-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MX4HWvu0lg3CYZqsjSaBYAUxcXA7JbV5aoCTnGCyhBfUKdIyspfCGQ3lpO7q0KX/ R7sOQF4+deLTsN1k4CWHbQ== 0001047469-98-004550.txt : 19980612 0001047469-98-004550.hdr.sgml : 19980612 ACCESSION NUMBER: 0001047469-98-004550 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19971227 FILED AS OF DATE: 19980210 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: RADIUS INC CENTRAL INDEX KEY: 0000805574 STANDARD INDUSTRIAL CLASSIFICATION: 3577 IRS NUMBER: 680101300 STATE OF INCORPORATION: CA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-18690 FILM NUMBER: 98527961 BUSINESS ADDRESS: STREET 1: 215 MOFFETT PARK DRIVE CITY: SUNNYVALE STATE: CA ZIP: 94089-1374 BUSINESS PHONE: 4085416100 MAIL ADDRESS: STREET 1: 215 MOFFETT PARK DR CITY: SUNNYVALE STATE: CA ZIP: 94089-1374 10-Q 1 10Q - - ------------------------------------------------------------------------------ - - ------------------------------------------------------------------------------ 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 December 27, 1997. 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) 215 Moffett Park Drive Sunnyvale, CA 94089 (Address of principal executive offices and zip code) (408) 541-6100 (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 February 9, 1998 was 55,139,731. - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- RADIUS INC. INDEX
PART I. FINANCIAL INFORMATION PAGE ---- Item 1. Financial Statements Consolidated Balance Sheets at December 31, 1997 and September 30, 1997 3 Consolidated Statements of Operations for the Three Months Ended December 31, 1997 and 1996 4 Consolidated Statements of Cash Flows for the Three Months Ended December 31, 1997 and 1996 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 PART II. OTHER INFORMATION Item 1. Legal Proceedings 21 Item 5. Other Information 21 Item 6. Exhibits and Reports on Form 8-K 21 SIGNATURES 21
-2- PART 1. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS RADIUS INC. CONSOLIDATED BALANCE SHEETS (in thousands)
DECEMBER 31, SEPTEMBER 30, 1997 1997 (1) ------------ ------------- (unaudited) ASSETS: Current assets: Cash $ 845 $ 773 Accounts receivable, net 2,798 2,168 Inventories 640 805 Investment in Splash Technology Holdings, Inc. 11,332 22,093 Prepaid expenses and other current assets 197 184 -------- -------- Total current assets 15,812 26,023 Property and equipment, net 205 249 -------- -------- $16,017 $26,272 -------- -------- -------- -------- LIABILITIES AND SHAREHOLDERS' EQUITY (Net capital deficiency): Current liabilities: Accounts payable $ 4,000 $4,511 Accrued payroll and related expenses 1,031 1,320 Accrued warranty costs 433 538 Other accrued liabilities 2,401 2,690 Accrued income taxes 2,107 2,111 Accrued restructuring and other charges 1,772 2,033 Short-term borrowings 6,466 4,638 Obligation under capital leases 118 273 -------- -------- Total current liabilities 18,328 18,114 Shareholders' equity (Net capital deficiency): Common stock 169,025 168,994 Unrealized gain on available-for-sale securities 11,332 22,093 Accumulated deficit (182,711) (182,972) Accumulated translation adjustment 43 43 -------- -------- Total shareholders' equity (Net capital deficiency) (2,311) 8,158 -------- -------- $16,017 $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 DECEMBER 31, ------------------ 1997 1996 ---- ---- Net sales $ 5,107 $10,802 Commissions and royalties 433 1,295 -------- --------- Total net sales 5,540 12,097 Cost of sales 3,597 7,026 -------- -------- Gross profit 1,943 5,071 -------- -------- Operating expenses: Research and development 494 904 Selling, general and administrative 2,094 4,098 -------- -------- Total operating expenses 2,588 5,002 -------- -------- Income (loss) from operations (645) 69 Other income (expense), net 1,079 (5) Interest expense (173) (737) --------- --------- Income (loss) before income taxes 261 (673) Provision for income taxes -- 121 -------- -------- Net income (loss) $ 261 $ (794) -------- --------- -------- --------- Preferred stock dividend -- 75 Net income (loss) applicable to common shareholders $ 261 $ (869) -------- --------- -------- --------- Income (loss) per share: Basic net income (loss) per share applicable to common shareholders $ 0.00 $ (0.02) -------- --------- -------- --------- Diluted net income (loss) per share applicable to common shareholders $ 0.00 $ (0.02) -------- --------- -------- --------- Shares used in per share computations: Shares used in computing basic net income (loss) per share 55,126 54,660 -------- --------- -------- --------- Shares used in computing diluted net income (loss) per share 56,169 54,660 -------- --------- -------- ---------
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, ------------------ 1997 1996 ---- ---- Cash flows from operating activities: Net income (loss) $ 261 $ (794) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 44 302 Gain on the sale of Splash Common Stock (1,056) -- (Increase) decrease in assets: Accounts receivable (630) (2,699) Inventories 165 1,150 Prepaid expenses and other current assets (13) (21) Increase (decrease) in liabilities: Accounts payable (511) (58) Accrued payroll and related expenses (289) (592) Accrued warranty costs (105) 19 Other accrued liabilities (289) (132) Accrued restructuring costs (261) (16) Accrued income taxes (4) 142 --------- -------- Total adjustments (2,949) (1,905) --------- -------- Net cash used in operating activities (2,688) (2,699) Cash flows from investing activities: Capital expenditures -- (50) Net proceeds from the sale of Splash Common Stock 1,056 -- --------- -------- Net cash provided by (used in) investing activities 1,056 (50) Cash flows from financing activities: Short-term borrowings, net 1,828 1,913 Principal payments of long-term debt and capital leases (155) (372) Issuance of common stock 31 32 --------- -------- Net cash provided by financing activities 1,704 1,573 --------- -------- Net increase (decrease) in cash and cash equivalents 72 (1,176) Cash and cash equivalents, beginning of period 773 2,974 --------- -------- Cash and cash equivalents, end of period $ 845 $ 1,798 --------- -------- --------- -------- Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ 146 $ 715 --------- -------- --------- -------- Income taxes $ 4 $ 55 --------- -------- --------- -------- Non-cash financing activity: Dividend paid on preferred stock $ -- $ 75 --------- -------- --------- --------
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, 1997 and for the three months ended December 31, 1997 and 1996 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):
DECEMBER 31, SEPTEMBER 30, 1997 1997 ------------ ------------- (unaudited) Work in process $ 74 $ 176 Finished goods 566 629 -------- -------- $ 640 $ 805 -------- -------- -------- --------
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 allegedly infringe. In January 1996, the Company completed the divestiture of the Color Server Group. The Company has filed an answer denying all material allegations, and has filed counterclaims against EFI alleging causes of action for interference with prospective economic benefit, antitrust violations, and unfair business practices. EFI's motion to dismiss or sever the Company's amended counterclaims was granted in part and the ruling permitted the Company to file an amended counterclaim for antitrust violations. The Company has filed an amended antitrust claim. The Company believes it has meritorious defenses to EFI's claims and is defending them vigorously. In addition, the Company believes it has indemnification rights with respect to EFI's claims. A motion for summary judgment based on these indemnification rights disposing of EFI's claims was filed, and the court granted this motion finding the Company immune from suit under the patent after February 22, 1995. The Company expects to vigorously defend the remaining claims of EFI and to vigorously prosecute the claims it has asserted against EFI. In the opinion of management, based on the facts known at this time, although the eventual outcome of this case is unlikely to have a material adverse effect on the results of operations or financial position of the Company, the costs of defense, regardless of outcome, may have a material adverse effect on the results of operations or financial position of the Company. In addition, in connection with the divestiture of its Color Server business, the Company has certain indemnification obligations for which approximately $2.0 million remains held in escrow at December 31, 1997 to secure such obligations in the event that the purchaser suffers any losses resulting from this litigation. (b) The Company was named as one of approximately 42 defendants in Shapiro et al. v. ADI Systems, Inc. et al., Superior Court of California, Santa Clara County, case no. CV751685, filed August 14, 1995. Radius was named as one of approximately 32 defendants in Maizes & Maizes et al. v. Apple Computer et al., Superior Court of New Jersey, Essex -6- County, case no. L-13780-95, filed December 15, 1995. Plaintiffs in each case purport to represent alleged classes of similarly situated persons and/or the general public, and allege that the defendants falsely advertised that the viewing areas of their computer monitors are larger than in fact they are. The Company was served with the Shapiro complaint on August 22, 1995 and was served with the Maizes complaint on January 5, 1996. Defendants' petition to the California State Judicial Council to coordinate the Shapiro case with similar cases brought in other California jurisdictions was granted in part and the coordinated proceedings are being held in Superior Court of California, San Francisco County. An amended consolidated complaint was filed on March 26, 1996. Although the Company believes it has meritorious defenses to the plaintiffs' claims, due to the costs of defense, on March 11, 1997, the Company along with all but two of the other named defendants agreed to settle the suits, subject to final court approval, which the court tentatively approved on June 30, 1997. The settlement provides that class members are eligible for a $13 rebate per monitor purchased during the class period on applicable new purchases over a three year period, subject to specific limitations. Class members who are consumers and do not elect to use the rebate fully can thereafter elect to receive a $6 refund per monitor (up to a maximum of $30 per consumer class member) during the following six months. The Company is responsible only to class members who purchased Radius branded monitors during the class period of May 1, 1991 to May 1, 1995. Additionally, the Company will pay its share of publication and administration costs associated with the implementation of the settlement, pay its share of plaintiffs' stipulated attorneys' fees and will agree to abide by certain limitations in the description of its monitors. This settlement remains subject to final court approval. (c) On July 18, 1997, Intelligent Electronics, Inc. and its affiliates filed a suit in the United States District Court for the District of Colorado alleging a breach of contract and related claims in the approximate amount of $800,000, maintaining that the Company failed to comply with various return, price protection, inventory balancing and marketing development funding undertakings. In 1997, the Company filed an answer to the complaint and cross claimed against the plaintiffs and in October 1997 additionally cross claimed against Deutsche Financial, Inc., a factor in the account relationship between the Company and the plaintiffs, seeking the recovery of approximately $2 million. The Company continues to investigate these claims as well as cross claims and expects to vigorously defend and prosecute them as applicable. (d) The Company is involved in a number of other judicial and administrative proceedings incidental to its business. The Company intends to defend such lawsuits vigorously and although adverse decisions (or settlements) may occur in one or more of such cases, the final resolution of these lawsuits, individually or in the aggregate, is not expected to have a material adverse effect on the financial position of the Company. However, depending on the amount and timing of an unfavorable resolution of these lawsuits, it is possible that the Company's future results of operations or cash flows could be materially adversely affected in a particular period. In addition, the costs of defense, regardless of the outcome, could have a material adverse effect on the results of operations and financial condition of the Company. (e) In September 1992, the Company and certain of its officers and directors were named as defendants in a securities class action litigation brought in the United States District Court for the Northern District of California that sought unspecified damages, prejudgment and postjudgment interest, attorneys' fees, expert witness fees and costs, and equitable relief. In July 1994, SuperMac and certain of its officers and directors, several venture capital firms and several of the underwriters of SuperMac's May 1992 initial public offering and its February 1993 secondary offering were named as defendants in a class action litigation brought in the same court that sought unspecified damages, prejudgment and postjudgment interest, attorneys' fees, experts' fees and costs, and equitable relief (including the imposition of a constructive trust on the proceeds of defendants' trading activities). In June 1995, the Court approved the settlement of both litigations and entered a Final Judgment and Order of Dismissal. Under the settlement of the litigation brought in 1992 against the Company, the Company's insurance carrier paid $3.7 million in cash and the Company is required to issue 128,695 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 707,609 shares of its Common Stock. The number of shares required to be issued by the Company increased by 100,000 since the price of the Common Stock was below $12 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 December 31, 1997, the Company had issued 836,304 of its Common Stock due to the settlement and approximately 100,000 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 December 31, 1997, an additional $2.0 million is being maintained in escrow to secure certain indemnification obligations. 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. These shares of Splash Common Stock have been pledged to IBM Credit. IBM Credit has not exercised its option. On October 8, 1996, Splash completed its initial public offering of common stock. During the fourth quarter of fiscal 1997 and in December 1997, the Company sold an aggregate of 996,875 and 40,000 shares, respectively, of the 1,741,127 shares of Splash Common Stock owned by the Company. The Company continues to own 530,139 shares of Splash Common Stock (net of the option to buy 174,113 shares held by IBM Credit exercisable at a nominal price). 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 $11.3 million relating to the remaining 530,139 shares held, based upon the closing price of $21.375 per share at December 26, 1997 is recorded as a component of shareholders' equity at December 31, 1997. Since then, the closing price of Splash Common Stock has further declined to $14.38 on February 5, 1998. The value of the 530,139 shares still held by the Company is $7.6 million as of February 5, 1998. See Management's Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition. NOTE 5. EARNINGS PER SHARE In 1997, The Financial Accounting Board issued Statement of Financial Accounting Standards No. 128 (SFAS128), EARNINGS PER SHARE. Statement 128 replaced the previously reported primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been restated to conform to Statement 128 requirements. Basic earnings per share is computed using the weighted average number of common shares. Diluted earnings per share is computed using the weighted average number of common shares and dilutive common share equivalents outstanding during the period. Dilutive common share equivalents in 1997 consist of employee stock options using the treasury stock method. -8- The following table sets forth the computation of basic and diluted earnings per share:
THREE MONTHS ENDED DECEMBER 31, -------------------- 1997 1996 ----------- ---------- (UNAUDITED) NUMERATOR: Net income (loss) $ 261 $ (794) Preferred stock dividends -- (75) ----------- ---------- Numerator for basic earnings per share - income (loss) available to common stockholders $ 261 $ (869) ----------- ---------- ----------- ---------- Effect of dilutive securities: Preferred stock dividends -- -- ----------- ---------- Numerator for diluted earnings per share - income (loss) available to common stockholders $ 261 $ (869) ----------- ---------- ----------- ---------- DENOMINATOR: Denominator for basic earnings per share - weighted-average shares outstanding 55,126 54,660 Effect of dilutive securities: Employee stock options 1,043 -- ----------- ---------- Dilutive potential common shares 1,043 - Denominator for diluted earnings per share - adjusted weighted-average shares outstanding 56,169 54,660 ----------- ---------- ----------- ---------- Basic earnings (loss) per share $ 0.00 $ (0.02) ----------- ---------- ----------- ---------- Diluted earnings (loss) per share $ 0.00 $ (0.02) (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 1997 Form 10-K. -9- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS: The following discussion contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 that are subject to risks and uncertainties. Statements indicating that the Company or management "intends", "plans", "expects," "estimates" or "believes" are forward-looking, as are all other statements concerning future financial results, product offerings or other events that have not yet occurred. There are several important factors that could cause actual results or events to differ materially from those anticipated by the forward-looking statements contained in this discussion and other sections of this Form 10-Q. Such factors include, but are not limited to: the Company's ability to achieve profitability; the Company's ability to dispose of its remaining holdings in Splash on a timely and profitable basis; the Company's ability to repay its indebtedness to IBM Credit; the timely payment of royalty obligations by Umax to the Company and Umax's success in the Mac clone business, the Company's ability to successfully renew or replace its lease of space for its main offices in Sunnyvale; the Company's ability to successfully conclude or settle its patent infringement litigation with EFI; the success of the Apple Macintosh computer line and operating system, the success of Apple as well as the Company's ability to compete successfully with Apple in its market; the Company's ability to successfully develop, introduce and market new products, including products for Windows operating system, to keep pace with technological innovation, particularly in light of its limited financial resources; the ability of the Company's manufacturers and suppliers to deliver components and manufacture the Company's products; the Company's reliance on international sales and the effect of its partially exclusive distributor arrangements with respect to Europe and Japan; and the Company's ability to attract and retain its key personnel. Each forward-looking statement should be read in conjunction with the entire consolidated interim financial statements and the notes thereto in Part I, Item 1 of this Quarterly Report, with the information contained in Item 2, including, but not limited to, "Certain Factors That May Affect Future Results," and with "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1997, including, but not limited to, "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Certain Factors That May Affect the Company's Future Results of Operations." OVERVIEW The Company designs, develops, assembles, markets and supports color publishing and digital video computer products for creative professionals. The Company's current product line includes: multimedia authoring and editing video systems and software that can acquire and manipulate video and audio information; high resolution color reference displays that allow users to view text, graphics, images and video; accelerated color graphics products that facilitate the creation of graphical images; and PCI bus adapter cards featuring Windows compatibility to users of MacOS products ("PC on a card" or "DOS on Mac" products). To date, substantially all of the Company's products have been designed for and sold to users of Macintosh computer products (the "Macintosh") manufactured by Apple Computer, Inc. ("Apple") as Apple products have been the preferred platform in the Company's target markets. The Company's current product development plans include adding cross platform (Windows) capabilities to some of the Company's products in order to market these products to users of the Windows operating system. There can be no assurance that the Company will be successful in developing and marketing products for the Windows operating system, particularly in light of the Company's current financial condition. As shown in the accompanying consolidated financial statements, the Company has incurred substantial operating and net losses and currently has liabilities in excess of assets. During fiscal 1996 and 1997, management implemented a number of actions to address its cash flow and operating issues including: restructuring its outstanding indebtedness to trade creditors and its secured creditor; refocusing its efforts on providing solutions for high end digital video and graphics customers; discontinuing sales of mass market and other low value added products; divesting a number of businesses and product lines, including its Color Server Group, which is now known as Splash Technology Holdings, Inc. ("Splash"); significantly reducing expenses and headcount; and reducing its lease obligations for its current facility lease given its reduced occupancy requirements. There can be no assurance that these measures will be sufficient to allow the Company to achieve profitability. -10- 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, ------------------------------- 1997 1996 ---- ---- Total net sales 100.0% 100.0% Cost of sales 64.9 58.1 ------ ------ Gross profit 35.1 41.9 ------ ------ Operating expenses: Research and development 8.9 7.5 Selling, general and administrative 37.8 33.9 ------ ------ Total operating expenses 46.7 41.4 ------ ------ Income (loss) from operations (11.6) 0.5 Other income (expense), net 19.4 0.0 Interest expense (3.1) (6.1) -------- ------- Income (loss) before income taxes 4.7 (5.6) ------- ------- Provision for income taxes 0.0 1.0 ------- ------ Net income (loss) 4.7% (6.6)% ------ ------ ------ ------
NET SALES The Company's total net sales decreased 54.2% to $5.5 million in the first quarter of fiscal 1998 from $12.1 million for the same quarter in fiscal 1997. The decline is due primarily to the following factors: the Company's decision to focus its efforts on its color publishing and digital video software product lines while discontinuing the development of its accelerated color graphics products and its DOS on Mac products; a decline in the sales of its color publishing products; reduced commissions paid by the its international distributors due to the company's above decisions as to its product focus; and reduced royalties paid by Umax Computer Corporation under its license agreement for the MacOS compatible systems signed in February 1996. The Company expects these trends to continue. The Company also anticipates that, as a result of these trends the proportion of hardware sales will decline in the coming periods. For example, in the Company's digital video product line, the sales of the systems products have been declining while the sale of the software products for digital video camcorders (PhotoDV introduced in April 1997 and MotoDV introduced in September 1997) have increased during 1997. The Company's EditDV product, which the Company introduced in November 1997, may add to this trend. There can be no assurance that sales of these software products will continue to increase or that they will increase to a sufficient extent to offset the anticipated decline in hardware sales. Moreover, the Company anticipates that its royalties from Umax will decline significantly during fiscal 1998 due to Apple's decision not to extend the operating system licenses and the expiration of this obligation in March 1998. Effective January 1, 1998, the Company has modified its relationships with its distributors in Japan and Europe for its digital video software products. Sales will now be made for these products based upon a price list and they will no longer pay commissions upon their sale of these products. Commission will still be paid on the sales of all of the Company's other products. Sales to Ingram Micro and Microage Computer Center accounted for 61.0% and 12.0% of net sales for the first quarter of fiscal 1998, respectively. For the corresponding period of fiscal 1997, the same customers accounted for 81.5% and 0.6% of the Company's net sales. -11- GROSS PROFIT The Company's gross profit margin was 35.1% and 41.9% for the first quarter of fiscal 1998 and 1997, respectively. The decrease in gross profit margin for the three month period ended December 31, 1997 was due primarily to sales of its accelerated graphics products and its DOS on Mac products at very low profit margins. Excluding these products the gross profit margin would have been 39.1%. The Company anticipates continued price reductions and margin pressure within its industry; however, these trends may be offset if the Company increases sales of higher gross margin software products that are expected to become a focus of the Company's sales and marketing efforts in the coming periods, although there can be no assurance that the Company will be successful in marketing these products. Additionally, the Company is taking further steps to reduce product costs and controlling expenses. There can be no assurance that the Company's gross margins will improve or remain at current levels. RESEARCH AND DEVELOPMENT EXPENSES Research and development expenses decreased to $0.5 million or 8.9% of net sales in the first quarter of fiscal 1998 from $0.9 million or 7.5% of net sales in the same quarter of fiscal 1997. This decrease is primarily the result of funds received for the outplacement of some of the Company's engineers in October 1997. The company continues to expect to spend approximately $3.0 million on the development of its digital video and color product lines during fiscal 1998. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses decreased to $2.1 million or 37.8% of net sales in the first quarter of fiscal 1998 from $4.1 million or 33.9% of net sales in the same quarter of fiscal 1997. 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 decline in sales from the first quarter of fiscal 1997. 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 $1.1 million in the first quarter of fiscal 1998 and was immaterial in the first quarter of fiscal 1997. This income resulted from the sale of 40,000 shares of Splash Common Stock in December 1997. INTEREST EXPENSE Interest expense declined to $0.2 million in the first quarter of fiscal 1998 from $0.7 million in the same quarter of fiscal 1997. This decrease was due to lower average borrowings primarily as a result of the term loan repayment to IBM Credit in August 1997. NET PROFIT As a result of the above factors, the Company had a net profit of $0.3 million for the first quarter fiscal 1998 as compared to a net loss of $0.8 million in the first quarter fiscal 1997. FINANCIAL CONDITION The Company's cash and cash equivalents remained essentially unchanged at $0.8 million at December 31,1997, as compared with the fiscal 1997 ending balance. However, as of December 31, 1997, 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 $11.3 million at the end of the first quarter of fiscal 1998 due to the sale of 40,000 shares, and more importantly, due to the substantial decline in the closing price of Splash Common Stock from $38.75 to $21.375 during that period of time. Since then, the closing price of Splash Common Stock has further declined to $14.38 on February 5, 1998. The value of the 530,139 shares (net of the option to buy 174,113 shares held by IBM Credit and which is exercisable at a nominal price) still held by the Company is $7.6 million as of February 5, 1998. -12- The Company's principal source(s) of liquidity currently are cash generated by operations, if any; an up to $6.5 million amended working capital line of credit provided by IBM Credit pursuant to the terms of the restructured loan with IBM Credit; and cash generated from the sale of Splash Common Stock net of repayments on the working capital line of credit. The loan agreement was amended in January 1998. Under the terms of the amended working capital line of credit, the amount available to borrow will be decreased to $6.0 million on March 2, 1998 and will be further reduced by mandatory pre-payments which arise from the sale of additional shares of Splash Common Stock until the working capital line of credit is fully repaid. The borrowing base under the amended working capital line of credit is defined as (i) sixty percent of the value of the Splash Common Stock held by the Company (net of IBM Credit's option to purchase 174,113 shares); (ii) the lesser of 10% of the gross value of eligible inventory or $500,000; plus (iii) 80% of the Company's eligible domestic accounts receivable; (iv) the lesser of 50% of the gross value of certain eligible Japanese and European accounts receivable or $500,000); plus (v) 50% of the approximately $2.0 million held in escrow in connection with the law suit filed by EFI. As the borrowing base is primarily dependent on the daily closing price of Splash Common Stock, there can be no assurance that it will be sufficient to allow the Company to borrow up to the full amount of the amended working capital line of credit. At February 5, 1998 the Company had borrowed $6.0 million against the working capital line of credit. The Company has granted to IBM Credit a security interest in substantially all of its assets to secure the Company's various obligations to IBM Credit. The Company has also granted to Mitsubishi Electronics a security interest (securing an amount up to $4.4 million) in all of the Company's technology and intellectual property rights related to and incorporated into the Company's PressView products. As of December 31, 1997, the Company was not in compliance with all of the financial covenants under the amended loan agreement dated November 10, 1997 (specifically, minimum working capital and current assets to current liabilities ratio). The Company obtained a waiver from IBM Credit of this noncompliance. There can be no assurance that IBM Credit will grant a waiver in the future in the event the Company is not in compliance with the amended financial covenants. As a result of IBM's control over the Company's cash flow and restrictions on the use of the Company's excess cash flow, the Company anticipates that it will not have significant cash available for expenditures other than for its ordinary course of business operating expenses, which will be significantly lower than historical amounts. In the event the Company were unable to generate sufficient net sales or if the Company incurs unforeseen operating expenses, it may not be able to meet its operating expenses without additional financing or a restructuring of its loan agreements with IBM Credit. In the event that the Company desires to acquire any strategic technologies or businesses, it would probably be unable to do so without obtaining additional financing or the consent of IBM Credit. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Certain Factors That May Affect the Company's Future Results of Operations -- Need for Additional Financing; Loan Restrictions." A significant portion of the Company's net worth and liquidity is represented by the Company's remaining holdings in Splash. Although the Company may trade its shares in the open market pursuant to Rule 144 or privately, the market price of Splash Common Stock has been volatile with relatively limited volume since Splash's secondary public offering in August 1997. There are other shareholders in Splash with large blocks of restricted common stock who may try to sell their shares at the same time as the Company. If too many shares are offered for sale at the same time, the price may be further depressed. CERTAIN FACTORS THAT MAY AFFECT THE COMPANY'S FUTURE RESULTS OF OPERATIONS A number of uncertainties exist that could affect the Company's future operating results, including, without limitation, the following: -13- VALUE AND LIQUIDITY OF INTEREST IN SPLASH TECHNOLOGY HOLDINGS, INC. A significant portion of the Company's net worth and liquidity resides in the Company's remaining holdings in Splash. Although the Company may trade its shares pursuant to Rule 144 or privately, the market price of Splash Common Stock has been volatile with relatively limited volume since Splash's secondary public offering in August 1997. There are other shareholders in Splash with large blocks of restricted common stock who may try to sell their shares when the Company is in the market. If too many shares are offered for sale at the same time, the price may be depressed. Ideally, proceeds from the sale of Splash Common Stock held by the Company will be sufficient to repay the balance of the IBM Credit facility and to provide sufficient working capital to the Company during fiscal 1998, but there can be no assurance that the Company will be able to effectively time its sales or that the market value of Splash Common Stock will be adequate to achieve such goals. With the recent decline in the closing price of Splash Common Stock to $14.38 on February 5, 1998, the Company would have $1.6 million net proceeds after retirement of the IBM Credit debt if it were to sell its remaining 530,139 shares of Splash Common Stock as of that date. CONTINUING OPERATING LOSSES The Company experienced operating losses in each of its prior five fiscal years. In the future, the Company's ability to achieve and subsequently sustain profitable operations will depend upon a number of factors, including the Company's ability to control costs; the Company's ability to service its outstanding indebtedness to IBM Credit; the Company's ability to realize appreciation in minority ownership interests in Splash and other investments, which cannot be assured in light of the substantial decline in the market value of Splash Common Stock; the Company's ability to generate sufficient cash from operations or obtain additional funds to fund its operating expenses; the Company's ability to successfully market its software products; the Company's ability to develop innovative and cost-competitive new products and to bring those products to market in a timely manner; the commercial acceptance of Apple computers and the MacOS and the rate and mix of Apple computers and related products sold; the Company's ability to successfully develop and market products for the Microsoft Windows and NT operating systems in a timely manner; competitive factors such as new product introductions, product enhancements and aggressive marketing and pricing practices; general economic conditions; the Company's ability to successfully negotiate a lease renewal for its main offices facility, and negotiate a settlement or other favorable conclusion of the EFI litigation; and other factors. For these and other reasons, there can be no assurance that the Company will be able to achieve or subsequently maintain profitability in the near term, if at all. FLUCTUATIONS IN OPERATING RESULTS The Company has experienced substantial fluctuations in operating results. The Company's customers generally order on an as-needed basis, and the Company has historically operated with relatively small backlogs. Quarterly sales and operating results depend heavily on the volume and timing of bookings received during the quarter, which are difficult to forecast. A substantial portion of the Company's revenues are derived from sales made late in each quarter, which increases the difficulty in forecasting sales accurately. Since the end of the Company's 1995 fiscal year, shortages of available cash have restricted the Company's ability to purchase inventory and have delayed the Company's receipt of products from suppliers and increased shipping and other costs. Furthermore, because of its financial condition, the Company believes that many suppliers are hesitant to continue their relationships with or extend credit terms to the Company and potential new suppliers are reluctant to provide goods to the Company. The Company recognizes sales upon shipment of product, and allowances are recorded for estimated uncollectable amounts, returns, credits and similar costs, including product warranties and price protection. Due to the inherent uncertainty of such estimates, there can be no assurance that the Company's forecasts regarding bookings, collections, rates of return, credits and related matters will be accurate. A significant portion of the operating expenses of the Company are relatively fixed in nature, and planned expenditures are based primarily on sales forecasts which, as indicated above, are uncertain. Any inability on the part of the Company to adjust spending quickly enough to compensate for any failure to meet sales forecasts or to receive anticipated collections, or any unexpected increase in product returns or other costs, could also have an adverse impact on the Company's operating results. As a strategic response to a changing competitive environment, the Company has elected, and, in the future, may elect from time to time, to make certain pricing, service or marketing decisions or acquisitions that could have a material adverse effect on the Company's business, results of operations and financial condition. The Company also completed a variety of business divestitures during fiscal 1996 and 1997, restructured the terms of its indebtedness to IBM Credit and issued a substantial amount of equity in the Company to its creditors in satisfaction of approximately $45.9 million in claims and indebtedness during the fourth quarter of fiscal 1996. In addition, the Company has begun to focus its efforts on developing and marketing software products, an area in which it has limited experience. As a result, the Company believes that period-to-period comparisons of its results of operations will not necessarily be meaningful and should not be relied upon as any -14- indication of future performance. Due to all of the foregoing factors, it is likely that in some future quarter the Company's operating results will be below the expectations of public market analysts and investors. In such event, the price of the Company's Common Stock would be likely to be materially adversely affected. NEED FOR ADDITIONAL FINANCING; LOAN RESTRICTIONS The Company intends to finance its working capital needs through cash generated by operations, sales of liquid assets and borrowings under a restructured working line of credit with IBM Credit. Because the Company has experienced operating losses in each of its prior five fiscal years, the Company must significantly reduce operating expenses and/or significantly increase net sales in order to finance its working capital needs with cash generated by operations. This is particularly important as a result of the substantial decline in the value of the Splash Common Stock. Furthermore, pursuant to the restructured loan with IBM Credit, the Company is required to deposit its revenues in accounts subject to control by IBM Credit. At any time, regardless of whether the Company is in default of its obligations to IBM Credit, IBM Credit is permitted to apply these amounts towards the repayment of the Company's obligations to IBM Credit. This loan is also subject to mandatory prepayment as follows: (i) upon the disposition of any assets of the Company outside of the ordinary course of business, all net proceeds to the Company must be applied towards the Company's obligations under the loan; (ii) upon the closing of any financing, 10% of the proceeds must be applied towards the Company's obligations under the loan; (iii) upon the thirtieth day following the end of each fiscal quarter, an amount of no less than 50% of operating cash flow for such prior fiscal quarter must be applied towards the Company's obligations under the loan; and (iv) upon the receipt of any other amounts other than sales of inventory or used or obsolete equipment in the ordinary course of business, and not otherwise described in the preceding clause (i) - (iii), all of such amounts must be applied towards the Company's obligations under the loan. IBM Credit's control over the Company's financial resources as well as these prepayment provisions will place a further strain on the ability of the Company to fund its working capital needs internally. Accordingly, there can be no assurance that the Company will be able to successfully fund its working capital needs internally. Although the restructured loan provides for an amended working line of credit of up to $6.5 million, the Company will only be able to borrow amounts up to the "borrowing base" which is defined as (i) sixty percent of the value of the Splash Common Stock held by the Company (net of IBM Credit's option to purchase 174,113 shares); (ii) the lesser of 10% of the gross value of eligible inventory or $500,000; plus (iii) 80% of the Company's eligible domestic accounts receivable; (iv) the lesser of 50% of the gross value of certain eligible Japanese and European accounts receivable or $500,000); plus (v) 50% of the approximately $2.0 million held in escrow in connection with the law suit filed by EFI. The amended working capital line of credit will be reduced to $6.0 million on March 2, 1998 and will be further reduced by fifty percent of the value of Splash Common Stock shares sold by the Company other than the shares representing the option held by IBM Credit. Also under the terms of the amended working capital line of credit, the Company has the obligation to sell up to 232,151 shares of Splash Common Stock at a price approved by IBM Credit and pay seventy-five percent of the proceeds to IBM Credit as a "cancellation fee" of the option that IBM holds for 174,113 shares of Splash Common Stock. Once the line of credit has been reduced to zero, if ever, the Company does not expect that it will be a source of working capital in the future. The restructured loan and amended working capital line of credit also imposes certain operating and financial restrictions on the Company and requires the Company to maintain certain financial covenants such as minimum working capital, restricts the ability of the Company to incur additional indebtedness, pay dividends, create liens, sell assets or engage in mergers or acquisitions, or make certain capital expenditures. The failure to comply with these covenants would constitute a default under the loan, which is secured by substantially all of the Company's assets. In the event of such a default, IBM Credit could elect to declare all of the funds borrowed pursuant thereto to be due and payable together with accrued and unpaid interest proceeding and to apply all amounts on deposit in the Company's bank accounts, which could result in the Company becoming a debtor in a bankruptcy. The loan restrictions could limit the ability of the Company to effect future financings or otherwise restrict corporate activities. As of December 31, 1997, the Company was not in compliance with all of the financial covenants under the restructured loan agreement and amended working capital line of credit (specifically, minimum working capital and current assets to current liabilities ratio) however, IBM Credit has waived such defaults. In the event that the Splash Common Stock and the working capital line of credit are insufficient to fund the Company's working capital needs, the Company may need to raise additional capital through public or private financings, strategic relationships or other arrangements. There can be no assurance that such additional funding will be available on terms attractive to the Company, or at all. The failure of the Company to raise capital when needed would have a material adverse -15- effect on the Company's business, operating results and financial condition. If the additional funds are raised through the issuance of equity securities, the percentage ownership of the Company of its then-current shareholders would be reduced. Furthermore, such equity securities might have rights, preferences or privileges senior to those of the Company's Common Stock. DEPENDENCE ON AND COMPETITION WITH APPLE Historically, substantially all of the Company's products have been designed for and sold to users of Apple personal computers. Although the Company has begun to market certain products for the Windows environment, it is expected that sales of products for Apple computers will continue to represent substantially all of the sales of the Company for fiscal 1998. Apple has lost significant market share over the past couple of years and is experiencing declining sales in an absolute sense. The Company's operating results would be adversely affected if these trends should continue or if other developments were to adversely affect Apple's business. Furthermore, any continued difficulty that may be experienced by Apple in the development, manufacturing, marketing or sale of its computers, or other disruptions to, or uncertainty in the market regarding, Apple's business, resulting from these or other factors could result in further reduced demand for Apple computers, which in turn could materially and adversely affect sales of the Company's products. Recently, Apple has announced large losses, management changes, headcount reductions, and other significant events which have led to uncertainty in the market regarding Apple's business and products. In addition, news reports indicating that Apple may be or may have been the target of merger, acquisition, or takeover negotiations, have led or could lead to uncertainty in the market regarding Apple's business and products. Also, Apple's decision not to renew the licenses to the MacOS with the Mac clone manufacturers further limits the market available for the Company's Macintosh products. As software applications for the color publishing and multimedia markets become more available on platforms other than Macintosh, it is likely that these other platforms will continue to gain acceptance in these markets. For example, newer versions of the Windows operating environment support high performance graphics and video applications similar to those offered on the Macintosh. There is a risk that this trend will reduce the support given to Macintosh products by third party developers and could substantially reduce demand for Macintosh products and peripherals over the long term. A number of the Company's products compete with products marketed by Apple. As a competitor of the Company, Apple could in the future take steps to hinder the Company's development of compatible products and slow sales of the Company's products. The Company's business is based in part on supplying products that meet the needs of high-end customers that are not fully met by Apple's products. As Apple improves its products or bundles additional hardware or software into its computers, it reduces the market for Radius products that provide those capabilities. For example, the Company believes that the on-board performance capabilities included in Macintosh Power PC products have reduced and continue to reduce overall sales for the Company's graphics cards. In the past, the Company has developed new products as Apple's progress has rendered existing Company products obsolete. However, in light of the Company's current financial condition there can be no assurance that the Company will continue to develop new products on a timely basis or that any such products will be successful. In order to develop products for the Macintosh on a timely basis, the Company depends upon access to advance information concerning new Macintosh products. A decision by Apple to cease sharing advance product information with the Company would adversely affect the Company's business. New products anticipated from and introduced by Apple could cause customers to defer or alter buying decisions due to uncertainty in the marketplace, as well as presenting additional direct competition for the Company. For example, the Company believes that Apple's transition during 1994 to Power PC products caused delays and uncertainties in the marketplace and had the effect of reducing demand for the Company's products. In addition, sales of the Company's products have been adversely affected by Apple's revamping of its entire product line from NuBus-based to PCI Bus-based computers. In the past, transitions in Apple's products have been accompanied by shortages in those products and in key components for them, leading to a slowdown in sales of those products and in the development and sale by the Company of compatible products. In addition, it is possible that the introduction of new Apple products with improved performance capabilities may create uncertainties in the market concerning the need for the performance enhancements provided by the Company's products and could reduce demand for such products. COMPETITION The markets for the Company's products are highly competitive, and the Company expects competition to intensify. Many of the Company's current and prospective competitors have significantly greater financial, technical, manufacturing and marketing resources than the Company. The Company believes that its ability to compete will depend on a number of factors, including the amount of financial resources available to the Company, its ability to repay its indebtedness to IBM Credit, success and timing of new product developments by the Company and its competitors, product performance, price and quality, breadth of distribution and customer support. There can be no assurance that the Company will be able to -16- compete successfully with respect to these factors. In addition, the introduction of lower priced competitive products could result in price reductions that would adversely affect the Company's results of operations. DEPENDENCE ON LIMITED NUMBER OF MANUFACTURERS AND SUPPLIERS The Company outsources the manufacturing and assembly of its products to third party manufacturers. Although the Company uses a number of manufacturer/assemblers, each of its products is manufactured and assembled by a single manufacturer. The failure of a manufacturer to ship the quantities of a product ordered by the Company could cause a material disruption in the Company's sales of that product. In the past, most recently in the fourth quarter of fiscal 1996, the Company has experienced substantial delays in its ability to fill customer orders for displays and other products, due to the inability of certain manufacturers to meet their volume and schedule requirements and, more recently, due to the Company's shortages in available cash. Such shortages have caused some manufacturers to put the Company on a cash or prepay basis and/or to require the Company to provide security for their risk in procuring components or reserving manufacturing time, and there is a risk that manufacturers will discontinue their relationship with the Company. The Company currently has arranged payment terms for certain of its major manufacturers such that certain of the Company's major customers pay these manufacturers directly for products ordered and shipped. In the event these customers do not pay these manufacturers, there can be no assurance that such manufacturers will not cease supplying the Company. In addition, as a condition to continuing its manufacturing arrangement with the Company, the Company granted Mitsubishi Electronics, the manufacturer of the Company's PressView products, a security interest in all of the Company's technology and intellectual property rights related to and incorporated into the Company's PressView products. There can be no assurance that other manufacturers will not require special terms in order to continue 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, color-calibrated monitors and other products. Certain other components and molded plastic parts are also purchased from sole or limited source suppliers. The Company purchases these sole or limited source components primarily pursuant to purchase orders placed from time to time in the ordinary course of business and has no guaranteed supply arrangements with sole or limited source suppliers. Therefore, these suppliers are not obligated to supply products to the Company for any specific period, in any specific quantity or at any specific price, except as may be provided in a particular purchase order. Although the Company expects that these suppliers will continue to meet its requirements for the components, there can be no assurance that they will do so, particularly in light of the Company's financial condition. The Company's reliance on a limited number of suppliers involves a number of risks, including the absence of adequate capacity, the unavailability or interruption in the supply of key components and reduced control over delivery schedules and costs. The Company expects to continue to rely on a limited number of suppliers for the foreseeable future. If these suppliers became unwilling or unable to continue to provide these components the Company would have to develop alternative sources for these components which could result in delays or reductions in product shipments which could have a material adverse effect on the Company's business, operating results and financial condition. Certain suppliers, due to the Company's shortages in available cash, have put the Company on a cash or prepay basis and/or required the Company to provide security for their risk in procuring components or reserving manufacturing time, and there is a risk that suppliers will discontinue their relationship with the Company. The introduction of new products presents additional difficulties in obtaining timely shipments from suppliers. Additional time may be needed to identify and qualify suppliers of the new products. Also, the Company has experienced delays in achieving volume production of new products due to the time required for suppliers to build their manufacturing capacity. An extended interruption in the supply of any of the components for the Company's products, regardless of the cause, could have an adverse impact on the Company's results of operations. TECHNOLOGICAL CHANGE; CONTINUING NEED TO DEVELOP NEW PRODUCTS The personal computer industry in general, and color publishing and video applications within the industry, are characterized by rapidly changing technology, often resulting in short product life cycles and rapid price declines. The Company believes that its success will be highly dependent on its ability to develop innovative and cost-competitive new products and to bring them to the marketplace in a timely manner. Should the Company fail to introduce new products on a timely basis, the Company's operating results could be adversely affected. As a result of the Company's financial condition, it has had to significantly reduce its research and development expenditures. For the 1997 fiscal year, the Company spent approximately $5.0 million on research and development as compared with approximately $7.5 million for the 1996 fiscal year and $19.3 for the 1995 fiscal year. Furthermore, as described in "-- Need for Additional Financing; Loan Restrictions," the terms of the restructured loan with IBM Credit will restrict the Company's ability to fund its working capital needs and, as a result, the ability of the Company to maintain historical levels of research and development expenditures. Continued reduction in the available cash resources of the Company could result in the interruption or cancellation of research and product -17- development efforts which would have a material adverse effect on the business, operating results and financial condition of the Company. The Company anticipates that the video editing industry will follow the pattern of the professional publishing industry in which desktop publishing products, including those produced by Radius, replaced more expensive, proprietary products, and the Company also anticipates that this evolution will lead to an increase in the purchase and use of video editing products, in particular digital video editing products for use with digital video camcorders. As a result, the Company has devoted significant resources to this product line. There can be no assurance that this evolution will occur in the digital video editing industry as expected by the Company, or that even if it does occur that it will not occur at a slower pace than anticipated. There can also be no assurance that any digital video editing products developed by the Company will achieve consumer acceptance or broad commercial success. In the event that the increased use of such video editing products does not occur or in the event that the Company is unable to successfully develop and market such products, the Company's business, operating results and financial condition would be materially adversely affected, particularly in light of the fact that the Company anticipates that it will begin to de-emphasize many of its traditional hardware products in the future. DEPENDENCE ON INDIRECT DISTRIBUTION CHANNELS The Company's primary means of distribution is through a limited number of third-party distributors and master resellers that are not under the direct control of the Company. Furthermore, the Company relies on one exclusive or primary distributor for its sales in each of Japan and Europe. The Company does not maintain a direct sales force. As a result, the Company's business and financial results are highly dependent on the amount of the Company's products that is ordered by these distributors and resellers. Such orders are in turn dependent upon the continued viability and financial condition of these distributors and resellers as well as on their ability to resell such products and maintain appropriate inventory levels. Furthermore, many of these distributors and resellers generally carry the product lines of a number of companies, are not subject to minimum order requirements and can discontinue marketing the Company's products at any time. Accordingly, the Company must compete for the focus and sales efforts of these third parties. Because certain of the Company's major suppliers have arrangements with the Company pursuant to which certain of the Company's major customers are responsible for payment of goods sent to the Company, the Company is dependent on certain resellers to make payments to its suppliers. In addition, due in part to the historical volatility of the personal computer industry, certain of the Company's resellers have from time to time experienced declining profit margins, cash flow shortages and other financial difficulties. The future growth and success of the Company will continue to depend in large part upon its indirect distribution channels, including its reseller channels. If its resellers or other distributors were to experience financial difficulties, the Company's results of operations could be adversely affected. INTERNATIONAL SALES Prior to the second fiscal quarter of 1996, the Company's international sales were primarily made through distributors and the Company's subsidiary in Japan. Effective April 1, and July 1, 1996 the Company appointed an exclusive distributor for Japan and Europe, respectively. The Company expects that international sales, particularly sales to Japan, will represent a significant portion of its business activity and that it will be subject to the normal risks of international sales such as currency fluctuations, longer payment cycles, export controls and other governmental regulations and, in some countries, a lesser degree of intellectual property protection as compared to that provided under the laws of the United States. Sales in Japan could be affected by the economic conditions in that region. Asian sales outside of Japan are not material. 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. During the third quarter of fiscal 1997, the exclusivity clause in the agreement with the Japanese distributor was terminated. No other distribution relationship for Japan has been entered into by the Company. Effective January 1, 1998, the Company has modified its relationships with its distributors in Japan and Europe for its digital video software products. Sales will now be made for these products based upon a price list and they will no longer pay commissions upon their sale of these products. Commission will still be paid on the sales of all of the Company's other products. -18- 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 three other Vice Presidents, and 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. DEPENDENCE ON PROPRIETARY RIGHTS The Company relies on a combination of patent, copyright, trademark and trade secret protection, nondisclosure agreements and licensing arrangements to establish and protect its proprietary rights. The Company has a number of patents and patent applications and intends to file additional patent applications as it considers appropriate. There can be no assurance that patents will issue from any of these pending applications or, if patents do issue, that any claims allowed will be sufficiently broad to protect the Company's technology. In addition, there can be no assurance that any patents that may be issued to the Company will not be challenged, invalidated or circumvented, or that any rights granted thereunder would provide proprietary protection to the Company. The Company has a number of trademarks and trademark applications. There can be no assurance that litigation with respect to trademarks will not result from the Company's use of registered or common law marks, or that, if litigation against the Company were successful, any resulting loss of the right to use a trademark would not reduce sales of the Company's products in addition to the possibility of a significant damages award. Although, the Company intends to defend its proprietary rights, policing unauthorized use of proprietary technology or products is difficult, and there can be no assurance that the Company's efforts will be successful. The laws of certain foreign countries may not protect the proprietary rights of the Company to the same extent as do the laws of the United States. The Company has received, and may receive in the future, communications asserting that its products infringe the proprietary rights of third parties, and the Company is engaged and has been engaged in litigation alleging that the Company's products infringe others' patent rights. As a result of such claims or litigation, it may become necessary or desirable in the future for the Company to obtain licenses relating to one or more of its products or relating to current or future technologies, and there can be no assurance that it would be able to do so on commercially reasonable terms. IMPACT OF YEAR 2000 The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. The Company has been studying this issue but has not yet completed the process. As a result, the Company has no reasonable basis to conclude that the Year 2000 Issue will not materially affect future financial results, or cause reported financial information not to be indicative of future operating results or future financial condition. SHARES ELIGIBLE FOR FUTURE SALE Sales of substantial amounts of Common Stock in the public market could adversely affect the prevailing market price of the Company's Common Stock. The Company estimates that approximately 10 million shares of common stock issued to unsecured creditors under the Plan in September 1996 have not yet been sold and are eligible for sale under Rule 144. The tradability of such shares of Common Stock could materially and adversely affect the market price of the Common Stock. As of December 31, 1997, there were 6,105,680 shares of Common Stock reserved for issuance upon exercise of outstanding options by employees and consultants. As of such date there were an additional 1,129,100 shares of Common Stock available for issuance under options to be granted to employees and consultants and 158,998 shares reserved for -19- issuances for purchases under the Company's Employee Stock Purchase Plan. Additionally, 152,500 shares of Common Stock were reserved for issuance under the Company's stock option plans for non-employee directors, 47,500 of which were subject to outstanding options. The Company has amended its 1995 Stock Option Plan (the "1995 Plan") to increase the number of shares available for issuance thereunder by 2,700,000 shares, subject to shareholder approval at its Annual Meeting of Shareholders in February 1998. The Company may also seek to obtain Board and/or shareholder approval for grants of options in excess of the amounts described above. All of the shares of Common Stock to be issued upon exercise of options granted or to be granted or upon stock purchases will be available for sale in the public market. Such availability will further increase the number of freely tradeable shares of Common Stock outstanding which could exert downward pressure on the trading price of the Common Stock. As of July 31, 1997, the Company granted a warrant to purchase 250,000 shares of the Company's Common Stock at an exercise price of $1.50 per share which is exercisable two years from the grant date to WPS, L.L.C. in consideration of consulting services performed during the third quarter of 1997. The value of the warrants has been deemed to be immaterial. As of August 29, 1997, the Company granted a warrant to purchase 500,000 shares of the Company's Common Stock at a price of $1.25 per share exercisable over a forty two month period from the grant date to Reply Corporation (Reply) as part of the technology licensing agreement with Reply. The value of the warrants has been deemed to be immaterial. See Notes to Consolidated Financial Statements - Note 9 Technology licensing from Reply Corporation in the Company's 1997 Form 10-K. POSSIBLE DELISTING OF COMMON STOCK FROM NASDAQ SMALLCAP MARKET The Company's Common Stock is listed on the Nasdaq SmallCap Market pursuant to an agreement with the NASD which requires that the Company comply with the continued listing requirements for the Nasdaq SmallCap Market. Failure to meet the continued listing requirements in the future would subject the Common Stock to delisting. Companies traded on the Nasdaq SmallCap Market will be required commencing in March 1998, for example, to maintain a minimum bid price of $1.00 per share. Because the Company's Common Stock has not traded over $1.00 per share since November 1996, the Common Stock could be delisted from the Nasdaq SmallCap Market. As a result, the Board of Directors has proposed, subject to shareholder approval at the February 1998 annual meeting of shareholders, a significant reverse stock split if the trading price of the Company's Common Stock remains below $1.00 per share. There can be no assurance that such a proposal will be timely approved by the shareholders, or if approved, that the stock price will perform as hoped. If the Company's Common Stock is delisted, there can be no assurance that the Company will meet the requirements for initial inclusion on Nasdaq in the future, particularly in light of the fact that Nasdaq requires traded securities to have a $4.00 minimum per share bid requirement. Moreover, the NASD is considering the elimination of the SmallCap Market altogether. Trading, if any, in the listed securities after delisting or the elimination of the SmallCap Market would be conducted in the over-the-counter market in what are commonly referred to as the "pink sheets." As a result, investors may find it more difficult to dispose of, or to obtain accurate quotations as to the value of, the Company's securities. -20- PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS See Note 3 to Consolidated Financial Statements - Commitments and Contingencies. ITEM 5. OTHER INFORMATION The value of the Company's investment in Splash Technology Holdings, Inc. declined from $22.1 million at the end of fiscal year 1997 to $11.3 million at the end of the first quarter of fiscal 1998 due to the sale of 40,000 shares, and more importantly, due to the substantial decline in the closing price of Splash Common Stock from $38.75 to $21.375 during that period of time. Since then the closing price of Splash Common Stock has further declined to $14.38 on February 5, 1998. The value of the 530,139 shares (net of the option to buy 174,113 shares held by IBM Credit and which is exercisable at a nominal price) still held by the Company is $7.6 million as of February 5, 1998. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS The following exhibits are filed with this Quarterly Report: 10.01 Amended and Restated Working Capital and Term Loan Agreement dated as of January 8, 1998 between IBM Credit and the Registrant. 27.01 Financial Data Schedule (EDGAR version only). (b) REPORTS ON FORM 8-K No report on Form 8-K was filed during the three months ended December 31, 1997. 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 10, 1998 RADIUS INC. By: /s/ ------------------ Henry V. Morgan Chief Financial Officer -21- EX-10.1 2 EX 10.01 - LOAN AGREEMENT EXHIBIT 10.01 AMENDMENT TO AMENDED AND RESTATED WORKING CAPITAL FINANCING AND TERM LOAN AGREEMENT This Amendment ("Amendment") to the Amended and Restated Working Capital Financing and Term Loan Agreement is made as of January 8, 1998 by and between Radius Inc., a California corporation ("Customer") and IBM CREDIT CORPORATION, a Delaware corporation ("IBM Credit"). RECITALS A. Customer and IBM Credit have entered into that certain Amended and Restated Working Capital Financing and Term Loan Agreement, dated as of August 30, 1996 (as amended, supplemented or otherwise modified from time to time, the "Agreement"); B. Customer and IBM Credit agree to amend the Agreement on the terms and subject to the conditions set forth in this Amendment; AGREEMENT NOW THEREFORE, in consideration of the premises set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: Section 1. Definitions. All capitalized terms not otherwise defined herein shall have the respective meanings set forth in the Agreement. Section 2. Sale of Splash Stock. Customer sold 40,000 shares of common stock of Splash Technology Holdings, Inc. (the "Splash Stock") between November 11, 1997 and January 8, 1998. Pursuant to the terms of the Agreement, Customer agreed to pay IBM Credit as the Cancellation Fee seventy-five percent (75%) of the proceeds of the sale, transfer or other disposition of the first 232,151 shares of Splash Stock sold on or after November 11, 1997. IBM Credit and Customer hereby agree that the sale of 35,000 shares of such Splash Stock was for the account of Customer and has been applied to Customer's outstandings under the Agreement. IBM Credit and Customer further agree that the sale of the remaining 5,000 shares of such Splash Stock was for the account of Customer and the proceeds of such sale have been remitted to CLB Associates/Clearbrook Companies, as partial compensation for services rendered. Section 3. Amendment. The Agreement is hereby amended by deleting Exhibit A to the Agreement in its entirety and substituting, in lieu thereof, the Exhibit A attached hereto. Section 4. Rights and Remedies. Except to the extent specifically waived herein IBM Credit reserves any and all rights and remedies that IBM Credit now has or may have in the future with respect to Customer, including any and all rights or remedies which it may have in the future as a result of Customer's failure to comply with its financial covenants to IBM Credit. Except to the extent specifically waived herein neither this Amendment, any of IBM Credit's actions or IBM Credit's failure to act shall be deemed to be a waiver of any such rights or remedies. Section 5. Governing Law. This Amendment shall be governed by and interpreted in accordance with the laws which govern the Agreement. 1 Section 6. Counterparts. This Amendment may be executed in any number of counterparts, each of which shall be an original and all of which shall constitute one agreement. IN WITNESS WHEREOF, this Amendment has been executed by duly authorized representatives of the undersigned as of the day and year first above written. RADIUS INC. IBM CREDIT CORPORATION By: /s/ Henry V. Morgan By: /s/ Joni Tooliatos -------------------------- --------------------------- Name: Henry V. Morgan Name: Joni Tooliatos ------------------------ ------------------------- Title: SVP & CFO Title: Center Operations Mgr. ----------------------- ------------------------ 2 EX-27.01 3 EX 27.01 FDS
5 3-MOS SEP-30-1997 DEC-31-1997 845 0 7508 (4710) 640 15812 19788 (19583) 16017 18328 0 0 0 169025 (171336) 16017 5540 5540 3597 3597 2588 0 173 261 0 0 0 0 0 261 0.00 0.00
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