-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DHH+vo3fN/EBWf+uqsvRhtO4s276+4hnx7aC2n8eMnvyrIIT5SCRDTLtC0q6rFyA MxBxFp0EBNoqFSkGzgaYjw== 0000891618-96-001745.txt : 19960816 0000891618-96-001745.hdr.sgml : 19960816 ACCESSION NUMBER: 0000891618-96-001745 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960814 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: DIAMOND MULTIMEDIA SYSTEMS INC CENTRAL INDEX KEY: 0000936734 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 770390654 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-25580 FILM NUMBER: 96611658 BUSINESS ADDRESS: STREET 1: 2880 JUNCTION AVE CITY: SAN JOSE STATE: CA ZIP: 95134 BUSINESS PHONE: 4083257000 MAIL ADDRESS: STREET 1: 2880 JUNCTION AVE CITY: SAN JOSE STATE: CA ZIP: 95134 10-Q 1 FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 1996 1 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. 2 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 2 3 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)
JUNE 30, 1996 DECEMBER 31, 1995 (UNAUDITED) ASSETS 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 ========= =========
The accompanying notes are an integral part of these consolidated condensed financial statements. 3 4 DIAMOND MULTIMEDIA SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED (UNAUDITED) (UNAUDITED) JUNE 30, 1996 JUNE 30, 1995 JUNE 30, 1996 JUNE 30, 1995 ------------- ------------- ------------- ------------- 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
The accompanying notes are an integral part of these consolidated condensed financial statements. 4 5 DIAMOND MULTIMEDIA SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
SIX MONTHS ENDED ---------------- JUNE 30, 1996 JUNE 30, 1995 ------------- ------------- (UNAUDITED) 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 --------- ---------
The accompanying notes are an integral part of these consolidated condensed financial statements. 5 6 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):
June 30, 1996 December 31, 1995 ------------- ----------------- (Unaudited) Raw materials $24,955 $42,194 Work in process 20,718 33,597 Finished goods 15,981 13,844 --------- --------- $61,654 $89,635 ======== ========
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 6 7 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. 7 8 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. 8 9 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. 9 10 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 10 11 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 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 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 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 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 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 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 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:
Votes Directors Votes For Withheld ---------------------------------------------------------- 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
b) The shareholders approved the following proposals:
Number of Common Shares Voted . Proposal For Against Abstain - -------------------------------------------------------------------------------------------------------- 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
ITEM 5. OTHER INFORMATION Not applicable. 18 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 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 21 EXHIBIT INDEX
Exhibit # Description of Doucment 11.1 Statement Regarding Computation of Net Income Per Share 27 Financial Data Schedule
EX-11.1 2 COMPUTATION OF NET INCOME (LOSS) PER SHARE 1 EXHIBIT 11.1 DIAMOND MULTIMEDIA SYSTEMS, INC. STATEMENT REGARDING COMPUTATION OF NET INCOME (LOSS) PER SHARE (amounts in thousands, except per share data)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 1996 1995 1996 1995 ------ ------ ------ ------ 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 ======= ======= ======= =======
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 EX-27 3 FINANCIAL DATA SCHEDULE
5 0000936734 DIAMOND MULTIMEDIA 1000 US DOLLARS 6-MOS DEC-29-1996 JAN-01-1996 JUN-30-1996 1 91,812 6,292 70,921 1,984 61,654 253,354 15,636 3,642 290,810 68,260 5,027 0 0 34 216,276 290,810 307,824 307,824 256,595 256,595 11,828 263 (885) 10,412 4,008 6,404 0 0 0 6,404 0.18 0.18
-----END PRIVACY-ENHANCED MESSAGE-----