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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 JUNE 27, 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 AUGUST 7,
1998 WAS 5,522,816.
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RADIUS INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE
- ------------------------------ ----
Item 1. Financial Statements
Consolidated Balance Sheets at June 30, 1998 (unaudited) and
September 30, 1997 3
Consolidated Statements of Operations for the Three and Nine Months Ended
June 30, 1998 and 1997 (unaudited) 4
Consolidated Statements of Cash Flows for the Nine Months Ended
June 30, 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 11
PART II. OTHER INFORMATION
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Item 1. Legal Proceedings 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
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-2-
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RADIUS INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
JUNE 30, SEPTEMBER 30,
1998 1997 (1)
--------- -------------
(unaudited)
ASSETS:
Current assets:
Cash $ 1,188 $ 773
Receivable from sale of shares of Splash Technology Holdings, Inc. 728 -
Accounts receivable, net 2,008 2,168
Inventories 1,081 805
Investment in Splash Technology Holdings, Inc. 532 22,093
Prepaid expenses and other current assets 200 184
-------- -------
Total current assets 5,737 26,023
Property and equipment, net 110 249
-------- -------
$ 5,847 $26,272
-------- -------
-------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY (Net capital deficiency):
Current liabilities:
Accounts payable $ 4,404 $ 4,511
Accrued payroll and related expenses 440 1,320
Accrued warranty costs 216 538
Other accrued liabilities 1,949 2,690
Deferred Income 500 -
Accrued income taxes 2,122 2,111
Accrued restructuring and other charges 497 2,033
Short-term borrowings 1,597 4,638
Obligation under capital leases - 273
-------- -------
Total current liabilities 11,725 18,114
Shareholders' equity (Net capital deficiency):
Common stock 169,102 168,994
Unrealized gain on available-for-sale securities 532 22,093
Accumulated deficit (175,560) (182,972)
Accumulated translation adjustment 48 43
-------- -------
Total shareholders' equity (Net capital deficiency) (5,878) 8,158
-------- -------
$ 5,847 $26,272
-------- -------
-------- -------
(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-
RADIUS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data; unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- ------------------------
1998 1997 1998 1997
-------- -------- --------- ---------
Sales $ 3,823 $ 4,816 $ 13,514 $ 23,867
Commissions and royalties 47 1,225 911 4,418
-------- -------- --------- ---------
Total net sales 3,870 6,041 14,425 28,285
Cost of sales 2,223 5,472 9,283 20,907
-------- -------- --------- ---------
Gross profit 1,647 569 5,142 7,378
-------- -------- --------- ---------
Operating expenses:
Research and development 737 1,633 2,051 3,534
Selling, general and administrative 1,661 5,986 5,474 15,307
-------- -------- --------- ---------
Total operating expenses 2,398 7,619 7,525 18,841
-------- -------- --------- ---------
Loss from operations (751) (7,050) (2,383) (11,463)
Other income (expense), net 4,715 (10) 10,211 (22)
Interest expense (78) (757) (416) (2,251)
-------- -------- --------- ---------
Income (loss) before income taxes 3,886 (7,817) 7,412 (13,736)
Provision for income taxes - - - 316
-------- -------- --------- ---------
Net income (loss) $ 3,886 $ (7,817) $ 7,412 $ (14,052)
-------- -------- --------- ---------
-------- -------- --------- ---------
Preferred stock dividend - 75 - 225
Net income (loss) applicable to
common shareholders $ 3,886 $ (7,892) $ 7,412 $`(14,277)
-------- -------- --------- ---------
-------- -------- --------- ---------
Net income (loss) per share:
Basic net income (loss) per share applicable
to common shareholders $ 0.70 $ (1.43) $ 1.34 $ (2.60)
-------- -------- --------- ---------
-------- -------- --------- ---------
Diluted net income (loss) per share applicable
to common shareholders $ 0.70 $ (1.43) $ 1.33 $ (2.60)
-------- -------- --------- ---------
-------- -------- --------- ---------
Shares used in per share computations:
Shares used in computing basic net
income (loss) per share 5,529 5,521 5,519 5,491
-------- -------- --------- ---------
-------- -------- --------- ---------
Shares used in computing diluted net
income (loss) per share 5,546 5,521 5,566 5,491
-------- -------- --------- ---------
-------- -------- --------- ---------
See accompanying notes.
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RADIUS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(in thousands, unaudited)
NINE MONTHS ENDED
JUNE 30,
-----------------------
1998 1997
-------- ------
Cash flows from operating activities:
Net income (loss) $ 7,412 (14,052)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization 115 769
Gain on the sale of Splash and UCC Common Stock (9,016) -
Loss on the disposal of fixed assets 25 446
(Increase) decrease in assets:
Accounts receivable 165 (151)
Inventories (276) 9,210
Prepaid expenses and other current assets (16) -
Income tax receivable - 514
Increase (decrease) in liabilities:
Accounts payable (107) 1,671
Accrued payroll and related expenses (880) (1,294)
Accrued warranty costs (322) (132)
Other accrued liabilities (741) (770)
Accrued restructuring costs (1,536) (394)
Accrued income taxes 11 (112)
-------- ------
Total adjustments (12,578) 9,757
-------- ------
Net cash used in operating activities (5,166) (4,295)
Cash flows from investing activities:
Capital expenditures (1) (55)
Deposits and other assets - 50
Payment from KDS 500 -
Net proceeds from the sale of Splash and UCC Common Stock 8,288 -
-------- ------
Net cash provided by (used in) investing activities 8,787 (5)
Cash flows from financing activities:
Short-term borrowings, net (3,041) 2,919
Principal payments of long-term debt and capital leases (273) (875)
Issuance of common stock 108 48
-------- ------
Net cash (used in) provided by financing activities (3,206) 2,092
-------- ------
Net increase (decrease) in cash and cash equivalents 415 (2,208)
Cash and cash equivalents, beginning of period 773 2,974
-------- ------
Cash and cash equivalents, end of period $ 1,188 $ 766
-------- ------
-------- ------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 427 $ 2,254
-------- ------
-------- ------
Income taxes $ - $ 1
-------- ------
-------- ------
Non-cash financing activity:
Dividend paid on preferred stock $ - $ 225
-------- ------
-------- ------
Non-cash investing activity:
Receivable from sale of shares of Splash Technology Holdings, Inc. $ 728 $ -
-------- ------
-------- ------
See accompanying notes.
-5-
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 June 30, 1998 and for the three and nine months ended June
30, 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):
JUNE 30, SEPTEMBER 30,
1998 1997
----------- -------------
(unaudited)
Work in process $144 $176
Finished goods 937 629
------- -------
$ 1,081 $ 805
------- -------
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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 may have indemnification rights or additional immunity with
respect to elements of 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 immunity defense ruled
on in the summary judgment motion, which would require the Company to defend
EFI's claims based upon their merits. EFI filed its notice of appeal on
April 7, 1998, and each party has submitted opening briefs. Oral argument
and a determination of this appeal are expected during the 1999 fiscal year.
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
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of approximately 32 defendants in Maizes & Maizes et al. v. Apple Computer et
al., Superior Court of New Jersey, Essex 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. The settlement has been approved by the
court. 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.
(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 June 30, 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-
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 June 30, 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 July 16, 1998, IBM Credit had exercised all its option of
Splash Common Stock.
During the fourth quarter of fiscal 1997 and the nine months ended June 30,
1998, the Company sold an aggregate of 996,875 and 537,411 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 $0.5 million relating to the
remaining 32,728 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
$16.25 per share at June 26, 1998 is recorded as a component of shareholders'
equity at June 30, 1998. Since June 30, 1998, the Company has sold the
remaining 32,728 shares of Splash Common Stock and has repaid in full its
working line of credit with IBM Credit. See Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources.
NOTE 5. UMAX DATA SYSTEMS, INC.
In February 1996, the Company sold its MacOS compatible systems business to
UMAX Computer Corporation ("UCC"), a company formed by UMAX Data Systems,
Inc. ("UMAX"). The Company received approximately $2.3 million in cash and
debt relief and 1,492,500 shares of UCC's Common Stock, representing
approximately 19.9% of UCC's then outstanding shares of UCC Common Stock.
The cash proceeds were paid to IBM Credit. In March 1998, due to Apple
Computer's recent reversal in MacOS licensing policy, the Company sold the
common stock of Umax Computer Corporation held by it to Umax Data Systems,
Inc. for $550,000.
NOTE 6. 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 consist of
employee stock options using the treasury stock method.
-8-
The following table sets forth the computation of basic and diluted earnings
per share:
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- ------------------------
1998 1997 1998 1997
---------- -------- --------- --------
(UNAUDITED) (UNAUDITED)
NUMERATOR:
Net income (loss) $ 3,886 $(7,817) $ 7,412 $(14,052)
Preferred stock dividends - (75) - (225)
---------- -------- --------- --------
Numerator for basic and diluted earnings per share -
income (loss) available to common stockholders $ 3,886 $ (7,892) $ 7,412 $(14,277)
---------- -------- --------- --------
---------- -------- --------- --------
DENOMINATOR:
Denominator for basic earnings per share - weighted-average
shares outstanding 5,529 5,521 5,519 5,491
Effect of dilutive securities:
Employee stock options 17 - 47 -
---------- -------- --------- --------
Dilutive potential common shares 17 - 47 -
Denominator for diluted earnings per share - adjusted
weighted-average shares outstanding 5,546 5,521 5,566 5,491
---------- -------- --------- --------
---------- -------- --------- --------
Basic earnings (loss) per share $ 0.70 $ (1.43) $ 1.34 $ (2.60)
---------- -------- --------- --------
---------- -------- --------- --------
Diluted earnings (loss) per share $ 0.70 $ (1.43)(1) $ 1.33 $ (2.60)(1)
---------- -------- --------- --------
---------- -------- --------- --------
(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 on
Form 10-K for the fiscal year ended September 30, 1997.
NOTE 7. 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-
NOTE 8. SUBSEQUENT EVENTS
On August 7, 1998, the Company agreed to sell certain significant assets
related to its monitor business to Korea Data Systems (America), Inc.
("KDS"). Under the agreement, Radius will transfer its Radius, Supermac,
PressView and certain other trademarks to KDS and will license certain
intellectual property pertaining to PressView and PrecisionView monitors to
KDS. KDS has not agreed to purchase any inventory or other tangible assets
of Radius. The expected value of the transaction is $6.2 million, including
$1.0 million payable in August 1998 under the related license agreement. The
remaining amount is payable in installments over the next twelve months. Two
affiliates of KDS have guaranteed KDS' performance of its obligations. The
agreement is expected to close in February 1999 if KDS elects to have the
agreement submitted to Radius' shareholders for approval and such approval is
obtained and certain other contingencies are satisfied. In the interim,
Radius has licensed KDS the use of its monitor trademarks and specific
technology and expects to wind down its monitor business activities as
current supplies of monitors are sold, whether or not the asset purchase
agreement is completed. In the event that the asset purchase agreement is
not completed, the license agreement will continue as a perpetual license and
KDS will pay an additional $5.2 million under the extended license over
fifteen months instead of twelve. Radius will continue to use the
transferred trademarks and technology until the transition is completed over
the next several months and expects to focus on its digital video line of
business during this transition period.
-10-
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 successfully conclude or settle its
patent infringement litigation with EFI; the success of the Company's digital
video software products on which the Company expects to be substantially
dependent; 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 software products, including products for
Windows operating system, and 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. Furthermore,
substantially all of the Company's historic revenues have been attributed to
hardware/monitors. 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 second product for the Windows operating
system, MotoDV for Windows in the third quarter of fiscal 1998.
On August 7, 1998, the Company agreed to sell certain significant assets
related to its monitor business to KDS, see Notes to the Financial
Statements, Note 8 - Subsequent Events. The monitor business accounts for
substantially all of the revenues of the color publishing product line. The
two companies are in the process of defining the transition timetable, but at
the completion of the transition the Company will no longer realize any
revenues from the sale of monitors. The primary focus of the Company at that
time will be its digital video product line, which includes multimedia
authoring and editing video systems and software that can acquire and
manipulate video and audio information. The Company has also agreed with KDS
to continue to support the sale of the monitors through the Company's sales
force during August and September in return for $55 thousand a month and a
sharing of the gross margin from the sale of the monitor products during this
period.
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, 1997 and 1998,
management implemented a number of actions to address its cash flow and
operating issues including: restructuring its outstanding indebtedness to
trade
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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 most recently the agreement for
the sale and related license of significant assets of its monitor business to
Korea Data Systems (America), Inc. (See Notes to Consolidated Financial
Statements - Subsequent events - Note 8); 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.
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).
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
------ ------ ------ ------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 57.4 90.6 64.4 73.9
------ ------ ------ ------
Gross profit 42.6 9.4 35.6 26.1
------ ------ ------ ------
Operating expenses:
Research and development 19.1 27.0 14.2 12.5
Selling, general and administrative 42.9 99.1 37.9 54.1
------ ------ ------ ------
Total operating expenses 62.0 126.1 52.1 66.6
------ ------ ------ ------
Loss from operations (19.4) (116.7) (16.5) (40.5)
Other income(expense), net 121.8 (0.2) 70.8 (0.1)
Interest Expense (2.0) (12.5) (2.9) (8.0)
------ ------ ------ ------
Income (loss) before income taxes 100.4 (129.4) 51.4 (48.6)
Provision for income taxes 0.0 - 0.0 1.1
------ ------ ------ ------
Net income (loss) 100.4% (129.4)% 51.4% (49.7)%
------ ------ ------ ------
------ ------ ------ ------
NET SALES
The Company's total net sales decreased 35.9% to $3.9 million in the third
quarter of fiscal 1998 from $6.0 million for the same quarter in fiscal 1997.
Net sales for the first nine months of fiscal 1998 decreased 49.0% to $14.4
million from $28.3 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 digital video software product lines while discontinuing the
development of its color publishing, 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.
As a result of the planned sale by the Company of significant monitor
business assets to KDS, the Company anticipates lower overall net sales in
the immediate future. Future sales will be predominately attributable to
sales of software products since 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 PhotoDV for Windows in March 1998 and MotoDV for Windows in June
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 royalties
from Umax have ended due to the expiration of this obligation in March 1998.
-12-
Effective January 1, 1998, the Company has modified its relationships with
its distributors in Japan and Europe for its digital video software products
and will instead purchase products from the Company at a discount from the
price list. 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, although the Company believes that
these sales will not be material.
Sales to Ingram Micro and Microage Computer Center accounted for 57.2% and
3.6% of net sales for the third quarter of fiscal 1998, respectively. For
the corresponding period of fiscal 1997, the same customers accounted for
42.5% and 15.9% of the Company's net sales. For the nine month period ended
June 30, 1998, Ingram Micro accounted for 55.8% of the Company's net sales as
compared to 63.7% for the corresponding period of fiscal 1997.
GROSS PROFIT
The Company's gross profit margin was 42.6% and 35.6% for the three and nine
month periods ended June 30, 1998, as compared with 9.4% and 26.1% for the
corresponding periods in fiscal 1997. The gross profit margin for the three
month period ended June 30, 1997 included higher start-up manufacturing cost
for the DOS on Mac products. The gross profit margin for the nine month
period ended June 30, 1997 reflects a net charge of $3.6 million relating to
inventory write downs. Excluding this charge, the gross profit margin would
have been 38.8%. The increase in gross profit margin for the three and nine
month periods ended June 30, 1998 was due primarily to increased sales of
higher gross margin software products.
The Company anticipates the gross profit margins will be higher in the future
due to the impact of the planned sale of significant monitor business assets
and the increase in 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 $0.7 million or 19.0% of net
sales in the third quarter of fiscal 1998 from $1.6 million or 27.0% of net
sales in the same quarter of fiscal 1997. Research and development expenses
decreased from $3.5 million or 12.5% of net sales for the first nine months
of fiscal 1997 to $2.1 million or 14.2% of net sales for the corresponding
period of fiscal 1998. The increase in research and development expenses
expressed as a percentage of net sales for the nine month period were
primarily attributed to the decrease in net sales. The decrease in research
and development expenses in absolute dollars is primarily the result of
reducing expenses related to headcount resulting from the efforts to refocus
its business. The Company expects that decreases in its research and
development expenses due to the planned sale of significant monitor business
assets will be offset by increases in the expenses for the digital video
product line and therefore, expects research and development to remain at
third quarter levels.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased to $1.7 million or
42.9% of net sales in the third quarter of fiscal 1998 from $6.0 million or
99.1% of net sales in the same quarter of fiscal 1997. Selling, general and
administrative expenses decreased from $15.3 million or 54.1% of net sales
for the first nine months of fiscal 1997 to $5.5 million or 37.9% of net
sales for the corresponding period in fiscal 1998. Included in the selling,
general and administrative expenses for the three and nine months ended June
30, 1997 is an increase of $1.1 million to the allowance of doubtful
accounts. The Company decreased its selling, general and administrative
expenses primarily by reducing expenses related to headcount resulting from
the efforts to refocus its business. As a result of the planned sale of
significant monitor business assets, the Company expects selling, general and
administrative expenses to decrease slightly over the next several quarters.
After that the Company expects selling, general and administrative expenses
to increase gradually over time, however, the Company does not expect them to
approach historical levels in absolute amount.
OTHER INCOME (EXPENSE), NET
Other income was $4.7 million and $10.2 million for the three and nine month
periods ended June 30, 1998, respectively, and was not material in the same
periods of fiscal 1997. Other income resulted from the sale of 537,411 shares
of Splash Common Stock during the nine month period ended June 30, 1998.
-13-
INTEREST EXPENSE
Interest expense was $0.1 million and $0.4 million for the three and nine
month periods ended June 30, 1998, as compared with $0.8 and $2.3 million for
the corresponding periods in fiscal 1997. This decrease was due to lower
average borrowings primarily as a result of the repayment of the IBM Credit
term loan in August 1997.
NET PROFIT
As a result of the above factors, the Company had a net profit of $3.9
million and $7.4 million for the three and nine months ended June 30, 1998,
respectively, as compared to a net loss of $7.8 million and $14.1 million
for the three and nine months ended June 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents increased to $1.2 million at June 30,
1998, as compared with $0.8 million for the same quarter in fiscal 1997.
However, as of June 30, 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 $0.5
million at the end of the third quarter of fiscal 1998 due to the sale of
537,411 shares of Splash Common Stock, and due to the substantial decline in
the trading price of the Splash Common Stock from $38.75 to $16.25 during
that period of time. Since June 30, 1998, the Company has sold the remaining
32,728 shares of Splash Common Stock and has repaid in full its working line
of credit with IBM Credit. The planned sale of significant monitor business
assets and the related license is expected to generate improved liquidity for
the Company, if installment payments are timely made, other things equal.
Under the agreement with KDS, see Notes to consolidated Financial Statements,
Note 8 - Subsequent Events, the $6.2 million is due to be paid in monthly
installments over the next twelve months. Additionally, the Company has
agreed with KDS to continue to support the sale of the monitors through the
Company's sales force during August and September in return for $55 thousand
a month and a sharing of the gross margin from the sale of the monitor
products during this period. It is anticipated that these funds will provide
the working capital that the Company needs to offset the operating losses
during the coming months. However, there can be no assurances that the sale
of software products will continue to increase to a sufficient extent to
offset the loss of revenues and gross margin from the monitor business. The
Company may need to further reduce its operating expenses or seek additional
sources of working capital if the sale of the software products does not
increase at the rate that it has assumed in its operating plans.
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:
CONTINUING OPERATING LOSSES
The Company experienced operating losses in each of its prior five fiscal
years and currently has liabilities in excess of assets. 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 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.
-14-
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 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 and agreed to sell its monitor business in August,
1998. In addition, the Company has focused 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
The Company intends to finance its working capital needs through cash
generated by operations and proceeds from the planned sale of significant
monitor business assets and the related license to KDS America. Because the
Company has experienced operating losses in each of its prior five fiscal
years and has liabilities in excess of assets, 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.
Accordingly, there can be no assurance that the Company will be able to
successfully fund its working capital needs internally. Furthermore, there
can be no assurance that the Company will be able to raise additional capital
on commercially reasonable terms or at all.
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.
As software applications for the 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 over the long term.
-15-
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. 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.
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, 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, particularly in light of its
financial condition. 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 a
third party manufacturer. The failure of the 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 is also dependent on sole or limited source suppliers for certain
key components used in its products, including certain cables, digital video
integrated circuits, and other products. 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.
TECHNOLOGICAL CHANGE; CONTINUING NEED TO DEVELOP NEW PRODUCTS
The 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 bring them to the marketplace in a timely manner. Should the
Company fail to introduce new products or enhancements to existing 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
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year and $19.3 for the 1995 fiscal year. Research and development was $2.1
million in the nine months ended June 30, 1998 compared to $3.5 million for
the same period in 1997. The Company's financial condition 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 or marketed 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 has agreed to sell its remaining hardware product line.
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.
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, which are
currently unstable. Sales in Asian markets have not been, and the Company
does not expect them to be, material in the future outside of Japan which is
currently unstable. 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.
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
-17-
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 currently 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.
-18-
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 3 to Consolidated Financial Statements - Commitments and
Contingencies.
ITEM 5. OTHER INFORMATION
Possible Delisting from Nasdaq SmallCap Market.
As of June 30, 1998, the Company had assets of $5.8 million and total
liabilities of $11.7 million and therefore had net tangible assets of $(5.9
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.
On August 7, 1998, the Company agreed to sell certain significant assets
related to its monitor business to Korea Data Systems (America), Inc.
("KDS"). Under the agreement, Radius will transfer its Radius, Supermac,
PressView and certain other trademarks to KDS and will license certain
intellectual property pertaining to PressView and PrecisionView monitors to
KDS. KDS has not agreed to purchase any inventory or other tangible assets
of Radius. The expected value of the transaction is $6.2 million, including
$1.0 million payable in August 1998 under the related license agreement. The
remaining amount is payable in installments over the next twelve months. Two
affiliates of KDS have guaranteed KDS' performance of its obligations. The
agreement is expected to close in February 1999 if KDS elects to have the
agreement submitted to Radius' shareholders for approval and such approval is
obtained and certain other contingencies are satisfied. In the interim,
Radius has licensed KDS the use of its monitor trademarks and specific
technology and expects to wind down its monitor business activities as
current supplies of monitors are sold, whether or not the asset purchase
agreement is completed. In the event that the asset purchase agreement is
not completed, the license agreement will continue as a perpetual license and
KDS will pay an additional $5.2 million under the extended license over
fifteen months instead of twelve. Radius will continue to use the
transferred trademarks and technology until the transition is completed over
the next several months and expects to focus on its digital video line of
business during this transition period.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The following exhibits are filed with this Quarterly Report:
10.01 Asset Purchase Agreement dated as of August 7, 1998 between Korea Data
Systems (America), Inc. and the Registrant.
10.02 Amended and Restated License Agreement dated as of August 7, 1998
between Korea Data Systems (America), Inc. 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 June 30, 1998.
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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: August 10, 1998 RADIUS INC.
By: /s/ Henry V. Morgan
-----------------------
Henry V. Morgan
Chief Financial Officer
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