<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 28, 1998.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13(d) OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM____TO____.
COMMISSION FILE NUMBER: 0-18690
RADIUS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 68-0101300
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
460 E. MIDDLEFIELD ROAD
MOUNTAIN VIEW, CA 94043
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
(650) 404-6000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
--------------------------------------------
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 ON MAY 8, 1998
WAS 5,513,553.
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<PAGE>
RADIUS INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
- - ------------------------------ ----
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets at March 31, 1998 (unaudited) and
September 30, 1997 3
Consolidated Statements of Operations for the Three and Six Months Ended
March 31, 1998 and 1997 (unaudited) 4
Consolidated Statements of Cash Flows for the Six Months Ended
March 31, 1998 and 1997 (unaudited) 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 10
PART II. OTHER INFORMATION
- - ---------------------------
Item 1. Legal Proceedings 20
Item 4 Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 21
- - ---------
</TABLE>
-2-
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RADIUS INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1998 1997 (1)
----------- -------------
(unaudited)
<S> <C> <C>
ASSETS:
Current assets:
Cash $ 539 $ 773
Receivable from sale of shares of Splash Technology Holdings, Inc. 1,110 -
Accounts receivable, net 2,377 2,168
Inventories 608 805
Investment in Splash Technology Holdings, Inc. 5,428 22,093
Prepaid expenses and other current assets 131 184
-------- --------
Total current assets 10,193 26,023
Property and equipment, net 168 249
-------- --------
$10,361 $26,272
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY (Net capital deficiency):
Current liabilities:
Accounts payable $ 4,512 $ 4,511
Accrued payroll and related expenses 622 1,320
Accrued warranty costs 235 538
Other accrued liabilities 2,231 2,690
Accrued income taxes 2,127 2,111
Accrued restructuring and other charges 1,206 2,033
Short-term borrowings 4,371 4,638
Obligation under capital leases - 273
-------- --------
Total current liabilities 15,304 18,114
Shareholders' equity (Net capital deficiency):
Common stock 169,025 168,994
Unrealized gain on available-for-sale securities 5,428 22,093
Accumulated deficit (179,446) (182,972)
Accumulated translation adjustment 50 43
-------- --------
Total shareholders' equity (Net capital deficiency) (4,943) 8,158
$10,361 $26,272
-------- --------
-------- --------
</TABLE>
(1) The balance sheet at September 30, 1997 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See accompanying notes.
-3-
<PAGE>
RADIUS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data; unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------ ----------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales $ 4,584 $ 8,249 $ 9,691 $ 19,051
Commissions and royalties 431 1,898 864 3,193
------- -------- -------- --------
Total net sales 5,015 10,147 10,555 22,244
Cost of sales 3,463 8,409 7,060 15,435
------- -------- -------- --------
Gross profit 1,552 1,738 3,495 6,809
------- -------- -------- --------
Operating expenses:
Research and development 820 997 1,314 1,901
Selling, general and administrative 1,719 5,223 3,813 9,321
------- -------- -------- --------
Total operating expenses 2,539 6,220 5,127 11,222
------- -------- -------- --------
Loss from operations (987) (4,482) (1,632) (4,413)
Other income (expense), net 4,417 (7) 5,496 (12)
Interest expense (165) (757) (338) (1,494)
------- -------- -------- --------
Income (loss) before income taxes 3,265 (5,246) 3,526 (5,919)
Provision for income taxes - 195 - 316
------- -------- -------- --------
Net income (loss) $ 3,265 $ (5,441) $ 3,526 $ (6,235)
------- -------- -------- --------
------- -------- -------- --------
Preferred stock dividend - 75 - 150
Net income (loss) applicable to $ 3,265 $ (5,516) $ 3,526 $ (6,385)
common shareholders ------- -------- -------- --------
------- -------- -------- --------
Net income (loss) per share:
Basic net income (loss) per share applicable
to common shareholders $ 0.59 $ (1.01) $ 0.64 $ (1.17)
------- -------- -------- --------
------- -------- -------- --------
Diluted net income (loss) per share applicable
to common shareholders $ 0.59 $ (1.01) $ 0.63 $ (1.17)
------- -------- -------- --------
------- -------- -------- --------
Shares used in per share computations:
Shares used in computing basic net
income (loss) per share 5,514 5,488 5,513 5,477
------- -------- -------- --------
------- -------- -------- --------
Shares used in computing diluted net
income (loss) per share 5,534 5,488 5,575 5,477
------- -------- -------- --------
------- -------- -------- --------
</TABLE>
See accompanying notes.
-4-
<PAGE>
RADIUS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(in thousands, unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31,
------------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 3,526 $(6,235)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization 82 580
Gain on the sale of Splash Common Stock (5,345) -
(Increase) decrease in assets:
Accounts receivable (202) (3,487)
Inventories 197 8,326
Prepaid expenses and other current assets 53 (34)
Income tax receivable - 514
Increase (decrease) in liabilities:
Accounts payable 1 77
Accrued payroll and related expenses (698) (1,231)
Accrued warranty costs (303) (76)
Other accrued liabilities (459) (720)
Accrued restructuring costs (827) (319)
Accrued income taxes 16 (185)
-------- --------
Total adjustments (7,485) 3,445
-------- --------
Net cash used in operating activities (3,959) (2,790)
Cash flows from investing activities:
Capital expenditures (1) (54)
Net proceeds from the sale of Splash Common Stock 4,235 -
-------- --------
Net cash provided by (used in) investing activities 4,234 (54)
Cash flows from financing activities:
Short-term borrowings, net (267) 1,887
Principal payments of long-term debt and capital leases (273) (641)
Issuance of common stock 31 32
-------- --------
Net cash provided by financing activities (509) 1,278
-------- --------
Net increase (decrease) in cash and cash equivalents (234) (1,566)
Cash and cash equivalents, beginning of period 773 2,974
-------- --------
Cash and cash equivalents, end of period $ 539 $ 1,408
-------- --------
-------- --------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 324 $ 1,489
-------- --------
Income taxes $ - $ 7
-------- --------
Non-cash financing activity:
Dividend paid on preferred stock $ - $ 150
-------- --------
Non-cash financing activity:
Receivable from sale of shares of Splash Technology Holdings, Inc. $ 1,110 $ -
-------- --------
</TABLE>
See accompanying notes.
-5-
<PAGE>
RADIUS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The consolidated financial statements of Radius Inc. ("Radius" or the
"Company") as of March 31, 1998 and for the three and six months ended March
31, 1998 and 1997 are unaudited. In the opinion of management, the
consolidated financial statements reflect all adjustments (consisting only of
normal recurring items) necessary for a fair presentation in conformity with
generally accepted accounting principles. Preparing financial statements
requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses. Examples
include provisions for returns and bad debts and the length of product life
cycles. The information included in this Form 10-Q should be read in
conjunction with the Consolidated Financial Statements and notes thereto
included in the Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 1997.
For clarity of presentation, all fiscal periods are reported as ending on a
calendar month end.
NOTE 2. INVENTORIES
Inventories, stated at the lower of cost or market, consist of (in thousands):
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1998 1997
--------- -------------
(unaudited)
<S> <C> <C>
Work in process $ 174 $ 176
Finished goods 434 629
------ ------
$ 608 $ 805
------ ------
------ ------
</TABLE>
NOTE 3. COMMITMENTS AND CONTINGENCIES
(a) On November 16, 1995, Electronics for Imaging, Inc. ("EFI") filed a suit
in the United States District Court in the Northern District of California
alleging that the Company infringes a patent allegedly owned by EFI.
Although the complaint does not specify which of the Company's products
allegedly infringe the patent, subsequent pleading indicates that EFI alleges
that the Company's Color Server products infringe. In January 1996, the
Company completed the divestiture of the Color Server Group.
The Company has filed an answer denying all material allegations, and has
filed counterclaims against EFI alleging causes of action for interference
with prospective economic benefit, antitrust violations, and unfair business
practices. EFI's motion to dismiss or sever the Company's amended
counterclaims was granted in part and the ruling permitted the Company to
file an amended counterclaim for antitrust violations. The Company has filed
an amended antitrust claim. The Company believes it has meritorious defenses
to EFI's claims and is defending them vigorously. In addition, the Company
believes it has indemnification rights with respect to EFI's claims. A
motion for summary judgment based on these indemnification rights disposing
of EFI's claims was filed, and the court granted this motion finding the
Company immune from suit under the patent after February 22, 1995. In March
1998, EFI and the Company agreed to dismiss their remaining claims against
each other pending the outcome of EFI's appeal of this summary judgment
finding. If the Company prevails on appeal, the remaining claims will be
dismissed. On the other hand, if EFI prevails on appeal, then EFI can refile
its claims and the Company would intend to continue to vigorously defend
against such claims and prosecute its own claims against EFI. In such event,
neither the Company nor Splash Technology Holdings, Inc. would be able to
advance the indemnification/immunity defense ruled on in the summary judgment
motion, which would require the Company to defend EFI's claims based upon
their merits. While the Company believes it has meritorious defenses, the
costs of defending any litigation could adversely affect the Company's
results of operations and cash flows.
(b) The Company was named as one of approximately 42 defendants in Shapiro
et al. v. ADI Systems, Inc. et al., Superior Court of California, Santa Clara
County, case no. CV751685, filed August 14, 1995. Radius was named as one of
approximately 32 defendants in Maizes & Maizes et al. v. Apple Computer et
al., Superior Court of New Jersey, Essex
-6-
<PAGE>
County, case no. L-13780-95, filed December 15, 1995. Plaintiffs in each
case purport to represent alleged classes of similarly situated persons
and/or the general public, and allege that the defendants falsely advertised
that the viewing areas of their computer monitors are larger than in fact
they are. The Company was served with the Shapiro complaint on August 22,
1995 and was served with the Maizes complaint on January 5, 1996.
Defendants' petition to the California State Judicial Council to coordinate
the Shapiro case with similar cases brought in other California jurisdictions
was granted in part and the coordinated proceedings are being held in
Superior Court of California, San Francisco County. An amended consolidated
complaint was filed on March 26, 1996.
Although the Company believes it has meritorious defenses to the plaintiffs'
claims, due to the costs of defense, on March 11, 1997, the Company along
with all but two of the other named defendants agreed to settle the suits,
subject to final court approval, which the court tentatively approved on June
30, 1997. The settlement provides that class members are eligible for a $13
rebate per monitor purchased during the class period on applicable new
purchases over a three year period, subject to specific limitations. Class
members who are consumers and do not elect to use the rebate fully can
thereafter elect to receive a $6 refund per monitor (up to a maximum of $30
per consumer class member) during the following six months. The Company is
responsible only to class members who purchased Radius branded monitors
during the class period of May 1, 1991 to May 1, 1995. Additionally, the
Company will pay its share of publication and administration costs associated
with the implementation of the settlement, pay its share of plaintiffs'
stipulated attorneys' fees and will agree to abide by certain limitations in
the description of its monitors. This settlement remains subject to final
court approval.
(c) On July 18, 1997, Intelligent Electronics, Inc. and its affiliates filed
a suit in the United States District Court for the District of Colorado
alleging a breach of contract and related claims in the approximate amount of
$800,000, maintaining that the Company failed to comply with various return,
price protection, inventory balancing and marketing development funding
undertakings. In 1997, the Company filed an answer to the complaint and cross
claimed against the plaintiffs and in October 1997 additionally cross claimed
against Deutsche Financial, Inc., a factor in the account relationship
between the Company and the plaintiffs, seeking the recovery of approximately
$2 million. The Company continues to investigate these claims as well as
cross claims and expects to vigorously defend and prosecute them as
applicable.
(d) The Company is involved in a number of other judicial and administrative
proceedings incidental to its business. The Company intends to defend such
lawsuits vigorously and although adverse decisions (or settlements) may occur
in one or more of such cases, the final resolution of these lawsuits,
individually or in the aggregate, is not expected to have a material adverse
effect on the financial position of the Company. However, depending on the
amount and timing of an unfavorable resolution of these lawsuits, it is
possible that the Company's future results of operations or cash flows could
be materially adversely affected in a particular period. In addition, the
costs of defense, regardless of the outcome, could have a material adverse
effect on the results of operations and financial condition of the Company.
(e) In September 1992, the Company and certain of its officers and directors
were named as defendants in a securities class action litigation brought in
the United States District Court for the Northern District of California that
sought unspecified damages, prejudgment and postjudgment interest, attorneys'
fees, expert witness fees and costs, and equitable relief. In July 1994,
SuperMac and certain of its officers and directors, several venture capital
firms and several of the underwriters of SuperMac's May 1992 initial public
offering and its February 1993 secondary offering were named as defendants in
a class action litigation brought in the same court that sought unspecified
damages, prejudgment and postjudgment interest, attorneys' fees, experts'
fees and costs, and equitable relief (including the imposition of a
constructive trust on the proceeds of defendants' trading activities).
In June 1995, the Court approved the settlement of both litigations and
entered a Final Judgment and Order of Dismissal. Under the settlement of the
litigation brought in 1992 against the Company, the Company's insurance
carrier paid $3.7 million in cash and the Company is required to issue 12,869
shares of its Common Stock to a class action settlement fund. In the
settlement of the litigation brought in 1994 against SuperMac, the Company
paid $250,000 in cash and is required to issue into a class action settlement
fund 70,761 shares of its Common Stock. The number of shares required to be
issued by the Company increased by 10,000 since the price of the Common Stock
was below $120 per share during the 60-day period following the initial
issuance of shares. In connection with these settlements, the Company
recorded a charge of $12.4 million in the Consolidated Statement of
Operations in 1995 reflecting settlement costs not covered by insurance as
well as related legal fees.
As of March 31, 1998, the Company had issued 83,630 of its Common Stock due
to the settlement and approximately 10,000 shares remained to be issued.
-7-
<PAGE>
NOTE 4. INVESTMENT IN SPLASH TECHNOLOGY HOLDINGS, INC.
In January 1996, the Company completed the sale of its Color Server Group
("CSG") to Splash Merger Company, Inc. (the "Buyer"), a wholly owned
subsidiary of Splash Technology Holdings, Inc. ("Splash"), a corporation
formed by various investment entities associated with Summit Partners. In
fiscal 1996, the Company received approximately $21.0 million in cash and, as
of March 31, 1998, an additional $2.0 million is being maintained in escrow
to secure certain indemnification obligations relating to the EFI litigation.
The Company also received 4,282 shares of Splash's 6% Series B Redeemable
and Convertible Preferred Stock (the "Series B Preferred Stock"). The shares
of Series B Preferred Stock were converted into shares of Splash's Common
Stock in connection with the initial public offering of Splash. In June
1996, the Company granted IBM Credit, its secured lender, an option to
purchase 428 shares of Series B Preferred (now 174,113 shares of Splash
Common Stock) in connection with the restructuring of the terms of its loan
agreement with IBM Credit. As of April 8, 1998, IBM Credit had exercised its
option with respect to 30,000 shares of Splash Common Stock.
During the fourth quarter of fiscal 1997 and the six months ended March 31,
1998, the Company sold an aggregate of 996,875 and 290,000 shares,
respectively, of the 1,741,127 shares of Splash Common Stock owned by the
Company. The investment, which is available for sale, subject to certain
market trading restrictions, is accounted for in accordance with FASB
Statement No. 115. The unrealized gain of $5.4 million relating to the
remaining 280,139 shares held (net of the option to buy 174,113 shares held
by IBM Credit exercisable at a nominal price), based upon the closing price
of $19.375 per share at March 27, 1998 is recorded as a component of
shareholders' equity at March 31, 1998. Since March 31, 1998, the Company has
sold 90,000 shares of Splash Common Stock and continues to own 190,139 shares
of Splash Common Stock (net of the option to buy 144,113 shares held by IBM
Credit exercisable at a nominal price). The value of the 190,139 shares held
by the Company, based upon the closing price of $16.563 is $3.1 million as of
May 7, 1998. See Management's Discussion and Analysis of Financial Condition
and Results of Operations - Financial Condition.
NOTE 5. EARNINGS PER SHARE
On March 9, 1998, the Company effected a one-for ten reverse stock split.
All per share data and number of common shares, where appropriate, have been
retroactively adjusted to reflect the stock split.
Basic earnings per share is computed using the weighted average number of
common shares. Diluted earnings per share is computed using the weighted
average number of common shares and dilutive common share equivalents
outstanding during the period. Dilutive common share equivalents in 1997
consist of employee stock options using the treasury stock method.
-8-
<PAGE>
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------ ----------------
1998 1997 1998 1997
---- ---- ---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
NUMERATOR:
Net income (loss) $ 3,265 $ (5,441) $ 3,526 $ (6,235)
Preferred stock dividends - (75) $ - $ (150)
-------- -------- -------- --------
Numerator for basic and diluted earnings per share -
income (loss) available to common stockholders $ 3,265 $ (5,516) $ 3,526 $ (6,385)
-------- -------- -------- --------
-------- -------- -------- --------
DENOMINATOR:
Denominator for basic earnings per share - weighted-average
shares outstanding 5,514 5,488 5,513 5,477
Effect of dilutive securities:
Employee stock options 20 - 62 -
-------- -------- -------- --------
Dilutive potential common shares 20 - 62 -
Denominator for diluted earnings per share - adjusted
weighted-average shares outstanding 5,534 5,488 5,575 5,477
-------- -------- -------- --------
-------- -------- -------- --------
Basic earnings (loss) per share $ 0.59 $ (1.01) 0.64 (1.17)
-------- -------- -------- --------
-------- -------- -------- --------
Diluted earnings (loss) per share $ 0.59 $ (1.01) (1) 0.63 (1.17) (1)
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
(1) Diluted earnings per share does not reflect any potential shares
relating to employee stock options or the convertible preferred stock due to
a loss reported for the period, in accordance with FAS 128. The assumed
issuance of any additional shares would be antidilutive.
For additional disclosure regarding the employee stock options and
convertible preferred stock, see Note 4 in the Company's Annual Report
Form 10-K for the fiscal year ended September 30, 1997.
NOTE 6. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
statement of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting
Comprehensive Income." SFAS 130 establishes standards for reporting
comprehensive income in a financial statement. Comprehensive income items
include changes in equity (net assets) not included in net income. Examples
are foreign currency translation adjustments and unrealized gains/losses on
available for sale securities. This disclosure prescribed by SFAS 130 is
required beginning with the quarter ending December 31, 1998.
In June 1997, FASB issued SFAS 131, "Disclosures About Segments of an
Enterprise and Related Information." This statement establishes standards
for the way companies report information about operating segments in
financial statements. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. The
Company has not yet determined the impact, if any, of adopting this standard.
The disclosures prescribed by SFAS 131 are required in fiscal year 1999.
In October 1997, FASB approved the new American Institute of Certified Public
Accountants Statements of Position, "Software Revenue Recognition" ("SOP
97-2"). SOP 97-2 will be effective for the Company beginning in the first
quarter of fiscal 1999. The Company is evaluating this pronouncement and the
effects, if any, on the Company's current policies.
-9-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS: The following
discussion contains forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934 that are subject to risks and
uncertainties. Statements indicating that the Company or management
"intends", "plans", "expects," "estimates" or "believes" are forward-looking,
as are all other statements concerning future financial results, product
offerings or other events that have not yet occurred. There are several
important factors that could cause actual results or events to differ
materially from those anticipated by the forward-looking statements contained
in this discussion and other sections of this Form 10-Q. Such factors
include, but are not limited to: the Company's ability to achieve
profitability; the Company's ability to dispose of its remaining holdings in
Splash on a timely and profitable basis; the Company's ability to repay its
indebtedness to IBM Credit; the Company's ability to negotiate a favorable
Quick Time license with Apple for use with its digital video products; the
Company's ability to successfully conclude or settle its patent infringement
litigation with EFI; the success of the Company's digital video products; the
success of the Apple Macintosh computer line and operating system, the
success of Apple as well as the Company's ability to compete successfully
with Apple in its market; the Company's ability to successfully develop,
introduce and market new products, including products for Windows operating
system, to keep pace with technological innovation, particularly in light of
its limited financial resources; the ability of the Company's manufacturers
and suppliers to deliver components and manufacture the Company's products;
the Company's reliance on international sales and the effect of its partially
exclusive distributor arrangements with respect to Europe and Japan; and the
Company's ability to attract and retain its key personnel.
Each forward-looking statement should be read in conjunction with the entire
consolidated interim financial statements and the notes thereto in Part I,
Item 1 of this Quarterly Report, with the information contained in Item 2,
including, but not limited to, "Certain Factors That May Affect Future
Results," and with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contained in the Company's Annual Report
on Form 10-K for the fiscal year ended September 30, 1997, including, but not
limited to, "Management's Discussion and Analysis of Financial Condition and
Results of Operations --Certain Factors That May Affect the Company's Future
Results of Operations."
OVERVIEW
The Company designs, develops, assembles, markets and supports color
publishing and digital video computer products for creative professionals.
The Company's current product line includes: multimedia authoring and
editing video systems and software that can acquire and manipulate video and
audio information; high resolution color reference displays that allow users
to view text, graphics, images and video.
To date, substantially all of the Company's products have been designed for
and sold to users of Macintosh computer products (the "Macintosh")
manufactured by Apple Computer, Inc. ("Apple") as Apple products have been
the preferred platform in the Company's target markets. The Company's
current product development plans include adding cross platform (Windows)
capabilities to some of the Company's products in order to market these
products to users of the Windows operating system. There can be no assurance
that the Company will be successful in developing and marketing products for
the Windows operating system, particularly in light of the Company's current
financial condition. The Company has released and shipped its first product
for the Windows operating system, Photo DV for Windows, during its second
quarter of fiscal 1998.
As shown in the accompanying consolidated financial statements, the Company
has incurred substantial operating and net losses and currently has
liabilities in excess of assets. During fiscal 1996 and 1997, management
implemented a number of actions to address its cash flow and operating issues
including: restructuring its outstanding indebtedness to trade creditors and
its secured creditor; refocusing its efforts on providing solutions for high
end digital video and graphics customers; discontinuing sales of mass market
and other low value added products; divesting a number of businesses and
product lines, including its Color Server Group, which is now known as Splash
Technology Holdings, Inc. ("Splash"); significantly reducing expenses and
headcount; and reducing its lease obligations for its current facility lease
given its reduced occupancy requirements. There can be no assurance that
these measures will be sufficient to allow the Company to achieve
profitability.
-10-
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain operational
data as a percentage of net sales (may not add due to rounding).
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 69.1 82.9 66.9 69.4
----- ----- ----- -----
Gross profit 30.9 17.1 33.1 30.6
----- ----- ----- -----
Operating expenses:
Research and development 16.3 9.8 12.5 8.5
Selling, general and administrative 34.3 51.5 36.1 41.9
----- ----- ----- -----
Total operating expenses 50.6 61.3 48.6 50.4
----- ----- ----- -----
Income (loss) from operations (19.7) (44.2) (15.5) (19.8)
Other income(expense), net 88.1 (0.1) 52.1 (0.1)
Interest Expense (3.3) (7.5) (3.2) (6.7)
----- ----- ----- -----
Income (loss) before income taxes 65.1 (51.7) 33.4 (26.6)
Provision for income taxes 0.0 1.9 0.0 1.4
----- ----- ----- -----
Net income (loss) 65.1% (53.6)% 33.4% (28.0)%
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
NET SALES
The Company's total net sales decreased 50.6% to $5.0 million in the second
quarter of fiscal 1998 from $10.1 million for the same quarter in fiscal
1997. Net sales for the first six months of fiscal 1998 decreased 52.5% to
$10.6 million from $22.2 million in the same period of fiscal 1997. The
decline is due primarily to the following factors: the Company's decision to
focus its efforts on its color publishing and digital video software product
lines while discontinuing the development of its accelerated color graphics
products and its DOS on Mac products; a decline in the sales of its color
publishing products; reduced commissions paid by its international
distributors due to the Company's change in product focus; and reduced
royalties paid by Umax Computer Corporation under its license agreement for
the MacOS compatible systems signed in February 1996.
The Company also anticipates that, as a result of these trends the proportion
of hardware sales will decline in the coming periods. For example, in the
Company's digital video product line, the sales of the systems products have
been declining while the sale of the software products for digital video
camcorders (PhotoDV introduced in April 1997, MotoDV introduced in September
1997 and EditDV introduced in November 1997) have increased during fiscal
1998. Additionally, the Company introduced Photo DV for Windows in March
1998. There can be no assurance that sales of these software products will
continue to increase or that they will increase to a sufficient extent to
offset the anticipated decline in hardware sales. Moreover, the Company
anticipates that its royalties from Umax will decline significantly during
fiscal 1998 due to Apple's decision not to extend the operating system
licenses and the expiration of this obligation in March 1998.
Effective January 1, 1998, the Company has modified its relationships with
its distributors in Japan and Europe for its digital video software products.
Sales will now be made for these products based upon a price list and they
will no longer pay commissions upon their sale of these products.
Commissions will still be paid on the sales of the Company's other products
sold through these distributors.
Sales to Ingram Micro and Microage Computer Center accounted for 48.8% and
8.6% of net sales for the second quarter of fiscal 1998, respectively. For
the corresponding period of fiscal 1997, the same customers accounted for
55.0% and 3.2% of the Company's net sales. For the six month period ended
March 31, 1998, Ingram Micro accounted for 55.2% of the Company's net sales
as compared to 69.4% for the corresponding period of fiscal 1997.
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GROSS PROFIT
The Company's gross profit margin was 30.9% and 33.1% for the three and six
month periods ended March 31, 1998, as compared with 17.1% and 30.6% for the
corresponding periods in fiscal 1997. The gross profit margin for the three
and six month periods ended March 31, 1998 reflects the sales of its
accelerated graphics products and its DOS on Mac products at very low profit
margins. Excluding these products the gross profit margin would have been
38.7% and 38.9%, respectively. The gross profit margin for the three and six
month periods ended March 31, 1997 reflects a net charge of $3.6 million
relating to inventory write downs. Excluding this charge, the gross profit
margin would have been 54.5% and 46.8%, respectively. The decrease in
adjusted gross profit margin for the three and six month periods ended March
31, 1998 was due primarily to the high level of commissions and royalties
reported in the Company's second quarter of fiscal 1997.
The Company anticipates continued price reductions and margin pressure within
its industry; however, these trends may be offset if the Company increases
sales of higher gross margin software products that are expected to become a
focus of the Company's sales and marketing efforts in the coming periods,
although there can be no assurance that the Company will be successful in
marketing these products. Additionally, the Company is taking further steps
to reduce product costs and controlling expenses. There can be no assurance
that the Company's gross margins will improve or remain at current levels.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses decreased to $0.9 million or 16.3% of net
sales in the second quarter of fiscal 1998 from $1.0 million or 9.8% of net
sales in the same quarter of fiscal 1997. Research and development expenses
decreased from $1.9 million or 8.5% of net sales for the first six months of
fiscal 1997 to $1.3 million or 12.5% of net sales for the corresponding
period of fiscal 1998. The increase in research and development expenses
expressed as a percentage of net sales was primarily attributed to the
decrease in net sales. The decrease in research and development expenses is
primarily the result of reducing expenses related to headcount resulting from
the efforts to refocus its business and funds received for the outplacement
of some of the Company's engineers in October 1997. The Company continues to
expect to spend approximately $3.0 million on the development of its digital
video and color product lines during fiscal 1998, assuming sufficient net
sales to support such expenditures.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased to $1.7 million or
34.3% of net sales in the second quarter of fiscal 1998 from $5.2 million or
51.5% of net sales in the same quarter of fiscal 1997. Selling, general and
administrative expenses decreased from $9.3 million or 41.9% of net sales for
the first six months of fiscal 1997 to $3.8 million or 36.1% of net sales for
the corresponding period in fiscal 1998. The Company decreased its selling,
general and administrative expenses primarily by reducing expenses related to
headcount resulting from the efforts to refocus its business. Although the
Company expects selling, general and administrative expenses to increase
gradually over time, the Company does not expect them to approach historical
levels in absolute amount.
OTHER INCOME (EXPENSE), NET
Other income was $4.4 million and $5.5 million for the three and six month
periods ended March 31, 1998, respectively, and was not material in the same
periods of fiscal 1997. Other income resulted from the sale of 290,000 shares
of Splash Common Stock during the six month period ended March 31, 1998.
INTEREST EXPENSE
Interest expense was $0.2 million and $0.3 million for the three and six
month periods ended March 31, 1998, as compared with $0.8 and $1.5 million
for the corresponding periods in fiscal 1997. This decrease was due to lower
average borrowings primarily as a result of the term loan repayment to IBM
Credit in August 1997.
NET PROFIT
As a result of the above factors, the Company had a net profit of $3.3
million and $3.5 million for the three and six months ended March 31, 1998,
respectively, as compared to a net loss of $5.5 million and $6.4 million for
the three and six months ended March 31, 1997.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents declined to $0.5 million at March 31,
1998, as compared with $0.8 million for the same quarter in fiscal 1997.
However, as of March 31, 1998, the Company's liabilities exceeded its assets.
The value of the Company's investment in Splash Technology Holdings, Inc.
also declined from $22.1 million at the end of fiscal year 1997 to $5.4
million at the end of the second quarter of fiscal 1998 due to the sale of
290,000 shares of Splash Common Stock, and more importantly, due to the
substantial decline in the trading price of the Splash Common Stock from
$38.75 to $19.375 during that period of time. Since March 31, 1998, the
trading price of Splash Common Stock has further declined to $16.56 as of
May 7, 1998 and the Company has sold an additional 90,000 shares of Splash
Common Stock. The value of the 190,139 shares (net of the option to buy
144,113 shares held by IBM Credit and which is exercisable at a nominal
price) still held by the Company is $3.1 million as of May 7, 1998.
The Company's principal source(s) of liquidity currently are cash generated
by operations, if any; an amended working capital line of credit provided by
IBM Credit pursuant to the terms of the restructured loan with IBM Credit;
and cash generated from the sale of Splash Common Stock net of repayments on
the working capital line of credit. The loan agreement was last amended in
April 1998, and extended through May 15, 1998. Meanwhile the Company is
currently negotiating with a bank for a working capital line of credit of
$3.0 million, which is subject to the completion of an audit by the bank and
approval by its loan committee. The new working capital line of credit, if
obtained, will be secured by the Company's accounts receivables and the
remaining shares of Splash Common Stock (net of the option to buy 144,113
shares held by IBM Credit).
Under the terms of the current amended working capital line of credit with
IBM Credit, the amount available to borrow on March 31, 1998 was $3.3
million. Since then, due to sales of an additional 90,000 shares of Splash
Common Stock, the amount available for borrowing has been reduced to $2.1
million and will be further reduced by mandatory pre-payments of 50% of the
proceeds which arise from the sale of additional shares of Splash Common
Stock until the working capital line of credit is fully repaid. The borrowing
base under the amended working capital line of credit is defined as (i) sixty
percent of the value of the Splash Common Stock held by the Company (net of
IBM Credit's option to purchase 144,113 shares); (ii) the lesser of 10% of
the gross value of eligible inventory or $500,000; plus (iii) 80% of the
Company's eligible domestic accounts receivable; (iv) the lesser of 50% of
the gross value of certain eligible Japanese and European accounts receivable
or $500,000); plus (v) 50% of the approximately $2.0 million held in escrow
in connection with the law suit filed by EFI. At May 7, 1998 the Company had
outstanding borrowings of $2.1 million against the working capital line of
credit. Therefore, the Company does not expect this working capital line of
credit to provide the Company with any liquidity in the near future.
In the event that this proposed $3.0 million working capital line of credit
is not approved, the Company believes that it will be able to extend the
current arrangement that it has with IBM Credit until the line is fully
repaid through sales of the remaining shares of Splash Common Stock, assuming
that the price of Splash Common Stock does not further deteriorate.
The Company has granted to IBM Credit a security interest in substantially
all of its assets to secure the Company's various obligations to IBM Credit.
The Company has also granted to Mitsubishi Electronics a security interest
(securing an amount up to $4.4 million) in all of the Company's technology
and intellectual property rights related to and incorporated into the
Company's PressView products.
As of March 31, 1998, the Company was not in compliance with all of the
financial covenants under the amended loan agreement dated January 8, 1998
(specifically, minimum working capital and current assets to current
liabilities ratio). The Company obtained a waiver from IBM Credit of this
noncompliance. There can be no assurance that IBM Credit will grant a waiver
in the future in the event the Company is not in compliance with the amended
financial covenants.
As a result of IBM's control over the Company's cash flow and restrictions
on the use of the Company's excess cash flow, the Company anticipates that
it will not have significant cash available for expenditures other than for
its ordinary course of business operating expenses, which will be
significantly lower than historical amounts. In the event the Company were
unable to generate sufficient net sales or if the Company incurs unforeseen
operating expenses, it may not be able to meet its operating expenses without
additional financing or a restructuring of its loan agreements with IBM
Credit. In the event that the Company desires to acquire any strategic
technologies or businesses, it would most likely be unable to do so without
obtaining additional financing or the consent of IBM Credit. See
"Management's Discussion and Analysis of
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Financial Condition and Results of Operations -- Certain Factors That May
Affect the Company's Future Results of Operations -- Need for Additional
Financing; Loan Restrictions."
A significant portion of the Company's net worth and liquidity is represented
by the Company's remaining holdings in Splash. Although the Company may
trade its shares in the open market pursuant to Rule 144 or privately, the
market price of Splash Common Stock has been volatile. There are other
shareholders in Splash with large blocks of restricted common stock who may
try to sell their shares at the same time as the Company. If too many shares
are offered for sale at the same time, the price may be further depressed.
CERTAIN FACTORS THAT MAY AFFECT THE COMPANY'S FUTURE RESULTS OF OPERATIONS
A number of uncertainties exist that could affect the Company's future
operating results, including, without limitation, the following:
VALUE AND LIQUIDITY OF INTEREST IN SPLASH TECHNOLOGY HOLDINGS, INC.
A significant portion of the Company's net worth and liquidity is represented
by the Company's remaining holdings in Splash. Although the Company may
trade its shares pursuant to Rule 144 or privately, the market price of
Splash Common Stock has been volatile. There are other shareholders in
Splash with large blocks of restricted common stock who may try to sell their
shares when the Company is in the market. If too many shares are offered for
sale at the same time, the price may be depressed. Ideally, proceeds from
the sale of Splash Common Stock held by the Company will be sufficient to
repay the balance of the IBM Credit facility and to provide sufficient
working capital to the Company during fiscal 1998, but there can be no
assurance that the Company will be able to effectively time its sales or that
the market value of Splash Common Stock will be adequate to achieve such
goals. With the recent decline in the closing price of Splash Common Stock
to $16.56 on May 7, 1998, the Company would have $1.0 million net proceeds
after retirement of the IBM Credit debt if it were to sell its remaining
190,139 shares of Splash Common Stock as of that date.
CONTINUING OPERATING LOSSES
The Company experienced operating losses in each of its prior five fiscal
years. In the future, the Company's ability to achieve and subsequently
sustain profitable operations will depend upon a number of factors, including
the Company's ability to control costs; the Company's ability to service its
outstanding indebtedness to IBM Credit; the Company's ability to realize
appreciation in minority ownership interests in Splash and other investments,
which cannot be assured in light of the substantial decline in the market
value of Splash Common Stock; the Company's ability to generate sufficient
cash from operations or obtain additional funds to fund its operating
expenses; the Company's ability to successfully market its software products;
the Company's ability to develop innovative and cost-competitive new products
and to bring those products to market in a timely manner; the commercial
acceptance of Apple computers and the MacOS and the rate and mix of Apple
computers and related products sold; the Company's ability to successfully
develop and market products for the Microsoft Windows and NT operating
systems in a timely manner; competitive factors such as new product
introductions, product enhancements and aggressive marketing and pricing
practices; general economic conditions; the Company's ability to negotiate a
settlement or other favorable conclusion of the EFI litigation; and other
factors. For these and other reasons, there can be no assurance that the
Company will be able to achieve or subsequently maintain profitability in the
near term, if at all.
FLUCTUATIONS IN OPERATING RESULTS
The Company has experienced substantial fluctuations in operating results.
The Company's customers generally order on an as-needed basis, and the
Company has historically operated with relatively small backlogs. Quarterly
sales and operating results depend heavily on the volume and timing of
bookings received during the quarter, which are difficult to forecast. A
substantial portion of the Company's revenues are derived from sales made
late in each quarter, which increases the difficulty in forecasting sales
accurately. Since the end of the Company's 1995 fiscal year, shortages of
available cash have restricted the Company's ability to purchase inventory
and have delayed the Company's receipt of products from suppliers and
increased shipping and other costs. Furthermore, because of its financial
condition, the Company believes that many suppliers are hesitant to continue
their relationships with or extend credit terms to the Company and potential
new suppliers are reluctant to provide goods to the Company. The Company
recognizes sales upon shipment of product, and
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allowances are recorded for estimated uncollectable amounts, returns, credits
and similar costs, including product warranties and price protection. Due to
the inherent uncertainty of such estimates, there can be no assurance that
the Company's forecasts regarding bookings, collections, rates of return,
credits and related matters will be accurate. A significant portion of the
operating expenses of the Company are relatively fixed in nature, and planned
expenditures are based primarily on sales forecasts which, as indicated
above, are uncertain. Any inability on the part of the Company to adjust
spending quickly enough to compensate for any failure to meet sales forecasts
or to receive anticipated collections, or any unexpected increase in product
returns or other costs, could also have an adverse impact on the Company's
operating results. As a strategic response to a changing competitive
environment, the Company has elected, and, in the future, may elect from time
to time, to make certain pricing, service or marketing decisions or
acquisitions that could have a material adverse effect on the Company's
business, results of operations and financial condition. The Company also
completed a variety of business divestitures during fiscal 1996 and 1997,
restructured the terms of its indebtedness to IBM Credit and issued a
substantial amount of equity in the Company to its creditors in satisfaction
of approximately $45.9 million in claims and indebtedness during the fourth
quarter of fiscal 1996. In addition, the Company has begun to focus its
efforts on developing and marketing software products, an area in which it
has limited experience. As a result, the Company believes that
period-to-period comparisons of its results of operations will not
necessarily be meaningful and should not be relied upon as any indication of
future performance. Due to all of the foregoing factors, it is likely that
in some future quarter the Company's operating results will be below the
expectations of public market analysts and investors. In such event, the
price of the Company's Common Stock would be likely to be materially
adversely affected.
NEED FOR ADDITIONAL FINANCING; LOAN RESTRICTIONS
The Company intends to finance its working capital needs through cash
generated by operations, sales of liquid assets and borrowings under a
restructured working line of credit with IBM Credit. Because the Company has
experienced operating losses in each of its prior five fiscal years, the
Company must significantly reduce operating expenses and/or significantly
increase net sales in order to finance its working capital needs with cash
generated by operations. This is particularly important as a result of the
substantial decline in the value of the Splash Common Stock. Furthermore,
pursuant to the restructured loan with IBM Credit, the Company is required to
deposit its revenues in accounts subject to control by IBM Credit. At any
time, regardless of whether the Company is in default of its obligations to
IBM Credit, IBM Credit is permitted to apply these amounts towards the
repayment of the Company's obligations to IBM Credit. This loan is also
subject to mandatory prepayment as follows: (i) upon the disposition of any
assets of the Company outside of the ordinary course of business, all net
proceeds to the Company must be applied towards the Company's obligations
under the loan; (ii) upon the closing of any financing, 10% of the proceeds
must be applied towards the Company's obligations under the loan; (iii) upon
the thirtieth day following the end of each fiscal quarter, an amount of no
less than 50% of operating cash flow for such prior fiscal quarter must be
applied towards the Company's obligations under the loan; and (iv) upon the
receipt of any other amounts other than sales of inventory or used or
obsolete equipment in the ordinary course of business, and not otherwise
described in the preceding clause (i) - (iii), all of such amounts must be
applied towards the Company's obligations under the loan. IBM Credit's
control over the Company's financial resources as well as these prepayment
provisions will place a further strain on the ability of the Company to fund
its working capital needs internally. Accordingly, there can be no assurance
that the Company will be able to successfully fund its working capital needs
internally.
Although the restructured loan provides for an amended working line of credit
of up to $2.1 million, the Company will only be able to borrow amounts up to
the "borrowing base" which is defined as (i) sixty percent of the value of
the Splash Common Stock held by the Company (net of IBM Credit's option to
purchase 144,113 shares); (ii) the lesser of 10% of the gross value of
eligible inventory or $500,000; plus (iii) 80% of the Company's eligible
domestic accounts receivable; (iv) the lesser of 50% of the gross value of
certain eligible Japanese and European accounts receivable or $500,000);
plus (v) 50% of the approximately $2.0 million held in escrow in connection
with the law suit filed by EFI. The amended working capital line of credit
will be reduced by fifty percent of the value of Splash Common Stock shares
sold by the Company other than the shares representing the option held by IBM
Credit. Once the line of credit has been reduced to zero, if ever, the
Company does not expect that it will have a source of working capital in the
future, unless the proposed $3.0 million working capital line of credit is
approved. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations --Financial Condition."
The working capital line of credit also imposes certain operating and
financial restrictions on the Company and requires the Company to maintain
certain financial covenants such as minimum working capital, restricts the
ability of the Company to incur additional indebtedness, pay dividends,
create liens, sell assets or engage in mergers or acquisitions, or make
certain capital expenditures. The failure to comply with these covenants
would constitute a default under the loan, which is secured by substantially
all of the Company's assets. In the event of such a default, IBM Credit
could elect to declare all of the
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funds borrowed pursuant thereto to be due and payable together with accrued
and unpaid interest proceeding and to apply all amounts on deposit in the
Company's bank accounts, which could result in the Company becoming a debtor
in a bankruptcy. The loan restrictions could limit the ability of the
Company to effect future financings or otherwise restrict corporate
activities.
As of March 31, 1998, the Company was not in compliance with all of the
financial covenants under the working capital line of credit (specifically,
minimum working capital and current assets to current liabilities ratio)
however, IBM Credit has waived such defaults.
In the event that the Splash Common Stock and the working capital line of
credit are insufficient to fund the Company's working capital needs, the
Company may need to raise additional capital through public or private
financings, strategic relationships or other arrangements. There can be no
assurance that such additional funding will be available on terms attractive
to the Company, or at all. The failure of the Company to raise capital when
needed would have a material adverse effect on the Company's business,
operating results and financial condition. If the additional funds are
raised through the issuance of equity securities, the percentage ownership of
the Company of its then-current shareholders would be reduced. Furthermore,
such equity securities might have rights, preferences or privileges senior to
those of the Company's Common Stock.
DEPENDENCE ON AND COMPETITION WITH APPLE
Historically, substantially all of the Company's products have been designed
for and sold to users of Apple personal computers. Although the Company has
begun to market certain products for the Windows environment, it is expected
that sales of products for Apple computers will continue to represent
substantially all of the sales of the Company for fiscal 1998. Apple has
lost significant market share over the past couple of years and is
experiencing declining sales in an absolute sense. The Company's operating
results would be adversely affected if these trends should continue or if
other developments were to adversely affect Apple's business. Furthermore,
any continued difficulty that may be experienced by Apple in the development,
manufacturing, marketing or sale of its computers, or other disruptions to,
or uncertainty in the market regarding, Apple's business, resulting from
these or other factors could result in further reduced demand for Apple
computers, which in turn could materially and adversely affect sales of the
Company's products. Recently, Apple has announced large losses, management
changes, headcount reductions, and other significant events which have led to
uncertainty in the market regarding Apple's business and products. In
addition, news reports indicating that Apple may be or may have been the
target of merger, acquisition, or takeover negotiations, have led or could
lead to uncertainty in the market regarding Apple's business and products.
Also, Apple's decision not to renew the licenses to the MacOS with the Mac
clone manufacturers further limits the market available for the Company's
Macintosh products.
As software applications for the color publishing and multimedia markets
become more available on platforms other than Macintosh, it is likely that
these other platforms will continue to gain acceptance in these markets. For
example, newer versions of the Windows operating environment support high
performance graphics and video applications similar to those offered on the
Macintosh. There is a risk that this trend will reduce the support given to
Macintosh products by third party developers and could substantially reduce
demand for Macintosh products and peripherals over the long term.
A number of the Company's products compete with products marketed by Apple.
As a competitor of the Company, Apple could in the future take steps to
hinder the Company's development of compatible products and slow sales of the
Company's products. The Company's business is based in part on supplying
products that meet the needs of high-end customers that are not fully met by
Apple's products. As Apple improves its products or bundles additional
hardware or software into its computers, it reduces the market for Radius
products that provide those capabilities. For example, the Company believes
that the on-board performance capabilities included in Macintosh Power PC
products have reduced and continue to reduce overall sales for the Company's
graphics cards. In the past, the Company has developed new products as
Apple's progress has rendered existing Company products obsolete. However,
in light of the Company's current financial condition there can be no
assurance that the Company will continue to develop new products on a timely
basis or that any such products will be successful. In order to develop
products for the Macintosh on a timely basis, the Company depends upon access
to advance information concerning new Macintosh products. A decision by
Apple to cease sharing advance product information with the Company would
adversely affect the Company's business.
New products anticipated from and introduced by Apple could cause customers
to defer or alter buying decisions due to uncertainty in the marketplace, as
well as presenting additional direct competition for the Company. For
example, the Company believes that Apple's transition during 1994 to Power PC
products caused delays and uncertainties in the marketplace and had the
effect of reducing demand for the Company's products. In addition, sales of
the Company's products have been adversely affected by Apple's revamping of
its entire product line from NuBus-based to PCI Bus-based computers. In the
past, transitions in Apple's products have been accompanied by shortages in
those products and in key
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components for them, leading to a slowdown in sales of those products and in
the development and sale by the Company of compatible products. In addition,
it is possible that the introduction of new Apple products with improved
performance capabilities may create uncertainties in the market concerning
the need for the performance enhancements provided by the Company's products
and could reduce demand for such products.
COMPETITION
The markets for the Company's products are highly competitive, and the
Company expects competition to intensify. Many of the Company's current and
prospective competitors have significantly greater financial, technical,
manufacturing and marketing resources than the Company. The Company believes
that its ability to compete will depend on a number of factors, including the
amount of financial resources available to the Company, its ability to repay
its indebtedness to IBM Credit, success and timing of new product
developments by the Company and its competitors, product performance, price
and quality, breadth of distribution and customer support. There can be no
assurance that the Company will be able to compete successfully with respect
to these factors. In addition, the introduction of lower priced competitive
products could result in price reductions that would adversely affect the
Company's results of operations.
DEPENDENCE ON LIMITED NUMBER OF MANUFACTURERS AND SUPPLIERS
The Company outsources the manufacturing and assembly of its products to
third party manufacturers. Although the Company uses a number of
manufacturer/assemblers, each of its products is manufactured and assembled
by a single manufacturer. The failure of a manufacturer to ship the
quantities of a product ordered by the Company could cause a material
disruption in the Company's sales of that product. In the past, most
recently in the fourth quarter of fiscal 1996, the Company has experienced
substantial delays in its ability to fill customer orders for displays and
other products, due to the inability of certain manufacturers to meet their
volume and schedule requirements and, more recently, due to the Company's
shortages in available cash. Such shortages have caused some manufacturers
to put the Company on a cash or prepay basis and/or to require the Company to
provide security for their risk in procuring components or reserving
manufacturing time, and there is a risk that manufacturers will discontinue
their relationship with the Company. The Company currently has arranged
payment terms for certain of its major manufacturers such that certain of the
Company's major customers pay these manufacturers directly for products
ordered and shipped. In the event these customers do not pay these
manufacturers, there can be no assurance that such manufacturers will not
cease supplying the Company.
The Company is also dependent on sole or limited source suppliers for certain
key components used in its products, including certain cables, digital video
integrated circuits, color-calibrated monitors and other products. Certain
other components and molded plastic parts are also purchased from sole or
limited source suppliers. The Company purchases these sole or limited source
components primarily pursuant to purchase orders placed from time to time in
the ordinary course of business and has no guaranteed supply arrangements
with sole or limited source suppliers. Therefore, these suppliers are not
obligated to supply products to the Company for any specific period, in any
specific quantity or at any specific price, except as may be provided in a
particular purchase order. Although the Company expects that these suppliers
will continue to meet its requirements for the components, there can be no
assurance that they will do so, particularly in light of the Company's
financial condition. The Company's reliance on a limited number of suppliers
involves a number of risks, including the absence of adequate capacity, the
unavailability or interruption in the supply of key components and reduced
control over delivery schedules and costs. The Company expects to continue to
rely on a limited number of suppliers for the foreseeable future. If these
suppliers became unwilling or unable to continue to provide these components
the Company would have to develop alternative sources for these components
which could result in delays or reductions in product shipments which could
have a material adverse effect on the Company's business, operating results
and financial condition. Certain suppliers, due to the Company's shortages
in available cash, have put the Company on a cash or prepay basis and/or
required the Company to provide security for their risk in procuring
components or reserving manufacturing time, and there is a risk that
suppliers will discontinue their relationship with the Company.
The introduction of new products presents additional difficulties in
obtaining timely shipments from suppliers. Additional time may be needed to
identify and qualify suppliers of the new products. Also, the Company has
experienced delays in achieving volume production of new products due to the
time required for suppliers to build their manufacturing capacity. An
extended interruption in the supply of any of the components for the
Company's products, regardless of the cause, could have an adverse impact on
the Company's results of operations.
TECHNOLOGICAL CHANGE; CONTINUING NEED TO DEVELOP NEW PRODUCTS
The personal computer industry in general, and color publishing and video
applications within the industry, are characterized by rapidly changing
technology, often resulting in short product life cycles and rapid price
declines. The Company believes that its success will be highly dependent on
its ability to develop innovative and cost-competitive new products and to
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bring them to the marketplace in a timely manner. Should the Company fail to
introduce new products on a timely basis, the Company's operating results
could be adversely affected. As a result of the Company's financial
condition, it has had to significantly reduce its research and development
expenditures. For the 1997 fiscal year, the Company spent approximately $5.0
million on research and development as compared with approximately $7.5
million for the 1996 fiscal year and $19.3 for the 1995 fiscal year.
Furthermore, as described in "-- Need for Additional Financing; Loan
Restrictions," the terms of the Company's working capital line of credit
restricts the Company's ability to fund its working capital needs and, as a
result, the ability of the Company to maintain historical levels of research
and development expenditures. Continued reduction in the available cash
resources of the Company could result in the interruption or cancellation of
research and product development efforts which would have a material adverse
effect on the business, operating results and financial condition of the
Company.
The Company anticipates that the video editing industry will follow the
pattern of the professional publishing industry in which desktop publishing
products, including those produced by Radius, replaced more expensive,
proprietary products, and the Company also anticipates that this evolution
will lead to an increase in the purchase and use of video editing products,
in particular digital video editing products for use with digital video
camcorders. As a result, the Company has devoted significant resources to
this product line. There can be no assurance that this evolution will occur
in the digital video editing industry as expected by the Company, or that
even if it does occur that it will not occur at a slower pace than
anticipated. There can also be no assurance that any digital video editing
products developed by the Company will achieve consumer acceptance or broad
commercial success. In the event that the increased use of such video
editing products does not occur or in the event that the Company is unable to
successfully develop and market such products, the Company's business,
operating results and financial condition would be materially adversely
affected, particularly in light of the fact that the Company anticipates that
it will begin to de-emphasize many of its traditional hardware products in
the future.
DEPENDENCE ON INDIRECT DISTRIBUTION CHANNELS
The Company's primary means of distribution is through a limited number of
third-party distributors and master resellers that are not under the direct
control of the Company. Furthermore, the Company relies on one exclusive or
primary distributor for its sales in each of Japan and Europe. The Company
does not maintain a direct sales force. As a result, the Company's business
and financial results are highly dependent on the amount of the Company's
products that is ordered by these distributors and resellers. Such orders
are in turn dependent upon the continued viability and financial condition of
these distributors and resellers as well as on their ability to resell such
products and maintain appropriate inventory levels. Furthermore, many of
these distributors and resellers generally carry the product lines of a
number of companies, are not subject to minimum order requirements and can
discontinue marketing the Company's products at any time. Accordingly, the
Company must compete for the focus and sales efforts of these third parties.
Because certain of the Company's major suppliers have arrangements with the
Company pursuant to which certain of the Company's major customers are
responsible for payment of goods sent to the Company, the Company is
dependent on certain resellers to make payments to its suppliers. In
addition, due in part to the historical volatility of the personal computer
industry, certain of the Company's resellers have from time to time
experienced declining profit margins, cash flow shortages and other financial
difficulties. The future growth and success of the Company will continue to
depend in large part upon its indirect distribution channels, including its
reseller channels. If its resellers or other distributors were to experience
financial difficulties, the Company's results of operations could be
adversely affected.
INTERNATIONAL SALES
Prior to the second fiscal quarter of 1996, the Company's international sales
were primarily made through distributors and the Company's subsidiary in
Japan. Effective April 1, and July 1, 1996 the Company appointed an exclusive
distributor for Japan and Europe, respectively. The Company expects that
international sales, particularly sales to Japan, will represent a
significant portion of its business activity and that it will be subject to
the normal risks of international sales such as currency fluctuations, longer
payment cycles, export controls and other governmental regulations and, in
some countries, a lesser degree of intellectual property protection as
compared to that provided under the laws of the United States. Sales in
Japan could be affected by the economic conditions in that region. Sales in
Asian markets have not been, and the Company does not expect them to be,
material in the future outside of Japan. Furthermore, a reduction in sales
efforts or financial viability of the distributors could adversely affect the
Company's net sales and its ability to provide service and support to
Japanese and European customers. Additionally, fluctuations in exchange
rates could affect demand for the Company's products. If for any reason
exchange or price controls or other restrictions on foreign currencies are
imposed, the Company's business, operating results and financial condition
could be materially adversely affected. Net sales could also be adversely
affected in the future as a result of the exclusive distributor relationships
for Japan and Europe because the Company only recognizes as net sales a
portion of the sales price of any product sold through such distributor
arrangements. Accordingly, even if sales for such regions increase or remain
similar to historic levels, the Company would recognize a lesser amount of
net sales for such regions as compared to historic levels.
-18-
<PAGE>
During the third quarter of fiscal 1997, the exclusivity clause in the
agreement with the Japanese distributor was terminated. No other distribution
relationship for Japan has been entered into by the Company.
Effective January 1, 1998, the Company has modified its relationships with
its distributors in Japan and Europe for its digital video software products.
Sales will now be made for these products based upon a price list and they
will no longer pay commissions upon their sale of these products. Commission
will still be paid on the sales of all of the Company's other products.
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant degree upon the continued
contributions of its key management, marketing, product development and
operational personnel and the Company's ability to retain and continue to
attract highly skilled personnel. The Company does not carry any key person
life insurance with respect to any of its personnel. Competition for
employees in the computer industry is intense, and there can be no assurance
that the Company will be able to attract and retain qualified employees.
Many members of the Company's management have departed within the past year,
including its former President and Chief Executive Officer and four other
Vice Presidents, including its former Senior Vice President on March 31,
1998. The Company has also had substantial layoffs and other employee
departures. Because of the Company's financial difficulties and the very
tight labor market for technical personnel, it has become increasingly
difficult for it to hire new employees and retain key management and current
employees. The failure of the Company to attract and retain key personnel
would have a material adverse effect on the Company's business, operating
results and financial condition.
IMPACT OF YEAR 2000
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the
Company's computer programs that have time-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could
result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
The Company has been studying this issue but has not yet completed the
process. As a result, the Company has no reasonable basis to conclude that
the Year 2000 Issue will not materially affect future financial results, or
cause reported financial information not to be indicative of future operating
results or future financial condition.
-19-
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 3 to Consolidated Financial Statements - Commitments and
Contingencies.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Shareholders held on February 11, 1998, the
following proposals were adopted by the margins indicated:
1. To elect a Board of Directors to hold office until the next annual meeting
of shareholders and until their respective successors have been elected
and qualified or until their earlier resignation or removal. (All number
of shares are stated prior to the one-for-ten reverse stock split of
outstanding shares of Common Stock effected on March 9, 1998.
<TABLE>
<CAPTION>
Number of Shares
For Withheld
<S> <C> <C>
Charles W. Berger 39,733,665 2,335,272
Michael D. Boich 41,248,930 820,007
Mark M Housley 41,346,045 722,892
John C. Kirby 41,293,741 775,196
</TABLE>
2. To approve an amendment to the Company's 1995 Stock Option Plan to reserve
an dditional 2,700,000 shares of Common Stock for issuance thereunder.
<TABLE>
<S> <C>
For 38,412,760
Against 2,374,712
Abstain 1,281,465
Broker Non-Vote 13,023,261
</TABLE>
3. To authorize the amendment of the articles of incorporation of the Company
to ffectuate a reverse stock split.
<TABLE>
<S> <C>
For 40,518,429
Against 1,358,558
Abstain 191,950
Broker Non-Vote 13,023,261
</TABLE>
4. To ratify the appointment of Ernst & Young LLP as independent auditors of
the Company for it's fiscal year ending September 30, 1998.
<TABLE>
<S> <C>
For 41,507,085
Against 386,661
Abstain 175,191
Broker Non-Vote 13,023,261
</TABLE>
ITEM 5. OTHER INFORMATION
Steve Petracca, senior vice president, who joined the Company in connection
with the purchase of Reply Corporation's Dos on Mac assets, resigned from the
Company as of March 31, 1998 to join a supplier to the Company. Mr. Petracca
will remain available as a consultant on a limited basis.
On May 1, 1998, the Company moved its headquarters to 460 E. Middlefield
Road, Mountain View, CA 94043. The lease on this facility will expire in
April, 1999 and consists of leased space of approximately 18,600 square feet
In March 1998, the Company sold the common stock of Umax Computer Corporation
held by it to Umax Data Systems, Inc. for $550,000.
-20-
<PAGE>
Possible Delisting from Nasdaq SmallCap Market: as of March 31, 1998, the
Company had assets of $10.4 million and total liabilities of $15.3 million
and therefore had net tangible assets of $(4.9 million). In order for the
Company's Common Stock to continue to be listed on the Nasdaq SmallCap
Market, the Company will be required to maintain net tangible assets of at
least $2.0 million, or must have net income in its most recently completed
fiscal year or in two of the three prior fiscal years. The Company had net
income in its most recently completed fiscal year. However, in the event
that the Company does not increase its net tangible assets to greater than
$2.0 million, the Company's Common Stock would be subject to delisting if it
also failed to achieve net income for its current fiscal year.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The following exhibits are filed with this Quarterly Report:
10.01 Amended and Restated Working Capital and Term Loan Agreement dated as
of April 16, 1998 between IBM Credit and the Registrant.
27.01 Financial Data Schedule (EDGAR version only).
(b) REPORTS ON FORM 8-K
No report on Form 8-K was filed during the three months ended March 31, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 11, 1998 RADIUS INC.
By: /s/
-----------------------
Henry V. Morgan
Chief Financial Officer
-21-
<PAGE>
EXHIBIT 10.01
AMENDMENT
TO
AMENDED AND RESTATED
WORKING CAPITAL FINANCING AND
TERM LOAN AGREEMENT
This Amendment ("Amendment") to the Amended and Restated Working Capital
Financing and Term Loan Agreement is made as of April 16, 1998 by and between
RADIUS INC., a California corporation ("Customer") and IBM CREDIT
CORPORATION, a Delaware corporation ("IBM Credit").
RECITALS:
A. Customer and IBM Credit have entered into that certain Amended and
Restated Working Capital Financing and Term Loan Agreement, dated as of
August 30, 1996 (as amended, supplemented or otherwise modified from time to
time, the "Agreement");
B. Customer has indicated that it is in negotiations with Silicon
Valley Bank for a line of credit and that Customer anticipates entering into
such line of credit on or prior to May 15, 1998;
C. Customer has requested that IBM Credit extend the termination date
of the Agreement to May 15, 1998 and make certain other modifications to the
Agreement;
D. Whereas, IBM Credit is willing to extend the termination date and make
certain other modifications to the Agreement, in each case, on the terms and
subject to the conditions set forth in this Amendment.
AGREEMENT
NOW THEREFORE, in consideration of the premises set forth herein, and
for other good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the parties hereto agree as follows:
Section 1. Definitions. All capitalized terms not otherwise defined herein
shall have the respective meanings set forth in the Agreement.
Section 2. Amendment. The Agreement is hereby amended as follows:
(1) Attachment A to the Agreement is hereby amended by deleting such
Attachment A in its entirety and substituting, in lieu thereof, the
Attachment A attached hereto.
(2) Section 1.1 of the Agreement is hereby amended by deleting the
definition of "Termination Date" in its entirety and substituting, in lieu
thereof, the following definition of "Termination Date":
"Termination Date": shall mean May 15, 1998 or such other date
as IBM Credit and Customer shall agree to in writing.
(3) The Agreement is hereby amended by inserting therein the
following new term:
"In consideration of the extension of the Termination Date
to May 15, 1998 and for other good and valuable consideration
the receipt and sufficiency of which is hereby acknowledged,
Customer shall pay to IBM Credit an
1
<PAGE>
extension fee equal to Five Thousand Dollars ($5,000.00) on
or prior to April 30, 1998. Such fee payable to IBM Credit
hereunder shall be nonrefundable and shall be in addition to
any other fees IBM Credit may charge to Customer."
Section 4. Rights and Remedies. Except to the extent specifically amended
herein IBM Credit reserves any and all rights and remedies that IBM Credit
now has or may have in the future with respect to Customer, including any and
all rights or remedies which it may have in the future as a result of
Customer's failure to comply with its financial covenants to IBM
Credit. Except to the extent specifically amended herein the Agreement shall
remain in full force and effect and neither this Amendment, any of IBM
Credit's actions or IBM Credit's failure to act shall be deemed to be a
waiver or modification of any such rights or remedies.
Section 5. Governing Law. This Amendment shall be governed by and interpreted
in accordance with the laws which govern the Agreement.
Section 6. Counterparts. This Amendment may be executed in any number of
counterparts, each of which shall be an original and all of which shall
constitute one agreement.
IN WITNESS WHEREOF, this Amendment has been executed by duly
authorized representatives of the undersigned as of the day and year first
above written.
RADIUS INC. IBM CREDIT CORPORATION
By: /s/ Henry V. Morgan By: /s/ David Lindsay
-------------------------- -------------------------
Name: Henry V. Morgan Name: David Lindsay
------------------------- -----------------------
Title: CFO Title: AOM
------------------------- -----------------------
2
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> MAR-31-1998
<CASH> 539
<SECURITIES> 0
<RECEIVABLES> 6,696
<ALLOWANCES> (4,319)
<INVENTORY> 608
<CURRENT-ASSETS> 10,193
<PP&E> 19,789
<DEPRECIATION> (19,621)
<TOTAL-ASSETS> 10,361
<CURRENT-LIABILITIES> 15,304
<BONDS> 0
0
0
<COMMON> 169,025
<OTHER-SE> (173,968)
<TOTAL-LIABILITY-AND-EQUITY> 10,361
<SALES> 5,015
<TOTAL-REVENUES> 5,015
<CGS> 3,463
<TOTAL-COSTS> 4,363
<OTHER-EXPENSES> 2,539
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 165
<INCOME-PRETAX> 3,265
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,265
<EPS-PRIMARY> 0.59
<EPS-DILUTED> 0.59
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