-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SZxIrznXnkXb2KwomeA43+JPKtXjE8AUonYyvnjPq/JxIMJTqhYjR+18MRxY9Jou fASFY58hD5P5qV2lcOtrjg== 0001047469-99-007625.txt : 19990301 0001047469-99-007625.hdr.sgml : 19990301 ACCESSION NUMBER: 0001047469-99-007625 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981031 FILED AS OF DATE: 19990226 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STB SYSTEMS INC CENTRAL INDEX KEY: 0000934596 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 751855896 STATE OF INCORPORATION: TX FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 000-25540 FILM NUMBER: 99552181 BUSINESS ADDRESS: STREET 1: 1651 NORTH GLENVILLE DR CITY: RICHARDSON STATE: TX ZIP: 75081 BUSINESS PHONE: 9722348750 MAIL ADDRESS: STREET 1: 1651 NORTH GLENVILLE DR CITY: RICHARDSON STATE: TX ZIP: 75081 10-K/A 1 10-K/A - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K/A --------------- AMENDMENT NO. 1 (MARK ONE) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED OCTOBER 31, 1998 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] FOR THE TRANSITION PERIOD FROM ______________ TO ______________ COMMISSION FILE NUMBER 0-25540 STB SYSTEMS, INC. (Exact name of registrant as specified in its charter) TEXAS 75-1855896 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3400 WATERVIEW PARKWAY 75080 RICHARDSON, TEXAS (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code: (972) 234-8750 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, par value $0.01 per share (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. /X/ The aggregate market value on January 20, 1999 of the voting and non-voting common equity held by non-affiliates of the registrant was $91,444,815. Number of shares of registrant's Common Stock, par value $0.01 per share, outstanding as of January 20, 1999: 12,606,787. DOCUMENTS INCORPORATED BY REFERENCE None. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ITEM 3. LEGAL PROCEEDINGS. UNLESS THE CONTEXT OTHERWISE REQUIRES, THE TERM "STB," "WE" OR "US" WHEN USED IN THIS REPORT REFERS TO STB SYSTEMS, INC., A TEXAS CORPORATION, AND ITS CONSOLIDATED SUBSIDIARIES AND PRIOR AFFILIATES. A securities class action lawsuit was filed on October 9, 1998 in Dallas County, Texas against us and certain of our officers and directors, along with the underwriters who participated in our secondary public offering on March 20, 1998. The petition alleges that the registration statement for our secondary public offering contained false and misleading statements of material facts and omitted to state material facts, alleging that the registration statement failed to disclose certain alleged product defects, alleged difficulties with some of our major customers and our allegedly deteriorating financial performance. The petition asserts claims under Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, as amended, and Sections 581-33A and 581-33F of the Texas Securities Act on behalf of a purported class of persons who purchased or otherwise acquired STB Common Stock in the public offering. The petition seeks recission and/or unspecified damages. We deny the allegations in the petition and intend to vigorously defend the lawsuit. In the event the plaintiffs in the lawsuit prevail in connection with any of their claims, then, depending upon the magnitude of damages and expenses incurred by us and the extent to which such damages and expenses are covered by insurance, the lawsuit could materially harm us. We are a party from time to time to certain other legal proceedings arising in the ordinary course of our business. Although the amount of any liability that could arise with respect to these proceedings cannot be predicted accurately, in our opinion, any liability that might result from such claims will not have a material adverse effect on our financial position. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. THIS REPORT CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE FEDERAL SECURITIES LAWS. ANY STATEMENTS CONTAINED HEREIN -- INCLUDING WITHOUT LIMITATION STATEMENTS TO THE EFFECT THAT STB OR ITS MANAGEMENT "BELIEVES," "EXPECTS," "ANTICIPATES," "PLANS," "MAY," "WILL," "PROJECTS," "CONTINUES" OR "ESTIMATES," OR STATEMENTS CONCERNING "POTENTIAL," OR "OPPORTUNITY" OR OTHER VARIATIONS THEREOF OR COMPARABLE TERMINOLOGY OR THE NEGATIVE THEREOF -- THAT ARE NOT STATEMENTS OF HISTORICAL FACT SHOULD BE CONSIDERED FORWARD-LOOKING STATEMENTS. ACTUAL RESULTS AND THE TIMING OF CERTAIN EVENTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN OR CONTEMPLATED BY THE FORWARD-LOOKING STATEMENTS DUE TO A NUMBER OF FACTORS, INCLUDING WITHOUT LIMITATION THOSE SET FORTH UNDER "RISK FACTORS" IN STB'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED OCTOBER 31, 1998. OVERVIEW We currently sell two broad categories of products, multimedia subsystem products and specialized technology products. Our multimedia subsystem product line includes a wide selection of multimedia accelerators designed for use in mid-range to high-end PCs. Our multimedia subsystem product line also features several complementary products, including DVD decoder subsystems and PC/TV convergence subsystems. Our specialized technology products incorporate graphics technologies and are primarily designed to enable one computer to control simultaneously the display of multiple monitors. We sell our products to OEMs, the commercial market and the specialized technology market. We sell multimedia subsystem products both to OEMs as subsystems for their PC products and to the commercial market. Sales of multimedia accelerators and other multimedia subsystems to OEMs typically possess higher unit volumes and lower gross profit margins. Sales of multimedia products to the commercial market typically have modest unit volumes and higher gross profit margins than the sale of similar products to OEMs. Although sales volumes of specialized technology products are relatively low, we realize higher gross profit margins from the sale of these products than from the sale of multimedia subsystem products. For the fiscal years 1998 and 1997, sales of our products to OEMs represented approximately 80% and 79%, respectively, of total net sales. Sales to the commercial market represented approximately 12% of total net sales for fiscal years 1998 and 1997. Sales to specialized technology product markets constituted approximately 7% of total net sales for fiscal 1998 and 8% of total net sales for fiscal 1997. We derived the balance of total net sales primarily from third party assembly services. Third party assembly services comprised approximately 1% of total net sales for fiscal years 1998 and 1997. We export our products through all of our sales channels. Export sales of our products have grown moderately in recent periods. As a result, exports have increased as a percentage of net sales to 28% in fiscal 1998 from 27% in fiscal 1997. Our total gross profit margins and gross profits will likely fluctuate from period to period as a result of our product mix, sales channel mix, component costs and the competitive pricing pressures on our products. We recognize revenue upon shipment of our products. For products sold through the commercial channel, we generally allow returns in the form of stock rotation and price protection in the form of credits. Our current stock rotation policies permit a commercial customer to return a portion of the products purchased within specified time periods, if that customer places an order with us for additional products of equal or greater value. We also provide price protection to commercial channel customers in the form of credits for price reductions on products remaining in customer inventories at the time of the price reduction. We maintain reserves related to these programs, and we believe that such reserves are adequate. We have no guaranteed supply arrangements with any of our suppliers. We obtain most of the primary components of our products directly from the component manufacturers. The primary components of our products consist mainly of controller chips and memory chips. The prices of such components can change significantly from time to time. In the past we have experienced, and may in the future experience, increases in our unit component costs without being able to increase the price of the related products. Such an increase in component costs could negatively impact our gross profit margins and results of operations. In particular, occasional world-wide shortages of memory and controller chips and international tariff disputes have in the past resulted in substantial unit component cost increases that have materially adversely affected our gross profit margins and our results of operations. On December 13, 1998, we entered into the 3Dfx Merger Agreement. The 3Dfx Merger Agreement provides for the merger of a newly formed, wholly-owned subsidiary of 3Dfx with and into STB (the "3Dfx Merger"). STB will be the surviving corporation in the 3Dfx Merger and, upon consummation of the 3Dfx Merger, will become a wholly-owned subsidiary of 3Dfx. In the event of the consummation of the 3Dfx Merger, the combination of 3Dfx's and STB's operations will result in many significant changes in STB's business and its related results of operations and financial condition. In particular, the announcement and consummation of the merger may disrupt STB's relationships with its suppliers, some of whom are competitors of 3Dfx. For example, nVidia, which is a major supplier of STB and whose graphics chips were incorporated into STB products representing 63.9% of STB's net sales in fiscal 1998 (approximately $170.1 million net sales), competes directly with 3Dfx. As a result of the merger, STB plans to continue to offer for sale to its customers its current products that use nVidia graphics chips, but will not use nVidia's graphics chips on any new products. Unless STB or the 3Dfx/STB combined company can persuade STB's existing customers that are purchasing products using nVidia graphics chips to purchase new products based on 3Dfx graphics chips, the revenue derived from sales to such customers will be reduced significantly. Similarly, while no suppliers of graphics chips to STB have as of the date of this report indicated to STB that they intend to terminate their supplier relationship with STB, to the extent that any such relationship is terminated or curtailed and STB cannot persuade its existing customers who purchase products containing any of those supplier's chips to purchase products containing 3Dfx chips then revenues could be reduced significantly. 2 RESULTS OF OPERATIONS The following table sets forth certain items from our Consolidated Statements of Operations as a percentage of net sales:
PERCENTAGE OF NET SALES YEAR ENDED OCTOBER 31, ------------------------------- 1998 1997 1996 --------- --------- --------- 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% --------- --------- --------- --------- --------- ---------
FISCAL YEAR ENDED OCTOBER 31, 1998 COMPARED TO FISCAL YEAR ENDED OCTOBER 31, 1997 NET SALES. Net sales increased by $66.8 million, or 33.5%, from $199.5 million in fiscal 1997 to $266.3 million in fiscal 1998. This increase resulted from continued growth in all sales channels. Unit volume for fiscal 1998 increased by 25.7% over fiscal 1997. Our overall average unit selling prices increased slightly, primarily as a result of increased product performance and complexity and higher memory configurations. OEM channel sales increased $58.9 million, or 38.3%, from approximately $153.5 million in fiscal 1997 to approximately $212.4 million in fiscal 1998. Sales growth in the OEM channel primarily resulted from increased sales to existing customers. Commercial channel sales increased $8.9 million, or 37.1%, from approximately $23.9 million in fiscal 1997 to approximately $32.8 million in fiscal 1998. This increase in sales to the commercial channel resulted primarily from sales of the award winning Velocity 128, as well as the Black Magic Voodoo 2 and Velocity 4400 multimedia accelerators to established customers. Sales in the specialized technology market experienced moderate growth, increasing from approximately $15.2 million in fiscal 1997 to approximately $16.9 million in fiscal 1998, an increase of $1.7 million, or 11.3%. Unit volume for specialized technology products increased approximately 24.2%, while average unit selling prices declined slightly as a result of increased competition in the market. An increase in sales to existing customers also contributed to the moderate increase in sales of specialized technology products. GROSS PROFIT. Gross profit decreased by $5.8 million, or 11.6%, to $44.2 million in fiscal 1998, as compared to $50.0 million in fiscal 1997. For the period, gross profit as a percentage of net sales declined to 16.6% from 25.1%. The decrease in the amount of gross profit margin resulted primarily from increased pricing pressure in the commercial and OEM markets and to a lesser degree, the 10.3% decline in average selling prices in the specialized technology market from fiscal 1997 to fiscal 1998. The decrease in gross profit as a percentage of net sales resulted primarily from increased pricing pressure on the Company's products and a decrease in higher margin specialized technology products as a percentage of total sales. Price protection credits granted during the year ended October 31, 1998 were $4.2 million compared to $1.3 million during the year ended October 31, 1997. The increase in price protection resulted primarily 3 from price protection credits granted in the fourth quarter of 1998 for the Velocity 128 and Black Magic Voodoo 2 products, totaling approximately $2.2 million. Amounts charged to expense for potential excess and obsolete inventory were $6.4 million and $2.2 million during the years ended October 31, 1998 and 1997, respectively. The relative increase in amounts charged to expense for potential excess and obsolete inventory during 1998 was primarily related to $3.2 million for non-recurring charges associated with components provided by a supplier that did not meet specifications and a slow-moving inventory matter specifically identified through routine obsolescence reviews by management. Management believes these additional charges for excess and obsolete inventory are considered unusual and non-recurring in nature and are not expected to represent any trend which would have a material impact on future results of operations. The increases in price protection credits granted and amounts charged to expense for potential excess and obsolete inventory contributed to the decrease in gross profit margin. RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses increased by $4.1 million, or 60.1%, to $10.8 million in fiscal 1998, as compared to $6.7 million in fiscal 1997. This increase resulted primarily from increased staffing levels at our corporate headquarters in Richardson, Texas, as well as at our design centers in Austin, Texas, Eugene, Oregon and Belfast, Northern Ireland. Expenses associated with new product development, software and driver development and continued enhancement and support of our existing products also contributed to the increase. Research and development expenses as a percentage of net sales increased from 3.4% in fiscal 1997 to 4.0% in fiscal 1998. SALES AND MARKETING EXPENSES. Sales and marketing expenses increased by $2.9 million, or 19.8%, to $17.7 million in fiscal 1998, as compared to $14.8 million in fiscal 1997. This increase resulted from additional staffing and commissions paid as a result of our growth and higher sales levels. A decrease in commissions paid to independent sales representatives partially offset the general increase in sales and marketing expenses. Increased advertising and promotional expenses in the commercial channel, the specialized technology market and the international market also contributed to the overall increase in sales and marketing expense. Sales and marketing expense as a percentage of net sales decreased from 7.4% in fiscal 1997 to 6.6% in fiscal 1998. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased by $2.1 million, or 19.3%, to $12.7 million in fiscal 1998, as compared to $10.6 million in fiscal 1997. The increase is due primarily to expenses associated with our growth, including increased staffing, occupancy costs and other general operating expenses. Expenses associated with data processing, as well as increased goodwill amortization also contributed to the overall increase in general and administrative expenses. General and administrative expense as a percentage of net sales decreased from 5.3% in 1997 to 4.8% in 1998. NET INCOME. As a result of the foregoing factors, net income decreased by $9.0 million, or 83.9%, to $1.7 million in fiscal 1998, as compared to $10.7 million in fiscal 1997. FISCAL YEAR ENDED OCTOBER 31, 1997 COMPARED TO FISCAL YEAR ENDED OCTOBER 31, 1996 NET SALES. Net sales increased by $19.3 million, or 10.7%, from $180.2 million in fiscal 1996 to $199.5 million in fiscal 1997. This increase result from continued growth in all sales channels. Unit volume for fiscal 1997 increased by 27.4% over fiscal 1996. At the same time, our average unit selling prices continued to decline primarily as a result of declines in component costs. OEM channel sales increased $8.0 million, or 5.5%, from approximately $145.5 million in fiscal 1996 to approximately $153.5 million in fiscal 1997. Sales growth in the OEM channel resulted primarily from increased sales to existing customers. Commercial channel sales increased $4.1 million, or 20.8%, from approximately $19.8 million in fiscal 1996 to approximately $23.9 million in fiscal 1997. This moderate increase in sales to the commercial channel resulted primarily from increased sales to established customers. Sales in the specialized technology market experienced significant growth, increasing from approximately $10.9 million in fiscal 1996 to approximately $15.2 million in fiscal 1997, an increase of $4.3 million, or 38.9%. Increased sales to existing 4 customers and the sale of products to OEM workstation groups both contributed to the increase in sales of specialized technology products. GROSS PROFIT. Gross profit increased by $14.7 million, or 41.9%, to $50.0 million in fiscal 1997, as compared to $35.3 million in fiscal 1996. For the period, gross profit as a percentage of net sales increased to 25.1% from 19.6%. The increase in gross profit margin resulted primarily from increased sales of higher margin specialized technology products and, to a lesser degree, increased sales to the commercial channel. In addition, declines in component costs, economies of scale resulting from higher production volumes and greater manufacturing efficiencies also contributed to the increase in gross profit margin. Decreasing unit sales prices partially offset the increase in gross profit margins. RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses increased by $2.3 million, or 52.2%, to $6.7 million in fiscal 1997, as compared to $4.4 million in fiscal 1996. This increase resulted primarily from additional staffing levels at our headquarters in Richardson, Texas, as well as at our design centers in Houston, Texas and Eugene, Oregon. During 1997 we expanded our research and development efforts by establishing and staffing a design center in Belfast, Northern Ireland. Expenses associated with new product development, software development and continued enhancement and support of our existing products also contributed to the increase. Research and development expenses as a percentage of net sales increased from 2.4% in fiscal 1996 to 3.4% in fiscal 1997. SALES AND MARKETING EXPENSES. Sales and marketing expenses increased by $3.8 million, or 34.6%, to $14.8 million in fiscal 1997, as compared to $11.0 million in fiscal 1996. This increase resulted from additional staffing and commissions paid as a result of our growth and higher sales levels, as well as increased travel and operating costs. Increased trade show expense, as well as increased advertising and promotional expenses in the commercial channel, the specialized technology market and the international market also contributed to the overall increase in sales and marketing expense. Sales and marketing expense as a percentage of net sales increased from 6.1% in fiscal 1996 to 7.4% in fiscal 1997. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased by $1.1 million, or 11.9%, to $10.6 million in fiscal 1997, as compared to $9.5 million in fiscal 1996. The increase resulted primarily from expenses associated with our growth, including increased staffing and related expenses and data processing costs. An increase in the allocation of certain costs related to the Mexican manufacturing operation to cost of goods sold partially offset the increase in general and administrative expenses. Facility expansion at our headquarters and related occupancy costs, including rent and insurance, also contributed to the overall increase in general and administrative expenses. As a result of the increase in operating income, expenses associated our profit sharing plan also increased. For the periods, general and administrative expense as a percentage of net sales remained unchanged at 5.3%. NET INCOME. As a result of the foregoing factors, net income increased by $4.7 million, or 77.2%, to $10.8 million in fiscal 1997, as compared to $6.1 million in fiscal 1996. SEASONALITY Our quarterly operating results vary significantly depending on factors such as the timing of new product introductions, adequacy of component supply, changes in component costs, variations in our product mix, seasonal promotions by us and our customers and competitive pricing pressures. Because the timing of these factors may vary, the results of any particular quarter may not be indicative of results for the entire year or any future period. In addition, the PC market generally experiences weaker sales during the summer months. LIQUIDITY AND CAPITAL RESOURCES Inventory and accounts receivable financing and manufacturing and other equipment expenditures constitute our principal capital and liquidity needs. We have generally financed these requirements and our 5 operations through a combination of cash generated from operations, trade credit from vendors, bank borrowings and the proceeds from our public offerings. As a result of our rapid growth in recent years and our capital requirements, we completed a secondary public offering of 2,775,000 shares of STB Common Stock during the second quarter of fiscal 1998. We used the net proceeds from our secondary offering to reduce indebtedness and retained the balance for general corporate purposes. We recognize that future growth, if any, may require additional capital, particularly to support increased working capital needs, staffing requirements, promotional expenses and manufacturing facilities and equipment requirements. Cash used in operating activities was $148,000 in fiscal 1998, primarily attributable to increases in inventory and other assets, as well as decreases in accounts payable, partially offset by decreases in accounts receivable, as a result of declining revenues late in the fourth quarter. Cash used in operating activities was $3.9 million in fiscal 1997, resulting primarily from increases in inventory and accounts receivable, as a result of higher sales, partially offset by increased earnings and increases in accounts payable. At October 31, 1998, the Company's working capital amounted to $83.7 million, compared to $31.4 million at October 31, 1997. Cash and cash equivalents equaled $30.6 million and $3.9 million at October 31, 1998 and 1997, respectively. In fiscal 1998, we invested $3.1 million in capital equipment, compared with net purchases of equipment aggregating $9.6 million during fiscal 1997. Our investment in equipment is primarily attributable to manufacturing equipment additions and upgrades of existing equipment to support the increased demand for our products. During the first quarter of fiscal 1998, we completed a move to a new manufacturing facility in Juarez, Mexico, immediately adjacent to our previous facility. We have retained one-half of the previous facility for expansion. During the fourth quarter of fiscal 1997, we installed two new high speed surface-mount assembly lines at our new facility, at a total cost of approximately $6.3 million. We installed an additional line in the third quarter of fiscal 1998, at a cost of approximately $2.9 million. We financed this equipment through operating lease finance arrangements. During the fourth quarter of fiscal 1996, we installed four surface-mount technology assembly lines, at an approximate cost totaling $4.2 million. We financed this equipment through traditional lease financing arrangements also. Our aggregate obligations under all such equipment lease financing arrangements totaled approximately $9.2 million at October 31, 1998 (see Note 8 of Notes to Consolidated Financial Statements). We expect that additional capital expenditures for similar types of equipment may be necessary to support any additional future customer demand and production requirements. We have a $40.0 million revolving credit facility ("Revolving Credit Facility"), as well as a $3.0 million term loan ("Term Loan"). At October 31, 1998, no amounts were outstanding under the Revolving Credit Facility and $2.7 million was outstanding under the Term Loan. Principal amounts outstanding under the Revolving Credit Facility bear interest at LIBOR plus 175 basis points (6.989% at October 31, 1998). Amounts outstanding under the Term Loan bear interest at LIBOR plus 250 basis points and are payable in 60 monthly installments of principal and interest. Payment of principal and interest began November 1, 1997. Formulas based on eligible accounts receivable determine availability under the new Revolving Credit Facility. All indebtedness under the Revolving Credit Facility matures on November 21, 1999, and indebtedness under the Term Loan matures on November 1, 2002 (subject to renewal of the Revolving Credit Facility through such date). In December 1997, we entered into a five-year agreement to construct and lease a new corporate headquarters in Richardson, Texas. Construction on the 210,000 square foot facility was completed in December 1998, and we completed our move into the facility during that month. We estimate the total cost of the building and the land to be approximately $22.8 million. The lessor agreed to fund the cost of the land and construction of the building. Rental payments commenced upon occupancy. We estimate that we will pay approximately $225,000 per month in rent over a four-year period beginning in the first quarter of fiscal 1999. This amount exceeds the expense of our previous headquarter facilities, because local rental rates have increased and we have increased the square footage of our corporate headquarters. The lease agreement also provides that the amount of the lease payments is subject to adjustment based upon 6 prevailing interest rates. Consequently, an increase in prevailing interest rates will increase the expense of our facilities. We have recently entered into an interest rate swap agreement that fixes the interest rate on a majority of our lease obligation at 7.55%. We are also seeking opportunities to sublease that portion of our new headquarters that we do not expect to utilize immediately. At the end of the initial five-year lease, we have the option to renew the lease for an additional five years, pay off the underlying debt or cause the building to be sold. In the event of a sale, the proceeds are to be used to retire the underlying debt. Any excess will be paid to us. We are generally responsible for any remaining unpaid balance owing on the underlying obligation after the sale of the facility. YEAR 2000 ASSESSMENT STATE OF READINESS: STB has performed a company-wide evaluation to assess the ability of its products and its information technology ("IT") and non-IT systems to properly function and execute transactions in the Year 2000. STB's Year 2000 Project is divided into three major sections: (a) Infrastructure, which includes internal management information systems, computers, servers, networks to support the business and any non-IT systems used in the operation of the business; (b) Third party Suppliers, which includes those suppliers that provide STB with components that are used in the manufacture of its products; and (c) STB Products which includes those products that generate revenue for STB. The Project has been divided into six phases: (1) Awareness and Communication; (2) Inventory; (3) Assessment; (4) Renovation; (5) Testing; and (6) Rollout. As discussed below, STB has substantially completed the first three phases of the Year 2000 Project for its Infrastructure; the first phase for its Third Party Suppliers and all phases for its Customer Products and Services. All phases of the Year 2000 Project are expected to be completed by the third quarter of 1999. INFRASTRUCTURE: STB has completed an assessment of its IT and non-IT systems and currently is in the renovation phase for these systems. STB has completed the renovation of its IT hardware systems and expects to complete a renovation of its various software systems by June 1999. The Renovation, Testing and Rollout phases of the Project are expected to be complete by July 1999. STB has distributed a letter to each of its vendors that supply systems or software for its IT and non-IT systems to determine the systems' Year 2000 status. A majority of the recipients have responded to the letter, and most of the respondents have given assurances that their products and services are able to function in the context of the Year 2000 Problem either currently or through upgrades to existing systems. A majority of the total systems are either compliant currently or have been upgraded. STB is assessing these responses and will continue to communicate with vendors that are material to its operations to gain satisfactory assurances. If such assurances are not obtained, STB will seek alternatives, including contracting with other vendors. THIRD PARTY SUPPLIERS: STB has taken a inventory of the components supplied from third party suppliers that are used in conjunction with its products. STB has contacted significant third party suppliers in an effort to assess the state of their Year 2000 readiness. To date, a majority of the recipients have responded to the letter, and approximately 20% of the respondents have given assurances that their products and services are able to function in the context of the Year 2000 Problem. Approximately 25% of those responding have not been willing to certify the Year 2000 compliance of their products. STB is continuing to obtain responses to the letter and at the same time is formulating a contingency plan that includes identifying alternate suppliers in the event STB is unable to obtain such assurances. Many of STB's components and services are obtained from sources that are not the sole source for such items. Accordingly, STB believes that alternative means are generally available that are Year 2000 compliant from which to obtain components and services. Other than as described above, STB has not undertaken to employ any independent verification or validation process to determine its third party suppliers' state of Year 2000 readiness. STB PRODUCTS AND SERVICES: During 1998, all of STB's products that were produced in the last five years were tested and confirmed as compliant. STB has transmitted letters to its customers notifying them 7 of their current year 2000 readiness status. In general, STB believes that the nature of the functionality of its products do not entail any date type functions. Therefore STB believes that, the products do not have any Year 2000 performance implications. COSTS: To date, STB has spent approximately $170,000 relating to software, training and labor costs for its Year 2000 Project, of which $100,000 was incurred for replacement costs for non-compliant software systems as well as the acceleration of replacement of certain other systems as a result of the Year 2000 Problem. STB currently estimates that its software, training and labor costs through fiscal year 1999 relating to the Year 2000 Project will be approximately $100,000. No assurances, however, can be given that these costs will not exceed such amount or that STB will not have to use other sources for these amounts. STB has to date only used internal resources to assess its Year 2000 risks and cost estimates and does not expect to use any independent verification or validation process in this regard. None of STB's other IT projects has been delayed due to STB's Year 2000 Project. Funds for the Year 2000 Project are expected to be paid for out of operations. RISKS: If STB does not successfully complete its Year 2000 Project, it could, among other results, prevent it from receiving orders and delivering Year 2000 compliant goods to customers and prevent it from placing orders and receiving sufficient quantities of supplies from vendors. This could have a material effect on STB's ability to market, sell and implement its products, which could have a material adverse effect on its financial condition and results of operations. STB's most reasonably likely worst case Year 2000 scenario would likely involve the failure of a critical supplier's products to be Year 2000 compliant, which could temporarily suspend the manufacture and delivery of STB's related products while the problem was fixed or an alternate supply source was identified. As indicated above, STB is formulating an informal contingency plan that includes identifying alternate suppliers. In addition, as a result of Year 2000 concerns, the PC industry as a whole may experience declining growth rates and a decreased demand for PCs and PC related products. There can be no assurances that third parties will be Year 2000 compliant in a timely manner. CONTINGENCY PLANS: STB has to date experienced no significant Year 2000 problems. Although STB has not adopted a formal contingency plan, it is currently assessing alternatives, which may be implemented in the event Year 20000 issues arise. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 1997, Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS 130"), was issued. FAS 130 establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of general-purpose financial statements. It mandates that all items required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. FAS 130 is effective for fiscal years beginning after December 15, 1997. STB will adopt FAS 130 in the year ending October 31, 1999. Reclassification of financial statements for earlier periods provided for comparative purposes is required upon adoption. In June 1997, Statement of Financial Accounting Standards No. 131, "Disclosure About Segments of an Enterprise and Related Information" ("FAS 131"), was issued, FAS 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. FAS 131 is effective for financial statements for periods beginning after December 15, 1997. STB will adopt FAS 131 in the year ending October 31, 1999. On March 4, 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1 requires computer software 8 costs related to internal use software that are incurred in the preliminary project stage should be expensed as services consumed in developing or obtaining internal-use computer software; payroll and payroll-related costs for employees who are directly associated with and who devote time to the internal-use computer software project (to the extent of the time spent directly on the project); and interest costs incurred when developing computer software for internal use should be capitalized. SOP 98-1 is effective for financial statements for fiscal years beginning after December 15, 1998. Accordingly, STB will adopt SOP 98-1 in its financial statements for the year ending October 31, 1999. STB does not believe the adoption of SOP 98-1 will have a material effect on its results of operations or financial condition. On June 15, 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (FAS 133). FAS 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 1999 (November 1, 1999 for STB). FAS 133 requires that all derivatives instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. STB is currently evaluating implementation of FAS 133 and the effects the statement will have on its financial statements and disclosures. STB believes that, due to the current limited use of derivative instruments, adoption of the statement will not have a material effect on its results of operations, financial position, capital resources or liquidity. 9 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of STB Systems, Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of changes in shareholders' equity and of cash flows present fairly, in all material respects, the consolidated financial position of STB Systems, Inc. and subsidiaries at October 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended October 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the management of STB Systems, Inc.; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for the opinion expressed above. PRICEWATERHOUSECOOPERS LLP /s/ PricewaterhouseCoopers LLP Dallas, Texas December 12, 1998, except as to Note 15, which is as of January 15, 1999 10 STB SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET OCTOBER 31, 1998 AND 1997 (IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
1998 1997 ---------- ---------- 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 ---------- ---------- ---------- ----------
The accompanying notes are an integral part of these consolidated financial statements. 11 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)
1998 1997 1996 ------------ ------------ ------------ 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 ------------ ------------ ------------ ------------ ------------ ------------
The accompanying notes are an integral part of these consolidated financial statements. 12 STB SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEARS ENDED OCTOBER 31, 1998, 1997 AND 1996 (DOLLARS IN THOUSANDS)
1998 1997 1996 ---------- ---------- --------- Cash flows from operating activities: Net income.................................................................... $ 1,732 $ 10,770 $ 6,077 Adjustments to reconcile net income to net cash flow from operating activities: Depreciation and amortization............................................... 3,885 2,550 1,252 Changes in assets and liabilities: Accounts receivable--trade................................................ 14,700 (18,506) (7,397) Inventories, net.......................................................... (7,698) (13,652) 727 Other current assets...................................................... (4,474) (621) (479) Other assets.............................................................. (2,277) (763) 151 Accounts payable--trade................................................... (4,751) 15,543 1,807 Accrued wages, commissions, and bonuses................................... (772) 322 585 Other accrued liabilities................................................. (493) 419 817 ---------- ---------- --------- Net cash provided by (used in) operating activities..................... (148) (3,938) 3,540 ---------- ---------- --------- Cash flows from investing activities: Purchases of property and equipment............................................. (3,124) (9,580) (3,086) Investment in subsidiary........................................................ -- (236) -- ---------- ---------- --------- Net cash used in investing activities..................................... (3,124) (9,816) (3,086) ---------- ---------- --------- Cash flows from financing activities: Borrowings (payments) on short-term debt........................................ (21,520) 9,760 (351) Borrowings on long-term debt.................................................... -- 3,000 -- Payments on long-term debt...................................................... (1,596) (703) (1,003) Issuance of common stock, net of issue costs.................................... 474 1,218 158 Proceeds from secondary offering................................................ 57,104 -- -- Repurchase of common stock...................................................... (4,633) -- -- Tax benefit from exercise of stock options...................................... 213 928 -- ---------- ---------- --------- Net cash provided by(used in) financing activities.............................. 30,042 14,203 (1,196) ---------- ---------- --------- Net increase (decrease) in cash and cash equivalents............................ 26,770 449 (742) Cash and cash equivalents at beginning of period................................ 3,869 3,420 4,162 ---------- ---------- --------- Cash and cash equivalents at end of period...................................... $ 30,639 $ 3,869 $ 3,420 ---------- ---------- --------- ---------- ---------- --------- Supplemental disclosure of cash flow information: --Cash paid for interest in 1998, 1997 and 1996 was $1,235, $1,640, and$1,243, respectively. --Cash paid for income taxes in 1998, 1997 and 1996 was $3,400, $4,375 and $2,775, respectively.
The accompanying notes are an integral part of these consolidated financial statements. 13 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)
COMMON STOCK ADDITIONAL TREASURY STOCK ------------------------- PAID-IN RETAINED -------------------- SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT TOTAL ------------ ----------- ----------- --------- --------- --------- --------- 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 ------------ ----- ----------- --------- --------- --------- --------- ------------ ----- ----------- --------- --------- --------- ---------
The accompanying notes are an integral part of these consolidated financial statements. 14 NOTE 1--DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES STB Systems, Inc. develops, manufactures and sells a wide selection of multimedia accelerators, other multimedia subsystem products and specialized technology products designed for use in mid-range and high-end personal computers ("PCs"). STB Assembly, Inc. is a wholly owned subsidiary and provides manufacturing services to STB Systems, Inc. Symmetric Simulation Systems, Inc., also a wholly owned subsidiary of STB Systems, Inc., designs high-end 3D graphics acceleration products. PRINCIPLES OF CONSOLIDATION--The accompanying financial statements include the consolidated accounts of STB Systems, Inc., STB Assembly, Inc. and Symmetric Simulation Systems, Inc., (collectively referred to as the "Company"). STB de Mexico S.A. de C.V. ("STB de Mexico"), a majority owned subsidiary of STB Assembly, Inc., is a Mexican corporation operated as a maquiladora and performs assembly services for STB Systems, Inc. All significant intercompany accounts and transactions have been eliminated in consolidation. Minority interests in STB de Mexico are insignificant for financial reporting purposes. MANAGEMENT ESTIMATES--In preparing the consolidated financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results may differ from those estimates. CASH AND CASH EQUIVALENTS--Cash equivalents are short-term, highly liquid investments that are both readily convertible to known amounts of cash and so near to their maturity that they present insignificant risk of changes in value because of changes in interest rates. Investments with initial maturities of three months or less qualify as cash equivalents. REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE--The Company recognizes revenue from product sales upon shipment. Sales to original equipment manufacturers ("OEMs") account for a significant portion of the Company's sales. The Company offers its OEM customers a limited warranty for a period of typically 15 to 36 months. Costs associated with the warranty program are accrued when revenue is recognized and are determined on the basis of estimated future costs to fulfill the warranty commitment. Stock rotation return rights, under specified conditions, are provided to certain retail customers for recently purchased products, provided an equivalent dollar amount of other products is purchased at the time of the return. Also, in the event the Company reduces its selling prices, certain retail customers receive price protection credit for the difference between the original purchase price of products remaining in specified levels of their inventories and the Company's reduced price for such products. Sales adjustments resulting from stock rotation returns and price protection programs are estimated by management and accrued in the period in which the sale is made. These sales adjustments have generally not been significant. Management's estimates of the costs associated with the price protection and stock rotation programs are based on the Company's historical experience with such arrangements and its evaluation of exposure at each balance sheet date resulting from these policies. The Company's sales are presented net of stock rotation returns and price adjustments. The Company participates in cooperative advertising programs with certain distributors. These programs are used by the Company to reimburse distributors for certain forms of advertising, and in general, allows distributors credits up to a specified percentage of net purchases. Credits for cooperative advertising earned by the distributor, may be taken up to six months after the sale has occurred. The Company's costs associated with these programs are estimated and accrued at the time of sale and are included in sales and marketing expenses. INVENTORIES--Inventories are valued at the lower of cost or market. Cost is determined on a first-in, first-out basis using a moving weighted average methodology. 15 NOTE 1--DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PROPERTY AND EQUIPMENT--Property and equipment are stated at cost. Depreciation is computed for financial statement purposes using an accelerated method over the estimated useful lives of the assets, which range from three to five years. Amortization of assets recorded under capital leases is included in depreciation expense. Depreciation and amortization expense for each of the years ended October 31, 1998, 1997 and 1996 was $3,885,000, $2,550,000 and $1,252,000, respectively. LONG-LIVED ASSETS--Long-lived assets held and used by the Company, or to be disposed of, are reviewed for impairment whenever events or changes in circumstances indicate that the net book value of the asset may not be recoverable. An impairment loss is recognized if the sum of the expected future cash flows (undiscounted and before interest) from the use of the asset is less than the net book value of the asset. The amount of the impairment loss will generally be measured as the difference between net book value of the assets and the estimated fair value of the related assets. Based on its most recent analysis, the Company believes that no impairment of long-lived assets existed at October 31, 1998. RESEARCH AND DEVELOPMENT--Research and development costs are charged to expense as incurred. INCOME TAXES--Effective February 21, 1995 and in connection with the Company's initial public offering ("Stock Offering"), the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109) on a prospective basis (see Note 2). Under the asset and liability method of SFAS 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities measured using estimated tax rates expected to apply to taxable income in the years in which the temporary differences are expected to be recovered or settled. ACCOUNTING FOR STOCK-BASED COMPENSATION--In October 1995, Statement of Financial Accounting Standards No. 123, "Accounting for Stock-based Compensation" (SFAS 123) was issued. This statement requires the fair value of stock options and other stock-based compensation issued to employees to either be included as compensation expense in the statement of operations, or the pro forma effect on net income and earnings per share of such compensation expense to be disclosed in the footnotes to the Company's financial statements. Accordingly, the Company has adopted SFAS 123 on a disclosure basis only. FINANCIAL INSTRUMENTS--As of October 31, 1998 and 1997 the fair values of the Company's revolving credit balance and the fair values of the Company's fixed-rate debt approximates the related carrying values. STOCK SPLITS--During 1997, the Company declared a three-for-two split of the Company's common stock. The stock split was effected in the form of a stock dividend on July 17, 1997. Additionally, on January 27, 1998, another three-for-two split of the Company's common stock was declared. Again, the stock split was effected in the form of a stock dividend on February 29, 1998, and resulted in the issuance of 3,491,182 additional shares. Share and per share amounts in the accompanying financial statements have been retroactively adjusted to reflect the stock splits. EARNINGS PER SHARE--In February 1997, the Financial Accounting Standards Board issued FAS No. 128, "Earnings per share" (SFAS 128). The Company adopted SFAS 128, which establishes standards for computing and presenting earnings per share (EPS), in the first quarter of fiscal 1998. This statement requires dual presentation of basic and diluted EPS on the face of the income statement for entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes the effect of potentially dilutive securities while diluted EPS reflects the potential dilution that would occur 16 NOTE 1--DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) if securities or other contracts to issue common stock were exercised, converted into or resulted in the issuance of common stock. INTEREST RATE SWAP--The Company may enter into interest rate swap agreements to limit the effect of increases in floating interest rates. The differential is accrued as interest rates change and is recorded as interest expense. FOREIGN CURRENCY TRANSLATION--The U.S. dollar is the functional currency for the Company's foreign operations. Gains and losses on the translation into U.S. dollars of amounts denominated in foreign currencies are included in net income. OTHER ASSETS--During the fourth quarter of fiscal 1998, the Company invested $3 million in nVIDIA Corporation, a supplier. The investment is in the form of a Convertible Subordinated Note. In the event the supplier sells common stock in an initial public offering prior to December 31, 1998, the investment will convert to common stock at a discount from the price per share of the common stock in the initial public offering. In the event the supplier does not complete an initial public offering prior to December 31, 1998, then on January 15, 1999 the investment shall automatically convert into common stock of the supplier (see Note 15, Subsequent Events). The Convertible Subordinated Note, included in other assets, is classified as an available-for-sale security and is reported at fair value. At October 31, 1998 there were no unrealized gains or losses. NOTE 2--INITIAL PUBLIC OFFERING AND SECONDARY OFFERING On December 16, 1994, the Board of Directors of the Company authorized an initial public offering of the Company's common stock ("Stock Offering"). Accordingly, the Company filed a Registration Statement on Form S-1 with the Securities and Exchange Commission for the sale of common stock. On February 14, 1995, 4,500,000 shares of common stock were offered to the public at a price of $5.33 per share. Proceeds from the Company's Stock Offering totaled $24,000,000, net of $2,322,000 of Stock Offering expenses. The Company's stock is listed on the NASDAQ National Market under the symbol "STBI". On February 25, 1998, the Company filed a registration statement on Form S-3 to offer an additional 3,000,000 shares of its common stock to the public in a secondary offering at a price of $22.00 per share. On March 20, 1998, the offering was completed and of the shares being offered, 2,775,000 shares were sold by the Company and 225,000 were sold by certain selling shareholders. Proceeds to the Company from the secondary offering totaled $61,050,000, net of $3,946,000 of secondary offering expenses. NOTE 3--ACQUISITION During the quarter ended April 30, 1997, STB Systems, Inc. acquired all of the outstanding shares of Symmetric Simulation Systems, Inc. ("Symmetric"). Symmetric designs and builds high-end 3D graphics acceleration products for use in applications such as computer-aided design, product visualization and animation. This transaction was accounted for as a purchase in accordance with Accounting Principles Board Opinion No. 16, "Business Combinations" (APB 16). As consideration, the Company issued 65,047 shares of stock at a fair market value of $950,000 and cash in the amount of $236,000. As a result of the acquisition, the Company recorded goodwill in the amount of $1,648,000, which is included in other assets. At October 31, 1998, the Company evaluated the remaining useful life of the goodwill, and accordingly, changed the straight-line amortization period to five years from seven years. Based on an analysis of the undiscounted cash flow of the associated assets, no impairment of the asset was recorded. Unamortized goodwill at October 31, 1998 was $982,000. 17 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:
MARCH 18, 1997 --------------- (IN THOUSANDS) 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 ------ ------
NOTE 4--INVENTORIES Inventories at October 31 consist of the following:
1998 1997 --------- --------- (IN THOUSANDS) Raw materials........................................................... $ 30,757 $ 23,193 Work-in-process......................................................... 17,267 13,859 Finished goods.......................................................... 6,169 5,643 --------- --------- Inventories, gross.................................................... 54,193 42,695 Reserve for Obsolescence................................................ (5,200) (1,400) --------- --------- Inventories, net...................................................... $ 48,993 $ 41,295 --------- --------- --------- ---------
NOTE 5--PROPERTY AND EQUIPMENT Property and equipment at October 31 consist of the following:
1998 1997 --------- --------- (IN THOUSANDS) 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 --------- --------- --------- ---------
NOTE 6--SHORT-TERM DEBT On November 21, 1997, the Company entered into a credit agreement with a bank, whereby the Company can borrow up to $30,000,000, against a revolving credit facility ("Revolving Credit Facility"). The borrowing capacity under the Revolving Credit Facility was increased to $40,000,000 in January 1998. The Revolving Credit Facility is payable upon demand, and bears interest at Libor plus 175 basis points (6.989% at October 31, 1998). In addition, the Company will incur a fee on the unused portion of the commitment, at an annual rate of .375%, payable quarterly, in arrears. There was no outstanding balance under the Revolving Credit Facility at October 31, 1998. All indebtedness under the Revolving Credit Facility matures on November 1, 1999. 18 NOTE 6--SHORT-TERM DEBT (CONTINUED) Availability under the Revolving Credit Facility is subject to limitations determined by the Company's borrowing base, which is calculated based on eligible accounts receivable, as defined in the Revolving Credit Facility agreement. In connection with the re-negotiation of the Revolving Credit Facility in January 1998, the Company incurred additional fees in the amount of $103,000. At October 31, 1997, the Company had $21,520,000 outstanding under a $25,000,000 credit agreement with a bank. This line of credit had an interest rate of prime plus .75% (9.25% at October 31, 1997). All outstanding balances under this credit agreement were satisfied with funds obtained from the Revolving Credit Facility. NOTE 7--LONG-TERM LIABILITIES Long-term liabilities at October 31 consist of the following:
1998 1997 --------- --------- (IN THOUSANDS) 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 --------- --------- --------- ---------
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:
(IN YEARS ENDING OCTOBER 31, THOUSANDS) - ------------------------------------------------------------------------------- 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 ------ ------
19 NOTE 8--COMMITMENTS AND CONTINGENCIES The Company leases office space and equipment under various noncancelable operating lease agreements extending through 1999. Rental expense for each of the years ended October 31, 1998, 1997 and 1996 was $4,602,000, $2,136,000 and $856,000, respectively. In the first quarter of fiscal 1999, the Company moved its Corporate headquarters to a new 210,000 square foot facility in Richardson, Texas. Future minimum lease payments for the new facility are included in the table below. At October 31, 1998, future minimum lease payments for such operating leases are:
(IN YEARS ENDING OCTOBER 31, THOUSANDS) - ------------------------------------------------------------------------------- 1999........................................................................... $ 5,749 2000........................................................................... 5,170 2001........................................................................... 5,187 2002........................................................................... 5,121 2003........................................................................... 3,513 Thereafter..................................................................... 2,860 ------------- Total.......................................................................... $ 27,600 ------------- -------------
The Company installed three high speed surface-mount assembly lines at its facility in Juarez, Mexico. The first two assembly lines were installed during the fourth quarter of fiscal 1997, at a total cost of $6.3 million. The third line was installed during the third quarter of fiscal 1998, at a cost of $2.9 million. The equipment has been financed through operating lease finance arrangements. Under the operating lease arrangements, the Company must make 60 monthly payments of $60,775, $53,691 and $49,659, respectively. During the fourth quarter of fiscal 1996, the Company installed four SMT assembly lines, at an approximate cost of $4.2 million. This equipment was also financed through operating lease finance arrangements. The Company's aggregate obligations under all such equipment lease financing arrangements totaled approximately $9.2 million at October 31, 1998. In December 1997, the Company entered into a five-year lease agreement for a new corporate headquarters facility to be constructed in fiscal 1998. Construction on the 210,000 square foot facility began in December 1997 and was completed in December 1998. The total cost is estimated to be $22.8 million (including land). The lessor has agreed to fund the cost of the land and construction of the building (subject to reductions based on certain conditions in the lease agreement). The Company began occupying the facility during the first fiscal quarter of 1999 with rental payments commencing upon occupancy. Upon completion of the initial five-year agreement, the Company has the option to purchase the property, renew the lease for an additional five years, or arrange for the facility to be sold. In the case that the facility is sold for less than the original cost, the Company has guaranteed to the lessor to make up for any shortfall not to exceed $17.2 million. Under the lease agreement, the Company is responsible for all operating expenses of the facility along with a lease payment that is subject to adjustment based upon prevailing interest rates. The Company has entered into an interest rate swap agreement effective upon occupancy whereby the Company, via the swap, is fixing the rent payments on the lease. This interest rate swap agreement reduces the impact of changes in interest rates on the Company's monthly floating rate lease obligation to the lessor of its corporate headquarters facility. At October 31, 1998, the Company had one interest rate swap agreement with a commercial bank, having a total notional principal amount of $19.4 million. This agreement effectively changes the Company's interest rate exposure on its corporate headquarters facility lease obligation to a fixed 7.55%. The interest rate swap agreement extends through the term of the lease agreement and provides for monthly receipts to or payments by the Company dependent upon prevailing market rates of interest each month. Any cash payments made or received under the swap agreement will 20 NOTE 8--COMMITMENTS AND CONTINGENCIES (CONTINUED) be recorded in facility expense for such month upon the effective date of the agreement, January 4, 1999. The Company is exposed to credit loss in the event of non-performance by the counter-party to the interest rate swap agreement. However, the Company does not anticipate non-performance by the counterparty to the swap agreement. In June 1998, the Company granted a major customer a warrant to purchase up to 420,000 shares of the Company's common stock over the next five calendar years. The customer receives the right to exercise the warrant upon achieving certain levels of business in each of the calendar years 1998 through 2000. Upon attainment of the specified level of business, the customer has three years to exercise the warrants applicable to that year. The exercise price of the warrant was based upon the closing price on the date the warrant was signed. The specified sales levels for 1998 were not met; therefore, the customer did not vest in any of the warrants during the year ended October 31, 1998. In August 1998, a lawsuit was filed by a supplier to the Company seeking payment in the amount of $1.2 million, representing an unpaid balance allegedly owing for components sold to the Company. The Company denies the claim on the basis that the components do not meet the stated specifications and that the supplier has breached an implied duty to its customer by entering into a line of business that competes with the Company. The Company has filed a counter claim against the supplier for damages in excess of the amount claimed by the supplier. In the opinion of management, this lawsuit is not likely to result in any loss that would have a material adverse effect on the Company's financial condition. In August 1998, a lawsuit was filed by two employees of the Company alleging implied termination of their employment seeking damages pursuant to their employment contracts with the Company. The Company denies the allegations. Formal discovery has begun and the Company intends to vigorously defend its position. In the opinion of management, this lawsuit is not likely to result in any loss that would have a material adverse effect on the Company's financial condition. In October 1998, a class action lawsuit was filed in Dallas, Texas, County Court against the Company and certain of its officers and directors, alleging the prospectus and registration statement of the Company's secondary stock offering in March 1998 contained false and materially misleading facts, and omitted to state material facts. The members of the class seek unspecified damages. The Company denies the allegations. No formal discovery has yet been undertaken, and the Company intends to vigorously defend the action. In the opinion of management, this lawsuit is not likely to result in any loss that would have a material adverse effect on the Company's financial condition. NOTE 9--MAJOR CUSTOMERS Sales to major customers, as a percentage of net sales, were as follows for each of the years ended October 31:
CUSTOMER 1998 1997 1996 - ------------------------------------------------------------------------- ----- ----- ----- A........................................................................ 39% 35% 47% B........................................................................ 31% 20% 8% C........................................................................ 5% 11% --
21 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:
1998 1997 1996 ---------- ---------- ---------- (IN THOUSANDS) 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 ---------- ---------- ---------- ---------- ---------- ----------
NOTE 10--EMPLOYEE BENEFIT PLAN AND PROFIT SHARING PLAN The Company has a 401(K) plan for all full-time employees. During fiscal 1997, the Company modified the plan contribution amount. The new plan provides for the Company to make contributions of up to 50% of the amount of an employee's contribution, but not more than 2% of an employee's total cash compensation. Prior to the change, the Company made contributions of up to 25% of the amount of an employee's contribution, up to 1% of the employee's total cash compensation. The Company incurred expense of $226,000, $149,000 and $43,000 for the years ended October 31, 1998, 1997 and 1996, respectively, for its contributions to this plan. The Company's profit sharing plan provides for 10% of the Company's income before taxes to be paid as additional compensation to participants in the plan. Employees meeting eligibility requirements participate in the plan. The Company incurred compensation expense of $1,019,000, $1,464,000 and $991,000 for the years ended October 31, 1998, 1997 and 1996, respectively, as a result of the Company's obligations under the profit sharing plan. NOTE 11--EARNINGS PER SHARE The following table sets forth the basic and diluted EPS computation for the years ended October 31:
1998 1997 1996 ------------ ------------ ------------ 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 ------------ ------------ ------------ ------------ ------------ ------------
22 NOTE 12--INCOME TAXES PROVISION FOR INCOME TAXES--The components of the income tax provision for the years ended October 31, are as follows:
1998 1997 1996 --------- --------- --------- (IN THOUSANDS) 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 --------- --------- --------- --------- --------- ---------
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:
1998 1997 1996 --------- --------- --------- 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% --------- --- --- --------- --- ---
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:
1998 1997 1996 --------- --------- --------- (IN THOUSANDS) 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 --------- --------- --------- --------- --------- ---------
23 NOTE 13--STOCK PLANS LONG-TERM INCENTIVE PLAN The Company's 1995 Long-Term Incentive Plan provides for the granting of incentive stock options and non-qualified stock options to purchase common stock, stock appreciation rights, restricted stock and performance units to key executives and other key employees of the Company. In April 1997, the plan increased its number of authorized shares of common stock to be used for stock options, stock appreciation rights, or restricted stock from 1,912,500 to 2,250,000 shares. All options vest at the rate of 20% per year on each of the first five anniversaries of the date of grant. At October 31, 1998, options to purchase 634,500 shares were exercisable. The plan will terminate on December 31, 2004. Stock option activity during fiscal 1998, 1997 and 1996 is as follows:
NUMBER OPTION PRICE WEIGHTED AVERAGE OF SHARES RANGE PER SHARE EXERCISE PRICE ---------- ---------------- ----------------- 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 ---------- ---------------- ------ ---------- ---------------- ------
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:
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 - ----------------------------------- ---------- ---------------- -------- ---------- -------- $ 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
The fair value of each option was estimated on the date of grant based on the Black-Scholes option pricing model, assuming, among other things, no dividend yield, a risk free interest rate of 6.0%, and expected life of four years and expected volatility of 57% for fiscal year 1998 and 71% for fiscal years 1997 and 1996. Had the Company recorded compensation expense based on the fair value at the date of grant 24 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:
1998 1997 1996 --------- --------- --------- 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 --------- --------- --------- --------- --------- ---------
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)
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) 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
NOTE 15--SUBSEQUENT EVENTS On December 14, 1998, the Company announced it has entered into a definitive merger agreement with 3Dfx Interactive, Inc., whereby in a stock-for-stock purchase transaction, STB shareholders will receive 0.65 shares of 3Dfx common stock for each share of STB common stock. The merger is expected to close in March 1999, subject to customary regulatory approvals and approvals by the shareholders of both 3Dfx and STB. OTHER ASSETS--During the fourth quarter of fiscal 1998, the Company invested $3 million in nVIDIA Corporation, a supplier. The investment was in the form of a Convertible Subordinated Note. On 25 NOTE 15--SUBSEQUENT EVENTS (CONTINUED) January 15, 1999 the Note converted into 428,572 shares of common stock of the supplier, based on a conversion rate of $7.00 per common share. Subsequent to the conversion, the supplier completed an initial public offering at a price of $12.00 per common share. Immediately preceding the initial public offering, the Company's ownership in the supplier was approximately 2.7%, and approximately 1.5% subsequent to the IPO. The securities are classified as available-for-sale whereby, the unrealized gains or losses will be reported as a separate component of shareholders' equity. 26 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
PAGE ----- (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).
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PAGE ----- **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))
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PAGE ----- *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)
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PAGE ----- 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)
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PAGE ----- 10.36 Lease Schedule No. 1000063250 dated as of October 31, 1997 to Master Lease Agreement dated October 30, 1996 between Banc One Leasing Corporation and the Company (incorporated by reference to Exhibit 10.36 of the Company's Registration Statement on Form S-3, Registration No. 333-4684) 10.37 Lease Schedule No. 1000063259 dated as of October 31, 1997 to Master Lease Agreement dated October 30, 1996 between Banc One Leasing Corporation and the Company (incorporated by reference to Exhibit 10.37 of the Company's Registration Statement on Form S-3, Registration No. 333-4684) 10.38 Lease Schedule No. 1000063905 dated as of December 15, 1997 to Master Lease Agreement dated October 30, 1996 between Banc One Leasing Corporation and the Company (incorporated by reference to Exhibit 10.38 of the Company's Registration Statement on Form S-3, Registration No. 333-4684) 10.39 Master Lease Amendment dated as of October 31, 1997 to Master Lease Agreement dated October 30, 1996 between Banc One Leasing Corporation and the Company (incorporated by reference to Exhibit 10.39 of the Company's Registration Statement on Form S-3, Registration No. 333-4684) 10.40 Selling Shareholder Agreement between the Company and each of Messrs. Ogle, Balthaser and Sims (incorporated by reference to Exhibit 10.40 of the Company's Registration Statement on Form S-3, Registration No. 333-4684) 10.41 Underwriting Agreement by and among the Company, William E. Ogle, Mark S. Sims, William D. Balthaser and CIBC Oppenheimer (in its own capacity and on behalf of an underwriting syndicate) (incorporated by reference to Exhibit 1.1 of the Company's Registration Statement on Form S-3, Registration No. 333-4684) **10.42 Letter Agreement dated December 11, 1998 between STB Systems, Inc. and Hoak Breedlove Wesneski & Co. 11.1 Intentionally omitted. 21 Subsidiaries of the Company (a) STB Assembly, Inc., a Texas corporation (b) STB de Mexico, S.A. de C.V., a Mexican corporation (c) Maquilados Continentales de Chihuahua, a Mexican corporation (an inactive shell corporation) (d) Symmetric Simulation Systems, Inc. (e) STB Systems, Inc., a Delaware corporation (an inactive shell corporation) +23 Consent of PricewaterhouseCoopers LLP **24 Powers of Attorney (included on first signature page) **27 Financial Data Schedule
- ------------------------ * Management contract or compensatory plan or arrangement. The Company will furnish a copy of any Exhibit listed above to any shareholder without charge upon written request to Mr. Bryan F. Keyes, Secretary, 3400 Waterview Parkway, Richardson, Texas 75080. ** Previously filed. + Filed herewith. (b) No reports on Form 8-K were filed during the last quarter of the period covered by this Report. 31 SIGNATURE Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 as amended, STB has duly caused this Amendment No. 1 on Form 10-K/A to be signed on its behalf by the undersigned, thereunto duly authorized. STB SYSTEMS, INC. By: /s/ WILLIAM E. OGLE ----------------------------------------- William E. Ogle CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER Dated: February 24, 1999 32 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
BALANCE AT FISCAL BEGINNING OF CHARGED TO COSTS BALANCE AT END YEAR ENDED DESCRIPTION YEAR AND EXPENSES DEDUCTIONS OF YEAR - ----------- ---------------------------------- ------------ ---------------- ------------ ---------------- 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
33 EXHIBIT INDEX
EXHIBIT PAGE --------- ----- (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).
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EXHIBIT PAGE --------- ----- **10.1 Employment Agreement dated November 1, 1996 by and between the Company and William E. Ogle (incorporated by reference to Exhibit 10.42 to the Company's Registration Statement on Form S-1 (Registration No. 333-14313)), as amended by that certain Amendment to Employment Agreement for Executive Officer dated December 13, 1998 **10.2 Employment Agreement dated November 1, 1996 by and between the Company and Randall D. Eisenbach (incorporated by reference to Exhibit 10.43 to the Company's Registration Statement on Form S-1 (Registration No. 333-14313)), as amended by that certain Amendment to Employment Agreement for Executive Officer dated December 13, 1998 **10.3 Employment Agreement dated November 1, 1996 by and between the Company and James L. Hopkins (incorporated by reference to Exhibit 10.44 to the Company's Registration Statement on Form S-1 (Registration No. 333-14313)), as amended by that certain Amendment to Employment Agreement for Executive Officer dated December 13, 1998 **10.4 Employment Agreement dated November 1, 1996 by and between the Company and J. Shane Long (incorporated by reference to Exhibit 10.45 to the Company's Registration Statement on Form S-1 (Registration No. 333-14313)), as amended by that certain Amendment to Employment Agreement for Executive Officer dated December 13, 1998 *10.5 Indemnification Agreement dated February 8, 1995 by and between William E. Ogle and the Company (incorporated by reference to Exhibit 10.23 to the Company's Registration Statement on Form S-1 (Registration No. 33-87612)) *10.6 Indemnification Agreement dated February 8, 1995 by and between Randall D. Eisenbach and the Company (incorporated by reference to Exhibit 10.24 to the Company's Registration Statement on Form S-1 (Registration No. 33-87612)) *10.7 Indemnification Agreement dated February 8, 1995 by and between James L. Hopkins and the Company (incorporated by reference to Exhibit 10.25 to the Company's Registration Statement on Form S-1 (Registration No. 33-87612)) *10.8 Indemnification Agreement dated February 8, 1995 by and between J. Shane Long and the Company (incorporated by reference to Exhibit 10.30 to the Company's Registration Statement on Form S-1 (Registration No. 33-87612)) *10.9 Indemnification Agreement dated February 8, 1995 by and between James J. Byrne and the Company (incorporated by reference to Exhibit 10.28 to the Company's Registration Statement on Form S-1 (Registration No. 33-87612)) *10.10 Indemnification Agreement dated February 8, 1995 by and between Lawrence E. Wesneski and the Company (incorporated by reference to Exhibit 10.29 to the Company's Registration Statement on Form S-1 (Registration No. 33-87612)) *10.11 Indemnification Agreement by and between Dennis G. Sabo and the Company (incorporated by reference to Exhibit 10.11 of the Company's Registration Statement on Form S-3, Registration No. 333-4684) *10.12 Indemnification Agreement by and between Bryan F. Keyes and the Company (incorporated by reference to Exhibit 10.12 of the Company's Registration Statement on Form S-3, Registration No. 333-4684)
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EXHIBIT PAGE --------- ----- *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)
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EXHIBIT PAGE --------- ----- 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)
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EXHIBIT PAGE --------- ----- 10.36 Lease Schedule No. 1000063250 dated as of October 31, 1997 to Master Lease Agreement dated October 30, 1996 between Banc One Leasing Corporation and the Company (incorporated by reference to Exhibit 10.36 of the Company's Registration Statement on Form S-3, Registration No. 333-4684) 10.37 Lease Schedule No. 1000063259 dated as of October 31, 1997 to Master Lease Agreement dated October 30, 1996 between Banc One Leasing Corporation and the Company (incorporated by reference to Exhibit 10.37 of the Company's Registration Statement on Form S-3, Registration No. 333-4684) 10.38 Lease Schedule No. 1000063905 dated as of December 15, 1997 to Master Lease Agreement dated October 30, 1996 between Banc One Leasing Corporation and the Company (incorporated by reference to Exhibit 10.38 of the Company's Registration Statement on Form S-3, Registration No. 333-4684) 10.39 Master Lease Amendment dated as of October 31, 1997 to Master Lease Agreement dated October 30, 1996 between Banc One Leasing Corporation and the Company (incorporated by reference to Exhibit 10.39 of the Company's Registration Statement on Form S-3, Registration No. 333-4684) 10.40 Selling Shareholder Agreement between the Company and each of Messrs. Ogle, Balthaser and Sims (incorporated by reference to Exhibit 10.40 of the Company's Registration Statement on Form S-3, Registration No. 333-4684) 10.41 Underwriting Agreement by and among the Company, William E. Ogle, Mark S. Sims, William D. Balthaser and CIBC Oppenheimer (in its own capacity and on behalf of an underwriting syndicate) (incorporated by reference to Exhibit 1.1 of the Company's Registration Statement on Form S-3, Registration No. 333-4684) **10.42 Letter Agreement dated December 11, 1998 between STB Systems, Inc. and Hoak Breedlove Wesneski & Co. 11.1 Intentionally omitted. 21 Subsidiaries of the Company (a) STB Assembly, Inc., a Texas corporation (b) STB de Mexico, S.A. de C.V., a Mexican corporation (c) Maquilados Continentales de Chihuahua, a Mexican corporation (an inactive shell corporation) (d) Symmetric Simulation Systems, Inc. (e) STB Systems, Inc., a Delaware corporation (an inactive shell corporation) +23 Consent of PricewaterhouseCoopers LLP **24 Powers of Attorney (included on first signature page) **27 Financial Data Schedule
- ------------------------ * Management contract or compensatory plan or arrangement. The Company will furnish a copy of any Exhibit listed above to any shareholder without charge upon written request to Mr. Bryan F. Keyes, Secretary, 3400 Waterview Parkway, Richardson, Texas 75080. ** Previously filed. + Filed herewith. 38 EX-23 2 EXHIBIT 23 EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in this Registration Statement on Form S-8, as amended by Post-Effective Amendment No. 1, of our report dated December 12, 1998, except as to Note 15, which is as of January 15, 1999 which appears in the 1998 Annual Report to Shareholders of STB Systems, Inc., which is incorporated by reference in STB Systems, Inc.'s Annual Report on Form 10-K/A for the year ended October 31, 1998. We also consent to the incorporation by reference of our report on the Financial Statement Schedule, which appears in such Annual Report on Form 10-K/A. PricewaterhouseCoopers LLP Dallas, Texas February 24, 1999 -----END PRIVACY-ENHANCED MESSAGE-----