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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 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
June 30, 1996 was 34,390,503.
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DIAMOND MULTIMEDIA SYSTEMS, INC.
INDEX TO FORM 10-Q
Page
PART I - FINANCIAL INFORMATION:
ITEM 1- Financial Statements
Consolidated Condensed Balance Sheets as of June 30, 1996
and December 31, 1995 3
Consolidated Condensed Statements of Operations for the three
and six months months ended June 30, 1996 and June 30, 1995 4
Consolidated Condensed Statements of Cash Flows
for the six months ended June 30, 1996 and June 30, 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 18
ITEM 2 - Changes in securities 18
ITEM 3 - Defaults Upon Senior Securities 18
ITEM 4 - Submission of Matters to a Vote of Security Holders 18
ITEM 5 - Other Information 18
ITEM 6 - Exhibits and Reports on Form 8-K 18
SIGNATURE(S) 20
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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)
<TABLE>
<CAPTION>
JUNE 30, 1996 DECEMBER 31, 1995
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 91,812 $ 93,971
Short-term investments 6,292 12,232
Trade accounts receivable, net of allowance for doubtful accounts
of $1,984 and $1,959 as of June 30, 1996 and
December 31, 1995 68,937 90,640
Other receivables -- 13,129
Inventories 61,654 89,635
Prepaid expenses, other current assets and deferred income taxes 24,659 23,034
--------- ---------
Total current assets 253,354 322,641
Property, plant and equipment, net 11,994 10,152
Other assets 6,634 6,385
Goodwill and other intangibles, net 18,828 12,551
--------- ---------
Total assets $ 290,810 $ 351,729
========= =========
LIABILITIES
Current liabilities:
Current portion of long-term debt $ 14,231 $ 18,077
Trade accounts payable 41,957 94,920
Other accrued liabilities 12,072 16,557
--------- ---------
Total current liabilities 68,260 129,554
Long-term debt, net of current portion 5,027 11,705
Deferred income taxes 1,213 1,860
--------- ---------
Total liabilities 74,500 143,119
--------- ---------
STOCKHOLDERS' EQUITY
Preferred stock, par value $.001; Authorized - 8,000 shares at
June 30, 1996 and December 31, 1995; none issued and outstanding -- --
Common stock, par value $.001; Authorized - 75,000 at June 30,
1996 and December 31, 1995; issued and outstanding - 34,391
at June 30, 1996 and 34,673 at December 31, 1995 34 35
Additional paid-in capital 307,994 306,697
Distributions in excess of net book value (56,775) (56,775)
Accumulated deficit (34,943) (41,347)
--------- ---------
Total stockholders' equity 216,310 208,610
--------- ---------
Total liabilities and stockholders' equity $ 290,810 $ 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 SIX MONTHS ENDED
(UNAUDITED) (UNAUDITED)
JUNE 30, 1996 JUNE 30, 1995 JUNE 30, 1996 JUNE 30, 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 120,219 $ 95,110 $ 307,824 $ 175,386
Cost of sales 109,052 72,023 256,595 131,614
--------- --------- --------- ---------
Gross profit 11,167 23,087 51,229 43,772
--------- --------- --------- ---------
Operating expenses:
Research and development 4,631 2,257 9,434 4,244
Selling, general and administrative 13,851 8,221 29,834 15,222
Amortization of intangibles 1,187 -- 2,394 --
--------- --------- --------- ---------
Total operating expenses 19,669 10,478 41,662 19,466
--------- --------- --------- ---------
Income (loss) from operations (8,502) 12,609 9,567 24,306
Interest income (expense), net 660 -- 885 (1,467)
Other expense, net 53 -- (40) --
--------- --------- --------- ---------
Income (loss) before provision for income (7,789) 12,609 10,412 22,839
taxes
Provision (benefit) for income taxes (2,999) 4,815 4,008 8,907
--------- --------- --------- ---------
Net income (loss) $ (4,790) $ 7,794 $ 6,404 $ 13,932
--------- --------- --------- ---------
Reversal of accretion for dividends on
mandatorily redeemable preferred stock -- 292 -- --
--------- --------- --------- ---------
Net income (loss) available for common
stockholders $ (4,790) $ 8,086 $ 6,404 $ 13,932
========= ========= ========= =========
Net income (loss) per share $ (0.14) $ 0.30 $ 0.18 $ 0.58
========= ========= ========= =========
Shares used in computing per share amounts 34,328 27,115 35,111 23,997
</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>
SIX MONTHS ENDED
----------------
JUNE 30, 1996 JUNE 30, 1995
------------- -------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 6,404 $ 13,932
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 3,817 550
Provision for doubtful accounts 263 (50)
Provision for excess and obsolete inventories 13,819 (750)
Changes in assets and liabilities:
Trade accounts and other receivables 34,569 (21,210)
Inventories 6,072 (15,606)
Prepaid expenses, deferred income taxes and other assets (1,874) (1,150)
Trade accounts payable and other liabilities (58,095) 21,721
Other (65) (172)
-------- --------
Net cash provided by operating activities 4,910 (2,735)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (3,068) (1,032)
Proceeds from sales of short-term investments 5,940 15,758
-------- ---------
Net cash provided by investing activities 2,872 14,726
-------- ---------
Cash flows from financing activities:
Repayments to stockholders (82,664)
Proceeds from Initial Public Offering, less related expenses 117,322
Payment of Mandatorily Redeemable Preferred Stock (29,174)
Repayment of subordinated promissory notes (34,167)
Proceeds from issuance of common stock 799 536
Principal payments under capital lease obligations (376) (92)
Proceeds from term loans and revolving credit facilities 3,939 25,000
Payments of term loans and credit facilities (14,285) (25,000)
Repurchases of common stock (18) --
-------- --------
Net cash used in financing activities (9,941) (28,239)
-------- --------
Net decrease in cash and cash equivalents (2,159) (16,248)
Cash and cash equivalents at beginning of period 93,971 57,164
-------- --------
Cash and cash equivalents at end of period $ 91,812 $ 40,916
======== ========
Supplemental Disclosure of cash flow information:
Income taxes paid during the period $ 6,980 $ 9,050
--------- ---------
Interest paid during the period $ 657 $ 1,884
--------- ---------
Supplemental disclosure of non-cash financing activities:
Issuance of capital lease obligations for acquisition of
property and equipment $ 197 $ 1,469
--------- ---------
</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.
Operating results for the quarter and the six months ended June 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>
June 30, 1996 December 31, 1995
------------- -----------------
(Unaudited)
<S> <C> <C>
Raw materials $24,955 $42,194
Work in process 20,718 33,597
Finished goods 15,981 13,844
--------- ---------
$61,654 $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 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 upon the outcome of certain contingencies.
During the second quarter of 1996, approximately 61,000 shares of the total of
approximately 465,000 shares of the Company's common stock which were withheld
were issued in settlement of the contingencies resulting in an increase of
goodwill of $0.5 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 the federal
securities laws and California law. The plaintiffs allege that the Company and
the other defendants
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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.
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. In September 1995, the Company acquired Supra Corporation
("Supra"), a supplier of fax/modem products, including related software, for the
PC and Macintosh markets. In November 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 second quarter and the first six months of 1996 increased
$25.1 million (26%) to $120.2 million and $132.4 million (76%) to $307.8
million, respectively, compared to the corresponding prior year periods. 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 $35.6 million and $96.4 million for the
second quarter and first six months of 1996, respectively. Because the
acquisitions were accounted for as purchases, the results of operations for the
second quarter and the first six months of 1995 do not include those of Supra or
Spea. These increases were offset, in part, by a decline in sales of the Viper
and Speedstar series of graphics accelerator cards as these products were
replaced by the new Stealth product line, a decrease in the sale of multimedia
upgrade kits, and declining unit prices.
The increase in net sales also reflected an increase in international sales,
which represented 36% in the second quarter of 1996 compared to 35% in the
second quarter of 1995 and 42% in the first six months of 1996 compared to 33%
for the corresponding period of the prior year. These increases in international
sales are attributable to actions taken by the Company during 1995. During 1995,
the Company acquired Spea, increased its sales to international OEMs, opened
offices in the United Kingdom and France and launched sales efforts in South
America and South Korea.
Net sales for the second quarter of 1996 declined from the first quarter of
1996 by $67.4 million (36%) to $120.2 million. The decrease was due primarily to
declining unit prices, product mix changes and significantly decreased shipments
in Europe. The decline in sales during the second quarter of 1996 compared to
the first quarter of 1996 negatively impacted the Company's operating results
during the second quarter.
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GROSS PROFIT
Gross profit for the second quarter of 1996 decreased $11.9 million (52%) to
$11.2 million compared to the second quarter of 1995 and increased $7.5 million
(17%) to $51.2 million in the first six months of 1996 compared to the
corresponding period last year. Gross margin (gross profit as a percentage of
sales) decreased to 9.3% of net sales during the second quarter of 1996 from
24.3% for the corresponding period of 1995 and decreased to 16.6% for the first
six months of 1996 from 25% for the corresponding period of 1995. Gross profit
declined due, in part to a charge for approximately $10 million in the second
quarter of 1996 reflecting increased inventory reserves and expected customer
price protection claims related to the Diamond Edge(R) 3D product, as well as
lower unit prices across most product lines and price protection credits issued
to retail customers as a result of sales price decreases. The charge of
approximately $10 million and the large decline in sales from the prior quarter
were significant factors which contributed to the Company's net loss during the
second quarter of 1996.
Gross profit for the second quarter of 1996 compared to the first quarter of
1996 decreased $28.9 million (72%) to $11.2 million from $40 million. Gross
profit decreased to 9.3% of net sales during the second quarter of 1996 from
21.4% for the first quarter of 1996. This decrease in gross profit was due
primarily to the factors noted in the paragraph above. Additionally, the gross
profit in the second quarter was negatively impacted by a lower volume of unit
sales in which to absorb the fixed portion of manufacturing costs.
RESEARCH AND DEVELOPMENT
Research and development (R&D) expenses increased $2.4 million (105%) and
$5.2 million (122%) for the second quarter and the first six months of 1996,
respectively, compared to the corresponding periods in 1995. As a percentage of
sales, R&D expenses were 3.9% and 2.4% in the second quarter of 1996 and 1995,
respectively, and 3.1% and 2.4% in the first six 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 those that will offer various
combinations of graphics, digital video, 3D animation, 3D CAD, sound, ISDN
modem, international modem, telephony, television, MPEG-2 and other emerging
functions. Additionally, the increases in expenses as a percentage of net sales
resulted primarily from having a much lower proportional increase in sales and
the significant increase in the Company's engineering staff and occupancy costs
related to its efforts to support the introduction of new product lines. This
increase in spending is also attributable to the acquisitions of Supra and Spea
(which were not included in operating results for the second quarter and first
six months of 1995), as well as the continued expansion of product development
activities.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses increased $5.6 million (68%)
and $14.6 million (96%) in the second quarter and the first six months of 1996,
respectively, compared to the corresponding periods in 1995. The increases in
expenses were due primarily to higher personnel-related expenses associated with
increased 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 increased selling and marketing expenses associated with higher sales
and increased promotion of the Company's products, particularly in international
markets. This increase in spending is also attributable to the acquisitions of
Supra and Spea (which were not included in operating results for the second
quarter and first six months of 1995). As a percentage of sales, selling,
general and administrative expenses were 11.5% and 8.6% in the second quarters
of 1996 and 1995, respectively, and 9.7% and 8.7% for the first six months of
1996 and 1995, respectively. The increases in expenses as a percentage of net
sales resulted primarily from having a significantly lower proportional increase
in sales during the periods in 1996 which was due primarily to the large decline
in net sales during the second quarter of 1996 relative to the first quarter of
1996.
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AMORTIZATION OF INTANGIBLE ASSETS
The Company incurred amortization expenses of $1.2 million and $2.4 million
in the second quarter and first six 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.
INTEREST INCOME (EXPENSE)
Interest income was $660,000 and $885,000 in the second quarter and the
first six months of 1996 compared to no interest income in the second quarter of
1995 and interest expense of $1,467,000 in the first six months of 1995.
Interest income in the second quarter and the first six months of 1996 was
generated from the Company's cash and short-term investments, offset in part by
interest expense on outstanding borrowings. There was no interest income for the
second quarter of 1995 due to interest income that was earned on cash and
short-term investments being offset by interest expense on certain debt that was
repaid from the proceeds of the Company's initial public offering in April 1995.
The interest expense during the first six 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 (BENEFIT) FOR INCOME TAXES
The Company's effective tax rate was 38.5% for the second quarter and the
first six months of 1996 compared to 38.2% and 39% for the corresponding periods
of 1995. 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 decreased by $2.2 million during the first six months
of 1996. Operating activities provided $4.9 million in cash and the primary
sources of cash were net income of $6.4 million, a decrease in receivables, net
of provision for doubtful accounts, of $34.8 million, a decrease in inventories,
net of provision for excess and obsolete inventories, of $19.9 million, and
depreciation and amortization of $3.8 million. These sources of cash from
operating activities were offset, in part by a decrease in accounts payable and
other liabilities of $58.1 million and an increase of $1.9 million in prepaid
expenses, deferred taxes and other assets.
The Company provided $2.9 million in cash from investing activities
primarily due to proceeds from sales of short-term investments of $5.9 million,
offset in part, by purchases of property and equipment of $3.1 million. Net cash
used in financing activities was $9.9 million, primarily due to payments of
$14.3 million on term loans and revolving credit facilities, offset in part, by
$3.9 million of proceeds from these facilities and $0.8 million from the
issuance of common stock.
At June 30, 1996, the Company had $91.8 million of cash and cash equivalents
and an additional $6.3 million in short-term investments. Further, as of such
date, the Company had lines of credit and bank credit facilities totaling $54.5
million, of which $39.4 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, all or
a portion of which may be financed by equipment lease financing. 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 and product returns or price protection charges from
customers. Many of these factors are beyond the Company's control. The Company's
operating results in the second quarter of 1996 were adversely impacted by
significantly lower unit prices and larger price protection charges from
customers and there can be no assurance that lower unit prices and price
protection measures 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 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 due to an inability to adjust expenses or inventory
during the quarter to match the level of revenues for the quarter. In the second
quarter of 1996, for example, the Company's operating results were negatively
impacted by a significant decline in revenues during such quarter without a
commensurate decline in the level of operating expenses. 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 and market share.
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, and general economic conditions. For
example, Diamond 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 and stock rotation 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. 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 accelerated
during the first six months of 1996 and is expected to continue in the third
quarter of 1996. Accordingly, the Company's average selling prices and margins
may decline in the future from the levels experienced to date. The Company's
gross
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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 supply of multimedia
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 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 quarter of 1996 by declining market prices for the Company's
products and resulting price protection chargebacks from certain retail and
distribution customers. Conversely, an increase in the price of semiconductor
components may adversely impact the Company's margin due to higher unit costs.
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
products. Also, to the extent the Company is successful in expanding its
consumer-oriented markets and 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 consumer electronics sales in the U.S. are spread across the four
(4) calendar quarters in the ratio of 23%, 18%, 22% and 37%, 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 scope of its operations, including research
and development, marketing, technical support, and sales and distribution. 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. Furthermore, this
requirement is relatively more substantial due to the limited systems investment
made by the Company prior to 1995. 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 is taking significant steps to
reduce spending at Spea and integrate its operations with the Company. These
efforts to improve Spea's financial performance have, however, been adversely
impacted by the downturn in the German PC market and there can be no assurance
that the Company will be successful in improving Spea's financial performance.
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.
11
<PAGE> 12
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 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. 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 due to product unavailability. The Company
incurred a write-down of $10 million in the second quarter of 1996 for increased
inventory reserves and expected customer price protection claims related to the
Diamond Edge(R) 3D product line which experienced lower demand than anticipated
and there can be no assurance that similar charges will not be taken in the
future.
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 expected introduction of Windows NT 4.0 in 1996. 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, and yet the installation of this software may result in
technical support calls. 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 its Viper Pro Video series and
SpeedStar 64 Graphics series, as well as functional Windows95 drivers for its
MVP 2000 MPEG-1 accelerator add-on card 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
12
<PAGE> 13
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 a similar reaction
may occur in the corporate PC market with the impending release of Windows NT
4.0, expected late summer 1996, 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 revenue. The Company
believes that this may be a feature of the 1996 market for its products and PCs
in general due to the falling prices for 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 six
months of 1996, these components are periodically in short supply and on
allocation by semiconductor manufacturers. 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 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 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 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 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 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 quarter 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 and revenue depressed from time
to time during such 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 market emerges 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
13
<PAGE> 14
inventory or scheduled purchase orders to meet market demand, thereby missing
orders and revenue opportunities, and perhaps losing market share.
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 second quarter and first six
months of 1996 and greater than 90% 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 the
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, there can be no assurance that the incorporation of new
multimedia functions onto personal computer motherboards or into the CPU
microprocessor, such as MMX or accelerated graphics port 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 video on the Internet. The timing of 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 the
personal computer motherboard 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 and
central processing unit markets) emerge as competitors across broader product
categories.
14
<PAGE> 15
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,
systems 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 from multimedia chipset manufacturers are higher quality
and more sophisticated, then competitors who compete largely on price 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.
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 yet 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. 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 integration of graphics
acceleration or modem connectivity by systems OEMs, 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
operating results.
15
<PAGE> 16
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. 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
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 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 sales, 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 multi-national financial results,
state-imposed restrictions on the repatriation of funds, import and export
duties and restrictions, international economic conditions, the expenses, time
and technical resources required to localize the Company's various products and
support local languages, the logistical difficulties of managing multinational
operations and dispersed product inventory designed or manufactured to meet
specific countries' requirements, and delays and expenses associated with
homologating the Company's telecommunications products and securing necessary
governmental approvals for various countries. As discussed above, the Company's
net sales in the second quarter of 1996 were adversely impacted 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 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, 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. 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
16
<PAGE> 17
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 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.
17
<PAGE> 18
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.
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
The following matters were approved at the Company's Annual Meeting of
Stockholders held on May 22, 1996:
a) The following Directors were elected:
<TABLE>
<CAPTION>
Votes
Directors Votes For Withheld
----------------------------------------------------------
<S> <C> <C>
Chong-Moon Lee 27,578,808 743,092
William J. Schroeder 28,208,522 113,378
Jeffrey T. Chambers 28,235,122 86,778
Bruce C. Edwards 28,236,472 85,428
Walter G. Kortschak 28,233,222 88,678
Gregorio Reyes 28,234,472 87,428
Jeffrey D. Saper 28,222,460 99,440
</TABLE>
b) The shareholders approved the following proposals:
<TABLE>
<CAPTION>
Number of Common Shares Voted
. Proposal For Against Abstain
- --------------------------------------------------------------------------------------------------------
<C> <C> <C> <C>
1) Amendment to the 1994 Stock Option Plan 20,301,393 1,986,545 104,338
2) Appointment of Coopers & Lybrand L.L.P. as
independent accountants 28,161,060 52,970 107,870
</TABLE>
ITEM 5. OTHER INFORMATION
Not applicable.
18
<PAGE> 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibit
Exhibit # Description of Document
11.1 Statement Regarding Computation of Net Income per
Share
27 Financial Data Schedule
B. Reports on Form 8-K
The Company did not file any reports on Form 8-K during the
quarter ended June 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: August 6, 1996 /s/ William J. Schroeder
----------------------------------------
William J. Schroeder
President and Chief Executive Officer
Date: August 6, 1996 /s/ Gary B. Filler
----------------------------------------
Gary B. Filler
Chief Financial Officer
20
<PAGE> 21
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit # Description of Doucment
<C> <S>
11.1 Statement Regarding Computation of Net Income Per Share
27 Financial Data Schedule
</TABLE>
<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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
1996 1995 1996 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
Weighted average common shares outstanding for period 34,328 26,445 34,440 23,417
Dilutive employee stock options -- 670 671 580
------- ------- ------- -------
Shares used in per share calculations 34,328 27,115 35,111 23,997
======= ======= ======= =======
Net income (loss) before reversal of accretion (4,790) 7,794 6,404 13,932
Reversal of accretion for dividends on mandatorily redeemable -- 292 -- --
preferred stock ------- ------- ------- -------
Net income (loss) available for common stockholders (4,790) 8,086 6,404 13,932
======= ======= ======= =======
Net income (loss) per share ($ 0.14) $ 0.30 $0.18 $ 0.58
======= ======= ======= =======
</TABLE>
The difference between the calculation of net income (loss) per share calculated
on the primary and fully diluted basis is not material. Dilutive stock options
have not been included in the calculation of common and common equivalent shares
used to calculate net loss per share for the three months ended June 30, 1996 as
their inclusion would be anti-dilutive.
21
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000936734
<NAME> DIAMOND MULTIMEDIA
<MULTIPLIER> 1000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-29-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 91,812
<SECURITIES> 6,292
<RECEIVABLES> 70,921
<ALLOWANCES> 1,984
<INVENTORY> 61,654
<CURRENT-ASSETS> 253,354
<PP&E> 15,636
<DEPRECIATION> 3,642
<TOTAL-ASSETS> 290,810
<CURRENT-LIABILITIES> 68,260
<BONDS> 5,027
0
0
<COMMON> 34
<OTHER-SE> 216,276
<TOTAL-LIABILITY-AND-EQUITY> 290,810
<SALES> 307,824
<TOTAL-REVENUES> 307,824
<CGS> 256,595
<TOTAL-COSTS> 256,595
<OTHER-EXPENSES> 11,828
<LOSS-PROVISION> 263
<INTEREST-EXPENSE> (885)
<INCOME-PRETAX> 10,412
<INCOME-TAX> 4,008
<INCOME-CONTINUING> 6,404
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,404
<EPS-PRIMARY> 0.18
<EPS-DILUTED> 0.18
</TABLE>
