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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 JANUARY 2, 1999.
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)
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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
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THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S COMMON STOCK ON FEBRUARY
10, 1999 WAS 5,532,174.
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RADIUS INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE
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Item 1. Financial Statements
Consolidated Balance Sheets at December 31, 1998 (unaudited) and
September 30, 1998 3
Consolidated Statements of Operations for the Three Months Ended
December 31, 1998 and 1997 (unaudited) 4
Consolidated Statements of Cash Flows for the Three Months Ended
December 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 11
PART II. OTHER INFORMATION
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Item 1. Legal Proceedings 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 17
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-2-
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RADIUS INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
DECEMBER 31, SEPTEMBER 30,
1998 1998 (1)
------------ -------------
(unaudited)
ASSETS:
Current assets:
Cash $ 1,636 $ 600
Accounts receivable, net 887 364
Note receivable from Korea Data Systems America, Inc. 3,450 4,500
Inventories 592 803
Prepaid expenses and other current assets 83 156
--------- ---------
Total current assets 6,648 6,423
Property and equipment, net 98 133
Purchased technology 150 --
--------- ---------
$ 6,896 $ 6,556
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY (Net capital deficiency):
Current liabilities:
Accounts payable $ 1,860 $ 1,971
Accrued payroll and related expenses 284 324
Other accrued liabilities 2,028 2,069
Deferred income 3,608 4,833
Accrued income taxes 1,098 1,102
Short-term borrowings 236 1,340
--------- ---------
Total current liabilities 9,114 11,639
Shareholders' equity (Net capital deficiency):
Common stock 169,175 169,102
Accumulated deficit (171,393) (174,185)
--------- ---------
Total shareholders' equity (Net capital deficiency) (2,218) (5,083)
--------- ---------
$ 6,896 $ 6,556
--------- ---------
--------- ---------
(1) The balance sheet at September 30, 1998 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
DECEMBER 31,
---------------------------
1998 1997
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Net sales $ 2,498 $ 5,107
Commissions and royalties 40 433
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Total net sales 2,538 5,540
Cost of sales 994 3,597
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Gross profit 1,544 1,943
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Operating expenses:
Research and development 676 494
Selling, general and administrative 1,642 2,094
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Total operating expenses 2,318 2,588
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Loss from operations (774) (645)
Other income, net 3,620 1,079
Interest expense (54) (173)
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Income before income taxes 2,792 261
Provision for income taxes -- --
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Net income $ 2,792 $ 261
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------- -------
Net income per share:
Basic net income per share $ 0.50 $ 0.05
------- -------
------- -------
Diluted net income per share $ 0.50 $ 0.05
------- -------
------- -------
Shares used in per share computations:
Shares used in computing basic net income per share 5,524 5,513
------- -------
------- -------
Shares used in computing diluted net income per share 5,563 5,617
------- -------
------- -------
See accompanying notes.
-4-
RADIUS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(in thousands, unaudited)
THREE MONTHS ENDED
DECEMBER 31,
---------------------
1998 1997
-------- -------
Cash flows from operating activities:
Net income $ 2,792 $ 261
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 35 44
Gain on the sale of Splash Common Stock - (1,056)
Gain on the sale of the Color Server Group and other assets to Splash (2,504) -
Gain on the monitor license and sale of other assets to KDS (1,118) -
(Increase) decrease in assets:
Accounts receivable (523) (630)
Note receivable 1,050 -
Inventories 211 165
Prepaid expenses and other current assets 73 (13)
Increase (decrease) in liabilities:
Accounts payable (111) (511)
Accrued payroll and related expenses (40) (289)
Other accrued liabilities (41) (394)
Deferred income (1,225) -
Accrued restructuring costs - (261)
Accrued income taxes (4) (4)
--------- ---------
Total adjustments (4,197) (2,949)
--------- ---------
Net cash used in operating activities (1,405) (2,688)
Cash flows from investing activities:
Other assets (150) -
Net proceeds from the sale of Splash Common Stock - 1,056
Net proceeds on the sale of the Color Server Group and other assets to Splash 2,504 -
Net proceeds from the monitor license and sale of other assets to KDS 1,118 -
-------- ------
Net cash provided by investing activities 3,472 1,056
Cash flows from financing activities:
Short-term borrowings, net (1,104) 1,828
Principal payments of long-term debt and capital leases - (155)
Issuance of common stock 73 31
-------- --------
Net cash (used in) provided by financing activities (1,031) 1,704
--------- --------
Net increase (decrease) in cash and cash equivalents 1,036 72
Cash and cash equivalents, beginning of period 600 773
-------- --------
Cash and cash equivalents, end of period $ 1,636 $ 845
-------- --------
-------- --------
Supplemental disclosure of cash flow information: Cash paid during the period
for:
Interest $ 46 $ 146
-------- --------
-------- --------
Income taxes $ 4 $ 4
-------- --------
-------- --------
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 December 31, 1998 and for the three months ended
December 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. Actual results may differ from management's estimates.
Results for the three months ended December 31, 1998 will not necessarily
indicate the results to be expected for the fiscal year ending September
30, 1999 or any other future period. 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 31, 1998.
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):
DECEMBER 31, SEPTEMBER 30,
1998 1998
------------ ------------
(unaudited)
Raw materials $ 12 $ 20
Work in process 256 238
Finished goods 324 545
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$ 592 $ 803
-------- --------
-------- --------
NOTE 3. COMMITMENTS AND CONTINGENCIES
(a) On January 15, 1999, the Company and one of its directors,
Charles Berger, were named as defendants in a shareholder class action
lawsuit against Splash Technology Holdings, Inc. ("Splash"), various
directors and executives of Splash and certain selling shareholders of
Splash. The suit was filed in the United States District Court in Northern
District of California. The Company is still investigating these claims and
therefore, cannot predict the outcome of this litigation. The Company
expects to defend itself and its officers and directors from these claims.
(b) 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 to
Splash Technology Holdings, Inc.
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.
Pursuant to this agreement, if the Company prevails on appeal, the
remaining claims will be dismissed. On the other hand, if EFI were to
prevail on appeal, then EFI could
-6-
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, each party submitted opening briefs, oral argument was heard in
December 1998 and the District Court summary judgement was affirmed by
the Federal Circuit Court after the oral argument. No further appeal is
expected and in such event, the Company believes the case should be
concluded.
(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. The Company has provided for the
full amount of accounts receivable due from Intelligent Electronics, Inc.
and Deutsche Financial, Inc.
(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.
NOTE 4. LICENSING OF ASSETS TO KOREA DATA SYSTEMS AMERICA, INC.
In June 1998, the Company licensed certain technology and assets
necessary to conduct its monitor and color publishing business to Korea
Data Systems America, Inc. ("KDS"), leaving the Company free to focus on
its digital video software business. The brand name and trademark RADIUS
was one of the assets so licensed because of its primary association with
monitors. In August 1998, the Company amended and restated this license and
agreed to sell the licensed assets to KDS pursuant to an asset transfer
agreement, subject to certain contingencies at the discretion of KDS. The
monitor business has accounted for substantially all of the revenues of the
color publishing product line and 55.3% of the Company's revenues during
fiscal 1998. Under the license and asset transfer agreement, Radius has
transferred (by licensing or by assignment if KDS elects to close the asset
transfer agreement) its Radius, Supermac, PressView and certain other
trademarks to KDS and has licensed certain intellectual property pertaining
to PressView and PrecisionView monitors. The expected value of the
transaction is $6.2 million paid or to be paid in installments. As of
December 31, 1998, $2.25 million was paid under the amended license and
$0.5 million under the original license in June 1998. The remaining amount
is payable in installments through October 1999. These installment payment
obligations have been pledged to secure a $4.2 million line of credit from
Silicon Valley Bank (as of December 31, 1998, the amount available to
borrow was $2.8 million). KDS' performance is guaranteed by a Korean
corporation and its US affiliate. The agreement is expected to close by
June 1999 if 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. 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.
As of December 31, 1998, the remaining balance receivable under
the agreement was $3.4 million which is included as note receivable and
deferred revenue in the accompanying Consolidated Balance Sheets. The
Company will recognize other income under the license agreement as cash is
received on the note.
-7-
On December 4, 1998, Radius and KDS supplementally agreed to the
sale of certain tangible personal property and the transfer of rights in
the Radius Emachines and Colormatch trademarks for $100,000 and other
consideration.
NOTE 5. TECHNOLOGY PURCHASE FROM POST DIGITAL SOFTWARE, INC.
On November 23, 1998, the Company acquired certain software and
other intangible property from Post Digital Software, Inc. for (i) an
initial payment of $50,000, (ii) earnout payments equal to at least $50,000
but not exceeding $700,000 based on subsequent sales of the Company's
digital video products incorporating such software and (iii) a warrant to
purchase up to 50,000 shares of the Company's Common Stock at an exercise
price of $1.50 per share. The warrant is exercisable over a four year
period through November 23, 2002. The warrant can be exercised for up to
12,000 shares on May 1, 1999, plus an additional 2,000 shares for each full
month that transpires thereafter, up to a total of 50,000 shares. The value
of this agreement, as noted below, is included as purchased technology in
the accompanying Consolidated Balance Sheet. The technology is being
amortized over a three year period and future royalties based on digital
video products sold will be expensed as they are incurred.
Initial purchase price $ 50,000
Guaranteed earnout 50,000
Value assigned to warrant 50,000
---------
Purchased technology $ 150,000
---------
---------
NOTE 6. TRANSACTIONS WITH SPLASH TECHNOLOGY HOLDINGS, INC.
ESCROW FUND RELEASE
In connection with the Company's sale of its Color Server Group to
Splash Technology Holdings, Inc. in January 1996, an escrow fund was
established to secure certain indemnification obligations. On December 31,
1998, the balance of the escrow fund of $2.2 million was released to the
Company as a result of the Federal Circuit Court affirming the summary
judgment in favor of the Company in the EFI litigation. See Note 3. The
Company used approximately $1.0 million of the proceeds to repay all
outstanding indebtedness to Silicon Valley Bank under the working capital
line of credit and will use the remaining proceeds to fund future working
capital needs.
SALE OF CERTAIN COLOR PUBLISHING TECHNOLOGY
On December 4, 1998, the Company agreed to sell certain software
and other intangible property associated with its monitor and color
publishing business to Splash Technology Holdings, Inc. for $275,000 and
other consideration.
NOTE 7. RECENT ACCOUNTING PRONOUNCEMENTS
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 disclosures prescribed by SFAS 131 will be adopted for the
fiscal year ending September 30, 1999.
NOTE 8. EARNINGS PER SHARE
Basic earnings per share is computed using the weighted average
number of common shares outstanding during the period. Diluted earnings per
share is computed using the weighted average number of common and dilutive
common equivalent shares outstanding during the period. Dilutive common
equivalent shares consist of employee stock options and warrants using the
treasury stock method.
-8-
The following table shows the computation of basic and diluted
earnings per share:
THREE MONTHS ENDED
DECEMBER 31,
------------------------
1998 1997
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NUMERATOR:
Numerator for basic and diluted earnings per share -
Net income $2,792 $ 261
------ ------
------ ------
DENOMINATOR:
Denominator for basic earnings per share - weighted-average
shares outstanding 5,524 5,513
Effect of dilutive securities:
Employee stock options 39 104
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Dilutive potential common shares 39 104
Denominator for diluted earnings per share - adjusted
weighted-average shares outstanding 5,563 5,617
------ ------
------ ------
Basic earnings per share $ 0.50 $ 0.05
------ ------
------ ------
Diluted earnings per share $ 0.50 $ 0.05
------ ------
------ ------
For additional disclosure regarding the employee stock options, see Note 4
in the Company's 1998 Form 10-K.
NOTE 9. COMPREHENSIVE NET INCOME
As of October 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive
Income." SFAS 130 requires foreign currency translation adjustments and
changes in the fair value of available-for-sale-securities to be included
in comprehensive income. However, it has no impact on the net income or
stockholders' equity as presented in the financial statements.
The components of comprehensive net income, net of tax, are as
follows:
THREE MONTHS ENDED
DECEMBER 31,
---------------------
1998 1997
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Net income $2,792 $ 261
Unrealized loss on available-for-sale-securities
(net of reclassification adjustment) - (9,705)
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Comprehensive net income (loss) $2,792 $(9,444)
------ -------
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-9-
NOTE 10. SUBSEQUENT EVENTS
OPERATING LEASE
The Company has signed an operating lease for 460 East Middlefield
Road, Mountain View, California 94043, for a period of three years
beginning April 15, 1999, with an option to extend the lease for an
additional two years. The base rent will be $25,000 per month the first
year, $27,500 the second year and $30,000 for years three through five, if
extended.
-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; receipt of timely installment
payments from KDS; the Company's ability to repay any amounts it may borrow from
Silicon Valley Bank; the Company's ability to successfully conclude its
litigation with IE and Splash shareholders; 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 markets, including the non linear digital video
editing software market; the success of Apple's Quicktime technology for
Windows; favorable licensing terms for Quicktime from Apple; the Company's
ability to successfully develop, introduce and market new software products,
including products for the Windows operating system, to keep pace with
technological innovation, particularly in light of its limited financial
resources; the Company's ability to compete in the digital video software
market, including with Apple; the ability of the Company's manufacturers and
suppliers to deliver components and manufacture the Company's products; the
Company's ability to achieve Year 2000 readiness in our business operations and
our dealings with significant third parties; the Company's reliance on
international sales and its new 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, 1998, 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 digital
video computer products for creative professionals and consumers who use digital
camcorders. The Company's current product line includes: multimedia authoring
and editing video systems and software that can acquire and manipulate video and
audio information.
The primary target markets for the Company's products are video
editors, video producers, and creators of multimedia. These markets encompass
creative professionals involved in such areas as multimedia authoring, video
editing, video and multimedia production and corporate training.
Historically, 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. During fiscal 1998, the
Company added cross platform (Windows and Macintosh) capabilities to many of the
Company's products in order to market these products to users of the Windows
operating system. In the fourth quarter of fiscal 1998, 27% of unit sales were
made to Macintosh-only users, 43% were made to Windows-only users, and 30% were
made to cross-platform users. This compares to 23% of unit sales to
Macintosh-only users, 39% of unit sales to Windows-only users and 38% of unit
sales to cross-platform users in the first quarter of fiscal 1999.
As shown in the accompanying consolidated financial statements, the
Company has incurred substantial operating losses. During fiscal 1997 and 1998,
management implemented a number of actions to address its cash flow and
operating issues including; refocusing its efforts on providing solutions for
digital video 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. ("KDS");
significantly reducing expenses and headcount; and reducing its lease
obligations given its reduced occupancy
-11-
requirements. There can be no assurance that these measures will be
sufficient to allow the Company to achieve profitability. As of December 31,
1998, the Company had a working capital deficit of $2.5 million. The Company
intends to finance its working capital needs through cash generated by
operations and borrowings under a working capital line of credit with Silicon
Valley Bank. The Company may need to further reduce its operating expenses or
seek additional sources of working capital if software product sales do not
increase at the rate assumed in the Company's current operating plans.
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 DECEMBER 31,
--------------------------------
1998 1997
------- ---------
Total net sales 100.0% 100.0%
Cost of sales 39.2 64.9
------ ------
Gross profit 60.8 35.1
------ ------
Operating expenses:
Research and development 26.6 8.9
Selling, general and administrative 64.7 37.8
------ ------
Total operating expenses 91.3 46.7
------ ------
Loss from operations (30.5) (11.6)
Other income (expense), net 142.6 19.4
Interest expense (2.1) (3.1)
------ ------
Income before income taxes 110.0 4.7
------ ------
Provision for income taxes 0.0 0.0
------ ------
Net income 110.0% 4.7%
------ ------
------ ------
NET SALES
The Company's total net sales decreased 54.2% to $2.5 million in the
first quarter of fiscal 1999 from $5.5 million for the same quarter in fiscal
1998. The decline is due primarily to the following factors: the Company's
decision to refocus 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 due to the agreement for the license of significant
assets of its monitor business to KDS; and reduced commissions paid by its
international distributors due to the Company's change in product focus.
As a result of the KDS transaction, the Company anticipates
significantly lower overall net sales in the immediate future as compared to net
sales in fiscal 1998. Future sales will be predominately attributable to sales
of software products since the Company's digital video product line is primarily
software. Net sales for the first quarter of fiscal 1999 increased $1.3 million
from the $1.2 million for the fourth quarter of fiscal 1998 ended September 30,
1998. Shipments of digital video products were $2.4 million, an increase of 233%
from the previous quarter. 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. Revenue
recognition related to software product sales is as follows: Revenue from the
sale of software, net of estimated returns, is recognized upon either shipment
of the physical product or delivery of electronic product, at which time,
collectibility is probable and the Company has no remaining obligations.
Sales to Ingram Micro, Truevision and Canon U.S.A., Inc. accounted for
27.9%, 16.5% and 12.8% of net sales for the first quarter of fiscal 1999,
respectively. For the corresponding period of fiscal 1998, the same customers
accounted for 61.0%, 0.0% and 0.0% of the Company's net sales.
-12-
GROSS PROFIT
The Company's gross profit margin was 60.8% and 35.1% for the first
quarter of fiscal 1999 and 1998, respectively, and 48.7% for the fourth quarter
of fiscal 1999. The increase in gross profit margin for the three month period
ended December 31, 1998 was due primarily to increased sales of higher gross
margin digital video software products.
The Company anticipates the gross profit margins will be higher in the
future due to the Company's decision to refocus its business on higher margin
digital video software products. Additionally, the Company is taking further
steps to reduce product costs and control expenses. However, 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 increased to $0.7 million or 26.6% of
net sales in the first quarter of fiscal 1999 from $0.5 million or 8.9% of net
sales in the same quarter of fiscal 1998. Included in the research and
development expenses for the first quarter of fiscal 1998 are reimbursements for
the outplacement of some of the Company's engineers in October 1997. Excluding
these funds, the research and development expenses would have been $0.8 million
or 15.2% of net sales. The Company expects that decreases in its research and
development expenses due to the KDS transaction will be offset by increases in
the expenses for the digital video product line and therefore, expects to devote
approximately $3.0 million to research and development during the entire fiscal
1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased to $1.6 million
or 64.7% of net sales in the first quarter of fiscal 1999 from $2.1 million or
37.8% of net sales in the same quarter of 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. The
increase in selling, general and administrative expenses expressed as a
percentage of sales is due to the decrease in net sales from the first quarter
of fiscal 1998. 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 $3.6 million and $1.1 million for the three month
period ended December 31, 1998 and 1997, respectively. Other income in the first
quarter of fiscal 1999 resulted from the release of $2.2 million from escrow
related to the 1996 divestiture of the Color Server Group, $1.0 million in
income from KDS and $0.4 million for the license of intellectual property
unrelated to the digital video business. In the first quarter of fiscal 1998,
other income resulted from the sale of 40,000 shares of Splash Common Stock.
INTEREST EXPENSE
Interest expense declined to $54,000 in the first quarter of fiscal
1999 from $173,000 in the same quarter of fiscal 1998. This decrease was due to
lower average borrowings primarily as a result of the repayment of the working
capital line of credit to IBM Credit offset by amounts outstanding under Silicon
Valley Bank working capital line of credit.
NET PROFIT
As a result of the above factors, the Company had a net income of $2.8
million for the first quarter of fiscal 1999 as compared to a net income of $0.3
million in the first quarter of fiscal 1998.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents increased to $1.6 million at
December 31, 1998, as compared with $0.6 million for the same quarter in fiscal
1998. Approximately $0.1 million of the $1.6 million of cash and cash
equivalents available at December 31, 1998 was restricted under a letter of
credit.
As of December 31, 1998, the Company's total assets had increased to
$6.9 million from $6.6 million on September 30, 1998. However, the Company had a
working capital deficit of $2.5 million. The increase in the Company's cash and
cash equivalents, and total assets during the first quarter of fiscal 1999 was
primarily attributable to funds received from the Splash escrow and income from
the license agreement with KDS which was offset by funding of operating losses
of the Company.
Under the license and asset transfer agreement with KDS, Radius has
transferred (by licensing or by assignment if KDS elects to close the asset
transfer agreement) its Radius, Supermac, PressView and certain other trademarks
to KDS and has licensed certain intellectual property pertaining to PressView
and PrecisionView monitors. The expected value of the transaction is $6.2
million which is payable in installments. As of December 31, 1998, $2.25 million
was paid under the amended license and $0.5 million under the original license
in June 1998. The remaining amount is payable in installments through October
1999. KDS' performance is guaranteed by a Korean corporation and its US
affiliate. The asset transfer agreement is expected to close by June 1999, if
contingencies are satisfied. These installment payment obligations have been
pledged to secure a $4.2 million line of credit from Silicon Valley Bank. There
can be no assurance that the closing will occur or that installment payments
under the license will be timely made.
The Company believes that the cash flows from KDS, results of
operations and other sources of financing will be sufficient to fund operations
for at least the remainder of this fiscal year. 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 or that the installment payments will be timely made. The
Company may need to further reduce its operating expenses or seek additional
sources of working capital if software product sales do not increase at the rate
assumed in the Company's current operating plans. The Company and its management
believes that it can further reduce such operating expenses, if necessary, and
that other sources of financing will be available.
The Company's principal sources of liquidity currently are cash
generated by operations, if any, and up to $4.2 million working capital line of
credit provided by Silicon Valley Bank which is secured by the installment
payment obligations of the KDS transaction. Under the terms of the $4.2 million
working capital line of credit, the amount available to borrow will be decreased
by eighty percent of the payments made by KDS, since the borrowing base under
the working capital line of credit is eighty percent of the unpaid balance of
KDS' installment obligations. As the borrowing base is dependent on the
continued payment of monthly installments, there can be no assurance that it
will be sufficient to allow the Company to borrow up to the full amount of the
working capital line of credit. As of December 31, 1998, the amount available to
borrow was $2.8 million. Interest is paid at the rate of 1.25% per month of 125%
of the average daily outstanding balance of the loan. In addition, a one time
administrative fee of 0.50% of 125% of each advance amount is also paid to
Silicon Valley Bank. As of December 31, 1998, the Company had borrowed $0.2
million against the working capital line of credit. With the proceeds from the
release of the $2.2 million from the escrow related to the divestiture of the
Color Server Group, the Company repaid all outstanding debt to Silicon Valley
Bank in January, 1999. However, the associated working capital line of credit
remains in effect.
The Company anticipates that it will not have significant cash
available for expenditures other than for its ordinary course of business
operating expenses. Although the Company has achieved current trade terms with
its critical vendors, certain suppliers may put the Company on a cash or prepay
basis and/or require the Company to provide security for their risk in procuring
components or reserving manufacturing time. 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.
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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 factors: the
Company's ability to achieve profitability; receipt of timely installment
payments from KDS; the Company's ability to repay any amounts it may borrow from
Silicon Valley Bank; the Company's ability to successfully conclude its
litigation with IE and Splash shareholders; 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 markets, including the non linear digital video
editing software market; the success of Apple's Quicktime technology for
Windows; favorable licensing terms for Quicktime from Apple; the Company's
ability to successfully develop, introduce and market new software products,
including products for the Windows operating system, to keep pace with
technological innovation, particularly in light of its limited financial
resources; the Company's ability to compete in the digital video software
market, including with Apple; the ability of the Company's manufacturers and
suppliers to deliver components and manufacture the Company's products; the
Company's ability to achieve Year 2000 readiness in our business operations and
our dealings with significant third parties; the Company's reliance on
international sales and its new distributor arrangements with respect to Europe
and Japan; the Company's ability to attract and retain its key personnel; and
the risk factors identified from the Company's Form 10-K for the fiscal year
ended September 30, 1998.
IMPACT OF YEAR 2000
The year 2000 Issue ("Y2K 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 or hardware 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's plan to resolve the Y2K Issue involves the following
four phases: assessment, remediation, testing, and implementation. To date, the
Company has fully completed its assessment of all internal systems and products
that could be significantly affected. The assessment of risks associated with
suppliers and distributors is not yet complete.
Based on recent assessments of its information management and
accounting systems, the Company has determined that it will be required to
modify or replace significant portions of its software and certain hardware so
that those systems will properly utilize dates beyond December 31, 1999. The
Company presently believes that with such modifications, the Y2K Issue can be
mitigated without a material adverse impact on the Company. However, if such
modifications and replacements are not timely made, the Y2K Issue could have a
material impact on the operations of the Company. None of these systems
interoperate directly with the systems of suppliers or distributors.
Based on a review of its product line, the Company has determined that
primarily all of the products it has sold and will continue to sell do not
require remediation to be Year 2000 compliant, as primarily all operate in
conjunction with the MacOS. Accordingly, the Company does not believe that the
Y2K Issue presents a material risk with respect to the Company's products.
The Company is approximately 50% through the remediation phase with
respect to its information management and accounting systems and expects to
complete software and hardware replacement no later than September 30, 1999.
Once the software and hardware is replaced for a system, the Company begins
testing and implementation. These phases run concurrently for different systems.
The Company has completed 50% of its testing. Completion of the testing phase
for all significant software systems was completed as of January 31, 1999, with
all remediated systems to be fully tested and implemented by December 31, 1999.
None of the Company systems interface directly with significant third
party suppliers. The Company is starting the process of working with third party
suppliers and distributors to ensure that any Company systems that could
interface directly with third parties are Year 2000 compliant by December 31,
1999. Remediation and testing of all significant systems is expected no later
than December 31, 1999. The Company believes that its key suppliers, two of whom
are sole sources, are in the process of making their billing systems Year 2000
compliant. The Company is not aware of any supplier or distributor with a Y2K
Issue that would materially impact the Company's results of operations,
liquidity, or
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capital resources. However, the Company has no means of ensuring that such
suppliers and distributors will be Year 2000 ready. The inability of
suppliers and distributors to complete their Year 2000 resolution process in
a timely fashion could materially impact the Company. There are no vendors
that could not be replaced in a reasonable period of time, except for
transport vendors. The failure of Fedex, UPS, Airborne and the U.S. Mail
would impact direct sales. The effect of this occurrence is not determinable.
The Company will utilize both internal and external resources to
reprogram, or replace, test, and implement the software and operating equipment
for Year 2000 compliance. The total future cost of the Year 2000 compliance is
estimated at $200,000 to $600,000 and is being funded through net cash flows or
capital leases. Some of these expenditures were likely to have been made in the
ordinary course of upgrading and replacing obsolete systems without regard to
the Y2K Issue. Through the first quarter of fiscal 1999, the Company has
incurred less than $100,000 related to all phases of the Year 2000 project and
$100,000 has been budgeted for fiscal 1999, under the assumption that most of
the new system cost will be funded via leasing.
Management of the Company believes it has an effective program in place
to resolve those aspects of the Y2K Issue within its control in a timely manner.
As noted above, the Company has not completed all necessary phases of the Year
2000 program. In the event that the Company does not complete these phases, the
Company would be unable in some degree to take customer orders, manufacture and
ship products, invoice customers and collect payments. In addition, disruptions
in the economy generally resulting from Year 2000 issues could also materially
adversely affect the Company. The Company could be subject to litigation for
computer systems product failure, for example, equipment shutdown or failure to
properly date business records. Furthermore, although management is not aware of
any Y2K Issue with products sold, there can be no assurance that the use of such
products alone or in conjunction with other products will not malfunction and
expose the Company to liability. The amount of potential liability and lost
revenue associated with these risks cannot be reasonably estimated at this time.
The Company has contingency plans for certain critical applications and
is working on such plans for others. These contingency plans involve, among
other actions, manual workarounds, increasing inventories, and adjusting
staffing strategies. All of the Company's production, shipping, purchasing,
billing and inventory functions could be accomplished via outsource vendors that
are currently readily available, although there can be no assurance that such
vendors will be available on reasonable terms as the millennium approaches.
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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 December 31, 1998, the Company had assets of $6.9 million and
total liabilities of $9.1 million and therefore had net tangible assets of $(2.2
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 fiscal years 1997 and 1998. 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 Lease Agreement by and between Registrant and Eliane Ortuno, Trustee,
Donald T. Kitts Trust dated January 8, 1999. (460 East Middlefield
Road, Mountain View, California offices).
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 December 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: February 12, 1999 RADIUS INC.
By:/s/
--------------------------------
Edwin Silliman
Interim Chief Financial Officer
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