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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 30, 1996.
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 MAY 13,
1996 WAS 18,240,789.
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This report consists of 24 sequentially numbered pages. The exhibit index on
this report is located on sequentially numbered page 22.
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RADIUS INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
- - ------------------------------ ----
<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets at March 30, 1996 and September 30, 1995 3
Consolidated Statements of Operations for the Three and Six Months Ended
March 30, 1996 and 1995 4
Consolidated Statements of Cash Flows for the Six Months Ended
March 30, 1996 and 1995 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 8
PART II. OTHER INFORMATION
- - ---------------------------
Item 1. Legal Proceedings 18
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 20
- - ----------
</TABLE>
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RADIUS INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
MARCH 30, SEPTEMBER 30,
1996 1995 (1)
----------- -------------
(unaudited)
<S> <C> <C>
ASSETS:
Current assets:
Cash ............................................................. $ 2,779 $ 4,760
Accounts receivable, net ......................................... 24,471 61,644
Inventories ...................................................... 13,207 15,071
Prepaid expenses and other current assets ........................ 1,146 2,336
Income tax receivable ............................................ 517 519
--------- ---------
Total current assets ....................................... 42,120 84,330
Property and equipment, net ......................................... 2,104 3,031
Deposits and other assets ........................................... 433 517
--------- ---------
$ 44,657 $ 87,878
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY (Net capital deficiency)
Current liabilities:
Accounts payable ................................................. $ 41,430 $ 73,098
Accrued payroll and related expenses ............................. 4,267 5,815
Accrued warranty costs ........................................... 332 3,170
Other accrued liabilities ........................................ 9,999 11,920
Accrued income taxes ............................................. 1,844 1,665
Accrued restructuring and other charges .......................... 16,439 17,013
Short-term borrowings ............................................ 21,380 29,489
Obligations under capital leases - current portion ............... 1,431 1,494
--------- ---------
Total current liabilities .................................. 97,122 143,664
Obligations under capital leases - noncurrent portion ............... 560 1,331
Shareholders' equity: (Net capital deficiency)
Common stock ..................................................... 117,128 113,791
Common stock to be issued ........................................ 8,695 12,022
Accumulated deficit .............................................. (178,857) (182,993)
Accumulated translation adjustment ............................... 9 63
--------- ---------
Total shareholders' equity (Net capital deficiency) ........ (53,025) (57,117)
--------- ---------
$ 44,657 $ 87,878
========= =========
</TABLE>
(1) The balance sheet at September 30, 1995 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.
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RADIUS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data; unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 30, MARCH 30,
---------------------- -----------------------
1996 1995 1996 1995
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Net sales $ 30,575 $ 84,447 $ 63,227 $ 163,682
Cost of sales 25,098 62,913 53,705 119,671
-------- -------- -------- ---------
Gross profit 5,477 21,534 9,522 44,011
-------- -------- -------- ---------
Operating expenses:
Research and development 1,519 4,672 5,149 8,790
Selling, general and administrative 6,951 14,401 16,912 30,283
-------- -------- -------- ---------
Total operating expenses 8,470 19,073 22,061 39,073
-------- -------- -------- ---------
Income (loss) from operations (2,993) 2,461 (12,539) 4,938
Other income (expense), net 17,161 (2,154) 17,115 (3,074)
Settlement of litigation -- -- -- (12,422)
-------- -------- -------- ---------
Income (loss) before income taxes 14,168 307 4,576 (10,558)
Provision for income taxes 249 31 440 187
-------- -------- -------- ---------
Net income (loss) $ 13,919 $ 276 $ 4,136 $ (10,745)
======== ======== ======== =========
Income(loss) per share:
Net income (loss) per share $ 0.77 $ 0.02 $ 0.23 $ (0.76)
======== ======== ======== =========
Common and common equivalent shares used 18,082 14,556 18,058 14,183
in computing net income(loss) per share ======== ======== ======== =========
</TABLE>
See accompanying notes.
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RADIUS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(in thousands, unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 30,
----------------------
1996 1995
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 4,136 $(10,745)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,128 2,184
Gain on the sale of the Color Hard Copy Group (16,993) --
Common stock to be issued -- 12,022
(Increase) decrease in assets:
Accounts receivable 35,187 (25,825)
Allowance for doubtful accounts (1,668) (487)
Inventories 1,084 (10,212)
Prepaid expenses and other current assets 1,190 (2,857)
Income tax receivable 2 7,829
Increase (decrease) in liabilities:
Accounts payable (28,137) 27,522
Accrued payroll and related expenses (1,404) (699)
Accrued warranty costs (2,728) 128
Other accrued liabilities (777) 3,524
Accrued restructuring costs (574) (11,655)
Accrued income taxes 179 (155)
-------- --------
Net cash used in operating activities (9,375) (9,426)
Cash flows from investing activities:
Capital expenditures (201) (2,983)
Deposits and other assets 84 (153)
Net proceeds from the sale of the Color Hard Copy Group 16,438 --
-------- --------
Net cash provided by (used in) investing activities 16,321 (3,136)
Cash flows from financing activities:
Principal payments of short-term borrowings, net (8,109) 388
Principal payments of long-term debt and capital leases (834) (896)
Issuance of common stock 16 1,446
-------- --------
Net cash provided by (used in) financing activities (8,927) 938
-------- --------
Net decrease in cash and cash equivalents (1,981) (11,624)
Cash and cash equivalents, beginning of period 4,760 15,997
-------- --------
Cash and cash equivalents, end of period $ 2,779 $ 4,373
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest paid $ 1,084 $ 1,082
======== ========
Income taxes paid $ 259 $ 0
======== ========
</TABLE>
See accompanying notes.
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RADIUS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The consolidated financial statements of Radius Inc. ("Radius") as of March 30,
1996 and for the three months ended March 30, 1996 and 1995 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 of the financial position and results of operations for the interim
periods presented. These consolidated financial statements 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 year ended
September 30, 1995.
During the first quarter of its 1995 fiscal year, the Company changed its fiscal
year end from the Sunday closest to September 30 to the Friday closest to
September 30. During the second quarter of its 1995 fiscal year, the Company
changed its fiscal year end to the Saturday closest to September 30 for
operational efficiency purposes.
NOTE 2. INVENTORIES
Inventories, stated at the lower of cost or market, consist of (in thousands):
<TABLE>
<CAPTION>
MARCH 30, SEPTEMBER 30,
1996 1995
--------- -------------
<S> <C> <C>
Raw materials $ 2,952 $ 1,559
Work in process 3,608 2,258
Finished goods 6,647 11,254
------- -------
$13,207 $15,071
======= =======
</TABLE>
NOTE 3. COMMITMENTS AND CONTINGENCIES
(a) In November 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
its divestiture of the Color Server Group. The Company has certain
indemnification obligations relating to this litigation. See Item 5 Other
Information - Color Server Group Divestiture.
The Company has filed an answer denying all material allegations, and has filed
amended 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; 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 with respect to EFI's claims. 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 the outcome -- may have a material adverse effect on the results
of operations and financial position of the Company.
(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
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approximately 32 defendants in Maizes & Maizes et al. v. Apple Computer et al.,
Superior Court of New Jersey, Essex County, case no. L-13780-95, filed December
15, 1995. Plaintiffs in each case purport to represent alleged classes of
similarly situated persons and/or the general public, and allege that the
defendants falsely advertise 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 it is
anticipated that the coordinated proceedings will be held in Superior Court of
California, San Francisco County. An amended consolidated complaint was filed on
March 26, 1996. Discovery proceedings are scheduled to begin. The Company
believes it has meritorious defenses to the plaintiffs' claims and is defending
them vigorously. In the opinion of management, based on the facts known at this
time, the eventual outcome of these cases may have a material adverse effect on
the results of operations or financial position of the Company in the financial
period in which they are resolved, in addition, whether or not the eventual
outcome of these cases have a material adverse effect on the results of
operations or financial position of the Company, the costs of defense --
regardless of the outcome -- may have a material adverse effect on the results
of operations and financial position of the Company.
(c) On April 17, 1996, the Company was served with a complaint filed by Colorx
Corporation ("Colorx"), in the Circuit Court of the State of Oregon, County of
Multnomah, case no. 9604-02481, which alleges that the Company breached an
alleged contract to sell its dye sublimation printer business to Colorx for
$200,000, and seeks both specific performance of the alleged contract and
alleged damages of $2.5 million. The lawsuit also alleges that an officer of the
Company interfered with the alleged contract. The Company believes it has
meritorious defenses to the plaintiff's claims and intends to defend them
vigorously.
NOTE 4. BUSINESS DIVESTITURES
COLOR SERVER GROUP DIVESTITURE
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. (the "Parent"), a corporation formed by
various investment entities associated with Summit Partners. The Company
received approximately $17.2 million in cash and $4.7 million was placed in
escrow for certain post-closing adjustments and to secure certain
indemnification obligations, and 4,282 shares of the Parent's 6% Series B
Redeemable and Convertible Preferred Stock (the "Series B Preferred Stock"). The
shares of Series B Preferred Stock will be convertible by the Company at any
time into approximately 19.9% of the Parent's common stock outstanding as of the
closing of the transaction. The shares of Series B Preferred Stock also will be
redeemable by the Parent at any time, and will be subject to mandatory
redemption beginning on the sixth anniversary of issuance, in each case at a
redemption price of $1,000 per share plus accrued dividends. The Company has
certain indemnification obligations in connection with the patent lawsuit
brought by Electronics for Imaging, Inc. See Item 1 "Legal Proceedings". The net
proceeds of the Color Server Group transaction were paid to Silicon Valley Bank
("SVB"), in order to repay the Company's indebtedness to SVB, and to IBM Credit
Corp. ("ICC"), in order to reduce the Company's outstanding indebtedness to ICC.
PORTRAIT DISPLAY LABS
In January 1996, the Company entered into a series of agreements with Portrait
Display Labs, Inc. ("PDL"). The agreements assigned the Company's pivoting
technology to PDL and canceled PDL's on-going royalty obligation to the Company
under an existing license agreement in exchange for a one-time cash payment. PDL
also granted the Company a limited license back to the pivoting technology.
Under these agreements, PDL also settled its outstanding receivable to the
Company by paying the Company $500,000 in cash and issuing to the Company
214,286 shares of PDL's Common Stock.
UMAX DATA SYSTEMS, INC.
In February 1996, the Company sold its MacOS compatible systems business to UMAX
Computer Corporation ("UCC"), a company formed by UMAX Data Systems, Inc.
("UMAX"). The Company received approximately $2.3 million in cash and debt
relief, and 1,492,500 shares of UCC's Common Stock, representing approximately
19.9% of UCC's then
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outstanding shares of Common Stock. The Company has a right to receive royalties
based on UCC's net revenues related to the MacOS compatible systems business.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following information should be read in conjunction with the consolidated
interim financial statements and the notes thereto in Part I, Item 1 of this
Quarterly Report, 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 year ended September 30, 1995, and with Management's
Discussion and Analysis of Financial Condition and Results of Operations
contained in the Company's Quarterly Report on Form 10-Q for the quarter ended
December 30, 1995.
All assumptions, anticipations, and expectations contained herein are
forward-looking statements that involve uncertainty and risk. Actual results
could differ materially from those projected in such forward-looking statements.
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, Management's Discussion and Analysis of Financial Condition
and Results of Operations - Certain Factors That May Affect Future Results, 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 year
ended September 30, 1995, including, but not limited to, Management's Discussion
and Analysis of Financial Condition -- Certain Factors That May Affect the
Company's Future Results of Operations, and Business Divestitures, and with
Management's Discussion and Analysis of Financial Condition and Results of
Operations contained in the Company's Quarterly Report on Form 10-Q for the
quarter ended December 30, 1995, including, but not limited to, Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Certain Factors That May Affect Future Results.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain operational
data as a percentage of net sales (may not add due to rounding).
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 30, MARCH 30,
1996 1995 1996 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 82.1 74.5 84.9 73.1
------ ------ ------ ------
Gross profit 17.9 25.5 15.1 26.9
------ ------ ------ ------
Operating expenses:
Research and development 5.0 5.5 8.1 5.4
Selling, general and administrative 22.7 17.1 26.7 18.5
------ ------ ------ ------
Total operating expenses 27.7 22.6 34.9 23.9
------ ------ ------ ------
Income (loss) from operations (9.8) 2.9 (19.8) 3.0
Other income(expense), net 56.1 (2.6) 27.1 (1.9)
Settlement of litigation -- -- -- (7.6)
------ ------ ------ ------
Income (loss) before income taxes 46.3 0.4 7.2 (6.5)
Provision (benefit) for income taxes 0.8 0.0 0.7 0.1
------ ------ ------ ------
Net income (loss) 45.5% 0.3% 6.5% (6.6)%
====== ====== ====== ======
</TABLE>
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NET SALES
The Company's net sales decreased 63.8% to $30.6 million in the second quarter
of fiscal 1996 from $84.4 million for the same quarter in fiscal 1995. This
decline was primarily due to the Company's efforts to refocus its business which
included exiting markets for high-volume low-margin displays, reduced sales of
the Company's video and graphics products caused by Apple Computer's ("Apple")
shift from Nubus to PCI Bus computers, and business divestitures. As a result of
the sale by the Company of its Color Server Group (as described more fully in
the Company's Annual Report on Form 10-K, Management's Discussion and Analysis
of Financial Condition -- "Certain Factors That May Affect the Company's Future
Results of Operations", and "Business Divestitures," and below in Item 5 "Other
Information"), the Company recorded no revenue from sales of color server
products in the second quarter of its fiscal year.
Net sales for the first half of fiscal 1996 decreased 61.4% to $63.2 million
from $163.7 million in the same period in fiscal 1995. This decline was
primarily due to the Company's efforts to refocus its business which included
exiting markets for high-volume low-margin displays, reduced sales of the
Company's video and graphics products caused by Apple's shift from Nubus to PCI
Bus computers, and business divestitures.
One customer accounted for 29.8% and 34.4% of the Company's net sales for the
three and six months ended March 30, 1996, respectively. For the corresponding
periods of fiscal 1995, one customer accounted for 19.7% and 15.1% of the
Company's net sales.
The Company's second quarter export sales increased to 53.1% from 36.5% of net
sales in the same quarter of fiscal 1995 primarily due to sales decline in
export sales being less than the sales decline in the North America sales
region. Export sales were 58.4% of net sales for the six month period in fiscal
1996. The Company anticipates a decline in the percentage of net sales
attributable to the Asia-Pacific sales region in connection with the appointment
of a Japanese distributor. Export sales are subject to the normal risks
associated with doing business in foreign countries such as currency
fluctuations, longer payment cycles, greater difficulties in accounts receivable
collection, export controls and other government regulations and, in some
countries, a lesser degree of intellectual property protection as compared to
that provided under the laws of the United States. The Company hedges
substantially all of its trade receivables denominated in foreign currency
through the use of foreign currency forward exchange contracts. Gains and losses
associated with currency rate changes on forward contracts are recognized in the
Company's consolidated statements of operations and were not material in the
second quarter of fiscal 1996 or 1995.
GROSS PROFIT
The Company's gross profit margin was 17.9% and 15.1% for the three and six
month periods ending March 30, 1996, as compared with 25.5% and 26.9% for the
corresponding periods in fiscal 1995. The decline in gross margin was primarily
due to pricing pressure and greater competition in PCI Bus products than in
Nubus products, and price declines on lower margin displays related to the
Company's exit from that business.
The Company anticipates continued price reductions and margin pressure within
its industry. The Company is responding to these trends by focusing on higher
margin products, taking further steps to reduce product costs and controlling
expenses. There can be no assurance that the Company's gross margins will
recover or remain at current levels.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses decreased to $1.5 million or 5.0% of net sales
in the second quarter of fiscal 1996 from $4.7 million or 5.5% of net sales in
the same quarter of fiscal 1995. Research and development expenses decreased
from $8.8 million or 5.4% of net sales for the first six months of fiscal 1995
to $5.1 million or 8.1% of net sales for the corresponding period in fiscal
1996. The Company decreased its research and development expenses primarily by
reducing expenses related to headcount resulting from the Company's efforts to
refocus its business and business divestitures. The increase in research and
development expenses expressed as a percentage of net sales was primarily
attributed to the decrease in net sales and the Company's refocusing on
higher-end products, rather than high-volume lower-margin products.
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased to $7.0 million or 22.7%
of net sales in the second quarter of fiscal 1996 from $14.4 million or 17.1% of
net sales in the same quarter of fiscal 1995. Selling, general and
administrative expenses decreased from $30.3 million or 18.5% of net sales for
the first six months of fiscal 1995 to $16.9 million or 26.7% of net sales for
the corresponding period in fiscal 1996. Expenses in the second quarter of
fiscal 1995 included a reduction of approximately $2.1 million of merger-related
restructuring reserves to reflect current requirements.
During the second quarter of fiscal 1996, the building in which the Company
leases its headquarters was sold. In connection with the sale, the Company
terminated its existing lease and entered into a lease with the new owner of the
building. The Company anticipates that the change of rental terms will help
reduce the Company's occupancy costs and long-term lease obligations.
The Company decreased its selling, general and administrative expenses primarily
by reducing expenses related to headcount resulting from the Company's efforts
to refocus its business and business divestitures. The increase in selling,
general and administrative expenses expressed as a percentage of net sales was
primarily attributed to the decrease in net sales and the Company's refocusing
on higher-end products, rather than high-volume lower-margin products.
RESTRUCTURING, MERGER AND OTHER CHARGES
During fiscal 1994 and 1995, two restructuring and other charges were recorded.
RADIUS FISCAL 1994 MERGER RELATED RESTRUCTURING AND OTHER CHARGES
In the fourth quarter of fiscal 1994, the Company recorded charges of $43.4
million in connection with the Merger of Radius and SuperMac. These charges
include the discontinuance of duplicative product lines and related assets;
elimination of duplicative facilities, property and equipment and other assets;
and personnel severance costs as well as transaction fees and costs incidental
to the merger. The charges (in thousands) are included in: net sales ($3,095);
cost of sales ($25,270); research and development ($4,331); and selling, general
and administrative expenses ($10,711). The elements of the total charge as of
March 30, 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
Representing
-----------------------------------------------------
Cash Outlays
----------------------
Asset
Provision Write-Downs Completed Future
<S> <C> <C> <C> <C>
Adjust inventory levels $22,296 $ 19,200 $ 3,096 $ -
Excess facilities 2,790 400 2,256 134
Revision of the operations business model 9,061 7,078 1,268 715
Employee severance 6,311 - 6,311 -
Merger related costs 2,949 - 2,949 -
------- -------- -------- --------
Total charges $43,407 $26,678 $ 15,880 $ 849
</TABLE>
The adjustment of inventory levels reflects the discontinuance of duplicative
product lines. The provision for excess facility costs represents the write-off
of leaseholds and sublease costs of Radius' previous headquarters, the
consolidation into one main headquarters and the consolidation of sales offices.
The revision of the operations business model reflects the reorganization of the
combined Company's manufacturing operations to mirror Radius' manufacturing
reorganization in 1993. This reorganization was designed to outsource a number
of functions that previously were performed internally, reduce product costs
through increased efficiencies and lower overhead, and focus the Company on a
limited number of products. Employee severance costs are related to employees or
temporary employees who were released due to the revised business model.
Approximately 250 employees were terminated in connection with the Merger. The
provision for merger related costs is for the costs associated with the Merger
transaction, such as legal, investment banking and accounting fees. The Company
has spent $15.9 million of cash for restructuring through March 30, 1996. The
Company expects to have substantially completed the restructuring by September
1996. During fiscal 1995, approximately $2.1
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million of merger related restructuring reserves were reversed and recorded as
an expense reduction due to changes in estimated requirements.
RADIUS FISCAL 1995 RESTRUCTURING AND OTHER CHARGES
In September 1995, Radius recorded charges of $57.9 million in connection with
the Company's efforts to restructure its operations by refocusing its business
on the color publishing and multimedia markets. The charges primarily included a
writedown of inventory and other assets. Additionally, the charges included
expenses related to the cancellation of open purchase orders, excess facilities
and employee severance. The charges (in thousands) are included in cost of sales
($47,004), and selling, general and administrative expense ($10,861). The
elements of the total charge as of March 30, 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
Representing
-----------------------------------------------------
Cash Outlays
------------
Asset
Provision Write-Downs Completed Future
<S> <C> <C> <C> <C>
Adjust inventory levels $ 33,138 $ 32,300 $ 838 $ 838
Excess facilities 2,004 404 500 1,100
Cancellation fees and asset write-offs 19,061 5,196 - 13,865
Employee severance 3,662 - 1,419 2,243
-------- --------- ------- --------
Total charges $ 57,865 $ 37,900 $ 2,757 $ 17,208
</TABLE>
The adjustment of inventory levels reflects the discontinuance of several
product lines. The provision for excess facility costs represent the write-off
of leasehold improvements and the costs associated with anticipated reductions
in facilities. The cancellation fees and asset write-offs reflect the Company's
decision to refocus its efforts on providing solutions for the color publishing
and multimedia markets. Employee severance costs are related to employees or
temporary employees who have been or will be released due to the restructuring.
As of March 30, 1996, approximately 228 positions had been eliminated in
connection with the restructuring. The Company had spent approximately $2.8
million of cash for this restructuring during the quarter ended March 30, 1996.
As of March 30, 1996, the Company had cash of $2.8 million. See the Company's
Annual Report on Form 10-K, and "Management's Business Recovery Plans" at Note 1
to the Consolidated Financial Statements contained therein. The Company expects
to have substantially completed the restructuring by September 1996.
LITIGATION SETTLEMENT
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 post judgment interest, attorneys' fees,
expert witness fees and costs, and equitable relief. In July 1994, SuperMac
Technology, Inc. ("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 post judgment 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 to issue a total of 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 to issue into a class action settlement fund a total of 707,609 shares of
its Common Stock. The number of shares to be issued by the Company will increase
by up to 100,000 if the price of the Company's Common Stock is below $12 per
share during the 60-day period following the initial issuance of shares. In
connection with these settlements, the financial statements for the first
quarter of fiscal 1995 included a charge to other income of $12.4 million,
reflecting settlement costs
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not covered by insurance as well as related legal fees, resulting in a reduction
in net income from $1.4 million to a net loss of $11.0 million or $0.78 per
share for the quarter.
The settlements will result in dilution to existing shareholders of the Company
ranging from 4.8% to 5.4% depending on the number of shares of Radius Common
Stock issued. The Company had 17,401,611 common shares outstanding as of March
30, 1996. As of March 30, 1996, the Company had issued 259,130 shares of its
Common Stock due to the settlements. The Company anticipates that the remainder
will be issued prior to June 30, 1996. See Note 3 of Notes to Consolidated
Financial Statements contained herein.
PROVISION FOR INCOME TAXES
The Company recorded a tax provision of $249,000 for the second quarter of
fiscal 1996 as compared to a provision for taxes for the second quarter of
fiscal 1995 of $31,000. The tax provision is primarily comprised of foreign
taxes.
FASB Statement 109 provides for the recognition of deferred tax assets if
realization of such assets is more likely than not. The Company's valuation
allowance reduced the deferred tax asset to the amount realizable. The Company
has provided a full valuation allowance against its net deferred tax assets due
to uncertainties surrounding their realization. Due to the net losses reported
in the prior three years and as a result of the material changes in operations
reported in its 1995 fiscal fourth quarter, predictability of earnings in future
periods is uncertain. The Company will evaluate the realizability of the
deferred tax asset on a quarterly basis.
FINANCIAL CONDITION
The Company's cash decreased approximately $4.2 million in the second quarter of
fiscal 1996 to $2.8 million at March 30, 1996 as compared to the ending balance
at December 31, 1995 of $7.0 million. This decrease was primarily due to
principal payments of the Company's short-term borrowings and payments of other
current obligations. Approximately $0.4 million of the $2.8 million of cash and
cash equivalents available at March 30, 1996 was restricted under various
letters of credit.
At March 30, 1996, the Company's principal source of liquidity included
approximately $30.0 million in inventory and working capital financing (which
was temporarily augmented by an additional $20.0 million provided to finance the
manufacturing of the Company's MacOS compatible computers) under an agreement
with IBM Credit Corporation (the "ICC Agreement"), all of which was fully
utilized. In December 1995, IBM Credit Corp. and the Company executed an
amendment to the ICC Agreement (the "ICC Amendment") which expired March 31,
1996. The ICC Amendment, among other things, also provides that IBM Credit Corp.
will extend advances to the Company in an amount up to 90% of the Company's
collections and fund the Company's payroll in the event that collections are
insufficient to permit the advances needed for this purpose. Such advances and
payroll funding, however, may be suspended by IBM Credit Corp. (i) immediately
following a default of the ICC Amendment, and (ii) following thirty days notice
in the event of any default of the underlying ICC Agreement. At March 30, 1996,
approximately $20.4 million was outstanding to IBM Credit Corp. During the
second quarter of fiscal 1996, ICC notified the Company that it was not in
compliance with all its contractual obligations under its agreement with ICC. As
of March 30, 1996, the Company was not in compliance with all its contractual
obligations, including financial covenants, under the ICC Amendment.
Additionally, the Company's Japanese subsidiary has a revolving line of credit
with a bank in Japan under which $1.0 million has been utilized as of March 30,
1996. The Company anticipates that the outstanding balance will be paid in full
during the third quarter of fiscal 1996.
The Company's limited cash resources have restricted the Company's ability to
purchase inventory, which in turn has limited its ability to manufacture and
sell products and has resulted in additional costs for expedited deliveries. The
Company also is delinquent in its accounts payable as payments to vendors are
not being made in accordance with vendor terms. Several vendors have initiated
legal action to collect allegedly delinquent accounts. Several vendors have
threatened the Company with institution of insolvency and/or bankruptcy
proceedings. In addition, as described above, the Company's largest creditor,
ICC, has informed the Company that it is not in compliance with all its
contractual obligations, including financial covenants, under its agreements
with ICC which confers to ICC a security interest in most of the
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Company's assets. An unsecured creditors' committee has been established in an
effort to work toward resolving the capital deficiency and creditor litigation
issues outside of formal insolvency or bankruptcy proceedings. There can be no
assurance that bankruptcy proceedings can be avoided. The Company has proposed a
plan under which creditors' claims will be exchanged for equity in the Company
and/or in certain businesses or holdings of the Company. There can be no
assurance that the creditors will approve this plan. The Company has filed with
the Securities and Exchange Commission (the "SEC") a preliminary proxy statement
to seek shareholder approval, if necessary, the issuance of convertible
preferred stock of the Company in satisfaction of these claims. The terms of
this convertible preferred stock will be determined by negotiations with the
Company's creditors. The Company anticipates that the shares of this convertible
preferred stock will be convertible into an excess of 50% of the currently
outstanding shares of the Company's Common Stock. Accordingly, the Company's
current shareholders will experience significant dilution depending upon the
number of shares of Common Stock into which these yet to be determined shares of
convertible preferred stock are convertible.
The Company has incurred and expects to continue to incur significant legal
expense in responding to creditor demands, litigation, and the workout process.
There can be no assurance that the Company will be able to reach accommodation
with all of its creditors outside of bankruptcy, or that the terms of any
accommodation reached will not dilute shareholder value or adversely affect the
Company's results of operations. In the event that no accommodation is reached
with its creditors or in the event that not all of the Company's creditors agree
to such an accommodation, there can be no assurance that the Company will not be
placed into an involuntary bankruptcy by its creditors, or that, if bankruptcy
proceedings are initiated, they will not result in the liquidation of the
Company or will not otherwise materially and adversely affect the Company's
result of operations, Even if an accommodation with the Company's creditors can
be reached and the Company is unable to obtain or generate additional funds, it
still may not be able to repay its other obligations. Accordingly, the Company
may have to reorganize or liquidate under Chapter 11 or Chapter 7 of the United
States Bankruptcy Code.
The adverse effect on the Company's results of operations due to its limited
cash resources can be expected to continue until such time as the Company is
able to return to operational profitability, or generate additional cash from
other sources. There can be no assurance that the Company will be able to do so.
Absent reaching an agreement with most of its creditors including ICC, the
Company will require additional funding to repay its accounts payable and other
indebtedness, in addition to funding its operating and product development
activities. While the Company is investigating possible financing alternatives,
there can be no assurance that additional financing will be available or, if
available, that the terms of such financing will not adversely affect the
Company's results of operations or result in substantial shareholder dilution.
FACTORS THAT MAY AFFECT FUTURE RESULTS
A number of uncertainties exist that could affect the Company's future operating
results, including, without limitation, the following:
NET CAPITAL DEFICIENCY; CREDITOR DEMANDS AND LITIGATION
As of March 30, 1996, the Company had total assets of approximately $44.7
million and total current liabilities of approximately $97.1 million. The
Company is delinquent in its accounts payable as payments to certain vendors are
not being made in accordance with vendor terms. In addition to the matters
discussed in Part II below under "Item 1. Legal Proceedings," several vendors
have initiated legal action to collect allegedly delinquent accounts. Several
vendors have threatened the Company with initiation of insolvency or bankruptcy
proceedings. In addition, as described above, the Company's largest secured
creditor, ICC, has informed the Company that it is not in compliance with all of
its contractual obligations, including financial covenants, under its agreements
with ICC. In connection with the ICC Amendment, the Company granted to ICC a
security interest in substantially all of its assets.
The Company has established an unsecured creditors' committee in an effort to
work toward resolving the capital deficiency and creditor litigation issues
outside of formal insolvency or bankruptcy proceedings. The Company has proposed
a plan under which creditors' claims will be exchanged for equity in the Company
and/or in certain businesses or holdings of the Company. The Company has filed
with the SEC a preliminary proxy statement to seek shareholder approval, if
necessary, the issuance of convertible preferred stock of the Company in
satisfaction of these claims. The
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terms of this convertible preferred stock will be determined by negotiations
with the Company's creditors. The Company anticipates that the shares of this
convertible preferred stock will be convertible into an excess of 50% of the
currently outstanding shares of the Company's Common Stock. Accordingly, the
Company's current shareholders will experience significant dilution depending
upon the number of shares of Common Stock into which these yet to be determined
shares of convertible preferred stock are convertible.
The Company has incurred and expects to continue to incur significant legal
expense in responding to creditor demands, litigation, and the workout process.
There can be no assurance that the Company will be able to reach accommodation
with all of its creditors outside of bankruptcy, or that the terms of any
accommodation reached will not dilute shareholder value or adversely affect the
Company's results of operations. In the event that no accommodation is reached
with its creditors or in the event that not all of the Company's creditors agree
to such an accommodation, there can be no assurance that the Company will not be
placed into an involuntary bankruptcy by its creditors, or that, if bankruptcy
proceedings are initiated, they will not result in the liquidation of the
Company or will not otherwise materially and adversely affect the Company's
results of operations. Even if an accommodation with the Company's creditors can
be reached and if the Company is unable to obtain or generate additional funds,
it still may not be able to repay its other obligations. Accordingly, the
Company may have to reorganize or liquidate under Chapter 11 or Chapter 7 of the
United States Bankruptcy Code.
Absent reaching an agreement with most of its creditors including ICC, the
Company will require additional funding to repay its accounts payable and other
indebtedness, in addition to funding its operating and product development
activities. While the company is investigating possible financing alternatives,
there can be no assurance that additional financing will be available or, if
available, that the terms of such financing will not adversely affect the
Company's results of operations or result in substantial shareholder dilution.
CONTINUING OPERATING LOSSES
The Company experienced net operating losses in the fiscal quarters ended March
30, 1996 and December 30, 1995, and in each of the fiscal years ended September
30, 1993, 1994 and 1995. The Company's ability to continue operations will
depend, initially, upon the Company's success in negotiating accommodations with
substantially all of its creditors and the Company's ability to repay creditors
with whom accommodations cannot be reached (assuming such remaining creditors
have not instituted bankruptcy or other insolvency proceedings against the
Company). In the future, if the Company is able to continue its operations, the
Company's ability to achieve and sustain profitable operations will depend upon
a number of other factors, including the Company's ability to control costs; to
develop innovative and cost-competitive new products and to bring those products
to market in a timely manner; the continual commercial acceptance of Apple
computers and the rate and mix of Apple computers and related products sold;
competitive factors such as new product introductions, product enhancements and
aggressive marketing and pricing practices; general economic conditions; and
other factors. The Company has faced and expects to continue to face increased
competition in graphic cards as a result of Apple's transition of its product
line to the PCI Bus. For these and other reasons, there can be no assurance that
the Company will be able to achieve 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. Recently, shortages of
available cash have delayed the Company's receipt of products from suppliers and
increased shipping and other costs. 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,
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or any unexpected increase in product returns or other costs, could also have an
adverse impact on the Company's operating results.
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, and it is expected that sales of
products for such computers will continue to represent substantially all of the
sales of the Company for the foreseeable future. The Company's operating results
would be adversely affected if Apple should lose market share, if Macintosh
sales were to decline or if other developments were to adversely affect Apple's
business. Furthermore, any 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 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 has led or
could lead 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.
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,
recently introduced 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 market place 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, whether the Company can reach an
accommodation with its creditors, success and timing of new product developments
by the Company and its competitors,
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product performance, price and quality, breadth of distribution and customer
support. There can be no assurance that the Company will be able to compete
successfully with respect to these factors. In addition, the introduction of
lower priced competitive products could result in price reductions that would
adversely affect the Company's results of operations.
DEPENDENCE ON SUPPLIERS
The Company outsources the manufacturing and assembly of its products to third
party suppliers. Although the Company uses a number of manufacturer/assemblers,
each of its products is manufactured and assembled by a single supplier. The
failure of a supplier 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, the Company has at times experienced substantial delays in its ability to
fill customer orders for displays and other products, due to the inability of
certain suppliers to meet their volume and schedule requirements and, more
recently, due to the Company's shortages in available cash. Such shortages have
caused some suppliers to put the Company on a cash or prepay basis and/or to
require the Company 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. In the past, the Company has
been vulnerable to delays in shipments from suppliers because the Company has
sought to manage its use of working capital by, among other things, limiting the
backlog of inventory it purchases. More recently, this vulnerability has been
exacerbated by the Company's shortages in cash reserves. Delays in shipments
from suppliers can cause fluctuations in the Company's short term results and
contribute to order cancellations. The Company currently has arranged payment
terms for certain of its major suppliers such that certain of the Company's
major customers pay these suppliers directly for products ordered and shipped.
The Company is also dependent on sole or limited source suppliers for certain
key components used in its products, including certain digital to analog
converters, digital video chips, and other products. Certain other semiconductor
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. 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. Certain suppliers, due to the Company's shortages in
available cash, have put the Company on a cash or prepay basis and/or to require
the Company 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. The Company's products also incorporate
components, such as VRAMs, DRAMs and ASICs that are available from multiple
sources but have been subject to substantial fluctuations in availability and
price. Since a substantial portion of the total material cost of the Company's
products is represented by these components, significant fluctuations in their
price and availability could affect its results of operations.
TECHNOLOGICAL CHANGE; CONTINUING NEED TO DEVELOP NEW PRODUCTS
The personal computer industry in general, 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. Technological innovation is particularly important for the
Company, since its business is based on its ability to provide functionality and
features not included in Apple's products. As Apple introduces new products with
increased functionality and features, the Company's business will be adversely
affected unless it develops new products that provide advantages over Apple's
latest offerings. Continued reduction in the available cash resources of the
Company could result in the interruption or cancellation of research and product
development efforts.
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,
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and the Company also anticipates that this evolution will lead to a significant
increase in the purchase and use of video editing products. There is a risk that
this evolution will not occur in the video editing industry as expected by the
Company, or that it will occur at a slower pace than anticipated.
The introduction of new products is inherently subject to risks of delay. Should
the Company fail to introduce new products on a timely basis, the operating
results of the Company could be adversely affected. The introduction of new
products and the phasing out of older products will require the Company to
carefully manage its inventory to avoid inventory obsolescence and may require
increases in inventory reserves. The long lead times -- as much as three to five
months -- associated with the procurement of certain components (principally
displays and ASICs) exposes the Company to greater risk in forecasting the
demand for new products. There can be no assurance that the Company's forecasts
regarding new product demand and its estimates of appropriate inventory levels
will be accurate. Moreover, no assurance can be given that the Company will be
able to cause all of its new products to be manufactured at acceptable
manufacturing yields or that the Company will obtain market acceptance for these
products.
DISTRIBUTION
The Company's primary means of distribution is through a limited number of
third-party distributors and master resellers. 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. This risk may
also affect the Company's supply of products under arrangements wherein certain
of the Company's major suppliers rely on certain of the Company's major
customers for payment. 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 reseller channels. If its resellers were to
experience financial difficulties, the Company's results of operations could be
adversely affected.
INTERNATIONAL SALES
During the second fiscal quarter, the Company's international sales were
primarily made through distributors and the Company's subsidiary in Japan.
Effective April 1, 1996, the Company has appointed an exclusive distributor for
Japan. The Company expects that international sales will represent a significant
portion of its net sales 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. In addition, demand for the Company's products in
Japan could be affected by the transition of its Japanese sales and marketing
efforts from Radius' subsidiary to a distributor. 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 and operating results could be materially
adversely affected.
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. 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. The Company has recently made a
number of management changes, including the departure of its Chief Financial
Officer and three other Vice Presidents, and has had substantial layoffs and
other employee departures. As the Company's financial difficulties continue, it
may become increasingly difficult for it to hire new employees and retain key
management and current employees. Moreover, the terms of any arrangement with
creditors may require changes in Board composition or management. The Company
does not carry any key person life insurance with respect to any of its
personnel.
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
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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.
VOLATILITY OF STOCK PRICE; DILUTION
The price of the Company's Common Stock has fluctuated widely in the past.
Management believes that such fluctuations may have been caused by announcements
of new products, quarterly fluctuations in the results of operations and other
factors, including changes in conditions of the personal computer industry in
general and of Apple Computer in particular, and changes in the Company's
results of operations and financial condition. Stock markets, and stocks of
technology companies in particular, have experienced extreme price volatility in
recent years. This volatility has had a substantial effect on the market prices
of securities issued by the Company and other high technology companies, often
for reasons unrelated to the operating performance of the specific companies.
Due to the factors referred to herein, the dynamic nature of the Company's
industry, general economic conditions and other factors, the Company's future
operating results and stock prices may be subject to significant volatility in
the future. Such stock price volatility for the Common Stock has in the past
provoked securities litigation, and future volatility could provoke litigation
in the future that could divert substantial management resources and have an
adverse effect on the Company's results of operations.
The Company's Common Stock is listed on the NASDAQ national market pursuant to
an agreement containing certain financial requirements with which the Company is
currently not in compliance. NASDAQ has granted the Company a limited
conditional waiver with respect to these requirements which will expire on June
30, 1996 at which time the Company must be in compliance with all of the
requirements for listing on the NASDAQ national market. There is no assurance
that the Company will fulfill the conditions in the times prescribed by NASDAQ,
or that NASDAQ will deem that the Company has not fulfilled such conditions.
In its attempt to restructure its debt, the Company has proposed exchanging
equity in the Company in full or partial satisfaction of creditor claims.
Although the Company has no agreements or understandings with respect to the
issuance of additional equity securities to creditors, the issuance of any
additional equity in the Company could exert downward pressure or otherwise
affect the volatility of the price of the Company's Common Stock.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
(a) In November 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
its divestiture of the Color Server Group. The Company has certain
indemnification obligations relating to this litigation. See Item 5 Other
Information - Color Server Group Divestiture.
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The Company has filed an answer denying all material allegations, and has filed
amended 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; 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 with respect to EFI's claims. 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 the outcome -- may have a material adverse effect on the results
of operations and financial position of the Company.
(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 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 advertise 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 it is
anticipated that the coordinated proceedings will be held in Superior Court of
California, San Francisco County. An amended consolidated complaint was filed on
March 26, 1996. Discovery proceedings are scheduled to begin. The Company
believes it has meritorious defenses to the plaintiffs' claims and is defending
them vigorously. In the opinion of management, based on the facts known at this
time, the eventual outcome of these cases may have a material adverse effect on
the results of operations or financial position of the Company in the financial
period in which they are resolved, in addition, whether or not the eventual
outcome of these cases have a material adverse effect on the results of
operations or financial position of the Company, the costs of defense --
regardless of the outcome -- may have a material adverse effect on the results
of operations and financial position of the Company.
(c) On April 17, 1996, the Company was served was a lawsuit filed by Colorx
Corporation ("Colorx"), Circuit Court of the State of Oregon, County of
Multnomah, case no. 9604-02481, which alleges that the Company breached an
alleged contract to sell its dye sublimation printer business to Colorx for
$200,000, and seeks both specific performance of the alleged contract and
alleged damages of $2.5 million. The lawsuit also alleges that an officer of the
Company interfered with the alleged contract. The Company believes it has
meritorious defenses to the plaintiff's claims and intends to defend them
vigorously.
(d) The Company is involved in a number of other judicial and administrative
proceedings incidental to its business, including litigation initiated by
alleged trade creditors. 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 -- may have a material adverse effect on the results of operations and
financial position of the Company.
ITEM 5. OTHER INFORMATION
COLOR SERVER GROUP DIVESTITURE
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. (the "Parent"), a corporation formed by
various investment entities associated with Summit Partners. The Company
received approximately $17.2 million in cash and
-19-
<PAGE> 20
approximately $4.7 million was placed in escrow for certain post-closing
adjustments and to secure certain indemnification obligations, and 4,282 shares
of the Parent's 6% Series B Redeemable and Convertible Preferred Stock (the
"Series B Preferred Stock"). The shares of Series B Preferred Stock will be
convertible by the Company at any time into approximately 19.9% of the Parent's
common stock outstanding as of the closing of the transaction. The shares of
Series B Preferred Stock also will be redeemable by the Parent at any time, and
will be subject to mandatory redemption beginning on the sixth anniversary of
issuance, in each case at a redemption price of $1,000 per share plus accrued
dividends. The Company has certain indemnification obligations in connection
with the patent lawsuit brought by Electronics for Imaging, Inc. See Item 1
"Legal Proceedings". The net proceeds of the Color Server Group transaction were
paid to Silicon Valley Bank ("SVB"), in order to repay the Company's
indebtedness to SVB, and to IBM Credit Corp. ("ICC"), in order to reduce the
Company's outstanding indebtedness to ICC.
PORTRAIT DISPLAY LABS
In January 1996, the Company entered into a series of agreements with Portrait
Display Labs, Inc. ("PDL"). The agreements assigned the Company's pivoting
technology to PDL and canceled PDL's on-going royalty obligation to the Company
under an existing license agreement in exchange for a one-time cash payment. PDL
also granted the Company a limited license back to the pivoting technology.
Under these agreements, PDL also settled its outstanding receivable to the
Company by paying the Company $500,000 in cash and issuing to the Company
214,286 shares of PDL's Common Stock.
UMAX DATA SYSTEMS, INC.
In February 1996, the Company sold its MacOS compatible systems business to UMAX
Computer Corporation ("UCC"), a company formed by UMAX Data Systems, Inc.
("UMAX"). The Company received approximately $2.3 million in cash and debt
relief, and 1,492,500 shares of UCC's Common Stock, representing approximately
19.9% of UCC's then outstanding shares of Common Stock. The Company has a right
to receive royalties based on UCC's net revenues related to the MacOS compatible
systems business.
Dennis J. Dunnigan, the Company's Chief Financial Officer, and three other
Vice-Presidents resigned during the quarter ended March 30, 1996.
-20-
<PAGE> 21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See attached exhibit index.
(b) Reports on Form 8-K
No report on Form 8-K was filed during the three months ended March 30, 1996.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 13, 1996 RADIUS INC.
By: /s/ Charles W. Berger
-------------------------------------------------
Charles W. Berger
Chairman, President, Chief Executive Officer, and
Acting Chief Financial Officer
-21-
<PAGE> 22
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Sequentially
Number Title Numbered Page
- - ------------ -------------
<S> <C> <C>
11.01 Computation of per share earnings 22
</TABLE>
-22-
<PAGE> 1
EXHIBIT 11.01
COMPUTATION OF NET INCOME (LOSS) PER SHARE
(in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 30, MARCH 30,
1996 1995 1996 1995
------- ------- ------- --------
<S> <C> <C> <C> <C>
Primary:
Average common shares outstanding 18,079 14,152 18,002 14,183
Net effect of dilutive stock
options - based on the modified treasury
stock method using average
market price 3 404 56 --
------- ------- ------- --------
Totals 18,082 14,556 18,058 14,183
======= ======= ======= ========
Net income (loss) $13,919 $ 276 $ 4,136 $(10,745)
======= ======= ======= ========
Per share amount $ 0.77 $ 0.02 $ 0.23 $ (0.76)
======= ======= ======= ========
Fully diluted:
Average common shares outstanding 18,079 14,152 18,002 14,183
Net effect of dilutive stock
options - based on the modified treasury stock method
using quarter end market price which is greater than
average market price 3 1,667 56 --
------- ------- ------- --------
Totals 18,082 15,819 18,058 14,183
======= ======= ======= ========
Net income (loss) $13,919 $ 276 $ 4,136 $(10,745)
======= ======= ======= ========
Per share amount* $ 0.77 $ 0.02 $ 0.23 $ (0.76)
======= ======= ======= ========
</TABLE>
* The primary net income (loss) per share is shown in the statements of
operations. Net income (loss) per share under the primary and fully diluted
calculations are equivalent.
-23-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> MAR-30-1996
<CASH> 2779
<SECURITIES> 0
<RECEIVABLES> 31219
<ALLOWANCES> 6748
<INVENTORY> 13207
<CURRENT-ASSETS> 1146
<PP&E> 37072
<DEPRECIATION> 34968
<TOTAL-ASSETS> 44657
<CURRENT-LIABILITIES> 97122
<BONDS> 560
0
0
<COMMON> 125832
<OTHER-SE> 178857
<TOTAL-LIABILITY-AND-EQUITY> 44657
<SALES> 63227
<TOTAL-REVENUES> 63227
<CGS> 53705
<TOTAL-COSTS> 53705
<OTHER-EXPENSES> 22061
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17115
<INCOME-PRETAX> 4576
<INCOME-TAX> 440
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4136
<EPS-PRIMARY> .23
<EPS-DILUTED> .23
</TABLE>
