<PAGE> 1
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the
[X] Definitive Proxy Statement Commission Only (as permitted by
[ ] Definitive Additional Materials Rule 14a-6(e)(2))
[ ] Soliciting Material Pursuant to
Rule 14a-11(c) or Rule 14a-12
RADIUS INC.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
[ ] $500 per each party to the controversy pursuant to Exchange Act Rule 14a-6
(i)(3).
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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<PAGE> 2
Radius Inc.
215 Moffett Park Drive
Sunnyvale, California 94089
(408) 541-6100
SPECIAL MEETING OF SHAREHOLDERS
To Be Held Tuesday, August 27, 1996
To Our Shareholders:
You are cordially invited to attend a Special Meeting of Shareholders
(the "Meeting") of Radius Inc. to be held at 215 Moffett Park Drive, Sunnyvale,
California, on Tuesday, August 27, 1996 at 11:00 a.m. P.D.T.
The matter expected to be acted upon at the meeting is described in
detail in the following Notice of Special Meeting of Shareholders and Proxy
Statement.
The Board of Directors has fixed the close of business on July 29,
1996, as the record date for determination of shareholders entitled to notice of
and to vote at the Meeting or any postponements or adjournments thereto.
It is important that you use this opportunity to take part in the
affairs of your Company by voting on the business to come before this Meeting.
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE COMPLETE, DATE, SIGN AND
PROMPTLY RETURN THE ACCOMPANYING PROXY IN THE ENCLOSED POSTAGE-PAID ENVELOPE SO
THAT YOUR SHARES MAY BE REPRESENTED AT THE MEETING. Returning the Proxy does not
deprive you of your right to attend the meeting and to vote your shares in
person.
We look forward to seeing you at the Meeting.
Sincerely,
/s/ Charles W. Berger
Charles W. Berger
President, Chief Executive Officer
and Chairman of the Board of Directors
Sunnyvale, California
August 1, 1996
<PAGE> 3
RADIUS INC.
215 MOFFETT PARK DRIVE
SUNNYVALE, CALIFORNIA 94089
-----------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To Our Shareholders:
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders (the
"Meeting") of Radius Inc. (the "Company") will be held at 215 Moffett Park
Drive, Sunnyvale, California, on Tuesday, August 27, 1996, at 11:00 a.m. P.D.T.
for the following purposes:
1. To approve an amendment to the Company's Articles of
Incorporation to increase the authorized number of shares of
Common Stock issuable by the Company from 50,000,000 to 100,000,000
shares.
2. To transact such other business as may properly come before the
meeting or any adjournment or postponement thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
Only shareholders of record at the close of business on July 29, 1996
are entitled to notice of and to vote at the meeting or any adjournment or
postponement thereof.
By Order of the Board of Directors
Charles W. Berger
President, Chief Executive Officer
and Chairman of the Board of Directors
Sunnyvale, California
August 1, 1996
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE COMPLETE, DATE, SIGN AND
PROMPTLY RETURN THE ACCOMPANYING PROXY IN THE ENCLOSED POSTAGE-PAID ENVELOPE SO
THAT YOUR SHARES MAY BE REPRESENTED AT THE MEETING.
<PAGE> 4
RADIUS INC.
215 MOFFETT PARK DRIVE
SUNNYVALE, CALIFORNIA 94089
PROXY STATEMENT
AUGUST 1, 1996
The accompanying proxy is solicited on behalf of the Board of Directors
of Radius Inc., a California corporation (the "Company" or "Radius"), for use at
a Special Meeting of Shareholders of the Company to be held at 215 Moffett Park
Drive, Sunnyvale, California, on Tuesday, August 27, 1996 at 11:00 a.m. P.D.T.
(the "Meeting"). Only holders of record of the Company's Common Stock at the
close of business on July 29, 1996 will be entitled to vote at the Meeting. At
the close of business on June 30, 1996, the Company had approximately 18,225,000
shares of Common Stock outstanding and entitled to vote. A majority of such
shares, present in person or represented by proxy, will constitute a quorum for
the transaction of business. This Proxy Statement and the accompanying form of
proxy were first mailed to shareholders on or about August 1, 1996.
VOTING RIGHTS AND SOLICITATION OF PROXIES
Holders of the Company's Common Stock are entitled to one vote for each
share held as of the above record date. All votes will be tabulated by the
inspector of election appointed for the Meeting who will tabulate affirmative
and negative votes, abstentions and broker non-votes. Abstentions and broker
non-votes will be counted towards a quorum and have the same effect as negative
votes with regard to the proposal.
The expenses of soliciting proxies to be voted at the Meeting will be paid
by the Company. Following the original mailing of the proxies and other
soliciting materials, the Company and/or its agents may also solicit proxies by
mail, telephone, telegraph or in person. The Company has retained Skinner & Co.,
a proxy solicitation firm, and will pay Skinner & Co. a fee of approximately
$3,500 plus expenses estimated at $3,500. In addition, following the original
mailing of the proxies and other soliciting materials, the Company will request
that brokers, custodians, nominees and other record holders of the Company's
Common Stock forward copies of the proxy and other soliciting materials to
persons for whom they hold shares of Common Stock and request authority for the
exercise of proxies. In such cases, the Company, upon the request of the record
holders, will reimburse such holders for their reasonable expenses.
REVOCABILITY OF PROXIES
Any person signing a proxy in the form accompanying this Proxy Statement
has the power to revoke it prior to the Meeting or at the Meeting prior to the
vote pursuant to the proxy. A proxy may be revoked by a writing delivered to the
Company stating that the proxy is revoked, by a subsequent proxy that is signed
by the person who signed the earlier proxy and is presented at the Meeting or by
attendance at the Meeting and voting in person. Please note, however, that if a
shareholder's shares are held of record by a broker, bank or other nominee and
that shareholder wishes to vote at the Meeting, the shareholder must bring to
the Meeting a letter from the broker, bank or other nominee confirming that
shareholder's beneficial ownership of the shares.
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
Page
<S> <C>
Voting Rights and Solicitation of Proxies .................................................................................. 1
Revocability of Proxies..................................................................................................... 1
Approval of an Amendment of the Company's Articles of Incorporation to Increase
the Authorized Number of Shares of Common Stock of the Company.............................................................. 3
Security Ownership of Certain Beneficial Owners and Management.............................................................. 10
Independent Public Accountants.............................................................................................. 11
Shareholder Proposals....................................................................................................... 11
Other Business ............................................................................................................ 11
Capitalization ............................................................................................................ 12
Available Information....................................................................................................... 13
Incorporation of Certain Information by Reference........................................................................... 13
Index to Financial Statements .............................................................................................. F-1
</TABLE>
2
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PROPOSAL 1:
APPROVAL OF AN AMENDMENT OF THE COMPANY'S ARTICLES OF
INCORPORATION TO INCREASE THE AUTHORIZED NUMBER OF
SHARES OF COMMON STOCK ISSUABLE BY THE COMPANY
Shareholders are being asked to approve an amendment of the
Company's Articles of Incorporation, which has been approved by the Board,
subject to shareholder approval, to increase the authorized number of shares of
Common Stock issuable by the Company from 50,000,000 shares to 100,000,000
shares.
INTRODUCTION
At June 29, 1996, approximately 18,225,000 shares of Common Stock
were issued and outstanding, approximately 2,487,468 shares were reserved for
issuance upon exercise of options outstanding and options to be granted under
the Company's stock option plans and approximately 146,824 shares were reserved
for issuance for purchases under the Company's employee stock purchase program.
Thus, as of that date, the Company had approximately 28,642,458 shares of Common
Stock available for issuance in the future unless the proposed amendment is
adopted by the shareholders. The proposed increase in the number of authorized
shares of Common Stock from 50,000,000 to 100,000,000 would result in additional
shares being available for, among other things: issuance of approximately
47,543,478 shares of Common Stock to its unsecured creditors; issuance of
approximately 5,546,739 (or, in certain circumstances described below,
6,147,686) shares of Common Stock upon conversion of the Series A Convertible
Preferred Stock; issuance upon the exercise of Warrants to purchase 1,200,000
shares of Common Stock proposed to be issued to certain creditors of the
Company; and the increase in the number of shares of Common Stock covered by the
Company's stock option plans, to 10% of the shares of Common Stock to be
outstanding after consummation of the Plan described below. These additional
shares of Common Stock would also be available for issuance from time to time
for other corporate purposes (such as raising additional capital, acquisitions
of companies or assets, sales of stock or securities convertible into Common
Stock and issuances pursuant to stock options or other employee benefit
plans).
On April 8, 1996, the Board of Directors approved an amendment to
the Company's Articles of Incorporation, subject to shareholder approval, to
increase the authorized number of shares of Common Stock of the Company from
50,000,000 shares to 100,000,000 shares.
REASONS FOR PROPOSAL
A significant portion of the additional shares available for issuance
upon the proposed increase in the authorized Common Stock of the Company will be
used for the purposes described below.
1. FOR ISSUANCES PURSUANT TO THE PLAN
(a) Background
As of June 29, 1996, the Company had total assets of approximately
$43.9 million and total current liabilities of approximately $91.4 million. The
Company is delinquent in its accounts payable as payments to certain vendors are
not being made in accordance with vendor terms. As of June 29, 1996, the Company
had outstanding accounts payable, short-term borrowings and obligations under
capital leases of approximately $62.5 million, of which approximately $38.0
million was outstanding under accounts payable, approximately $22.9 million
represented short-term borrowings and approximately $1.6 million represented
obligations under capital leases. Several vendors have initiated legal action to
collect allegedly delinquent accounts and at least two vendors have orally
threatened the Company with initiation of insolvency or bankruptcy proceedings.
As a result, the Company has established an unofficial unsecured
creditors committee consisting of eight of its largest unsecured creditors (the
"Committee Members") and is negotiating with this creditors committee
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and the Company's secured creditor, IBM Credit Corporation ("ICC"), in an effort
to resolve the delinquent accounts payable, capital deficiency and creditor
litigation issues outside of insolvency or bankruptcy proceedings. The Company
is seeking to resolve these claims outside of bankruptcy or insolvency
proceedings in order to avoid the significant costs and uncertainties that would
arise in such proceedings, including the likely demoralization of employees,
customers and distributors.
The Company, the creditors committee and ICC have agreed in
principle to a plan (the "Plan") pursuant to which creditors will receive equity
in the Company in satisfaction of all or a portion of their claims. Pursuant to
the Plan, ICC, the Company's secured creditor, would receive Series A
Convertible Preferred Stock in satisfaction of $3 million of the Company's
approximately $23 million indebtedness to ICC and in consideration of
restructuring its loan with the Company, including an additional advance of up
to $500,000 for making Discount Payments (defined below). The Company's
unsecured creditors would receive shares of Common Stock in satisfaction of
approximately $45 million in claims or, in the case of smaller creditors, would
receive a discounted cash payment (not exceeding $500,000 in the aggregate)
instead of shares of Common Stock. There can be no assurance that a sufficient
number of these creditors will elect to receive such securities or discounted
cash payments in satisfaction of their claims. The Company also expects to issue
Warrants to ICC and to some of the Committee Members who are also key suppliers
of the Company to ensure favorable credit terms for continuing supply and credit
arrangements. The issuance of the Series A Convertible Preferred Stock, the
Common Stock and the Warrants does not require the approval of the Company's
shareholders. Accordingly, the definitive terms of the Series A Convertible
Preferred Stock and Warrants will be determined by the Board of Directors after
negotiations with the creditors committee and ICC. An increase in the authorized
number of shares of Common Stock, however, which is necessary to implement this
Plan, does require shareholder approval.
It is anticipated that unsecured creditors with claims in excess
of $50,000 ("Major Creditors") and the other unsecured creditors (the
"Convenience Class") will receive 60% of the outstanding Common Stock of the
Company and that the Series A Convertible Preferred Stock will be convertible
into 7% of the outstanding Common Stock of the Company. The Company also expects
to amend its stock option plans to reserve for issuance thereunder approximately
10% of the outstanding shares of the Company's Common Stock. Therefore,
shareholders holding shares of Common Stock as of the Record Date ("Existing
Shareholders") will represent approximately 30% of outstanding shares of Common
Stock immediately after the Plan is consummated. (Because the Series A
Convertible Preferred Stock will vote on an as-converted basis, Existing
Shareholders will represent approximately 28% of the voting power of the Company
assuming all options are exercised). If and when the Series A Convertible
Preferred Stock is converted into Common Stock, Existing Shareholders will then
represent 23% of the outstanding shares of Common Stock assuming no other
issuances of the Company's securities.
SHAREHOLDERS ARE NOT BEING ASKED TO APPROVE THE PLAN OR THE
ISSUANCE OF THE COMMON STOCK, WARRANTS OR THE SERIES A CONVERTIBLE PREFERRED
STOCK. BUT INSTEAD ARE BEING ASKED TO APPROVE THE AMENDMENT OF THE COMPANY'S
ARTICLES OF INCORPORATION TO APPROVE AN INCREASE IN THE AUTHORIZED NUMBER OF
SHARES OF COMMON STOCK.
(b) Description of Series A Convertible Preferred Stock and Warrants
Series A Convertible Preferred Stock
The Company's Articles of Incorporation currently authorize the
Company to issue up to 2,000,000 shares of Preferred Stock. The Board has the
authority, subject to any limitations prescribed by California law, to issue
shares of Preferred Stock in one or more series, to establish, from time to
time, the number of shares to be included in each such series, to fix the
rights, preferences and privileges of the shares of each wholly unissued series
and any qualifications, limitations or restrictions thereon, and to increase or
decrease the number of shares of any such series (but not below the number of
shares of such series then outstanding), without any further vote or action by
the shareholders.
The definitive terms of the Series A Convertible Preferred Stock
are still subject to negotiation and will be determined by the Board of
Directors after negotiations with the creditors' committee and ICC. No
authorization
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<PAGE> 8
for the issuance of the Series A Convertible Preferred Stock by a vote of the
Company's shareholders will be solicited prior to the issuance of the Series A
Convertible Preferred Stock.
It is anticipated that the dividend, liquidation and certain
redemption features of the Series A Convertible Preferred Stock, each of which
is discussed in greater detail below, will be determined by reference to the
Liquidation Price of the Series A Convertible Preferred Stock, which is defined,
in the aggregate, as $3 million plus any accrued but unpaid dividends.
Dividends on the Series A Convertible Preferred Stock will accrue
cumulatively at a rate of 10% per annum of the Liquidation Price and are payable
in cash or in shares of Common Stock, at the Company's discretion. The Series A
Convertible Preferred Stock will rank senior to any other Preferred Stock and
the Common Stock with respect to the declaration and payment of dividends.
Upon dissolution, liquidation or winding up of the Company, it is
anticipated that holders of the Series A Convertible Preferred Stock will be
entitled to receive from the assets of the Company available for distribution to
shareholders an amount in cash or property or a combination thereof per share
equal to the Liquidation Price. The Series A Convertible Preferred Stock will
rank senior to the Common Stock and any other Preferred Stock with respect to
the receipt of liquidation proceeds.
The Series A Convertible Preferred Stock will be redeemable at the
option of ICC at the Liquidation Price as of the date of redemption upon the
sale by the Company of the Company's interest in Splash Technology Holdings,
Inc. or upon the occurrence of certain extraordinary events such as the sale or
disposition of the Company's other portfolio interests or the sale of some or
all of its operating assets or the merger or consolidation of the Company with
another entity. In the event that ICC does not elect to such redemption, Radius
can elect either to (i) redeem the Series A Convertible Preferred Stock at a
redemption price equal to 110% of the Liquidation Price or (ii) require the
Series A Convertible Preferred Stock to be converted into 7% of the Common Stock
as described below, subject to ICC's election of either alternative.
The Series A Convertible Preferred Stock will vote on all matters
submitted to a vote of the Company's shareholders together as a single class
with all other classes of the Company's capital stock with each share of Series
A Convertible Preferred Stock having the number of votes which would be cast if
such shares were converted into Common Stock on the day prior to the date of the
vote except as otherwise required by applicable law.
The Series A Convertible Preferred Stock will be convertible from
time to time, in whole or in part, at the option of the holder, into such number
of shares of Common Stock as represents 7% of the outstanding shares of Common
Stock. For example if the total number of shares of Common Stock outstanding
immediately prior to the consummation of the Plan was 18,225,000 and ICC elected
to convert immediately, then upon consummation of the Plan, approximately
79,239,130 shares of Common Stock would be outstanding (including 7,923,913
shares to be reserved for issuance under the Company's stock option plans and
47,543,478 shares of Common Stock held by unsecured creditors) and 5,546,739
(or, in certain circumstances described in the next paragraph, 6,147,686) is the
maximum number of shares of Common Stock into which the Series A Convertible
Preferred Stock would be convertible by ICC.
The Company can also require the conversion of the Series A
Convertible Preferred Stock at any time 90 days after the issuance of the Series
A Convertible Preferred Stock in the event that the trading price of the
Company's Common Stock exceeds, for a period of 15 consecutive trading days, a
price per share equal to the product of 1.5 times the quotient of (i) $3 million
divided by (ii) the maximum number of shares into which the Series A Convertible
Preferred Stock could be converted (5,546,739 in the above example). Assuming
that 18,225,000 shares of Common Stock are outstanding immediately prior to the
consummation of the Plan, the price would be approximately $0.82. Upon such a
conversion, the Series A Convertible Preferred Stock would be convertible into
7.7% of the Company's outstanding shares of Common Stock. Using the assumptions
set forth in the above example, upon such a conversion, ICC would hold 6,147,686
of 79,840,097 outstanding shares of Common Stock (including 7,923,913 shares to
be reserved for issuances under the Company's stock option plans).
Warrants
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<PAGE> 9
The Company anticipates that it will issue Warrants to purchase up
to an aggregate of 1,200,000 shares of Common Stock. The exercise price of the
Warrants is equal to the average closing price per share of the Common Stock for
the five trading days preceding and five trading days following the date of the
issuance of the Common Stock, Convertible Preferred Stock and Warrants not to
exceed $1.25 (the "Average Price"). It is anticipated that the Warrants will be
exercisable for a four year period, provided that, in the case of Warrants
issued to Committee Members, at the time of such exercise, such Committee Member
has not ceased extending open credit terms to the Company for any reason other
than the Company's failure to pay amounts owed to such Committee Member in
accordance with the terms of such credit arrangement.
The Warrants will contain standard antidilution provisions in the
event of a stock dividend, stock split, combination or reclassification of the
Common Stock.
THIS PROXY STATEMENT SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF ANY OFFER TO BUY ANY SECURITIES OF RADIUS INC.
(c) Description of the Transaction in which the Series A Convertible
Preferred Stock, Common Stock and Warrants is to be Issued.
The Company anticipates that it will issue all of the Series A
Convertible Preferred Stock to ICC in satisfaction of $3 million of the
Company's approximately $23 million indebtedness to ICC. The Company would then
amend the terms of its remaining approximately $20 million of indebtedness to
ICC and ICC will commit to loan the Company up to an additional $500,000 for the
purpose of making Discount Payments (defined below). The Company also expects to
issue Warrants to purchase up to 600,000 shares of Common Stock to ICC in order
to secure favorable credit terms on the remaining approximately $20.5 million of
indebtedness to ICC.
The Company anticipates that it will offer Common Stock to its
Major Creditors representing accounts payable or other claims in the aggregate
of approximately $43.1 million, of which sum, an aggregate of approximately $30
million represents claims of the Committee Members and approximately $6 million,
$6 million, $4 million and $2 million represent claims of Mitsubishi
Electronics, SCI Technology, Inc., Hamilton Hallmark-Avnet Co. and Quantum,
respectively, the Company's largest unsecured creditors and who are Committee
Members. In consideration of the issuance, it is anticipated that participating
Major Creditors will release the Company from any further liability related to
the applicable claims. There are approximately 50 Major Creditors, many of whom
continue to do business with the Company.
The Company also anticipates that it will issue Warrants to
purchase an aggregate of 600,000 shares of its Common Stock to some Committee
Members who are key suppliers of the Company and who extend open credit terms to
the Company agreeable to the Committee Member and the Company. The Warrants will
be exercisable for four years unless the Committee Member has ceased extending
open credit terms to the Company for any reason other than the Company's failure
to pay amounts owed to such creditor in accordance with the terms of such credit
arrangement.
The Company anticipates that the remaining unpaid indebtedness of
approximately $1.9 million owed to its Convenience Class creditors would be
repaid at an average discount of approximately 75% of the amount of the
applicable claim (the "Discount Payment"). The Company would repay these
creditors from the proceeds of the additional loan of up to $500,000 from ICC.
This loan will be made by ICC only for the purpose of making Discount Payments
to Convenience Class creditors. If the Discount Payment represents an average
discount of 75% of the amount of the Convenience Class creditor's claims, the
loan proceeds should be sufficient to repay (at such discount) all claims of
Convenience Class creditors. If a substantial number of Convenience Class
creditors insist on a larger Discount Payment, the proceeds of this loan may be
insufficient to satisfy the claims of 95% of the Convenience Class creditors,
thereby preventing the consummation of the Plan. There can be no assurance that
these remaining creditors will agree to settle their accounts at such a
discount. If the Convenience Class as a group demands more consideration in
order to satisfy their claims, the Company may be unable to generate sufficient
cash flow or obtain additional financing to repay these nonparticipating
creditors, and there can be no assurance that nonparticipating creditors will
not seek to enforce their claims. There are approximately 300 Convenience Class
creditors, many of whom continue to do business with the Company.
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<PAGE> 10
The Company has no other plans to meet its future working capital
needs other than through cash generated from operations. For the nine months
ended June 30, 1996, the Company had an operating loss of approximately $11.6
million. If the Company is unable to increase net sales and/or reduce operating
expenses, it may need to divest assets or businesses or seek additional
financing to meet its working capital needs. There can be no assurance that such
financing will be available to the Company, or that the Company will be able to
divest its assets, on favorable terms, if at all.
The Company anticipates that it will issue the Series A
Convertible Preferred Stock, Common Stock and Warrants pursuant to a transaction
exempt from registration under the Securities Act of 1933, as amended. Assuming
that the Plan is consummated, the Common Stock issued to unsecured creditors
together with the Common Stock issuable upon conversion of the Series A
Convertible Preferred Stock would constitute 67% of the issued and outstanding
shares of Common Stock (assuming all shares authorized for issuance under the
Company's stock option plans were granted and exercised). For example, if there
were 18,225,000 shares of Common Stock outstanding upon the consummation of the
Plan, an aggregate of 53,090,217 shares of Common Stock would be issued to
creditors (assuming the voluntary conversion of Series A Convertible Preferred
Stock into Common Stock and the grant and exercise of outstanding stock
options). It is anticipated that the creditors will have demand registration
rights with respect to these shares of Common Stock. THIS PROXY STATEMENT SHALL
NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY
SECURITIES OF THE COMPANY.
At this time, no further definitive terms with respect to the
issuance of the Common Stock, Series A Convertible Preferred Stock and Warrants
have been agreed upon because negotiations with the creditors committee and ICC
are still ongoing. Furthermore, only eight of the largest unsecured creditors of
the Company are members of the creditors committee and such Committee Members
cannot bind any other creditors. Accordingly, there can be no assurance that a
significant portion of the Company's unsecured creditors will agree to receive
equity or Discount Payments in satisfaction of their claims. The shares of
Common Stock to be issued to the unsecured creditors will represent 60% of, and
the shares of Series A Convertible Preferred Stock to be issued to ICC shall be
voluntarily convertible into 7% of, the issued and outstanding of the Company's
Common Stock (assuming the issuance and exercise of stock options pursuant to
the Company's stock option plans which plans will cover 10% of the Company's
outstanding Common Stock after the consummation of the Plan. The shares of
Common Stock to be issued to the unsecured creditors shall be allocated on a pro
rata basis based upon the amount of their undisputed claims. For example, a
creditor with claims of $4.5 million would receive approximately 10% of the 60%
of the Company's equity allocated for the unsecured creditors. The Committee
Members hold aggregate claims of approximately $30 million and would receive
approximately two-thirds of the 60% of the Company's equity allocated to
unsecured creditors. Mitsubishi Electronics, SCI Technology, Inc., Hamilton
Hallmark-Avnet Co. and Quantum, the four largest Major Creditors (who are also
Committee Members), have aggregate claims of approximately $18 million and would
receive, in the aggregate, approximately 40% of the 60% of the Company's equity
allocated for the unsecured creditors. Appropriate amounts of Common Stock may
be reserved for any disputed claims.
It is a condition to the consummation of the Plan that all Major
Creditors agree to receive shares of Common Stock in satisfaction of their
claims. It is also a condition to the consummation of the Plan that Convenience
Class creditors representing 95% of the total amount of claims held by all
Convenience Class creditors agree to receive the Discount Payment. There can be
no assurance that a sufficient percentage of either class of creditors will
agree to receive Common Stock, or if applicable, the Discount Payment in
satisfaction of their claims. In such event, the Company may be unable to
consummate the Plan and would likely be unable to generate or obtain sufficient
funds to repay such obligations. Furthermore, even if the Company achieves the
requisite consent of creditors, there can be no assurance that any remaining
nonparticipating creditors will not elect to enforce their obligations or
institute bankruptcy proceedings. In the event the Plan is not approved by the
creditors or cannot be implemented for any reason, the Company, as a condition
to obtaining the creditors committee's and ICC's agreement in principle of the
Plan, has agreed to seek approval of the Plan through a "pre-packaged" plan of
reorganization under Chapter 11 of the United States Bankruptcy Code. Under a
prepackaged plan, a company solicits and obtains all creditor approvals
necessary to confirm a Chapter 11 plan of reorganization prior to or shortly
after filing a petition for relief under Chapter 11. The Company does not intend
to solicit consents from its shareholders for any prepackaged plan of
reorganization. The principal advantage of a prepackaged plan is that it may
shorten the period during which a company must operate under Chapter 11,
reducing the costs and disruption of a conventional Chapter 11 proceeding. It is
presently anticipated that any prepackaged plan of reorganization would be
identical to the Plan in all material respects. Accordingly, if the prepackaged
plan of reorganization is implemented on substantially the same terms as the
Plan, shares held by Existing Shareholders would represent not less than 23% of
the outstanding
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<PAGE> 11
shares of Common Stock after implementation of the Plan. However, because the
Company believes that any bankruptcy filing would have an immediate and adverse
impact on the market price of its Common Stock as well as its business, it is
seeking to implement the Plan outside of bankruptcy. In the event of such a
filing, there can be no assurance that any plan of reorganization ultimately
approved by the court will be similar to the Plan in any material respect.
The Company expects to agree to and to implement the Plan as
discussed above. Given the large number of creditors, however, the Company
retains discretion to adjust these terms if necessary to obtain the requisite
approval of the Plan and adjust for individual differences, provided that such
adjustments in the aggregate do not, in the Company's good faith opinion,
materially and adversely affect the Company's financial condition or results of
operations. For example, some Major Creditors may insist on receiving Preferred
Stock (rather than Common Stock). In such case, the Board may need to designate
a new series of Preferred Stock which will be identical to the Series A
Convertible Preferred Stock except in respect of: the Liquidation Price and
preferences (this Preferred Stock would be junior to the Series A Convertible
Preferred Stock); dividends would be payable only if dividends are paid on the
Common Stock; and there would be no redemption rights. The number of shares of
Common Stock into which any such Preferred Stock would be convertible would not
exceed the amount of Common Stock which would have been issued directly to such
creditor had such creditor elected to receive Common Stock. Furthermore,
Convenience Class creditors may insist on receiving a larger Discount Payment.
If less than all of the Major Creditors or less than 95% of the Convenience
Class creditors agree to the Plan, the Company, with the consent of ICC and the
creditors committee, may also elect to consummate the Plan if the Company can
secure the necessary funds to satisfy the claims of the nonparticipating
creditors. Nevertheless, if there are too many individualized demands placed on
the Company from other creditors, the Company may have no alternative other than
to seek bankruptcy protection.
There can also be no assurance that the Company will ever achieve or
maintain profitability even if all creditors consent to the Plan.
The Company does not intend to seek shareholder approval with
respect to the issuance of the Series A Convertible Preferred Stock, the Common
Stock and Warrants other than with respect to the approval of the increase in
the number of shares of Common Stock authorized to be issued under the Company's
Articles of Incorporation.
While the Company has sufficient authorized shares of Common Stock
for issuance in the event of the exercise of all outstanding options or, if
issued, upon the exercise of the Warrants and upon conversion of the Series A
Convertible Preferred Stock, the Company does not have sufficient authorized
shares of Common Stock for issuances to unsecured creditors who agree to receive
shares of Common Stock in satisfaction of their claims. Because the Company must
have a sufficient number of authorized shares of Common Stock available for
issuance to unsecured creditors, for issuance upon conversion of the Series A
Convertible Preferred Stock, for issuance upon the exercise of the Warrants and
for other corporate purposes and because the need to issue additional shares of
Common Stock could arise when it would be inconvenient to hold a shareholders'
meeting or when there would not be time for such a meeting, the Board of
Directors believes that adoption of the proposed amendment is in the best
interests of the Company and its shareholders.
2. FOR EXERCISE OF OUTSTANDING OPTIONS.
At June 30, 1996, approximately 2,487,468 shares of Common Stock
were reserved for issuance upon exercise of options outstanding and options to
be granted under the Company's stock option plans and approximately 146,824
shares were reserved for issuance under the Company's employee stock purchase
program. While the Company currently has sufficient authorized shares of Common
Stock reserved for issuance in the event of all outstanding options, if the Plan
is consummated, the additional authorized shares will also be needed for
issuance upon exercise of stock options.
3. FOR GENERAL CORPORATE PURPOSES.
In addition, the Board of Directors considers the proposed
increase in the authorized number of shares of Common Stock advisable in order
to afford the Company the opportunity, if necessary, to obtain its future
8
<PAGE> 12
working capital requirements by means of the sale of equity securities rather
than by incurring additional indebtedness. It is believed that this will permit
the Company greater flexibility in determining which method of financing would
be more advantageous to the Company. The Company currently has no specific
plans, arrangements or understandings with respect to the issuance of these
additional shares, except for the proposed issuance of Common Stock, Series A
Convertible Preferred Stock and Warrants to its creditors as set forth in this
Proposal, and no other change in the rights of shareholders is proposed.
The issuance of the Common Stock, Series A Convertible Preferred
Stock and Warrants will not, by itself, have any dilutive effect on the
presently issued and outstanding Common Stock; however, upon the issuance of
such shares of Series A Convertible Preferred Stock and Common Stock, the voting
powers of the presently outstanding shares of Common Stock will be reduced
commensurate with the voting rights of the amount of Series A Convertible
Preferred Stock and Common Stock issued to participating creditors. It is
currently anticipated that the Series A Convertible Preferred Stock would vote
on an "as converted basis" together with the Common Stock as a single class.
Holders of Warrants will not have voting rights unless such Warrants are
exercised. As currently proposed, the Common Stock to be issued to the unsecured
creditors and Series A Convertible Preferred Stock will represent 67% of the
voting power of the Company assuming exercise of all stock options available, or
to be available under the Company's stock option plans. Accordingly, as a group,
creditors receiving securities pursuant to the Plan will, in the aggregate, have
voting control of the Company. Holders of Common Stock do not have preemptive
rights to subscribe to shares of Common Stock or Series A Convertible Preferred
Stock or Warrants (or any shares of Common Stock issuable upon the exercise or
conversion thereof) proposed to be issued to creditors. Information concerning
pro forma adjustments that would be made to the Company's capitalization as of
June 29, 1996, to give effect to the adoption of this Proposal, as well as
certain other events, is set forth below in "Capitalization."
VOTE REQUIRED
The proposed amendment to the Articles of Incorporation must be
approved by the affirmative vote of holders of outstanding shares of Common
Stock representing a majority of the voting power of the Company's outstanding
Common Stock. The Company believes that the availability of the additional
shares will provide it with the flexibility to implement the proposed debt to
equity conversion, to meet business needs as they arise, to take advantage of
favorable opportunities and to respond to a changing corporate environment.
If the shareholders approve the amendment, the Company will file
an amendment to its Articles of Incorporation with the Secretary of State of the
State of California reflecting the increase in authorized shares. If
shareholders do not approve this Proposal, the Company will not have a
sufficient number of authorized shares of Common Stock for issuance to unsecured
creditors, upon conversion of the Convertible Preferred Stock and upon exercise
of the Warrants. If the Company does not have a sufficient number of shares of
Common Stock reserved for issuance at the time the Common Stock, Series A
Convertible Preferred Stock and Warrants are to be issued, the Company believes
that its creditors will not accept such securities in satisfaction of their
claims and, as a result because the Company will be unable to generate funds
from operations or most likely will be unable to obtain additional financing on
a timely basis, it will not be able to repay its obligations to such creditors.
In the event this Proposal is not approved and as a result the Company has
insufficient shares of Common Stock available for issuance to creditors, the
Company will not have sufficient means to repay its creditors. Accordingly, the
Company has agreed with the creditors committee and ICC to seek bankruptcy
protection if the Plan is not approved or implemented, and there can also be no
assurance that creditors will not institute involuntary bankruptcy
proceedings.
The Company believes that shareholders voting against the Proposal
will not have any appraisal rights in connection with the Plan. Nevertheless, a
vote for the Proposal could, under common law, adversely affect a shareholders'
position should the shareholder later seek to institute or join litigation
against the Company based upon the matters approved.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE AMENDMENT TO THE
COMPANY'S ARTICLES OF INCORPORATION TO INCREASE THE NUMBER OF
SHARES OF COMMON STOCK AUTHORIZED TO BE ISSUED BY THE COMPANY
9
<PAGE> 13
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information known to the Company
with respect to beneficial ownership of the Company's Common Stock as of June
29, 1996, for (i) each shareholder who is known by the Company to be the
beneficial owner of more than 5% of the Company's Common Stock; (ii) the Chief
Executive Officer and each of the Company's four other most highly compensated
executive officers at September 30, 1995, (iii) each of the Company's directors,
and (iv) all current directors and executive officers of the Company as a
group.
<TABLE>
<CAPTION>
Amount and Nature of Percent
Name and of Beneficial Owner Beneficial Ownership(1) of Class
- ---------------------------- ----------------------- --------
<S> <C> <C>
The Capital Group Companies, Inc.(2) 900,000 5.3%
Michael D. Boich(3) 214,301 1.2%
Charles W. Berger(4) 206,250 1.2%
Gregory M. Millar(5) 50,171 *
Regis McKenna(6) 33,463 *
Douglas W. C. Boake(7) 0 *
Keith Harris(8) 0 *
David B. Pratt 1,000 *
J. Daniel Shaver(9) 0 *
All current executive officers and
directors as a group (8 persons)(10) 537,347 3.2%
</TABLE>
- -------------------------------------------
* Less than one percent.
(1) Unless otherwise indicated below, the persons and entities named in the
table have sole voting and sole investment power with respect to all
shares beneficially owned, subject to community property laws where
applicable.
(2) Based solely upon the Schedule 13G filed by The Capital Group of
Companies, Inc., Capital Research and Management Company and SMALLCAP
World Fund, Inc. The address of such entities is 333 South Hope Street,
Los Angeles, CA 90071. Each of the aforementioned entities has
disclaimed beneficial ownership of such shares of Common Stock.
(3) Represents 211,801 shares held by Mr. Boich, and approximately 2,500
shares subject to options exercisable within 60 days of July 1, 1996.
(4) Represents 150 shares held by Mr. Berger as beneficial owner for his
children, and approximately 206,100 shares subject to an option
exercisable within 60 days of July 1, 1996.
(5) Represents shares subject to options held by Mr. Millar that are
exercisable within 60 days of July 1, 1996.
(6) Represents approximately 21,276 shares held by Mr. McKenna, and 12,187
shares subject to options exercisable within 60 days of July 1, 1996.
(7) Mr. Boake resigned from the Company on April 30, 1996 and all of his
options expired on May 30, 1996.
(8) Mr. Harris resigned from the Company on March 4, 1996 and all of his
options expired on April 4, 1996.
(9) Mr. Shaver resigned from the Company on October 1, 1995 and all of his
stock options expired on November 1, 1995.
(10) Includes the shares described in all footnotes above except (2), (7),
(8) and (9) relating to directors and executive officers, a total of
2,223 shares not described in the footnotes above held by one executive
officer, and a total of approximately 29,939 shares subject to options
held by two executive officers exercisable within 60 days of July 1,
1996.
10
<PAGE> 14
INDEPENDENT PUBLIC ACCOUNTANTS
Ernst & Young LLP has examined, as independent auditors, the
financial statements of the Company for the year ending September 30, 1995 and
has been appointed as its independent auditors to perform the audit of the
Company's financial statements for the current fiscal year. A representative of
Ernst & Young LLP will attend the meeting and will have the opportunity to make
a statement if he or she desires to do so and to respond to appropriate
questions.
SHAREHOLDER PROPOSALS
Proposals of shareholders intended to be presented at the Company's 1997
Annual Meeting of Shareholders must be received by the Company at its principal
executive offices no later than September 8, 1996 in order to be included in the
Company's proxy statement and form of proxy relating to that meeting.
OTHER BUSINESS
The Board does not presently intend to bring any other business before the
Meeting, and, so far as is known to the Board, no matters are to be brought
before the Meeting except as specified in the Notice of the Meeting. As to any
business that may properly come before the Meeting, however, it is intended that
proxies, in the form enclosed, will be voted in respect thereof in accordance
with the judgment of the persons voting such proxies.
11
<PAGE> 15
CAPITALIZATION
The following table is intended to provide certain information to
illustrate the effects of the adoption of the Proposal on the Company's
capitalization. The table sets forth (i) the historical capitalization of the
Company as of June 29, 1996, and (ii) such capitalization, as adjusted to
reflect the issuance of Series A Convertible Preferred Stock to ICC and Common
Stock to all of the Major Creditors and to all Convenience Class creditors, the
additional borrowing of $500,000 from ICC under its amended credit agreement and
the subsequent conversion of such Series A Convertible Preferred Stock into
Common Stock. There can be no assurance that a sufficient number of such
creditors will elect to receive Common Stock in satisfaction of their claims in
order to implement the plan.
<TABLE>
<CAPTION>
AS
HISTORICAL ADJUSTED (1)
---------- ------------
<S> <C> <C>
Capitalization:
Current Liabilities......................................................... 91,444 44,265
Obligations under capital leases - noncurrent portion....................... 321 --
Shareholders' Equity:
Common Stock, no par value; 50,000,000 shares authorized,
18,225,000 shares issued and outstanding, actual; 100,000,000 shares
authorized, 71,856,087 shares(2) outstanding, as adjusted...............
126,243 172,343
Accumulated translation adjustment.......................................... 14 14
Accumulated deficit......................................................... (174,144) (174,144)
--------- ---------
Total shareholders' equity
(net capital deficiency)............................................ (47,887) (1,787)
--------- ---------
Total capitalization............................................. $ 43,878 $ 42,478
========= =========
</TABLE>
________________________
(1) Excludes shares issuable upon exercise of any Warrants which are to be
issued to ICC and some of the eight Major Creditors who are members of the
creditors committee and key suppliers of the Company and who agree to
extend credit to the Company. Assumes that all members of the Convenience
Class agree to receive a Discount Payment averaging 25% of the amount of
the claim. If the amount of the Discount Payment increases, the as
adjusted Common Stock entry, total shareholders equity(net capital
deficiency) and total capitalization would each increase. Also assumes no
exercise of stock options granted or to be granted under the Company'
stock option plans.
(2) Assumes that there are outstanding 18,225,000 shares of Common Stock on
the date of the consummation of the Plan.
12
<PAGE> 16
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company can be inspected and
copied at the public reference facilities of the Commission located at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the Commission's regional offices at Seven World Trade Center, 13th Floor, New
York, New York 10048; and Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511. Copies of such material can also be
obtained form the Public Reference Section of the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates. The Commission maintains a World Wide Web site that contains reports,
proxy and information statements and other information regarding issuers that
file electronically with the Commission. The address of the Commission's World
Wide Web site is: http://www.sec.gov. The Company's Common Stock is quoted for
trading on the Nasdaq SmallCap Market and reports, proxy statements and other
information concerning the Company may be inspected at the offices of the
National Association of Securities Dealers, Inc., 9513 Key West Avenue,
Rockville, Maryland 20850.
The Company hereby undertakes to provide without charge to each person,
including any beneficial owner, to whom this Proxy Statement is delivered, upon
written or oral request of such person, a copy of any and all of the information
that has been incorporated by reference in this Proxy Statement (not including
exhibits to the information that is incorporated by reference unless such
exhibits are specifically incorporated by reference into the information that
this Proxy Statement incorporates). Request should be directed to General
Counsel, Radius Inc., 215 Moffett Park Drive, Sunnyvale, California 94089;
telephone number (408) 541-6100.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following information contained in documents filed with the
Commission are incorporated herein by reference:
(a) Item 7 of the Company's annual report on Form 10-K, as
amended by Form 10-K/A, filed with the Commission for the
fiscal year ended September 30, 1995.
(b) Item 2 of the Company's quarterly report on Form 10-Q filed
with the Commission for the quarter ended March 30, 1996.
Any statement contained herein or in a document incorporated or
deemed to be incorporated herein by reference shall be deemed to be modified or
superseded for purposes of this Proxy Statement to the extent that a statement
contained herein or in any subsequently filed document which also is deemed to
be incorporated herein by reference modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Proxy Statement.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROXY STATEMENT IN CONNECTION WITH THE
MATTERS SUBJECT HEREOF, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROXY
STATEMENT DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES. THE DELIVERY OF THIS
PROXY STATEMENT AT ANY TIME DOES NOT IMPLY THAT THE INFORMATION HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
13
<PAGE> 17
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE COMPLETE, DATE, SIGN AND
PROMPTLY RETURN THE ACCOMPANYING PROXY IN THE ENCLOSED POSTAGE PAID ENVELOPE SO
THAT YOUR SHARES MAY BE REPRESENTED AT THE MEETING.
By Order of the Board of Directors
Radius Inc.
Charles W. Berger
President, Chief Executive Officer
and Chairman of the Board of Directors
Sunnyvale, California
August 1, 1996
14
<PAGE> 18
INDEX TO FINANCIAL STATEMENTS
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors F-2
Consolidated Balance Sheets at September 30, 1995 and 1994 F-3
Consolidated Statements of Operations for the Years Ended September 30,
1995, 1994 and 1993 F-4
Consolidated Statements of Shareholders' Equity for the Years Ended
September 30, 1995, 1994, and 1993 F-5
Consolidated Statements of Cash Flows for the Years Ended September 30,
1995, 1994, and 1993 F-6
Notes to Consolidated Financial Statements F-7
September 30, 1995, 1994 and 1993 F-22
Schedule II: Valuation and Qualifying Accounts
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheet at March 30, 1996 F-23
Consolidated Statements of Operations for the Three Months Ended
March 30, 1995 and 1996 and for the Six Months Ended
March 30, 1995 and 1996 F-24
Consolidated Statements of Cash Flows for the Six Months Ended
March 30, 1995 and 1996 F-25
Notes to Consolidated Financial Statements F-26
</TABLE>
F-1
<PAGE> 19
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Radius Inc.
We have audited the accompanying consolidated balance sheets of Radius Inc. as
of September 30, 1995 and 1994, and the related consolidated statements of
operations, shareholders' equity (net capital deficiency) and cash flows for
each of the three years in the period ended September 30, 1995. Our audits also
included the financial statement schedule listed in the Index at page F-21.
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respect, the consolidated financial position of Radius
Inc. at September 30, 1995 and 1994, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
September 30, 1995, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, present fairly
in all material respects the information set forth therein.
The accompanying consolidated financial statements have been prepared assuming
that Radius Inc. will continue as a going concern. As more fully described in
Note 1, the Company has incurred recurring operating losses, and has a
deficiency in assets and working capital. In addition the Company has not
complied with certain covenants of loan agreements with its lenders. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. (Management's plans in regard to these matters are also described
in Note 1.) The financial statements do not include any adjustment to reflect
the possible future effects on the recoverability and classification of assets
or the amounts and classification of liabilities that may result from the
outcome of this uncertainty.
As discussed in Note 1 to the Consolidated Financial Statements, in 1993 the
Company changed its method of accounting for income taxes.
Palo Alto, California ERNST & YOUNG LLP
December 8, 1995
except for Note 11, as to which the
date is December 27, 1995
F-2
<PAGE> 20
CONSOLIDATED BALANCE SHEETS
September 30 (in thousands)
<TABLE>
<CAPTION>
1995 1994
---------- --------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 4,760 $ 15,997
Accounts receivable, net of allowance for doubtful accounts
of $8,502 in 1995 and $2,548 in 1994 61,644 62,145
Inventories 15,071 21,069
Prepaid expenses and other current assets 2,336 1,473
Income tax receivable 519 9,083
Deferred income taxes - 8,400
---------- --------
Total current assets 84,330 118,167
Property and equipment, net 3,031 7,728
Deposits and other assets 517 964
---------- --------
$ 87,878 $126,859
========== ========
Liabilities and Shareholders' Equity (Net capital deficiency)
Current liabilities:
Accounts payable $ 73,098 $ 39,255
Accrued payroll and related expenses 5,815 4,024
Accrued warranty costs 3,170 2,255
Other accrued liabilities 11,920 6,650
Accrued income taxes 1,665 1,237
Accrued restructuring and other charges 17,013 15,148
Short-term borrowings 29,489 18,095
Obligations under capital leases - current portion 1,494 1,647
---------- --------
Total current liabilities 143,664 88,311
Obligations under capital leases-noncurrent portion 1,331 2,857
Commitments and contingencies
Shareholders' equity: (Net capital deficiency)
Convertible preferred stock, no par value, 1,000 shares
authorized; none issued and outstanding
Common stock, no par value; 50,000 shares authorized;
issued and outstanding--17,143 shares in 1995 and
14,046 shares in 1994 113,791 87,017
Common stock to be issued 12,022 -
Accumulated deficit (182,993) (51,251)
Accumulated translation adjustment 63 (75)
---------- --------
Total shareholders' equity (Net capital deficiency) (57,117) 35,691
---------- --------
$ 87,878 $126,859
========== ========
</TABLE>
See accompanying notes.
F-3
<PAGE> 21
CONSOLIDATED STATEMENTS OF OPERATIONS
For years ended September 30
(in thousands, except per share data)
<TABLE>
<CAPTION>
1995 1994 (1) 1993 (1)
------------ ---------- ----------
<S> <C> <C> <C>
Net sales $ 308,133 $ 324,805 $ 337,373
Cost of sales 302,937 276,948 254,321
------------ ---------- ----------
Gross profit 5,196 47,857 83,052
------------ ---------- ----------
Operating expenses:
Research and development 19,310 33,956 33,503
Selling, general and administrative 90,068 94,731 84,132
------------ ---------- ----------
Total operating expenses 109,378 128,687 117,635
------------ ---------- ----------
Loss from operations (104,182) (80,830) (34,583)
Interest and other income (loss) (3,045) (376) 705
Interest expense (3,023) (869) (635)
Litigation settlement (12,422) - -
------------ ---------- ----------
Loss before income taxes (122,672) (82,075) (34,513)
Provision (benefit) for income taxes 9,070 (4,600) (13,774)
------------ ---------- ----------
Loss before cumulative
effect of a change in accounting principle (131,742) (77,475) (20,739)
Cumulative effect of a change in method
of accounting for income taxes - - 600
------------ ---------- ----------
Net loss $ (131,742) $ (77,475) $ (20,139)
============ ========== ==========
Net loss per share:
Loss before cumulative effect
of a change in accounting principle $ (8.75) $ (5.70) $ (1.61)
Cumulative effect of a change in method
of accounting for income taxes - - 0.05
------------ ---------- ----------
Net loss per share $ (8.75) $ (5.70) $ (1.56)
============ ========== ==========
Common and common equivalent shares used in
computing net loss per share 15,049 13,598 12,905
============ ========== ==========
</TABLE>
See accompanying notes.
(1) This period has been restated to reflect the 1994 Merger of Radius and
SuperMac which was accounted for as a pooling of interests. See Note 10 of Notes
to the Consolidated Financial Statements. The consolidated financial statements
for fiscal 1993 have not been restated to adjust SuperMac's fiscal year end to
that of Radius. This period includes Radius' results of operations and balance
sheet data on a September 30 fiscal year basis and SuperMac's on a December 31
calendar year basis. The operating results for both the twelve months ended
September 30, 1994 and September 30, 1993 include the restructuring and other
charges of $16.6 million recorded by SuperMac in December 1993.
F-4
<PAGE> 22
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended September 30, 1995, 1994 and 1993
(in thousands, except share data)
<TABLE>
<CAPTION>
Total
Retained Shareholders
Earnings Accumulated Equity
Common (Accumulated Deferred Translation (Net Capital
Stock Deficit) Compensation Adjustment Deficiency)
-------- ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1992 (1) $ 60,203 $ 36,449 $ (58) $ 37 $ 96,631
Issuance of 738 shares of common stock
under the SuperMac public offering 15,401 15,401
Issuance of 517 shares of common stock
under Stock Option Plans 1,324 - - - 1,324
Issuance of 159 shares of common stock
under the Employee Stock Purchase Plans 1,663 - - - 1,663
Tax benefit from stock options exercised 3,358 - - - 3,358
Amortization of deferred compensation - - 36 - 36
Currency translation adjustment - - - (119) (119)
Net loss - (20,139) - - (20,139)
-------- ---------- ------- ------- ---------------
Balance at September 30, 1993 (1) 81,949 16,310 (22) (82) 98,155
Issuance of 350 shares of common stock
under Stock Option Plans 1,800 - - - 1,800
Issuance of 170 shares of common stock
under Employee Stock Purchase Plans 989 - - - 989
Issuance of 206 shares of common stock
pursuant to the acquisition of VideoFusion 1,854 - - - 1,854
Tax benefit from stock options exercised 425 - - - 425
Amortization of deferred compensation - - 22 - 22
Currency translation adjustment - - - 7 7
Net loss - (77,475) - - (77,475)
Elimination of SuperMac net loss
for the three months ended December 31, 1993 9,914 - - 9,914
-------- ---------- ------- ------- ---------------
Balance at September 30, 1994 87,017 (51,251) - (75) 35,691
Issuance of 214 shares of common stock
under Stock Option Plans 1,254 1,254
Issuance of 162 shares of common stock
under Employee Stock Purchase Plan 1,298 1,298
Issuance of 212 shares pursuant to the
acquisition of VideoFusion 2,857 2,857
Settlement of Litigation-stock to be issued 12,022 12,022
Issuance of 2,509 shares of common stock
through private placement 21,365 21,365
Currency translation adjustment 138 138
Net Loss (131,742) (131,742)
-------- ---------- ------- ------- ---------------
Balance at September 30, 1995 $125,813 $ (182,993) - $ 63 $ (57,117)
======== ========== ======= ======= ===============
</TABLE>
See accompanying notes.
(1) These periods have been restated to reflect the 1994 Merger of Radius and
SuperMac which was accounted for as a pooling of interests. See Note 10 of Notes
to the Consolidated Financial Statements. The consolidated financial statements
for all periods prior to fiscal 1994 have not been restated to adjust SuperMac's
fiscal year end to that of Radius. Such periods include Radius' results of
operations and balance sheet data on a September 30 fiscal year basis and
SuperMac's on a December 31 calendar year basis.
F-5
<PAGE> 23
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
For years ended September 30
(in thousands)
<TABLE>
<CAPTION>
1995 1994 1993(1)
---------- ------------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (131,742) $ (77,475) $ (20,139)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 4,689 4,542 8,160
Acquired in-process research and development expenses - 2,550 -
Elimination of SuperMac net loss for the three months
ended December 31, 1993 - 9,914 -
Non-cash restructuring and other charges 57,865 40,775 28,981
Common stock to be issued 12,022 - -
(Increase) decrease in assets:
Accounts receivable (5,471) (20,171) (7,543)
Allowance for doubtful accounts 5,954 426 297
Inventories (27,140) (1,058) (5,633)
Prepaid expenses and other current assets (862) 1,739 15
Income tax receivable 8,564 468 (9,551)
Deferred income taxes 8,400 11,248 (11,322)
Increase (decrease) in liabilities:
Accounts payable 33,843 3,470 2,570
Accrued payroll and related expenses (1,871) (1,441) 1,014
Accrued warranty costs 915 (1,584) 438
Other accrued liabilities 5,270 (4,039) 2,171
Accrued restructuring and other charges (13,601) (6,117) -
Accrued income taxes 428 (1,534) 4,585
---------- ------------- -----------
Total adjustments 89,005 39,188 14,182
---------- ------------- -----------
Net cash used in operating activities (42,737) (38,287) (5,957)
---------- ------------- -----------
Cash flows from investing activities:
Capital expenditures (1,894) (3,460) (7,739)
Deposits and other assets (238) 71 -
Purchase of short-term investments - (2,002) (31,914)
Proceeds from sale of short-term investments - 18,395 35,938
---------- ------------- -----------
Net cash provided by (used in) investing activities (2,132) 13,004 (3,715)
---------- ------------- -----------
Cash flows from financing activities:
Issuance of short-term borrowings, net 11,394 15,275 1,158
Issuance of common stock 23,917 3,214 18,388
Principal payments of long-term debt - (43) (1,388)
Principal payments under capital leases (1,679) (1,179) (1,140)
---------- ------------- -----------
Net cash provided by
financing activities 33,632 17,267 17,018
---------- ------------- -----------
Net increase (decrease) in cash and cash equivalents (11,237) (8,016) 7,346
Cash and cash equivalents, beginning of period 15,997 24,013 16,667
---------- ------------- -----------
Cash and cash equivalents, end of period $ 4,760 $ 15,997 $ 24,013
========== ============= ===========
</TABLE>
See accompanying notes.
(1) This period has been restated to reflect the 1994 Merger of Radius and
SuperMac which was accounted for as a pooling of interests. See Note 10 of Notes
to the Consolidated Financial Statements. The consolidated financial statements
for fiscal 1993 have not been restated to adjust SuperMac's fiscal year end to
that of Radius. This period includes Radius' results of operations and balance
sheet data on a September 30 fiscal year basis and SuperMac's on a December 31
calendar year basis.
F-6
<PAGE> 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE ONE. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
The consolidated financial statements include the accounts of Radius
Inc. ("Radius") and its wholly owned subsidiaries after elimination of
significant intercompany transactions and balances.
Radius and SuperMac Technologies, Inc. ("SuperMac") merged into the
combined company (the "Company") effective August 31, 1994 (the
"Merger"), which was accounted for as a pooling of interests. The
consolidated financial statements for fiscal 1993 have not been
restated to adjust SuperMac's fiscal year end to that of Radius. This
period includes Radius' results of operations and balance sheet data on
a September 30 fiscal year basis and SuperMac's on a December 31
calendar year basis.
Financial Statements Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. Such estimates include the level of
allowance for potentially uncollectible receivables and sales returns;
inventory reserves for obsolete, slow-moving, or non-salable inventory;
and estimated cost for installation, warranty and other customer
support obligations. Actual results could differ from these estimates.
Management's Business Recovery Plans
As shown in the accompanying consolidated financial statements, the
Company has incurred recurring operating losses, and has a deficiency
in assets and working capital. In addition, as of September 30, 1995,
the Company was not in compliance with all of its contractual
obligations and financial covenants under its credit agreements. The
Company also is delinquent in its accounts payables as payments to
vendors are not being made in accordance with vendor terms.
The Company's relatively 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 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
profitability, or generate additional cash from other sources.
These conditions raise concerns about the Company's ability to continue
operations as an ongoing concern. Management has implemented, or has
developed plans to implement, a number of actions to address these
conditions including: 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 its color
server and monochrome display businesses and exploring opportunities
for the divestiture of its MacOS compatible systems products and other
product lines; significantly reducing expenses and headcount;
subleasing all or a portion of its current facility given its reduced
occupancy requirements; and investigating various strategic partnering
opportunities.
Additional funds will be needed to finance the Company's development
plans and for other purposes, and the Company is now investigating
possible financing opportunities. There can be no assurance that
additional financing will be available when needed or, if available,
that the terms of such financing will not adversely affect the
Company's results of operations.
F-7
<PAGE> 25
Fiscal year
The Company's fiscal year ends on the Saturday closest to September 30
and includes 53 weeks in fiscal 1993 and 52 weeks in all other fiscal
years presented. During fiscal 1995, the Company changed its fiscal
year end from the Sunday closest to September 30 to the Saturday
closest to September 30 for operational efficiency purposes. For
clarity of presentation, all fiscal periods in this Form 10-K are
reported as ending on a calendar month end.
Foreign currency translation
The Company translates the assets and liabilities of its foreign
subsidiaries into dollars at the rates of exchange in effect at the end
of the period and translates revenues and expenses using rates in
effect during the period. Gains and losses from these translations are
accumulated as a separate component of shareholders' equity. Foreign
currency transaction gains or losses, which are included in the results
of operations, are not material.
Inventories
Inventories are stated at the lower of cost or market. The Company
reviews the levels of its inventory in light of current and forecasted
demand to identify and provide reserve for obsolete, slow-moving, or
non-salable inventory. Cost is determined using standard costs that
approximate cost on a first-in, first-out basis. Inventories consist of
the following (in thousands):
<TABLE>
<CAPTION>
September 30 1995 1994
---- ----
<S> <C> <C>
Raw materials $ 1,559 $ 4,515
Work in process 2,258 6,852
Finished goods 11,254 9,702
-------- ---------
$ 15,071 $ 21,069
======== ========
</TABLE>
Property and equipment
Property and equipment is stated at cost and consists of the following
(in thousands):
<TABLE>
<CAPTION>
September 30 1995 1994
---- ----
<S> <C> <C>
Computer equipment $ 17,429 $ 18,007
Machinery and equipment 12,335 14,184
Furniture and fixtures 6,023 5,562
Leasehold improvements 1,084 1,683
-------- ---------
36,871 39,436
Less accumulated depreciation
and amortization (33,840) (31,708)
--------- ---------
$ 3,031 $ 7,728
======== =========
</TABLE>
Depreciation has been provided for using the straight-line method over
estimated useful lives of three to five years. Equipment under capital
leases and leasehold improvements are being amortized on the
straight-line method over six years or the remaining lease term,
whichever is shorter.
Long-lived Assets
In 1995, the Financial Accounting Standards Board released the
Statement of Financial Accounting Standards No. 121 (SFAS 121),
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of." SFAS 121 requires recognition of impairment
of long-lived assets in the event the net book value of such assets
exceeds the future undiscounted cash flows attributable to such assets.
SFAS 121 is effective for fiscal years beginning after December 15,
1995. Adoption of
F-8
<PAGE> 26
SFAS 121 is not expected to have a material impact on the Company's
financial position or results of operations.
Revenue recognition
Revenue is recognized when products are shipped. Sales to certain
resellers are subject to agreements allowing certain rights of return
and price protection on unsold merchandise held by these resellers. The
Company provides for estimated returns at the time of shipment and for
price protection following price declines.
Warranty expense
The Company provides at the time of sale for the estimated cost to
repair or replace products under warranty. The warranty period
commences on the end user date of purchase and is normally one year for
displays and digital video products and for the life of the product for
graphics cards.
Income taxes
Effective October 1, 1992, the Company adopted FASB Statement 109,
"Accounting for Income Taxes." Under Statement 109, the liability
method is used in accounting for income taxes. Under this method,
deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and
are measured using the enacted tax rates and laws that will be in
effect when the differences are expected to reverse. Prior to the
adoption of Statement 109, income tax expense was determined using the
liability method prescribed by Statement 96, which is superseded by
Statement 109. Among other changes, Statement 109 changes the
recognition and measurement criteria for deferred tax assets included
in Statement 96.
As permitted by Statement 109, the Company has elected not to restate
the financial statements of any prior years. The cumulative effect of
the change in method of accounting for income taxes decreased the net
loss by $600,000 or $0.05 per share in fiscal 1993 on a combined basis.
Loss per share
Net loss per share is computed using the weighted average number of
common shares outstanding.
Cash and cash equivalents
The Company considers all highly liquid investments with a maturity
from date of purchase of three months or less to be cash equivalents;
investments with maturities between three and twelve months are
considered to be short-term investments. Cash equivalents are carried
at cost which approximates market. There were no short-term investments
as of September 30, 1995 or 1994. Approximately $1.6 million of the
$4.8 million of cash and cash equivalents available at September 30,
1995 was restricted under various letters of credit.
Off balance-sheet risk and concentration of credit risk
The Company sells its products to direct computer resellers in the
United States and to distributors in various foreign countries. The
Company performs on-going credit evaluations of its customers and
generally does not require collateral. The Company maintains reserves
for potential credit losses.
The Company also hedges substantially all of its trade accounts
receivable denominated in foreign currency through the use of foreign
currency forward exchange contracts based on firm third party
commitments. Gains and losses associated with currency rate changes on
forward contracts are recognized in the consolidated statements of
operations upon contract settlement and were not material. At September
30, 1995, the Company had forward contracts to sell three different
foreign currencies which totaled the equivalent of approximately $11.1
million and mature between October 1995 and November 1995. At September
30, 1995, the fair value of the Company's forward contracts
approximated cost.
F-9
<PAGE> 27
Related Parties
In fiscal 1994, the Company acquired shares of preferred stock of
Portrait Display Labs ("PDL") and a warrant to purchase additional
shares of PDL preferred stock in exchange for the cancellation of
certain rights held by the Company to purchase all of the outstanding
equity securities or assets of the predecessor entity to PDL. The
warrant permitted the purchase of approximately an additional 10%
interest in PDL. The Company also was granted one seat on PDL's Board
of Directors. In addition, the Company licensed PDL certain pivot
display technology in exchange for the payment of royalties. Product
revenues were approximately $5.0 million in fiscal 1994. In fiscal
1995, the Company exercised the warrant for an additional 10% interest
in PDL in exchange for cancellation of approximately $945,000 in
accounts receivable. There were no product revenues for the fiscal 1995
to this related party. The receivable from PDL at September 30, 1995
was approximately $980,000. Subsequent to September 30, 1995, the
Company signed a series of additional agreements with Portrait Display
Labs, see Note 11 to the Consolidated Financial Statements.
There were no material transactions from this or any other related
party during fiscal 1993.
NOTE TWO. BORROWINGS
Line of credit arrangement
In February 1995, the Company and IBM Credit Corp. ("ICC") entered into
a $30.0 million Inventory and Working Capital Financing Agreement (the
"ICC Agreement"). The ICC Agreement permits advances for inventory and
working capital up to the lesser of $30.0 million or 85% of eligible
receivables ("Inventory and Working Capital Advances"). In September
1995, ICC advanced an additional $20.0 million under the ICC Agreement
to finance the manufacturing of the Company's MacOS compatible products
(the "MacOS Advances"). The weighted average interest rate during 1995
was approximately 12.6%. Advances bear interest at rates ranging from
prime rate plus 2.25% to prime rate plus 4% and are secured by all the
assets of the Company. The ICC Agreement expires in March 1996.
As of September 30, 1995, $50.8 million was outstanding under the ICC
Agreement consisting of $30.8 million in Inventory and Working Capital
Advances and approximately $20.0 million in MacOS Advances. The
outstanding Inventory and Working Capital Advances included $18.7
million in working capital advances supported by eligible receivables,
$6.1 million in working capital advances in excess of the borrowing
base, and $6.1 million in inventory advances. The $24.7 million in
working capital advances are included in Short-term borrowings in the
Consolidated Financial Statements. The $6.1 million in inventory
advances, together with the approximately $20.0 million in MacOS
Advances, are included in Accounts payable in the Consolidated
Financial Statements.
As of September 30, 1995, the Company was not in compliance with all of
its contractual obligations and financial covenants under the ICC
Agreement (specifically, revenues to working capital ratio, net profit
to revenue, and total liabilities to total net worth); however, IBM
Credit has waived such defaults pursuant to an amendment to the ICC
Agreement. See Note 11 to the Consolidated Financial Statements.
In addition, the Company entered into a Business Loan Agreement on
March 20, 1995 with Silicon Valley Bank. The agreement, which expires
on March 19, 1996, allows the Company to issue letters of credit as a
sub-facility under a $5.0 million foreign accounts receivable revolving
line of credit subject to an interest rate of up to the prime rate plus
1.25%. The weighted average interest rate during 1995 was approximately
13.0%. The related debt outstanding as of September 30, 1995 was $1.7
million and outstanding letters of credit were $0.8 million. The
Company was not in compliance with all the terms of this credit
arrangement.
One of the Company's subsidiaries has a revolving line of credit with a
bank in Japan. Borrowings were approximately $3.1 million at September
30, 1995. This note bears interest at the lesser of the
F-10
<PAGE> 28
Euro-yen rate or the bank's prime lending rate (1.5 percent at
September 30, 1995, the prime rate). The weighted average interest rate
during 1995 was approximately 4.9% The line of credit is renewed every
six months with the next renewal in December 1995.
NOTE THREE. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases facilities under operating leases and certain
computer equipment and office furniture under capital leases.
Depreciation expense for assets under capital leases is included in
depreciation and amortization expense. The cost and net book value of
these capitalized lease assets included in property and equipment are
(in thousands):
<TABLE>
<CAPTION>
At September 30, Cost Net Book Value
------- --------------
<S> <C> <C>
1995 $ 7,437 $ 2,642
1994 7,437 4,021
</TABLE>
Future minimum lease payments at September 30, 1995, under capital
leases and noncancelable operating leases are as follows (in
thousands):
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------ ------
<S> <C> <C>
1996 $ 1,686 $ 1,837
1997 1,155 1,887
1998 280 1,843
1999 - 1,750
2000 - 1,759
------- -------
Total minimum lease payments 3,121 $ 9,076
Amount representing interest (296)
-------
Present value of minimum lease payments 2,825
Amount due within one year (1,494)
-------
Amount due after one year $ 1,331
=======
</TABLE>
Rent expense charged to operations amounted to approximately $3.5
million, $3.0 million and $3.8 million for the years ended September
30, 1995, 1994 and 1993, respectively. The rent expense amounts for
fiscal 1995, 1994 and 1993 exclude a provision for remaining lease
obligations on excess facilities. See Note 8 of Notes to the
Consolidated Financial Statements.
Sublease income for fiscal 1995 and 1994 was approximately $0.6 million
and $0.1 million. There was no sublease income for fiscal 1993.
Contingencies
DISPLAY SCREEN SIZE
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 has not yet been served with the Maizes complaint. Defendants'
petition to the California State Judicial Council to
F-11
<PAGE> 29
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. Discovery proceedings have not yet
begun in either case. In the opinion of management, based on the facts
known at this time, the eventual outcome of these cases is unlikely to
have a material adverse effect on the results of operations or
financial position of the Company.
ELECTRONICS FOR IMAGING
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 Radius products
allegedly infringe the patent, EFI is a prime competitor of Radius in
the Color Server market. Radius' Color Server products are material to
its business.
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. 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, 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.
SECURITIES LITIGATION.
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, our insurance
carrier paid $3.7 million in cash and the Company will 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 will issue into a class action
settlement fund 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 Common Stock is 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 Financial Statements reflecting settlement costs not
covered by insurance as well as related legal fees.
The Company has periodically received communications from third parties
asserting infringement of patent rights on certain of the Company's
products and features. Management does not believe any claims made will
have a material adverse effect on the results of operations or
financial position of the Company.
NOTE FOUR. SHAREHOLDERS' EQUITY
Common Stock
In June 1995, the Company sold approximately 2.5 million shares of its
Common Stock in a series of private placements to a small number of
investors unaffiliated with the Company. Proceeds from the offering,
net of commission and other related expenses were $21.4 million. The
net proceeds were used for working capital.
F-12
<PAGE> 30
Stock options
The Company's 1986 Stock Option Plan, as amended, authorizes the
issuance of up to 2,975,000 shares of common stock upon the exercise of
incentive stock options or nonqualified stock options that may be
granted to officers, employees (including directors who are also
employees), consultants and independent contractors. Under the plan,
options are exercisable for a term of up to ten years after issuance.
Options may be granted at prices ranging from 50% to 100% of the fair
market value of the stock on the date of grant, as determined by the
Board of Directors. Vesting of shares is also determined by the Board
of Directors at the date of grant. The 1986 Stock Option Plan will
expire in October 1996.
On August 31, 1994, pursuant to the Merger, Radius assumed 975,239
outstanding options originally issued under the SuperMac 1988 Stock
Option Plan. These options will be administered in accordance with the
SuperMac 1988 Stock Option Plan until all options are exercised or
expired. Under the plan, options are exercisable for a term of up to
ten years after issuance.
The following table summarizes the consolidated activity of the 1986
and 1988 Stock Option Plans and the 1992 Non-Employee Directors' Stock
Option Plan:
<TABLE>
<CAPTION>
September 30,
------------------------------------------------
1995 1994 1993
<S> <C> <C> <C>
Outstanding at beginning of year 2,042,481 2,208,783 2,157,040
Granted 707,590 892,131 1,219,514
Exercised (213,791) (294,042) (516,597)
Canceled (838,745) (764,391) (651,174)
------------ ------------ ------------
Outstanding at September 30 1,697,535 2,042,481 2,208,783
============ ============ ============
Price range at September 30 $1.36-$28.96 $0.42-$32.18 $0.42-$30.14
============ ============ ============
Price range of options exercised $0.42-$13.13 $0.42-$13.13 $0.42-$22.35
============ ============ ============
Exercisable at September 30 1,325,222 706,474 455,241
============ ============ ============
Available for grant at September 30 415,586 281,726 331,314
============ ============ ============
</TABLE>
The stock option activity as shown in the table for fiscal 1993 has not
been restated to adjust SuperMac's fiscal year end to that of Radius.
Fiscal 1993 includes Radius' activity on a September 30 fiscal year
basis and SuperMac's activity on a December 31 calendar year basis. The
fiscal 1994 period includes the Radius activity for fiscal year ended
September 30, 1994 and SuperMac activity for the nine months ended
September 30, 1994.
The Company has also reserved 100,000 shares of common stock for
issuance to non-employee directors pursuant to options granted under
the 1994 Directors' Stock Option Plan (the "1994 Plan"). Such options
may only be nonqualified stock options, must be exercised within ten
years from the date of grant, and must be granted in accordance with a
non-discretionary formula. Under this formula, each new director
receives an option to purchase 10,000 shares when that director is
first appointed to the Board and an option to purchase 2,500 shares on
each anniversary of such director's appointment. As of September 30,
1995, 27,500 shares had been granted under this plan at exercise prices
ranging from $7.44 to $12.00 per share. Options to purchase 1,250
shares were canceled following the resignation of a director. None of
the options granted under the 1994 Plan are exercisable.
Prior to the approval of the 1994 Plan, the 1990 Directors' Stock
Option Plan (the "Prior Plan") was in effect. As of September 30, 1995,
the Prior Plan had 33,750 options outstanding at prices ranging from
$8.00 to $17.25. Such options are nonqualified stock options, must be
exercised within five years from the date of grant, and were granted in
accordance with a non-discretionary formula.
F-13
<PAGE> 31
Options unissued under the Prior Plan become available for grant under
the 1994 Plan. As of September 30, 1995, options to purchase 37,500
shares became available upon the resignation of three directors. In
addition, 28,750 options to purchase shares, which were never granted
under the Prior Plan were transferred to the 1994 Plan.
In March 1993, the Company granted a nonqualified stock option to one
officer to purchase a total of 250,000 shares of common stock outside
the Company's 1986 Stock Option Plan at an exercise price of $7.75 per
share. This option is exercisable for a term of ten years and vests
over a fifty month period commencing on the date of grant. During
fiscal 1994, 150 of these shares were exercised by the officer, and as
of September 30, 1995 an additional 149,850 shares were exercisable.
In June 1995, the Company repriced approximately 232,000 of then
outstanding options to an exercise price of $12.00 per share, the fair
market value of the Company's stock on the date of the repricing.
Employee stock purchase plan
The Company has an employee stock purchase plan under which
substantially all employees may purchase common stock through payroll
deductions at a price equal to 85% of its fair market value as of
certain specified dates. Stock purchases under this plan are limited to
10% of an employee's compensation, and in no event may exceed $21,250
per year. Under this plan a total of 650,000 shares of common stock
have been reserved for issuance to employees. At September 30, 1995,
255,859 shares remain available for issuance under the plan.
Employee Stock Plans
The Company account for its stock option plans and the Employee Stock
Purchase Plan in accordance with provisions of the accounting
Principles Board's Opinion No. 25 (APB 25), "Accounting for Stock
Issued to Employees." In 1995, the Financial Accounting Standards Board
released the Statement of Financial Accounting Standard No. 123 (SFAS
123), "Accounting for Stock Based Compensation." SFAS 123 provides an
alternative to APB 25 and is effective for fiscal years beginning after
December 15, 1995. The Company expects to continue to account for its
employee stock plans in accordance with the provision of APB 25.
Accordingly, SFAS 123 is not expected to have any material impact on
the Company's financial position or results of operations.
F-14
<PAGE> 32
NOTE FIVE. FEDERAL AND STATE INCOME TAXES
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
1995 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
For years ended September 30
(in thousands)
Federal:
Current $ -- $(12,583) $ (3,974)
Deferred 7,170 12,311 (7,505)
-------- -------- --------
7,170 (272) (11,479)
Foreign:
Current 650 376 297
-------- -------- --------
State:
Current 20 (3,641) 844
Deferred 1,230 (1,063) (3,436)
-------- -------- --------
1,250 (4,704) (2,592)
-------- -------- --------
$ 9,070 $ (4,600) $(13,774)
======== ======== ========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. Significant components of the Company's deferred tax assets
and liabilities are as follows:
<TABLE>
<CAPTION>
1995 1994
- ------------------------------------------------------------------------------------------
<S> <C> <C>
For years ended September 30
(in thousands)
Deferred tax assets:
Net operating loss carryovers $ 27,077 $ 5,100
Reserves and accruals not currently tax deductible 22,342 10,055
Restructuring reserves 22,314 --
Credit carryovers 6,280 3,100
Inventory valuation differences 4,188 12,612
Depreciation 4,079 4,202
Capitalized research & development expenditures 3,202 2,193
Other -- 374
-------- --------
Total deferred tax assets 89,482 37,636
-------- --------
Valuation allowance for deferred tax assets (85,086) (26,724)
-------- --------
Deferred tax assets $ 4,396 $ 10,912
======== ========
Deferred tax liabilities:
State income tax $ 3,849 $ 2,512
Other 547 --
-------- --------
Total deferred tax liabilities 4,396 2,512
-------- --------
Net deferred tax assets $ -- $ 8,400
======== ========
</TABLE>
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
F-15
<PAGE> 33
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.
The provision for income taxes differs from the amount computed by
applying the statutory federal income tax rate to income before taxes.
The sources and tax effects of the differences are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
For years ended September 30
(in thousands)
Expected tax at statutory rate $(42,935) $(28,726) $(12,080)
Change in valuation allowance 49,820 26,724 --
State income tax, net of federal tax benefit 1,250 (3,105) (1,707)
Non-deductible merger costs -- 1,054 --
Non-deductible charge for purchased
research and development -- 763 --
Research and development tax credits (497) (458) (734)
Other 1,432 (852) 747
-------- -------- --------
$ 9,070 $ (4,600) $(13,774)
======== ======== ========
</TABLE>
As of September 30, 1995, the Company had net operating loss
carryforwards for federal and state income tax purposes of
approximately $71,000,000 and $27,900,000, respectively. The state loss
carryforwards will expire as follows; $8,000,000 in 1998, $5,000,000 in
1999; and $14,900,000 in 2000, if not utilized, and the federal loss
carryforwards will expire primarily in 2009 and 2010, if not utilized.
In addition, the Company had tax credit carryforwards of approximately
$6,280,000 which will expire in 2005, if not utilized.
Utilization of net operating loss and tax credit carryforwards may be
subject to substantial annual limitation due to the ownership change
limitations provided by the Internal Revenue Code of 1986 and similar
state provisions. The annual limitation may result in the expiration of
net operating losses before utilization.
F-16
<PAGE> 34
NOTE SIX. STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1995 1994 1993
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
For years ended September 30,
(in thousands)
Supplemental disclosure of cash
flow information (in thousands):
Cash paid (received) during the year for:
Interest $ 1,620 $ 812 $ 927
=========== =========== ======
Income taxes $ (8,370) $ (8,295) $2,661
=========== =========== ======
Supplemental schedule of noncash
investing and financing activities
(in thousands):
Retirement of fully and partially
depreciated assets $ 4,459 $ 6,025 $1,544
=========== =========== ======
Tax benefit from stock options
exercised $ -- $ 425 $3,358
=========== =========== ======
Equipment acquired pursuant to
capital leases $ -- $ 2,000 $4,138
=========== =========== ======
Common stock issued pursuant to
VideoFusion agreement $ 2,857 $ -- $ --
=========== =========== ======
</TABLE>
NOTE SEVEN. EXPORT SALES AND MAJOR CUSTOMERS
The Company currently operates in one principal industry segment: the
design, manufacturing and marketing of color publishing and digital
video computer products. The Company's export sales were approximately
$124,469,000, $112,050,000 and $108,115,000 in the fiscal years ended
September 30, 1995, 1994 and 1993, respectively, and included export
sales to Europe of approximately $57,257,000, $60,621,000, and
$59,473,000, respectively. Export sales to Japan were approximately
$57,173,000, $35,701,000 and $33,042,000 for fiscal years ended
September 30, 1995, 1994 and 1993, respectively.
One customer accounted for approximately 34.0%, 13.5% and 11.5% of the
Company's net sales during the years ended September 30, 1995, 1994 and
1993, respectively.
NOTE EIGHT. RESTRUCTURING AND OTHER CHARGES
RADIUS JUNE 1993 RESTRUCTURING AND OTHER CHARGES
In June 1993, Radius announced a restructuring program designed to
reduce costs and improve operating efficiencies. The program included,
among other things, the write-down of inventory following Radius'
decision to phase out its older generation of products, lease
termination expenses, capital equipment write-offs, severance payments,
and costs associated with the discontinuation of Radius'
minicomputer-class server product. The restructuring program costs of
$15.5 million were recorded during the third quarter of fiscal 1993.
These charges (in thousands) are included in: cost of sales ($10,993);
research and development ($411); and selling, general and
administrative expenses ($4,096). The Company completed this
restructuring event by the end of calendar 1994. There were no material
changes in the restructuring plan or in the estimates of the
restructuring costs from the recognition of the charge in June 1993
with the completion of the restructuring program in December 1994.
F-17
<PAGE> 35
SUPERMAC DECEMBER 1993 RESTRUCTURING AND OTHER CHARGES
In December 1993, SuperMac recorded charges of $16.6 million in connection
with a program to adjust inventory levels, eliminate excess facilities,
terminate certain projects and contract arrangements and reduce the number
of employees. The charges (in thousands) are included in: cost of sales
($13,352); research and development ($2,000); and selling, general and
administrative expenses ($1,238). There have been no material changes in
the restructuring plan or in the estimates of the restructuring costs. The
Company has $236,000 remaining in its restructuring reserve related to
facility costs, the balance of which is expected to be eliminated in fiscal
1996. As noted in the Consolidated Financial Statements, the consolidated
results for the Company in both the twelve months ended September 30, 1994
and the fiscal period ended 1993 include SuperMac's $16.6 million charge.
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 September 30, 1995 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 2,236 154
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 $15,860 $ 869
</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 headquarter 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 September 30, 1995. The Company expects to have
substantially completed the restructuring by September 1996. During fiscal
1995, approximately $2.1 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 refocus its business on the color publishing
and multimedia markets. The charges primarily included a writedown of
inventory and other assets. Additionally, it included expenses related to
the cancellation of open purchase orders, excess facilities and 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 September 30, 1995 are as follows (in thousands):
F-18
<PAGE> 36
<TABLE>
<CAPTION>
Representing
-------------------------
Cash Outlays
------------------------
Asset
Provision Write-Downs Completed Future
<S> <C> <C> <C> <C>
Adjust inventory levels $33,138 $ 32,300 $ - $ 838
Excess facilities 2,004 404 - 1,600
Cancellation fees and asset write-offs 19,061 5,196 - 13,865
Employee severance 3,662 - - 3,662
-------- --------- ------- --------
Total charges $ 57,865 $ 37,900 $ - $ 19,965
</TABLE>
The adjustment of inventory levels reflects the discontinuance of several
product lines. Revenues and product margins for significant product lines
discontinued were as follows: MacOS-compatible systems were $21.8 million
and $(19.2 million), respectively; and low-margin displays $82.9 million
and $19.6 million, respectively. 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 revised business model. As of
December 15, 1995, approximately 157 positions of the 240 total planned had
been eliminated in connection with the new business model. The Company had
not spent any cash for this restructuring as of September 30, 1995. As of
September 30, 1995, the Company had cash and cash equivalents of $4.8
million. See "Management's Business Recovery Plans" at Note 1 due to the
Consolidated Financial Statements. The Company expects to have
substantially completed the restructuring by September 1996.
NOTE NINE. VIDEOFUSION ACQUISITION
The Company acquired VideoFusion, Inc. ("VideoFusion") on September 9,
1994. VideoFusion is a developer of advanced digital video special effects
software for Apple Macintosh and compatible computers. The Company acquired
VideoFusion in exchange for approximately 890,000 shares of the Company's
Common Stock, 205,900 shares of which were issued at the closing of the
acquisition. The balance of the shares were to be issued in installments
over a period of time contingent on the achievement of certain performance
milestones and other factors. In addition, the Company was required to pay
up to $1.0 million in cash based upon net revenues derived from future
sales of products incorporating VideoFusion's technology. The purchase
price for VideoFusion, including closing costs and the issuance of shares
of Common Stock valued at $500,000 in connection with the achievement of
the first milestone was approximately $2.4 million. This amount was
allocated to the assets and liabilities of VideoFusion and resulted in
identifiable intangibles of approximately $440,000 and an in-process
research and development expense of approximately $2.2 million. The
intangible asset was to be amortized over two years. The Company recognized
the charge of approximately $2.7 million for in-process research and
development and other costs associated with the acquisition of VideoFusion
during the fourth quarter of fiscal 1994.
In May 1995, the Company entered into an agreement with the former holders
of VideoFusion stock to settle the contingent stock and earnout payments
that were originally contemplated. Pursuant to this agreement, the Company
issued approximately 212,000 shares, and paid approximately $200,000, to
the former holders of VideoFusion stock. These transactions resulted in
additional compensation expense of approximately $3.0 million which was
recorded in fiscal 1995.
NOTE TEN. MERGER WITH SUPERMAC TECHNOLOGIES, INC.
On August 31, 1994, Radius merged with SuperMac in exchange for 6,632,561
shares of Radius' common stock. SuperMac was a designer, manufacturer, and
marketer of products that enhanced the power and graphics performance of
personal computers. The Merger was accounted for as a pooling of interests,
and, accordingly, the Company's Consolidated Financial Statements and Notes
to Consolidated Financial Statements have been restated to include the
results of SuperMac for all periods presented.
F-19
<PAGE> 37
Separate results of operations for the periods prior to the Merger are as
follows (in thousands):
<TABLE>
<CAPTION>
Merger-
Related
Radius SuperMac Expenses Adjustment Combined
------ -------- -------- ---------- --------
<S> <C> <C> <C> <C> <C>
Year ended September 30, 1994
Net revenues $162,922 $164,978 $ (3,095) $ - $324,805
Net loss (18,293) (15,775) (43,407) - (77,475)
Year ended September 30, 1993
(SuperMac as of December 1993)
Net revenues 134,872 202,501 - - 337,373
Net loss (17,415) (2,724) - - (20,139)
</TABLE>
The merger related expenses reflect the recording of the merger related
restructuring and other charges.
Prior to the Merger, SuperMac's fiscal year end was December 31. SuperMac's
separate results for fiscal 1994 have been restated to conform with the
twelve months ended September 30. The Consolidated Financial Statements for
all periods prior to fiscal 1994 have not been restated to adjust
SuperMac's fiscal year end to that of Radius. Such periods include Radius'
results of operations and balance sheet data on a September 30 fiscal year
basis and SuperMac's on a December 31 calendar year basis. Therefore, the
results for both the fiscal year ended September 30, 1994 and the results
for the fiscal year ended 1993 include the results for SuperMac's three
months ended December 31, 1993. Revenues, cost and expenses, and net loss
of SuperMac for the three months ended December 31, 1993 were, $48.5
million, $64.7 million and $9.9 million, respectively.
The Company incurred substantial costs in connection with the Merger and
consolidation of operations. Included in the accompanying consolidated
statement of operations for the year ended September 30, 1994 are merger
related expenses totaling $43.4 million consisting primarily of charges for
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
incident to the Merger. See Note 8 of Notes to the Consolidated Financial
Statements.
NOTE ELEVEN. SUBSEQUENT EVENTS
PORTRAIT DISPLAY LABS
On December 19, 1995, the Company signed 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 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. See
Note 1 to the Consolidated Financial Statements.
DISPLAY TECHNOLOGIES ELECTROHOME INC.
On December 21, 1995, the Company signed a Business Purchase Agreement and
an Asset Purchase and License Agreement with Display Technologies
Electrohome Inc. ("DTE"). Pursuant to the agreements and subject to certain
closing conditions, DTE will purchase Radius' monochrome display monitor
business and certain assets related thereto, for approximately $200,000 in
cash and cancellation of $2.5 million of the Company's indebtedness to DTE.
In addition, DTE and Radius will cancel outstanding contracts relating to
DTE's manufacture and sale of monochrome display monitors to Radius.
F-20
<PAGE> 38
COLOR SERVER GROUP
On December 23, 1995, the Company signed a definitive agreement pursuant to
which the Company will sell its Color Server business 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 will receive
approximately $21.9 million in cash (subject to certain post-closing
adjustments) 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 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
transaction is expected to close in January 1996. Under the Inventory and
Working Capital Agreement, as recently amended, with IBM Credit Corp., the
Company is required to pay all of the net proceeds of the Color Server
business transaction to IBM Credit Corp. in order to reduce the Company's
outstanding indebtedness under that agreement.
IBM CREDIT CORP.
On December 14, 1995, the Company and IBM Credit Corp. ("ICC") amended the
Inventory and Working Capital Financing Agreement (the "ICC Agreement")
entered into by the Company and ICC on February 17, 1995 and subsequently
revised in September 1995 to fund the manufacturing of the Company's MacOS
compatible systems products. See Note 2 to the Consolidated Financial
Statements. Under the amendment, ICC waived the Company's failure to comply
with all of its contractual obligations and financial covenants under the
ICC Agreement. The ICC Amendment, among other things, also provides that
until March 31, 1996 ICC 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 ICC (i) immediately following a default of the ICC Amendment,
and (ii) following thirty (30) days notice in the event of any default of
the ICC Agreement. The ICC Amendment also requires the Company to pay all
of the net proceeds of the Color Server Group transaction to ICC to reduce
the Company's outstanding indebtedness under the ICC Agreement.
1995 STOCK OPTION PLAN
On December 20, 1995, the Company's Board of Directors adopted the 1995
Stock Option Plan to replace the 1986 Stock Option Plan that expires in
1996, and reserved 850,000 shares (plus all unissued and unexercised shares
available under the existing 1986 Stock Option Plan) for issuance
thereunder. The 1995 Stock Option Plan is subject to shareholder approval.
See Note 4 to the Consolidated Financial Statements.
F-21
<PAGE> 39
SCHEDULE II --- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Balance at Charged to Charged Balance
beginning costs and to other at end of
Description of period expenses accounts Deductions(1) period
----------- --------- -------- -------- ------------- ---------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Year ended September 30, 1993 (2) $1,825 $1,272 $0 $975 $2,122
Year ended September 30, 1994 $2,018 (2) $1,283 $0 $753 $2,548
Year ended September 30, 1995 $2,548 $6,837 $0 $883 $8,502
</TABLE>
- ------------------------
(1) Uncollectable accounts written off.
(2) The Consolidated Financial Statements for fiscal 1993 have not been
restated for the change in fiscal year. This period includes Radius'
results of operations and balance sheet data on a September 30 fiscal
year basis and SuperMac's on a December 31 calendar year basis.
F-22
<PAGE> 40
RADIUS INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, unaudited)
<TABLE>
<CAPTION>
MARCH 30,
1996
-----------
(unaudited)
<S> <C>
ASSETS:
Current assets:
Cash $ 2,779
Accounts receivable, net 24,471
Inventories 13,207
Prepaid expenses and other current assets 1,146
Income tax receivable 517
---------
Total current assets 42,120
Property and equipment, net 2,104
Deposits and other assets 433
---------
$ 44,657
=========
LIABILITIES AND SHAREHOLDERS' EQUITY (Net capital deficiency)
Current liabilities:
Accounts payable $ 41,430
Accrued payroll and related expenses 4,267
Accrued warranty costs 332
Other accrued liabilities 9,999
Accrued income taxes 1,844
Accrued restructuring and other charges 16,439
Short-term borrowings 21,380
Obligations under capital leases - current portion 1,431
---------
Total current liabilities 97,122
Obligations under capital leases - noncurrent portion 560
Shareholders' equity: (Net capital deficiency)
Common stock 117,128
Common stock to be issued 8,695
Accumulated deficit (178,857)
Accumulated translation adjustment 9
---------
Total shareholders' equity (Net capital deficiency) (53,025)
---------
$ 44,657
=========
</TABLE>
See accompanying notes.
F-23
<PAGE> 41
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.
F-24
<PAGE> 42
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.
F-25
<PAGE> 43
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
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.
F-26
<PAGE> 44
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 Company has not converted any shares of this
Series B Preferred Stock into Common Stock of the Parent. 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.
F-27
<PAGE> 45
RADIUS INC.
PROXY FOR SPECIAL MEETING OF SHAREHOLDERS
AUGUST 27, 1996
THIS PROXY IS SOLICITED ON BEHALF OF THE COMPANY'S BOARD OF DIRECTORS
The undersigned hereby appoints Charles W. Berger and Cherrie Fosco, or either
of them, each with power of substitution, to represent the undersigned at the
Special Meeting of Shareholders of Radius Inc. (the "Company") to be held at 215
Moffett Park Drive, Sunnyvale, California 94089 on August 27, 1996, at 11:00
a.m., P.D.T., and any adjournment or postponement thereof, and to vote the
number of shares the undersigned would be entitled to vote if personally present
at the meeting on the following matters:
-----------
SEE REVERSE
SIDE
-----------
<PAGE> 46
-------------- ---------------
ACCOUNT NUMBER COMMON
- ----------------------------- -----------------------------------------
AMENDMENT TO ARTICLES OF FOR AGAINST ABSTAIN
INCORPORATION TO INCREASE
AUTHORIZED SHARES OF / / / / / /
COMMON STOCK
The Board of Directors recommends a vote FOR the Proposal.
THIS PROXY WILL BE VOTED AS DIRECTED. IN THE ABSENCE OF DIRECTION, THIS
PROXY WILL BE VOTED FOR THE PROPOSAL.
In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the meeting or any adjournment or
postponement thereof to the extent authorized by Rule 14a-4(c) promulgated
by the Securities and Exchange Commission.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE COMPANY.
Dated: , 1996
----------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Signature(s)
Please sign exactly as your name(s) appear(s) on your stock certificate. If
shares are held of record in the names of two or more persons or in the name
of husband and wife, whether as joint tenants or otherwise, both or all of
such persons should sign the proxy. If shares of stock are held of record by
a corporation, the proxy should be executed by the president or vice
president and the secretary or assistant secretary. Executors,
administrators or other fiduciaries who execute the above proxy for a
deceased shareholder should give their full title. Please date the proxy.
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE COMPLETE, DATE, SIGN
AND PROMPTLY RETURN THIS PROXY IN THE ENCLOSED, POSTAGE-PAID ENVELOPE SO
THAT YOUR SHARES MAY BE REPRESENTED AT THE MEETING.
<PAGE> 47
PURSUANT TO ITEM 13 OF SCHEDULE 14A AND RULE 14A-6(B), THE COMPANY'S
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 30, 1996, ITEM 2 OF
WHICH IS INCORPORATED BY REFERENCE IN THE COMPANY'S PROXY STATEMENT AND WHICH
REPORT IS BEING SENT TO SHAREHOLDERS, IS BEING FILED IN ELECTRONIC FORMAT
CONCURRENTLY WITH THE PROXY STATEMENT.
<PAGE> 48
================================================================================
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.
================================================================================
This report consists of 24 sequentially numbered pages. The exhibit index on
this report is located on sequentially numbered page 22.
<PAGE> 49
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>
-2-
<PAGE> 50
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.
-3-
<PAGE> 51
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.
-4-
<PAGE> 52
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.
-5-
<PAGE> 53
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
-6-
<PAGE> 54
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
-7-
<PAGE> 55
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>
-8-
<PAGE> 56
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.
-9-
<PAGE> 57
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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<PAGE> 60
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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<PAGE> 61
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
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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.
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<PAGE> 68
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
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<PAGE> 69
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Sequentially
Number Title Numbered Page
- ------------ -------------
<S> <C> <C>
11.01 Computation of per share earnings 22
</TABLE>
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<PAGE> 70
PURSUANT TO ITEM 13 OF SCHEDULE 14A AND RULE 14A-6(6), THE AMENDMENT TO THE
COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30,
1995, ITEM 7 OF WHICH IS INCORPORATED BY REFERENCE IN THE COMPANY'S PROXY
STATEMENT AND WHICH AMENDMENT IS BEING SENT TO SHAREHOLDERS, IS BEING FILED IN
ELECTRONIC FORMAT CONCURRENTLY WITH THE PROXY STATEMENT.
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<PAGE> 71
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1995 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,
INCLUDING ZIP CODE)
(408) 541-6100
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK
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
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF THE REGISTRANTS KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. (X)
<TABLE>
<CAPTION>
AS OF DECEMBER 15, 1995
<S> <C>
AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY
NON-AFFILIATES OF THE REGISTRANT BASED ON THE CLOSING
BID PRICE OF SUCH STOCK: $43,739,556
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING: 17,401,094
</TABLE>
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF REGISTRANT'S DEFINITIVE PROXY STATEMENT FOR THE ANNUAL MEETING OF
SHAREHOLDERS TO BE HELD FEBRUARY 21, 1996 ARE INCORPORATED BY REFERENCE INTO
PART III (ITEMS 10, 11, 12, AND 13) HEREOF.
<PAGE> 72
<TABLE>
RADIUS INC.
1995 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART II Page
<S> <C>
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations .............................................. 3
PART IV
ITEM 14. Exhibits, Financial Statements, Financial Statement
Schedule, and Reports on Form 8-K ................................................ 15
SIGNATURES..................................................................................... 20
</TABLE>
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<PAGE> 73
The undersigned Registrant hereby amends the following items, exhibits
and other portions of its Annual Report on Form 10-K for the period ended
September 30, 1995, as set forth in the pages attached hereto.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
This item contains forward-looking statements within the meaning of Section 21E
of the Securities Exchange Act of 1934. Actual results could differ materially
from those projected in the forward-looking statements as a result of the
factors described below and elsewhere in this Annual Report.
RESULTS OF OPERATIONS--ANNUAL PERIODS
The following table sets forth for the years indicated certain operational data
as a percentage of net sales (may not add due to rounding).
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
--------------------------------------------
1995 1994 (1) 1993 (1)
---- -------- --------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales 98.3 85.3 75.4
---- ---- ----
Gross profit 1.7 14.7 24.6
Operating expenses:
Research and development 6.3 10.5 9.9
Selling, general, and administrative 29.2 29.2 24.9
---- ---- ----
Total operating expenses 35.5 39.6 34.9
Loss from operations (33.8) (24.9) (10.3)
Interest expense, net (2.0) (0.4) -
Litigation settlement (4.0) -
----- ------ -----
Loss before income taxes (39.8) (25.3) (10.2)
Provision (benefit) for income taxes 2.9 (1.4) (4.1)
----- ----- -----
Loss before cumulative effect of
a change in accounting principle (42.8) (23.9) (6.1)
Cumulative effect of change in method of
accounting for income taxes - - 0.2
----- ----- -----
Net loss (42.8)% (23.9)% (6.0)%
====== ====== =====
</TABLE>
(1) These periods have been restated to reflect the Merger of Radius and
SuperMac which has been accounted for as a pooling of interests. See Note 10 of
Notes to the Consolidated Financial Statements. The consolidated financial
statements for all periods prior to fiscal 1994 have not been restated to adjust
SuperMac's fiscal year end to that of Radius. Such periods include Radius'
results of operations and balance sheet data on a September 30 fiscal year basis
and SuperMac's on a December 31 calendar year basis. The operating results for
both the twelve months ended September 30, 1994 and September 30, 1993 include
the restructuring and other charges of $16.6 million recorded by SuperMac in
December 1993.
FISCAL 1995 COMPARED TO FISCAL 1994
Net Sales. The Company's net sales decreased 5.1% to $308.1 million in fiscal
1995 from $324.8 million in fiscal 1994. Fiscal 1995 net sales were reduced by
approximately $11.4 million due to reserves taken by the Company in anticipation
of future price reductions on a number its graphics cards, MacOS compatible
systems and other products that are designed for Apple's NuBus-based computers
which have been largely replaced by Apple's recently introduced PCI Bus-based
computers.
During the fiscal year, net sales of graphics cards declined substantially due
primarily to reduced demand resulting from Apple's incorporation of built-in
graphics capabilities in its PowerPC based Macintosh systems. Net sales from
displays, accelerator cards and printers also declined during the fiscal year.
These declines were largely offset
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by sales of MacOS compatible systems which were first introduced in the 1995
fiscal year and by a substantial increase in net sales from the Company's color
server products.
While net sales from the Company's digital video products increased slightly
during the fiscal year, the Company anticipates lower revenue from this product
line until the introduction of new products now under development.
The Company anticipates significantly lower overall net sales in fiscal 1996 as
a result of the Company's decision to focus its efforts on providing solutions
for high end digital video and graphics customers, discontinue selling mass
market displays and other low value added products, and divest of certain
businesses such as color servers and MacOS compatible systems. Net sales
attributable to the Company's Color Server Group and MacOS compatible systems
were approximately $29.3 million and $21.8 million, respectively, for fiscal
1995. Had the net sales of these businesses not been included in net sales for
the 1995 fiscal year, the Company's net sales for such fiscal year would have
been approximately $257 million.
On December 23, 1995, the Company entered into a definitive agreement to sell
its color server business to Splash Technology, Inc., a company in which Radius
will retain a 19.9% equity interest, for approximately $21.9 million. That sale
is anticipated to be completed in January 1996. In addition the Company is now
negotiating to sell its MacOS compatible systems business and does not
anticipate significant net sales from this business during the 1996 fiscal year.
Export sales represented approximately 40.4%, 34.5%, and 32.0% of net sales for
fiscal 1995, 1994 and 1993, respectively. See Note 7 of Notes to Consolidated
Financial Statements. 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.
Gross Profit. The Company's gross profit margin including restructuring and
other charges declined to 1.7% in fiscal 1995, compared to 14.7%, in fiscal
1994. The Company's gross profit margin excluding the restructuring and other
charges declined to 16.9% in fiscal 1995, compared to 27.3% in fiscal 1994.
Excluding restructuring and other charges, the Company's gross profit margin
declined primarily due to lower sales of higher margin graphics cards, costs
incurred to process higher than expected product returns resulting from the
consolidation of the Radius and SuperMac product lines and slower than expected
sell through of its Radius Telecast digital video product, significant price
erosion on NuBus based MacOS compatible systems combined with high production
costs for these systems, the sale of end of life products, and increased pricing
pressures. The Company anticipates continued competitive pricing actions
resulting in declining prices in its industry.
In addition, the Color Server Group and MacOS businesses had gross profit of
approximately $9.8 million and ($19.2 million), respectively for fiscal 1995.
Had these businesses not been included in the calculation of the Company's gross
profit for 1995, gross profit for such fiscal year would have been approximately
$14.6 million, with a gross profit margin of approximately 5.7%.
Research and Development Expenses. Research and development expenses decreased
to $19.3 million (6.3% of net sales) in fiscal 1995 from $34.0 million (10.5% of
net sales) in fiscal 1994. The Company's research and development expenses in
fiscal 1994 included restructuring and other charges of $4.3 million. No
restructuring and other charges were included in research and development
expenses in fiscal 1995.
The decrease in research and development expenses during the fiscal year was
primarily due to the reduction of expenses as a result of the Company's
restructuring following the Merger. The merger-related restructuring resulted in
reduced costs primarily related to headcount, depreciation, and facilities.
While there can be no assurance that the Company's product development efforts
will result in commercially successful products, the Company believes that
development of new products and enhancement of existing products are essential
to its continued success, and management intends to continue to devote
substantial resources to research and new product development.
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<PAGE> 75
Selling, General and Administrative Expenses. Selling, general and
administrative expenses including restructuring and other charges decreased to
$90.1 million (29.2% of net sales) in fiscal 1995 from $94.7 million (29.2% of
net sales) in fiscal 1994. Selling, general and administrative expenses
excluding restructuring and other charges decreased to $79.2 million (25.7% of
net sales) in fiscal 1995 from $84.0 million (25.9% of net sales) in fiscal
1994.
The decrease in selling, general and administrative expenses during the fiscal
year was primarily due to the reduction of expenses as a result of the Company's
restructuring following the Merger. The merger-related restructuring resulted in
reduced costs primarily related to headcount, depreciation and facilities.
Provision for Income Taxes. The Company's annual combined federal and state
effective income tax rates were approximately (7.4%) (expense) in fiscal 1995
and 6% (benefit) in fiscal 1994. In fiscal 1995, the rate differs from the
combined statutory rate in effect during the period primarily as a result of the
impact of not benefiting the 1995 operating losses and the reversal of existing
deferred tax assets. The fiscal 1994 rate differs from the combined statutory
rate in effect during the period primarily as a result of non-deductible merger
related costs, the one time write-off of purchased research and development
which is not tax deductible and the impact of not benefiting a significant
portion of the 1994 operating loss.
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.
Net Loss. As a result of the above factors, net loss increased to $131.7 million
in fiscal 1995 from $77.5 million in fiscal 1994. The Color Server Group had net
income of approximately $3.5 million for fiscal 1995. Had this business not been
included in the calculation of the Company's net loss for fiscal 1995, the
Company would have had a net loss of approximately $135.2 million for such
fiscal year.
FISCAL 1994 COMPARED TO FISCAL 1993
Net Sales. The Company's net sales decreased 3.7% to $324.8 million in fiscal
1994 from $337.4 million in fiscal 1993. The Company believes that this decline
in net sales was in part attributable to the customers postponing purchasing
decisions during the fourth quarter while waiting to see which of the Company's
product lines would be supported and which would be discontinued following the
Merger. Sales were flat for the nine months ended June 30, 1994 prior to the
Merger. Net sales of video products and displays increased but this increase was
offset by pricing pressure on graphics cards. Demand was lower than anticipated
for graphics cards due to the introduction of the Power Macintosh by Apple and
the resulting customer uncertainty surrounding the need for graphics
acceleration given the built-in video capabilities of this new product.
Gross Profit. The Company's gross profit margin including the restructuring and
other charges declined to 14.7% in fiscal 1994, compared to 24.6%, in fiscal
1993. The Company's gross profit margin excluding the restructuring charges
declined to 27.3% in fiscal 1994, compared to 31.8% in fiscal 1993. See Note 8
of Notes to Consolidated Financial Statements regarding the restructuring and
other charges for SuperMac in December 1993 and Merger related restructuring and
other charges in September 1994. Excluding the restructuring charges, the
decline in gross margins was due to increased pricing pressures and a change in
the product mix favoring lower margin displays over higher margin graphics
accelerator cards.
Research and Development Expenses. Research and development expenses increased
slightly to $34.0 million (10.5% of net sales) in fiscal 1994 from $33.5 million
(9.9% of net sales) in fiscal 1993. The relatively flat absolute dollar
expenditures in research and development activities were due to recording
significant restructuring and other charges related to development project
cancellations, equipment disposal, and severance in fiscal 1994 offset by the
decrease in expenditures in fiscal 1994 as a result of the cancellation of
Radius' efforts to develop a variety of technologies originally intended for a
minicomputer-class server product. Additionally, the research and development
expenses appeared flat due to the SuperMac 1993 restructuring of $2.0 million
for development project cancellations included in both the fiscal 1993 and
fiscal 1994 results of operations.
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<PAGE> 76
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $94.7 million (29.2% of net sales) in
fiscal 1994 from $84.1 million (24.9% of net sales) in fiscal 1993. The increase
in absolute dollars was primarily due to increased personnel expense, market
development expenses, restructuring and other charges in fiscal 1994 and the
Company's investment in its information system. The 1993 restructuring and other
charges included the elimination of excess facilities, capital equipment
write-offs, severance payments and the termination of certain contractual
agreements. Restructuring and other charges for fiscal 1994 included the
elimination of duplicative facilities, property and equipment and other assets,
severance payments, as well as transaction fees and costs incidental to the
Merger.
Provision for Income Taxes. The Company's annual combined federal and state
effective income tax rates were approximately 6% in fiscal 1994 and 40% in
fiscal 1993 before the cumulative effect of the change in method of accounting
for income taxes. The fiscal 1994 rate differs from the combined statutory rate
in effect during the period primarily as a result of non-deductible merger
related costs, the one time write-off of purchased research and development
which is not tax deductible and the impact of not benefiting a significant
portion of the 1994 operating loss. The 1993 rate differs from the combined
statutory rate in effect during the period primarily as a result of the
utilization of the research and development tax credit.
Net Loss. As a result of the above factors, net loss increased to $77.5 million
in fiscal 1994 from $20.1 million in fiscal 1993.
RESTRUCTURING, MERGER AND OTHER CHARGES
During fiscal 1993, 1994 and 1995, four restructuring and other charges were
recorded. Radius recorded a $15.5 million restructuring charge during the third
quarter of fiscal 1993 in connection with the implementation of a program
designed to reduce costs and improve operating efficiencies. SuperMac recorded a
$16.6 million restructuring charge during December 1993 in connection with a
program to realign its inventory and facility and personnel resources.
Subsequently, the two companies merged and incurred a restructuring charge of
$43.4 million. In September 1995, Radius recorded $57.9 million restructuring
charge in connection with the Company's efforts to refocus and streamline its
business. A discussion of each of these events follows.
RADIUS JUNE 1993 RESTRUCTURING AND OTHER CHARGES
In June 1993, Radius announced a restructuring program designed to reduce costs
and improve operating efficiencies. The program included, among other things,
the write-down of inventory following Radius' decision to phase out its older
generation of products, lease termination expenses, capital equipment
write-offs, severance payments, and costs associated with the discontinuation of
Radius' minicomputer-class server product. The restructuring program costs of
$15.5 million were recorded during the third quarter of fiscal 1993. These
charges (in thousands) are included in: cost of sales ($10,993); research and
development ($411); and selling, general and administrative expenses ($4,096).
The Company completed this restructuring event by the end of calendar 1994.
There were no material changes in the restructuring plan or in the estimates of
the restructuring costs from the recognition of the charge in June 1993 with the
completion of the restructuring program in December 1994.
SUPERMAC DECEMBER 1993 RESTRUCTURING AND OTHER CHARGES
In December 1993, SuperMac recorded charges of $16.6 million in connection with
a program to adjust inventory levels, eliminate excess facilities, terminate
certain projects and contract arrangements and reduce the number of employees.
The charges (in thousands) are included in: cost of sales ($13,352); research
and development ($2,000); and selling, general and administrative expenses
($1,238). There have been no material changes in the restructuring plan or in
the estimates of the restructuring costs. The Company has $236,000 remaining in
its restructuring reserve related to facility costs, the balance of which is
expected to be eliminated in fiscal 1996. As noted in the Consolidated Financial
Statements, the consolidated results for the Company in both the twelve months
ended September 30, 1994 and the fiscal period ended 1993 include SuperMac's
$16.6 million charge.
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
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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 September 30, 1995
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 2,236 154
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 $15,860 $ 869
</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 September 30, 1995.
The Company expects to have substantially completed the restructuring by
September 1996. During fiscal 1995, approximately $2.1 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 refocus its business on the color publishing and
multimedia markets. The charges primarily included a writedown of inventory and
other assets. Additionally, it included expenses related to the cancellation of
open purchase orders, excess facilities and 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
September 30, 1995 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
Excess facilities 2,004 404 - 1,600
Cancellation fees and asset write-offs 19,061 5,196 - 13,865
Employee severance 3,662 - - 3,662
-------- --------- ------- --------
Total charges $ 57,865 $ 37,900 $ - $ 19,965
</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 revised
business model. As of December 15, 1995, approximately 157 positions had been
eliminated in connection with the new business model. The Company had not spent
any cash for this restructuring as of September 30, 1995. As of September 30,
1995, the Company had cash and cash equivalents of $4.8 million. See
"Management's Business Recovery Plans" at Note 1
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<PAGE> 78
due to the Consolidated Financial Statements. The Company expects to have
substantially completed the restructuring by September 1996.
BUSINESS DIVESTITURES
COLOR SERVER GROUP
On December 23, 1995, the Company signed a definitive agreement pursuant to
which the Company will sell 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 will receive approximately
$21.9 million in cash (subject to certain post-closing adjustments) 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 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 transaction is expected to close in January 1996. Under the Inventory and
Working Capital Agreement, as recently amended, with IBM Credit Corp., the
Company is required to pay all of the net proceeds of the Color Server Group
transaction to IBM Credit Corp. in order to reduce the Company's outstanding
indebtedness under that agreement.
PORTRAIT DISPLAY LABS
On December 19, 1995, the Company signed 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. See Note 1 to the Consolidated Financial
Statements.
DISPLAY TECHNOLOGIES ELECTROHOME INC.
On December 21, 1995, the Company signed a Business Purchase Agreement and an
Asset Purchase and License Agreement with Display Technologies Electrohome Inc.
("DTE"). Pursuant to the agreements and subject to certain closing conditions,
DTE will purchase Radius' monochrome display monitor business and certain assets
related thereto, for approximately $200,000 in cash and cancellation of $2.5
million of the Company's indebtedness to DTE. In addition, DTE and Radius will
cancel outstanding contracts relating to DTE's manufacture and sale of
monochrome display monitors to Radius.
RESULTS OF OPERATIONS--QUARTERLY PERIODS
The following table sets forth certain unaudited quarterly financial information
for the Company's last eight fiscal quarters (in thousands, except per share
data). The information includes all adjustments (consisting only of normal
recurring adjustments) that management considers necessary for a fair
presentation thereof. The operating results for any quarter are not necessarily
indicative of results for any future period. The Company's fiscal year ends on
the Sunday closest to September 30.
<TABLE>
<CAPTION>
FISCAL 1995 FISCAL 1994 (1)
-------------------------------------- ---------------------------------------
9/30/95 6/30/95 3/31/95 12/30/95 9/30/94 6/30/94 3/31/94 12/31/93
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $57,126 $87,325 $84,447 79,235 $66,940 $ 86,673 $83,180 $88,013
Cost of sales 118,055 65,211 62,913 56,758 86,682 _59,931_ 57,279 73,057
------- ------ ------ ------ ------ ------ ------ -------
Gross profit (loss) (60,929) 22,114 21,534 22,477 (19,742) 26,742 25,901 14,956
-------- ------ ------ ------ ------- -------- ------- -------
Operating expenses:
Research and development 5,530 4,990 4,672 4,118 13,119 5,645 6,445 8,648
Selling, general and
administrative 41,343 18,442 14,401 15,882 _ 35,190 _ 19,232 _19,003 _21,405
------- ------ ------ ------ ------ ------ ------ ------
Total operating expenses 46,873 23,432 19,073 20,000 48,309 _24,877 25,448 30,053
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) from operations (107,802) (1,318) 2,461 2,477 (68,051) 1,865 453 (15,097)
Interest (expense) income, net (1,463) (1,531) (2,154) (920) (739) (223) (121) (159)
Litigation settlement - - - (12,422) - - - -
----- ----- --- ------- ------ ------ ------ -------
</TABLE>
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<PAGE> 79
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income (loss) before income taxes (109,265) (2,849) 307 (10,865) (68,790) 1,642 332 (15,256)
Provision (benefit) for income
taxes 8,620 263 31 156 209 _580 688 _(6,077)
------- ----- --- ------ ----- ----- --- -----
Net income (loss) $(117,885) $(3,112) $ 276 $(11,021) $(68,999) $1,062 $ (356) $(9,179)
======== ====== ===== ========= ========= ====== ======= ========
Net income (loss) per share $ (6.92) $ (0.21) $0.02 $ (0.78) $ (4.99) $ 0.08 $(0.03) $ (0.69)
======== ====== ===== ========= ========= ====== ======= ========
Common and common equivalent
shares used in computing
net income (loss) per share 17,039 14,791 14,556 14,215 13,828 14,042 13,496 13,370
======== ====== ===== ========= ========= ====== ======= ========
</TABLE>
(1) These periods have been restated to reflect the Merger of Radius and
SuperMac which has been accounted for as a pooling of interests. See Note 10 of
Notes to the Consolidated Financial Statements. The consolidated financial
statements for all periods prior to fiscal 1994 have not been restated to adjust
SuperMac's fiscal year end to that of Radius. Such periods include Radius'
results of operations and balance sheet data on a September 30 fiscal year basis
and SuperMac's on a December 31 calendar year basis. Therefore, results for the
quarter ended September 30, 1993 shown above include a $16.6 million charge
recorded by SuperMac in December 1993. Additionally, the results for the quarter
ended December 31, 1993 reflect this same $16.6 million charge recorded by
SuperMac in December 1993.
The Company's operating results are subject to quarterly fluctuations as a
result of a number of factors, including: the sales rate and mix of Apple
computers; the introduction of new products by Apple, the Company or its
competitors; the timing of sales and marketing expenses by the Company; the
timing of business cycles in the United States and worldwide; the availability
and cost of key components; the Company's ability to develop innovative
products; the Company's product and customer mix; and the level of competition.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents decreased approximately $11.2 million
during fiscal 1995 to approximately $4.8 million at September 30, 1995, as
compared with the fiscal 1994 ending balance of cash and cash equivalents of
$16.0 million. Approximately $1.6 million of the $4.8 million of cash and cash
equivalents available at September 30, 1995 was restricted under various letters
of credit. Capital expenditures were $1.9 million in fiscal 1995 and $3.5
million in fiscal 1994.
The decrease in the Company's cash and cash equivalents during fiscal 1995 was
primarily attributable to expenditures made in connection with the development
and introduction of the Company's MacOS compatible systems.
The Company completed a private placement during the third quarter of the 1995
fiscal year, the proceeds of which allowed the Company to build inventory of
MacOS-compatible systems components and reduce other vendor payables. In the
private placement, the Company sold 2,509,319 shares of its Common Stock
resulting in net proceeds of approximately $21.4 million.
At September 30, 1995, the Company's principal sources of liquidity included
approximately $30.0 million in inventory and working capital financing under an
agreement with IBM Credit Corporation (the "ICC Agreement") together with an
additional $20.0 million provided by IBM Credit Corp. under the ICC Agreement to
finance the manufacturing of the Company's MacOS compatible products, all of
which was fully utilized.
In addition, the Company has a $5.0 million credit arrangement with Silicon
Valley Bank ("SVB") which was partially utilized as of that date. Additionally,
the Company's Japanese subsidiary has a revolving line of credit with a bank in
Japan under which $3.1 million has been utilized as of September 30, 1995.
As of September 30, 1995, the Company was not in compliance with all of its
contractual obligations and financial covenants under the ICC Agreement;
however, IBM Credit Corp. has waived such defaults pursuant to an amendment to
the ICC Agreement executed in December 1995 (the "ICC Amendment"). The ICC
Amendment, among other things, also provides that until March 31, 1996 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
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<PAGE> 80
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
(30) days notice in the event of any default of the ICC Agreement.
As of September 30, 1995, the Company was not in compliance with all of its
contractual obligations and financial covenants under its credit arrangement
with SVB. As of December 15, 1995 approximately $1,200,000 was outstanding under
this credit arrangement, all of which the Company anticipates paying SVB during
the first calendar quarter of 1996.
Recently, 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 payables as payments
to vendors are not being made in accordance with vendor terms. 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
profitability, or generate additional cash from other sources. There can be no
assurance that the Company will be able to do so.
Additional funds will be needed to finance the Company's development plans and
for other purposes, and the Company is now investigating possible financing
opportunities. There can be no assurance that additional financing will be
available when needed or, if available, that the terms of such financing will
not adversely affect the Company's results of operations.
CERTAIN FACTORS THAT MAY AFFECT THE COMPANY'S FUTURE RESULTS OF OPERATIONS
A number of uncertainties exist that could affect the Company's future operating
results, including, without limitation, the following:
CONTINUING OPERATING LOSSES
The Company experienced net operating losses in the fiscal years ended September
30, 1993, 1994 and 1995. The Company's ability to achieve and sustain profitable
operations will depend upon a number of 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 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. In addition,
the Company anticipates significantly lower revenue and gross profit from its
digital video products primarily due to lower than anticipated sell through
rates for Radius Telecast. For these and other reasons, there can be no
assurance that the Company will be able to achieve profitability in the near
term.
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 noncollectable 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.
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<PAGE> 81
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
net 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. 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, but there can be no assurance that the Company will
continue to develop successful new products on a timely basis in the future. 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 success and timing of
new product developments by the Company and its competitors, product
performance, price and quality, breadth of distribution and customer support.
There can be no assurance that the Company will be able to compete successfully
with respect to these factors. In addition, the introduction of lower priced
competitive products could result in price reductions that would adversely
affect the Company's results of operations.
DEPENDENCE ON 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, recently, due to the Company's shortages in available cash.
Due to recent shortages in cash resources and because the Company seeks to
manage its use of working
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<PAGE> 82
capital by, among other things, limiting the backlog of inventory it purchases,
the Company is particularly vulnerable to delays in shipments from suppliers.
Such delays can cause fluctuations in the Company's short term results and
contribute to order cancellations.
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. The Company expects that these suppliers will continue
to meet its requirements for the components, but there can be no assurance that
they will do so. 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, and the 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, 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. 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
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<PAGE> 83
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
The Company's international sales are primarily made through distributors and
the Company's subsidiary in 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, 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 appointment of a new Chief Financial
Officer. If the Company continues to experience financial difficulties, it may
become increasingly difficult for it to hire new employees and retain current
employees. 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 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. Stock markets 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. In addition, any change in other operating
results
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<PAGE> 84
could have an immediate and significant effect on the prices of the
Company's Common Stock. 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.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
(a) (1) Financial Statements. The Company's financial statements filed
herewith are as follows:
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Report of Ernst & Young LLP, Independent Auditors F-1
Consolidated Balance Sheets at September 30, 1995 and 1994 F-2
Consolidated Statements of Operations for the Years Ended September 30,
1995, 1994 and 1993 F-3
Consolidated Statements of Shareholders' Equity for the Years Ended
September 30, 1995, 1994, and 1993 F-4
Consolidated Statements of Cash Flows for the Years Ended September 30,
1995, 1994, and 1993 F-5
Notes to Consolidated Financial Statements F-6
(a) (2) Financial Statement Schedules. The Company's financial statement
schedule filed herewith is as follows: Page
----
Schedule II: Valuation and Qualifying Accounts F-22
All other financial statement schedules are omitted because the
information called for is not present in amounts sufficient to
require submission of the schedules or because the information
required is shown either in the financial statements or the notes
thereto.
</TABLE>
-15-
<PAGE> 86
<TABLE>
<CAPTION>
(a) (3) Exhibits.
Exhibit
Number Title
<S> <C> <C>
2.01 Agreement and Plan of Reorganization dated May 20, 1994 between
Radius Inc. and SuperMac Technology, Inc. (9)
2.02 Modification Agreement dated July 21, 1994 to Agreement and Plan
of Reorganization between Radius Inc. and SuperMac Technology, Inc. (9)
2.03 Agreement of Merger dated August 31, 1994 between Radius
Acquisition Corp. and SuperMac Technology, Inc.
2.04 Certificate of Ownership and Merger of SuperMac Technologies, Inc.
into Radius Inc. dated September 7, 1994 and Certificate of Ownership of
SuperMac Technologies, Inc. by Radius Inc. dated September 8, 1994
2.05 Agreement and Plan of Reorganization dated July 19, 1994 between
Radius Inc. and VideoFusion, Inc. (12)
2.06 First Amendment to Agreement and Plan of Reorganization between Radius Inc.
and Video Fusion, Inc. dated August 25, 1994
2.07 Second Amendment to Agreement and Plan of Reorganization between Radius Inc.
and VideoFusion, Inc. dated September 6, 1994.
2.08 Third Amendment to Agreement and Plan of Reorganization between Radius Inc.
and VideoFusion, Inc. dated May 10, 1995
3.01 A Registrant's Sixth Amended and Restated Articles of Incorporation. (2)
B Certificate of Amendment of Registrant's Sixth Amended and Restated
Articles of Incorporation.
3.02 Registrant's Bylaws. (4)
4.01 Form of Specimen Certificate for Registrant's Common Stock. (1)
4.04 * Non-Plan Stock Option Grant to Charles W. Berger. (8)
10.01 * A Registrant's 401(k) Savings and Investment Plan. (6)
* B Amendment to the Registrant's 401(k) Savings and Investment Plan.
* C Registrant's 401(k) Savings and Investment Plan Loan Policy
10.02 * Registrant's 1995 Stock Option Plan.
10.03 * Form of Stock Option Agreement and Exercise Request as currently
in effect under 1995 Stock Option Plan.
10.04 * Registrant's 1990 Employee Stock Purchase Plan and related documents. (3)
10.05 * Registrant's 1994 Directors' Stock Option Plan.
</TABLE>
-16-
<PAGE> 87
<TABLE>
<CAPTION>
Exhibit
Number Title
<S> <C> <C>
10.07 Form of Indemnity Agreement with Directors. (1)
10.08 A Credit Agreement by and among Radius Inc., the certain financial
institutions, and Silicon Valley Bank, dated March 20, 1995. (14)
B Credit Agreement by and among Radius Inc., the certain financial
institutions, and International Business Machines Credit Corporation,
dated February 17, 1995. (14)
C Acknowledgment, Waiver and Amendment to Radius Inc. Inventory and
Working Capital Financing Agreement by and between Radius Inc. and
International Business Machines Credit Corporation dated December 14, 1995.
10.09 A Lease Agreement by and between Registrant and the
Equitable Life Assurance Society of the United States
dated June 22, 1988, as amended by the Commencement of
Term Agreement dated February 13, 1989 and Amendment No.
One dated July 20, 1989, and related documents (1710
Fortune Drive, San Jose, California offices). (1)
B Second Amendment to Lease dated January 27, 1993
amending Lease Agreement by and between Registrant and
Fortune Drive Partners (successor in interest to the
Equitable Life Assurance Society of the United States)
dated June 22, 1988 (1710 Fortune Drive, San Jose,
California offices). (7)
10.10 Lease Agreement by and between Registrant and Board of
Administration, as Trustee for the Police and Fire
Department Fund, and Board of Administration, as Trustee
for the Federated City Employees Retirement Fund dated
December 11, 1990, and related documents (Milpitas,
California warehouse space). (2)
10.11 Lease Agreement by and between Registrant and South Bay/Copley Associates III
Joint Venture dated May 11, 1992; Sublease by and
between Core Industries, Inc. and Registrant dated May 12, 1992;
and related documents (2040 Fortune Drive, San Jose, California offices). (5)
10.12 A Lease Agreement between SuperMac Technologies, Inc. and Connecticut
General Life Insurance Company dated as of November 13, 1993 (215 Moffett
Park Drive, Sunnyvale, California offices). (10)
B First Amendment to Lease Agreement between SuperMac
Technologies, Inc. and Connecticut General Life Insurance
Company dated as of May 4, 1993 (215 Moffett Park Drive,
Sunnyvale, California offices).
10.13 Lease Agreement between SuperMac Technologies, Inc. and RREEF
USA Fund-II, Inc. dated as of June 16, 1993 (Borregas Avenue,
Sunnyvale, California warehouse space).
10.14 * Employment Agreement by and between Registrant and Charles W. Berger
dated February 26, 1993 as amended on September 17, 1993. (11)
10.17 Full Recourse Promissory Note with Charles W. Berger. (11)
</TABLE>
-17-
<PAGE> 88
<TABLE>
<CAPTION>
Exhibit
Number Title
<S> <C> <C>
10.18 Full Recourse Promissory Notes with J. Daniel Shaver.
10.19 Full Recourse Promissory Note from Michael A. McConnell.
10.20 * SuperMac Technology, Inc.'s 1988 Stock Option Plan ("Option Plan"). (13)
10.21 * SuperMac Technology, Inc.'s Form of Incentive Stock Option Agreement
under the Option Plan. (13)
10.22 * SuperMac Technology, Inc.'s Form of Supplemental Stock Option Agreement
under the Option Plan. (13)
10.23 * SuperMac Technology, Inc.'s Form of Early Exercise Stock Purchase Agreement
under the Option Plan. (13)
10.24 Distribution Agreement between Radius Inc. and Ingram Micro, Inc. dated June 5,
1991 as amended on April 1, 1992, May 31, 1995 and July 14, 1995. (Confidential
treatment has been requested with respect to certain portions of this exhibit). (15)
11.01 Computation of per share earnings
21.01 List of Registrant's subsidiaries
23.01 Consent of Ernst & Young, LLP, Independent Auditors
27 Financial Data Schedule
</TABLE>
* Management contracts or compensatory plans required to be filed as an
exhibit to Form 10-K.
(1) Incorporated by reference to exhibits to the Company's Registration
Statement on Form S-1 (File No. 33-35769), which became effective on August
16, 1990.
(2) Incorporated by reference to exhibits to the Company's Report on Form 10-K
filed on December 24, 1990.
(3) Incorporated by reference to exhibits to the Company's Report on Form 10-K
filed on December 30, 1991.
(4) Incorporated by reference to exhibits to the Company's Registration
Statement on Form S-8 filed on April 29, 1992 (File No. 33-47525).
(5) Incorporated by reference to exhibits to the Company's Report on Form 10-Q
filed on August 12, 1992.
(6) Incorporated by reference to exhibits to the Company's Report on Form 10-K
filed on December 28, 1992.
(7) Incorporated by reference to exhibits to the Company's Report on Form 10-Q
filed on August 18, 1993.
(8) Incorporated by reference to exhibits to the Company's Registration
Statement on Form S-8 filed on November 15, 1993 (File No. 33-71636).
(9) Incorporated by reference to exhibits to the Company's Amendment No. 2
(File No. 33-79732) to Form S- 4 filed on July 25, 1994.
(10) Incorporated by reference to exhibits to SuperMac's Form S-1 (File No.
33-58158) filed on February 11, 1993.
(11) Incorporated by reference to exhibits to the Company's Report on Form 10-K
filed on January 3, 1994.
-18-
<PAGE> 89
(12) Incorporated by reference to exhibits to the Company's Report on Form 10-Q
filed on August 17, 1994.
(13) Incorporated by reference to exhibits to SuperMac Technology, Inc.'s
Registration Statement on Form S-1, as amended (File No. 33-46800), which
became effective on May 15, 1992.
(14) Incorporated by reference to exhibits to the Company's Report on Form 10-Q
filed on May 10, 1995.
(15) Incorporated by reference to exhibits to the Company's Report on Form 10-Q
filed on August 15, 1995.
(b) Reports on Form 8-K. No report on Form 8-K was filed during the last
quarter of the period covered by this report.
(c) Exhibits - See (a) (3) above.
(d) Financial Statement Schedules - See (a) (2) above.
-19-
<PAGE> 90
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Registrant has duly caused this amendment to be signed on its
behalf by the undersigned, thereunto duly authorized.
RADIUS INC.
By: /s/ Charles W. Berger
--------------------------------------
Charles W. Berger
President, Chief Executive Officer and Director
-20-
<PAGE> 91
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Radius Inc.
We have audited the accompanying consolidated balance sheets of Radius Inc. as
of September 30, 1995 and 1994, and the related consolidated statements of
operations, shareholders' equity (net capital deficiency) and cash flows for
each of the three years in the period ended September 30, 1995. Our audits also
included the financial statement schedule listed in the Index at page F-21.
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respect, the consolidated financial position of Radius
Inc. at September 30, 1995 and 1994, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
September 30, 1995, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, present fairly
in all material respects the information set forth therein.
The accompanying consolidated financial statements have been prepared assuming
that Radius Inc. will continue as a going concern. As more fully described in
Note 1, the Company has incurred recurring operating losses, and has a
deficiency in assets and working capital. In addition the Company has not
complied with certain covenants of loan agreements with its lenders. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. (Management's plans in regard to these matters are also described
in Note 1.) The financial statements do not include any adjustment to reflect
the possible future effects on the recoverability and classification of assets
or the amounts and classification of liabilities that may result from the
outcome of this uncertainty.
As discussed in Note 1 to the Consolidated Financial Statements, in 1993 the
Company changed its method of accounting for income taxes.
Palo Alto, California Ernst & Young LLP
December 8, 1995
except for Note 11, as to which the
date is December 27, 1995
F-1
<PAGE> 92
CONSOLIDATED BALANCE SHEETS
September 30 (in thousands)
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 4,760 $ 15,997
Accounts receivable, net of allowance for doubtful accounts
of $8,502 in 1995 and $2,548 in 1994 61,644 62,145
Inventories 15,071 21,069
Prepaid expenses and other current assets 2,336 1,473
Income tax receivable 519 9,083
Deferred income taxes -- 8,400
--------- ---------
Total current assets 84,330 118,167
Property and equipment, net 3,031 7,728
Deposits and other assets 517 964
--------- ---------
$ 87,878 $ 126,859
========= =========
Liabilities and Shareholders' Equity (Net capital deficiency)
Current liabilities:
Accounts payable $ 73,098 $ 39,255
Accrued payroll and related expenses 5,815 4,024
Accrued warranty costs 3,170 2,255
Other accrued liabilities 11,920 6,650
Accrued income taxes 1,665 1,237
Accrued restructuring and other charges 17,013 15,148
Short-term borrowings 29,489 18,095
Obligations under capital leases - current portion 1,494 1,647
--------- ---------
Total current liabilities 143,664 88,311
Obligations under capital leases-noncurrent portion 1,331 2,857
Commitments and contingencies
Shareholders' equity: (Net capital deficiency)
Convertible preferred stock, no par value, 1,000 shares
authorized; none issued and outstanding
Common stock, no par value; 50,000 shares authorized;
issued and outstanding -- 17,143 shares in 1995 and
14,046 shares in 1994 113,791 87,017
Common stock to be issued 12,022 --
Accumulated deficit (182,993) (51,251)
Accumulated translation adjustment 63 (75)
--------- ---------
Total shareholders' equity (Net capital deficiency) (57,117) 35,691
--------- ---------
$ 87,878 $ 126,859
========= =========
</TABLE>
See accompanying notes.
F-2
<PAGE> 93
CONSOLIDATED STATEMENTS OF OPERATIONS
For years ended September 30
(in thousands, except per share data)
<TABLE>
<CAPTION>
1995 1994 (1) 1993 (1)
---- -------- --------
<S> <C> <C> <C>
Net sales $ 308,133 $ 324,805 $ 337,373
Cost of sales 302,937 276,948 254,321
--------- --------- ---------
Gross profit 5,196 47,857 83,052
--------- --------- ---------
Operating expenses:
Research and development 19,310 33,956 33,503
Selling, general and administrative 90,068 94,731 84,132
--------- --------- ---------
Total operating expenses 109,378 128,687 117,635
--------- --------- ---------
Loss from operations (104,182) (80,830) (34,583)
Interest and other income (loss) (3,045) (376) 705
Interest expense (3,023) (869) (635)
Litigation settlement (12,422) -- --
--------- --------- ---------
Loss before income taxes (122,672) (82,075) (34,513)
Provision (benefit) for income taxes 9,070 (4,600) (13,774)
--------- --------- ---------
Loss before cumulative
effect of a change in accounting principle (131,742) (77,475) (20,739)
Cumulative effect of a change in method
of accounting for income taxes -- -- 600
--------- --------- ---------
Net loss $(131,742) $ (77,475) $ (20,139)
========= ========= =========
Net loss per share:
Loss before cumulative effect
of a change in accounting principle $ (8.75) $ (5.70) $ (1.61)
Cumulative effect of a change in method
of accounting for income taxes -- -- 0.05
--------- --------- ---------
Net loss per share $ (8.75) $ (5.70) $ (1.56)
========= ========= =========
Common and common equivalent shares used in
computing net loss per share 15,049 13,598 12,905
========= ========= =========
</TABLE>
See accompanying notes.
(1) This period has been restated to reflect the 1994 Merger of Radius and
SuperMac which was accounted for as a pooling of interests. See Note 10 of Notes
to the Consolidated Financial Statements. The consolidated financial statements
for fiscal 1993 have not been restated to adjust SuperMac's fiscal year end to
that of Radius. This period includes Radius' results of operations and balance
sheet data on a September 30 fiscal year basis and SuperMac's on a December 31
calendar year basis. The operating results for both the twelve months ended
September 30, 1994 and September 30, 1993 include the restructuring and other
charges of $16.6 million recorded by SuperMac in December 1993.
F-3
<PAGE> 94
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended September 30, 1995, 1994 and 1993
(in thousands, except share data)
<TABLE>
<CAPTION>
Total
Retained Shareholders
Earnings Accumulated Equity
Common (Accumulated Deferred Translation (Net Capital
Stock Deficit) Compensation Adjustment Deficiency)
----- -------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1992 (1) $ 60,203 $ 36,449 $ (58) $ 37 $ 96,631
Issuance of 738 shares of common stock
under the SuperMac public offering 15,401 15,401
Issuance of 517 shares of common stock
under Stock Option Plans 1,324 -- -- -- 1,324
Issuance of 159 shares of common stock
under the Employee Stock Purchase Plans 1,663 -- -- -- 1,663
Tax benefit from stock options exercised 3,358 -- -- -- 3,358
Amortization of deferred compensation -- -- 36 -- 36
Currency translation adjustment -- -- -- (119) (119)
Net loss -- (20,139) -- -- (20,139)
--------- --------- --------- --------- ---------
Balance at September 30, 1993 (1) 81,949 16,310 (22) (82) 98,155
Issuance of 350 shares of common stock
under Stock Option Plans 1,800 -- -- -- 1,800
Issuance of 170 shares of common stock
under Employee Stock Purchase Plans 989 -- -- -- 989
Issuance of 206 shares of common stock
pursuant to the acquisition of VideoFusion 1,854 -- -- -- 1,854
Tax benefit from stock options exercised 425 -- -- -- 425
Amortization of deferred compensation -- -- 22 -- 22
Currency translation adjustment -- -- -- 7 7
Net loss -- (77,475) -- -- (77,475)
Elimination of SuperMac net loss
for the three months ended December 31, 1993 9,914 -- -- 9,914
--------- --------- --------- --------- ---------
Balance at September 30, 1994 87,017 (51,251) -- (75) 35,691
Issuance of 214 shares of common stock
under Stock Option Plans 1,254 1,254
Issuance of 162 shares of common stock
under Employee Stock Purchase Plan 1,298 1,298
Issuance of 212 shares pursuant to the
acquisition of VideoFusion 2,857 2,857
Settlement of Litigation-stock to be issued 12,022 12,022
Issuance of 2,509 shares of common stock
through private placement 21,365 21,365
Currency translation adjustment 138 138
Net Loss (131,742) (131,742)
--------- --------- --------- --------- ---------
Balance at September 30, 1995 $ 125,813 $(182,993) -- $ 63 $ (57,117)
========= ========= ========= ========= =========
</TABLE>
See accompanying notes.
(1) These periods have been restated to reflect the 1994 Merger of Radius and
SuperMac which was accounted for as a pooling of interests. See Note 10 of Notes
to the Consolidated Financial Statements. The consolidated financial statements
for all periods prior to fiscal 1994 have not been restated to adjust SuperMac's
fiscal year end to that of Radius. Such periods include Radius' results of
operations and balance sheet data on a September 30 fiscal year basis and
SuperMac's on a December 31 calendar year basis.
F-4
<PAGE> 95
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
For years ended September 30
(in thousands) 1995 1994 1993(1)
---- ---- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(131,742) $ (77,475) $ (20,139)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 4,689 4,542 8,160
Acquired in-process research and development expenses -- 2,550 --
Elimination of SuperMac net loss for the three months
ended December 31, 1993 -- 9,914 --
Non-cash restructuring and other charges 57,865 40,775 28,981
Common stock to be issued 12,022 -- --
(Increase) decrease in assets:
Accounts receivable (5,471) (20,171) (7,543)
Allowance for doubtful accounts 5,954 426 297
Inventories (27,140) (1,058) (5,633)
Prepaid expenses and other current assets (862) 1,739 15
Income tax receivable 8,564 468 (9,551)
Deferred income taxes 8,400 11,248 (11,322)
Increase (decrease) in liabilities:
Accounts payable 33,843 3,470 2,570
Accrued payroll and related expenses (1,871) (1,441) 1,014
Accrued warranty costs 915 (1,584) 438
Other accrued liabilities 5,270 (4,039) 2,171
Accrued restructuring and other charges (13,601) (6,117) --
Accrued income taxes 428 (1,534) 4,585
--------- --------- ---------
Total adjustments 89,005 39,188 14,182
--------- --------- ---------
Net cash used in operating activities (42,737) (38,287) (5,957)
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures (1,894) (3,460) (7,739)
Deposits and other assets (238) 71 --
Purchase of short-term investments -- (2,002) (31,914)
Proceeds from sale of short-term investments -- 18,395 35,938
--------- --------- ---------
Net cash provided by (used in) investing activities (2,132) 13,004 (3,715)
--------- --------- ---------
Cash flows from financing activities:
Issuance of short-term borrowings, net 11,394 15,275 1,158
Issuance of common stock 23,917 3,214 18,388
Principal payments of long-term debt -- (43) (1,388)
Principal payments under capital leases (1,679) (1,179) (1,140)
--------- --------- ---------
Net cash provided by
financing activities 33,632 17,267 17,018
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents (11,237) (8,016) 7,346
Cash and cash equivalents, beginning of period 15,997 24,013 16,667
--------- --------- ---------
Cash and cash equivalents, end of period $ 4,760 $ 15,997 $ 24,013
========= ========= =========
</TABLE>
See accompanying notes
(1) This period has been restated to reflect the 1994 Merger of Radius and
SuperMac which was accounted for as a pooling of interests. See Note 10 of Notes
to the Consolidated Financial Statements. The consolidated financial statements
for fiscal 1993 have not been restated to adjust SuperMac's fiscal year end to
that of Radius. This period includes Radius' results of operations and balance
sheet data on a September 30 fiscal year basis and SuperMac's on a December 31
calendar year basis.
F-5
<PAGE> 96
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE ONE. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
The consolidated financial statements include the accounts of Radius Inc.
("Radius") and its wholly owned subsidiaries after elimination of
significant intercompany transactions and balances.
Radius and SuperMac Technologies, Inc. ("SuperMac") merged into the
combined company (the "Company") effective August 31, 1994 (the "Merger"),
which was accounted for as a pooling of interests. The consolidated
financial statements for fiscal 1993 have not been restated to adjust
SuperMac's fiscal year end to that of Radius. This period includes Radius'
results of operations and balance sheet data on a September 30 fiscal year
basis and SuperMac's on a December 31 calendar year basis.
Financial Statements Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses. Such estimates include the level of allowance for
potentially uncollectible receivables and sales returns; inventory reserves
for obsolete, slow-moving, or non-salable inventory; and estimated cost for
installation, warranty and other customer support obligations. Actual
results could differ from these estimates.
Management's Business Recovery Plans
As shown in the accompanying consolidated financial statements, the Company
has incurred recurring operating losses, and has a deficiency in assets and
working capital. In addition, as of September 30, 1995, the Company was not
in compliance with all of its contractual obligations and financial
covenants under its credit agreements. The Company also is delinquent in
its accounts payables as payments to vendors are not being made in
accordance with vendor terms.
The Company's relatively 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 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 profitability, or
generate additional cash from other sources.
These conditions raise concerns about the Company's ability to continue
operations as an ongoing concern. Management has implemented, or has
developed plans to implement, a number of actions to address these
conditions including: 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 its color server and
monochrome display businesses and exploring opportunities for the
divestiture of its MacOS compatible systems products and other product
lines; significantly reducing expenses and headcount; subleasing all or a
portion of its current facility given its reduced occupancy requirements;
and investigating various strategic partnering opportunities.
Additional funds will be needed to finance the Company's development plans
and for other purposes, and the Company is now investigating possible
financing opportunities. There can be no assurance that additional
financing will be available when needed or, if available, that the terms of
such financing will not adversely affect the Company's results of
operations.
Fiscal year
The Company's fiscal year ends on the Saturday closest to September 30 and
includes 53 weeks in fiscal 1993 and 52 weeks in all other fiscal years
presented. During fiscal 1995, the Company changed its fiscal year end
F-6
<PAGE> 97
from the Sunday closest to September 30 to the Saturday closest to
September 30 for operational efficiency purposes. For clarity of
presentation, all fiscal periods in this Form 10-K are reported as ending
on a calendar month end.
Foreign currency translation
The Company translates the assets and liabilities of its foreign
subsidiaries into dollars at the rates of exchange in effect at the end of
the period and translates revenues and expenses using rates in effect
during the period. Gains and losses from these translations are accumulated
as a separate component of shareholders' equity. Foreign currency
transaction gains or losses, which are included in the results of
operations, are not material.
Inventories
Inventories are stated at the lower of cost or market. The Company reviews
the levels of its inventory in light of current and forecasted demand to
identify and provide reserve for obsolete, slow-moving, or non-salable
inventory. Cost is determined using standard costs that approximate cost on
a first-in, first-out basis. Inventories consist of the following (in
thousands):
<TABLE>
<CAPTION>
September 30 1995 1994
---- ----
<S> <C> <C>
Raw materials $ 1,559 $ 4,515
Work in process 2,258 6,852
Finished goods 11,254 9,702
-------- ---------
$ 15,071 $ 21,069
======== ========
</TABLE>
Property and equipment
Property and equipment is stated at cost and consists of the following (in
thousands):
<TABLE>
<CAPTION>
September 30 1995 1994
---- ----
<S> <C> <C>
Computer equipment $ 17,429 $ 18,007
Machinery and equipment 12,335 14,184
Furniture and fixtures 6,023 5,562
Leasehold improvements 1,084 1,683
-------- ---------
36,871 39,436
Less accumulated depreciation
and amortization (33,840) (31,708)
--------- ---------
$ 3,031 $ 7,728
======== =========
</TABLE>
Depreciation has been provided for using the straight-line method over
estimated useful lives of three to five years. Equipment under capital
leases and leasehold improvements are being amortized on the straight-line
method over six years or the remaining lease term, whichever is shorter.
Long-lived Assets
In 1995, the Financial Accounting Standards Board released the Statement of
Financial Accounting Standards No. 121 (SFAS 121), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of." SFAS 121 requires recognition of impairment of long-lived assets in
the event the net book value of such assets exceeds the future undiscounted
cash flows attributable to such assets. SFAS 121 is effective for fiscal
years beginning after December 15, 1995. Adoption of SFAS 121 is not
expected to have a material impact on the Company's financial position or
results of operations.
Revenue recognition
F-7
<PAGE> 98
Revenue is recognized when products are shipped. Sales to certain resellers
are subject to agreements allowing certain rights of return and price
protection on unsold merchandise held by these resellers. The Company
provides for estimated returns at the time of shipment and for price
protection following price declines.
Warranty expense
The Company provides at the time of sale for the estimated cost to repair
or replace products under warranty. The warranty period commences on the
end user date of purchase and is normally one year for displays and digital
video products and for the life of the product for graphics cards.
Income taxes
Effective October 1, 1992, the Company adopted FASB Statement 109,
"Accounting for Income Taxes." Under Statement 109, the liability method is
used in accounting for income taxes. Under this method, deferred tax assets
and liabilities are determined based on differences between financial
reporting and tax bases of assets and liabilities and are measured using
the enacted tax rates and laws that will be in effect when the differences
are expected to reverse. Prior to the adoption of Statement 109, income tax
expense was determined using the liability method prescribed by Statement
96, which is superseded by Statement 109. Among other changes, Statement
109 changes the recognition and measurement criteria for deferred tax
assets included in Statement 96.
As permitted by Statement 109, the Company has elected not to restate the
financial statements of any prior years. The cumulative effect of the
change in method of accounting for income taxes decreased the net loss by
$600,000 or $0.05 per share in fiscal 1993 on a combined basis.
Loss per share
Net loss per share is computed using the weighted average number of common
shares outstanding.
Cash and cash equivalents
The Company considers all highly liquid investments with a maturity from
date of purchase of three months or less to be cash equivalents;
investments with maturities between three and twelve months are considered
to be short-term investments. Cash equivalents are carried at cost which
approximates market. There were no short-term investments as of September
30, 1995 or 1994. Approximately $1.6 million of the $4.8 million of cash
and cash equivalents available at September 30, 1995 was restricted under
various letters of credit.
Off balance-sheet risk and concentration of credit risk
The Company sells its products to direct computer resellers in the United
States and to distributors in various foreign countries. The Company
performs on-going credit evaluations of its customers and generally does
not require collateral. The Company maintains reserves for potential credit
losses.
The Company also hedges substantially all of its trade accounts receivable
denominated in foreign currency through the use of foreign currency forward
exchange contracts based on firm third party commitments. Gains and losses
associated with currency rate changes on forward contracts are recognized
in the consolidated statements of operations upon contract settlement and
were not material. At September 30, 1995, the Company had forward contracts
to sell three different foreign currencies which totaled the equivalent of
approximately $11.1 million and mature between October 1995 and November
1995. At September 30, 1995, the fair value of the Company's forward
contracts approximated cost.
Related Parties
In fiscal 1994, the Company acquired shares of preferred stock of Portrait
Display Labs ("PDL") and a warrant to purchase additional shares of PDL
preferred stock in exchange for the cancellation of certain rights held by
the Company to purchase all of the outstanding equity securities or assets
of the predecessor entity to PDL. The warrant permitted the purchase of
approximately an additional 10% interest in PDL. The Company also was
F-8
<PAGE> 99
granted one seat on PDL's Board of Directors. In addition, the Company
licensed PDL certain pivot display technology in exchange for the payment
of royalties. Product revenues were approximately $5.0 million in fiscal
1994. In fiscal 1995, the Company exercised the warrant for an additional
10% interest in PDL in exchange for cancellation of approximately $945,000
in accounts receivable. There were no product revenues for the fiscal 1995
to this related party. The receivable from PDL at September 30, 1995 was
approximately $980,000. Subsequent to September 30, 1995, the Company
signed a series of additional agreements with Portrait Display Labs, see
Note 11 to the Consolidated Financial Statements.
There were no material transactions from this or any other related party
during fiscal 1993.
NOTE TWO. BORROWINGS
Line of credit arrangement
In February 1995, the Company and IBM Credit Corp. ("ICC") entered into a
$30.0 million Inventory and Working Capital Financing Agreement (the "ICC
Agreement"). The ICC Agreement permits advances for inventory and working
capital up to the lesser of $30.0 million or 85% of eligible receivables
("Inventory and Working Capital Advances"). In September 1995, ICC advanced
an additional $20.0 million under the ICC Agreement to finance the
manufacturing of the Company's MacOS compatible products (the "MacOS
Advances"). The weighted average interest rate during 1995 was
approximately 12.6%. Advances bear interest at rates ranging from prime
rate plus 2.25% to prime rate plus 4% and are secured by all the assets of
the Company. The ICC Agreement expires in March 1996.
As of September 30, 1995, $50.8 million was outstanding under the ICC
Agreement consisting of $30.8 million in Inventory and Working Capital
Advances and approximately $20.0 million in MacOS Advances. The outstanding
Inventory and Working Capital Advances included $18.7 million in working
capital advances supported by eligible receivables, $6.1 million in working
capital advances in excess of the borrowing base, and $6.1 million in
inventory advances. The $24.7 million in working capital advances are
included in Short-term borrowings in the Consolidated Financial Statements.
The $6.1 million in inventory advances, together with the approximately
$20.0 million in MacOS Advances, are included in Accounts payable in the
Consolidated Financial Statements.
As of September 30, 1995, the Company was not in compliance with all of its
contractual obligations and financial covenants under the ICC Agreement
(specifically, revenues to working capital ratio, net profit to revenue,
and total liabilities to total net worth); however, IBM Credit has waived
such defaults pursuant to an amendment to the ICC Agreement. See Note 11 to
the Consolidated Financial Statements.
In addition, the Company entered into a Business Loan Agreement on March
20, 1995 with Silicon Valley Bank. The agreement, which expires on March
19, 1996, allows the Company to issue letters of credit as a sub-facility
under a $5.0 million foreign accounts receivable revolving line of credit
subject to an interest rate of up to the prime rate plus 1.25%. The
weighted average interest rate during 1995 was approximately 13.0%. The
related debt outstanding as of September 30, 1995 was $1.7 million and
outstanding letters of credit were $0.8 million. The Company was not in
compliance with all the terms of this credit arrangement.
One of the Company's subsidiaries has a revolving line of credit with a
bank in Japan. Borrowings were approximately $3.1 million at September 30,
1995. This note bears interest at the lesser of the Euro-yen rate or the
bank's prime lending rate (1.5 percent at September 30, 1995, the prime
rate). The weighted average interest rate during 1995 was approximately
4.9% The line of credit is renewed every six months with the next renewal
in December 1995.
NOTE THREE. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases facilities under operating leases and certain computer
equipment and office furniture under capital leases. Depreciation expense
for assets under capital leases is included in depreciation and
amortization
F-9
<PAGE> 100
expense. The cost and net book value of these capitalized lease assets
included in property and equipment are (in thousands):
<TABLE>
<CAPTION>
At September 30, Cost Net Book Value
------- ---------------
<S> <C> <C>
1995 $ 7,437 $ 2,642
1994 7,437 4,021
</TABLE>
Future minimum lease payments at September 30, 1995, under capital leases
and noncancelable operating leases are as follows (in thousands):
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
<S> <C> <C>
1996 $1,686 $ 1,837
1997 1,155 1,887
1998 280 1,843
1999 - 1,750
2000 - 1,759
------- --------
Total minimum lease payments 3,121 $ 9,076
Amount representing interest (296)
-------
Present value of minimum lease payments 2,825
Amount due within one year (1,494)
-------
Amount due after one year $ 1,331
=======
</TABLE>
Rent expense charged to operations amounted to approximately $3.5 million,
$3.0 million and $3.8 million for the years ended September 30, 1995, 1994
and 1993, respectively. The rent expense amounts for fiscal 1995, 1994 and
1993 exclude a provision for remaining lease obligations on excess
facilities. See Note 8 of Notes to the Consolidated Financial Statements.
Sublease income for fiscal 1995 and 1994 was approximately $0.6 million and
$0.1 million. There was no sublease income for fiscal 1993.
Contingencies
DISPLAY SCREEN SIZE
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
has not yet been served with the Maizes complaint. 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. Discovery proceedings
have not yet begun in either case. In the opinion of management, based on
the facts known at this time, the eventual outcome of these cases is
unlikely to have a material adverse effect on the results of operations or
financial position of the Company.
ELECTRONICS FOR IMAGING
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.
F-10
<PAGE> 101
Although the complaint does not specify which Radius products allegedly
infringe the patent, EFI is a prime competitor of Radius in the Color
Server market. Radius' Color Server products are material to its business.
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. 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, 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.
SECURITIES LITIGATION.
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, our insurance carrier
paid $3.7 million in cash and the Company will 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 will issue into a class action settlement fund 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 Common Stock is 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 Financial Statements reflecting settlement
costs not covered by insurance as well as related legal fees.
The Company has periodically received communications from third parties
asserting infringement of patent rights on certain of the Company's
products and features. Management does not believe any claims made will
have a material adverse effect on the results of operations or financial
position of the Company.
NOTE FOUR. SHAREHOLDERS' EQUITY
Common Stock
In June 1995, the Company sold approximately 2.5 million shares of its
Common Stock in a series of private placements to a small number of
investors unaffiliated with the Company. Proceeds from the offering, net of
commission and other related expenses were $21.4 million. The net proceeds
were used for working capital.
Stock options
The Company's 1986 Stock Option Plan, as amended, authorizes the issuance
of up to 2,975,000 shares of common stock upon the exercise of incentive
stock options or nonqualified stock options that may be granted to
officers, employees (including directors who are also employees),
consultants and independent contractors. Under the plan, options are
exercisable for a term of up to ten years after issuance. Options may be
granted at prices ranging from 50% to 100% of the fair market value of the
stock on the date of grant, as determined by the Board of Directors.
Vesting of shares is also determined by the Board of Directors at the date
of grant. The 1986 Stock Option Plan will expire in October 1996.
On August 31, 1994, pursuant to the Merger, Radius assumed 975,239
outstanding options originally issued under the SuperMac 1988 Stock Option
Plan. These options will be administered in accordance with the
F-11
<PAGE> 102
SuperMac 1988 Stock Option Plan until all options are exercised or expired.
Under the plan, options are exercisable for a term of up to ten years after
issuance.
The following table summarizes the consolidated activity of the 1986 and
1988 Stock Option Plans and the 1992 Non-Employee Directors' Stock Option
Plan:
<TABLE>
<CAPTION>
September 30,
-------------------------------------------
1995 1994 1993
<S> <C> <C> <C>
Outstanding at beginning of year 2,042,481 2,208,783 2,157,040
Granted 707,590 892,131 1,219,514
Exercised (213,791) (294,042) (516,597)
Canceled (838,745) (764,391) (651,174)
------------ ------------ ------------
Outstanding at September 30 1,697,535 2,042,481 2,208,783
============ ============ ============
Price range at September 30 $1.36-$28.96 $0.42-$32.18 $0.42-$30.14
============ ============ ============
Price range of options exercised $0.42-$13.13 $0.42-$13.13 $0.42-$22.35
============ ============ ============
Exercisable at September 30 1,325,222 706,474 455,241
============ ============ ============
Available for grant at September 30 415,586 281,726 331,314
============ ============ ============
</TABLE>
The stock option activity as shown in the table for fiscal 1993 has not
been restated to adjust SuperMac's fiscal year end to that of Radius.
Fiscal 1993 includes Radius' activity on a September 30 fiscal year basis
and SuperMac's activity on a December 31 calendar year basis. The fiscal
1994 period includes the Radius activity for fiscal year ended September
30, 1994 and SuperMac activity for the nine months ended September 30,
1994.
The Company has also reserved 100,000 shares of common stock for issuance
to non-employee directors pursuant to options granted under the 1994
Directors' Stock Option Plan (the "1994 Plan"). Such options may only be
nonqualified stock options, must be exercised within ten years from the
date of grant, and must be granted in accordance with a non-discretionary
formula. Under this formula, each new director receives an option to
purchase 10,000 shares when that director is first appointed to the Board
and an option to purchase 2,500 shares on each anniversary of such
director's appointment. As of September 30, 1995, 27,500 shares had been
granted under this plan at exercise prices ranging from $7.44 to $12.00 per
share. Options to purchase 1,250 shares were canceled following the
resignation of a director. None of the options granted under the 1994 Plan
are exercisable.
Prior to the approval of the 1994 Plan, the 1990 Directors' Stock Option
Plan (the "Prior Plan") was in effect. As of September 30, 1995, the Prior
Plan had 33,750 options outstanding at prices ranging from $8.00 to $17.25.
Such options are nonqualified stock options, must be exercised within five
years from the date of grant, and were granted in accordance with a
non-discretionary formula. Options unissued under the Prior Plan become
available for grant under the 1994 Plan. As of September 30, 1995, options
to purchase 37,500 shares became available upon the resignation of three
directors. In addition, 28,750 options to purchase shares, which were never
granted under the Prior Plan were transferred to the 1994 Plan.
In March 1993, the Company granted a nonqualified stock option to one
officer to purchase a total of 250,000 shares of common stock outside the
Company's 1986 Stock Option Plan at an exercise price of $7.75 per share.
This option is exercisable for a term of ten years and vests over a fifty
month period commencing on the date of grant. During fiscal 1994, 150 of
these shares were exercised by the officer, and as of September 30, 1995 an
additional 149,850 shares were exercisable.
In June 1995, the Company repriced approximately 232,000 of then
outstanding options to an exercise price of $12.00 per share, the fair
market value of the Company's stock on the date of the repricing.
Employee stock purchase plan
F-12
<PAGE> 103
The Company has an employee stock purchase plan under which substantially
all employees may purchase common stock through payroll deductions at a
price equal to 85% of its fair market value as of certain specified dates.
Stock purchases under this plan are limited to 10% of an employee's
compensation, and in no event may exceed $21,250 per year. Under this plan
a total of 650,000 shares of common stock have been reserved for issuance
to employees. At September 30, 1995, 255,859 shares remain available for
issuance under the plan.
Employee Stock Plans
The Company account for its stock option plans and the Employee Stock
Purchase Plan in accordance with provisions of the accounting Principles
Board's Opinion No. 25 (APB 25), "Accounting for Stock Issued to
Employees." In 1995, the Financial Accounting Standards Board released the
Statement of Financial Accounting Standard No. 123 (SFAS 123), "Accounting
for Stock Based Compensation." SFAS 123 provides an alternative to APB 25
and is effective for fiscal years beginning after December 15, 1995. The
Company expects to continue to account for its employee stock plans in
accordance with the provision of APB 25. Accordingly, SFAS 123 is not
expected to have any material impact on the Company's financial position or
results of operations.
F-13
<PAGE> 104
NOTE FIVE. FEDERAL AND STATE INCOME TAXES
The provision (benefit) for income taxes consists of the following:
1995 1994 1993
- --------------------------------------------------------------------------------
For years ended September 30
(in thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Federal:
Current $ -- $(12,583) $ (3,974)
Deferred 7,170 12,311 (7,505)
-------- -------- --------
7,170 (272) (11,479)
Foreign:
Current 650 376 297
-------- -------- --------
State:
Current 20 (3,641) 844
Deferred 1,230 (1,063) (3,436)
-------- -------- --------
1,250 (4,704) (2,592)
-------- -------- --------
$ 9,070 $ (4,600) $(13,774)
======== ======== ========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
1995 1994
-------------------------------------------------------------------------------------
For years ended September 30
(in thousands)
Deferred tax assets:
<S> <C> <C>
Net operating loss carryovers $ 27,077 $ 5,100
Reserves and accruals not currently tax deductible 22,342 10,055
Restructuring reserves 22,314 --
Credit carryovers 6,280 3,100
Inventory valuation differences 4,188 12,612
Depreciation 4,079 4,202
Capitalized research & development expenditures 3,202 2,193
Other -- 374
-------- --------
Total deferred tax assets 89,482 37,636
-------- --------
Valuation allowance for deferred tax assets (85,086) (26,724)
-------- --------
Deferred tax assets $ 4,396 $ 10,912
======== ========
Deferred tax liabilities:
State income tax $ 3,849 $ 2,512
Other 547 --
-------- --------
Total deferred tax liabilities 4,396 2,512
-------- --------
Net deferred tax assets $ -- $ 8,400
======== ========
</TABLE>
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
F-14
<PAGE> 105
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.
The provision for income taxes differs from the amount computed by applying
the statutory federal income tax rate to income before taxes. The sources
and tax effects of the differences are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
- -------------------------------------------------------------------------------------------
For years ended September 30
(in thousands)
<S> <C> <C> <C>
Expected tax at statutory rate $(42,935) $(28,726) $(12,080)
Change in valuation allowance 49,820 26,724 --
State income tax, net of federal tax benefit 1,250 (3,105) (1,707)
Non-deductible merger costs -- 1,054 --
Non-deductible charge for purchased
research and development -- 763 --
Research and development tax credits (497) (458) (734)
Other 1,432 (852) 747
-------- -------- --------
$ 9,070 $ (4,600) $(13,774)
======== ======== ========
</TABLE>
As of September 30, 1995, the Company had net operating loss carryforwards
for federal and state income tax purposes of approximately $71,000,000 and
$27,900,000, respectively. The state loss carryforwards will expire as
follows; $8,000,000 in 1998, $5,000,000 in 1999; and $14,900,000 in 2000,
if not utilized, and the federal loss carryforwards will expire primarily
in 2009 and 2010, if not utilized. In addition, the Company had tax credit
carryforwards of approximately $6,280,000 which will expire in 2005, if not
utilized.
Utilization of net operating loss and tax credit carryforwards may be
subject to substantial annual limitation due to the ownership change
limitations provided by the Internal Revenue Code of 1986 and similar state
provisions. The annual limitation may result in the expiration of net
operating losses before utilization.
F-15
<PAGE> 106
NOTE SIX. STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1995 1994 1993
------------------------------------------------------------------------------------
For years ended September 30,
(in thousands)
Supplemental disclosure of cash
flow information (in thousands):
Cash paid (received) during the year for:
<S> <C> <C> <C>
Interest $ 1,620 $ 812 $ 927
======= ======= ======
Income taxes $(8,370) $(8,295) $2,661
======= ======= ======
Supplemental schedule of noncash
investing and financing activities
(in thousands):
Retirement of fully and partially
depreciated assets $ 4,459 $ 6,025 $1,544
======= ======= ======
Tax benefit from stock options
exercised $ -- $ 425 $3,358
======= ======= ======
Equipment acquired pursuant to
capital leases $ -- $ 2,000 $4,138
======= ======= ======
Common stock issued pursuant to
VideoFusion agreement $ 2,857 $ -- $ --
======= ======= ======
</TABLE>
NOTE SEVEN. EXPORT SALES AND MAJOR CUSTOMERS
The Company currently operates in one principal industry segment: the
design, manufacturing and marketing of color publishing and digital video
computer products. The Company's export sales were approximately
$124,469,000, $112,050,000 and $108,115,000 in the fiscal years ended
September 30, 1995, 1994 and 1993, respectively, and included export sales
to Europe of approximately $57,257,000, $60,621,000, and $59,473,000,
respectively. Export sales to Japan were approximately $57,173,000,
$35,701,000 and $33,042,000 for fiscal years ended September 30, 1995, 1994
and 1993, respectively.
One customer accounted for approximately 34.0%, 13.5% and 11.5% of the
Company's net sales during the years ended September 30, 1995, 1994 and
1993, respectively.
NOTE EIGHT. RESTRUCTURING AND OTHER CHARGES
RADIUS JUNE 1993 RESTRUCTURING AND OTHER CHARGES
In June 1993, Radius announced a restructuring program designed to reduce
costs and improve operating efficiencies. The program included, among other
things, the write-down of inventory following Radius' decision to phase out
its older generation of products, lease termination expenses, capital
equipment write-offs, severance payments, and costs associated with the
discontinuation of Radius' minicomputer-class server product. The
restructuring program costs of $15.5 million were recorded during the third
quarter of fiscal 1993. These charges (in thousands) are included in: cost
of sales ($10,993); research and development ($411); and selling, general
and administrative expenses ($4,096). The Company completed this
restructuring event by the end of calendar 1994. There were no material
changes in the restructuring plan or in the estimates of the restructuring
costs from the recognition of the charge in June 1993 with the completion
of the restructuring program in December 1994.
F-16
<PAGE> 107
SUPERMAC DECEMBER 1993 RESTRUCTURING AND OTHER CHARGES
In December 1993, SuperMac recorded charges of $16.6 million in connection
with a program to adjust inventory levels, eliminate excess facilities,
terminate certain projects and contract arrangements and reduce the number
of employees. The charges (in thousands) are included in: cost of sales
($13,352); research and development ($2,000); and selling, general and
administrative expenses ($1,238). There have been no material changes in
the restructuring plan or in the estimates of the restructuring costs. The
Company has $236,000 remaining in its restructuring reserve related to
facility costs, the balance of which is expected to be eliminated in fiscal
1996. As noted in the Consolidated Financial Statements, the consolidated
results for the Company in both the twelve months ended September 30, 1994
and the fiscal period ended 1993 include SuperMac's $16.6 million charge.
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 September 30, 1995 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 2,236 154
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 $ 15,860 $ 869
</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 headquarter 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 September 30, 1995. The Company expects to have
substantially completed the restructuring by September 1996. During fiscal
1995, approximately $2.1 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 refocus its business on the color publishing
and multimedia markets. The charges primarily included a writedown of
inventory and other assets. Additionally, it included expenses related to
the cancellation of open purchase orders, excess facilities and 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 September 30, 1995 are as follows (in thousands):
F-17
<PAGE> 108
<TABLE>
<CAPTION>
Representing
--------------------------------------------
Cash Outlays
-------------------------
Asset
Provision Write-Downs Completed Future
<S> <C> <C> <C> <C>
Adjust inventory levels $33,138 $ 32,300 $ - $ 838
Excess facilities 2,004 404 - 1,600
Cancellation fees and asset write-offs 19,061 5,196 - 13,865
Employee severance 3,662 - - 3,662
-------- --------- ------- --------
Total charges $ 57,865 $ 37,900 $ - $ 19,965
</TABLE>
The adjustment of inventory levels reflects the discontinuance of several
product lines. Revenues and product margins for significant product lines
discontinued were as follows: MacOS-compatible systems were $21.8 million
and $(19.2 million), respectively; and low-margin displays $82.9 million
and $19.6 million, respectively. 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 revised business model. As of
December 15, 1995, approximately 157 positions of the 240 total planned had
been eliminated in connection with the new business model. The Company had
not spent any cash for this restructuring as of September 30, 1995. As of
September 30, 1995, the Company had cash and cash equivalents of $4.8
million. See "Management's Business Recovery Plans" at Note 1 due to the
Consolidated Financial Statements. The Company expects to have
substantially completed the restructuring by September 1996.
NOTE NINE. VIDEOFUSION ACQUISITION
The Company acquired VideoFusion, Inc. ("VideoFusion") on September 9,
1994. VideoFusion is a developer of advanced digital video special effects
software for Apple Macintosh and compatible computers. The Company acquired
VideoFusion in exchange for approximately 890,000 shares of the Company's
Common Stock, 205,900 shares of which were issued at the closing of the
acquisition. The balance of the shares were to be issued in installments
over a period of time contingent on the achievement of certain performance
milestones and other factors. In addition, the Company was required to pay
up to $1.0 million in cash based upon net revenues derived from future
sales of products incorporating VideoFusion's technology. The purchase
price for VideoFusion, including closing costs and the issuance of shares
of Common Stock valued at $500,000 in connection with the achievement of
the first milestone was approximately $2.4 million. This amount was
allocated to the assets and liabilities of VideoFusion and resulted in
identifiable intangibles of approximately $440,000 and an in-process
research and development expense of approximately $2.2 million. The
intangible asset was to be amortized over two years. The Company recognized
the charge of approximately $2.7 million for in-process research and
development and other costs associated with the acquisition of VideoFusion
during the fourth quarter of fiscal 1994.
In May 1995, the Company entered into an agreement with the former holders
of VideoFusion stock to settle the contingent stock and earnout payments
that were originally contemplated. Pursuant to this agreement, the Company
issued approximately 212,000 shares, and paid approximately $200,000, to
the former holders of VideoFusion stock. These transactions resulted in
additional compensation expense of approximately $3.0 million which was
recorded in fiscal 1995.
NOTE TEN. MERGER WITH SUPERMAC TECHNOLOGIES, INC.
On August 31, 1994, Radius merged with SuperMac in exchange for 6,632,561
shares of Radius' common stock. SuperMac was a designer, manufacturer, and
marketer of products that enhanced the power and graphics performance of
personal computers. The Merger was accounted for as a pooling of interests,
and, accordingly, the Company's Consolidated Financial Statements and Notes
to Consolidated Financial Statements have been restated to include the
results of SuperMac for all periods presented.
Separate results of operations for the periods prior to the Merger are as
follows (in thousands):
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<PAGE> 109
<TABLE>
<CAPTION>
Merger-
Related
Radius SuperMac Expenses Adjustment Combined
------ -------- -------- ---------- --------
<S> <C> <C> <C> <C> <C>
Year ended September 30, 1994
Net revenues $162,922 $164,978 $ (3,095) $ - $324,805
Net loss (18,293) (15,775) (43,407) - (77,475)
Year ended September 30, 1993
(SuperMac as of December 1993)
Net revenues 134,872 202,501 - - 337,373
Net loss (17,415) (2,724) - - (20,139)
</TABLE>
The merger related expenses reflect the recording of the merger related
restructuring and other charges.
Prior to the Merger, SuperMac's fiscal year end was December 31. SuperMac's
separate results for fiscal 1994 have been restated to conform with the
twelve months ended September 30. The Consolidated Financial Statements for
all periods prior to fiscal 1994 have not been restated to adjust
SuperMac's fiscal year end to that of Radius. Such periods include Radius'
results of operations and balance sheet data on a September 30 fiscal year
basis and SuperMac's on a December 31 calendar year basis. Therefore, the
results for both the fiscal year ended September 30, 1994 and the results
for the fiscal year ended 1993 include the results for SuperMac's three
months ended December 31, 1993. Revenues, cost and expenses, and net loss
of SuperMac for the three months ended December 31, 1993 were, $48.5
million, $64.7 million and $9.9 million, respectively.
The Company incurred substantial costs in connection with the Merger and
consolidation of operations. Included in the accompanying consolidated
statement of operations for the year ended September 30, 1994 are merger
related expenses totaling $43.4 million consisting primarily of charges for
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
incident to the Merger. See Note 8 of Notes to the Consolidated Financial
Statements.
NOTE ELEVEN. SUBSEQUENT EVENTS
PORTRAIT DISPLAY LABS
On December 19, 1995, the Company signed 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 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. See
Note 1 to the Consolidated Financial Statements.
DISPLAY TECHNOLOGIES ELECTROHOME INC.
On December 21, 1995, the Company signed a Business Purchase Agreement and
an Asset Purchase and License Agreement with Display Technologies
Electrohome Inc. ("DTE"). Pursuant to the agreements and subject to certain
closing conditions, DTE will purchase Radius' monochrome display monitor
business and certain assets related thereto, for approximately $200,000 in
cash and cancellation of $2.5 million of the Company's indebtedness to DTE.
In addition, DTE and Radius will cancel outstanding contracts relating to
DTE's manufacture and sale of monochrome display monitors to Radius.
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<PAGE> 110
COLOR SERVER GROUP
On December 23, 1995, the Company signed a definitive agreement pursuant to
which the Company will sell its Color Server business 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 will receive
approximately $21.9 million in cash (subject to certain post-closing
adjustments) 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 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
transaction is expected to close in January 1996. Under the Inventory and
Working Capital Agreement, as recently amended, with IBM Credit Corp., the
Company is required to pay all of the net proceeds of the Color Server
business transaction to IBM Credit Corp. in order to reduce the Company's
outstanding indebtedness under that agreement.
IBM CREDIT CORP.
On December 14, 1995, the Company and IBM Credit Corp. ("ICC") amended the
Inventory and Working Capital Financing Agreement (the "ICC Agreement")
entered into by the Company and ICC on February 17, 1995 and subsequently
revised in September 1995 to fund the manufacturing of the Company's MacOS
compatible systems products. See Note 2 to the Consolidated Financial
Statements. Under the amendment, ICC waived the Company's failure to comply
with all of its contractual obligations and financial covenants under the
ICC Agreement. The ICC Amendment, among other things, also provides that
until March 31, 1996 ICC 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 ICC (i) immediately following a default of the ICC Amendment,
and (ii) following thirty (30) days notice in the event of any default of
the ICC Agreement. The ICC Amendment also requires the Company to pay all
of the net proceeds of the Color Server Group transaction to ICC to reduce
the Company's outstanding indebtedness under the ICC Agreement.
1995 STOCK OPTION PLAN
On December 20, 1995, the Company's Board of Directors adopted the 1995
Stock Option Plan to replace the 1986 Stock Option Plan that expires in
1996, and reserved 850,000 shares (plus all unissued and unexercised shares
available under the existing 1986 Stock Option Plan) for issuance
thereunder. The 1995 Stock Option Plan is subject to shareholder approval.
See Note 4 to the Consolidated Financial Statements.
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<PAGE> 111
SCHEDULE II --- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Balance at Charged to Charged Balance
beginning costs and to other at end of
Description of period expenses accounts Deductions(1) period
----------- ---------- ---------- -------- ------------- ---------
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
<S> <C> <C> <C> <C> <C>
Year ended September 30, 1993 (2) $1,825 $1,272 $0 $975 $2,122
Year ended September 30, 1994 $2,018 (2) $1,283 $0 $753 $2,548
Year ended September 30, 1995 $2,548 $6,837 $0 $883 $8,502
</TABLE>
- -----------------------------
(1) Uncollectable accounts written off.
(2) The Consolidated Financial Statements for fiscal 1993 have not been
restated for the change in fiscal year. This period includes Radius'
results of operations and balance sheet data on a September 30 fiscal
year basis and SuperMac's on a December 31 calendar year basis.
F-21
