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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to ________
Commission File Number 0-25580
DIAMOND MULTIMEDIA SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0390654
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2880 JUNCTION AVENUE, SAN JOSE, CALIFORNIA 95134
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 325-7000
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 __
The number of shares outstanding of the registrant's common stock at
September 30, 1996 was 34,279,267.
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DIAMOND MULTIMEDIA SYSTEMS, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I - FINANCIAL INFORMATION:
ITEM 1- Financial Statements
Consolidated Condensed Balance Sheets as of September 30, 1996
and December 31, 1995 3
Consolidated Condensed Statements of Operations for the three
and nine months ended September 30, 1996 and 1995 4
Consolidated Condensed Statements of Cash Flows
for the nine months ended September 30, 1996 and 1995 5
Notes to Consolidated Condensed Financial Statements 6
ITEM 2 - Management's Discussion and Analysis of
Financial Condition And Results of Operations 7
PART II - OTHER INFORMATION
ITEM 1 - Legal proceedings 19
ITEM 2 - Changes in securities 19
ITEM 3 - Defaults Upon Senior Securities 19
ITEM 4 - Submission of Matters to a Vote of Security Holders 19
ITEM 5 - Other Information 19
ITEM 6 - Exhibits and Reports on Form 8-K 19
SIGNATURE(S) 20
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
DIAMOND MULTIMEDIA SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 DECEMBER 31, 1995
------------------ -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 121,783 $ 93,971
Short-term investments -- 12,232
Trade accounts receivable, net of allowance for doubtful accounts
of $2,043 and $1,959 as of September 30, 1996 and
December 31, 1995 68,629 90,640
Other receivables -- 13,129
Inventories 64,474 89,635
Prepaid expenses, other current assets and deferred income taxes 29,251 23,034
--------- ---------
Total current assets 284,137 322,641
Property, plant and equipment, net 12,589 10,152
Other assets 3,263 6,385
Goodwill and other intangibles, net 17,536 12,551
--------- ---------
Total assets $ 317,525 $ 351,729
========= =========
LIABILITIES
Current liabilities:
Current portion of long-term debt $ 9,740 $ 18,077
Trade accounts payable 74,291 94,920
Other accrued liabilities 11,690 16,557
--------- ---------
Total current liabilities 95,721 129,554
Long-term debt, net of current portion 5,520 11,705
Deferred income taxes 991 1,860
--------- ---------
Total liabilities 102,232 143,119
--------- ---------
STOCKHOLDERS' EQUITY
Preferred stock, par value $.001; Authorized - 8,000 shares at September 30,
1996 and December 31, 1995; none issued
and outstanding -- --
Common stock, par value $.001;
Authorized - 75,000 at September 30, 1996 and December 31, 1995 Issued and
outstanding - 34,279 at September 30, 1996 and 34,673
at December 31, 1995 34 35
Additional paid-in capital 304,877 306,697
Distributions in excess of net book value (56,775) (56,775)
Accumulated deficit (32,843) (41,347)
--------- ---------
Total stockholders' equity 215,293 208,610
--------- ---------
Total liabilities and stockholders' equity $ 317,525 $ 351,729
========= =========
</TABLE>
The accompanying notes are an integral part
of these consolidated condensed financial statements.
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DIAMOND MULTIMEDIA SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
(UNAUDITED) (UNAUDITED)
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
------------- ------------- ------------- -------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 123,729 $ 102,193 $ 431,553 $ 277,579
Cost of sales 98,706 77,640 355,301 209,254
--------- --------- --------- ---------
Gross profit 25,023 24,553 76,252 68,325
--------- --------- --------- ---------
Operating expenses:
Research and development 4,435 2,318 13,869 6,562
Selling, general and administrative 16,587 8,735 46,421 23,957
Amortization of intangibles 1,292 -- 3,686 --
Write-off of in-process technology -- 38,710 -- 38,710
--------- ---------
Total operating expenses 22,314 49,763 63,976 69,229
--------- --------- --------- ---------
Income (loss) from operations 2,709 (25,210) 12,276 (904)
Interest income (expense), net 544 168 1,429 (1,299)
Other expense, net (59) (50) (99) (50)
--------- --------- --------- ---------
Income (loss) before provision for income taxes 3,194 (25,092) 13,606 (2,253)
Provision for income taxes 1,094 5,275 5,102 14,182
--------- --------- --------- ---------
Net income (loss) $ 2,100 ($ 30,367) $ 8,504 ($ 16,435)
--------- --------- --------- ---------
Net income (loss) per share $ 0.06 ($ 1.08) $ 0.24 ($ 0.66)
========= ========= ========= =========
Shares used in computing per share amounts 34,930 28,014 35,051 24,949
</TABLE>
The accompanying notes are an integral part of these consolidated
condensed financial statements.
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DIAMOND MULTIMEDIA SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------
SEPTEMBER 30, SEPTEMBER 30,
1996 1995
---- ----
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 8,504 ($ 16,435)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities
Write-off of in-process technology 38,710
Depreciation and amortization 6,290 835
Provision for doubtful accounts 606 400
Provision for excess and obsolete inventories 13,767
Changes in assets and liabilities:
Trade accounts and other receivables 34,534 (38,018)
Inventories 3,303 (36,181)
Prepaid expenses, deferred income taxes and other assets (6,288) (2,537)
Trade accounts payable and other liabilities (26,365) 29,832
Other (99)
--------- ---------
Net cash provided by (used in) operating activities 34,351 (23,493)
--------- ---------
Cash flows from investing activities:
Cash acquired in acquisition of Supra Corporation 919
Purchases of property and equipment (5,041) (3,705)
Purchases of short-term investments (10,534)
Proceeds from the sale of short-term investments 12,232 15,758
--------- ---------
Net cash provided by investing activities 7,191 2,438
--------- ---------
Cash flows from financing activities:
Repayment of Mandatorily Redeemable Preferred Stock (29,174)
Proceeds from issuance of common stock 813 707
Repayment of subordinated promissory notes (34,167)
Repayment of short-term notes payable to stockholders
in Reorganization (82,664)
Proceeds from Initial Public Offering, less related expenses 117,188
Proceeds from term loans and revolving credit facilities 21,546 26,230
Payments of term loans and credit facilities (35,679) (25,646)
Proceeds from capital lease financings 197 1,776
Payments of capital lease financings (587) (154)
Repurchases of common stock (20) (13)
--------- ---------
Net cash used in financing activities (13,730) (25,917)
--------- ---------
Net increase (decrease) in cash and cash equivalents 27,812 (46,972)
Cash and cash equivalents at beginning of period 93,971 57,164
--------- ---------
Cash and cash equivalents at end of period $ 121,783 $ 10,192
========= =========
Supplemental Disclosure of cash flow information:
Income taxes paid during the period $ 13,293 $ 11,735
========= =========
Interest paid during the period $ 1,260 $ 1,940
========= =========
Supplemental disclosure of non-cash financing activities:
Issuance of common stock in settlement of Note
Receivable $ 3,196 $ --
--------- ---------
Issuance of common stock in settlement of
contingencies in Spea acquisition $ 580 $ --
========= =========
Issuance of common stock and options for Supra
Corporation $ -- $ 53,733
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
condensed financial statements.
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DIAMOND MULTIMEDIA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared by the
Company without audit in accordance with generally accepted accounting
principles for interim financial information and pursuant to rules and
regulations of the Securities and Exchange Commission. In the opinion of
management, all adjustments (consisting only of normal recurring adjustments)
considered necessary for a fair presentation have been included. These financial
statements should be read in conjunction with the Company's consolidated
financial statements and notes thereto contained in the Company's Form 10-K for
the fiscal year ended December 31, 1995.
The Company operates under a 52-53 week fiscal year with thirteen week quarters
that end on the Sunday closest to calendar quarter end. For convenience of
presentation, the accompanying consolidated financial statements have been shown
as ending on September 30.
Operating results for the quarter and the nine months ended September 30, 1996
may not necessarily be indicative of the results to be expected for any other
interim period or for the full year.
2. INVENTORIES
Inventories are stated at the lower of cost (determined on a first-in, first-out
basis) or market. Inventories consisted of (in thousands):
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
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(Unaudited)
<S> <C> <C>
Raw materials $23,646 $42,194
Work in process 26,163 33,597
Finished goods 14,665 13,844
------- -------
$64,474 $89,635
======= =======
</TABLE>
3. SPEA PURCHASE PRICE ALLOCATION
During the three and six months ended June 30, 1996, the Company adjusted the
purchase price related to the Spea Software AG acquisition that occurred during
November 1995. The adjustments related primarily to inventory impairments that
existed at the date of acquisition and certain unfavorable purchase commitments.
These adjustments resulted in an increase of goodwill of $8.1 million.
Under the terms of the acquisition agreement, a certain number of shares of the
Company's common stock were withheld pending the outcome of certain
contingencies. During the second quarter of 1996, approximately 61,000 shares of
the Company's common stock were issued in settlement of the contingencies
resulting in an increase of goodwill of $0.6 million.
4. LITIGATION
The Company has been named as a defendant in several putative class action
lawsuits which were filed in June and July 1996 in the California Superior Court
for Santa Clara County and the U.S. District Court for the Northern District of
California. Certain executive officers and directors of the Company are also
named as defendants. The plaintiffs purport to represent a class of all persons
who purchased the Company's Common Stock between October 26, 1995 and June 20,
1996 (the "Class Period"). The complaints allege claims under
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the federal securities laws and California law. The plaintiffs allege that the
Company and the other defendants made various material misrepresentations and
omissions during the Class Period. The complaints do not specify the amount of
damages sought. The Company believes that it has good defenses to the claims
alleged in the lawsuits and will defend itself vigorously against these actions.
These cases are in the early stages and no schedule for the litigation has been
set. The ultimate outcome of these actions cannot be presently determined.
Accordingly, no provision for any liability or loss that may result from
adjudication or settlement thereof has been made in the accompanying
consolidated financial statements. In addition, a shareholder has filed a
shareholder derivative action in California Superior Court purportedly brought
on behalf of the Company against certain of its officers and directors. The
derivative action asserts claims of breach of fiduciary duty and related state
law claims arising out of the same facts as the state and federal class actions.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The discussion and analysis below contains trend analysis and other
forward-looking statements within the meaning of Section 27A of the Securities
and Exchange Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Actual results could differ materially from those projected in the
forward-looking statements as a result of the risk factors set forth under
"Certain Factors That May Affect Future Performance" below and elsewhere in this
report.
The following discussion should be read in conjunction with the Company's
consolidated financial statements and the notes thereto. All references to years
represent fiscal years unless otherwise noted.
OVERVIEW
The Company develops, manufactures, markets and supports multimedia and
connectivity subsystems for IBM-compatible personal computers ("PCs") and
Macintosh computers. On September 20, 1995, the Company acquired Supra
Corporation ("Supra"), a supplier of fax/modem products, including related
software, for the PC and Macintosh markets. On November 15, 1995, the Company
acquired SPEA Software AG ("Spea"), a German corporation. Spea develops, markets
and supports add-in graphics and multimedia accelerator subsystems for PCs and
3D graphics accelerators for computer-aided design ("CAD") applications. Both
acquisitions have been accounted for as purchase business combinations.
NET SALES
Net sales for the third quarter of 1996 increased $21.5 million (21%) to
$123.7 million compared to the corresponding prior year period while net sales
for the first nine months of 1996 increased $154 million (55%) to $431.6 million
compared to the corresponding prior year period. The increases in net sales were
primarily attributable to the revenues generated by the growth in demand for the
Stealth series of graphics accelerator cards and the revenues generated by the
recently acquired subsidiaries of Supra and Spea, which together amounted to
approximately $28.1 million and $124.5 million for the third quarter and first
nine months of 1996, respectively. Because the acquisitions were accounted for
as purchases, the results of operations for the third quarter and the first nine
months of 1995 include only ten days of Supra's operations and none for Spea.
These increases in net sales attributable to Supra and Spea were offset in the
third quarter and the first nine months of 1996 by declining unit prices, a
decline in sales of the Viper and Speedstar series of graphics accelerator cards
as these products were supplanted by the new Stealth product line, and a
decrease in the sale of multimedia upgrade kits.
The increase in net sales also reflected an increase in international sales,
which represented 33% in the third quarter of 1996 compared to 30% in the third
quarter of 1995 and 34% in the first nine months of 1996 compared to 32% in the
first nine months of 1995. These increases in international sales are
attributable, in part, to actions taken by the Company during 1995 and 1996
including the Company's acquisition of Spea, increases in sales to international
OEMs, opening of new offices in the United Kingdom, France and Singapore and the
launch of sales efforts in South America and South Korea.
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GROSS PROFIT
Gross profit for the third quarter of 1996 increased $0.5 million (2%) to
$25 million compared to the third quarter of 1995 and increased $7.9 million
(12%) to $76.3 million in the first nine months of 1996 compared to the
corresponding period last year. Gross margin (gross profit as a percentage of
sales) decreased to 20.2% of net sales during the third quarter of 1996 from 24%
for the corresponding period of 1995 primarily due to lower unit prices across
most product lines. Gross margin decreased to 17.7% for the first nine months of
1996 from 24.6% for the corresponding period of 1995 primarily due to a charge
in the second quarter of 1996 of approximately $10 million, reflecting increased
inventory reserves and expected customer price protection claims related to the
Diamond Multimedia Edge 3D(R) product, as well as lower unit prices across most
product lines and price protection credits issued to retail customers as a
result of price decreases on Diamond Multimedia products held in their
inventory.
RESEARCH AND DEVELOPMENT
Research and development (R&D) expenses increased $2.1 million (91%) and
$7.3 million (111%) for the third quarter and the first nine months of 1996,
respectively, compared to the corresponding periods in 1995. As a percentage of
sales, R&D expenses were 3.6% and 2.3% in the third quarter of 1996 and 1995,
respectively, and 3.2% and 2.4% in the first nine months of 1996 and 1995,
respectively. These increases were due primarily to higher personnel-related
expenses and, to a lesser extent, the material and outside service costs
associated with new product development, including products that will offer
various functions or combinations of functions including graphics, digital
video, 3D animation, 3D CAD, sound, ISDN adapter, analog modem, telephony,
television, MPEG-2 and other functions increasingly being implemented on
personal computers. The increases in expenses as a percentage of net sales
resulted primarily from the significant increase in the Company's engineering
staff and the related occupancy costs. This increase in spending is also
attributable to the acquisitions of Supra and Spea (of which only ten days of
Supra's operations were included in operating results for the third quarter and
nine months of 1995), as well as the continued expansion of new product
development activities.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative (SG&A) expenses increased $7.9 million
(90%) and $22.5 million (94%) in the third quarter and the first nine months of
1996, respectively, compared to the corresponding periods in 1995. As a
percentage of sales, SG&A were 13.4% and 8.5% in the third quarters of 1996 and
1995, respectively, and 10.8% and 8.6% for the first nine months of 1996 and
1995, respectively. The increase in expenses, both in absolute dollars and as a
percentage of sales, was due to higher costs related to sales incentive and
promotion programs, including a channel sales incentive program that was
implemented during the third quarter of 1996, and to higher selling and
marketing expenses associated with increased sales. The Company intends to
continue selected channel sales incentive programs for the foreseeable future.
Also, the increase in expenses was due to higher personnel-related expenses
associated with increased general and administrative staffing to handle the
expansion in the Company's overall level of business and to improve the
Company's systems and procedures infrastructure, as well as higher legal expense
associated with certain ongoing litigation. Further, the increase in spending is
also attributable to the acquisitions of Supra and Spea (of which only ten days
of Supra's operations were included in operating results for the third quarter
and nine months of 1995).
AMORTIZATION OF INTANGIBLE ASSETS
The Company incurred amortization expenses of $1.3 million and $3.7 million
in the third quarter and first nine months of 1996, respectively. These expenses
relate to amortization of purchased technology and goodwill from the Supra and
Spea acquisitions which occurred in the third and fourth quarters of 1995,
respectively.
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INTEREST INCOME (EXPENSE)
Interest income was $544,000 and $1,429,000 in the third quarter and the
first nine months of 1996 compared to $168,000 in the third quarter of 1995 and
interest expense of $1,299,000 in the first nine months of 1995. Interest income
in the third quarter and the first nine months of 1996 was generated from the
Company's cash and short-term investments, offset in part by interest expense on
outstanding borrowings. The interest income for the third quarter of 1995 was
generated from the Company's cash and short-term investments while the interest
expense during the first nine months of 1995 was due primarily to interest
charges on certain debt that was only partially offset by interest income earned
during the same period.
PROVISION FOR INCOME TAXES
The Company's effective tax rate for the third quarter and first nine
months of 1996 was 34.3% and 37.5%, respectively, based upon an estimate of the
annual effective tax rate. The rate for the third quarter of 1996 incorporates
the impact of a decline in the estimated annual rate from that of the first six
months of 1996 resulting primarily from lower state income taxes. For the third
quarter and first nine months of 1995, the Company provided for income taxes on
pre-tax losses due to the write-off of $38.7 million of in-process technology
related to the acquisition of Supra, which was not deductible for tax purposes.
Without the one-time write-off, the Company's effective tax rates for the third
quarter and first nine months of 1995 would have been 38.7% and 38.9%,
respectively. Differences from the statutory rates consist principally of the
effect of state income taxes, the research and development tax credit, federal
tax-exempt interest income and tax benefits from the Company's foreign sales
corporation.
LIQUIDITY AND CAPITAL RESOURCES
Cash and equivalents increased by $27.8 million during the first nine months
of 1996. Operating activities provided $34.4 million in cash and the primary
sources of cash were as follows: net income of $8.5 million; a decrease in
receivables, net of provision for doubtful accounts, of $35.1 million; a
decrease in inventories, net of provision for excess and obsolete inventories,
of $17.1 million; and depreciation and amortization of $6.3 million. These
sources of cash from operating activities were offset, in part, by a decrease in
accounts payable and other liabilities of $26.4 million and an increase of $6.3
million in prepaid expenses, deferred taxes and other assets.
The Company provided $7.2 million in cash from investing activities
primarily due to proceeds from sales of short-term investments of $12.2 million,
offset in part by purchases of property and equipment of $5 million. Net cash
used in financing activities was $13.7 million, primarily due to payments of
$35.7 million on term loans and revolving credit facilities, offset in part by
$21.5 million of proceeds from these facilities and $0.8 million from the
issuance of common stock.
At September 30, 1996, the Company had $121.8 million of cash and cash
equivalents. Further, as of such date, the Company had lines of credit and bank
credit facilities totaling $44.5 million, of which $28.5 million was unused and
available.
The Company currently expects to spend approximately $6 million for capital
equipment in 1996, principally relating to computer and office equipment. The
Company believes that its cash balances, short-term investments and available
credit under existing bank lines will be sufficient to meet anticipated
operating and investing requirements for the foreseeable future. There can be no
assurance that additional capital beyond the amounts currently forecasted by the
Company will not be required nor that any such required additional capital will
be available on reasonable terms, if at all, at such time or times as required
by the Company.
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CERTAIN FACTORS THAT MAY AFFECT FUTURE PERFORMANCE
In addition to other information in this Form 10-Q, the following are
important factors that should be considered carefully in evaluating the Company
and its business.
POTENTIAL FLUCTUATIONS IN FUTURE OPERATING RESULTS
The Company's future operating results may vary significantly from period to
period as a result of a number of factors, including the volume and timing of
orders received during the period, the timing of new product introductions by
the Company and its competitors, product line maturation, the impact of price
competition on the Company's average selling prices, the availability and
pricing of components for the Company's products, changes in product or
distribution channel mix, the level of inventory carried by the Company's
distribution and retail channel customers, and product returns or price
protection charges from customers.
Many of these factors are beyond the Company's control. For example, the
Company's operating results in the second and third quarters of 1996 were
adversely impacted by significantly lower unit prices and there can be no
assurance that lower unit prices will not affect the Company's operating results
in the future. In addition, due to the short product life cycles that
characterize the Company's markets, the Company's failure to successfully
introduce competitive products in a timely manner would adversely affect
operating results for one or more product cycles. The volume and timing of
orders received during a quarter are difficult to forecast. Customers generally
order on an as-needed basis and, accordingly, the Company has historically
operated with a relatively small backlog. Also, during periods of uncertainty in
the personal computer industry's outlook for future demand or pricing, the
Company's customers may choose to draw down their inventory levels thereby
adversely impacting the Company's revenues during the period of adjustment.
Moreover, as often occurs in the personal computer industry, a disproportionate
percentage of the Company's net sales in any quarter may be generated in the
last month of a quarter. As a result, a shortfall in sales in any quarter as
compared to expectations may not be identifiable until near the end of the
quarter. In addition, from time to time, a significant portion of the Company's
sales are derived from a limited number of customers, the loss of one or more of
which could adversely impact operating results.
Notwithstanding the difficulty in forecasting future sales and the
relatively small level of backlog at any given time, the Company generally must
plan production, order components and undertake its development, sales and
marketing activities and other commitments months in advance. Accordingly, any
shortfall in revenues in a given quarter may impact the Company's operating
results and cash balances in a magnified way due to the Company's inability to
adjust expenses or inventory during the quarter to match the level of revenues
for the quarter. Excess inventory could also result in cash flow difficulties as
well as added expenses associated with inventory write-offs or sell-offs.
Conversely, in its efforts to adjust inventory levels to a slower order rate,
the Company may overcorrect its purchase orders and inventory levels, thereby
experiencing stock outs and delivery delays, and negatively impacting its
revenue, market share and customer satisfaction.
The Company's gross margins are impacted by short product life cycles, the
mix of products sold, the mix of distribution channels, pricing pressures, the
availability and cost of products and components from the Company's suppliers,
component price inflation or deflation, end-of-life inventory write downs and
general economic conditions. For example, the Company has increased in recent
periods its proportionate sales to OEMs, which historically have yielded lower
gross margins, and to the retail/mass merchant channel, which typically provides
higher gross margins than OEM sales but requires higher sales and marketing
expenses and carries price-protection, stock-rotation and customer-return
liabilities. Individual product lines generally provide higher margins at the
beginning of the typical six-to-twelve-month product life cycle, and lower
margins as the product line matures. Product lines with less technology
value-added, however, such as multimedia upgrade kits, generally provide lower
margins than product lines with higher technology value-added. Moreover, if a
product's life should end prior to expectations, then there is also a risk of
unexpected end-of-life obsolete inventory charges, which could depress the
Company's gross margin in the affected period.
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The Company's markets are characterized by intense ongoing competition and a
trend of declining average selling prices. The decline in selling prices may
cause the amount of revenues in any one quarter to be lower than the preceding
quarter even though more units were sold during the current quarter than the
preceding quarter. This trend of declining prices was particularly strong during
the first nine months of 1996. For example, the Company's net revenue grew only
by approximately 3% from the second quarter to the third quarter of 1996, even
though net unit shipments grew by almost 30%. Accordingly, the Company's average
selling prices, revenue and margins may decline in the future from the levels
experienced to date. The Company's gross margins may also be adversely affected
by shortages of and higher prices for key components for the Company's products,
including its recently acquired modem and fax/modem products, its 3-D
accelerators and its planned DVD/MPEG-2 products, which have been impacted from
time-to-time by a scarcity in the supply of chipsets and other components. In
addition, the Company's revenues, average selling prices and gross margins may
be adversely affected if the market prices for certain components used or
expected to be used by the Company, such as DRAMs, VRAMs, CD-ROMs, DVD drives or
multimedia controller chips, decline more rapidly than the Company is able to
process its component inventory bought earlier at higher prices into finished
products, book and ship the associated orders, and move such products through
third-party distribution channels, some of which may be price protected, to the
final customer. For example, operating results were negatively impacted in the
second and third quarters of 1996 by declining market prices for the Company's
products. Conversely, an increase in the price of semiconductor components may
adversely impact the Company's margin due to higher unit costs, and a decrease
in the supply of such components may adversely impact the Company's shipments
and revenue, in the affected period.
SEASONALITY
The Company believes that, due to industry seasonality, demand for its
products is strongest during the fourth calendar quarter of each year. This
seasonality may become more pronounced in the future to the extent that a
greater proportion of the Company's sales consist of sales into the retail/mass
merchant channel or to the extent that PCs become more consumer-oriented and
entertainment-driven products. Also, to the extent the Company is successful in
expanding its consumer-oriented markets or European operations, both internally
and through its acquisition of Spea, it may experience relatively weak demand in
third calendar quarters due to historically weak summer sales, particularly in
Europe. The potential effect of seasonality on the Company's revenue is
illustrated through market research results published by International Data
Corporation showing that personal computer sales in the U.S. are spread
across the four (4) calendar quarters in the ratio of 22%, 22%, 27% and 29%,
respectively. This is not intended, however, to be a prediction of how the
Company's sales will develop.
MANAGEMENT OF GROWTH; INTEGRATION OF SUPRA AND SPEA
In recent years, the Company has experienced a significant expansion in the
overall level of its business and the scope of its operations, including
manufacturing, research and development, marketing, technical support, customer
service, sales and logistics. In addition, through its acquisitions of Supra in
September 1995 and Spea in November 1995, the Company increased the scope of its
product lines and multinational operations. This expansion in scope has resulted
in a need for significant investment in infrastructure and systems, as well as
the integration of Supra and Spea into the Company's infrastructure. This
requirement includes, without limitation, securing adequate financial resources
to successfully integrate and manage the acquired businesses, retention of key
employees, integration of management information, control and telecommunications
systems, consolidation of geographically dispersed manufacturing and
distribution facilities, consolidation and coordination of suppliers,
rationalization of distribution channels, and integration of various functions
and groups of employees, each of which could pose significant challenges.
Moreover, Spea historically has not been profitable and the Company's management
has taken significant steps to reduce expenses at Spea and integrate its
operations with those of the Company. Accordingly, the Company has reorganized
Spea to function as a product localization, sales, marketing, technical support
and customer service operation for Europe, and a product development and launch
facility for professional 3D, CAD, digital video and other selected products for
worldwide markets. The Company discontinued manufacturing, test,
11
<PAGE> 12
packaging and logistics operations at Spea effective October 1, 1996. Since the
acquisition of Spea in November 1995, the Company's efforts to improve Spea's
financial performance have, however, been adversely impacted by a recession in
Germany and the associated downturn in the PC market and there can be no
assurance that the Company will be successful in improving the financial
performance of its operations in Europe.
The Company's future operating results will depend in large measure on its
success in implementing operating, manufacturing and financial procedures and
controls, improving communication and coordination among different operating
functions, integrating certain functions such as sales, procurement and
manufacturing, strengthening management information and telecommunications
systems, and continuing to hire additional qualified personnel in all areas.
There can be no assurance that the Company will be able to manage these
activities and implement these additional systems and controls successfully, and
any failure to do so could have a material adverse effect upon the Company's
operating results.
SHORT PRODUCT LIFE CYCLES
The market for the Company's products is characterized by frequent new
product introductions and rapid product obsolescence. These factors typically
result in short product life cycles, frequently ranging from six to twelve
months. The Company must continually monitor industry trends and make difficult
choices regarding the selection of new technologies and features to incorporate
into its products and the timing of when to introduce such new products, which
may impair orders for or prices of the Company's existing products. Each new
product cycle presents new opportunities for current or prospective competitors
of the Company to gain a product advantage or increase their market share. If
the Company does not successfully introduce new products within a given product
cycle, the Company's sales will be adversely affected for that cycle and
possibly for subsequent cycles. Any such failure could also impair the Company's
brand name and ability to command retail shelf space in future periods.
Moreover, because of the short product life cycles coupled with the long lead
times for many components used in the Company's products, the Company may not be
able, in a timely manner, to reduce its procurement commitments, production or
inventory levels in response to unexpected shortfalls in sales, technological
obsolescence or declines in prices or, conversely, to increase production in
response to unexpected increases in demand, particularly if the demand increase
is in a new product or new technology area where component supply may be hard to
secure. Therefore, changes in actual or expected demand could result in excess
inventory, inventory write downs, price protection and gross margin compression
or, conversely, in lost sales and revenue compression due to product
unavailability.
NEW OPERATING SYSTEMS
The PC industry has recently been characterized by significant operating
system changes, such as the introduction of OS/2 Warp in 1994, Windows95 in 1995
and the recent introduction of Windows NT 4.0. While new operating systems can
provide new market opportunities, such as the growing market for graphical user
interface ("GUI") accelerators that occurred with the introduction of Windows
3.0 and the expected growth in the PC games market with the introduction of
Windows95, new operating systems also place a significant research and
development burden on the Company. New drivers, applications and user interfaces
must be developed for the new operating systems in order to maintain revenue
levels. Perhaps more significantly, such drivers, applications and interfaces
customarily are ported to the recently shipped portion of the Company's
installed base. This effort involves a substantial software engineering,
compatibility testing and customer technical support investment with only a
limited near-term incremental revenue return since these driver updates are
usually provided via electronic distribution free to the Company's installed
customer base. Yet the installation of this software may result in technical
support calls, thereby generating expenses that do not have offsetting revenue.
Moreover, during the introductory period of a major new operating system release
such as Windows95, such installed base support may reduce the research and
development and customer technical support resources available for launching new
products. For example, after substantial investment in porting the Company's
software, graphics accelerator and modem products over to Windows95, the Company
was in mid-1996 still developing for full gold release improved, accelerated
Windows95 drivers for the Viper Pro Video series, the SpeedStar 64 Graphics
series, and the MVP 2000 MPEG-1 accelerator add-
12
<PAGE> 13
on cards for the Stealth 64 Video 3000 series. While these products do not
represent a substantial current or future revenue opportunity for the Company,
the Company nevertheless believes that it is important to make the significant
software development investment represented by these efforts in order to
maintain relations with its installed customer base and its reputation for
reliable on-going product support. Furthermore, new operating systems for which
the Company prospectively develops driver support may not be successful, or the
drivers themselves may not be successful or accepted by customers, and a
reasonable financial return on the corollary research and development investment
may not be achieved.
MARKET ANTICIPATION OF NEW PRODUCTS, NEW TECHNOLOGIES, OR LOWER PRICES
Since the environment in which the Company operates is characterized by
rapid new product and technology introductions and generally falling prices for
existing products, the Company's customers may from time to time postpone
purchases in anticipation of such new product introductions or lower prices. If
such anticipated changes are viewed as significant by the market, such as
perhaps the introduction of a new operating system or microprocessor
architecture, then this may have the effect of temporarily slowing overall
market demand and negatively impacting the Company's operating results. For
example, the substantial pre-publicity surrounding the release of Windows95 may
have contributed to a slowing of the consumer PC market in the summer of 1995,
and to a slowing in the corporate PC market prior to the recent release of
Windows NT 4.0 and the Pentium Pro. Moreover, a similar reaction may occur in
the modem market with the recent announcements of 56 kilobits per second (Kbps)
technology to be available early in 1997, or in the overall PC market in
anticipation of Intel Corporation's release of MMX-based microprocessors in
1997. Also, if the Company announces a product that the market views as having
more desirable features or pricing than the Company's existing products, demand
for such existing products may be curtailed even though the new product is not
yet available. Similarly, if the Company's customers anticipate that the Company
may reduce its prices in the near term, they may curtail their purchases until
such price reductions are effected, reducing the Company's shipments and
revenue. The Company believes that this was a major feature in the first nine
(9) months of 1996 affecting the market for its products and for PCs in general,
due to rapidly falling prices for random access memory. In general, market
anticipation of new products, new technologies or lower prices can negatively
impact the Company's operating results in a given period.
COMPONENT SHORTAGES; RELIANCE ON SOLE OR LIMITED SOURCE SUPPLIERS
The Company is dependent on sole or limited source suppliers for certain key
components used in its products, particularly application specific integrated
circuit ("ASIC") chipsets that provide graphics, digital video, 3D CAD,
television (TV), sound, 3D animation, telephony and other multimedia functions,
VRAM and DRAM memory, TV tuners and fax/modem chipsets, including voice modem
and simultaneous voice and data ("SVD") modem chipsets. Although the price and
availability of semiconductor components has improved during the first nine
months of 1996, these components are periodically in short supply and on
allocation by semiconductor manufacturers. For example, it is expected that
high-performance DRAMs will be in short supply during the latter part of 1996
and into early 1997, and components for 56Kbps modems will also likely be in
short supply. The Company's dependence on sole or limited source suppliers, and
the risks associated with any delay or shortfall in supply, can be exacerbated
by the short life cycles that characterize multimedia and communications ASIC
chipsets and the Company's products in general. Although the Company maintains
ongoing efforts to obtain required supplies of components, including working
closely with vendors and qualifying alternative components for inclusion in the
Company's products, component shortages continue to exist from time to time, and
there can be no assurances that the Company can continue to obtain adequate
supplies or obtain such supplies at their historical cost levels. Conversely, in
its attempt to counter actual or perceived component shortages, the Company may
overpurchase certain components, resulting in excess inventory and reducing the
Company's liquidity or, in the event of unexpected inventory obsolescence or a
decline in the market value of such inventory, causing inventory write-offs or
sell-offs that adversely affect the Company's gross margin.
From time to time, as noted above, supply-demand conditions for
semiconductor components may change. During periods of oversupply, prices are
likely to fall and certain vendors of such semiconductor chips may
13
<PAGE> 14
liquidate their inventories in a rapid manner. If such semiconductor vendors are
suppliers to the Company's competitors, then such actions could enable
competitors of the Company to enjoy, at least on a temporary basis, a cost
advantage vis-a-vis the Company, and any resultant price reduction for such
competitors' products could require the Company to reduce its prices, thereby
depressing the Company's margins or revenues in one or more operating periods.
During periods of oversupply and the associated price deflation of
semiconductor components, customers of the Company, particularly those
comprising channels that do not receive price protection from the Company, may
seek to draw down the inventory that they hold since such inventory may bear a
price deflation risk and, in any case, ties up cash. In this regard, the
Company's sales to OEMs and European distributors declined during the second and
third quarters of 1996 compared to the first quarter of 1996, due in part to
customers drawing down their inventory levels in response to significant price
deflation of semiconductor components. As a consequence, the Company may see its
orders, unit shipments and average selling prices depressed from time to time
during such price-deflation and inventory-reduction periods, which could
adversely affect revenues or gross margin in the related operating period or
periods.
Conversely, when the PC or PC peripherals markets emerge from a period of
oversupply, it is normal for most manufacturers, distributors and resellers to
have substantially drawn down their inventory levels and to be unprepared for a
possible rapid increase in sales. In such an event, the Company may not have
enough inventory, scheduled component purchase orders or available manufacturing
capacity to meet market demand, thereby missing orders and revenue
opportunities, and perhaps losing market share. For example, the Company's
significant unshipped backlog early in the fourth quarter of 1996 may indicate
that the current environment is reflecting such a scenario.
DEPENDENCE ON GRAPHICS AND MULTIMEDIA ACCELERATOR MARKET
Sales of graphics and multimedia accelerator subsystems accounted for
greater than 75% of the Company's revenues in the third quarter and first nine
months of 1996 and greater than 85% in corresponding prior year periods.
Although the Company has introduced audio, video and ISDN subsystems and
acquired Supra Corporation, a supplier of internal and external fax/modems,
graphics and multimedia accelerator subsystems are expected to continue to
account for a substantial majority of the Company's sales for the foreseeable
future. A decline in demand or average selling prices for graphics or multimedia
accelerator subsystems, whether as a result of new product introductions, price
competition, excess supply, widespread cost reduction, technological change,
incorporation of the products' functionality onto personal computer motherboards
or otherwise, would have a material adverse effect on the Company's sales and
operating results.
MIGRATION TO PERSONAL COMPUTER MOTHERBOARDS; OEM RISKS
The Company's graphics and multimedia accelerator subsystems are individual
products which function with personal computers to provide additional multimedia
functionality. Historically, as a given functionality becomes technologically
stable and widely accepted by personal computer users, the cost of providing
such functionality is typically reduced by means of large scale integration onto
semiconductor chips, which can be subsequently incorporated onto personal
computer motherboards. The Company expects that such migration could, in fact,
occur with respect to the functionality provided by the Company's current
products. While the Company believes that a market will continue to exist for
add-in subsystems that provide advanced functions and offer flexibility in
systems configuration, such as 3D graphics acceleration and telephony modems
supporting speakerphone functions, there can be no assurance that the
incorporation of new multimedia functions onto personal computer motherboards or
into the CPU microprocessor, such as under Intel's MMX or accelerated graphics
port (AGP) technologies, will not adversely affect the future market for the
Company's products. In large part, the continuation of a robust market for
add-in graphics subsystems may depend on the timing and market acceptance of 3-D
graphics and digital video acceleration. This, in turn, may depend on the
availability of compelling 3-D and MPEG-2 content, including games and
entertainment, broadcast digital video, PC video phones, video conferencing, and
digital video and 3D VRML on the Internet. Similarly, the robustness of the
modem market may depend largely on the widespread availability of 56 Kbps and,
later,
14
<PAGE> 15
digital subscriber line (xDSL) modem technology. The timing of major technology
introductions and the market acceptance of these new technologies is largely out
of the control of the Company.
The Company currently has only a limited number of OEM customers. While the
Company is seeking to increase its sales to OEMs, certain OEMs maintain internal
add-in subsystem design and manufacturing capabilities or have long-standing
relationships with competitors of the Company, and there can be no assurance
that the Company will be successful in its efforts to increase its OEM sales. In
any case, it is expected that OEM revenue will carry a lower gross margin
percentage compared to sales to other channels due to perceived lower expenses
to support such OEM revenue and the buying power exercised by large OEMs.
Furthermore, the Company's products are priced and generally aimed at the higher
performance segment of the market. Therefore, to the extent that OEMs focus on
price rather than performance, an increase in the proportion of the Company's
sales to OEMs may result in an increase in the proportion of the Company's
revenue generated by lower-selling-price or lower-gross-margin products, which
could adversely affect future operating results.
COMPETITION
The market for the Company's products is highly competitive. The Company
competes directly against a large number of suppliers of add-in visual and audio
subsystems and data communications products, and indirectly against OEMs to the
extent they manufacture their own add-in subsystems or incorporate on personal
computer motherboards the functionality provided by the Company's products. In
addition, the Company's markets are expected to become increasingly competitive
as multimedia functions continue to converge and companies that previously
supplied products providing distinct functions (for example, companies in the
sound, fax/modem, telephony, digital signal processing, central processing unit
and motherboard markets) emerge as competitors across broader product
categories.
In addition, manufacturers of chipsets or other components used in the
Company's products could become future competitors of the Company to the extent
that such manufacturers elect to integrate forward into the add-in subsystem or
value-added software market, or as such multimedia chipset manufacturers provide
increasingly higher quality and more sophisticated software to their chipset
customers, including subsystem suppliers competitive to the Company. Also,
certain of the Company's current and potential competitors have significantly
greater market presence, name recognition and financial and technical resources
vis-a-vis the Company, and many have long-standing market positions and
established brand names in their respective markets. In addition, certain of the
Company's current and potential competitors also have a competitive cost
advantage from being located in areas that impose significantly lower taxes than
the United States or provide a substantially lower cost of labor. Many of the
Company's current and potential competitors also design and manufacture their
own graphics acceleration, video, sound, fax/modem or other multimedia
processing chipsets. While the Company believes that its semiconductor vendor
flexibility enables it to select, within certain limits, from among the most
advanced and price competitive chipsets available on the open market, the
captive semiconductor operations of certain of the Company's current and
potential competitors could provide significant advantages, including greater
control over semiconductor architecture and technology, component design,
component performance, systems and software design, availability and cost. Also,
the Company believes that certain of its current and potential competitors
compete largely on the basis of price, which may result in significant price
competition and lead to lower margins for the Company's products or otherwise
affect the market for the Company's products. To the extent that semiconductor
availability is relatively greater and software drivers and reference hardware
designs from multimedia chipset manufacturers are higher quality and more
sophisticated, then competitors who compete largely on price with little
engineering valued added are in a relatively improved position vis-a-vis the
Company. There can be no assurance that the Company will be able to continue to
compete successfully in its markets, or will be able to compete successfully
against current and new competition as the Company's technology, markets and
products continue to evolve.
15
<PAGE> 16
DISTRIBUTION RISKS; DIVERSIFICATION OF SALES CHANNELS
The Company sells its products to a domestic and international network of
distributors, retailers/mass merchants and OEM customers, and the Company's
success is dependent on the continued viability and financial stability of its
customer base. The computer distribution and retail/mass merchant industries
have historically been characterized by rapid change, including periods of
widespread financial difficulties and consolidations and the emergence of
alternative distribution channels. The loss of, or reduction in, sales to
certain of the Company's key customers could have a material adverse effect on
the Company's operating results, as could the failure of such customers to pay
their accounts receivables to the Company. Likewise, changes in distribution
channel patterns, such as increased commerce on the Internet or increased use of
catalog or consumer-oriented channels for personal computer sales, could affect
the Company in ways not yet known. Moreover, changes in the types of products
the Company sells toward more professional or commercial grade products, or
toward more communications-centric products, may require specialized value-added
reseller channels, relations with which the Company has only begun to establish.
The Company frequently grants limited rights to customers to return certain
unsold inventories of the Company's products in exchange for new purchases
("Stock Rotation"), as well as price protection on unsold inventory. Moreover,
certain of the Company's retail customers will readily accept returned product
from their own retail customers, and these returned products are, in turn,
returned to the Company for credit. The Company estimates returns and accrues
for potential price protection on unsold inventory. However, there can be no
assurance that these estimates or accruals will be sufficient, or that any
future returns or price reductions will not have a material adverse effect on
operating results, including through the mechanisms of Stock Rotation or price
protection, particularly in light of the rapid product obsolescence which often
occurs during product transitions. The short product life cycles of the
Company's products, the evolving markets for new multimedia and connectivity
technologies and the difficulty in predicting future sales increase the risk
that new product introductions, price reductions by the Company or its
competitors, or other factors affecting the personal computer and add-in
subsystem industry could result in significant product returns. In addition,
there can be no assurance that new product introductions by competitors or other
market factors, such as the integration of graphics acceleration or modem
connectivity by OEMs onto system motherboards, will not require the Company to
reduce prices in a manner or at a time that gives rise to significant price
protection charges and has a material adverse impact upon the Company's gross
margins.
RAPID TECHNOLOGICAL CHANGE
The market for the Company's products is characterized by rapidly changing
technology, evolving industry standards, frequent new product introductions and
rapid product obsolescence. For example, 3D technology is evolving rapidly in
the graphics industry and 56 Kbps technology is expected to be rapidly accepted
in the modem industry during 1997 and 1998. Product life cycles in the Company's
markets frequently range from 6 to 12 months. The Company's success will be
substantially dependent upon its ability to continue to develop and introduce
competitive products and technologies on a timely basis with features and
functionalities that meet changing customer requirements in a cost-effective
manner. Moreover, even if the Company is successful in developing and
introducing competitive new products, it must successfully manage the corollary
obsolescence and price erosion of its existing products and potential resulting
price protection charges and Stock Rotations from its distribution channels.
CAPITAL NEEDS; ACQUISITIONS
The financial obligations incurred by the Company as a result of the Supra
and, in particular, Spea acquisitions are expected to consume a portion of the
Company's available capital. There can be no assurance that additional capital
beyond the amounts currently forecasted by the Company will not be required or
that any required additional capital will be available on reasonable terms, if
at all, at such time or times as required by the Company. Any shortfall in
capital resources compared to the Company's level of operations, or any
inability to secure additional capital as needed, could impair the Company's
16
<PAGE> 17
ability to finance inventory, accounts receivable and other operational needs.
Such capital limitations could also impair the Company's ability to invest in
research and development, sales and marketing programs, customer service and
support, information technology, manufacturing and other operations, any of
which could have a material adverse effect on the Company's business and
operating results. Moreover, any need to raise additional capital through the
issuance of equity securities may result in additional dilution to earnings per
share.
RISKS OF INTERNATIONAL SALES
The Company's international sales are subject to a number of risks generally
associated with international business operations, including the effect on
demand for the Company's products in international markets as a result of a
strengthening or weakening U.S. dollar (or German mark, in the case of Spea),
the effect of currency fluctuations on consolidated multinational financial
results, any state-imposed restrictions on the repatriation of funds, any import
and export duties and restrictions, certain international economic conditions,
the expenses, time and technical resources required to localize the Company's
various products and to support local languages, the logistical difficulties of
managing multinational operations and dispersed product inventory designed or
manufactured to meet specific countries' requirements, and the delays and
expenses associated with homologating the Company's telecommunications products
and securing necessary governmental approvals for various countries. The
Company's net sales in the second and third quarters of 1996 were adversely
impacted compared to the first quarter of 1996 by a large decline in shipments
in Europe due to a downturn in the European PC market, and there can be no
assurances that such economic conditions will not continue or worsen. The
Company's international sales can also be affected if inventory sold by the
Company to its international distributors and OEMs and held by them or their
customers has not sold through to final end customers, which may impact
international distributor or OEM orders in the succeeding periods. The Company
believes that at this stage of its development it has generally less visibility
on the inventory levels held by its international OEMs and distributors,
vis-a-vis their domestic counterparts, and therefore generally less visibility
on how this held inventory might affect future orders to and sales by the
Company.
PROPRIETARY RIGHTS
The Company has only a limited number of patents and patent applications
and relies primarily on a combination of copyright and trade secret protection
to establish and protect its proprietary rights. There can be no assurance that
the Company's measures to protect its proprietary rights will deter or prevent
unauthorized use of the Company's technology, brand or other proprietary or
intellectual property. In addition, the laws of certain foreign countries may
not protect the Company's proprietary rights to the same extent as do the laws
of the United States. As is typical in its industry, the Company from time to
time is subject to legal claims asserting that the Company has violated
intellectual property rights of third parties. In the event that a third party
was to sustain a valid claim against the Company, and any required licenses were
not available on commercially reasonable terms, the Company's operating results
could be materially and adversely affected. Litigation, which could result in
substantial cost to and diversion of the resources of the Company, may also be
necessary to enforce intellectual property rights of the Company or to defend
the Company against claimed infringement of the rights of others.
STOCK PRICE VOLATILITY
The trading price of the Common Stock has been subject to fluctuations to
date, and could be subject to wide fluctuations in the future in response to
quarter-to-quarter variations in operating results, announcements of
technological innovations, new products or significant OEM design wins by the
Company or its competitors, general conditions in the markets for the Company's
products or the computer industry, the price and availability of purchased
components, general financial market conditions, market conditions for
technology, PC or semiconductor stocks, changes in earnings estimates by
analysts, or other events or factors. In this regard, the Company does not
endorse and accepts no responsibility for the estimates or recommendations
issued by analysts from time to time. In addition, the public stock markets in
general, and technology stocks in particular, have experienced extreme price and
trading volume volatility in recent months. This volatility has significantly
affected the market prices of securities of many high technology
17
<PAGE> 18
companies for reasons frequently unrelated to the operating performance of the
specific companies. These broad market fluctuations may adversely affect the
market price of the Company's Common Stock.
EDGE is a registered trademark of The EDGE Interactive Media, Inc. in the US,
UK, France, and Germany and is a trademark elsewhere, used under license. All
other trademarks referenced are the service mark, trademark or registered
trademark of their respective manufacturers.
18
<PAGE> 19
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company has been named as a defendant in several putative class action
lawsuits which were filed in June and July 1996 in the California Superior Court
for Santa Clara County and the U.S. District Court for the Northern District of
California. Certain executive officers and directors of the Company are also
named as defendants. The plaintiffs purport to represent a class of all persons
who purchased the Company's Common Stock between October 26, 1995 and June 20,
1996 (the "Class Period"). The complaints allege claims under the federal
securities laws and California law. The plaintiffs allege that the Company and
the other defendants made various material misrepresentations and omissions
during the Class Period. The complaints do not specify the amount of damages
sought. The Company believes that it has good defenses to the claims alleged in
the lawsuits and will defend itself vigorously against these actions. These
cases are in the early stages and no schedule for the litigation has been set.
In addition, a shareholder has filed a shareholder derivative action in
California Superior Court purportedly brought on behalf of the Company against
certain of its officers and directors. The derivative action asserts claims of
breach of fiduciary duty and related state law claims arising out of the same
facts as the state and federal class actions.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibit
Exhibit # Description of Document
--------- -----------------------
11.1 Statement Regarding Computation of Net Income
(Loss) per Share
27.1 Financial Data Schedule
B. Reports on Form 8-K
The Company did not file any reports on Form 8-K during the
quarter ended September 30, 1996.
19
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DIAMOND MULTIMEDIA SYSTEMS, INC.
Date: November 5, 1996 /s/ William J. Schroeder
-------------------------
William J. Schroeder
President and Chief Executive Officer
20
<PAGE> 21
EXHIBIT INDEX
Exhibit Description
11.1 Statement Regarding Computation of Net Income
(Loss) per Share
27.1 Financial Data Schedule
<PAGE> 1
EXHIBIT 11.1
DIAMOND MULTIMEDIA SYSTEMS, INC.
STATEMENT REGARDING COMPUTATION OF NET INCOME (LOSS) PER SHARE
(amounts in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Weighted average common shares outstanding for period 34,290 28,014 34,390 24,949
Dilutive employee stock options 640 -- 661 --
-------- -------- -------- --------
Shares used in per share calculations 34,930 28,014 35,051 24,949
======== ======== ======== ========
Net income (loss) before reversal of accretion $ 2,100 ($30,367) $ 8,504 ($16,453)
Net income (loss) per share $ 0.06 ($ 1.08) $ 0.24 ($ 0.66)
======== ======== ======== ========
</TABLE>
The difference between the calculation of net income (loss) per share calculated
on the primary and fully diluted basis is not material.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000936734
<NAME> DIAMOND MULTIMEDIA
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-29-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 121,783
<SECURITIES> 0
<RECEIVABLES> 70,672
<ALLOWANCES> 2,043
<INVENTORY> 64,474
<CURRENT-ASSETS> 284,137
<PP&E> 17,152
<DEPRECIATION> 4,563
<TOTAL-ASSETS> 317,525
<CURRENT-LIABILITIES> 95,721
<BONDS> 5,520
0
0
<COMMON> 34
<OTHER-SE> 215,259
<TOTAL-LIABILITY-AND-EQUITY> 317,525
<SALES> 431,553
<TOTAL-REVENUES> 431,553
<CGS> 355,301
<TOTAL-COSTS> 355,301
<OTHER-EXPENSES> 17,555
<LOSS-PROVISION> 606
<INTEREST-EXPENSE> (1,429)
<INCOME-PRETAX> 13,606
<INCOME-TAX> 5,102
<INCOME-CONTINUING> 8,504
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,504
<EPS-PRIMARY> 0.24
<EPS-DILUTED> 0.24
</TABLE>
