<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
---------------
(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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART I
ITEM 1. BUSINESS.
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. THIS REPORT CONTAINS CERTAIN
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE FEDERAL SECURITIES LAWS.
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" BELOW.
INTRODUCTION
We design, manufacture and sell multimedia subsystems and specialized
technology products, primarily for use in desktop personal computers ("PCs").
These products supplement a PC's central processing unit (the "CPU") to enhance
multimedia performance and to accelerate the computationally intensive
operations and processing requirements necessary to perform advanced multimedia
applications. We focus primarily on the sale of products to major original
equipment manufacturers ("OEMs"), and work closely with our component suppliers
and OEM customers to develop products that are responsive to technological
trends and consumer demand. We manufacture substantially all of our products at
our ISO 9002 certified facility in Juarez, Mexico. We believe that this enables
us to respond more quickly to changing customer needs, to maintain product
quality and to achieve economies of scale.
Our multimedia subsystem product line includes a wide selection of
multimedia accelerator subsystems (also referred to as "graphics add-in cards"
or "graphics boards") designed primarily for use in mid to high-end PCs. Our
multimedia accelerator subsystems enable users to take advantage of true-color
graphics, 3D and other video features found in the latest PC operating systems
(such as Microsoft Windows 98 and Windows NT) and in multimedia applications. We
sell our multimedia subsystem products to major OEMs and, to a lesser extent, to
commercial customers, such as retailers, distributors and direct-mail companies.
We are broadening our relationships with OEMs beyond the sale of multimedia
accelerator subsystems to include the sale of other complementary multimedia
subsystems, such as DVD decoder subsystems and PC/TV convergence subsystems.
Sales of multimedia subsystems to OEMs represented approximately 80% of our
total net sales for the fiscal year ended October 31, 1998. Our OEM and
commercial customers include Gateway, Inc. ("Gateway"), Dell Computer
Corporation ("Dell"), Compaq Computer Corporation ("Compaq"), International
Business Machines Corporation ("IBM"), Best Buy Co., Inc. ("Best Buy"), CompUSA
Inc. ("CompUSA"), Tech Data Corporation and Ingram Micro, Inc.
Our specialized technology products include products designed to enable a
single computer to control the display of up to 32 monitors and a line of
multi-channeled digital video products. These products apply proprietary
software and hardware designs to industry standard components to deliver
solutions tailored to customers' needs. We sell our specialized technology
products primarily to resellers, OEM workstation groups and corporate customers
for specialized applications in the financial services, hospitality, factory
automation, cable television distribution, transportation and emergency response
industries. Customers for our specialized technology products include Reuters
Limited, Compaq and LodgeNet Entertainment Corporation.
PROPOSED 3Dfx MERGER
GENERAL. On December 13, 1998, we entered into a Merger Agreement (the
"3Dfx Merger Agreement") with 3Dfx Interactive, Inc., a California corporation
("3Dfx"). 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 of the 3Dfx Merger and, upon consummation of the
3Dfx Merger, will become a wholly-owned subsidiary of 3Dfx. In the event that
the 3Dfx Merger is consummated, the combination of 3Dfx's and STB's operations
will result in many significant changes in our business.
EFFECTIVE TIME OF THE 3Dfx MERGER. The 3Dfx Merger will become effective
upon the filing of the executed Articles of Merger with the Secretary of State
of Texas (the "Effective Time"). The 3Dfx Merger
<PAGE>
Agreement provides that the parties thereto will cause the Articles of Merger to
be filed as soon as practicable after the occurrence of the following events:
- The 3Dfx shareholders have approved the 3Dfx Merger, the 3Dfx Merger
Agreement and issuance of 3Dfx Common Stock pursuant to the 3Dfx Merger
Agreement
- Our shareholders have approved and adopted the 3Dfx Merger Agreement and
approved the 3Dfx Merger
- The parties obtain all required regulatory approvals, take all required
actions and satisfy or waive all other conditions to the consummation of
the 3Dfx Merger
We cannot guarantee that these conditions precedent to the 3Dfx Merger will be
satisfied. Moreover, the 3Dfx Merger Agreement may be terminated by either 3Dfx
or STB under various conditions specified in the 3Dfx Merger Agreement.
Therefore, there can be no assurance as to whether or when the 3Dfx Merger will
become effective.
CONVERSION OF SECURITIES. In the event of the consummation of the 3Dfx
Merger, each outstanding share of STB Common Stock will automatically be
converted into 0.65 of a share of 3Dfx Common Stock (the "Exchange Ratio"). No
fractional shares of 3Dfx Common Stock will be issued in the 3Dfx Merger.
Pursuant to the 3Dfx Merger Agreement, each STB shareholder who would otherwise
be entitled to receive a fraction of a share of 3Dfx Common Stock will receive
from 3Dfx an amount of cash equal to the per share market value of 3Dfx Common
Stock multiplied by the fraction of a share of 3Dfx Common Stock to which such
shareholder would otherwise be entitled. Under the 3Dfx Merger Agreement, the
per share market value of 3Dfx Common Stock will be based on the closing price
of a share of 3Dfx Common Stock as reported on the Nasdaq National Market
("Nasdaq") on the last full trading day prior to the Effective Time. Based upon
the number of shares of 3Dfx Common Stock and STB Common Stock outstanding at
December 31, 1998, an aggregate of approximately 8,193,827 shares of 3Dfx Common
Stock would be issued in connection with the 3Dfx Merger. This amount represents
approximately 34.3% of the total number of shares of 3Dfx Common Stock
outstanding after giving effect to such issuance (excluding shares issuable upon
the exercise of options or warrants). In addition, pursuant to the 3Dfx Merger
Agreement, certain outstanding options to purchase shares of STB Common Stock,
as well as a warrant to purchase shares of STB Common Stock, will be converted
into options and a warrant to purchase 65% of as many shares of 3Dfx Common
Stock at a correspondingly adjusted exercise price.
The Exchange Ratio is fixed and will not increase or decrease due to
fluctuations in the market price of either 3Dfx Common Stock or the STB Common
Stock. In the event that the market price of 3Dfx Common Stock decreases or
increases prior to the Effective Time, the value at the Effective Time of 3Dfx
Common Stock to be received by STB shareholders in the 3Dfx Merger would
correspondingly decrease or increase. We can give no assurance as to the market
prices of 3Dfx Common Stock or STB Common Stock at any time before the Effective
Time or as to the market price of 3Dfx Common Stock at any time thereafter.
OTHER AGREEMENTS EXECUTED WITH THE 3Dfx MERGER AGREEMENT. Concurrently with
the signing of the 3Dfx Merger Agreement, STB and 3Dfx entered into the STB
Stock Option Agreement, pursuant to which STB granted 3Dfx the right to purchase
up to 1,890,883 shares of STB Common Stock (representing 15.0% of the
outstanding shares of STB Common Stock as of December 31, 1998 on an undiluted
basis) at an exercise price of $5.78 per share. The option can be exercised only
if a person or group acquires beneficial ownership, or the right to acquire
beneficial ownership, of more than 20% of the outstanding STB Common Stock, any
person shall have made a tender offer or exchange for at least 20% of the
outstanding STB Common Stock, or STB shall have entered into an agreement
relating to liquidation, dissolution, recapitalization, merger, consolidation or
acquisition. In certain circumstances, 3Dfx may, in lieu of exercising the
option described above, require that STB pay to 3Dfx a cancellation fee. In
connection with the execution of the 3Dfx Merger Agreement, all executive
officers and directors and certain affiliated
2
<PAGE>
shareholders of STB, who beneficially owned approximately 12.1% of the
outstanding shares of STB Common Stock (excluding shares subject to options) as
of December 31, 1998, have agreed with 3Dfx that they will vote their shares of
STB Common Stock (i) in favor of approval of the 3Dfx Merger Agreement, the 3Dfx
Merger and any matter that could reasonably be expected to facilitate the 3Dfx
Merger and (ii) against approval of any proposal opposing or competing against
the 3Dfx Merger. Also, all executive officers and directors and certain
affiliated shareholders of 3Dfx who beneficially owned, in the aggregate,
approximately 13.3% of the outstanding shares of 3Dfx Common Stock (excluding
shares subject to options) as of December 31, 1998, have agreed with STB that
they will vote their shares of 3Dfx Common Stock in favor of the 3Dfx Merger
Agreement, the 3Dfx Merger, the issuance of 3Dfx Common Stock pursuant to the
3Dfx Merger and any matter that could reasonably be expected to facilitate the
3Dfx Merger.
INDUSTRY
According to Dataquest, an estimated 97.3 million PCs were shipped worldwide
in 1998, compared to 83.1 million units in 1997 and 70.9 million units in 1996.
A substantial portion of the PCs shipped in recent periods incorporate high
performance Intel Pentium, Pentium Pro and Pentium II processors and support
multimedia functionality. Typical multimedia functions include CD-ROM storage
and playback, high-resolution graphics, digital video and audio and, in most
systems, hardware 3D acceleration and telecommunications. The evolution of these
multimedia-enabled PCs has been driven by the proliferation of high performance
hardware, advanced operating systems, the popularity of the Internet and the
growth in the number of consumer and business applications featuring advanced
graphics, video and sound.
The PC market continually demands more sophisticated multimedia products as
new technologies evolve and enter the mainstream. Intel's incorporation of the
MMX extended instruction set in microprocessors, as well as our support of the
Accelerated Graphics Port ("AGP"), reflects the demand for higher CPU multimedia
functionality and better integration between the CPU and the multimedia
subsystem. These architectural enhancements, in combination with evolving
digital standards such as MPEG-2 decompression, Dolby Digital audio and DVD
storage, are establishing the PC as the enabling platform for digital
television, video teleconferencing and other emerging multimedia capabilities.
Multimedia applications typically place substantial processing demands on a
CPU, often degrading system performance. Offloading the computationally
intensive multimedia processing functions to specialized graphics and other
multimedia subsystems can reduce the processing burden on the CPU by allowing
the CPU to address other functions. This improves the PC's overall performance.
Multimedia processing functions can be offloaded either by placing subsystems on
the motherboard or by using add-in subsystems. Motherboard implementations
typically cost less than add-in subsystems. However, most motherboards currently
provide lower levels of functionality and performance than multimedia
subsystems. Add-in subsystems, while more expensive, generally support higher
levels of functionality and provide a higher degree of flexibility in PC
configuration, because PC manufacturers can stabilize their motherboard
configurations and add multimedia subsystems that suit end-user demands.
Consequently, PC manufacturers can integrate new technologies into their product
lines more rapidly and meet a range of price and performance requirements.
Historically, PC manufacturers introduced more powerful PCs at relatively
constant prices. Recently, PC manufacturers have introduced PCs at lower price
points, in particular below $1,000. OEMs meet some of the cost requirements for
the lower cost PC market by reducing the complexity of their products. To this
end, OEMs have begun to integrate functionality previously provided by separate
subsystems, including multimedia subsystems, onto their motherboards.
The accelerating pace of technological advancement and the demand by
consumers for more functionality have required OEMs to deliver technological
innovation to the market more quickly. As a result, PC manufacturers must
frequently introduce new PC models to the market. Accelerating
3
<PAGE>
time-to-market demands have made it more difficult for OEMs to devote the
resources necessary for the timely internal development of multimedia subsystems
incorporating the latest innovations. In addition, many OEMs are expanding their
product lines in response to consumer demand for a broader range of price and
performance options. As a result, many OEMs outsource their multimedia subsystem
development needs to those suppliers able to meet their time-to-market and
performance requirements with high quality, cost-effective solutions.
OUR SOLUTION
We deliver innovative multimedia subsystems and specialized technology
products to our customers. We design our multimedia subsystems and specialized
technology products to meet increasing performance requirements at
cost-effective prices and on a timely basis. By working closely with component
suppliers and OEM customers, we can develop innovative products that respond to
product development trends and consumer demands. As OEM customers communicate
desired features for next generation products, we use our close supplier
relationships and our technical and marketing expertise to determine the most
appropriate components to meet required price and performance specifications. By
maintaining direct control over production, we believe that we can respond more
quickly to changing customer needs and better control quality and costs. We also
believe that our strong relationships with our suppliers and our OEM customers,
coupled with our software and hardware design expertise and our in-house
manufacturing capabilities, give our customers a time-to-market advantage over
competing solutions.
STRATEGY
Our goal is to become the leading supplier of multimedia accelerator
subsystems and certain other multimedia subsystems for PCs. The major elements
of our strategy include:
- CONTINUED FOCUS ON OEM CUSTOMERS AND OEM SALES CHANNEL. We focus on our
OEM customers, and, in particular, on several of the largest OEMs. As a
result, we have experienced significant increases both in net sales within
this channel and in the proportion of net sales within this channel during
the past several years. During fiscal year 1998, approximately 80% of our
net sales were realized through our OEM channel, with Gateway, Dell and
Compaq accounting for 39%, 31% and 5% of net sales, respectively. By
developing and maintaining close relationships with leading OEMs, we
believe that we can better anticipate the demands of our OEM customers,
understand market trends and accelerate product development to address the
requirements of our customers.
- CONTINUED FOCUS ON MULTIMEDIA ACCELERATOR SUBSYSTEM MARKET AND OTHER
EMERGING MULTIMEDIA OPPORTUNITIES. We intend to continue to focus our
efforts on the multimedia accelerator subsystem market, where we have
consistently demonstrated our ability to introduce multimedia accelerator
subsystems designed to satisfy rapidly evolving and increasingly demanding
performance standards. We also intend to leverage our strong relationships
with our suppliers and our OEM customers, our software and hardware
expertise, and our in-house manufacturing capabilities to become the
provider of choice to OEMs for other multimedia subsystem products, such
as DVD decoder subsystems and PC/TV convergence products.
- VALUE-ADDED ENGINEERING EXPERTISE. Our experienced software and hardware
engineers provide us with industry-leading design expertise. We intend to
apply this engineering expertise to respond more quickly to customer
requirements, to anticipate trends and advances in our industry and to
expand our product line to take advantage of new technology applications.
During the past several years, our products have won industry awards from
numerous publications, including PC MAGAZINE, PC WORLD, WINDOWS MAGAZINE,
PC PROFESSIONAL and PC COMPUTING, as well as a number of major technology
websites.
- CONTROL OF MANUFACTURING. We believe that we are the only major
independent supplier of multimedia accelerator subsystems that
manufactures all of its own products. We believe that operating
4
<PAGE>
our own manufacturing facility that incorporates automated SMT in Juarez,
Mexico enables us to maintain lower manufacturing costs, to meet expedited
customer delivery schedules, to adjust quickly to changes in product
orders, to achieve shorter production cycles and to accommodate modified
or unusual design specifications. We also believe that operating our own
manufacturing facility ensures product quality and reliability.
- SELECTIVE PURSUIT OF ADDITIONAL SALES CHANNELS. In addition to expanding
our OEM sales channel, we intend to continue our efforts to further
penetrate the commercial market. We believe that our experience in meeting
the standards that our OEM customers demand better positions us to provide
competitive products in the commercial market. We also believe that
increased awareness of the STB brand name, due in part to our penetration
into the OEM sales channel, has strengthened our position in the
commercial market. We continue to seek to leverage the expertise that we
have acquired by developing and manufacturing multimedia subsystem
products in order to develop and manufacture our specialized technology
products. While we believe that we are already one of the world's largest
suppliers of specialized technology products, we intend to continue
marketing these products both to current customers and to new customers in
the same and other targeted industries.
PRODUCTS
We divide our products into two categories: multimedia subsystem products
and specialized technology products. From our entry-level to our most
sophisticated products, we offer our customers products that enhance the
graphics, video and audio capabilities for an increasingly broad range of PC
configurations and applications.
MULTIMEDIA SUBSYSTEM PRODUCTS
Our multimedia subsystem products include a full range of multimedia
accelerator subsystems at various price points, as well as other multimedia
subsystem products.
MULTIMEDIA ACCELERATOR SUBSYSTEMS. Substantially all of our multimedia
accelerator subsystems can display full-motion video images and provide
accelerated 3D graphics on a PC. A typical multimedia accelerator subsystem
consists of a printed circuit board configured with a graphics controller chip,
memory chips and software drivers and utilities. We believe that optimal
graphics enhancement and video display require custom software and hardware
designs that maximize the performance and features of a PC system. We
distinguish our products from those of our competitors through our proprietary
software drivers and utilities and through the hardware design of our multimedia
accelerator subsystems. STB supports various chipsets, with a consistent
interface that supports multiple languages, including English, German, French,
Dutch, Polish, Japanese, Italian and Spanish, and enhances the performance of a
multimedia accelerator subsystem.
The performance of our multimedia accelerator subsystem product line varies
based on display speed, resolution, color depth and 2D/3D capability. The
graphics controller chip and software driver largely determine the display speed
of a multimedia accelerator subsystem. The amount of display memory primarily
determines display resolution and color depth. We offer a wide array of
multimedia accelerator subsystems that are compatible with the bus architectures
prevalent in today's market.
By offering a complete line of multimedia accelerator subsystems, we can
better establish and build relationships with OEMs. We currently offer
multimedia accelerator subsystem products targeted at PC enthusiasts and users
requiring high performance. The top of our enthusiast product line is the
Velocity 4400, which has 16MB of Synchronous Dynamic RAM ("SDRAM") and
incorporates the nVidia RIVA TNT graphics controller chip. We also offer other
products based on 3Dfx graphics controller chips. The Black Magic product, which
uses the 3Dfx Voodoo2 chipset, is a 3D-only product intended to optimize the
performance of video games on the PC. Another 3Dfx product is the Lightspeed
3300, which uses the 3Dfx
5
<PAGE>
Banshee graphics controller chip. For fiscal year 1998, substantially all of the
multimedia accelerator subsystems shipped by us possessed hardware-assisted 3D
capability.
OTHER MULTIMEDIA SUBSYSTEM PRODUCTS. In addition to multimedia accelerator
subsystems, we offer complementary multimedia subsystem products that
incorporate various emerging technologies.
- DVD DECODER SUBSYSTEMS. We continue to ship to OEMs products designed to
enable the use of DVD drives in PCs. The DVD is a 5 1/4-inch diameter disk
that looks almost identical to the CD-ROM. However, due to advances in
recording technology, the capacity for the DVD exceeds 4,770 megabytes, as
compared to 680 megabytes on the CD-ROM. Full motion video and audio data
that is recorded on the DVD is compressed using the MPEG-2 standard, and
the audio data is digital data using Dolby Digital processing. This video
and audio data must be processed as it goes from the DVD drive to the PC
memory. Our DVD decoder subsystem processes this data. Several of our
multimedia accelerator subsystems provide DVD decoding capability in
addition to 3D graphics. Because DVD drives can read current CD-ROMs,
DVD's began replacing CD-ROMs in 1998. Industry analyst International Data
Corporation ("IDC") predicts that the DVD will gain market share relative
to the CD-ROM over the coming years. According to IDC, approximately 2.3
million DVD drives were sold into the PC market in 1997 and approximately
83.8 million units will be sold into the PC market in the year 2000.
- PC/TV CONVERGENCE SUBSYSTEMS. Our PC/TV convergence subsystems can receive
analog television broadcasts or cable transmissions and produce a
full-motion television display on a PC monitor. These products also allow
users to access Intel Intercast, which broadcasts within an analog
television transmission signal and provides Internet-like information to
supplement television programs. We sell our PC/TV Convergence subsystems
through our OEM channel and through commercial retailers such as Best Buy
and CompUSA. Our television tuner products are used in systems sold by
Gateway, Dell and Micron.
We anticipate that our multimedia subsystem product line will continue to
evolve based upon our assessment of strategic multimedia opportunities and the
continuing demand for new generations of video solutions from OEMs and
end-users. Our multimedia subsystem products tend to have relatively short life
cycles, reflecting the dynamic nature of technological development within the PC
industry. Historically, OEMs have introduced new system configurations as often
as twice a year, and we must design, develop, manufacture and deliver our new
products to comply with OEMs' schedules. The life cycle for a multimedia
accelerator subsystem typically runs six to nine months (plus a few additional
months of sales for certain products in the commercial market). See "--Risk
Factors--STB's Products Have Short Product Life Cycles; STB Must Successfully
Manage Product Transitions."
6
<PAGE>
Our current major multimedia accelerator subsystems and other multimedia
subsystem products include the following:
<TABLE>
<CAPTION>
PRODUCT NAME DESCRIPTION STATUS
- ------------------------------ ---------------------------------------------------------------------- ----------
<S> <C> <C>
PROFESSIONAL 3D ACCELERATORS
Velocity 4400 AGP............. Entry level professional 3D accelerator based on the nVidia RIVA TNT Shipping
graphics accelerator with 16MB SDRAM
Glyder TX Gold................ High performance professional 3D accelerator subsystem utilizing the Mature
3Dlabs Glint TX graphics processor
Glyder MX..................... Professional 3D accelerator subsystem based on 3Dlabs GLINT MX Mature
accelerator with 8MB VRAM and up to 32MB DRAM
PERFORMANCE 2D/3D ACCELERATORS
Velocity 4400 PCI/AGP......... High performance graphics accelerator based on the nVidia RIVA TNT Shipping
high performance 2D/3D graphics accelerator. Available with 8MB or
16MB of SDRAM and TV-Out
Velocity 128 PCI/AGP.......... Upper mid-range performance graphics accelerator based on the nVidia Shipping
RIVA 128 architecture utilizing 4MB or 8MB of SGRAM/SDRAM
BlackMagic 3D................. Enthusiast level 3D accelerator based on the 3Dfx Voodoo2 3D graphics Shipping
chipset. Available with 12MB of high speed EDO DRAM
Nitro 3D...................... Entry level graphics accelerator based on the S3 ViRGE/GX graphics Shipping
chipset utilizing 4MB of SDRAM
Nitro 64 Video................ Cirrus Logic CL5446 accelerator with 2MB EDO DRAM Mature
Powergraph 64 Video........... Entry level accelerator based on the S3 Trio64V2 Mature
DVD DECODER SUBSYSTEMS
DVD Theater................... An all hardware DVD/MPEG-2 solution using an IBM Microelectronics MPEG Shipping
decoder chip
Impact DVD.................... Hybrid DVD/MPEG-2 decoder based on the Chromatic Research Mpact 2 Shipping
media processor
PC/TV CONVERGENCE SUBSYSTEMS
Desktop TV.................... Leading edge convergence subsystem enabling TV and stereo FM decoding Shipping
on a PC platform. The product supports Web TV broadcasts and VBI
data decode
</TABLE>
SPECIALIZED TECHNOLOGY PRODUCTS
Our specialized technology products apply proprietary software and hardware
designs to industry standard components to deliver tailored solutions for
specific problems. These specialized technology products typically have
significantly lower unit sales volumes but relatively higher unit prices and
gross profit margins than our multimedia subsystem products. We sell our
specialized technology products primarily to resellers, OEM workstation groups
and corporate customers in a number of industries, including financial services,
hospitality, factory automation, cable television distribution, transportation
and emergency response industries. Our specialized technology products include
products designed to
7
<PAGE>
enable a single computer to control the display of up to 32 monitors and a line
of multi-channeled digital video products.
We offer two families of multi-monitor multimedia accelerator subsystem
products. The resolution of the monitors with which they are designed to be used
distinguishes these two families. The MVP family of products uses
high-resolution monitors, while the Channel family uses low-resolution,
television-type monitors. Importantly, we incorporate our "virtual screen"
software driver and our Mediator utility into the MVP family of products. Our
"virtual screen" software driver enables multiple monitors to act as a single
screen, displaying numerous "windows" of information through only one computer.
Our Mediator utility enables the user to control the placement of applications
on the available displays. Several financial institutions presently employ this
capability in their trading rooms, where large amounts of information must be
continuously available to traders. We have made several technological advances
to our existing MVP product line, including the introduction of full motion
digital video scalers, live video/TV tuner input ports (based on the PCI bus
standard) and new video graphics drivers and utilities. Our Channel products are
used in applications, such as airport arrival and departure displays, where
lower cost and larger display size are more important than clarity of display.
Hotel room televisions also use our Channel products to facilitate the selection
of on-demand programming.
We also recently introduced several specialized technology products
incorporating digital video features that meet the MPEG-2 decompression
standard. In some cases, these products incorporate a multimedia accelerator
subsystem. Those specialized technology products processing multi-monitor
control capability enable applications, such as video-on-demand, by storing
video data for viewing at a later time and by receiving MPEG-2 encoded material
over direct broadcast satellite or advanced technology cable. We cannot be
assured, however, that such products can be produced in profitable quantities,
if at all. See "--Risk Factors--Risks From STB's Entry into New Product
Markets."
Listed below are the principal industries and applications for our
specialized technology products:
<TABLE>
<CAPTION>
INDUSTRY APPLICATION
- ------------------------------------- ---------------------------------------------------------------------------
<S> <C>
Financial services................... Support of simultaneous display of multiple data sources on multiple
monitors from a single PC for use by financial traders
Hospitality.......................... Control of display on hotel room televisions to allow guests to view movie
choices, review bill prior to checking out and obtain other information
Factory automation................... Dual-monitor graphical man-machine interface for factory machinery
Cable television distribution........ Video servers and local advertising insertions
Transportation....................... Flight arrival and departure information
Emergency response................... "911" emergency call center displays to allow the operator to follow
multiple calls simultaneously, plus view a map of the emergency location
on a separate monitor
</TABLE>
On occasion, we also provide contract assembly services for third parties.
Such contract assembly services add incrementally to gross profit and contribute
to the absorption of overhead by utilizing manufacturing capacity. Revenues from
contract assembly services constituted approximately 1% of our net sales in
fiscal year 1998.
DESIGN AND DEVELOPMENT
Meeting the performance requirements of OEM customers and reinforcing our
competitive position in other sales channels requires the timely development and
introduction of new products. We work closely with our suppliers and OEM
customers to develop new products that satisfy their specific product
8
<PAGE>
requirements. Our software and hardware engineers design, develop and test the
new product prototypes, selecting the most appropriate graphics controller
chips, memory chips and other components for our products. Our design and
development personnel enable us to repeatedly deliver the latest technologies to
the OEM market.
In order to achieve customer acceptance for our products, our compatibility
lab ensures that our products can function properly in a variety of PC system
configurations and with popular commercial application software and operating
systems. Our compatibility lab also compares the test performance of our
products against that of competitors' products. We submit most of our products
for compatibility and performance testing to Microsoft's WHQL. While WHQL
certification may require several weeks to complete, it entitles us to claim
that a particular product is "Designed for Microsoft Windows." Our OEM customers
typically require our products to be "Designed for Microsoft Windows" prior to
making volume purchases. We also send product prototypes to OEM customers for
performance and compatibility testing and to the Federal Communications
Commission (the "FCC") and the Cenelec branch of the European Economic Community
(the "EEC") for "CE Certification." See "--Government Regulations." After any
necessary modifications are made to a product, we release it for production.
We believe that the strength of our engineering resources is critical to our
competitiveness. We have substantially increased our engineering and technical
resources, so that, as of December 31, 1998, we had a total engineering staff of
101, including 18 hardware engineers and 51 software engineers. We have also
established software engineering centers in Eugene, Oregon; Belfast, Northern
Ireland; and Austin, Texas. Our engineering resources are critical to our
strength in responding quickly to customer requirements, anticipating trends and
advances in our industry and expanding our product line to access new
technologies and applications. See "--Products" and "--Risk Factors--Risks
Related to the 3Dfx Merger."
We have won numerous awards from recognized industry magazines, including PC
WORLD, PC COMPUTING, WINDOWS MAGAZINE, COMPUTER GAMING WORLD and others. Our
Velocity 4400 product was introduced in late 1998 to wide critical acclaim,
first from major technology websites and then from computer trade publications.
The Velocity 4400 received a 4 1/2 star rating from GAMESPOT (www.gamespot.com),
4 1/2 stars from COMPUTER GAMES ONLINE (www.cdmag.com), the "Seal of Approval"
from PC MULTIMEDIA AND ENTERTAINMENT MAGAZINE (www.pcme.com) and the TWEAK3D
(www.tweak3d.com) Gold Medal in September and October of 1998. In November 1998
Velocity 4400 was nominated for the PC COMPUTING MVP Award for best product of
its class for 1998. The Velocity 128 dominated the graphics card reviews in
1998, winning over 70 awards from computer trade magazines and websites. The
Velocity 128 won the PC MAGAZINE Editor's Choice Award, the PC COMPUTING MVP
award for best product of its class for 1997, PC WORLD World Class Award for
best product of its class in 1998, GAME DEVELOPER MAGAZINE Front Line Award for
best product of its class in 1998, PC GAMES Hall of Fame, to name a few.
SUPPLIERS
We believe our close relationships with our component suppliers are
essential to producing low-cost, innovative products and maintaining short
design-to-market cycles. Our primary products, multimedia accelerator
subsystems, are printed circuit boards that contain a number of components,
including a graphics controller chip, memory chips, logic chips, capacitors and
resistors. The graphics controller chip, which regulates the information that is
displayed on the PC monitor, and the memory chip, which stores graphics
information for display, constitute the most important components in determining
the functions and manufacturing cost of a multimedia accelerator. Our other
multimedia subsystem products generally contain components comparable to those
found on our multimedia accelerator subsystem but with different types of
controller chips.
During fiscal year 1998, we purchased controller chips directly from a
number of suppliers, including nVidia Corporation ("nVidia"), S3, Incorporated
("S3"), 3Dfx Interactive, Inc., Cirrus Logic, Inc. and 3Dlabs. nVIDIA's
controller chips were incorporated into STB products representing 63.9% of our
total
9
<PAGE>
net sales in fiscal year 1998. If the proposed 3Dfx Merger is consummated, most
of our products will thereafter incorporate 3Dfx controller chips. Controller
chips typically include related software drivers, which our software engineers
often enhance for use in our products. In addition to controller chips and their
related software drivers, we obtain several other components that are used in
our products from single or limited sources. However, we have no guaranteed
supply arrangements with any of our suppliers, and there can be no assurance
that current suppliers will be able to meet our requirements. While we believe
that we could obtain most of our single and limited source components from other
sources, we would probably be required to pay significantly more for such
products, to alter product designs to use alternative products or to reduce or
delay our production of related products. In the past, we have experienced
difficulty meeting our own scheduled shipment dates to customers as a result of
delays in the delivery of components, lack of available components or the lack
of compatible software drivers from component vendors. Such difficulties are
likely to recur. See "--Risk Factors STB Depends on Suppliers."
We purchase memory chips from a number of manufacturers, including Samsung
Electronics Co., Ltd., Micron Semiconductor Products, Mosel Vitelic, Fujitsu
Microelectronics, Toshiba Corporation and IBM. Memory chips cost less if
purchased directly from the manufacturer, but manufacturers sometimes do not
produce sufficient quantities of memory chips to satisfy market demand. In times
of restricted supply of memory chips, manufacturers have in the past, and may in
the future, allocate the sale of their memory chips to customers based upon
factors such as purchase volume and customer creditworthiness. Our ability to
purchase memory chips from distributors, and possibly on the spot market,
provides an alternative, but more costly, source of supply if we cannot obtain
the memory chips we need from memory chip manufacturers. See "--Risk
Factors--STB Depends on Suppliers."
Our unit component costs tend to be volatile, and a significant increase or
decrease in unit component costs may have a significant effect on our results of
operations. We may, however, experience component cost increases in the future.
Any such increases could have a negative effect upon gross profit margins and
gross profits. See "--Risk Factors--STB Depends on Suppliers."
MANUFACTURING
We consider our ability to manufacture high quality products at a low cost
to be critical to our competitiveness. We began manufacturing at our ISO 9002
certified facility in Juarez, Mexico in 1988 and presently conduct substantially
all of our manufacturing operations there. We believe that by operating our own
manufacturing facility, we can respond more quickly to changing customer needs
and better control product quality and cost. By leasing a manufacturing facility
in Juarez, Mexico, we benefit from low labor and shipping costs, as well as
proximity to our headquarters in Richardson, Texas. We have increased our
manufacturing capacity in Mexico to approximately 500,000 boards per month,
depending on product mix and complexity. We have achieved this increase in
manufacturing capacity primarily through the addition of new high-volume
automated SMT equipment capable of manufacturing double-sided products, as well
as through existing equipment upgrades. We believe that the addition of this
equipment has increased not only our manufacturing capacity but also the speed
and efficiency of our manufacturing operations. With this additional equipment,
we believe that our manufacturing capacity is sufficient for our current level
of operations. During the fourth quarter of fiscal 1997, we relocated a portion
of our manufacturing operations to a larger facility adjacent to our present
manufacturing facility. This new facility provides us with the ability to
further increase our manufacturing capacity, if necessary. See "Properties" and
"--Risk Factors--Risk From STB's Single Manufacturing Facility."
We emphasize a comprehensive quality control program at each step in the
manufacturing process. The manufacturing process involves both automated and
manual placement and soldering of components onto the circuit board. After final
assembly, each product unit undergoes an elevated temperature burn-in. The
burn-in process simulates a PC environment. During the burn-in process, the
product is placed in an oven and connected to an electrical source for several
hours. After each product has been burned-in, we conduct a series of diagnostic
tests on the product to detect defects. We believe our comprehensive testing
10
<PAGE>
procedures contribute significantly to our ability to satisfy customers'
stringent product performance and reliability requirements. We generally offer a
limited warranty ranging from 15 to 60 months on multimedia subsystems sold to
OEMs. We also offer a five-year limited warranty on our specialized technology
products and a limited lifetime warranty on multimedia subsystems sold to
commercial customers.
While we conduct substantially all of our manufacturing operations at our
facility in Juarez, Mexico, we also maintain a smaller facility at our
Richardson, Texas headquarters to develop and test prototypes and for first-run
testing of new products. We also maintain a separate facility in Richardson,
Texas for technical support and product repair. In addition, we burn-in and
functionally test a small portion of the products assembled in Mexico at our
Richardson, Texas facilities.
SALES AND MARKETING
SALES. We presently sell our products in North America, most countries in
Europe and certain countries in the Pacific Rim. U.S. sales accounted for
approximately 72% of our net sales in fiscal year 1998.
We have organized our Richardson, Texas-based North American sales force on
the basis of our three sales channels. The OEM sales force provides direct sales
coverage of selected OEMs. The commercial market sales force focuses on
marketing and sales to retailers, distributors and direct mail companies. The
commercial market sales force also coordinates the efforts of our independent
sales representatives for the commercial channel. The specialized technology
sales force coordinates our efforts with our engineering staff to create
interest among prospects and customers and to determine product features.
Our North American sales force generally operates in tandem with our
independent sales representative network in the commercial market. We typically
retain these sales representatives based on relationships they have with
potential customers. We believe that the services of independent sales
representatives are important for obtaining and maintaining relationships with
certain commercial customers. Our independent sales representatives generally do
not sell products that compete with our products. In general, we do not utilize
independent sales representatives for our OEM or specialized technology
products.
Our European sales force, headquartered in London, England, oversees our
commercial and specialized technology product sales in Europe. The European
sales force has greater direct sales coverage responsibility than the North
American sales force because we employ fewer European independent sales
representatives. We coordinate our marketing and sales efforts for countries
outside of North America and Europe from our Richardson, Texas offices.
Our net sales to OEMs, the commercial market and specialized technology
customers approximated 80%, 12% and 7% of our total net sales in fiscal year
1998. Our top three customers accounted for approximately 75% of net sales
during fiscal year 1998, with Gateway 2000, Dell and Compaq accounting for
approximately 39%, 31% and 5%, respectively. Recently, we have increased our
marketing efforts in the commercial market. We attribute the recent increase in
our commercial channel sales to our increased focus on worldwide retailers and
distributors. We sell products to the commercial market through retailers, such
as Best Buy and CompUSA, and commercial distributors, such as Tech Data
Corporation and Ingram Micro, Inc.. We sell our specialized technology products
primarily to resellers, OEM workstation groups and corporate customers in the
financial services, hospitality, factory automation, cable television
distribution, transportation and emergency response industries. Our specialized
technology customers include Reuters Limited, Compaq and LodgeNet Entertainment
Corporation.
We generally allow returns in the form of stock rotations only of products
sold to commercial customers, such as distributors and retailers. Our current
stock rotation policies typically permit a commercial channel customer to return
a portion of the products purchased from us within specified time periods, if
that customer concurrently places an order with us for additional products of
equal or greater
11
<PAGE>
value. We usually resell returned products. In addition, we typically provide
price protection to commercial customers in the form of credits for price
reductions on products remaining in customer inventories at the time the price
reduction is implemented. See "--Risk Factors--Price Protection and Stock
Rotation Risks" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations-- Overview."
We currently sell all our products at prices denominated in U.S. dollars.
However, we expect to sell our products in other currencies in the future,
thereby increasing our currency exposure risk. We also incur a substantial
portion of our manufacturing labor costs in Mexican pesos. See "--Risk
Factors--STB's International Operations are Subject to Certain Risks."
MARKETING. We promote our products to OEM customers and specialized
technology customers primarily through the efforts of our sales force. We
believe such direct promotion enables us to develop products that are more in
line with our customers' requirements and market trends. We supplement these
sales efforts by promoting our products at industry trade shows. Our commercial
channel marketing efforts include advertising in recognized industry trade
magazines and cooperative promotional efforts with retailers and commercial
distributors.
TECHNICAL SUPPORT
We believe that providing technical support to our customers is essential to
our ongoing competitiveness. We maintain a toll-free telephone line in the U.S.
to provide technical support for purchasers of our specialized technology
products as well as for commercial purchasers of our multimedia subsystems. We
also maintain commercial electronic bulletin board systems in Richardson, Texas
and London, England to provide customers with new software drivers and utilities
that update the capabilities of our products. Our technical support group
provides the software on disk at a nominal charge to customers who are unable to
obtain updates through the electronic bulletin board system. In addition, we
provide software driver and utility updates for our products to maintain
compatibility with new versions of software. We believe that these efforts
increase the useful life of our products. We also prepare user manuals and other
product documentation that we believe are informative and easy to understand.
COMPETITION
The market for our products is intensely competitive, and we expect
competition to increase. We compete with independent manufacturers of brand name
multimedia subsystem products and with contract manufacturers and OEM
manufacturing operations that produce multimedia subsystem products. Our major
competitors in the multimedia subsystems market include Diamond Multimedia
Systems, Inc., ATI Technologies, Inc., Matrox Graphics, Inc., ELSA GmbH,
Creative Labs, Inc., CEI, Inc., Number Nine Visual Technology Corporation and
Hauppauge Computer Works, Inc. In the specialized technology product market, our
major competitors include Appian Graphics Corp., Colorgraphic Communication
Corporation, Datapath Ltd. and Matrox Graphics, Inc.
In addition to our major competitors, certain of our suppliers sell graphics
controller chips directly to OEMs for use in internally produced multimedia
accelerator subsystems, other multimedia subsystems or on motherboards. If one
or more of our significant OEM customers were to commence or increase internal
production of multimedia accelerator subsystems or other multimedia subsystems,
our business, financial condition and results of operations could be materially
adversely affected. Furthermore, several major OEMs currently integrate graphics
controller chips on the motherboard of their PCs. If one or more of our major
OEM customers begins to incorporate graphics controller chips or other
controller chips onto motherboards rather than incorporating our products, our
business, financial condition and results of operations could be materially
adversely affected. See "--Risk Factors--STB Depends on the Graphics Board
Market; STB Products Migrate to Motherboards Over Time."
12
<PAGE>
We expect Intel to continue to invest heavily in research and development
and new manufacturing facilities in order to maintain its position as one of the
largest manufacturers of motherboards and to promote its product offerings
through extensive advertising campaigns designed to increase brand loyalty by PC
users. Intel's recent entry into the graphics controller market could accelerate
migration of graphics functionality to the motherboard or onto the CPU. Also,
Intel has announced new core logic chips that will incorporate graphics
controller chip circuitry, therefore eliminating the need for a separate
graphics controller chip in systems that contain motherboards built with this
core logic. In addition, Intel exerts significant influence over the 3D graphics
industry due to the widespread acceptance of its microprocessor architecture and
its development of new interface architectures such as the AGP bus. The
introduction of products embodying new technologies and the emergence of new
industry standards and practices can significantly impair the average selling
prices of STB's multimedia subsystem and other products, or render such products
unmarketable or obsolete. If STB's products are unable to support or interface
with these new products, standards and technologies in a timely manner, demand
for STB's products could be reduced. This would materially harm STB's business,
financial condition and results of operations.
We compete in our markets on the basis of a number of factors. These factors
include:
- The functionality, performance, price, reliability and compatibility of
our products
- Our ability to reach the market quickly with new products
- Our ability to meet customer delivery and reliability requirements
- The quality of our technical support
- Our ability to develop and maintain relationships with customers and
suppliers
Many of our competitors and potential competitors possess significant
competitive advantages over us, such as greater financial, technical and other
resources, greater name recognition and market presence, lower cost structures
and larger customer bases. In addition, some of our competitors manufacture
their own controller chips. Manufacturing controller chips internally provides
these competitors with a significant advantage over us. Internally produced
controller chips cost less and maintain higher price and performance levels than
the controller chips available to us from independent suppliers. Furthermore,
while we believe we are the only supplier of brand name multimedia accelerator
subsystems that manufactures its own products, some of our competitors
internally manufacture other multimedia subsystems, such as PC/TV cards. The
rapid pace of change in the industry and markets in which we compete places a
premium on the knowledge and experience of personnel and their ability to
develop, enhance and transition new products. As a result, we have continued to
increase our engineering resources. Our ability to continue adding new engineers
to our staff will affect our future competitiveness. See "--Risk Factors-- STB
Faces Intense Competition.".
INTELLECTUAL PROPERTY
Our success depends in part upon our proprietary technology, particularly
our software drivers and utilities and our hardware designs. We rely primarily
upon copyright, trademark and trade secret laws to protect our proprietary
technology. We also seek patent protection on selected inventions. In addition,
we generally enter into nondisclosure agreements with persons to whom we reveal
our proprietary information. We cannot guarantee that our present protective
measures will adequately prevent misappropriation of our technology or
independent third party development of the same or similar technology. Many
foreign jurisdictions offer less protection of intellectual property rights than
the United States. Thus, we cannot guarantee that the protection provided to our
proprietary technology by these foreign jurisdictions will be sufficient to
protect our technology. See "--Risk Factors--STB Faces Risks Related to
Intellectual Property." While our competitive position may be affected by our
ability to protect our proprietary information, we believe that the rapid pace
of technological change in the multimedia accelerator market
13
<PAGE>
will cause other factors to be more significant in maintaining our competitive
position. These factors include:
- The technical expertise, knowledge and innovative skill of our management
and technical personnel
- Our name recognition
- The timeliness and quality of support services that we provide
- Our ability to rapidly develop, produce, enhance and market innovative
products
We generally enter into nondisclosure agreements with suppliers of
components for our products in connection with discussions regarding forthcoming
features of those components. We also commonly enter into source code licensing
agreements with suppliers of components that we desire to incorporate into our
products.
We have a patent for a computer monitor assembly and a pending utility
patent application. We also possess a United States trademark registration for
our corporate logo and claim common law trademark rights with respect to certain
other trademarks.
In the computer industry, companies frequently assert intellectual property
infringement claims against other companies. As a consequence, we indemnify some
of our OEM customers in certain respects against intellectual property claims
relating to our products. If an intellectual property claim were brought against
an OEM customer (or against us) and such OEM customer was (or we were) found to
be infringing upon the rights of others, we could be required to pay
infringement damages, to pay licensing fees, to modify our products so that they
are not infringing or to discontinue offering the infringing products. Any of
these actions could materially adversely affect us and our results of
operations. In addition, the assertion of such claims against one or more of our
vendors could adversely affect the availability from those vendors of components
used by us.
Several of our OEM customers have previously sent us notices of potential
indemnity claims under existing contractual indemnity provisions. These OEM
customers had received a notice of infringement from a patent owner.
Subsequently, the patent owner filed patent infringement lawsuits in the United
States and elsewhere against several of our OEM customers and a number of other
major PC systems manufacturers. We provide multimedia subsystems to these OEM
customers for use in their products that are alleged to infringe on the patent
owner's rights. Based upon our preliminary evaluation of the patent, we do not
believe the infringement claims are meritorious. See "--Risk Factors--STB Faces
Risks Related to Intellectual Property."
GOVERNMENT REGULATIONS
Federal, state, local and foreign authorities regulate our business. Our
products are subject to approval by the FCC and the EEC to assure that they do
not interfere with the frequencies of other consumer electronics products. In
order to comply with FCC and EEC regulations, we install certain filter
circuitry on our products to prevent them from disturbing such frequencies. To
date, regulations applicable to our business have not had a material adverse
effect on our business, financial condition and results of operations. Although
we have not historically experienced material delays in obtaining FCC or EEC
approval for any of our products, occasional government budget constraints have
caused delays in obtaining required approvals related to certain of our
products. We believe that any delay in obtaining such approvals could, in turn,
result in delays in making certain shipments on a timely basis and, as a result,
have a material adverse effect on our business, financial condition and results
of operations.
Our relationships with our employees at our Mexican manufacturing facility
are regulated by the Mexican Federal Labor Law. The Mexican Federal Labor Law
contains detailed provisions regarding minimum employment conditions and
specifies rights that must be provided to all employees in Mexico. Other Mexican
federal laws require employers to make contributions to the Mexican Social
Security
14
<PAGE>
System and to establish and make specified contributions to individual
retirement savings and housing accounts at a commercial bank for all employees.
In addition, Mexican federal law requires the payment of substantial severance
amounts relative to the employees' wages in the event of the termination of a
Mexican employee. Although Mexican laws heavily regulate employment
relationships, aggregate labor costs at our Mexican facility are less than labor
costs would be at a similar facility in the United States. There can be no
assurance, however, that these laws will not be amended or supplemented in the
future to increase the compensation required to be paid to Mexican employees or
the costs of compliance with such laws. Any such change could have a material
adverse effect on our business, financial condition and results of operations.
Our Mexican manufacturing operations are also subject to regulation by
various Mexican environmental agencies. In order to ensure compliance with
Mexican environmental laws, we regularly monitor changes in those laws.
Representatives of various environmental agencies also periodically inspect our
Mexican facility.
BACKLOG
As of December 31, 1998, our backlog approximated $43.2 million, as compared
to approximately $47.5 million at December 31, 1997. We include in our backlog
accepted purchase orders with respect to which a delivery schedule has been
specified for product shipment within 60 days. Our business is characterized by
short-term order and shipment schedules. As a result, backlog tends to fluctuate
substantially from month to month. Generally, orders constituting backlog are
subject to changes in delivery schedule or to cancellation at the option of the
purchaser. Our customer agreements typically specify penalties for cancellation
of orders within 60 days prior to shipment. Other factors, including our
inability to obtain components in sufficient quantities, may result in delays in
shipment or cancellation of orders included in backlog. See "--Risk Factors--STB
Depends on Suppliers." Thus, although backlog is useful for scheduling
production, it should not be considered as of any particular date to be a
reliable measure of sales for the current or any future period.
EMPLOYEES
As of December 31, 1998, we employed 2,156 individuals, of whom 1,783 were
employed in operations, 101 in engineering, 107 in sales and marketing and 165
in administration and finance. The foregoing figures include 1,812 employees in
Mexico. Competition for personnel in the PC industry is intense. We believe that
our future success will depend in part on our ability to continue to attract and
retain highly skilled technical, marketing and management personnel. None of our
employees are represented by a labor union or subject to a collective bargaining
agreement. We believe that our relations with our employees are good. See
"--Risk Factors--Risks Related to the 3Dfx Merger" and "--Risk From STB's Single
Manufacturing Facility."
SEASONALITY
Our quarterly operating results vary significantly depending on a number of
factors including:
- the timing of large customer orders
- timing of new product introductions
- the adequacy of component supply
- changes in component costs
- variations in the Company's product mix
- seasonal promotions by us and our customers
15
<PAGE>
- and competitive pricing pressures
Because the timing of these factors may vary, the results of any particular
quarter may not be indicative of results for the full year or any future period.
In addition, the PC market generally experiences weaker sales during the summer
months.
RISK FACTORS
This report contains certain forward-looking statements within the meaning
of the federal securities laws. STB's actual results and the timing of certain
events could differ greatly from those anticipated in these forward-looking
statements as a result of certain known and unknown factors, including the risks
faced by us described below. The risks and uncertainties described below are not
the only ones facing us. Additional risks and uncertainties not presently known
to us or that we do not currently believe are important may also harm our
business operations. If any of the following risks actually occur, our business,
our financial condition or our results of operations could be seriously harmed.
The following factors and other information in this report should be considered
carefully in evaluating STB and an investment in the STB Common Stock.
RISKS RELATED TO THE 3Dfx MERGER
There are a number of specific risks associated with the proposed 3Dfx
Merger, including the following:
- 3Dfx and STB may encounter substantial difficulties integrating the two
companies' products, technologies, research and development activities,
administration, sales and marketing and other aspects of operations in a
timely manner. The difficulties, costs and delays involved in integrating
the companies may arise from multiple possible sources and may cause
increased operating costs, lower then anticipated financial performance or
the loss of customers and employees. The failure to successfully integrate
3Dfx and STB in a timely manner could result in a failure of the resulting
company (the "Combined Company") to realize any of the anticipated
benefits of the 3Dfx Merger and could materially harm the business of the
Combined Company.
- 3Dfx and STB may lose customers or suppliers as a result of the Merger. In
particular, two of 3Dfx's largest customers, Creative Labs, Inc. and
Diamond Multimedia Systems, Inc., compete directly with STB. It is
expected that as a result of the 3Dfx Merger, sales to Creative Labs and
Diamond will be reduced significantly from prior levels and that such
customers may no longer continue to be significant customers of the
Combined Company. In addition, nVidia, which is a major supplier of STB
and whose graphic chips were incorporated into STB products representing
63.9% of STB's net sales in fiscal 1998, competes directly with 3Dfx. If
nVidia reduces its supply or raises the price of graphics chips, the
Combined Company may lose sales to those OEM customers that require nVidia
chips for their systems.
- The Combined Company will be dependent on a limited source of chips and
boards because both companies will be more restricted in their ability to
select products produced by either STB's or 3Dfx's competitors. If either
3Dfx's chips or STB's boards fail to meet the requirements of either
companies' customers, the business of the Combined Company could be
materially harmed.
- A significant component of the near-term success of the Combined Company
will be continued success in the retail sales channel, and there are
significant risks associated with the Combined Companies' dependence on
near-term revenues in this channel.
- The 3Dfx Merger Agreement provides for a fixed exchange ratio between
shares of STB Common Stock and shares of 3Dfx Common Stock. As a result,
if the market price of 3Dfx Common Stock decreases or increases prior to
the 3Dfx Merger, the market value of 3Dfx Common Stock to be received by
STB shareholders in the 3Dfx Merger would correspondingly decrease or
increase.
16
<PAGE>
- The Combined Company's success following the 3Dfx Merger will depend on
the retention and integration of key personnel.
- Upon consummation of the 3Dfx Merger, STB shareholders will become 3Dfx
shareholders. There are important differences between the rights of STB
and 3Dfx shareholders, including differences due to the fact that STB is a
Texas corporation and 3Dfx is a California corporation. In addition, 3Dfx
has adopted a shareholder rights plan that, among other things, may
discourage certain types of transactions that may involve an actual or
threatened change of control of 3Dfx. STB has no such plan.
- There will be substantial expenses resulting from the 3Dfx Merger of
approximately $4.5 million.
- Certain officers and directors of STB may be deemed to have conflicts of
interest with respect to the 3Dfx Merger.
- The closing of the 3Dfx Merger is subject to certain conditions that may
not be satisfied prior to the time of the closing, which could prevent the
3Dfx Merger from being consummated.
In addition, in the event of the consummation of the 3Dfx Merger, there are
a number of risks related to the business and operations of 3Dfx that will
affect the operations of the Combined Company, including a number of the same or
similar risks faced by STB that are identified below, as well as a number of
risks specific to 3Dfx, including 3Dfx's limited operating history, 3Dfx's
historical dependence on the retail distribution channel, 3Dfx's dependence on
independent manufacturers and other third parties (3Dfx has no manufacturing
capacity) and 3Dfx's dependence on third party developers and publishers of
software titles that operate with 3Dfx's chips. In the event the 3Dfx Merger is
not consummated, STB will face other risks, including the opportunity costs
associated with its pursuit of a business combination with 3Dfx.
STB'S QUARTERLY OPERATING RESULTS MAY FLUCTUATE
STB's quarterly and annual results of operations have varied significantly
in the past and are likely to continue to vary in the future. These variations
are the result of a number of factors, many of which are beyond STB's control.
These factors include:
- STB's ability to successfully develop, introduce and market new or
enhanced products.
- STB's ability to introduce and market products in accordance with customer
design requirements and design cycles
- Changes in the relative volume of sales of various products with different
margins
- Changes in demand for STB's products and its customers' products
- Gains or losses of significant customers or strategic relationships
- The volume and timing of customer orders
- The availability, pricing and timeliness of delivery of components for
STB's products
- The timing of new product announcements or introductions by competitors
- Product obsolescence, the management of product transitions
- Production delays
- Decreases in the average selling prices of products
- Seasonal fluctuations in sales
Any one or more of the factors listed above or other factors could cause STB
to fail to achieve its revenue and profitability expectations.
17
<PAGE>
Most of STB's operating expenses are relatively fixed in the short term. STB
may be unable to rapidly adjust spending to compensate for any unexpected sales
shortfall, which could materially harm quarterly operating results. Also, STB
operates its own manufacturing facility and as a result incurs relatively high
fixed overhead and labor costs compared with those of its competitors that
outsource their manufacturing requirements. If STB fails to generate the level
of product revenues needed to absorb its fixed overhead and labor costs, its
business could be materially harmed.
As a result of the above factors, STB believes that period-to-period
comparisons of results of operations should not be relied upon as an indication
of future performance. The results of any one quarter are not indicative of
results to be expected for a full fiscal year.
STB FACES INTENSE COMPETITION
The market in which STB competes is intensely competitive and is likely to
become more competitive in the future. Existing competitors and new market
entrants may introduce products that are less costly or provide better
performance or features than STB's products. STB does not compete on the basis
of price alone. STB believes that the principal competitive factors for its
products are:
- Product performance and quality
- Conformity to industry standard application programming interfaces, or
APIs
- Access to customers and distribution channels
- Manufacturing capabilities and cost of manufacturing
- Price
- Product support
- Ability to bring new products to the market in a timely way
Many of STB's current and potential competitors have substantially greater
financial, technical, manufacturing, marketing, distribution and other resources
than STB. These competitors may also have greater name recognition and market
presence, longer operating histories, lower cost structures and larger customer
bases than STB. As a result, such competitors may be able to adapt more quickly
to new or emerging technologies and changes in customer requirements.
STB seeks to use strategic relationships to augment its capabilities.
However, the benefits of these relationships may not be realized or sufficient
to overcome the established positions of STB's largest competitors as suppliers
to the PC OEM and retail markets. Regardless of the relative qualities of STB's
products, the market power, product breadth and customer relationships of its
larger competitors can be expected to provide such competitors with substantial
competitive advantages.
STB competes with independent manufacturers of brand name multimedia
subsystem products, as well as contract manufacturers and certain OEM
manufacturing operations that produce multimedia subsystem products. STB's major
competitors in the multimedia subsystems market include Diamond Multimedia
Systems, Inc., ATI Technologies, Inc., Matrox Graphics, Inc., ELSA GmbH,
Creative Labs, Inc., CEI Inc., Number Nine Visual Technology Corporation, and
Hauppauge ComputerWorks, Inc. In the specialized technology product market,
STB's major competitors include Appian Graphics Corp., Colorgraphic
Communications Corporation, Datapath Ltd, and Matrox Graphics, Inc.
In addition to its major competitors, certain of STB's suppliers sell
graphics controller chips directly to OEMs for use in internally produced
multimedia accelerator subsystems, other multimedia subsystems or on
motherboards. If one or more of STB's significant OEM customers commences or
increases internal production of multimedia accelerator subsystems or other
multimedia subsystems, STB's business could be materially harmed. Furthermore,
several major OEMs currently integrate graphics controller chips on the
18
<PAGE>
motherboard of their PCs. If one or more of STB's major OEM customers begin to
incorporate graphics controller chips or other controller chips onto
motherboards rather than incorporating STB's products, STB's business could be
materially harmed. See "--STB Depends on the Graphics Board Market; STB's
Products Migrate to Motherboards Over Time."
STB's competitors can produce products that have a similar functionality to
STB'S products. For instance, Intel has added new functionalities, such as the
MMX instruction set, to its controller chips to enhance the power of the central
processing unit, or CPU, to manage the display features of a PC. Similarly,
Microsoft is introducing new versions of its operating systems with features,
such as the Direct 3D API, that increase the capability of its operating systems
to control a PC's display features. Intel's recent entry into the graphics
controller market could accelerate migration of graphics functionality to the
motherboard or onto the CPU. Also, Intel has announced new core logic chips that
will incorporate graphics controller chip circuitry, therefore eliminating the
need for a separate graphics controller chip in systems that contain
motherboards built with this core logic. The introduction of products embodying
new technologies and the emergence of new industry standards and practices can
significantly impair the average selling prices of STB's multimedia subsystem
and other products, or render such products unmarketable or obsolete. If STB's
products are unable to support or interface with these new products, standards
and technologies in a timely manner, demand for STB's products could be reduced.
This would materially harm STB's business, financial condition and results of
operations.
STB DEPENDS ON THE PC MARKET
Substantially all of STB's revenues are currently derived from products sold
for use in PCs. STB expects to continue to derive almost all of its revenues
from the sales of products for use in PCs.
The PC industry is cyclical and has been characterized by:
- Rapid technological change
- Evolving industry standards
- Cyclical market patterns
- Frequent new product introductions and short product life cycles
- Significant price competition and price erosion
- Fluctuating inventory levels
- Alternating periods of over-capacity and capacity constraints
- Variations in manufacturing costs and yields
- Significant expenditures for capital equipment and product development
The PC market has also grown substantially in recent years. However, such
growth may not continue. A decline in PC sales or in the growth rate of such
sales would likely reduce demand for STB's products. Moreover, such changes in
demand could be large and sudden. Since graphics board and PC manufacturers
often build inventories during periods of anticipated growth, they may be left
with excess inventories if growth slows or if they have incorrectly forecasted
product transitions. In such cases, the manufacturers may abruptly stop
purchasing additional inventory from suppliers such as STB until the excess
inventory has been used. Such suspension of purchases or any reduction in demand
for PCs generally, or for particular products that incorporate STB's products,
would materially harm STB's business.
In addition, the PC industry has in the past experienced significant
economic downturns at various times, characterized by lower product demand and
accelerated reduction of product prices. STB may experience substantial
period-to-period fluctuations in results of operations due to general
semiconductor industry conditions.
19
<PAGE>
STB DEPENDS ON THE GRAPHICS BOARD MARKET; STB'S PRODUCTS MIGRATE TO MOTHERBOARDS
OVER TIME
A majority of STB's net sales are derived from the sale of graphics boards.
According to Jon Peddie Associates, an independent industry research firm,
approximately 71% of all graphics controller chips manufactured in the twelve
month period ended June 30, 1998 were incorporated onto graphics boards, and
approximately 29% were incorporated onto motherboards. Graphics boards are
usually used in higher-end PCs offering the latest technology and performance
features. However, as graphics boards functionality becomes technologically
stable and widely accepted by PC users, it typically migrates to the PC
motherboard. STB expects this trend to continue, especially with respect to its
low-end graphics boards. In this regard, the MMX instruction set from Intel and
the expanded capabilities provided by the Direct X APIs from Microsoft have
increased the capability of Microsoft's operating systems to control display
features that have traditionally been performed by graphics boards. As a result
of the technology migration to the PC motherboard, STB's success largely depends
on its ability to continue to develop products that incorporate new and rapidly
evolving technologies that manufacturers have not yet fully incorporated onto PC
motherboards.
Although STB currently believes that a market will continue to exist for
graphics boards that provide advanced functionalities and offer flexible systems
configuration, the incorporation of multimedia functions onto PC motherboards
may harm the market for STB's graphics boards. In addition, OEMs may choose to
develop graphics boards internally rather than purchase such products from third
party suppliers. Either of these occurrences, or a decrease in PC sales volumes
could shrink the market for STB's current products, and would materially harm
its business.
STB FACES THE CHALLENGES OF GROWTH
STB has experienced rapid growth and may continue to experience such growth.
Growth has placed, and is expected to continue to place, a significant strain on
STB's managerial, operational and financial resources, including its sales,
customer support, research and development, and finance and administrative
operations. As a result of this growth, STB may experience difficulty securing
adequate quantities of components or manufacturing equipment. In addition, to
the extent that new OEM customers are added, gross profit margins derived from
initial orders with new OEM customers are frequently lower than STB's typical
gross profit margins. This could reduce STB's overall gross profit margin.
In response to its growth, STB has increased its expenditures and made
certain long-term spending commitments, such as the expansion of production
lines at its Juarez manufacturing facility and the relocation of its corporate
headquarters to a larger facility in Richardson, Texas. These expenditures would
be difficult to reduce quickly if STB's business declined. STB's inability to
effectively manage any future growth would materially harm its businesses.
STB DEPENDS ON NEW PRODUCT DEVELOPMENT
The markets for which STB's products are designed are intensely competitive
and are characterized by short product life cycles, rapidly changing technology,
evolving industry standards and declining average selling prices. STB's
businesses will depend to a significant extent on its ability to successfully
develop new products. As a result, STB believes that significant expenditures
for research and development will continue to be required in the future. To
succeed in this environment STB must anticipate the features and functionality
that customers will demand. STB must then incorporate those features and
functionality into products that meet the design requirements of the PC market
and the timing requirements of retail selling seasons. The success of STB's new
product introductions will depend on several factors, including:
- Proper new product definition
- Timely completion and introduction of new product designs
20
<PAGE>
- The ability of subcontractors and component manufacturers to effectively
design and implement the manufacture of new products
- Quality of new products
- Product performance as compared to competitors' products
- Market acceptance of STB's and its customers' products
- Competitive pricing of products
- Introduction of new products to the market within the limited time window
for OEM design cycles and retail selling seasons
As the markets for STB's products continue to develop and competition
increases, we anticipate that product life cycles will shorten and average
selling prices will decline. In particular, average selling prices and, in some
cases, gross margins for STB's products will decline as products mature. Thus,
STB will need to introduce new products to maintain average selling prices and
gross margins. To do this, STB must successfully identify new product
opportunities and develop and bring new products to market in a timely manner.
The failure of STB to successfully develop and introduce new products and
achieve market acceptance for such products would materially harm STB's
business. STB has in the past experienced delays in completing development and
introduction of new products. Such delays in the future could materially harm
STB's business.
STB'S PRODUCTS HAVE SHORT PRODUCT LIFE CYCLES; STB MUST SUCCESSFULLY MANAGE
PRODUCT TRANSITIONS
STB's products have short product life cycles. STB's major OEM customers
typically introduce new system configurations as often as twice a year. The life
cycles of STB's graphics boards typically range from six to nine months. A
failure by STB to successfully introduce new products within a given product
cycle could materially harm its business for that cycle and possibly for
subsequent cycles. Any such failure could also damage STB's brand name,
reputation and relationships with its customers and cause longer term harm to
its business.
The PC market frequently undergoes transitions in which products rapidly
incorporate new features and performance standards on an industry-wide basis.
STB's products must be able to support the new features and performance levels
being required by PC manufacturers at the beginning of such a transition.
Otherwise, STB would likely lose business as well as the opportunity to compete
for new design contracts until the next product transition. Failing to develop
products with required features and performance levels or a delay as short as a
few months in bringing a new product to market could significantly reduce STB's
revenues for a substantial period. A revenue reduction of that nature would
likely materially harm STB's business.
The success of STB depends upon continued market acceptance of its existing
products, and its ability to continually develop and introduce new products and
features and product enhancements to meet changing customer requirements. Each
new product cycle presents new opportunities for competitors of STB to gain
market share.
STB submits most of its products for compatibility and performance testing
to the Microsoft Windows Hardware Quality Lab ("WHQL"). WHQL certification
typically requires up to several weeks to complete and entitles STB to claim
that a particular product is "Designed for Microsoft Windows." STB's OEM
customers typically require STB's product to have this certification prior to
making volume purchases. STB may not receive WHQL certification for future
products in a timely fashion. A failure to receive WHQL certification could
materially harm STB's business.
21
<PAGE>
There are long lead times for certain components used in STB's products.
Therefore, STB may not be able to quickly reduce its production or inventory
levels in response to unexpected shortfalls in sales or, conversely, to increase
production in response to unexpected demand. STB's existing products may not
continue to be accepted by its markets and STB may not be successful in
enhancing its existing products or identifying, developing, manufacturing or
marketing new products. Delays in developing new products or product
enhancements or the failure of such products or product enhancements to gain
market acceptance would materially harm STB's businesses.
STB HAS SIGNIFICANT CUSTOMER CONCENTRATION
STB's three largest OEM customers accounted for approximately 75% of net
sales during fiscal 1998, with Gateway, Inc. ("Gateway"), Dell Computer
Corporation ("Dell") and Compaq Computer Corporation ("Compaq") accounting for
approximately 39%, 31% and 5% of net sales for such period. Historically,
Gateway has been STB's largest customer, while Dell and Compaq have recently
become more significant customers. STB's other significant customers change from
period to period. STB expects that a small number of customers will continue to
account for a substantial portion of its revenues for the foreseeable future.
STB has no long-term commitments or contracts with any of its customers.
This lack of long-term commitments, together with the customer concentration
noted above, poses a significant risk. If a single customer of STB cancels an
order or ceases to be a customer, STB's business and financial condition could
be materially harmed.
Due to their purchasing power, STB's OEM customers can exert significant
pressure on the prices of STB's products, which could impair STB's gross profit
margins and harm STB's business. In addition, STB believes that its future
prospects largely depend upon the success of a limited number of key component
suppliers and a few major OEM customers (currently, Gateway, Dell and Compaq).
Because a limited number of major OEMs currently ship a majority of PC products,
the number of potential customers that STB can target is currently limited. STB
may not maintain its existing relationships with its major OEM customers or
secure additional major OEM customers. STB also may not retain or increase the
volume or profitability of products that it currently manufactures for such
customers. Any such failures would materially harm STB's business.
STB HAS SIGNIFICANT PRODUCT CONCENTRATION
Historically, a majority of STB's net sales have come from sales of graphics
boards. Also, from time to time, a majority of STB's net sales in a fiscal
quarter have come from the sale of a single or a limited number of graphics
boards.
RISK FROM STB'S SINGLE MANUFACTURING FACILITY
STB's sole manufacturing facility is located in Juarez, Mexico. Since STB is
dependent on this single manufacturing facility, any disruption of STB's
manufacturing operations at this facility would materially harm its business.
Such disruption could result from various factors, including difficulties in
attracting and retaining qualified manufacturing employees, difficulties
associated with the use of new, reconfigured or upgraded manufacturing
equipment, labor disputes, human error, governmental or political risks or a
natural disaster such as an earthquake, tornado, fire or flood.
In comparison to those of its competitors that do not maintain their own
manufacturing facilities, STB incurs higher relative fixed overhead and labor
costs as a result of operating its own manufacturing facility. Any failure to
generate the level of product revenues needed to absorb these overhead and labor
costs would materially harm STB's business.
22
<PAGE>
STB MAY EXPERIENCE A CHANGE IN PRODUCT OR SALES CHANNEL MIX
STB offers two broad categories of products: graphics boards and other
multimedia subsystems that are primarily sold to major OEMs and, to a lesser
degree, to commercial customers, and specialized technology products that are
primarily sold to resellers, the workstation groups of OEMs and corporate
customers in certain industries. Sales of graphics boards to OEMs, currently
account for a substantial majority of STB's net sales to OEMs. These sales are
characterized by relatively high unit volumes and relatively low gross profit
margins. Sales of STB's graphics boards and other multimedia subsystems to the
commercial market are characterized by relatively modest volumes and moderate
gross profit margins. Sales of STB's specialized technology products are
characterized by relatively low unit volumes and relatively high gross profit
margins.
Shifts in the mix of products sold or in the sales channels into which such
products are sold could materially harm STB's business. In particular, a
decrease in sales of graphics boards and other multimedia subsystems to the
commercial market or in sales of specialized technology products could result in
a disproportionately greater decrease in STB's gross profit margin. This is
because sales of graphics boards and other multimedia subsystems in the
commercial market and sales of specialized technology products currently have
higher gross profit margins than sales of graphics boards and other multimedia
subsystem products to STB's OEM customers. On the other hand, any decrease in
the volume of graphics boards and other multimedia subsystems sold to STB's OEM
customers would significantly reduce total net sales. This would also materially
harm STB's business.
STB FACES RISKS RELATING TO INTELLECTUAL PROPERTY
STB relies primarily on a combination of patent, mask work protection,
trademarks, copyrights, trade secret laws, employee and third-party
nondisclosure agreements and licensing arrangements to protect its intellectual
property. If these efforts are not sufficient to protect STB's intellectual
property, STB's business may be harmed. Many foreign jurisdictions offer less
protection of intellectual property rights than the United States. Therefore,
the protection provided to STB's proprietary technology by the laws of foreign
jurisdictions may not be sufficient to protect its technology.
The industry in which STB competes is characterized by vigorous protection
and pursuit of intellectual property fights or positions and it is common in the
PC industry for companies to assert intellectual property infringement claims
against other companies. Therefore, STB's products may become the target of
infringement claims. If that were to occur, STB may be required to spend
significant time and money to defend its products, redesign its products or
develop or license a substitute technology. Any of those events could materially
harm STB's business. Litigation by or against STB could result in significant
expense to STB and divert the efforts of STB's technical and management
personnel, regardless of the outcome of such litigation.
It is common in the PC industry for companies to assert intellectual
property infringement claims against other companies. As a result, STB
indemnifies some of its OEM customers against certain intellectual property
claims relating to STB's products used in OEM customers' products. Several OEM
customers have sent STB notices of potential indemnity claims based upon a
notice of patent infringement. Subsequently, the patent owner filed a patent
infringement lawsuits in the U.S. and elsewhere against several of such OEM
customers and a number of other major PC systems manufacturers. Based upon STB's
preliminary evaluation of the patent, it does not believe the infringement
claims have merit as to its products sold to its customers. However, even if the
claims do not have merit, STB may be required to dedicate significant management
time and expense to defending itself if it is directly sued, or assisting its
OEM customers in their defense of this or other infringement claims pursuant to
such indemnity agreements. This could materially harm STB's business.
23
<PAGE>
STB'S INTERNATIONAL OPERATIONS ARE SUBJECT TO CERTAIN RISKS
STB has significant export sales. These international operations subject STB
to a number of risks associated with conducting business outside of the United
States. These risks include:
- Unexpected changes in legislative or regulatory requirements
- Delays resulting from difficulty in obtaining export licenses for certain
technology
- Tariffs, quotas and other trade barriers and restrictions
- Longer accounts receivable payment cycles
- Difficulties in collecting payment
- Potentially adverse tax consequences, including repatriation of earnings
- Burdens of complying with a variety of foreign laws
- Unfavorable intellectual property laws
- Political instability
- Foreign currency fluctuations
Any of these factors could materially harm the international operations and
sales of STB, and consequently, its businesses. Recently, the financial markets
in Asia have experienced significant turmoil, which could harm STB's
international sales or operations.
STB sells its products at prices denominated in U.S. dollars. An increase in
the value of the U.S. dollar relative to foreign currencies could make STB's
products more expensive and potentially less competitive in foreign markets. In
the future STB plans to sell a portion of its products at prices denominated in
non-U.S. currency. This would result in an increase in risk from fluctuations in
currency exchange rates. In addition, a substantial portion of STB's
manufacturing labor costs are paid in Mexican pesos. Any decrease in the value
of the U. S. dollar relative to the Mexican peso would increase STB's
manufacturing costs, which could materially harm STB's business.
STB'S STOCK PRICE MAY BE VOLATILE
The trading price of STB's Common Stock has in the past been and could in
the future fluctuate significantly. The fluctuations have been or could be in
response to numerous factors including:
- Quarterly variations in results of operations
- Announcements of technological innovations or new products by STB, its
customers or competitors
- Changes in securities analysts' recommendations
- Earnings estimates for STB
- General fluctuations in the stock market
STB's revenues and results of operations may be below the expectations of
public market securities analysts or investors. This could result in a sharp
decline in the market price of STB's Common Stock. In addition, stock markets
have from time to time experienced extreme price and volume fluctuations. The
market prices for high technology companies have been particularly affected by
these market fluctuations and such effects have often been unrelated to the
operating performance of such companies. These broad market fluctuations may
cause a decline in the market price of STB's common stock.
In the past, following periods of volatility in the market price of a
company's stock, securities class action litigation has been brought against the
issuing company. A securities class action lawsuit was filed on
24
<PAGE>
October 9, 1998 in Dallas County, Texas against STB, certain of its officers and
directors along with the underwriters who participated in STB's secondary public
offering on March 20, 1998. The petition alleges that the registration statement
for STB's secondary public offering contained false and misleading statements of
material facts and omitted to state material facts. Such litigation could result
in substantial costs and would likely divert management's attention and
resources. See "Legal Proceedings."
RISKS ASSOCIATED WITH YEAR 2000 COMPLIANCE
STB uses a significant number of computer software programs and operating
systems in its internal operations. These include applications used in financial
business systems and various administration functions, and also software
programs in its products. If these software applications are unable to
appropriately interpret dates occurring in the upcoming calendar year 2000, some
level of modification or replacement of such software may be necessary. STB
believes that all of its existing products are Year 2000 compliant and has
conducted Year 2000 compliance testing. Despite such belief, STB's products may
not be Year 2000 compliant. If STB's products fail to perform, including
failures due to the onset of calendar year 2000, its business would likely be
materially harmed.
STB is currently evaluating its information technology ("IT") and non-IT
Systems for Year 2000 compliance. This evaluation includes reviewing what
actions are required to make such Systems Year 2000 compliant as well as actions
necessary to make STB less vulnerable to Year 2000 compliance problems
associated with third parties' systems. Such measures may not solve all Year
2000 problems. Any Year 2000 problems could materially harm STB's business. In
addition, STB's customers and suppliers may not be year 2000 compliant, which
could materially harm STB's business.
STB DEPENDS ON SUPPLIERS
STB obtains several of the components used in its products from single or
limited sources. If component manufacturers do not allocate a sufficient supply
of components to meet STB's needs, STB may have to obtain such components from
distributors or on the spot market at a higher cost. STB has no guaranteed
supply arrangements with any of its suppliers, and current suppliers may not be
able to meet its current or future component requirements. From time to time,
STB relies substantially upon a limited number of sole source suppliers for
multimedia controller chips, which can, in large part, determine the performance
of a multimedia subsystem.
If STB in the past experienced difficulty obtaining a particular multimedia
controller chip, it was able to use comparable multimedia controller chips. In
the event of the consummation of the 3Dfx Merger, STB may not be able to select
other controller chips because the controller chip suppliers are 3Dfx
competitors. Even if other multimedia controller chip suppliers would supply STB
as a 3Dfx subsidiary, these alternative components may cost significantly more.
Alteration of product designs to use alternative components could cause
significant delays and could require production recertification from STB's OEM
customers or reduce its production of the related products. Any of these effects
could materially harm STB's business.
From time to time STB has experienced difficulty meeting certain product
shipment dates to customers for various reasons. These reasons include component
delivery delays, component availability shortages, system compatibility
difficulties and supplier product quality deficiencies. In some instances
missing shipment dates has resulted in impaired margins, reduced production
volumes, strained customer relations and loss of business.
Software drivers, which are essential to the performance of substantially
all of STB's products, are included with some of STB's limited source
components. From time to time STB experiences product delivery delays due to the
inadequacy or the incompatibility of software drivers provided by component
suppliers or developed internally by STB. Delays in the delivery of components,
component shortages, system compatibility difficulties, supplier product quality
deficiencies and software driver problems will
25
<PAGE>
continue to occur in the future. Such delays or problems could materially harm
STB's business. Additionally, in an effort to avoid actual or perceived
component shortages, STB may overpurchase certain components. Excess inventory
resulting from such overpurchases, obsolescence or a decline in the market value
of such inventory, could result in inventory write-offs, which would materially
harm STB's business.
Significant increases in the prices of components, such as controller chips
or memory chips, have occurred in the past, and STB has not always been able to
increase its products' prices accordingly. Demand for STB's products has been
and will continue to be significantly affected by actual and anticipated changes
in the price and supply of DRAM or other memory products. Large supplies of
SDRAMs in the Spring of 1998 resulted in significant price declines for such
components and lowered total graphics board costs on products that used the
components as compared to SGRAMs. Worldwide shortages of controller chips or
memory chips and international tariff disputes have resulted in substantial
component cost increases that have harmed STB's business. Such price increases
may occur in the future, and may materially harm STB's business.
Historically STB has relied upon its suppliers to continue to develop,
introduce and manufacture controller chips, memory chips and other components in
sufficient volumes to satisfy STB's requirements. These components must compare
favorably in terms of functionality, performance and price with components from
other manufacturers, including competitors of STB that have internally developed
computer chips or manufacturing expertise. Any failure by STB to continue to
obtain components from its suppliers that are competitive in terms of
functionality, performance and price with the components that are available to
its competitors would materially harm STB's business.
RISKS FROM STB'S ENTRY INTO NEW PRODUCT MARKETS
STB's business historically has focused primarily on the design, manufacture
and sale of multimedia accelerator subsystems. However, STB from time to time
undertakes new product initiatives, such as DVD decoders and flat panel display
products. There are numerous risks inherent in entering into new product
markets. These risks include the reallocation of limited management, engineering
and capital resources to unproven product ventures, a greater likelihood of
encountering technical problems and a greater likelihood that STB's new products
(or the PCs into which they are incorporated) will not gain market acceptance.
In addition, a new product line, like STB's line of flat panel display products,
requires significant investment in long-lead time inventories as well as certain
manufacturing equipment. The failure of one or more of such products, or any
adverse effect such new products may have upon STB's reputation in its core
multimedia accelerator subsystem business as a result of such failure, could
materially harm STB's business.
PRICE PROTECTION AND STOCK ROTATION RISKS
If there is a price decrease in STB's products, STB's credit arrangements
with its commercial customers generally allow such customers credit equal to the
difference between the price originally paid and the new decreased price on
units in the customers' inventories on the date of the price decrease. This
practice is common in the industry. In addition, commercial customers generally
have the right to return slow-moving or excess inventory for product credit
equal to an agreed upon percentage of shipments within specified time periods.
Although STB establishes reserves to cover these practices, these reserves may
not be sufficient and any price protection claims or returns may materially harm
its business.
STB IS SUBJECT TO ENVIRONMENTAL REGULATIONS
STB is subject to a variety of local, state, federal and foreign
governmental regulations relating to the storage, discharge, handling, emission,
generation, manufacture and disposal of toxic or other hazardous substances used
to manufacture its products. STB could be fined or suffer a suspension of
production,
26
<PAGE>
alteration of its manufacturing processes or cessation of operations if it does
not comply with any such regulation. If this occurs, STB's business could be
materially harmed.
STB IS SUBJECT TO POTENTIAL PRODUCT LIABILITY CLAIMS
STB's purchase agreements with its major OEM customers typically contain
provisions that require STB to indemnify the OEM customer and any end-users for
potential product liability claims. Although STB has never experienced product
liability claims, STB cannot assure that it will not experience such claims in
the future. A successful product liability claim against STB could materially
harm STB's business.
ANTI-TAKEOVER MEASURES
STB is a Texas corporation and is therefore subject to the provisions of the
Texas Business Corporation Act, including the terms of the Texas Business
Combination Law ("TBCL") that became effective on September 1, 1997. In general,
the TBCL prohibits a Texas "issuing public corporation" (such as STB) from
engaging in a "business combination" with any shareholder who is a beneficial
owner of 20% or more of the corporation's outstanding stock for a period of
three years after such shareholder's acquisition of a 20% ownership interest,
unless: (i) the board of directors of the corporation approves the transaction
or the shareholder's acquisition of shares prior to the acquisition or (ii)
two-thirds of the unaffiliated shareholders of the corporation approve the
transaction at a shareholders' meeting. The TBCL may have the effect of
inhibiting a non-negotiated merger or other business combination involving STB.
The Company is subject to the terms of the TBCL, unless its shareholders or
directors take action electing not to be governed by its terms (which action is
not currently contemplated). The Company is also a party to certain agreements
that could be deemed to have an anti-takeover effect. The Company's Board of
Directors has the authority to issue up to 2,000,000 shares of preferred stock
in one or more series and to determine the price, rights, preferences and
privileges of those shares without any further vote or action by STB's
shareholders. The rights of the holders of Common Stock of STB are subject to,
and may be adversely affected by, the rights of the holders of any shares of
preferred stock which may be issued in the future. While STB has no present
intention to issue shares of preferred stock, such issuance, while providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire a majority of the outstanding voting stock of STB. In
addition, such preferred stock may have other rights, including economic rights
senior to the Common Stock, and as a result the issuance thereof could have a
material adverse effect on the market value of such Common Stock
SHARES ELIGIBLE FOR FUTURE SALE
As of December 31, 1998, STB had outstanding 12,605,887 shares of Common
Stock, substantially all of which were freely tradeable. The executive officers
and directors of STB, who own 1,522,567 outstanding shares of Common Stock, are
free to sell the shares beneficially owned by them, subject to compliance with
the Securities Act of 1933, as amended (the "Securities Act"), including Rule
144 promulgated thereunder, and the terms of certain voting agreements entered
into with 3Dfx, as well as a right of first refusal agreement pursuant to which
certain of such shares are subject. See "--Proposed 3Dfx Merger" and "Certain
Relationships and Related Transactions--Right of First Refusal Agreement." No
prediction can be made as to the effect, if any, that market sales of the above
shares or the availability of such shares for future sales will have on the
market price of shares of Common Stock prevailing from time to time. Future
sales of substantial amounts of Common Stock by existing shareholders could
adversely affect the prevailing market price of the Common Stock and STB's
ability to raise additional capital.
ITEM 2. PROPERTIES.
We lease a 210,000 square foot facility in Richardson, Texas that serves as
our headquarters and as a site for product development and testing. We also use
our headquarters for technical support and product
27
<PAGE>
development and repair. We moved into our new headquarters facility in November
1998. Our headquarters was constructed and is leased under the terms of a
"synthetic lease." See "Management's Discussion and Analysis of Financial
Condition and Results of Operation--Liquidity and Capital Resources."
Under the terms of a lease agreement expiring in November 2007, we lease a
136,800 square foot manufacturing facility in Juarez, Mexico that provides
increased space and improved layout for manufacturing operations compared to our
previous facility, which is located on an adjacent site. We have options to
acquire additional space at the same site. At the time of our relocation to the
new facility, we negotiated an extension of the lease covering our previous
facility in order to retain one-half of the former space (approximately 40,000
square feet) through December 1999.
Additionally, we lease 20,800 square feet of packaging space in El Paso,
Texas under a lease expiring in April 2003, a software development office in
Austin, Texas under a lease expiring in April 2001, a software development
office in Eugene, Oregon under a lease expiring in February 2000, a software
development office in Belfast, Northern Ireland under a lease expiring in April
2006, and sales offices in London, Paris and San Jose, California under leases
expiring in September 2012, December 2004 and February 1999, respectively. We
also maintain product inventories in various locations under warehouse
arrangements in order to permit the timely delivery of certain products to
nearby customers.
We believe that our existing facilities are well maintained, in good
operating condition and adequate for our present and anticipated levels of
operations.
ITEM 3. LEGAL PROCEEDINGS.
A securities class action lawsuit was filed October 9, 1998 in Dallas
County, Texas against us, certain of our officers and directors and 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. 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.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of our shareholders during the fourth
quarter of fiscal 1998.
28
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The STB Common Stock has traded on Nasdaq under the symbol "STBI" since
February 14, 1995. At December 31, 1998, there were approximately 68 record
holders of STB Common Stock. We believe that the number of beneficial owners of
STB Common Stock is substantially greater. The table below sets forth for the
fiscal quarters indicated the high and low sale prices for the STB Common Stock,
as reported by Nasdaq. These prices have been adjusted to reflect a
three-for-two stock split of the Common Stock that occurred on July 17, 1997 and
a three-for-two stock split of the Common Stock that occurred on February 20,
1998. Each of these stock splits was effected in the form of a stock dividend.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
Fiscal 1998
Fourth quarter........................................................... $ 9.25 $ 3.88
Third quarter............................................................ $ 13.25 $ 7.50
Second quarter........................................................... $ 26.33 $ 13.75
First quarter............................................................ $ 22.67 $ 13.33
Fiscal 1997
Fourth quarter........................................................... $ 30.50 $ 18.00
Third quarter............................................................ $ 19.92 $ 11.39
Second quarter........................................................... $ 16.11 $ 9.67
First quarter............................................................ $ 15.94 $ 8.44
</TABLE>
We intend to retain any future earnings for use in our business. We do not
intend to pay cash dividends in the foreseeable future. The payment of future
dividends, if any, will be at the discretion of our Board of Directors. Any
decision by the Board of Directors in this regard will depend, among other
things, upon future earnings, operations, capital requirements, restrictions in
future financing agreements, our general financial condition and general
business conditions. Our Revolving Credit Facility generally prohibits us from
paying cash dividends. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
On June 5, 1998 STB issued a warrant to purchase up to 420,000 shares of STB
Common Stock to one of its customers for nominal consideration, in reliance on
the exemption from registration under Section 4(2) of the Securities Act of
1933. The issuance of the warrant did not involve a public offering. The warrant
vests in increments of 52,500 shares over time based upon certain performance
thresholds. The warrant is exercisable at a price of $10.13 per share. The
warrant expires in varying increments on December 31, 2001, December 31, 2002
and December 31, 2003.
In connection with our entry into the 3Dfx Merger Agreement, on December 13,
1998 we entered into the STB Stock Option Agreement pursuant to which we granted
to 3Dfx an option to purchase up to 1,890,883 shares of STB Common Stock. The
option was granted to 3Dfx as a condition to 3Dfx's entry into the 3Dfx Merger
Agreement, in reliance on the exemption from registration under Section 4(2) of
the Securities Act 1933. The issuance of the option did not involve a public
offering. See "Business--Proposed 3Dfx Merger" for further information with
respect to the terms under which the option may be exercised.
29
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth our selected consolidated financial data. Our
selected consolidated statements of operations and consolidated balance sheet
data for the fiscal years ended October 31, 1998, 1997, 1996, 1995 and 1994 are
derived from our Consolidated Financial Statements that were audited by
PricewaterhouseCoopers LLP, independent accountants, whose report for the fiscal
years ended October 31, 1998, 1997 and 1996 is included herein.
The Selected Consolidated Financial Data set forth below should be read in
conjunction with, and is qualified in its entirety by, the Consolidated
Financial Statements and related Notes, and other financial information included
herein.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(IN THOUSANDS EXCEPT PER AMOUNTS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net sales.................................. $ 266,270 $ 199,485 $ 180,155 $ 129,603 $ 89,836
Cost of sales.............................. 222,018 149,439 144,879 110,129 73,213
--------- --------- --------- --------- ---------
Gross profit............................... 44,252 50,046 35,276 19,474 16,623
--------- --------- --------- --------- ---------
Operating expenses:
Research and development................. 10,794 6,740 4,428 2,719 1,795
Sales and marketing...................... 17,717 14,788 10,986 7,437 5,529
General and administrative............... 12,666 10,618 9,486 6,172 5,190
--------- --------- --------- --------- ---------
Total operating expenses................... 41,177 32,146 24,900 16,328 12,514
--------- --------- --------- --------- ---------
Income from operations..................... 3,075 17,900 10,376 3,146 4,109
Interest expense, net...................... 439 1,649 1,113 818 588
--------- --------- --------- --------- ---------
Income before income tax................... 2,636 16,251 9,263 2,328 3,521
Provision for income tax (1)............... 904 5,481 3,186 330 --
--------- --------- --------- --------- ---------
Net income............................... $ 1,732 $ 10,770 $ 6,077 $ 1,998 $ 3,521
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net income per share:
Basic.................................... $ 0.14 $ 1.05 $ 0.60 $ 0.23 $ 0.63
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Diluted.................................. $ 0.13 $ 0.97 $ 0.59 $ 0.23 $ 0.63
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
AS OF OCTOBER 31,
-------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998 1997 1996 1995 1994
---------- ---------- --------- --------- ---------
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital......................................... $ 83,719 $ 31,361 $ 25,192 $ 21,621 $ 4,373
Total assets............................................ 135,312 109,554 65,629 57,539 23,651
Accounts payable-trade.................................. 32,050 36,801 19,538 17,731 8,710
Short-term borrowings, including current maturities..... 587 22,687 12,465 12,138 6,793
Long-term debt.......................................... -- 500 1,000 1,982 2,164
Total shareholders' equity.............................. 98,352 43,462 29,597 23,362 4,196
</TABLE>
- ------------------------
(1) We operated as an S Corporation from November 1, 1986 until February 21,
1995, at which time we became fully subject to federal and state income
taxes.
30
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
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 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
31
<PAGE>
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.
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
--------- --------- ---------
<S> <C> <C> <C>
Net sales............................................................ 100.0% 100.0% 100.0%
Cost of sales........................................................ 83.4% 74.9% 80.4%
--------- --------- ---------
Gross profit......................................................... 16.6% 25.1% 19.6%
--------- --------- ---------
--------- --------- ---------
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%
--------- --------- ---------
Income from operations............................................... 1.2% 9.0% 5.8%
Interest expense, net................................................ 0.2% 0.8% 0.6%
--------- --------- ---------
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%
--------- --------- ---------
--------- --------- ---------
</TABLE>
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 resulted primarily from increased
pricing pressure in the commercial and OEM markets and, to a lesser degree, the
decline in average selling prices in the specialized technology market. The
decrease in gross profit as a percentage of net sales resulted primarily from
(i) increased pricing pressure on our products, (ii) a decrease in higher margin
specialized
32
<PAGE>
technology products as a percentage of total sales, (iii) price protection
credits granted during the period for the Velocity 128 and Black Magic Voodoo 2
products and (iv) additional reserves taken for potential excess and obsolete
inventory.
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
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
33
<PAGE>
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 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.
34
<PAGE>
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
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
35
<PAGE>
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 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.
STB PRODUCTS AND SERVICES: During 1998, all of STB's products that were
produced in the last five years were tested and confirmed as compliant. STB has
transmitted letters to its customers notifying them of their current year 2000
readiness status. In general, STB 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 issue. 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
36
<PAGE>
costs will not exceed such amount or that STB will not have to use other sources
for these amounts. 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, which could have a
material effect on the 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. 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: Although STB has not adopted a formal contingency plan,
it is currently assessing alternatives, which may be implemented in the event
Year 20000 issues arise.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("FAS 130"), was issued. FAS 130 establishes
standards for reporting and display of comprehensive income and its components
(revenues, expenses, gains, and losses) in a full set of general-purpose
financial statements. It mandates that all items required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. FAS 130 is effective for fiscal years beginning after
December 15, 1997. STB will adopt FAS 130 in the year ending October 31, 1999.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required upon adoption.
In June 1997, Statement of Financial Accounting Standards No. 131,
"Disclosure About Segments of an Enterprise and Related Information" ("FAS
131"), was issued, FAS 131 establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. FAS 131 is effective for financial statements for periods
beginning after December 15, 1997. STB will adopt FAS 131 in the year ending
October 31, 1999.
On March 4, 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use ("SOP 98-1"). SOP 98-1 requires computer software costs related
to internal use software that are incurred in the preliminary project stage
should be expensed as services consumed in developing or obtaining internal-use
computer software; payroll and payroll-related costs for employees who are
directly associated with and who devote time to the internal-use computer
software project (to the extent of the time spent directly on the project); and
interest costs incurred when developing computer software for internal use
should be capitalized. SOP 98-1 is effective for financial statements for fiscal
years beginning after December 15, 1998. Accordingly, STB will adopt SOP 98-1 in
its financial statements for the year ending October 31, 1999. STB does not
believe the adoption of SOP 98-1 will have a material effect on its results of
operations or financial condition.
On June 15, 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (FAS 133). FAS 133 is effective for all
fiscal quarters of all fiscal years beginning after June 15, 1999 (November 1,
1999 for STB). FAS 133 requires that all derivatives instruments be recorded on
the balance sheet at their fair value. Changes in the fair value of derivatives
are recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge transaction
and, if it is, the type of hedge transaction. STB is currently evaluating
implementation of FAS 133 and the effects the statement will have on its
financial statements and disclosures. STB believes
37
<PAGE>
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
None.
38
<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
39
<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.
40
<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.
41
<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 (payments) on long-term debt......................................... (1,596) 2,297 (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.
42
<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.
43
<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.
44
<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 SPLIT--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
45
<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.
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 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 investment is included in other assets.
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.
46
<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........................................................... $ 26,885 $ 22,416
Work-in-process......................................................... 16,289 13,416
Finished goods.......................................................... 5,819 5,463
--------- ---------
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.
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
47
<PAGE>
NOTE 6--SHORT-TERM DEBT (CONTINUED)
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>
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
48
<PAGE>
NOTE 8--COMMITMENTS AND CONTINGENCIES (CONTINUED)
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.
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. 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.
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
49
<PAGE>
NOTE 8--COMMITMENTS AND CONTINGENCIES (CONTINUED)
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>
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
50
<PAGE>
NOTE 10--EMPLOYEE BENEFIT PLAN AND PROFIT SHARING PLAN (CONTINUED)
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>
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>
51
<PAGE>
NOTE 12--INCOME TAXES (CONTINUED)
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>
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
52
<PAGE>
NOTE 13--STOCK PLANS (CONTINUED)
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
53
<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.
As of January 15, 1999, the Company's $3.0 million Convertible Subordinated
Note with a supplier converted into 428,572 shares of common stock of the
supplier based on a conversion price equal to $7.00
54
<PAGE>
NOTE 15--SUBSEQUENT EVENTS (CONTINUED)
per common share. The supplier completed its initial public offering in January
1999 at a price of $12.00 per common share.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
55
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following individuals currently serve as executive officers and
directors:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH COMPANY
- -------------------------- --- -------------------------------------------------------------------------------
<S> <C> <C>
William E. Ogle........... 52 Chief Executive Officer and Chairman of the Board of Directors
Randall D. Eisenbach...... 48 Executive Vice President, Chief Operating Officer, Assistant Secretary and
Director
James L. Hopkins.......... 53 Chief Financial Officer, Vice President of Strategic Marketing and Director
J. Shane Long............. 32 Vice President of Sales and Marketing and Director
Bryan F. Keyes............ 50 Vice President of Administration, General Counsel, Secretary and Treasurer
James J. Byrne............ 62 Director
Dennis G. Sabo............ 50 Director
Lawrence E. Wesneski...... 51 Director
</TABLE>
Set forth below is information concerning the background and business
experience of our executive officers and directors.
WILLIAM E. OGLE is one of our co-founders and has served as Chief Executive
Officer since 1981 and Chairman of the Board since 1985. Prior to founding STB,
Mr. Ogle co-founded Sundance Sales, Inc., a manufacturer's sales representative
organization selling a broad variety of electronic components, and served as
President of that company from 1978 to 1983.
RANDALL D. EISENBACH has served as one of our directors since December 1994,
as our Executive Vice President and Chief Operating Officer since December 1993
and as our Assistant Secretary since December 1994. From August 1990 to December
1993, Mr. Eisenbach served as our Director of Operations. From November 1985 to
December 1993, Mr. Eisenbach served as our Director of Manufacturing for the
Company.
JAMES L. HOPKINS has served as one of our directors and as our Chief
Financial Officer and Vice President of Strategic Marketing since December 1994.
Mr. Hopkins' present responsibilities include directing European sales and
marketing, managing specialized technology products and planning financial
strategy. From 1987 through December 1994, Mr. Hopkins acted as general partner
of H&H Management Systems, a consulting firm owned by Mr. Hopkins and his wife.
H&H Management Systems, through Mr. Hopkins, provided a broad spectrum of
consulting services to us from March 1990 through December 1994. Mr. Hopkins'
responsibilities to us pursuant to our arrangement with H&H Management Systems
largely mirror his current responsibilities as one of our officers. Mr. Hopkins
also served as an advisory director to us from 1992 until his election as a
director in December 1994.
J. SHANE LONG has served as our Vice President of Sales and Marketing since
November 1994. Mr. Long served as our National Sales Manager from November 1992
to October 1994 and as Western Area Sales Manager from July 1992 to October
1992. From January 1991 to July 1992, Mr. Long served as a field sales employee
for Quad State Sales, a manufacturer's representative company specializing in
the sale of high-technology products. Mr. Long was elected one of our directors
following the completion of our initial public offering.
BRYAN F. KEYES has served as our Vice President of Administration and
General Counsel since November 1997. Prior to such date, Mr. Keyes served as our
Director of Legal and Finance since April 1993 and as our Secretary and
Treasurer since December 1994. Mr. Keyes oversees all of our legal matters and
various administrative activities. From November 1992 to April 1993, Mr. Keyes
served as an independent financial consultant. From January 1988 to November
1992, Mr. Keyes served as Vice President of Finance
56
<PAGE>
and Administration for Trammell Crow Distribution Corporation, a national
warehousing and logistics company. From 1972 to 1987, Mr. Keyes was employed by
Coopers & Lybrand. He served as a partner of that firm from 1980 to 1987. Mr.
Keyes is a member of the American Institute of Certified Public Accountants, the
Texas Society of CPAs and the State Bar of Texas.
JAMES J. BYRNE has served as one of our directors since February 1995. Mr.
Byrne has served as Managing Partner of Byrne Technology Partners, Ltd. since
January 1996. The firm provides management services focusing on business and
product planning and valuation improvement strategies for high technology
companies. From April 1990 to its sale in March 1995, Mr. Byrne served as
President of Harris Adacom Corporation, a company formed by the merger of the
data communications division of Harris Corp. and Adacom Inc., which was engaged
in network systems and services. From December 1986 to April 1990, Mr. Byrne was
the Vice President and General Manager of the data communications division of
Harris Corp. Mr. Byrne serves on the board of directors of Lennox International,
Inc., a manufacturer of heating, ventilation and air conditioning systems. Mr.
Byrne also served as a member of the national board of directors of the American
Electronics Association and as a member of the Advisory Council of the
University of Texas School of Engineering and Computer Science.
DENNIS G. SABO has served as one of our directors since April 1997. He has
served as the President and Chief Executive Officer of Arithmos, Inc., a
privately held company engaged in the development of integrated circuits and
technology for LCD flat panel displays since March 1996. From 1990 through
February 1996, Mr. Sabo served as the Senior Vice President of graphics
accelerator products for S3 Incorporated, a designer and manufacturer of
integrated circuits. At S3 Incorporated, Mr. Sabo worked on the development and
introduction of "Windows Accelerators." Prior to being employed by S3
Incorporated, Mr. Sabo held management positions in the field of integrated
circuit design technology for approximately 20 years.
LAWRENCE E. WESNESKI has served as one of our directors since February 1995.
He has served as President and Chief Executive Officer of Hoak Breedlove
Wesneski & Co. since August 1996. Prior to August 1996, Mr. Wesneski was
President of BW Securities, Inc. Both Hoak Breedlove Wesneski & Co. and BW
Securities have provided certain financial advisory services to us. See
"Executive Compensation-- Compensation and Other Committee Interlocks and
Insider Participation." From January 1987 to the present, Mr. Wesneski has
served as President and Managing Director of Breedlove Wesneski & Co., a private
merchant banking firm. Mr. Wesneski also served as an advisory director to us
from 1987 to 1995. Mr. Wesneski serves on the board of directors of TSC
Communications Corp., an independent operator of private pay telephones,
Advanced Technical Products Corp., a defense products manufacturing company, and
David's Supermarkets, Inc., a company that operates a regional chain of grocery
stores. Mr. Wesneski also serves as the Vice Chairman of David's Supermarkets,
Inc.
The Board of Directors elects all of our executive officers on an annual
basis. Such officers serve until the next annual meeting of the Board of
Directors and until their respective successors are chosen and qualified.
57
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
The following information summarizes annual and long-term compensation for
services in all capacities to the Company for the fiscal years ended October 31,
1998, 1997 and 1996, of the Chief Executive Officer and the other four most
highly compensated executive officers of the Company (collectively, the "Named
Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
-------------
AWARDS
ANNUAL COMPENSATION SECURITIES
---------------------- UNDERLYING ALL OTHER
BONUS OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) ($)(1)(2) (#) ($)(3)
- --------------------------------------------------- --------- ---------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C>
William E. Ogle.................................... 1998 $ 275,000 $ 112,706 70,000 $ 3,200
Chairman and Chief 1997 $ 260,000 $ 169,240 -- $ 3,562
Executive Officer 1996 $ 200,000 $ 96,741 90,000 $ 1,974
Randall D. Eisenbach............................... 1998 $ 230,000 $ 94,264 70,000 $ 3,200
Executive Vice President and 1997 $ 210,000 $ 137,604 -- $ 3,500
Chief Operating Officer 1996 $ 177,770 $ 83,197 90,000 $ 1,746
James L. Hopkins (4)(5)............................ 1998 $ 265,674 $ 78,198 70,000 $ 3,200
Chief Financial Officer and 1997 $ 250,461 $ 135,995 -- $ 3,300
Vice President of Strategic Marketing 1996 $ 162,066 $ 60,463 90,000 $ 1,250
J. Shane Long (6).................................. 1998 $ 273,279 $ 69,509 70,000 $ 3,200
Vice President of 1997 $ 257,271 $ 103,445 -- $ 2,933
Sales and Marketing 1996 $ 212,993 $ 55,626 90,000 $ 1,150
Bryan F. Keyes..................................... 1998 $ 150,000 $ 18,494 12,500 $ 3,000
Vice President of Administration 1997 $ 110,000 $ 26,281 -- $ 1,696
and General Counsel 1996 $ 97,767 $ 27,540 18,000 $ 712
</TABLE>
- ------------------------
(1) Our current Profit Sharing Plan became effective upon the consummation of
our initial public offering. Except for the percentage of pretax income
allocated to the Profit Sharing Plan and the relative amounts allocated
among participants, the former Profit Sharing Plan resembled our current
Profit Sharing Plan.
(2) None of the Named Executive Officers received any perquisites or other
personal benefits in fiscal year 1996, fiscal year 1997 or fiscal year 1998
that in the aggregate exceeded the lesser of $50,000 or 10% of such Named
Executive Officer's salary and bonus for such year.
(3) Reflects for fiscal year 1996 matching contributions made by us pursuant to
our 401(k) Savings Plan to Messrs. Ogle, Eisenbach, Hopkins, Long and Keyes
in the amounts of $1,974, $1,746, $1,250, $1,150 and $712, respectively, for
fiscal year 1997 matching contributions made by us pursuant to our 401(k)
Savings Plan to Messrs. Ogle, Eisenbach, Hopkins, Long and Keyes in the
amounts of $3,562, $3,500, $3,300, $2,933 and $1,696, respectively, and for
fiscal year 1998 matching contributions made by us pursuant to our 401(k)
Savings Plan to Messrs. Ogle, Eisenbach, Hopkins, Long and Keyes in the
amounts of $3,200, $3,200, $3,200, $3,200 and $3,000, respectively.
(4) Salary amount includes for fiscal year 1996 $125,000 paid as base salary and
$37,065 paid as sales commissions, for fiscal year 1997 $180,000 paid as
base salary and $70,461 paid as sales commissions and for fiscal year 1998
$190,800 paid as base salary and $74,874 paid as sales commissions.
58
<PAGE>
(5) Included in the bonus amount for Mr. Hopkins is profit sharing of $115,995
and a bonus of $20,000 for fiscal year 1997.
(6) Salary amount includes for fiscal year 1996 $115,000 paid as base salary and
$97,993 paid as sales commissions, for fiscal year 1997 $160,093 paid as
base salary and $97,178 paid as sales commissions and for fiscal year 1998
$169,600 paid as base salary and $103,679 paid as sales commissions.
OPTION GRANTS IN LAST FISCAL YEAR
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information regarding options granted
during fiscal 1998 to the named executive officers.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
-------------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF STOCK
SECURITIES PERCENT OF TOTAL PRICE APPRECIATION FOR
UNDERLYING OPTIONS GRANTED EXERCISE OPTION TERM(3)
OPTIONS TO EMPLOYEES IN PRICE PER EXPIRATION ----------------------
GRANTED(#)(1) FISCAL YEAR SHARE(2) DATE 5% 10%
--------------- ------------------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
William E. Ogle.......................... 30,000 3.8% $ 15.08 12/18/07 $ 284,512 $ 721,009
40,000 5.1% 7.00 8/5/08 $ 176,090 $ 446,248
Randall D. Eisenbach..................... 30,000 3.8% 15.08 12/18/07 $ 284,512 $ 721,009
40,000 5.1% 7.00 8/5/08 $ 176,090 $ 446,248
James L. Hopkins......................... 30,000 3.8% 15.08 12/18/07 $ 284,512 $ 721,009
40,000 5.1% 7.00 8/5/08 $ 176,090 $ 446,248
J. Shane Long............................ 30,000 3.8% 15.08 12/18/07 $ 284,512 $ 721,009
40,000 5.1% 7.00 8/5/08 $ 176,090 $ 446,248
Bryan F. Keyes........................... 7,500 1.0% 15.08 12/18/07 $ 71,128 $ 180,252
5,000 * 7.00 8/5/08 $ 22,011 $ 55,781
</TABLE>
- ------------------------
* Less than 1%
(1) All options were granted on either December 18, 1997 or August 5, 1998 and
vest at the rate 20% per year over five years.
(2) All options were granted at the fair market value of the Common Stock on the
date of grant.
(3) In accordance with the rules of the Securities and Exchange Commission (the
"Commission"), shown are the gains or "option spreads" that would exist for
the respective options granted. These gains are based on the assumed rates
of annual compound stock price appreciation of 5% and 10% from the date the
option was granted over the full option term. These assumed annual compound
rates of stock price appreciation are mandated by the rules of the
Commission and do not represent STB's estimate or projection of future
Common Stock prices.
59
<PAGE>
AGGREGATED OPTION EXERCISES IN
LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL IN-THE-MONEY OPTIONS
SHARES YEAR-END(#) AT FISCAL YEAR-END($)(1)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE (#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------------- ------------ ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
William E. Ogle.................... -- -- 108,901 172,601 -- --
Randall D. Eisenbach............... -- -- 70,200 161,801 -- --
James L. Hopkins................... -- -- 62,850 151,900 -- --
J. Shane Long...................... -- -- 55,350 151,901 -- --
Bryan F. Keyes..................... -- -- 10,800 30,500 14,013 21,020
</TABLE>
- ------------------------
(1) Based on the last sale price of $5.19 of STB Common Stock on the Nasdaq
National Market on October 30, 1998. The exercise prices of the options in
this table ranged from $4.61 to $15.08 per share.
EMPLOYMENT AGREEMENTS
We are a party to employment agreements with each of Messrs. Ogle,
Eisenbach, Hopkins and Long. Each agreement has a term extending through October
31, 1999, subject to the terms of the amendment described in the next paragraph
that will become effective only if the 3Dfx Merger is consummated. Each
agreement contains a provision providing for its automatic renewal for an
additional year on each subsequent October 31, subject to the right of STB or
the employee to terminate the agreement with a 30-day notice prior to the date
of renewal. Under the agreements, Messrs. Ogle, Eisenbach, Hopkins and Long will
receive base annual salaries in fiscal year 1999 of $275000, $230,000, $190,800
and $169,600, respectively, and each is eligible to receive incentive
compensation under our Profit Sharing Plan. The agreements with Messrs. Hopkins
and Long also provide for the payment of sales commissions, the amounts of which
are subject to annual adjustment by the Compensation Committee. Each agreement
provides for a severance payment if the agreement is terminated under certain
circumstances (including termination of an agreement during the period
immediately preceding a renewal date). The amounts of the severance payments are
as follows: Mr. Ogle would receive two times the sum of his base annual salary
and annualized incentive compensation; Mr. Eisenbach would receive the sum of
his base annual salary and annualized incentive compensation; each of Mr.
Hopkins and Mr. Long would receive the sum of his base annual salary, annualized
incentive compensation and annualized sales commissions. If an agreement is
terminated under certain circumstances within twelve months after a change in
control of STB, such agreement also provides for a parachute payment in an
amount that is two times the severance payment. For purposes of calculating
severance and parachute payments, the employee's base annual salary is equal to
the employee's then current base annual salary; the annualized incentive
compensation is four times the average of the amount earned in the eight full
quarters preceding the termination; and the annualized sales commissions is
twelve times the average of the amount earned in the 24 full months preceding
the termination. Except in the event of a termination that requires payment of a
parachute payment, Messrs. Ogle, Eisenbach, Hopkins and Long also agree not to
participate, in any manner, during the term of their respective agreements and
for two years thereafter, in the development, manufacture or sale of graphics
adapters for desktop PCs or in any other business in which we may be engaged at
the time of termination of employment.
In the event the 3Dfx Merger is consummated, 3Dfx will assume existing
employment agreements with each of Messrs. Ogle, Eisenbach, Hopkins and Long,
which agreements were amended in connection with the execution of the 3Dfx
Merger Agreement. As amended, each agreement will have a term of one year from
the Effective Time, and will automatically renew for an additional year on each
subsequent
60
<PAGE>
anniversary of the Effective Time, subject to the right of 3Dfx or the employee
to terminate the agreement with a 30-day notice prior to the date of renewal.
Under the amended agreements, Messrs. Ogle, Eisenbach, Hopkins and Long will
receive base annual salaries of $275,000, $230,000, $225,000, and $215,000,
respectively. The agreement with Mr. Long also provides for the payment of sales
commissions, the amount of which will be subject to annual adjustment by 3Dfx.
Each of Messrs. Ogle, Eisenbach, Hopkins and Long will also participate in the
3Dfx incentive bonus program offered to its senior management. With respect to
Messrs. Ogle, Eisenbach and Hopkins, the bonus program will provide for payment
of an incentive bonus in an amount equal to 40% of each executive's base salary
if targeted goals are met. In the case of Mr. Long, the bonus program will
provide for payment of an incentive bonus in an amount equal to 10% of his base
salary and sales commissions if targeted goals are met. Each agreement provides
for a severance payment if the agreement is terminated under certain
circumstances (including termination during the period immediately preceding a
renewal date). In such event, Mr. Ogle would receive two times the sum of his
base annual salary and annualized incentive compensation. Messrs. Eisenbach,
Hopkins and Long would receive the sum of their respective base annual salaries,
annualized incentive compensation and, in the case of Mr. Long, annualized sales
commissions. If an agreement is terminated under certain circumstances (i) after
the 3Dfx Merger, or (ii) within twelve months after a change in control of 3Dfx,
such agreement also provides for a parachute payment in an amount equal to two
times the severance payment. Except in the event of a termination that requires
payment of a parachute payment, Messrs. Ogle, Eisenbach, Hopkins and Long also
agree not to participate, in any manner, during the term of their agreements and
for two years (or, in the case of Mr. Long, one year) thereafter, in the
development, manufacture or sale of graphics adapters for desktop PCs or in any
other business in which 3Dfx may be engaged at the time of termination of
employment.
COMPENSATION OF DIRECTORS
Prior to our initial public offering, we paid each director a fee of $1,000
per meeting and paid advisory director fees of $1,000 per meeting to Messrs.
Eisenbach, Hopkins and Wesneski. Following our initial public offering, we
stopped paying directors fees for their services as directors, although we
continue to reimburse directors for all expenses incurred in connection with
their activities as directors. Our non-employee directors are entitled to
receive certain stock option awards under our Stock Option Plan for Non-Employee
Directors.
COMPENSATION AND OTHER COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Our compensation committee is comprised of Messrs. Byrne and Wesneski, our
independent directors. Mr. Wesneski, a member of our board of directors, the STB
Board's compensation committee and a shareholder of STB, is also the President,
Chief Executive Officer and Chairman of the Board, as well as a shareholder, of
Hoak Breedlove Wesneski. Hoak Breedlove Wesneski serves as our financial advisor
in connection with the 3Dfx Merger and has issued a fairness opinion in
connection therewith. In the event of the consummation of the 3Dfx Merger, Hoak
Breedlove Wesneski will be paid a fee equal to 2/3 of 1% of the aggregate
consideration received by STB shareholders in the 3Dfx Merger (which is based
upon an average of closing prices of the 3Dfx Common Stock prior to closing),
plus reimbursement of its accountable out-of-pocket expenses incurred in
connection with its services. STB is also required to pay Hoak Breedlove
Wesneski a monthly retainer of $15,000, which is creditable against the
foregoing fee in the event of the consummation of the 3Dfx Merger.
CERTAIN TRANSACTIONS
The Company has adopted a policy that all transactions between the Company
and related parties are subject to approval by a majority of all disinterested
directors and must be on terms no less favorable than those that could be
obtained from unrelated third parties.
61
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table lists the beneficial ownership, as of December 31, 1998,
of shares of STB Common Stock by (i) each of our directors and executive
officers, (ii) all of our directors and executive officers as a group and (iii)
each person known to us to beneficially own more than 5% of the outstanding
shares of STB Common Stock.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED
PRIOR TO THE 3Dfx
MERGER(1)
---------------------
<S> <C> <C>
NAME NUMBER PERCENT
- ------------------------------------------------------------------------ ---------- ---------
William E. Ogle(2)(3)................................................... 1,780,572 13.1%
Randall D. Eisenbach(2)................................................. 236,588 *
James L. Hopkins(2)(3).................................................. 218,594 *
J. Shane Long(2)........................................................ 207,251 *
Bryan F. Keyes(2)(3).................................................... 42,866 *
James J. Byrne(2)....................................................... 24,750 *
Dennis G. Sabo(2)....................................................... 15,000 *
Lawrence E. Wesneski(2)(4).............................................. 45,000 *
Directors and executive officers as a group (8 persons)(2).............. 2,570,621 18.9%
</TABLE>
- ------------------------
* Less than 1%
(1) All executive officers and directors have agreed with 3Dfx that they will
vote their shares of STB Common Stock (i) in favor of approval of the 3Dfx
Merger Agreement, the 3Dfx Merger and any matter that could reasonably be
expected to facilitate the 3Dfx Merger and (ii) against approval of any
proposal opposing or competing against the 3Dfx Merger. Except as described
in the preceding sentence, to our knowledge, all shares are owned directly
and the owner has sole voting and investment power.
(2) Includes options to purchase 281,502, 232,001, 214,750, 207,251, 41,300,
22,500, 15,000, 33,750 and 1,048,054 shares of STB Common Stock granted to
Messrs. Ogle, Eisenbach, Hopkins, Long, Keyes, Byrne, Sabo, Wesneski and all
directors and executive officers as a group, respectively, that are
exercisable within 60 days of December 31, 1998, as well as all options
granted to such directors and executive officers that will accelerate upon
consummation of the 3Dfx Merger.
(3) Includes for William E. Ogle 12,375 shares held by him pursuant to an
Individual Retirement Account and 9,944 shares held by him pursuant to our
401 (k) Savings Plan. Includes for James L. Hopkins 1,594 shares held by him
pursuant to our 401 (k) Savings Plan and for Bryan F. Keyes 441 shares held
by him pursuant to our 401 (k) Savings Plan.
(4) Includes 11,250 shares held by Twin Lakes Partners, L.P. ("Twin Lakes"). Mr.
Wesneski is the sole general partner of Twin Lakes.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
EXECUTIVE OFFICER EMPLOYMENT AGREEMENTS. At the Effective Time of the 3Dfx
Merger, 3Dfx will assume the existing employment agreements with each of Messrs.
Ogle, Eisenbach, Hopkins and Long. Each such agreement was amended in connection
with the execution of the 3Dfx Merger Agreement. See "Executive
Compensation--Employment Agreements."
It is anticipated that following the 3Dfx Merger, Messrs. Ogle, Eisenbach,
Hopkins, Long and Keyes, along with other STB employees, will be awarded options
under the 3Dfx 1995 Employee Stock Plan commensurate with their positions.
62
<PAGE>
3Dfx BOARD OF DIRECTOR APPOINTMENTS. 3Dfx has agreed to take all actions
necessary to nominate and appoint Messrs. Ogle and Hopkins to serve as members
of the Board of Directors of 3Dfx immediately following the 3Dfx Merger, with
Mr. Ogle to serve as Vice Chairman of the 3Dfx Board of Directors. Their
continued service as directors assumes that they will thereafter continue to be
elected to the Board of Directors of 3Dfx by 3Dfx shareholders.
TREATMENT OF STOCK OPTIONS IN CONNECTION WITH THE 3Dfx MERGER. Upon
consummation of the 3Dfx Merger, options to purchase STB Common Stock that were
granted under STB's 1995 Long-Term Incentive Plan (the "STB Option Plan") will
accelerate and become fully vested and exercisable as a result of the 3Dfx
Merger (the "Accelerated STB Options"). Holders of Accelerated STB Options will
have the choice of either (1) exercising each such option prior to the Effective
Time of the 3Dfx Merger, or (2) receiving a cash payment equal to the difference
between the average per share closing price of STB Common Stock as reported on
the Nasdaq over a certain number of days prior to the Effective Date and the
exercise price per share of such option. Any Accelerated STB Options that are
not exercised or cashed out will terminate at the Effective Time. Options to
purchase STB Common Stock other than Accelerated STB Options)(the "Converting
STB Options"), which includes options granted under the STB Option Plan that
would have normally vested prior to the 3Dfx Merger plus all options granted
under the STB Stock Option Plan for Non-Employee Directors (the "STB Director
Plan") will convert into an option to purchase 65% of as many shares of 3Dfx
Common Stock at an adjusted exercise price. 3Dfx will assume each Converting STB
Option in accordance with the terms of the stock option plan under which the
option was issued. The terms and conditions that will apply to the new options
will be substantially the same as the terms and conditions that apply to the
existing options, except that options granted under the STB Director Plan will
expire if not exercised within six months following the 3Dfx Merger. As of the
date hereof, there are outstanding stock options under the STB Option Plan to
purchase 2,060,154 shares of STB Common Stock, of which 976,804 are held by
STB's executive officers. As of the date hereof, there are outstanding stock
options under the STB Director Plan to purchase 71,250 shares of STB Common
Stock, of which 22,500, 15,000 and 33,750 stock options are held by Messrs.
Byrne, Sabo and Wesneski, respectively. In the event that STB's executive
officers and directors exercise all of the options granted to them, then, based
on the $6.69 closing price of STB Common Stock on the Nasdaq on December 31,
1998, the aggregate value (net of the exercise price) for such options would be
approximately $363,847, including $98,906, $76,927, $56,778, $56,778, $28,670,
$18,315, $-0-, and $27,473 for the options held by Messrs. Ogle, Eisenbach,
Hopkins, Long, Keyes, Byrne, Sabo and Wesneski, respectively.
TREATMENT OF INDEMNIFICATION AND INSURANCE IN THE 3Dfx MERGER. The 3Dfx
Merger Agreement provides that 3Dfx will assume all of the obligations of STB
under STB's existing indemnification agreements with each of the directors and
officers of STB, as such agreements relate to the indemnification of such
persons for expenses and liabilities arising from facts or events that occurred
prior to the Effective Time or relating to the transactions contemplated by the
3Dfx Merger Agreement. In addition, the 3Dfx Merger Agreement provides that the
Bylaws and Articles of Incorporation of the surviving corporation in the 3Dfx
Merger shall contain provisions regarding indemnification identical to those in
the STB Articles of Incorporation and the STB Bylaws and that such provisions
shall not be amended, repealed or otherwise modified for a period of six years
from the Effective Time in any manner that would adversely affect the rights
thereunder of the directors or officers of STB.
The 3Dfx Merger Agreement also requires the surviving corporation in the
3Dfx Merger, or 3Dfx, to maintain in effect for six years after the Effective
Time, directors' and officers' liability insurance for the benefit of the
directors and officers of STB with respect to matters arising before the
Effective Time, containing terms and conditions no less advantageous to the
directors and officers of STB than those contained in the insurance currently
provided by STB and having the maximum available coverage, subject to maximum
annual premiums not in excess of 125% of the annual premium currently paid by
STB for such coverage (or such coverage as is available for such 125% of such
annual premium).
63
<PAGE>
RIGHT OF FIRST REFUSAL AGREEMENT. STB, Mr. Ogle and the two other founding
shareholders of STB (the "Founding Shareholders") are parties to a Right of
First Refusal Agreement (the "Right of First Refusal Agreement"). The Right of
First Refusal Agreement provides that if any Founding Shareholder proposes to
sell any shares of STB Common Stock registered in his name as of the date of the
closing of our initial public offering, then we will have a right of first
refusal to purchase such shares on terms similar to those proposed. If we do not
exercise our right to purchase all or a portion of the shares of STB Common
Stock proposed to be sold by either of the Founding Shareholders other than Mr.
Ogle, then Mr. Ogle will have a right of first refusal to purchase those shares
of STB Common Stock that we do not wish to purchase. Notwithstanding the
foregoing, the Right of First Refusal Agreement does not restrict the ability of
the Founding Shareholders to sell shares of STB Common Stock in the public
market pursuant to Rule 144 promulgated under the Securities Act of 1933, as
amended. It is expected that the Right of First Refusal Agreement will be
terminated by mutual agreement of the parties thereto in the event of the
consummation of the 3Dfx Merger.
TAX AGREEMENT. As of December 16, 1994, STB, on the one hand, and the
Founding Shareholders, on the other (the "parties"), entered into a Tax
Allocation and Indemnification Agreement (the "Tax Agreement") relating to their
respective income tax liabilities. Since STB became fully subject to corporate
income taxation as a C corporation after its status as an S corporation
terminated prior to the initial public, the reallocation of income and
deductions between the period during which STB was treated as an S corporation
and a period during which STB was subject to corporate income taxation as a C
corporation may increase the taxable income of one party in one period while
decreasing that of another party in another period. The Tax Agreement generally
provides that the Founding Shareholders will be indemnified by STB with respect
to income taxes (plus interest and penalties) arising due to taxable income
shifted from a C corporation taxable year to a taxable year in which STB was an
S corporation, and that STB will be indemnified by the Founding Shareholders
with respect to income taxes (plus interest and penalties) arising due to
taxable income shifted from an S corporation taxable year to a C corporation
taxable year; provided, however, that only in the case of the Founding
Shareholders' obligation to indemnify STB, such obligation shall be reduced by
an amount equal to the federal or state tax benefit (if any) derived by STB due
to the shift of taxable income from a taxable year in which STB was an S
corporation to a C corporation taxable year and shall not exceed the amount, if
any, by which (i) the amount of the reduction in the liability for taxes and
interest thereon of a Founding Shareholder that results from the shifting of S
corporation taxable income to a C corporation taxable year of STB, exceeds (ii)
all reasonable costs incurred by the Founding Shareholder reasonably
attributable to securing such reduction in liability for taxes. STB will also be
indemnified by the Founding Shareholders for any federal or state taxes that
arise because STB's status as an S corporation was ineffective, revoked or
terminated prior to the termination of STB's S corporation status. Any payment
made by STB to the Founding Shareholders pursuant to the Tax Agreement may be
considered by the Internal Revenue Service or the state taxing authorities to be
nondeductible by STB for income tax purposes.
64
<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>
65
<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>
66
<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>
67
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<C> <C> <S> <C>
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>
68
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<C> <C> <S> <C>
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 Computation of Earnings Per Common Share and Common Equivalent Share
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.
+ Filed herewith.
(b) No reports on Form 8-K were filed during the last quarter of the
period covered by this Report.
69
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each of STB Systems, Inc., a Texas
corporation, and the undersigned directors and officers of STB Systems, Inc.,
hereby constitutes and appoints William E. Ogle, Randall D. Eisenbach and Bryan
F. Keyes, or any one of them, his true and lawful attorney-in-fact and agent,
for him and in his name, place and stead, in any and all capacities, with full
power to act alone, to sign any and all amendments to this Report, and to file
each such amendment to the Report, with all exhibits thereto, and any and all
other documents in connection therewith, with the Securities and Exchange
Commission, hereby granting unto said attorney-in-fact and agent full power and
authority to do and perform any and all acts and things requisite and necessary
to be done in and about the premises as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934 as amended, STB has duly caused this Report 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: January 28, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the Company
in the capacities indicated on January 28, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------ --------------------------
<C> <S>
Chairman of the Board of
/s/ WILLIAM E. OGLE Directors and Chief
- ------------------------------ Executive Officer
William E. Ogle (Principal Executive
Officer)
Executive Vice President,
/s/ RANDALL D. EISENBACH Chief Operating Officer,
- ------------------------------ Assistant Secretary and
Randall D. Eisenbach Director
Chief Financial Officer,
/s/ JAMES L. HOPKINS Vice President of
- ------------------------------ Strategic Marketing and
James L. Hopkins Director (Principle
Financial Officer)
Vice President of
/s/ BRYAN F. KEYES Administration General
- ------------------------------ Counsel, Secretary and
Bryan F. Keyes Treasurer
</TABLE>
70
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------ --------------------------
<C> <S>
/s/ T. GREG DEWITT Director of Accounting
- ------------------------------ (Principle Accounting
T. Greg Dewitt Officer)
/s/ J. SHANE LONG Vice President of Sales
- ------------------------------ and Marketing and
J. Shane Long Director
/s/ JAMES J. BYRNE
- ------------------------------ Director
James J. Byrne
/s/ DENNIS G. SABO
- ------------------------------ Director
Dennis G. Sabo
/s/ LAWRENCE E. WESNESKI
- ------------------------------ Director
Lawrence E. Wesneski
</TABLE>
71
<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>
72
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT 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>
73
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 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)
</TABLE>
74
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT PAGE
--------- -----
<C> <C> <S> <C>
*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>
75
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT PAGE
--------- -----
<C> <C> <S> <C>
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>
76
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT PAGE
--------- -----
<C> <C> <S> <C>
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 Computation of Earnings Per Common Share and Common Equivalent Share
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.
+ Filed herewith.
77
<PAGE>
Exhibit 10.1
AMENDMENT TO EMPLOYMENT AGREEMENT FOR EXECUTIVE OFFICER
THIS AMENDMENT TO EMPLOYMENT AGREEMENT FOR EXECUTIVE OFFICER
("Agreement") made the 13 day of December, 1998, between STB SYSTEMS, INC.,
a Texas corporation (the "Company"), and WILLIAM E. OGLE ("Executive").
WHEREAS, Executive and the Company have executed an Employment Agreement
dated as of November 1, 1996 (the "Employment Agreement"); and
WHEREAS, under an Agreement and Plan of Reorganization dated as of
December 13, 1998 (the "Merger Agreement"), the Company will become a
wholly-owned subsidiary of 3Dfx Interactive, Inc., a California corporation
("3Dfx"); as of the Effective Time (as defined in the Merger Agreement) (the
"Merger"); and
WHEREAS, at the Effective Time of the Merger, 3Dfx will assume the
Employment Agreement and become the employer thereunder; and
WHEREAS, Executive and the Company desire to set forth in this Agreement
the amended terms for Executive's continued employment following the Merger.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, the parties agree as follows:
FIRST
The terms of this Agreement shall become effective only at the
Effective Time of the Merger, at which time 3Dfx shall assume the Employment
Agreement, as amended by this Agreement, and all references in such
Employment Agreement and this Agreement to the "Company" shall be deemed to
refer to 3Dfx. Paragraphs 1 and 2 of the Employment Agreement will be amended
in their entirety to provide as follows:
"1. EMPLOYMENT. The Company hereby agrees to employ Executive and Executive
hereby agrees to serve the Company, on the terms and conditions set forth
herein, for the period commencing on the Effective Time of the Merger and
expiring on the date that is the one year anniversary of such date (unless
sooner terminated as hereinafter set forth); provided, however, that
commencing on such anniversary date, and each annual anniversary of such date
thereafter, the term of this Agreement shall automatically be extended for
one additional year unless, at least 30 days prior to any such anniversary
date, the Company or the Executive shall have given notice that it does not
wish to extend this Agreement. The term of this Agreement, as it may from
time to time be extended this Agreement. The term of this Agreement, as it
may from time to time be extended in accordance with this Paragraph, may be
referred to herein as the "Period of Employment."
2. POSITION AND DUTIES. Executive shall serve as an Executive Vice
President of the Company, performing the functions and duties as shall be
prescribed from time to time provided that such functions and duties are
consistent with and attendant to Executive's position or other positions that
he may hold from time to time. Executive shall devote his full working time
and efforts to the business and affairs of the Company and the promotion of
its interest and
<PAGE>
perform all duties and services on behalf of the Company necessary to carry
out such functions."
SECOND
Subparagraphs 3a. and 3b. of the Employment Agreement will be amended
in their entirety to read as follows:
"3. COMPENSATION AND RELATED MATTERS.
a. BASE SALARY. Executive shall receive an annual base salary
("Base Salary") at the rate of Two Hundred Seventy-five Thousand Dollars and
No/100 Cents ($275,000.00) during the period ending on the first anniversary
of the Effective Time of the Merger. Thereafter, Executive's Base Salary
shall be redetermined at least 30 days before each annual anniversary in an
amount to be fixed by the Board of Directors of the Company or the
Compensation Committee thereof. The term "Base Salary" as used in this
Agreement shall mean, at any point in time, Executive's annual base salary at
such time. The Base Salary shall be payable in substantially equal
semi-monthly installments or in accordance with the Company's regular payroll
practices.
b. INCENTIVE COMPENSATION. In addition to Base Salary, Executive
shall participate in the Company's incentive compensation plan for its senior
executive management employees."
THIRD
Paragraph 4 of the Employment Agreement will be amended in its entirety
to read as follows:
"4. OFFICES. Executive agrees to serve as a director of the Company, if
elected or appointed thereto, provided he is indemnified for serving in such
capacity on a basis no less favorable than is currently provided by the
Company's By-laws. If elected as a director of the Company as of the
Effective Time, Executive will serve as the Vice Chairman of the Company's
Board of Directors.''
FOURTH
Subparagraph 9c of the Employment Agreement will be amended to delete
therefrom Subsection (A) in its entirety. Subsection (C) of the definition of
"Good Reason" in Subparagraph 9d of the Employment Agreement will be amended
in its entirety to reflect more clearly the original intent of the parties,
to read as follows:
"(C) without Executive's consent, a reduction of Executive's Base Salary
to an amount less than previously determined and fixed for the immediately
preceding twelve-month period by the Compensation Committee in accordance
with Subparagraph 3(a) other than a reduction deemed necessary by the Board
for all executive officers;"
<PAGE>
Paragraph 12 of the Employment Agreement will be amended in its entirety
to provide as follows:
"12. NOTICE. For purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
certified mail, return receipt requested, postage prepaid, addressed as
follows:
if to the Executive:
At his home address as shown
in the Company's personnel records;
if to the Company:
3Dfx, Inc.
4435 Fortran Drive
San Jose, CA 95134
Attn: Secretary
or to such other address as either party may have furnished to the other in
writing in accordance herewith, except that notices of change of address
shall be effective only upon receipt."
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
set forth above.
STB SYSTEMS, INC.
/s/ William E. Ogle /s/ Randy Eisenbach
- ----------------------------- ------------------------------
WILLIAM E. OGLE By: RANDY EISENBACH
It.: COO
------------------------------
<PAGE>
Exhibit 10.2
AMENDMENT TO EMPLOYMENT AGREEMENT FOR EXECUTIVE OFFICER
THIS AMENDMENT TO EMPLOYMENT AGREEMENT FOR EXECUTIVE OFFICER
("Agreement") made the 13th day of December, 1998, between STB SYSTEMS, INC.,
a Texas corporation (the "Company"), and RANDALL D. EISENBACH ("Executive").
WHEREAS, Executive and the Company have executed an Employment Agreement
dated as of November 1, 1996 (the "Employment Agreement"); and
WHEREAS, under an Agreement and Plan of Reorganization dated as of
December 13, 1998 (the "Merger Agreement"), the Company will become a
wholly-owned subsidiary of 3Dfx Interactive, Inc., a California corporation
("3Dfx"); as of the Effective Time (as defined in the Merger Agreement) (the
"Merger"); and
WHEREAS, at the Effective Time of the Merger, 3Dfx will assume the
Employment Agreement and become the employer thereunder; and
WHEREAS, Executive and the Company desire to set forth in this Agreement
the amended terms for Executive's continued employment following the Merger.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, the parties agree as follows:
FIRST
The terms of this Agreement shall become effective only at the Effective
Time of the Merger, at which time 3Dfx shall assume the Employment Agreement,
as amended by this Agreement, and all references in such Employment Agreement
and this Agreement to the "Company" shall be deemed to refer to 3Dfx.
Paragraphs 1 and 2 of the Employment Agreement will be amended in their
entirety to provide as follows:
"1. EMPLOYMENT. The Company hereby agrees to employ Executive and Executive
hereby agrees to serve the Company, on the terms and conditions set forth
herein, for the period commencing on the Effective Time of the Merger and
expiring on the date that is the one year anniversary of such date (unless
sooner terminated as hereinafter set forth); provided, however, that
commencing on such anniversary date, and each annual anniversary of such date
thereafter, the term of this Agreement shall automatically be extended for
one additional year unless, at least 30 days prior to any such anniversary
date, the Company or the Executive shall have given notice that it does not
wish to extend this Agreement. The term of this Agreement, as it may from
time to time be extended in accordance with this Paragraph, may be referred
to herein as the "Period of Employment."
2. POSITION AND DUTIES. Executive shall serve as the Senior Vice
President of Texas Operations for the Company, performing the functions and
duties as shall be prescribed from time to time provided that such functions
and duties are consistent with and attendant to Executive's position or other
positions that he may hold from time to time. Executive shall devote his
full working time and efforts to the business and affairs of the Company and
the promotion of its interests and perform all duties and services on behalf
of the Company
<PAGE>
necessary to carry out such functions."
SECOND
Subparagraphs 3a. and 3b. of the Employment Agreement will be amended in
their entirety to read as follows:
"3. COMPENSATION AND RELATED MATTERS.
a. BASE SALARY. Executive shall receive an annual base salary
("Base Salary") at the rate of Two Hundred Thirty Thousand Dollars and No/100
Cents ($230,000.00) during the period ending on the first anniversary of the
Effective Time of the Merger. Thereafter, Executive's Base Salary shall be
redetermined at least 30 days before each annual anniversary in an amount to
be fixed by the Board of Directors of the Company or the Compensation
Committee thereof. The term "Base Salary" as used in this Agreement shall
mean, at any point in time, Executive's annual base salary at such time. The
Base Salary shall be payable in substantially equal semi-monthly installments
or in accordance with the Company's regular payroll practices.
b. INCENTIVE COMPENSATION. In addition to Base Salary, Executive
shall participate in the Company's incentive compensation plan for its senior
executive management employees."
THIRD
Subparagraph 9c of the Employment Agreement will be amended to delete
therefrom Subsection (A) in its entirety. Subsection (C) of the definition
of "Good Reason" in Subparagraph 9d of the Employment Agreement will be
amended in its entirety to reflect more clearly the original intent of the
parties, to read as follows:
"(C) without Executive's consent, a reduction of Executive's Base Salary
to an amount less than previously determined and fixed for the immediately
preceding twelve-month period by the Compensation Committee in accordance
with Subparagraph 3(a) other than a reduction deemed necessary by the Board
for all executive officers;"
FOURTH
Paragraph 12 of the Employment Agreement will be amended in its entirety
to provide as follows:
"12. NOTICE. For purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
certified mail, return receipt requested, postage prepaid, addressed as
follows:
if to the Executive:
At his home address as shown
<PAGE>
in the Company's personnel records;
if to the Company:
3Dfx Interactive, Inc.
4435 Fortran Drive
San Jose, CA 95134
Attn: Secretary
or to such other address as either party may have furnished to the other in
writing in accordance herewith, except that notices of change of address
shall be effective only upon receipt."
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
set forth above.
STB SYSTEMS, INC.
/s/ Randall D. Eisenbach /s/ William E. Ogle
- ------------------------ -------------------------------
RANDALL D. EISENBACH By:
Its.: Chief Executive Officer
------------------------
<PAGE>
Exhibit 10.3
AMENDMENT TO EMPLOYMENT AGREEMENT FOR EXECUTIVE OFFICER
THIS AMENDMENT TO EMPLOYMENT AGREEMENT FOR EXECUTIVE OFFICER
("Agreement") made the 13TH day of December, 1998, between STB SYSTEMS,
INC., a Texas corporation (the "Company"), and JAMES L. HOPKINS
("Executive").
WHEREAS, Executive and the Company have executed an Employment Agreement
dated as of November 1, 1996 (the "Employment Agreement"); and
WHEREAS, under an Agreement and Plan of Reorganization dated as of
December 13, 1998 (the "Merger Agreement"), the Company will become a
wholly-owned subsidiary of 3Dfx Interactive, Inc., a California corporation
("3Dfx"); as of the Effective Time (as defined in the Merger Agreement) (the
"Merger"); and
WHEREAS, at the Effective Time of the Merger, 3Dfx will assume the
Employment Agreement and become the employer thereunder; and
WHEREAS, Executive and the Company desire to set forth in this Agreement
the amended terms for Executive's continued employment following the Merger.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, the parties agree as follows:
FIRST
The terms of this Agreement shall become effective only at the Effective
Time of the Merger, at which time 3Dfx shall assume the Employment Agreement,
as amended by this Agreement, and all references in such Employment Agreement
and this Agreement to the "Company" shall be deemed to refer to 3Dfx.
Paragraphs 1 and 2 of the Employment Agreement will be amended in their
entirety to provide as follows:
"1. EMPLOYMENT. The Company hereby agrees to employ Executive and Executive
hereby agrees to serve the Company, on the terms and conditions set forth
herein, for the period commencing on the Effective Time of the Merger and
expiring on the date that is the one year anniversary of such date (unless
sooner terminated as hereinafter set forth); provided, however, that
commencing on such anniversary date, and each annual anniversary of such date
thereafter, the term of this Agreement shall automatically be extended for
one additional year unless, at least 30 days prior to any such anniversary
date, the Company or the Executive shall have given notice that it does not
wish to extend this Agreement. The term of this Agreement, as it may from
time to time be extended in accordance with this Paragraph, may be referred
to herein as the "Period of Employment."
2. POSITION AND DUTIES. Executive shall serve as the Senior Vice
President for Finance & Strategic Planning for the Company, performing the
functions and duties as shall be prescribed from time to time provided that
such functions and duties are consistent with and attendant to Executive's
position or other positions that he may hold from time to time. Executive
shall devote his full working time and efforts to the business and affairs of
the
<PAGE>
Company and the promotion of its interests and perform all duties and
services on behalf of the Company necessary to carry out such functions."
SECOND
Subparagraph 3c of the Employment Agreement will be deleted in its
entirety. Subparagraphs 3a and 3b of the Employment Agreement will be
amended in their entirety to read as follows:
"3. COMPENSATION AND RELATED MATTERS.
a. BASE SALARY. Executive shall receive an annual base salary
("Base Salary") at the rate of Two Hundred Twenty-five Thousand Dollars and
No/100 Cents ($225,000.00) during the period ending on the first anniversary
of the Effective Time of the Merger. Thereafter, Executive's Base Salary
shall be redetermined at least 30 days before each annual anniversary in an
amount to be fixed by the Board of Directors of the Company or the
Compensation Committee thereof. The term "Base Salary" as used in this
Agreement shall mean, at any point in time, Executive's annual base salary at
such time. The Base Salary shall be payable in substantially equal
semi-monthly installments or in accordance with the Company's regular payroll
practices.
b. INCENTIVE COMPENSATION. In addition to Base Salary, Executive
shall participate in the Company's incentive compensation plan for its senior
executive management employees."
THIRD
Subparagraph 9c of the Employment Agreement will be amended to delete
therefrom Subsection (A) in its entirety. Subsection (C) of the definition
of "Good Reason" in Subparagraph 9d of the Employment Agreement will be
amended in its entirety to reflect more clearly the original intent of the
parties, to read as follows:
"(C) without Executive's consent, a reduction of Executive's Base Salary
to an amount less than previously determined and fixed for the immediately
preceding twelve-month period by the Compensation Committee in accordance
with Subparagraph 3(a) other than a reduction deemed necessary by the Board
for all executive officers;"
FOURTH
Paragraph 11 of the Employment Agreement will be amended by substituting
the following paragraph in lieu of the first paragraph thereof:
"The provisions of this Paragraph 11 of the Agreement set forth certain
terms of an agreement reached between Executive and the Company regarding
Executive's rights and obligations upon the occurrence of a Change in Control
of the Company. These provisions are intended to assure and encourage in
advance Executive's continued attention and dedication to his assigned duties
and his objectivity during the pendency and after the occurrence of any such
event. These
<PAGE>
provisions shall apply in lieu of, and expressly supersede, the provisions of
Subparagraph 10(d)(ii) regarding severance pay upon a termination of
employment, if such termination of employment occurs within 12 months after
the occurrence of the first event constituting a Change of Control, or if
such termination of employment occurs under certain circumstances after the
Merger. These provisions shall terminate and be of no further force or effect
12 months after the occurrence of a Change of Control or, the Merger, as the
case may be, Section 11(c) shall be the sole provision under which payments
may be made in connection with the Merger; that is, to the extent Section
11(c) applies, Section 11(b) shall not."
FIFTH
Paragraph 11 of the Employment Agreement will be amended by adding the
following subparagraph (c), and by renumbering the current subparagraph (c)
as subparagraph (d):
"(c) TERMINATION OF EMPLOYMENT FOLLOWING THE MERGER. If Executive's
employment terminates during the 12 months following consummation of the
Merger for any reason (other than his Voluntary Resignation on or prior to
May 31, 1999), the Company shall pay Executive or his estate an amount equal
to the applicable Parachute Payment Amount in a lump sum on the thirtieth day
following Executive's termination. After the first anniversary of the Merger,
this Section 11(c) shall be of no-force and effect. For purposes of this
subparagraph 11(c) only, the Severance Payment Amount payable under
Subparagraph 10(d)(ii) hereof shall be computed utilizing Executive's Base
Salary in effect on October 31, 1998, Executive's incentive compensation
earned in the eight full quarters ending October 31, 1998, and Executive's
sales commissions earned in the 24 full months preceding October 31, 1998."
SIXTH
Paragraph 11(d) of the Employment Agreement will be amended by adding
the following provision:
"MERGER" shall mean the Change in Control occurring as a result of the
merger of a newly formed, wholly-owned subsidiary of 3Dfx with and into STB
Systems, Inc., in accordance with that certain Merger Agreement dated as of
December 13, 1998."
SEVENTH
Paragraph 12 of the Employment Agreement will be amended in its entirety
to provide as follows:
"12. NOTICE. For purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
certified mail, return receipt requested, postage prepaid, addressed as
follows:
if to the Executive:
At his home address as shown
in the Company's personnel records;
if to the Company:
<PAGE>
3Dfx Interactive, Inc.
4435 Fortran Drive
San Jose, CA 95134
Attn: Secretary
or to such other address as either party may have furnished to the other in
writing in accordance herewith, except that notices of change of address
shall be effective only upon receipt."
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
set forth above.
STB SYSTEMS, INC.
/s/ James L. Hopkins /s/ William E. Ogle
- -------------------- -----------------------------
JAMES L. HOPKINS By:
Its.: Chief Executive Officer
-----------------------
<PAGE>
Exhibit 10.4
AMENDMENT TO EMPLOYMENT AGREEMENT FOR EXECUTIVE OFFICER
THIS AMENDMENT TO EMPLOYMENT AGREEMENT FOR EXECUTIVE OFFICER
("Agreement") made the 13th day of December, 1998, between SYLVESTER, INC., a
Texas corporation (the "Company"), and J. SHANE LONG ("Executive").
WHEREAS, Executive and the Company have executed an Employment Agreement
dated as of November 1, 1996 (the "Employment Agreement"); and
WHEREAS, under an Agreement and Plan of Reorganization dated as of
December 13, 1998 (the "Merger Agreement"), the Company will become a
wholly-owned subsidiary of Tweety Inc., a California corporation ("Tweety");
as of the Effective Time (as defined in the Merger Agreement) (the "Merger");
and
WHEREAS, at the Effective Time of the Merger, Tweety will assume the
Employment Agreement and become the employer thereunder; and
WHEREAS, Executive and the Company desire to set forth in this Agreement
the amended terms for Executive's continued employment following the Merger.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, the parties agree as follows:
FIRST
The terms of this Agreement shall become effective only at the Effective
Time of the Merger, at which time Tweety shall assume the Employment
Agreement, as amended by this Agreement, and all references in such
Employment Agreement and this Agreement to the "Company" shall be deemed to
refer to Tweety. Paragraphs 1 and 2 of the Employment Agreement will be
amended in their entirety to provide as follows:
"1. EMPLOYMENT. The Company hereby agrees to employ Executive and Executive
hereby agrees to serve the Company on the terms and conditions set forth
herein, for the period commencing on the Effective Time of the Merger and
expiring on the date that is three (3) months following such date (unless
sooner terminated as hereinafter set forth). The term of this Agreement may
be referred to herein as the "Period of Employment."
2. POSITION AND DUTIES. Executive shall serve as the Senior Vice
President of Worldwide Sales of the Company, performing the functions and
duties as shall be prescribed from time to time provided that such functions
and duties are consistent with and attendant to Executive's position or other
positions that he may hold from time to time. Executive shall devote his
full working time and efforts to the business and affairs of the Company and
the promotion of its interests and perform all duties and services on behalf
of the Company necessary to carry out such functions."
<PAGE>
SECOND
Subparagraphs 3a, 3b and 3c of the Employment Agreement will be amended
in their entirety to read as follows:
"3. COMPENSATION AND RELATED MATTERS.
a. BASE SALARY. Executive shall receive a base salary ("Base
Salary") at the annualized rate of Two Hundred Fifteen Thousand Dollars and
No/100 Cents ($215,000.00). The term "Base Salary" as used in this Agreement
shall mean, at any point in time, Executive's annual base salary at such
time. The Base Salary shall be payable in substantially equal semi-monthly
installments or in accordance with the Company's regular payroll practices.
b. INCENTIVE COMPENSATION. In addition to Base Salary, Executive
shall participate in the Company's incentive compensation plan for its senior
executive management employees at a rate of 10% of his Base Salary and Sales
Commissions.
c. SALES COMMISSIONS. In addition to Base Salary and Incentive
Compensation, Executive shall be targeted to receive sales commissions equal
to One Hundred Ten Thousand Dollars and No/100 Cents ($110,000.00) (as a
multiplier or ratio of sales revenue) that shall be payable monthly on the
fifteenth of the month following the month in which they are earned."
THIRD
Paragraph 8(b) of the Employment Agreement will be amended in its
entirety to provide as follows:
"(b) If Executive is entitled to receive the Parachute Payment Amount
under Paragraph 11, or if Executive remains employed with the Company through
the Period of Employment and the Agreement terminates in accordance with
Subparagraph 9(h) hereof, then the provisions of Subparagraph 8(a) shall not
apply.
FOURTH
Subparagraph 9c of the Employment Agreement will be amended to delete
therefrom Subsection (A) in its entirety. Subsection (C) of the definition
of "Good Reason" in Subparagraph 9d of the Employment Agreement will be
amended in its entirety to reflect more clearly the original intent of the
parties, to read as follows:
"(C) without Executive's consent, a reduction of Executive's Base Salary
to an amount less than previously determined and fixed for the immediately
preceding twelve-month period by the Compensation Committee in accordance
with Subparagraph 3(a) other than a reduction deemed necessary by the Board
for all executive officers;"
<PAGE>
FIFTH
Paragraph 12 of the Employment Agreement will be amended in its entirety
to provide as follows:
"12. NOTICE. For purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
certified mail, return receipt requested, postage prepaid, addressed as
follows:
if to the Executive:
At his home address as shown
in the Company's personnel records;
if to the Company:
3Dfx Interactive, Inc.
4435 Fortran Drive
San Jose, CA 95134
Attn: Secretary
or to such other address as either party may have furnished to the other in
writing in accordance herewith, except that notices of change of address
shall be effective only upon receipt."
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
set forth above.
STB SYSTEMS, INC.
/s/ J. Shane Long /s/ Willaim E. Ogle
- ----------------- -----------------------------
J. SHANE LONG By:
Its.: Chief Executive Officer
------------------------
<PAGE>
Exhibit 10.42
HOAK BREEDLOVE WESNESKI & CO.
One Galleria Tower
13355 Noel Road, Suite 1650
Dallas, Texas 75240
December 11, 1998
STB Systems, Inc.
3400 Waterview Parkway
Richardson, Texas 75080
Attention: William E. Ogle
Chief Executive Officer and Chairman of the Board of Directors
Gentlemen:
This letter agreement confirms the terms and conditions of the engagement (the
"Engagement") of Hoak Breedlove Wesneski & Co. ("HBW") by STB Systems, Inc. and
its subsidiaries and affiliates (collectively the "Company") as the Company's
exclusive financial advisor in connection with the possible combination of the
Company with 3Dfx Interactive, Inc. ("TDFX") by way of merger, purchase of all
or a portion of the assets of the Company, or the purchase of or exchange for
all or a portion of the stock of the Company or otherwise (a "Transaction").
1. HBW shall provide financial advisory services, including assistance in
developing appropriate strategies and tactics to effect a Transaction, to
include the determination of exchange ratios, evaluating proposals
presented by TDFX, providing financial analysis and modeling services, and
negotiating the terms of a Transaction. If requested, HBW will render a
fairness opinion to the Board of Directors of the Company relating to the
fairness of the Transaction, from a financial standpoint, to the
shareholders of the Company (the "Fairness Opinion"). The decision to
complete a Transaction shall be at the sold discretion of the Company.
2. The Company shall make available to HBW, on a timely basis, all financial
and other information concerning its business and operations that HBW
reasonably requests. HBW shall be entitled to rely, without investigation,
upon all information supplied by the Company or TDFX as well as all
information derived from public sources.
Furthermore, HBW shall bear no responsibility to the Company, TDFX, any
creditors, stockholders, employees, or any other parties for the accuracy,
completeness, or legal sufficiency of any financial statements, memoranda,
or other documentation prepared by, or on behalf of, the Company or for
verifying any of the information contained therein. Appropriate officers
of the Company shall be
<PAGE>
STB Systems, Inc.
Page 2
December 11, 1998
responsible for reviewing any memorandum or other documentation prior to
its use to determine that it does not contain any material omissions or
inaccuracies.
3. The Company shall indemnify and hold harmless HBW and its affiliates and
their respective officers, directors, employees, and agents (each an
"Indemnified Party") against and from any losses, claims, damages, or
liabilities, joint or several, or actions in respect thereof, to which such
Indemnified Party may become subject in connection with the services
rendered pursuant to, or matters which are the subject of or arise out of,
the Engagement (collectively, a "Claim") and agrees to reimburse each
Indemnified Party for any legal or other expenses incurred by such
Indemnified Party in connection with investigating or defending any such
Claim as such expenses are incurred; provided, however, that the Company
shall not be liable in any such case to the extent that a court of
competent jurisdiction shall have determined by a final judgment that such
Claim resulted primarily from an Indemnified Party's bad faith or gross
negligence. Such right to indemnification (i) shall survive the
termination or expiration of the Engagement or the consummation,
termination, or abandonment of any Transaction and (ii) shall not limit any
other rights that an Indemnified Party may have at common law or otherwise.
4. For services rendered in connection with the engagement, the Company shall
pay HBW the following:
A. Upon the execution of this letter agreement, a non-refundable
retainer of $15,000 per month for each month of this engagement
(the "Retainer Fee").
B. Upon the closing of a Transaction with the Seller, a cash success
fee (the "Success Fee") equal to two-thirds of one percent
(.0067) of the Aggregate Consideration.
The Success Fee shall be paid by wire transfer at the time the Transaction is
closed. The Success Fee due and payable HBW upon closing of the Transaction
shall be reduced by the Retainer Fee paid HBW pursuant to this engagement.
For purposes of this letter agreement, "Aggregate Consideration" means the
fair market value of all payments of any type (including cash, notes,
securities, in-kind service commitments, payments into escrow, or any other
form of property) made in connection with a Transaction received by the
Company or an affiliate of the Company, or by the Company's shareholders,
from TDFX. If a Transaction includes the assumption of any long-term debt or
other non-current liability or obligation by TDFX, Aggregate Consideration
shall include the face amount of such debt or non-current liability.
If any of the Aggregate Consideration to be received is (i) contingent upon
the future performance of the business or assets being sold (E.G., revenues
or income) or (ii) scheduled to be received in installments, the portion of
the Success Fee attributable to
<PAGE>
STB Systems, Inc.
Page 3
December 11, 1998
such Aggregate Consideration shall be estimated and paid to HBW upon closing
of the Transaction, unless it shall be impracticable to estimate such portion
of the Success Fee and the Company and HBW shall be unable to agree upon an
appropriate payment to be received in respect thereof, in which case such
portion of the Success Fee shall be paid to HBW at such time or times as such
Aggregate Consideration is received.
In the event that the Aggregate Consideration received in the Transaction is
received in whole or in part in non-cash consideration, the value of such
payment for purposes of calculating the Success Fee shall be determined as
follows: (i) if received in the form of nonconvertible debt securities, the
value of such securities shall be the face value thereof, (ii) if received in
the form of publicly traded capital stock, the value thereof shall be
determined by the average of the last sale prices for such stock received by
the Company or its shareholders on the last 20 trading days thereof prior to
such closing, (iii) if received in the form of one or more non-competition
agreements, the value thereof shall be the present value of the aggregate
amounts payable over the life of such agreements, and (iv) if received in the
form of capital stock which is not publicly traded or in the form of any
other securities or property, the value thereof shall be the fair market
value as established by HBW and the Company in good faith.
5. The Company shall reimburse, on a monthly basis, all accountable out-of-
pocket expenses (including any legal fees and expenses and direct or
allocated charges for computer data base services, if any) incurred by HBW
in connection with the Engagement. Such expenses shall not exceed $10,000
without the approval of the Company.
6. The term of the Engagement shall commence from the date of the Company's
acceptance of this letter and shall expire one year from such date, unless
extended by agreement of the Company and HBW. The Engagement may be
terminated by the Company or HBW at any time upon written notice to the
other party. HBW, however, shall be entitled to reimbursement of all
accountable, out-of-pocket expenses incurred prior to termination and
payment in full amount of the Success Fee in the event that at any time
within two (2) years after the termination or expiration of the Engagement
a Transaction is consummated by the Company with TDFX.
7. After the closing of the Transaction, HBW shall have the right, at HBW's
option and expense, to advertise its services to the Company in connection
with the Engagement.
8. This letter agreement shall be governed by and construed in accordance with
the laws of the State of Texas.
If this letter agreement is acceptable to the Company, please acknowledge by
signing both copies of the letter agreement and returning one copy to HBW.
Sincerely,
<PAGE>
STB Systems, Inc.
Page 4
December 11, 1998
HOAK BREEDLOVE WESNESKI & CO.
/s/ Gregory R. Chapados
By: --------------------------
Gregory R. Chapados
Managing Director
ACCEPTED AND AGREED TO THIS 11TH DAY OF DECEMBER, 1998.
--- ----------
STB SYSTEMS, INC.
BY: /s/ James Hopkins
--------------------------
James Hopkins
TITLE: Vice President/CFO
------------------------
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the 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 STB Systems, Inc.'s Annual Report on
Form 10-K 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.
PricewaterhouseCoopers LLP
Dallas, Texas
January 25, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF STB SYSTEMS, INC. ON FORM 10K AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> OCT-31-1998
<CASH> 30,639
<SECURITIES> 0
<RECEIVABLES> 33,028
<ALLOWANCES> 520
<INVENTORY> 48,993
<CURRENT-ASSETS> 118,584
<PP&E> 19,742
<DEPRECIATION> 8,156
<TOTAL-ASSETS> 135,312
<CURRENT-LIABILITIES> 34,865
<BONDS> 0
0
0
<COMMON> 133
<OTHER-SE> 98,219
<TOTAL-LIABILITY-AND-EQUITY> 135,312
<SALES> 266,270
<TOTAL-REVENUES> 266,270
<CGS> 222,018
<TOTAL-COSTS> 222,018
<OTHER-EXPENSES> 41,177
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 439
<INCOME-PRETAX> 2,636
<INCOME-TAX> 904
<INCOME-CONTINUING> 1,732
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,732
<EPS-PRIMARY> 0.14<F1><F2>
<EPS-DILUTED> 0.14<F1>
<FN>
<F1>Earnings per share numbers have been adjusted to reflect a three-for-two stock
split of the Company's common stock on February 20, 1998
<F2>"EPS-Primary" represents Basic earnings per share as defined by SFAS 128
</FN>
</TABLE>
