Diamond Multimedia Announces Restructuring; Redeploying Resources to More Proprietary Product Lines

Business Wire, Nov 13, 1998

SAN JOSE, Calif.--(BUSINESS WIRE)--Nov. 12, 1998--Diamond Multimedia Systems, Inc. (Nasdaq: DIMD), a leader in interactive multimedia and PC entertainment, today announced plans to implement a cost reduction program in its base business, including a reduction in force of approximately 20% of its combined full time and temporary work force. In addition, several other cost reduction steps are being taken, including the elimination of a number of low margin product lines, the closing of several small offices, transition to an offshore turn-key manufacturing model and further strengthening of both in-house and channel inventory controls. The Company expects that the cost reduction actions will result in a one-time charge of approximately $17 million - $19 million in the fourth quarter.

"At the end of the third quarter, we announced the implementation of a short-cycle inventory model as a first step toward reducing our inventory cost structure," said William J. Schroeder, president and chief executive officer. "While we believe this step is in our long-term business interests, we concluded that further changes across the company were necessary to reduce our overall operating cost structure while still maintaining appropriate resources to provide excellent service to our customers and grow new product categories. We examined our overall business model and made a number of difficult decisions with three primary goals in mind. First, we want to significantly change the model for our current base graphics and modem lines of business to maximize profit and cash flow potential and reduce risk. Second, we want to keep our operating expense levels as low as possible, without cutting into essential resources, to provide room to invest in new, more attractive lines of business. Third, we want to focus the Company on higher margin and more proprietary product lines. In this regard, promising new product lines in which we are currently investing include our line of home networking products, marketed under the HomeFree brand, and our portable Internet music player, the Rio. Further, as we announced earlier today, we are working with IBM on an exclusive basis to bring their professional graphics architecture, developed for the UNIX workstation market, to the Windows NT market.

"With those three goals in mind, the Company is taking the following steps:

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1)   We are reorganizing several areas of the Company and will
     eliminate approximately 120 full time positions and 60 temporary
     positions. Job reductions will come from across all departments
     and all geographic regions, although the heaviest concentration
     will be in the operations area as we progress to a more fully
     turn-key model.

2)   We are increasing our focus on controlling channel inventory
     levels. Because our stated goal is to have no more than four
     weeks of inventory in the channel, we have adopted an accounting
     policy to reserve all gross margins on any inventory shipped into
     the channel that exceeds four weeks of supply.

3)   Subject to the terms and conditions of our authorized distributor
     and retailer contracts and in conjunction with our goal of
     limiting inventory in the channel to four weeks, we will work
     with our channel customers to reduce our exposure to price
     protection risk.

4)   We will focus our development and marketing resources on a
     limited number of architectures and suppliers.

5)   We have opened a logistics center in Asia, closer to our third
     party manufacturing partners, with a goal to have all of our
     volume product lines in full turn-key mode by the first quarter
     of 1999. The focus of our U.S. Logistics Center will be narrowed
     to new product launch plus packaging and distribution for the
     Americas.

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"We believe that the above steps, along with the introduction of several new, more proprietary products, including Rio, HomeFree and our new Fire GL professional graphics products based on the IBM architecture, will return us to a more stable, predictable and profitable business model," Schroeder concluded.

"While we believe that the above steps are necessary, they will impact our fourth quarter financial performance," said James M. Walker, senior vice president and chief financial officer. "In addition to the charge mentioned above, we expect to complete our valuation analysis of the Micronics acquisition which, as we previously announced, will result in a charge of approximately $5 - $7 million in the fourth quarter for in process R & D. On a forward-looking operating basis, however, we believe the above steps should result in improved gross margin and reduced on-going operating expense levels."

About Diamond Multimedia

Diamond Multimedia is driving the interactive multimedia market by providing advanced solutions for home, business and professional desktop computer users, enabling them to create, access and experience compelling new media content from their desktops and through the Internet. Diamond accelerates multimedia from the Internet to the user with products that include the Stealth and Viper(R) series of media accelerators, the Monster series of entertainment 3D and sound accelerators, the Fire series of professional 3D accelerators, the Micronics series of system boards, the Supra(R) series of modems, and the HomeFree line of home networking products. Diamond's common stock is traded on the Nasdaq Stock Market under the symbol DIMD, and its web site address is www.diamondmm.com.