732
------------ ----- ----------- --------- --------- --------- ---------
BALANCE, OCTOBER 31, 1998................... 13,302,687 $ 133 $ 82,875 $ 19,977 696,800 $ (4,633) $ 98,352
------------ ----- ----------- --------- --------- --------- ---------
------------ ----- ----------- --------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
14
<PAGE>
NOTE 1--DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
STB Systems, Inc. develops, manufactures and sells a wide selection of
multimedia accelerators, other multimedia subsystem products and specialized
technology products designed for use in mid-range and high-end personal
computers ("PCs"). STB Assembly, Inc. is a wholly owned subsidiary and provides
manufacturing services to STB Systems, Inc. Symmetric Simulation Systems, Inc.,
also a wholly owned subsidiary of STB Systems, Inc., designs high-end 3D
graphics acceleration products.
PRINCIPLES OF CONSOLIDATION--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"). 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.
MANAGEMENT ESTIMATES--In preparing the consolidated financial statements in
conformity with generally accepted accounting principles, management is required
to make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. Actual results may differ from those
estimates.
CASH AND CASH EQUIVALENTS--Cash equivalents are short-term, highly liquid
investments that are both readily convertible to known amounts of cash and so
near to their maturity that they present insignificant risk of changes in value
because of changes in interest rates. Investments with initial maturities of
three months or less qualify as cash equivalents.
REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE--The Company recognizes revenue
from product sales upon shipment. Sales to original equipment manufacturers
("OEMs") account for a significant portion of the Company's sales. The Company
offers its OEM customers a limited warranty for a period of typically 15 to 36
months. Costs associated with the warranty program are accrued when revenue is
recognized and are determined on the basis of estimated future costs to fulfill
the warranty commitment.
Stock rotation return rights, under specified conditions, are provided to
certain retail customers for recently purchased products, provided an equivalent
dollar amount of other products is purchased at the time of the return. Also, in
the event the Company reduces its selling prices, certain retail customers
receive price protection credit for the difference between the original purchase
price of products remaining in specified levels of their inventories and the
Company's reduced price for such products. Sales adjustments resulting from
stock rotation returns and price protection programs are estimated by management
and accrued in the period in which the sale is made. These sales adjustments
have generally not been significant. Management's estimates of the costs
associated with the price protection and stock rotation programs are based on
the Company's historical experience with such arrangements and its evaluation of
exposure at each balance sheet date resulting from these policies. The Company's
sales are presented net of stock rotation returns and price adjustments.
The Company participates in cooperative advertising programs with certain
distributors. These programs are used by the Company to reimburse distributors
for certain forms of advertising, and in general, allows distributors credits up
to a specified percentage of net purchases. Credits for cooperative advertising
earned by the distributor, may be taken up to six months after the sale has
occurred. The Company's costs associated with these programs are estimated and
accrued at the time of sale and are included in sales and marketing expenses.
INVENTORIES--Inventories are valued at the lower of cost or market. Cost is
determined on a first-in, first-out basis using a moving weighted average
methodology.
15
<PAGE>
NOTE 1--DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT--Property and equipment are stated at cost.
Depreciation is computed for financial statement purposes using an accelerated
method over the estimated useful lives of the assets, which range from three to
five years. Amortization of assets recorded under capital leases is included in
depreciation expense. Depreciation and amortization expense for each of the
years ended October 31, 1998, 1997 and 1996 was $3,885,000, $2,550,000 and
$1,252,000, respectively.
LONG-LIVED ASSETS--Long-lived assets held and used by the Company, or to be
disposed of, are reviewed for impairment whenever events or changes in
circumstances indicate that the net book value of the asset may not be
recoverable. An impairment loss is recognized if the sum of the expected future
cash flows (undiscounted and before interest) from the use of the asset is less
than the net book value of the asset. The amount of the impairment loss will
generally be measured as the difference between net book value of the assets and
the estimated fair value of the related assets. Based on its most recent
analysis, the Company believes that no impairment of long-lived assets existed
at October 31, 1998.
RESEARCH AND DEVELOPMENT--Research and development costs are charged to
expense as incurred.
INCOME TAXES--Effective February 21, 1995 and in connection with the
Company's initial public offering ("Stock Offering"), the Company adopted
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (SFAS 109) on a prospective basis (see Note 2). Under the asset and
liability method of SFAS 109, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to temporary differences between
the financial statement carrying amounts and the tax basis of existing assets
and liabilities measured using estimated tax rates expected to apply to taxable
income in the years in which the temporary differences are expected to be
recovered or settled.
ACCOUNTING FOR STOCK-BASED COMPENSATION--In October 1995, Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-based
Compensation" (SFAS 123) was issued. This statement requires the fair value of
stock options and other stock-based compensation issued to employees to either
be included as compensation expense in the statement of operations, or the pro
forma effect on net income and earnings per share of such compensation expense
to be disclosed in the footnotes to the Company's financial statements.
Accordingly, the Company has adopted SFAS 123 on a disclosure basis only.
FINANCIAL INSTRUMENTS--As of October 31, 1998 and 1997 the fair values of
the Company's revolving credit balance and the fair values of the Company's
fixed-rate debt approximates the related carrying values.
STOCK SPLITS--During 1997, the Company declared a three-for-two split of the
Company's common stock. The stock split was effected in the form of a stock
dividend on July 17, 1997. Additionally, on January 27, 1998, another
three-for-two split of the Company's common stock was declared. Again, the stock
split was effected in the form of a stock dividend on February 29, 1998, and
resulted in the issuance of 3,491,182 additional shares. Share and per share
amounts in the accompanying financial statements have been retroactively
adjusted to reflect the stock splits.
EARNINGS PER SHARE--In February 1997, the Financial Accounting Standards
Board issued FAS No. 128, "Earnings per share" (SFAS 128). The Company adopted
SFAS 128, which establishes standards for computing and presenting earnings per
share (EPS), in the first quarter of fiscal 1998. This statement requires dual
presentation of basic and diluted EPS on the face of the income statement for
entities with complex capital structures and requires a reconciliation of the
numerator and denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation. Basic EPS excludes the effect of
potentially dilutive securities while diluted EPS reflects the potential
dilution that would occur
16
<PAGE>
NOTE 1--DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
if securities or other contracts to issue common stock were exercised, converted
into or resulted in the issuance of common stock.
INTEREST RATE SWAP--The Company may enter into interest rate swap agreements
to limit the effect of increases in floating interest rates. The differential is
accrued as interest rates change and is recorded as interest expense.
FOREIGN CURRENCY TRANSLATION--The U.S. dollar is the functional currency for
the Company's foreign operations. Gains and losses on the translation into U.S.
dollars of amounts denominated in foreign currencies are included in net income.
OTHER ASSETS--During the fourth quarter of fiscal 1998, the Company invested
$3 million in nVIDIA Corporation, a supplier. The investment is in the form of a
Convertible Subordinated Note. In the event the supplier sells common stock in
an initial public offering prior to December 31, 1998, the investment will
convert to common stock at a discount from the price per share of the common
stock in the initial public offering. In the event the supplier does not
complete an initial public offering prior to December 31, 1998, then on January
15, 1999 the investment shall automatically convert into common stock of the
supplier (see Note 15, Subsequent Events). The Convertible Subordinated Note,
included in other assets, is classified as an available-for-sale security and is
reported at fair value. At October 31, 1998 there were no unrealized gains or
losses.
NOTE 2--INITIAL PUBLIC OFFERING AND SECONDARY OFFERING
On December 16, 1994, the Board of Directors of the Company authorized an
initial public offering of the Company's common stock ("Stock Offering").
Accordingly, the Company filed a Registration Statement on Form S-1 with the
Securities and Exchange Commission for the sale of common stock. On February 14,
1995, 4,500,000 shares of common stock were offered to the public at a price of
$5.33 per share. Proceeds from the Company's Stock Offering totaled $24,000,000,
net of $2,322,000 of Stock Offering expenses. The Company's stock is listed on
the NASDAQ National Market under the symbol "STBI".
On February 25, 1998, the Company filed a registration statement on Form S-3
to offer an additional 3,000,000 shares of its common stock to the public in a
secondary offering at a price of $22.00 per share. 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.
Proceeds to the Company from the secondary offering totaled $61,050,000, net of
$3,946,000 of secondary offering expenses.
NOTE 3--ACQUISITION
During the quarter ended April 30, 1997, STB Systems, Inc. acquired all of
the outstanding shares of Symmetric Simulation Systems, Inc. ("Symmetric").
Symmetric designs and builds high-end 3D graphics acceleration products for use
in applications such as computer-aided design, product visualization and
animation. This transaction was accounted for as a purchase in accordance with
Accounting Principles Board Opinion No. 16, "Business Combinations" (APB 16). As
consideration, the Company issued 65,047 shares of stock at a fair market value
of $950,000 and cash in the amount of $236,000. As a result of the acquisition,
the Company recorded goodwill in the amount of $1,648,000, which is included in
other assets. At October 31, 1998, the Company evaluated the remaining useful
life of the goodwill, and accordingly, changed the straight-line amortization
period to five years from seven years. Based on an analysis of the undiscounted
cash flow of the associated assets, no impairment of the asset was recorded.
Unamortized goodwill at October 31, 1998 was $982,000.
17
<PAGE>
NOTE 3--ACQUISITION (CONTINUED)
The purchase price was allocated to the assets purchased and the liabilities
assumed based upon the fair values on the date of acquisition, as follows:
<TABLE>
<CAPTION>
MARCH 18, 1997
---------------
(IN THOUSANDS)
<S> <C>
Working capital, other than cash.............................................. $ 1,166
Property, plant and equipment................................................. 89
Other assets.................................................................. 4
Goodwill...................................................................... 1,648
Other liabilities............................................................. (1,720)
------
Purchase price, net of cash received.......................................... $ 1,187
------
------
</TABLE>
NOTE 4--INVENTORIES
Inventories at October 31 consist of the following:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Raw materials........................................................... $ 30,757 $ 23,193
Work-in-process......................................................... 17,267 13,859
Finished goods.......................................................... 6,169 5,643
--------- ---------
Inventories, gross.................................................... 54,193 42,695
Reserve for Obsolescence................................................ (5,200) (1,400)
--------- ---------
Inventories, net...................................................... $ 48,993 $ 41,295
--------- ---------
--------- ---------
</TABLE>
NOTE 5--PROPERTY AND EQUIPMENT
Property and equipment at October 31 consist of the following:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Furniture and equipment................................................. $ 17,876 $ 16,485
Leasehold improvements.................................................. 1,866 746
--------- ---------
19,742 17,231
Less: accumulated depreciation.......................................... (8,156) (4,883)
--------- ---------
Property and equipment, net............................................. $ 11,586 $ 12,348
--------- ---------
--------- ---------
</TABLE>
NOTE 6--SHORT-TERM DEBT
On November 21, 1997, the Company entered into a credit agreement with a
bank, whereby the Company can borrow up to $30,000,000, against a revolving
credit facility ("Revolving Credit Facility"). The borrowing capacity under the
Revolving Credit Facility was increased to $40,000,000 in January 1998. The
Revolving Credit Facility is payable upon demand, and bears interest at Libor
plus 175 basis points (6.989% at October 31, 1998). In addition, the Company
will incur a fee on the unused portion of the commitment, at an annual rate of
.375%, payable quarterly, in arrears. There was no outstanding balance under the
Revolving Credit Facility at October 31, 1998. All indebtedness under the
Revolving Credit Facility matures on November 1, 1999.
18
<PAGE>
NOTE 6--SHORT-TERM DEBT (CONTINUED)
Availability under the Revolving Credit Facility is subject to limitations
determined by the Company's borrowing base, which is calculated based on
eligible accounts receivable, as defined in the Revolving Credit Facility
agreement. In connection with the re-negotiation of the Revolving Credit
Facility in January 1998, the Company incurred additional fees in the amount of
$103,000.
At October 31, 1997, the Company had $21,520,000 outstanding under a
$25,000,000 credit agreement with a bank. This line of credit had an interest
rate of prime plus .75% (9.25% at October 31, 1997). All outstanding balances
under this credit agreement were satisfied with funds obtained from the
Revolving Credit Facility.
NOTE 7--LONG-TERM LIABILITIES
Long-term liabilities at October 31 consist of the following:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Mezzanine Facility, interest at prime plus .75%, payable in monthly
installments of interest-only through November 1, 1995 and principal and
interest from December 1, 1995 through November 1, 1999, collateralized
by certain assets of the Company........................................ $ -- $ 1,000
Obligations under capital leases.......................................... 2,682 3,278
--------- ---------
2,682 4,278
Less: current portion..................................................... (587) (1,167)
--------- ---------
Long-term liabilities..................................................... $ 2,095 $ 3,111
--------- ---------
--------- ---------
</TABLE>
In connection with the Revolving Credit Facility, the Company entered into a
long-term loan agreement ("Term Loan") in the amount of $3,000,000 which is
structured as a sale/leaseback transaction and is included in obligations under
capital leases. The Term Loan is collateralized by certain assets of the
Company, and bears interest at the rate of Libor plus 250 basis points (7.739%
at October 31, 1998). The Term Loan is payable in monthly installments of
principal and interest over five years.
The Company leases certain equipment under capital leases. Future minimum
lease payments under capital leases and the present value of the minimum capital
lease payments at October 31, 1998 are:
<TABLE>
<CAPTION>
(IN
YEARS ENDING OCTOBER 31, THOUSANDS)
- -------------------------------------------------------------------------------
<S> <C>
1999........................................................................... $ 786
2000........................................................................... 754
2001........................................................................... 690
2002........................................................................... 690
2003 and thereafter............................................................ --
------
2,920
Less: amount representing interest............................................. (238)
------
Present value of the minimum capital lease payments............................ $ 2,682
------
------
</TABLE>
19
<PAGE>
NOTE 8--COMMITMENTS AND CONTINGENCIES
The Company leases office space and equipment under various noncancelable
operating lease agreements extending through 1999. Rental expense for each of
the years ended October 31, 1998, 1997 and 1996 was $4,602,000, $2,136,000 and
$856,000, respectively. In the first quarter of fiscal 1999, the Company moved
its Corporate headquarters to a new 210,000 square foot facility in Richardson,
Texas. Future minimum lease payments for the new facility are included in the
table below.
At October 31, 1998, future minimum lease payments for such operating leases
are:
<TABLE>
<CAPTION>
(IN
YEARS ENDING OCTOBER 31, THOUSANDS)
- -------------------------------------------------------------------------------
<S> <C>
1999........................................................................... $ 5,749
2000........................................................................... 5,170
2001........................................................................... 5,187
2002........................................................................... 5,121
2003........................................................................... 3,513
Thereafter..................................................................... 2,860
-------------
Total.......................................................................... $ 27,600
-------------
-------------
</TABLE>
The Company installed three high speed surface-mount assembly lines at its
facility in Juarez, Mexico. The first two assembly lines were installed during
the fourth quarter of fiscal 1997, at a total cost of $6.3 million. The third
line was installed during the third quarter of fiscal 1998, at a cost of $2.9
million. The equipment has been financed through operating lease finance
arrangements. Under the operating lease arrangements, the Company must make 60
monthly payments of $60,775, $53,691 and $49,659, respectively. During the
fourth quarter of fiscal 1996, the Company installed four SMT assembly lines, at
an approximate cost of $4.2 million. This equipment was also financed through
operating lease finance arrangements. The Company's aggregate obligations under
all such equipment lease financing arrangements totaled approximately $9.2
million at October 31, 1998.
In December 1997, the Company entered into a five-year lease agreement for a
new corporate headquarters facility to be constructed in fiscal 1998.
Construction on the 210,000 square foot facility began in December 1997 and was
completed in December 1998. The total cost is estimated to be $22.8 million
(including land). The lessor has agreed to fund the cost of the land and
construction of the building (subject to reductions based on certain conditions
in the lease agreement). The Company began occupying the facility during the
first fiscal quarter of 1999 with rental payments commencing upon occupancy.
Upon completion of the initial five-year agreement, the Company has the option
to purchase the property, renew the lease for an additional five years, or
arrange for the facility to be sold. In the case that the facility is sold for
less than the original cost, the Company has guaranteed to the lessor to make up
for any shortfall not to exceed $17.2 million.
Under the lease agreement, the Company is responsible for all operating
expenses of the facility along with a lease payment that is subject to
adjustment based upon prevailing interest rates. The Company has entered into an
interest rate swap agreement effective upon occupancy whereby the Company, via
the swap, is fixing the rent payments on the lease. This interest rate swap
agreement reduces the impact of changes in interest rates on the Company's
monthly floating rate lease obligation to the lessor of its corporate
headquarters facility. At October 31, 1998, the Company had one interest rate
swap agreement with a commercial bank, having a total notional principal amount
of $19.4 million. This agreement effectively changes the Company's interest rate
exposure on its corporate headquarters facility lease obligation to a fixed
7.55%. The interest rate swap agreement extends through the term of the lease
agreement and provides for monthly receipts to or payments by the Company
dependent upon prevailing market rates of interest each month. Any cash payments
made or received under the swap agreement will
20
<PAGE>
NOTE 8--COMMITMENTS AND CONTINGENCIES (CONTINUED)
be recorded in facility expense for such month upon the effective date of the
agreement, January 4, 1999. The Company is exposed to credit loss in the event
of non-performance by the counter-party to the interest rate swap agreement.
However, the Company does not anticipate non-performance by the counterparty to
the swap agreement.
In June 1998, the Company granted a major customer a warrant to purchase up
to 420,000 shares of the Company's common stock over the next five calendar
years. The customer receives the right to exercise the warrant upon achieving
certain levels of business in each of the calendar years 1998 through 2000. Upon
attainment of the specified level of business, the customer has three years to
exercise the warrants applicable to that year. The exercise price of the warrant
was based upon the closing price on the date the warrant was signed. The
specified sales levels for 1998 were not met; therefore, the customer did not
vest in any of the warrants during the year ended October 31, 1998.
In August 1998, a lawsuit was filed by a supplier to the Company seeking
payment in the amount of $1.2 million, representing an unpaid balance allegedly
owing for components sold to the Company. The Company denies the claim on the
basis that the components do not meet the stated specifications and that the
supplier has breached an implied duty to its customer by entering into a line of
business that competes with the Company. The Company has filed a counter claim
against the supplier for damages in excess of the amount claimed by the
supplier. In the opinion of management, this lawsuit is not likely to result in
any loss that would have a material adverse effect on the Company's financial
condition. In August 1998, a lawsuit was filed by two employees of the Company
alleging implied termination of their employment seeking damages pursuant to
their employment contracts with the Company. The Company denies the allegations.
Formal discovery has begun and the Company intends to vigorously defend its
position. In the opinion of management, this lawsuit is not likely to result in
any loss that would have a material adverse effect on the Company's financial
condition.
In October 1998, a class action lawsuit was filed in Dallas, Texas, County
Court against the Company and certain of its officers and directors, alleging
the prospectus and registration statement of the Company's secondary stock
offering in March 1998 contained false and materially misleading facts, and
omitted to state material facts. The members of the class seek unspecified
damages. The Company denies the allegations. No formal discovery has yet been
undertaken, and the Company intends to vigorously defend the action. In the
opinion of management, this lawsuit is not likely to result in any loss that
would have a material adverse effect on the Company's financial condition.
NOTE 9--MAJOR CUSTOMERS
Sales to major customers, as a percentage of net sales, were as follows for
each of the years ended October 31:
<TABLE>
<CAPTION>
CUSTOMER 1998 1997 1996
- ------------------------------------------------------------------------- ----- ----- -----
<S> <C> <C> <C>
A........................................................................ 39% 35% 47%
B........................................................................ 31% 20% 8%
C........................................................................ 5% 11% --
</TABLE>
21
<PAGE>
Net sales to customers within the United States and to customers in foreign
countries were as follows for each of the years ended October 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
United States............................................ $ 191,768 $ 144,665 $ 144,761
Europe................................................... 58,945 42,510 32,654
Other.................................................... 15,557 12,310 2,740
---------- ---------- ----------
$ 266,270 $ 199,485 $ 180,155
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
NOTE 10--EMPLOYEE BENEFIT PLAN AND PROFIT SHARING PLAN
The Company has a 401(K) plan for all full-time employees. During fiscal
1997, the Company modified the plan contribution amount. The new plan provides
for the Company to make contributions of up to 50% of the amount of an
employee's contribution, but not more than 2% of an employee's total cash
compensation. Prior to the change, the Company made contributions of up to 25%
of the amount of an employee's contribution, up to 1% of the employee's total
cash compensation. The Company incurred expense of $226,000, $149,000 and
$43,000 for the years ended October 31, 1998, 1997 and 1996, respectively, for
its contributions to this plan.
The Company's profit sharing plan provides for 10% of the Company's income
before taxes to be paid as additional compensation to participants in the plan.
Employees meeting eligibility requirements participate in the plan. The Company
incurred compensation expense of $1,019,000, $1,464,000 and $991,000 for the
years ended October 31, 1998, 1997 and 1996, respectively, as a result of the
Company's obligations under the profit sharing plan.
NOTE 11--EARNINGS PER SHARE
The following table sets forth the basic and diluted EPS computation for the
years ended October 31:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net income (in thousands)........................... $ 1,732 $ 10,770 $ 6,077
------------ ------------ ------------
------------ ------------ ------------
BASIC
Weighted average number of shares outstanding....... 12,133,560 10,297,929 10,158,803
------------ ------------ ------------
Net income per share................................ $ 0.14 $ 1.05 $ 0.60
------------ ------------ ------------
------------ ------------ ------------
DILUTED
Weighted average number of shares outstanding....... 12,133,560 10,297,929 10,158,803
Additional weighted average shares from assumed
exercise of dilutive stock options, net of shares
assumed to be repurchased with exercise
proceeds.......................................... 749,304 848,673 150,453
------------ ------------ ------------
Weighted average number of shares outstanding....... 12,882,864 11,146,602 10,309,256
------------ ------------ ------------
Net income per share................................ $ 0.13 $ 0.97 $ 0.59
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
22
<PAGE>
NOTE 12--INCOME TAXES
PROVISION FOR INCOME TAXES--The components of the income tax provision for
the years ended October 31, are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Current Provision:
Federal....................................................... $ 1,320 $ 5,018 $ 3,468
State......................................................... 210 95 81
Foreign....................................................... 387 265 68
--------- --------- ---------
1,917 5,378 3,617
--------- --------- ---------
--------- --------- ---------
Deferred (benefit) expense:
Federal....................................................... (1,013) (800) (431)
Effect of stock option exercises.............................. -- 903 --
--------- --------- ---------
(1,013) 103 (431)
--------- --------- ---------
Provision for income taxes...................................... $ 904 $ 5,481 $ 3,186
--------- --------- ---------
--------- --------- ---------
</TABLE>
A reconciliation of taxes based on the federal statutory rate and the
provision for income taxes is summarized as follows for the years ended October
31:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Income taxes at the federal statutory rate.......................... 35.0% 35.0% 34.0%
State income taxes, net of federal benefit.......................... 5.2% 0.4% 0.6%
Foreign tax credit, net............................................. 0.0% (1.6)% (.1)%
R&D credit.......................................................... (18.2)% (1.9)% (1.5)%
Permanent difference................................................ 9.7% 1.2% 0.8%
Other, net.......................................................... 2.6% 0.6% 0.6%
--------- --- ---
Provision for income taxes.......................................... 34.3% 33.7% 34.4%
--------- --- ---
--------- --- ---
</TABLE>
The Company is required to provide deferred income taxes for cumulative
temporary differences arising from asset and liability basic differences between
financial and income tax reporting purposes. As a result, the Company has
recorded a deferred tax assets resulting primarily from differing methods of
recognizing inventory reserves and bad debt allowances for financial and income
tax reporting purposes. The deferred tax assets at October 31 are composed of
the following and are included in other current assets in the consolidated
balance sheets:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Bad debt reserves................................................ $ 182 $ 163 $ 113
Inventory reserves............................................... 2,021 490 476
Depreciation..................................................... 312 87 62
Various expense accruals......................................... 277 216 408
Tax credit....................................................... 80 -- --
Stock option tax benefit......................................... -- 903 --
--------- --------- ---------
Deferred tax asset............................................... $ 2,872 $ 1,859 $ 1,059
--------- --------- ---------
--------- --------- ---------
</TABLE>
23
<PAGE>
NOTE 13--STOCK PLANS
LONG-TERM INCENTIVE PLAN
The Company's 1995 Long-Term Incentive Plan provides for the granting of
incentive stock options and non-qualified stock options to purchase common
stock, stock appreciation rights, restricted stock and performance units to key
executives and other key employees of the Company. In April 1997, the plan
increased its number of authorized shares of common stock to be used for stock
options, stock appreciation rights, or restricted stock from 1,912,500 to
2,250,000 shares. All options vest at the rate of 20% per year on each of the
first five anniversaries of the date of grant. At October 31, 1998, options to
purchase 634,500 shares were exercisable. The plan will terminate on December
31, 2004. Stock option activity during fiscal 1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
NUMBER OPTION PRICE WEIGHTED AVERAGE
OF SHARES RANGE PER SHARE EXERCISE PRICE
---------- ---------------- -----------------
<S> <C> <C> <C>
Balance at October 31, 1995.................. 987,750 $ 5.33 - $ 6.17 $ 5.35
Granted.................................... 916,875 $ 4.11 - $10.39 $ 8.43
Terminated................................. (73,125) $ 4.61 - $ 5.33 $ 5.05
Exercised.................................. (24,750) $ 5.33 - $ 5.33 $ 5.33
---------- ---------------- ------
Balance at October 31, 1996.................. 1,806,750 $ 4.11 - $10.39 $ 6.93
---------- ---------------- ------
Granted.................................... 137,625 $ 8.67 - $25.67 $ 15.25
Terminated................................. (31,500) $ 5.33 - $ 7.67 $ 6.92
Exercised.................................. (198,225) $ 4.11 - $10.39 $ 5.45
---------- ---------------- ------
Balance at October 31, 1997.................. 1,714,650 $ 4.11 - $25.67 $ 7.77
---------- ---------------- ------
Granted.................................... 787,375 $ 6.75 - $25.94 $ 10.23
Terminated................................. (267,500) $ 4.33 - $25.94 $ 14.47
Exercised.................................. (73,725) $ 4.33 - $14.61 $ 6.23
---------- ---------------- ------
Balance at October 31, 1998.................. 2,160,800 $ 4.11 - $15.08 $ 7.89
---------- ---------------- ------
---------- ---------------- ------
</TABLE>
On August 5, 1998 the Company re-priced 160,625 stock options with exercise
prices ranging from $15.08 to $25.94 to the fair market value of such options on
the date of re-pricing, which was $7.00.
The following table summarizes information about stock options outstanding
at October 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER REMAINING EXERCISE NUMBER EXERCISE
EXERCISE PRICE RANGE OF OPTIONS CONTRACTUAL LIFE PRICE OF OPTIONS PRICE
- ----------------------------------- ---------- ---------------- -------- ---------- --------
<S> <C> <C> <C> <C> <C>
$ 4.11 - $ 5.50.................... 756,750 6.4 $ 5.26 346,800 $ 5.28
$ 5.51 - $ 7.00.................... 541,775 9.2 $ 6.84 34,725 $ 6.15
$ 7.01 - $10.00.................... 634,150 8.0 $ 9.64 233,400 $ 9.71
$10.01 - $15.09.................... 228,125 8.8 $14.22 19,575 $13.03
--
---------- -------- ---------- --------
2,160,800 7.9 $ 7.89 634,500 $ 7.19
</TABLE>
The fair value of each option was estimated on the date of grant based on
the Black-Scholes option pricing model, assuming, among other things, no
dividend yield, a risk free interest rate of 6.0%, and expected life of four
years and expected volatility of 57% for fiscal year 1998 and 71% for fiscal
years 1997 and 1996. Had the Company recorded compensation expense based on the
fair value at the date of grant
24
<PAGE>
NOTE 13--STOCK PLANS (CONTINUED)
for its stock options under SFAS 123, the Company's income would have been
reduced to the pro forma amounts indicated below, net of taxes:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
AS REPORTED:
Net income (in thousands)....................................... $ 1,732 $ 10,770 $ 6,077
--------- --------- ---------
--------- --------- ---------
Net income per share:
Basic......................................................... $ 0.14 $ 1.05 $ 0.60
--------- --------- ---------
--------- --------- ---------
Diluted....................................................... $ 0.13 $ 0.97 $ 0.59
--------- --------- ---------
--------- --------- ---------
PRO FORMA:
Net income (in thousands)....................................... $ 668 $ 10,127 $ 6,000
--------- --------- ---------
--------- --------- ---------
Net income per share:
Basic......................................................... $ 0.06 $ 0.98 $ 0.59
--------- --------- ---------
--------- --------- ---------
Diluted....................................................... $ 0.05 $ 0.91 $ 0.58
--------- --------- ---------
--------- --------- ---------
</TABLE>
EMPLOYEE STOCK OPTION PURCHASE PLAN--The 1995 Employee Stock Option Purchase
Plan provides a method whereby eligible employees may purchase common stock
through voluntary payroll deductions, not to exceed 10% of the employee's base
salary. Payroll deductions are made over a twelve-month period. At the end of
the deduction period, employees will have a subsequent twelve-month period
during which they may either exercise their options in whole or in part, or
withdraw their funds with interest at a rate determined by the Stock Option
Committee. The purchase price under the plan will be determined by the Stock
Option Committee; however, the option price will not be less than 85% of the
fair market value of the common stock on the date the option is granted. As of
October 31, 1998, 41,055 shares have been issued under this plan.
NOTE 14--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
31-OCT 31-JUL 30-APR 31-JAN 31-OCT 31-JUL 30-APR 31-JAN
THREE MONTHS ENDED 1998 1998 1998 1998 1997 1997 1997 1997
- ------------------------------------- --------- --------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............................ $ 54,922 $ 58,795 $ 73,795 $ 78,758 $ 60,674 $ 42,019 $ 48,700 $ 48,092
Gross profit......................... 2,157 12,018 13,862 16,216 15,211 12,425 11,778 10,633
Net income (loss).................... (5,856) 974 2,809 3,805 3,630 2,469 2,418 2,252
Net income (loss) per share:
Basic.............................. $ (0.45) $ 0.07 $ 0.24 $ 0.36 $ 0.35 $ 0.24 $ 0.24 $ 0.22
Diluted............................ $ (0.45) $ 0.07 $ 0.22 $ 0.33 $ 0.31 $ 0.22 $ 0.22 $ 0.21
</TABLE>
NOTE 15--SUBSEQUENT EVENTS
On December 14, 1998, the Company announced it has entered into a definitive
merger agreement with 3Dfx Interactive, Inc., 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
March 1999, subject to customary regulatory approvals and approvals by the
shareholders of both 3Dfx and STB.
OTHER ASSETS--During the fourth quarter of fiscal 1998, the Company invested
$3 million in nVIDIA Corporation, a supplier. The investment was in the form of
a Convertible Subordinated Note. On
25
<PAGE>
NOTE 15--SUBSEQUENT EVENTS (CONTINUED)
January 15, 1999 the Note converted into 428,572 shares of common stock of the
supplier, based on a conversion rate 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. Immediately preceding the initial public offering, the
Company's ownership in the supplier was approximately 2.7%, and approximately
1.5% subsequent to the IPO. The securities are classified as available-for-sale
whereby, the unrealized gains or losses will be reported as a separate component
of shareholders' equity.
26
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
<TABLE>
<CAPTION>
PAGE
-----
<C> <C> <S> <C>
(a) 1. The following financial statements are filed as part of this report:
Report of Independent Accountants.
Consolidated Balance Sheets dated October 31, 1998 and 1997.
Consolidated Statement of Operations for the three years ended October 31, 1998.
Consolidated Statement of Changes in Shareholders' Equity for the three years ended
October 31, 1998.
Consolidated Statement of Cash Flows for the three years ended October 31, 1998.
Notes to Consolidated Financial Statements.
2. Consolidated Financial Statement Schedules
Report of Independent Accountants on Financial Statement Schedule. S-1
Consolidated Valuation and Qualifying Accounts. S-2
All other schedules for which provision is made in the applicable accounting regulation
of the Securities & Exchange Commission are not required under the related instructions
or are inapplicable and therefore have been omitted.
3. The following documents are filed or incorporated by reference as exhibits to this
Report:
2.1 Agreement and Plan of Reorganization by and between the Registrant and STB Systems, Inc.
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).
3.1 Amended and Restated Articles of Incorporation of the Company (incorporated by reference
to Exhibit 3.1 to the Company's Registration Statement on Form S-1 (Registration No.
33-87612))
3.2 Articles of Amendment to Articles of Incorporation of the Company (incorporated by
reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarter
ended April 30, 1997)
3.3 Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2 to
the Company's Registration Statement on Form S-1 (Registration No. 33-87612))
4.1 Specimen of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the
Company's Registration Statement on Form S-1 (Registration No. 33-87612))
4.2 Amended and Restated Articles of Incorporation and Bylaws of the Company (see Exhibits
3.1, 3.2 and 3.3 above)
4.3 Right of First Refusal Agreement dated December 16, 1994 by and among the Company and
Messrs. Ogle, Balthaser and Sims (incorporated by reference to Exhibit 4.3 to the
Company's Registration Statement on Form S-1 (Registration No. 33-87612))
9.1 Form of Voting Agreement dated December 13, 1998 between the Company and certain
shareholders of 3Dfx Interactive, Inc., a California corporation (incorporated by
reference to Schedule 13D of 3Dfx Interactive, Inc. dated December 23, 1998 with
respect to the Company).
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<C> <C> <S> <C>
**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
**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
**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
**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
*10.5 Indemnification Agreement dated February 8, 1995 by and between William E. Ogle and the
Company (incorporated by reference to Exhibit 10.23 to the Company's Registration
Statement on Form S-1 (Registration No. 33-87612))
*10.6 Indemnification Agreement dated February 8, 1995 by and between Randall D. Eisenbach and
the Company (incorporated by reference to Exhibit 10.24 to the Company's Registration
Statement on Form S-1 (Registration No. 33-87612))
*10.7 Indemnification Agreement dated February 8, 1995 by and between James L. Hopkins and the
Company (incorporated by reference to Exhibit 10.25 to the Company's Registration
Statement on Form S-1 (Registration No. 33-87612))
*10.8 Indemnification Agreement dated February 8, 1995 by and between J. Shane Long and the
Company (incorporated by reference to Exhibit 10.30 to the Company's Registration
Statement on Form S-1 (Registration No. 33-87612))
*10.9 Indemnification Agreement dated February 8, 1995 by and between James J. Byrne and the
Company (incorporated by reference to Exhibit 10.28 to the Company's Registration
Statement on Form S-1 (Registration No. 33-87612))
*10.10 Indemnification Agreement dated February 8, 1995 by and between Lawrence E. Wesneski and
the Company (incorporated by reference to Exhibit 10.29 to the Company's Registration
Statement on Form S-1 (Registration No. 33-87612))
*10.11 Indemnification Agreement by and between Dennis G. Sabo and the Company (incorporated by
reference to Exhibit 10.11 of the Company's Registration Statement on Form S-3,
Registration No. 333-4684)
*10.12 Indemnification Agreement by and between Bryan F. Keyes and the Company (incorporated by
reference to Exhibit 10.12 of the Company's Registration Statement on Form S-3,
Registration No. 333-4684)
*10.13 Indemnification Agreement dated February 8, 1995 by and between Mark S. Sims and the
Company (incorporated by reference to Exhibit 10.26 to the Company's Registration
Statement on Form S-1 (Registration No. 33-87612))
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<C> <C> <S> <C>
*10.14 Indemnification Agreement dated February 8, 1995 by and between William D. Balthaser Jr.
and the Company (incorporated by reference to Exhibit 10.27 to the Company's
Registration Statement on Form S-1 (Registration No. 33-87612))
*10.15 Company's Amended and Restated 1995 Long Term Incentive Plan (incorporated by reference
to Appendix A of the Company's definitive Proxy Statement for the 1997 Annual Meeting
of Shareholders)
*10.16 Company's Amended and Restated Stock Option Plan for Non-Employee Directors (incorporated
by reference to Appendix B of the Company's definitive Proxy Statement for the 1997
Annual Meeting of Shareholders)
*10.17 STB Systems, Inc. 1995 Employee Stock Option Purchase Plan (as amended) (incorporated by
reference to Exhibit 10.38 to the Company's Quarterly Report on Form 10-Q for the
quarter ended January 31, 1996)
*10.18 Amended and Restated Profit Sharing Incentive Plan (incorporated by reference to Exhibit
10.47 to the Company's Registration Statement on Form S-1 (Registration No. 333-14313))
10.19 Lease Agreement dated December 6, 1988 by and between STB de Mexico S.A. de C.V.
(formerly known as Industrias Fronterizas de Chihuahua, S.A. de C.V.) (a subsidiary of
the Company, as lessee) and Complejo Industrial Fuentes, S.A. de C.V (as lessor),
including an Agreement for Modification dated February 25, 1994 by and between the same
parties (incorporated by reference to Exhibit 10.1 to the Company's Registration
Statement on Form S-1 (Registration No. 33-87612))
10.20 Modification Agreement dated October 4, 1996 by and between STB de Mexico, S.A. de C.V.
and Complejo Industrial Fuentes, S.A. de C.V. (relating to the Lease Agreement filed as
Exhibit 10.1 hereto) (incorporated by reference to Exhibit 10.46 to the Company's
Registration Statement on Form S-1 (Registration No. 333-14313))
10.21 Lease Contract dated October 4, 1996 by and between STB de Mexico, S.A. de C.V. (as
lessee) and Complejo Industrial Fuentes, S.A. de C.V. (as lessor) (incorporated by
reference to Exhibit 10.41 to the Company's Registration Statement on Form S-1
(Registration No. 333-14313))
10.22 Amendment to Lease Agreement dated January 30, 1997, by and between STB de Mexico, S.A.
de C.V. (as lessee) and Complejo Industrial Fuentes, S.A. de C.V. (incorporated by
reference to Exhibit 10.22 to the Company's Annual Report on Form 10-K for the Fiscal
Year Ended October 31, 1997).
10.23 Lease Agreement, as amended, dated July 8, 1986 by and between the Company (as lessee)
and Central Park Associates, Ltd. (as lessor) (incorporated by reference to Exhibit
10.2 to the Company's Registration Statement on Form S-1 (Registration No. 33-87612))
10.24 Lease Agreement dated June, 1995, by and between the Company (as lessee) and Springcreek
Place, Ltd. (as lessor) (incorporated by reference to Exhibit 10.32 to the Company's
Annual Report on Form 10-K for the fiscal year ended October 31, 1995)
</TABLE>
29
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10.25 Addendum to Lease Agreement dated March 7, 1996 by and between the Company (as lessee)
and Springcreek Place, Ltd. (as lessor) (incorporated by reference to Exhibit 10.37 to
the Company's Quarterly Report on Form 10-Q for the quarter ended January 31, 1996)
10.26 Second Addendum to Lease Agreement dated March 7, 1996, by and between the Company (as
lessee) and Springcreek Place, Ltd. (as lessor) (incorporated by reference to Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended July 31,
1997)
10.27 Sublease Agreement dated August 1996 by and between ADC Telecommunications, Inc. (as
sublessor) and the Company (as sublessee) (incorporated by reference to Exhibit 10.40
to the Company's Registration Statement on Form S-1 (Registration No. 333-14313))
10.28 Tax Allocation and Indemnification Agreement dated December 16, 1994 by and among the
Company and Messrs. Ogle, Balthaser and Sims (incorporated by reference to Exhibit
10.15 to the Company's Registration Statement on Form S-1 (Registration No. 33-87612))
10.29 Purchase Agreement dated December 17, 1996, by and between the Company and Gateway 2000,
Inc. (incorporated by reference to Exhibit 10.29 to the Company's Annual Report on Form
10-K for the Fiscal Year Ended October 31, 1997).
10.30 Lease Agreement by and between the Company and Banc One Leasing Corporation dated October
30, 1996, together with related attachments (incorporated by reference to Exhibit 10.48
to the Company's Registration Statement on Form S-1 (Registration No. 333-14313))
10.31 Participation Agreement dated as of November 14, 1997 among Asset XVII Holdings Company,
L.L.C., as lessor, STB Systems, Inc., as lessee and Bank One, Texas, N.A., as lender
(incorporated by reference to Exhibit 10.31 to the Company's Annual Report on Form 10-K
for the Fiscal Year Ended October 31, 1997).
10.32 Lease and Development Agreement dated as of November 14, 1997 among Asset XVII Holdings
Company, L.L.C., as lessor, and STB Systems, Inc., as lessee (incorporated by reference
to Exhibit 10.32 to the Company's Annual Report on Form 10-K for the Fiscal Year Ended
October 31, 1997).
10.33 Limited Notice to Proceed No. 1 dated as of December 18, 1997 executed by STB Systems,
Inc. and Austin Commercial, Inc. (incorporated by reference to Exhibit 10.33 to the
Company's Annual Report on Form 10-K for the Fiscal Year Ended October 31, 1997).
10.34 Credit Agreement dated as of November 21, 1997 between STB Systems, Inc., and Bank One,
Texas, N.A. (incorporated by reference to Exhibit 10.34 to the Company's Annual Report
on Form 10-K for the Fiscal Year Ended October 31, 1997).
10.35 First Amendment to Credit Agreement dated as of January 30, 1998 by and among the
Company, Bank One, Texas, N.A. and the Original Lenders as therein defined
(incorporated by reference to Exhibit 10.35 of the Company's Registration Statement on
Form S-3, Registration No. 333-4684)
</TABLE>
30
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10.36 Lease Schedule No. 1000063250 dated as of October 31, 1997 to Master Lease Agreement
dated October 30, 1996 between Banc One Leasing Corporation and the Company
(incorporated by reference to Exhibit 10.36 of the Company's Registration Statement on
Form S-3, Registration No. 333-4684)
10.37 Lease Schedule No. 1000063259 dated as of October 31, 1997 to Master Lease Agreement
dated October 30, 1996 between Banc One Leasing Corporation and the Company
(incorporated by reference to Exhibit 10.37 of the Company's Registration Statement on
Form S-3, Registration No. 333-4684)
10.38 Lease Schedule No. 1000063905 dated as of December 15, 1997 to Master Lease Agreement
dated October 30, 1996 between Banc One Leasing Corporation and the Company
(incorporated by reference to Exhibit 10.38 of the Company's Registration Statement on
Form S-3, Registration No. 333-4684)
10.39 Master Lease Amendment dated as of October 31, 1997 to Master Lease Agreement dated
October 30, 1996 between Banc One Leasing Corporation and the Company (incorporated by
reference to Exhibit 10.39 of the Company's Registration Statement on Form S-3,
Registration No. 333-4684)
10.40 Selling Shareholder Agreement between the Company and each of Messrs. Ogle, Balthaser and
Sims (incorporated by reference to Exhibit 10.40 of the Company's Registration
Statement on Form S-3, Registration No. 333-4684)
10.41 Underwriting Agreement by and among the Company, William E. Ogle, Mark S. Sims, William
D. Balthaser and CIBC Oppenheimer (in its own capacity and on behalf of an underwriting
syndicate) (incorporated by reference to Exhibit 1.1 of the Company's Registration
Statement on Form S-3, Registration No. 333-4684)
**10.42 Letter Agreement dated December 11, 1998 between STB Systems, Inc. and Hoak Breedlove
Wesneski & Co.
11.1 Intentionally omitted.
21 Subsidiaries of the Company
(a) STB Assembly, Inc., a Texas corporation
(b) STB de Mexico, S.A. de C.V., a Mexican corporation
(c) Maquilados Continentales de Chihuahua, a Mexican corporation (an inactive shell
corporation)
(d) Symmetric Simulation Systems, Inc.
(e) STB Systems, Inc., a Delaware corporation (an inactive shell corporation)
+23 Consent of PricewaterhouseCoopers LLP
**24 Powers of Attorney (included on first signature page)
**27 Financial Data Schedule
</TABLE>
- ------------------------
* Management contract or compensatory plan or arrangement. The Company will
furnish a copy of any Exhibit listed above to any shareholder without charge
upon written request to Mr. Bryan F. Keyes, Secretary, 3400 Waterview
Parkway, Richardson, Texas 75080.
** Previously filed.
+ Filed herewith.
(b) No reports on Form 8-K were filed during the last quarter of the
period covered by this Report.
31
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934 as amended, STB has duly caused this Amendment No. 1 on
Form 10-K/A to be signed on its behalf by the undersigned, thereunto duly
authorized.
STB SYSTEMS, INC.
By: /s/ WILLIAM E. OGLE
-----------------------------------------
William E. Ogle
CHAIRMAN OF THE BOARD
AND CHIEF EXECUTIVE OFFICER
Dated: February 24, 1999
32
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
of STB Systems, Inc.
Our audits of the consolidated financial statements referred to in our
report dated December 12, 1998, except as to Note 15, which is as of January 15,
1999, appearing in this Annual Report on Form 10-K for the year ended October
31, 1998, also included an audit of the Financial Statement Schedule listed in
Item 14(a) of this Form 10-K. In our opinion, this Financial Statement Schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
Dallas, Texas
December 12, 1998
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT
FISCAL BEGINNING OF CHARGED TO COSTS BALANCE AT END
YEAR ENDED DESCRIPTION YEAR AND EXPENSES DEDUCTIONS OF YEAR
- ----------- ---------------------------------- ------------ ---------------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
31-Oct-96 Allowance for Bad Debts $ 449,073 $ 489,837 $ 607,078 $ 331,832
Allowance for Product Returns
and Price Protection 45,000 405,000 175,000 275,000
Allowance for Obsolete Inventory 1,000,000 1,928,013 1,528,013 1,400,000
31-Oct-97 Allowance for Bad Debts 331,832 300,000 166,500 465,332
Allowance for Product Returns
and Price Protection 275,000 895 274,105
Allowance for Obsolete Inventory 1,400,000 2,248,918 2,248,918 1,400,000
31-Oct-98 Allowance for Bad Debts 465,332 350,509 295,519 520,322
Allowance for Product Returns
and Price Protection 274,105 4,284,588 3,983,693 575,000
Allowance for Obsolete Inventory 1,400,000 6,449,156 2,649,156 5,200,000
</TABLE>
33
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EXHIBIT INDEX
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(a) 1. The following financial statements are filed as part of this report:
Report of Independent Accountants.
Consolidated Balance Sheets dated October 31, 1998 and 1997.
Consolidated Statement of Operations for the three years ended October 31, 1998.
Consolidated Statement of Changes in Shareholders' Equity for the three years ended October
31, 1998.
Consolidated Statement of Cash Flows for the three years ended October 31, 1998.
Notes to Consolidated Financial Statements.
2. Consolidated Financial Statement Schedules
Report of Independent Accountants on Financial Statement Schedule. S-1
Consolidated Valuation and Qualifying Accounts. S-2
All other schedules for which provision is made in the applicable accounting regulation of
the Securities & Exchange Commission are not required under the related instructions or
are inapplicable and therefore have been omitted.
3. The following documents are filed or incorporated by reference as exhibits to this Report:
2.1 Agreement and Plan of Reorganization by and between the Registrant and STB Systems, Inc.
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).
3.1 Amended and Restated Articles of Incorporation of the Company (incorporated by reference to
Exhibit 3.1 to the Company's Registration Statement on Form S-1 (Registration No.
33-87612))
3.2 Articles of Amendment to Articles of Incorporation of the Company (incorporated by reference
to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended April
30, 1997)
3.3 Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the
Company's Registration Statement on Form S-1 (Registration No. 33-87612))
4.1 Specimen of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the
Company's Registration Statement on Form S-1 (Registration No. 33-87612))
4.2 Amended and Restated Articles of Incorporation and Bylaws of the Company (see Exhibits 3.1,
3.2 and 3.3 above)
4.3 Right of First Refusal Agreement dated December 16, 1994 by and among the Company and
Messrs. Ogle, Balthaser and Sims (incorporated by reference to Exhibit 4.3 to the
Company's Registration Statement on Form S-1 (Registration No. 33-87612))
9.1 Form of Voting Agreement dated December 13, 1998 between the Company and certain
shareholders of 3Dfx Interactive, Inc., a California corporation (incorporated by
reference to Schedule 13D of 3Dfx Interactive, Inc. dated December 23, 1998 with respect
to the Company).
</TABLE>
34
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**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
**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
**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
**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
*10.5 Indemnification Agreement dated February 8, 1995 by and between William E. Ogle and the
Company (incorporated by reference to Exhibit 10.23 to the Company's Registration
Statement on Form S-1 (Registration No. 33-87612))
*10.6 Indemnification Agreement dated February 8, 1995 by and between Randall D. Eisenbach and the
Company (incorporated by reference to Exhibit 10.24 to the Company's Registration
Statement on Form S-1 (Registration No. 33-87612))
*10.7 Indemnification Agreement dated February 8, 1995 by and between James L. Hopkins and the
Company (incorporated by reference to Exhibit 10.25 to the Company's Registration
Statement on Form S-1 (Registration No. 33-87612))
*10.8 Indemnification Agreement dated February 8, 1995 by and between J. Shane Long and the
Company (incorporated by reference to Exhibit 10.30 to the Company's Registration
Statement on Form S-1 (Registration No. 33-87612))
*10.9 Indemnification Agreement dated February 8, 1995 by and between James J. Byrne and the
Company (incorporated by reference to Exhibit 10.28 to the Company's Registration
Statement on Form S-1 (Registration No. 33-87612))
*10.10 Indemnification Agreement dated February 8, 1995 by and between Lawrence E. Wesneski and the
Company (incorporated by reference to Exhibit 10.29 to the Company's Registration
Statement on Form S-1 (Registration No. 33-87612))
*10.11 Indemnification Agreement by and between Dennis G. Sabo and the Company (incorporated by
reference to Exhibit 10.11 of the Company's Registration Statement on Form S-3,
Registration No. 333-4684)
*10.12 Indemnification Agreement by and between Bryan F. Keyes and the Company (incorporated by
reference to Exhibit 10.12 of the Company's Registration Statement on Form S-3,
Registration No. 333-4684)
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35
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*10.13 Indemnification Agreement dated February 8, 1995 by and between Mark S. Sims and the Company
(incorporated by reference to Exhibit 10.26 to the Company's Registration Statement on
Form S-1 (Registration No. 33-87612))
*10.14 Indemnification Agreement dated February 8, 1995 by and between William D. Balthaser Jr. and
the Company (incorporated by reference to Exhibit 10.27 to the Company's Registration
Statement on Form S-1 (Registration No. 33-87612))
*10.15 Company's Amended and Restated 1995 Long Term Incentive Plan (incorporated by reference to
Appendix A of the Company's definitive Proxy Statement for the 1997 Annual Meeting of
Shareholders)
*10.16 Company's Amended and Restated Stock Option Plan for Non-Employee Directors (incorporated by
reference to Appendix B of the Company's definitive Proxy Statement for the 1997 Annual
Meeting of Shareholders)
*10.17 STB Systems, Inc. 1995 Employee Stock Option Purchase Plan (as amended) (incorporated by
reference to Exhibit 10.38 to the Company's Quarterly Report on Form 10-Q for the quarter
ended January 31, 1996)
*10.18 Amended and Restated Profit Sharing Incentive Plan (incorporated by reference to Exhibit
10.47 to the Company's Registration Statement on Form S-1 (Registration No. 333-14313))
10.19 Lease Agreement dated December 6, 1988 by and between STB de Mexico S.A. de C.V. (formerly
known as Industrias Fronterizas de Chihuahua, S.A. de C.V.) (a subsidiary of the Company,
as lessee) and Complejo Industrial Fuentes, S.A. de C.V (as lessor), including an
Agreement for Modification dated February 25, 1994 by and between the same parties
(incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Form
S-1 (Registration No. 33-87612))
10.20 Modification Agreement dated October 4, 1996 by and between STB de Mexico, S.A. de C.V. and
Complejo Industrial Fuentes, S.A. de C.V. (relating to the Lease Agreement filed as
Exhibit 10.1 hereto) (incorporated by reference to Exhibit 10.46 to the Company's
Registration Statement on Form S-1 (Registration No. 333-14313))
10.21 Lease Contract dated October 4, 1996 by and between STB de Mexico, S.A. de C.V. (as lessee)
and Complejo Industrial Fuentes, S.A. de C.V. (as lessor) (incorporated by reference to
Exhibit 10.41 to the Company's Registration Statement on Form S-1 (Registration No.
333-14313))
10.22 Amendment to Lease Agreement dated January 30, 1997, by and between STB de Mexico, S.A. de
C.V. (as lessee) and Complejo Industrial Fuentes, S.A. de C.V. (incorporated by reference
to Exhibit 10.22 to the Company's Annual Report on Form 10-K for the Fiscal Year Ended
October 31, 1997).
10.23 Lease Agreement, as amended, dated July 8, 1986 by and between the Company (as lessee) and
Central Park Associates, Ltd. (as lessor) (incorporated by reference to Exhibit 10.2 to
the Company's Registration Statement on Form S-1 (Registration No. 33-87612))
10.24 Lease Agreement dated June, 1995, by and between the Company (as lessee) and Springcreek
Place, Ltd. (as lessor) (incorporated by reference to Exhibit 10.32 to the Company's
Annual Report on Form 10-K for the fiscal year ended October 31, 1995)
</TABLE>
36
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10.25 Addendum to Lease Agreement dated March 7, 1996 by and between the Company (as lessee) and
Springcreek Place, Ltd. (as lessor) (incorporated by reference to Exhibit 10.37 to the
Company's Quarterly Report on Form 10-Q for the quarter ended January 31, 1996)
10.26 Second Addendum to Lease Agreement dated March 7, 1996, by and between the Company (as
lessee) and Springcreek Place, Ltd. (as lessor) (incorporated by reference to Exhibit 10.1
to the Company's Quarterly Report on Form 10-Q for the quarter ended July 31, 1997)
10.27 Sublease Agreement dated August 1996 by and between ADC Telecommunications, Inc. (as
sublessor) and the Company (as sublessee) (incorporated by reference to Exhibit 10.40 to
the Company's Registration Statement on Form S-1 (Registration No. 333-14313))
10.28 Tax Allocation and Indemnification Agreement dated December 16, 1994 by and among the
Company and Messrs. Ogle, Balthaser and Sims (incorporated by reference to Exhibit 10.15
to the Company's Registration Statement on Form S-1 (Registration No. 33-87612))
10.29 Purchase Agreement dated December 17, 1996, by and between the Company and Gateway 2000,
Inc. (incorporated by reference to Exhibit 10.29 to the Company's Annual Report on Form
10-K for the Fiscal Year Ended October 31, 1997).
10.30 Lease Agreement by and between the Company and Banc One Leasing Corporation dated October
30, 1996, together with related attachments (incorporated by reference to Exhibit 10.48 to
the Company's Registration Statement on Form S-1 (Registration No. 333-14313))
10.31 Participation Agreement dated as of November 14, 1997 among Asset XVII Holdings Company,
L.L.C., as lessor, STB Systems, Inc., as lessee and Bank One, Texas, N.A., as lender
(incorporated by reference to Exhibit 10.31 to the Company's Annual Report on Form 10-K
for the Fiscal Year Ended October 31, 1997).
10.32 Lease and Development Agreement dated as of November 14, 1997 among Asset XVII Holdings
Company, L.L.C., as lessor, and STB Systems, Inc., as lessee (incorporated by reference to
Exhibit 10.32 to the Company's Annual Report on Form 10-K for the Fiscal Year Ended
October 31, 1997).
10.33 Limited Notice to Proceed No. 1 dated as of December 18, 1997 executed by STB Systems, Inc.
and Austin Commercial, Inc. (incorporated by reference to Exhibit 10.33 to the Company's
Annual Report on Form 10-K for the Fiscal Year Ended October 31, 1997).
10.34 Credit Agreement dated as of November 21, 1997 between STB Systems, Inc., and Bank One,
Texas, N.A. (incorporated by reference to Exhibit 10.34 to the Company's Annual Report on
Form 10-K for the Fiscal Year Ended October 31, 1997).
10.35 First Amendment to Credit Agreement dated as of January 30, 1998 by and among the Company,
Bank One, Texas, N.A. and the Original Lenders as therein defined (incorporated by
reference to Exhibit 10.35 of the Company's Registration Statement on Form S-3,
Registration No. 333-4684)
</TABLE>
37
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10.36 Lease Schedule No. 1000063250 dated as of October 31, 1997 to Master Lease Agreement dated
October 30, 1996 between Banc One Leasing Corporation and the Company (incorporated by
reference to Exhibit 10.36 of the Company's Registration Statement on Form S-3,
Registration No. 333-4684)
10.37 Lease Schedule No. 1000063259 dated as of October 31, 1997 to Master Lease Agreement dated
October 30, 1996 between Banc One Leasing Corporation and the Company (incorporated by
reference to Exhibit 10.37 of the Company's Registration Statement on Form S-3,
Registration No. 333-4684)
10.38 Lease Schedule No. 1000063905 dated as of December 15, 1997 to Master Lease Agreement dated
October 30, 1996 between Banc One Leasing Corporation and the Company (incorporated by
reference to Exhibit 10.38 of the Company's Registration Statement on Form S-3,
Registration No. 333-4684)
10.39 Master Lease Amendment dated as of October 31, 1997 to Master Lease Agreement dated October
30, 1996 between Banc One Leasing Corporation and the Company (incorporated by reference
to Exhibit 10.39 of the Company's Registration Statement on Form S-3, Registration No.
333-4684)
10.40 Selling Shareholder Agreement between the Company and each of Messrs. Ogle, Balthaser and
Sims (incorporated by reference to Exhibit 10.40 of the Company's Registration Statement
on Form S-3, Registration No. 333-4684)
10.41 Underwriting Agreement by and among the Company, William E. Ogle, Mark S. Sims, William D.
Balthaser and CIBC Oppenheimer (in its own capacity and on behalf of an underwriting
syndicate) (incorporated by reference to Exhibit 1.1 of the Company's Registration
Statement on Form S-3, Registration No. 333-4684)
**10.42 Letter Agreement dated December 11, 1998 between STB Systems, Inc. and Hoak Breedlove
Wesneski & Co.
11.1 Intentionally omitted.
21 Subsidiaries of the Company
(a) STB Assembly, Inc., a Texas corporation
(b) STB de Mexico, S.A. de C.V., a Mexican corporation
(c) Maquilados Continentales de Chihuahua, a Mexican corporation (an inactive shell
corporation)
(d) Symmetric Simulation Systems, Inc.
(e) STB Systems, Inc., a Delaware corporation (an inactive shell corporation)
+23 Consent of PricewaterhouseCoopers LLP
**24 Powers of Attorney (included on first signature page)
**27 Financial Data Schedule
</TABLE>
- ------------------------
* Management contract or compensatory plan or arrangement. The Company will
furnish a copy of any Exhibit listed above to any shareholder without charge
upon written request to Mr. Bryan F. Keyes, Secretary, 3400 Waterview
Parkway, Richardson, Texas 75080.
** Previously filed.
+ Filed herewith.
38
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in this Registration
Statement on Form S-8, as amended by Post-Effective Amendment No. 1, of our
report dated December 12, 1998, except as to Note 15, which is as of January 15,
1999 which appears in the 1998 Annual Report to Shareholders of STB Systems,
Inc., which is incorporated by reference in STB Systems, Inc.'s Annual Report on
Form 10-K/A for the year ended October 31, 1998. We also consent to the
incorporation by reference of our report on the Financial Statement Schedule,
which appears in such Annual Report on Form 10-K/A.
PricewaterhouseCoopers LLP
Dallas, Texas
February 24, 1999
