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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 28, 1997.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13(d) OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ TO ________.
COMMISSION FILE NUMBER: 0-18690
RADIUS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 68-0101300
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
215 MOFFETT PARK DRIVE
SUNNYVALE, CA 94089
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
(408) 541-6100
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO
SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
---- ----
THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S COMMON STOCK ON AUGUST
12, 1997 WAS 55,657,673.
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RADIUS INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Balance Sheets at June 30, 1997
and September 30, 1996 3
Consolidated Statements of Operations for the
Three and Nine Months Ended June 30, 1997 and 1996 4
Consolidated Statements of Cash Flows for the Nine
Months Ended June 30, 1997 and 1996 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 19
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PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RADIUS INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1997 1996 (1)
----------- -------------
(unaudited)
<S> <C> <C>
ASSETS:
Current assets:
Cash $ 766 $ 2,974
Accounts receivable, net 8,284 8,123
Inventories 3,642 12,852
Investment in Splash Technology Holdings, Inc. -
current portion 30,163 -
Prepaid expenses and other current assets 366 366
Income tax receivable - 514
------- -------
Total current assets 43,221 24,829
Investment in Splash Technology Holdings, Inc. -
noncurrent portion 21,940 19,152
Property and equipment, net 335 1,495
Deposits and other assets - 50
------- -------
$65,496 $45,526
------- -------
------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 6,675 $5,004
Accrued payroll and related expenses 1,384 2,678
Accrued warranty costs 346 478
Other accrued liabilities 1,775 2,545
Accrued income taxes 2,115 2,227
Accrued restructuring and other charges 31 425
Short-term borrowings 4,841 1,922
Obligation under capital leases - current portion 472 1,074
------- -------
Total current liabilities 17,639 16,353
Long term borrowings 21,940 21,940
Obligations under capital leases - noncurrent portion - 273
Commitments and contingencies
Convertible preferred stock 3,000 3,000
Shareholders' equity:
Common stock 169,019 168,746
Unrealized gain on available-for-sale securities 52,103 19,152
Accumulated deficit (198,245) (183,968)
Accumulated translation adjustment 40 30
------- -------
Total shareholders' equity 22,917 3,960
------- -------
$65,496 $45,526
------- -------
------- -------
</TABLE>
(1) The balance sheet at September 30, 1996 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See accompanying notes.
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RADIUS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data; unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
1997 1996 1997 1996
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 4,816 $ 19,234 $ 23,867 $ 82,461
Commissions and royalties 1,225 800 4,418 800
-------- -------- --------- ---------
Total net sales 6,041 20,034 28,285 83,261
Cost of sales 5,472 13,470 20,907 67,175
-------- -------- --------- ---------
Gross profit 569 6,564 7,378 16,086
-------- -------- --------- ---------
Operating expenses:
Research and development 1,633 1,092 3,534 6,241
Selling, general and administrative 5,986 4,518 15,307 21,430
-------- -------- --------- ---------
Total operating expenses 7,619 5,610 18,841 27,671
-------- -------- --------- ---------
(Loss) income from operations (7,050) 954 (11,463) (11,585)
Other income (expense), net (10) 4,754 (22) 24,023
Interest expense (757) (779) (2,251) (2,933)
-------- -------- --------- ---------
(Loss) income before income taxes (7,817) 4,929 (13,736) 9,505
Provision for income taxes - 216 316 656
-------- -------- --------- ---------
Net (loss) income $ (7,817) $ 4,713 $ (14,052) $ 8,849
-------- -------- --------- ---------
-------- -------- --------- ---------
Preferred stock dividend 75 - 225 -
Net (loss) income applicable to
common shareholders $ (7,892) $ 4,713 $ (14,277) $ 8,849
-------- -------- --------- ---------
-------- -------- --------- ---------
Net (loss) income per share applicable to
common shareholders $ (0.14) $ 0.26 $ (0.26) $ 0.49
-------- -------- --------- ---------
-------- -------- --------- ---------
Common and common equivalent shares used
in computing net (loss) income per share 55,207 18,412 54,915 17,950
-------- -------- --------- ---------
-------- -------- --------- ---------
</TABLE>
See accompanying notes.
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RADIUS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(in thousands, unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30,
----------------------
1997 1996
---------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (14,052) $ 8,849
Adjustments to reconcile net (loss) income to
net cash used in operating activities:
Depreciation and amortization 769 1,470
Gain on the sale of the Color Hard Copy Group - (20,638)
Loss on the disposal of fixed assets 446 301
(Increase) decrease in assets:
Accounts receivable (151) 36,302
Inventories 9,210 (2,162)
Prepaid expenses and other current assets - 1,912
Income tax receivable 514 5
Increase (decrease) in liabilities:
Accounts payable 1,671 (31,584)
Accrued payroll and related expenses (1,294) (3,489)
Accrued warranty costs (132) (2,373)
Other accrued liabilities (770) (1,914)
Accrued restructuring costs (394) (1,539)
Accrued income taxes (112) 391
--------- --------
Total adjustments 9,757 (23,318)
--------- --------
Net cash used in operating activities (4,295) (14,469)
Cash flows from investing activities:
Capital expenditures (55) (215)
Deposits and other assets 50 375
Net proceeds from the sale of the Color Hard
Copy Group - 20,163
--------- --------
Net cash (used in) provided by investing
activities (5) 20,323
Cash flows from financing activities:
Short-term borrowings, net 2,919 (6,569)
Principal payments of long-term debt and
capital leases (875) (1,211)
Issuance of common stock 48 430
--------- --------
Net cash provided by (used in) financing
activities 2,092 (7,350)
--------- --------
Net decrease in cash and cash equivalents (2,208) (1,496)
Cash and cash equivalents, beginning of period 2,974 4,760
--------- --------
Cash and cash equivalents, end of period $ 766 $ 3,264
--------- --------
--------- --------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 2,254 $ 2,804
--------- --------
--------- --------
Income taxes $ 1 $ 260
--------- --------
--------- --------
Non-cash financing activity:
Dividend paid in stock $ 225 $ -
--------- --------
--------- --------
</TABLE>
See accompanying notes.
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RADIUS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The consolidated financial statements of Radius Inc. ("Radius" or the
"Company") as of June 30, 1997 and for the three and nine months ended June
30, 1997 and 1996 are unaudited. In the opinion of management, the
consolidated financial statements reflect all adjustments (consisting only of
normal recurring items) necessary for a fair presentation in conformity with
generally accepted accounting principles. Preparing financial statements
requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses. Examples
include provisions for returns and bad debts and the length of product life
cycles. The information included in this Form 10-Q should be read in
conjunction with the Consolidated Financial Statements and notes thereto
included in the Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 1996.
For clarity of presentation, all fiscal periods are reported as ending on a
calendar month end.
NOTE 2. INVENTORIES
Inventories, stated at the lower of cost or market, consist of (in thousands):
JUNE 30, SEPTEMBER 30,
1997 1996
----------- -------------
(unaudited)
Raw materials $ 130 $ 124
Work in process 1,785 4,488
Finished goods 1,727 8,240
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$ 3,642 $ 12,852
------- --------
------- --------
Cost of sales for the nine month period ended June 30, 1997 includes write
down reserves for obsolete, slow-moving, or non-salable inventory of $3.6
million.
NOTE 3. COMMITMENTS AND CONTINGENCIES
(a) On July 18, 1997, Intelligent Electronics, Inc. and its affiliates
("IE") filed a suit in the United States District Court for the District of
Colorado alleging a breach of contract and related claims in the approximate
amount of $800,000 maintaining that the Company failed to comply with various
return, price protection, inventory balancing and marketing development
funding undertakings. The Company is currently investigating these claims
and therefore, cannot assess the potential effect of this claim, if any, on
the Company's business, results of operations or financial condition.
(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.
On March 11, 1997, all but two of the named defendants agreed to settle the
suits, subject to final court approval, which was tentatively granted on June
30, 1997. The settlement provides that class members are eligible for a $13
rebate per monitor purchased during the class period on applicable new
purchases over a three year period, subject to specific limitations. Class
members who are consumers and do not elect to use the rebate fully can
thereafter elect to receive a $6 refund per monitor (up to a maximum of $30
per consumer class member) during the following six months. The Company is
responsible only to class members who purchased Radius branded monitors
during the class period of May 1, 1991 to May 1, 1995. Additionally, Radius
will pay its share of publication and administration costs associated with
the implementation of the settlement, pay its share of plaintiffs' stipulated
attorneys' fees (estimated to be approximately $75,000 and currently payable)
and will agree to abide by certain limitations in the description of its
monitors. The
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Company estimates that the impact of this settlement, excluding the attorneys
fees and publication costs, will not be material to its financial condition
or results of operations.
(c) On November 16, 1995, Electronics for Imaging, Inc. ("EFI") filed a suit
in the United States District Court in the Northern District of California
alleging that the Company infringes a patent allegedly owned by EFI.
Although the complaint does not specify which of the Company's products
allegedly infringe the patent, subsequent pleading indicates that EFI alleges
that the Company's Color Server products allegedly infringe. In January
1996, the Company completed the divestiture of the Color Server Group.
The Company has filed an answer denying all material allegations, and has
filed counterclaims against EFI alleging causes of action for interference
with prospective economic benefit, antitrust violations, and unfair business
practices. EFI's motion to dismiss or sever the Company's amended
counterclaims was granted in part and the ruling permitted the Company to
file an amended counterclaim for antitrust violations. The Company has filed
an amended antitrust claim. The Company believes it has meritorious defenses
to EFI's claims and is defending them vigorously. In addition, the Company
believes it may have indemnification rights with respect to EFI's claims. A
motion for summary judgment based on these indemnification rights was filed,
and the court granted this motion finding the Company immune from suit under
the patent after February 22, 1995. The Company expects to vigorously defend
the remaining claims of EFI and to vigorously prosecute the claims it has
asserted against EFI. In the opinion of management, based on the facts known
at this time, although the eventual outcome of this case is unlikely to have
a material adverse effect on the results of operations or financial position
of the Company, the costs of defense, regardless of outcome, may have a
material adverse effect on the results of operations or financial position of
the Company. In addition, in connection with the divestiture of its Color
Server Group, the Company has certain indemnification obligations for which
approximately $2.4 million remains held in escrow to secure such obligations
in the event that the purchaser suffers any losses resulting from such
litigation.
NOTE 4. INVESTMENT IN SPLASH TECHNOLOGY HOLDINGS, INC.
In January 1996, the Company completed the sale of its Color Server Group
("CSG") to Splash Merger Company, Inc. (the "Buyer"), a wholly owned
subsidiary of Splash Technology Holdings, Inc. ("Splash"), a corporation
formed by various investment entities associated with Summit Partners. In
fiscal 1996, the Company received approximately $21.0 million in cash and an
additional $2.4 million is being maintained in escrow to secure certain
indemnification obligations. The Company also received 4,282 shares of
Splash's 6% Series B Redeemable and Convertible Preferred Stock (the "Series
B Preferred Stock"). The shares of Series B Preferred Stock were converted
into shares of Splash's Common Stock in connection with the initial public
offering of Splash. In June 1996, the Company granted IBM Credit, its
secured lender, an option to purchase 428 shares of Series B Preferred Stock
(now Splash Common Stock) in connection with the restructuring of the terms
of its loan agreement with IBM Credit. These shares of Splash Common Stock
have been pledged to IBM Credit. IBM Credit has not exercised its option.
On October 8, 1996, Splash completed its initial public offering of Common
Stock which reduced the Company's ownership position to approximately 14.6
percent. Consequently, the investment which will be available for sale,
subject to certain market trading restrictions, approximating 1.6 million
shares, is accounted for in accordance with FASB 115. The unrealized gain of
$52.1 million based upon the closing price of $33.25 per share on June 27,
1997 is recorded, net of deferred taxes of none, as a component of
shareholders' equity at June 30, 1997. Splash has filed with the Securities
and Exchange Commission for a public offering of its Common Stock and the
Company is one of the selling shareholders in this offering. See
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Financial Condition.
NOTE 5. TECHNOLOGY LICENSING FROM REPLY CORPORATION
Effective in the third fiscal quarter, the Company licensed certain
technology from Reply Corporation ("Reply") and agreed to purchase such
technology along with certain assets and inventory, subject to the approval
of the bankruptcy court with jurisdiction over Reply and its assets, which
approval was obtained and accordingly, it is anticipated that this
transaction will close in August 1997. The purchase price of such assets and
inventory is expected to be less than $500,000, although, the Company will be
required to pay a royalty fee based upon the number of products sold which
incorporate such technology. Additionally, upon the closing of the
transaction the Company will issue a warrant to Reply to purchase 500,000
shares of the Company's Common Stock at a price of $1.25 per share
exercisable over a forty two month period.
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<PAGE>
NOTE 6. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARD
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings per Share" (FAS 128), which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. The application of the FAS 128 new "basic earnings per share"
calculation results in basic earnings (loss) per share that is not materially
different from net (loss) income per share applicable to common shareholders
as reported for the three and nine months ended June 30, 1997 and 1996. The
Company does not expect the new diluted calculation to be materially
different from fully diluted earnings per share.
NOTE 7. SUBSEQUENT EVENTS
On July 28, 1997, Splash filed with the Securities and Exchange Commission
for a public offering of 3,250,000 shares of its Common Stock and the Company
is one of the selling shareholders in this offering. See Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Financial Condition.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 and there are certain important factors that could cause results
to differ materially from those in the forward-looking statements. Among
such important factors are: (i) the ability of Radius to increase revenues or
generate sufficient cash from operations to finance its working capital needs
and to generate sufficient income to repay its indebtedness to IBM Credit in
a timely manner; (ii) the value of the Company's holdings in Splash
Technology Holdings, Inc. ("Splash") and the Company's ability to timely
dispose of such holdings, if necessary, on favorable terms; (iii) the
Company's ability to attract and retain key personnel, particularly in light
of its financial condition; (iv) the Company's ability to successfully
compete against Apple Computer and other competitors; (v) the continued
acceptance of Macintosh computers for use by the color publishing and
multimedia markets; (vi) the Company's ability to successfully develop and
market products for, and the acceptance of the Company's products by, the
video editing industry; (vii) the continued willingness of third party
manufacturers and suppliers to assemble and/or supply components for the
Company's products, particularly in light of the Company's financial
condition; (viii) the ability of the Company's exclusive distributors in
Europe and Japan to increase sales of the Company's products and the ability
of the Company to generate increased revenues from product sales,
particularly in light of recent price reductions; (ix) the Company's ability
to develop new products and improve on existing products, particularly in
light of its significantly reduced research and development budgets; and (x)
the Company's ability to successfully develop, manufacture and market the "PC
on a Card" products licensed from Reply Corporation.
Each forward-looking statement should be read in conjunction with the entire
consolidated interim financial statements and the notes thereto in Part I,
Item 1 of this Quarterly Report, with the information contained in Item 2,
including, but not limited to, "Certain Factors That May Affect Future
Results," and with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contained in the Company's Annual Report
on Form 10-K for the fiscal year ended September 30, 1996, including, but not
limited to, "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Certain Factors That May Affect the Company's Future
Results of Operations."
RESULTS OF OPERATIONS
The Company designs, develops, assembles, markets and supports color
publishing and digital video computer products for creative professionals.
The Company's current product line includes: accelerated color graphics
products that facilitate the creation and manipulation of graphical images;
video systems and software that can acquire and manipulate video and audio
information; and high resolution color reference displays that allow users to
view text, graphics, images and video. The primary target markets for the
Company's products are color publishing and multimedia. These markets
encompass creative professionals involved in such areas as color prepress,
graphic arts, video editing, video and multimedia production and playback,
and corporate training. To date, substantially all of the Company's products
have been designed for and sold to users of Macintosh computer products (the
"Macintosh") manufactured by Apple Computer, Inc. ("Apple") as Apple products
have been the preferred platform in the Company's target markets.
As shown in the accompanying consolidated financial statements, the Company
has incurred declining revenues and recurring operating losses. In addition,
the Company has recently restructured its loan agreement with IBM Credit.
The Company has granted a security interest in most of its assets to IBM
Credit. Since the end of its last fiscal year, 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 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.
On March 31, 1997, the Company licensed certain technology from Reply
Corporation (see Note 5 to the financial statements) that will allow it to
develop and market PCI bus adapter cards featuring Windows compatibility to
users of Macintosh products. This technology is intended to enable a "PC on
a card", DOS on Mac, which can be added to various versions of Mac compatible
personal computers. When using such products, a Mac compatible user would
therefore have coprocessing ability and be able to participate in various
PC-based network functions without sacrificing Mac performance levels on
various desktop, color publishing and other applications. These products are
being marketed to the Company's existing customers and as well as to a
broader customer base. First customer shipments of these products were made
during the third fiscal quarter of 1997.
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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 NINE MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 90.6 67.2 73.9 80.7
------ ----- ----- -----
Gross profit 9.4 32.8 26.1 19.3
------ ----- ----- -----
Operating expenses:
Research and development 27.0 5.5 12.5 7.5
Selling, general and administrative 99.1 22.6 54.1 25.7
------ ----- ----- -----
Total operating expenses 126.1 28.0 66.6 33.2
------ ----- ----- -----
(Loss) income from operations (116.7) 4.8 (40.5) (13.9)
Other income (expense), net (0.2) 23.7 (0.1) 28.9
Interest Expense (12.5) (3.9) (8.0) (3.5)
------ ----- ----- -----
(Loss) income before income taxes (129.4) 24.6 (48.6) 11.4
Provision for income taxes - 1.1 1.1 0.8
------ ----- ----- -----
Net (loss) income (129.4)% 23.5% (49.7)% 10.6%
------ ----- ----- -----
------ ----- ----- -----
</TABLE>
NET SALES
The Company's net sales decreased 69.8% to $6.0 million in the third quarter
of fiscal 1997 from $20.0 million for the same quarter in fiscal 1996. Net
sales for the first nine months of fiscal 1997 decreased 66.0% to $28.3
million from $83.3 million in the same period of fiscal 1996. The decline is
due to the following factors: the Company's efforts to refocus its business
on higher margin products; the divestiture of certain business units, such as
its Color Hard Copy Group; entering into exclusive distributor arrangements
for Japan and Europe effective April 1, 1996 and July 1, 1996, respectively,
which relationships provide for the Company to recognize as net sales, a
percentage of the sales price of each product sold by those distributors as
compared to the entire sales price of the product which was formerly
recognized by the Company as net sales prior to the appointment of these
distributors; uncertainty regarding the viability of the Apple Macintosh
product line; and the slow development of the 3D graphics market due to
limited applications software availability. As a result of these factors,
product sales decreased 75.0% and 71.1% for the third quarter and the first
nine months of fiscal 1997 from the corresponding periods of fiscal 1996.
The exclusive distributor arrangements also account for the decrease of the
Company's export sales to 18.4% of net sales in the third quarter of fiscal
1997 from 35.0% of net sales in the same quarter of fiscal 1996.
International sales declined to 15.9% of net sales for the nine month period
in fiscal 1997, compared to 48.2% of net sales for the corresponding period
in fiscal 1996. These exclusive distributor relationships also lead to the
commission and royalties of $1.2 million and $4.4 million for the third
quarter and the first nine months of fiscal 1997, respectively.
Sales to Ingram Micro and Microage Computer Center accounted for 42.5% and
15.9% of net sales for the third quarter of fiscal 1997, respectively. For
the corresponding period of fiscal 1996, the same customers accounted for
53.5% and 4.8% of the Company's net sales. For the nine month period ended
June 30, 1997, Ingram Micro accounted for 63.7% of the Company's net sales as
compared to 39.0% for the corresponding period of fiscal 1996.
GROSS PROFIT
The Company's gross profit margin was 9.4% and 26.1% for the three and nine
month periods ended June 30, 1997, as compared with 32.8% and 19.3% for the
corresponding periods in fiscal 1996. The decrease in gross profit margin for
the three month period ended June 30, 1997 was due to the low level of
product sales and the consequent reduced contribution to cover fixed
manufacturing overhead expenses, higher cost of manufacturing for the DOS on
Mac products due to start-up inefficiencies, and due to rebate programs for
certain of the Company's other products. For the nine month period ended
June 30, 1997 the increase in the gross profit is a result of the Company's
efforts to refocus its business on higher margin
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products, offset by the factors mentioned above for the three month period
ended June 30 1997 and the $3.6 million net charge taken in the second
quarter of fiscal 1997 for inventory write downs.
On August 4, 1997, the Company announced a new graphics accelerator card with
list price of $399 and a price reduction of up to 40% on four of its existing
graphics accelerator cards, all of which will result in lower gross profit
than has historically been realized on these products. 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
increase for subsequent quarters or for the entire fiscal year.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased to $1.6 million or 27.0% of net
sales in the third quarter of fiscal 1997 from $1.1 million or 5.5% of net
sales in the same quarter of fiscal 1996. Research and development expenses
decreased from $6.2 million or 7.5% of net sales for the first nine months of
fiscal 1996 to $3.5 million or 12.5% of net sales for the corresponding
period of fiscal 1997. The increase in research and development expenses in
the third quarter of fiscal 1997 was due primarily to the addition of the DOS
on Mac product line which was licensed from Reply Corporation on March 31,
1997 (see Note 5 to the financial statements). The Company decreased its
research and development expenses for the nine month period ended June 30,
1997 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. Although the Company expects research and development
expenses to increase gradually over time, the Company does not expect
research and development expenses to approach historical levels in absolute
amount. The Company's ability to introduce new products or to compete
successfully could be adversely affected if it is unable to increase its
research and development efforts.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $6.0 million or
99.1% of net sales in the third quarter of fiscal 1997 from $4.5 million or
22.6% of net sales in the same quarter of fiscal 1996. The increase in
selling, general and administrative expenses was primarily a result of a
$1.1 million charge to increase the allowance for doubtful accounts due to
accounts which the Company determined were unlikely to be collected in full.
Expenses in the third quarter of fiscal 1996 included a reduction of
approximately $0.9 million of restructuring reserves. Selling, general and
administrative expenses decreased from $21.4 million or 25.7% of net sales
for the first nine months of fiscal 1996 to $15.3 million or 54.1% of net
sales for the corresponding period in fiscal 1997. The Company decreased its
selling, general and administrative expenses for the nine month period
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. Although the Company expects selling, general and
administrative expenses to increase gradually over time, the Company does not
expect them to approach historical levels in absolute amount.
OTHER INCOME (EXPENSE), NET
There was no other income recorded in the third quarter and the first nine
months of fiscal 1997 as compared to other income of $4.8 million and $24.0
million for the corresponding periods in fiscal 1996. Included in the three
and nine months ended June 30, 1996 was other income of approximately $4.9
million and $23.8 million, respectively, primarily related to product group
divestitures.
INTEREST EXPENSE
Interest expense was $0.8 million in the third quarter of fiscal 1997 and
1996. The interest expense decreased to $2.3 million for the first nine
months of fiscal 1997 from $2.9 million from the corresponding period in
fiscal 1996. This decrease was due to lower average interest rates on lower
average borrowings.
NET LOSS
As a result of the above factors, the Company had a net loss of $7.8 million
and $14.1 million for the three and nine months ended June 30, 1997,
respectively, as compared to a net income of $4.7 million and $8.8 million
for the three and nine months ended June 30, 1996.
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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 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 issued 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 increased by 100,000 because the price of the Company's
Common Stock was 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 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.
As of June 30, 1997, the Company had issued 836,304 shares of its Common
Stock due to the settlements and 100,000 shares remained to be issued.
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.
Although the Company believes it had meritorious defenses to the plaintiffs'
claims, due to the costs of defense, on March 11, 1997, the Company along
with all but two of the other named defendants agreed to settle the suits,
subject to final court approval, which the court tentatively approved on June
30, 1997. The settlement provides that class members are eligible for a $13
rebate per monitor purchased during the class period on applicable new
purchases over a three year period, subject to specific limitations. Class
members who are consumers and do not elect to use the rebate fully can
thereafter elect to receive a $6 refund per monitor (up to a maximum of $30
per consumer class member) during the following six months. The Company is
responsible only to class members who purchased Radius branded monitors
during the class period of May 1, 1991 to May 1, 1995. Additionally, the
Company will pay its share of publication and administration costs associated
with the implementation of the settlement, pay its share of plaintiffs'
stipulated attorneys' fees (estimated to be approximately $75,000 and
currently payable) and will agree to abide by certain limitations in the
description of its monitors. See Note 3 to Consolidated Financial Statements
- - Commitments and Contingencies.
FINANCIAL CONDITION
The Company's cash decreased approximately $2.2 million in the first nine
months of fiscal 1997 to $0.8 million at June 30, 1997 as compared to the
ending balance at September 30, 1996. This decrease is primarily a result
of the loss from operations in the first nine months of fiscal 1997, less the
non-cash charges and changes in working capital items during this period, and
the interest payments associated with the Company's indebtedness with IBM
Credit. Approximately $0.5 million of the $0.8 million of cash and cash
equivalents available at June 30, 1997 was restricted under various letters
of credit.
The Company's financial condition is extremely constrained under the terms of
its current loan agreement with IBM Credit, which includes an approximately
$21.9 million term loan and a $5 million working capital line of credit and
which contains a variety of covenants. Under this agreement the Company has
granted to IBM Credit a security interest in substantially all of its assets
including all of the Splash Common Stock held by it. The Splash Common Stock
owned by the Company is valued at $52.1 million as of June 30, 1997, net of
taxes (which are estimated to be zero), and based on a closing price of
$33.25 per share as of such date. As the Company is an affiliate of Splash,
absent an effective registration statement with the Securities and Exchange
Commission, it can only sell such shares subject to the SEC Rule 144 volume
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limitations. As described below, the Company has included 875,000 shares of
Splash Common Stock in the registration statement recently filed by Splash
with the Securities and Exchange Commission
The agreement with IBM Credit was amended in the second quarter of fiscal
1997 to reduce the interest rates on outstanding borrowings effective April
1, 1997 to prime rate plus 1.75% for the working capital line of credit and
to the prime rate plus 2.50% for the term loan. Additionally, the borrowing
base calculation under the working capital line of credit was modified to
include in the amounts available for borrowing, an amount equal to 25% of the
"excess value" of Splash Stock, as defined in the amendment to the agreement.
In the event the closing price of the Splash Common Stock is below $22 per
share, the "excess value" of the Splash Common Stock is excluded from the
calculation of the amounts available for borrowing under the working line of
credit.
On July 25, 1997, the working capital line of credit was temporarily
increased from $5.0 million to $6.8 million. This increase is effective
until September 30, 1997.
Because of the exclusion of Splash Common Stock from the borrowing base
calculation when it is below $22 per share, and because of the Company's
pattern of product shipments with shipments higher at the end of the quarter
than at the beginning of the quarter, the Company may not have a sufficient
borrowing base to fully utilize the working capital line of credit at all
times. This could result in the delay in payments to vendors and may delay
product shipments when the Company is on credit hold by its vendors.
As of June 30, 1997 the Company was not in compliance with all of the
financial covenants under the amended loan agreement dated May 12, 1997
(specifically, net profits before tax to revenues ratio and interest coverage
ratio). The Company obtained a waiver from IBM Credit of this noncompliance.
There can be no assurance that IBM Credit will grant a waiver in the event
the Company fails to comply with these financial covenants in the future.
See Note 2 to Consolidated Financial Statements - Borrowings - contained in
the Company's Annual Report on Form 10-K for the fiscal year ended September
30, 1996.
As a result of IBM's control over the Company's cash flow and restrictions
on the use of the Company's excess cash flow, the Company anticipates that
it will not have significant cash available for expenditures other than for
its ordinary course of business operating expenses, which will be
significantly lower than historical amounts. In the event the Company were
unable to generate sufficient net sales or if the Company incurs unforeseen
operating expenses, it may not be able to meet its operating expenses without
additional financing or a restructuring of its loan agreements with IBM
Credit. In the event that the Company desired to acquire any strategic
technologies or businesses, it would probably be unable to do so without
obtaining additional financing or the consent of IBM Credit. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Certain Factors That May Affect the Company's Future Results of
Operations -- Need for Additional Financing; Loan Restrictions."
On July 28, 1997, Splash filed a Form S-1 registration statement for an
offering of 3,250,000 shares of its Common Stock, included in which are
875,000 of the 1,741,127 shares owned by the Company (excluding the 174,113
shares subject to an option granted to IBM Credit). In the event that the
underwriters exercise their over allotment option, the Company could sell up
to an additional 131,250 shares. The proceeds from the sale, net of
underwriting discounts and commissions, will be applied first to repay
indebtedness to IBM Credit. Remaining proceeds may be required, at the option
of IBM Credit, first to redeem the outstanding shares of Series A Convertible
Preferred Stock; any remaining proceeds will be available for working capital
purposes. In the event that IBM Credit does not require the Company to
redeem such Series A Convertible Preferred Stock, the Company may redeem such
Stock at a premium. See Note 4 to Consolidated Financial Statements -
Convertible Preferred Stock and Shareholders' Equity - contained in the
Annual Report on Form 10-K for the year ended September 30, 1996.
Following the completion of this offering, the Company has agreed to a ninety
day lock-up period which will prevent the sale of additional shares of Splash
during such period. The Company intends to continue its existing
relationship with IBM Credit to provide loans under its working capital line
of credit in order to fund its working capital requirements (subject to
compliance with the conditions to borrowing thereunder and having a
sufficient "borrowing base" thereunder), until such time as it can generate
additional funds from operations or the sale of Splash Common Stock or the
divestiture of other assets.
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CERTAIN FACTORS THAT MAY AFFECT THE COMPANY'S FUTURE RESULTS OF OPERATIONS
A number of uncertainties exist that could affect the Company's future operating
results, including, without limitation, the following:
CONTINUING OPERATING LOSSES
The Company experienced a net operating loss in the third quarter and for the
nine months ended June 30, 1997. The Company also experienced net operating
losses in each of the fiscal years ended September 30, 1993, 1994, 1995 and
1996. In the future, the Company's ability to achieve and subsequently
sustain profitable operations will depend upon a number of factors, including
the Company's ability to control and reduce costs; the Company's ability to
generate increased revenues from product sales, particularly in light of
recent price reductions; the Company's ability to service its outstanding
indebtedness to IBM Credit; the Company's ability to realize appreciation in
minority ownership interests in Splash and other investments; the Company's
ability to increase revenues and generate sufficient cash from operations or
obtain additional funds to fund its operating expenses; the Company's ability
to develop innovative and cost-competitive new products and to bring those
products to market in a timely manner; the commercial acceptance of Apple
computers and the MacOS and the rate and mix of Apple computers and related
products sold; 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 or
subsequently maintain profitability in the near term, if at all.
FLUCTUATIONS IN OPERATING RESULTS
The Company has experienced substantial fluctuations in operating results.
The Company's customers generally order on an as-needed basis, and the
Company has historically operated with relatively small backlogs. Quarterly
sales and operating results depend heavily on the volume and timing of
bookings received during the quarter, which are difficult to forecast. A
substantial portion of the Company's revenues are derived from sales made
late in each quarter, which increases the difficulty in forecasting sales
accurately. Since the end of the Company's 1995 fiscal year, shortages of
available cash have restricted the Company's ability to purchase inventory
and have delayed the Company's receipt of products from suppliers and
increased shipping and other costs. Furthermore, because of its financial
condition, the Company believes that many suppliers are hesitant to continue
their relationships with or extend credit terms to the Company and potential
new suppliers are reluctant to provide goods to the Company. The Company
recognizes sales upon shipment of product, and allowances are recorded for
estimated uncollectable amounts, returns, credits and similar costs,
including product warranties and price protection. Due to the inherent
uncertainty of such estimates, there can be no assurance that the Company's
forecasts regarding bookings, collections, rates of return, credits and
related matters will be accurate. A significant portion of the operating
expenses of the Company are relatively fixed in nature, and planned
expenditures are based primarily on sales forecasts which, as indicated
above, are uncertain. Any inability on the part of the Company to adjust
spending quickly enough to compensate for any failure to meet sales forecasts
or to receive anticipated collections, or any unexpected increase in product
returns or other costs, could also have an adverse impact on the Company's
operating results. As a strategic response to a changing competitive
environment, the Company has elected, and, in the future, may elect from time
to time, to make certain pricing, service or marketing decisions or
acquisitions that could have a material adverse effect on the Company's
business, results of operations and financial condition. Furthermore, the
Company completed a variety of business divestitures during fiscal 1996,
restructured the terms of its indebtedness to IBM Credit, issued a
substantial amount of equity in the Company to its creditors in satisfaction
of approximately $45.9 million in claims and indebtedness during the fourth
quarter of fiscal 1996 and has acquired or introduced new product lines. As a
result, the Company believes that period-to-period comparisons of its results
of operations will not necessarily be meaningful and should not be relied
upon as any indication of future performance. Due to all of the foregoing
factors, it is likely that in some future quarter the Company's operating
results will be below the expectations of public market analysts and
investors. In such event, the price of the Company's Common Stock would be
likely to be materially adversely affected.
NEED FOR ADDITIONAL FINANCING; LOAN RESTRICTIONS
The Company intends to finance its working capital needs through cash
generated by operations, sales of liquid assets and borrowings under a
restructured working line of credit with IBM Credit. Amounts available under
this line of credit are affected by the amount eligible of accounts
receivable as well as the market price of Splash Common Stock, which if below
$22 per share, significantly reduces amounts available under this line of
credit. Because the Company has experienced operating losses in each of its
prior four fiscal years, the Company must significantly reduce operating
expenses and/or significantly increase net sales in order to finance its
working capital needs with cash generated by operations.
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Furthermore, pursuant to the restructured loan with IBM Credit, the Company
is required to deposit its revenues in accounts subject to control by IBM
Credit. See "Financial Condition."
VOLATILITY OF STOCK PRICE
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, changes in
the Company's results of operations and financial condition and sales of
large numbers of shares of Common Stock by former creditors of the Company.
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, the substantially larger number of freely tradable
shares of Common Stock held by former creditors of the Company 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.
DEPENDENCE ON AND COMPETITION WITH APPLE
Historically, substantially all of the Company's products have been designed
for and sold to users of Apple Macintosh computers, and it is expected that
sales of products relating to such computers will continue to represent
substantially all of the Company's product sales for the foreseeable future.
The Company's operating results would be adversely affected if Apple should
continue to lose market share, if Macintosh sales were to decline further 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.
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, the potential market for Radius
products that provide those capabilities will be reduced.
New products anticipated from and introduced by Apple could cause customers
to defer or alter buying decisions due to uncertainty in the marketplace, as
well as presenting additional direct competition for the Company. For
example, the Company believes that Apple's transition during 1994 to Power PC
products caused delays and uncertainties in the marketplace and had the
effect of reducing demand for the Company's products. In addition, sales of
the Company's products have been adversely affected by Apple's restructuring
of its entire product line from Nubus-based to PCI Bus-based computers. In
the past, transitions in Apple's products have been accompanied by shortages
in those products and in key components for them, leading to a slowdown in
sales of those products and in the development and sale by the Company of
compatible products. In addition, it is possible that the introduction of
new Apple products with improved performance capabilities may create
uncertainties in the market concerning the need for the performance
enhancements provided by the Company's products and could reduce demand for
such products.
COMPETITION
The markets for the Company's products are highly competitive, and the
Company expects competition to intensify. Many of the Company's current and
prospective competitors have significantly greater financial, technical,
manufacturing and marketing resources than the Company. The Company believes
that its ability to compete will depend on a number of factors, including the
amount of financial resources available to the Company, its ability to repay
its indebtedness to IBM Credit, success and timing of new product
developments by the Company and its competitors, product performance, price
and quality, breadth of distribution, customer support and its ability to
attract and retain key personnel, particularly in light of the Company's
financial condition. 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.
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DEPENDENCE ON LIMITED NUMBER OF MANUFACTURERS AND SUPPLIERS
The Company outsources the manufacturing and assembly of its products to
third party manufacturers. Although the Company uses a number of
manufacturer/assemblers, each of its products is manufactured and assembled
by a single manufacturer. The failure of a manufacturer to ship the
quantities of a product ordered by the Company could cause a material
disruption in the Company's sales of that product. 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, color-calibrated monitors 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.
Certain suppliers, due to the Company's shortages in available cash, have put
the Company on a cash or prepay basis and/or required the Company to provide
security for their risk in procuring components or reserving manufacturing
time, and there is a risk that suppliers will discontinue their relationship
with the Company.
TECHNOLOGICAL CHANGE; CONTINUING NEED TO DEVELOP NEW PRODUCTS
The personal computer industry in general, and color publishing and video
applications within the industry, are characterized by rapidly changing
technology, often resulting in short product life cycles and rapid price
declines. The Company believes that its success will be highly dependent on
its ability to develop innovative and cost-competitive new products and to
bring them to the marketplace in a timely manner. Should the Company fail to
introduce new products on a timely basis, the Company's operating results
could be adversely affected. As a result of the Company's financial
condition, it has had to significantly reduce its research and development
expenditures. For the nine months ended June 30, 1997, the Company spent
approximately $3.5 million on research and development as compared with
approximately $6.2 million for the same period in the prior fiscal year.
Continued reduction in the available cash resources of the Company could
result in the interruption or cancellation of research and product
development efforts which would have a material adverse effect on the
business, operating results and financial condition of the Company. See
"Need for Additional Financing; Loan Restrictions".
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 write-down 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, that the Company will obtain market acceptance for these products or
that potential manufacturers will not be hesitant to manufacture such new
products as a result of the Company's financial condition.
DEPENDENCE ON INDIRECT DISTRIBUTION CHANNELS
The Company's primary means of distribution is through a limited number of
third-party distributors and master resellers that are not under the direct
control of the Company. Furthermore, the Company relies on one exclusive
distributor for its sales in each of Japan and Europe. The Company does not
maintain a direct sales force. As a result, the Company's business and
financial results are highly dependent on the amount of the Company's
products that is ordered by these distributors and resellers. Third parties
carry many lines and have no minimum order requirements.
INTERNATIONAL SALES
Prior to the second fiscal quarter of 1996, the Company's international sales
were primarily made through distributors and the Company's subsidiary in
Japan. Effective April 1, and July 1, 1996 the Company appointed an exclusive
distributor for Japan and Europe, respectively. The Company expects that
international sales, particularly sales to Japan, will represent a
significant portion of its business activity and that it will be subject to
the normal risks of international sales such as currency fluctuations, longer
payment cycles, export controls and other governmental regulations and, in
some countries, a lesser degree of intellectual property protection as
compared to that provided under the laws of the United States. See "Results
of Operations - Net Sales".
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SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock in the public market could
adversely affect the prevailing market price of the Company's Common Stock.
As of November 12, 1996, the effective date of the Registration Statement on
Form S-1 with respect to the securities issued pursuant to the Plan (the
"Effective Date"), there were approximately 54,451,586 shares of Common Stock
outstanding, substantially all of which are available for sale without
restriction under the Securities Act of 1933, as amended (the "Act") (as
compared with approximately 18,147,099 shares of Common Stock outstanding as
of August 31, 1996) except for those shares which are held by affiliates of
the Company. If the Series A Convertible Preferred Stock is converted and if
outstanding warrants to purchase 800,000 shares of Common Stock are
exercised, up to an additional 17,921,393 shares (including 11,046,060 shares
issuable pursuant to the Rights) will be available for sale in the public
market. The tradability of such shares of Common Stock could materially and
adversely affect the market price of the Common Stock. See "-- Volatility of
Stock Price."
In addition, the Company is required to pay (on a quarterly basis) an annual
dividend of $300,000 (or $0.40 per share) on the Series A Convertible
Preferred Stock. Depending upon its financial position on any dividend
payment date, such dividends may be paid in the form of shares of Common
Stock instead of cash. In the event such dividend is fully paid in shares of
Common Stock, a number of shares having a market value of up to $75,000, the
amount of such quarterly dividend, will be issued each quarter. Based on the
closing price of $0.5313 per share on December 27, 1996, $0.3438 per share on
March 28, 1997 and $0.2813 per share on June 30, 1997, an additional 626,025
shares were issued as dividend on the Series A Convertible Preferred Stock.
The Company has registered under the Act, Common Stock having a market value
of $600,000 (representing the first eight quarterly dividend payments) in the
event that such dividend is paid in Common Stock. Such shares will be freely
tradable. Subsequent dividends in the form of shares of Common Stock will be
subject to the provisions of Rule 144, including the holding period
requirements.
As of June 30, 1997, there were 7,384,971 shares of Common Stock reserved
for issuance upon exercise by employees and consultants of outstanding
options. As of such date there were 586,840 shares of Common Stock available
for issuance under options to be granted to employees and consultants and
158,998 shares reserved for issuances for purchases under the Company's
Employee Stock Purchase Plan. Additionally, 200,000 shares of Common Stock
were reserved for issuance under the Company's stock option plans for
non-employee directors, 45,000 of which were subject to outstanding options.
The Company amended its 1995 Stock Option Plan (the "1995 Plan") to increase
the number of shares available for issuance thereunder by 2,716,620 shares at
its Annual Meeting of Shareholders in February 1997. In accordance with the
terms of the debt-to-equity exchange consummated in September 1996, the 1995
Plan will be further amended or a new plan adopted in the event that the
Series A Convertible Preferred Stock is converted into Common Stock so that
an aggregate of 7,890,043 shares of Common Stock are covered by the 1995 Plan
as amended and/or any additional plan. The Company may also seek to obtain
Board and/or shareholder approval for grants of options in excess of the
amounts described above. All of the shares of Common Stock to be issued upon
exercise of options granted or to be granted or upon stock purchases will be
available for sale in the public market, subject to the Rule 144 volume
limitations applicable to affiliates. Such availability will further
increase the number of freely tradable shares of Common Stock outstanding
which could exert downward pressure on the trading price of the Common Stock.
As of July 31, 1997, the Company granted a warrant to purchase 250,000 shares
of the Company's Common Stock at an exercise price of $1.50 per share which
is exercisable two years from the grant date to WPS, L.L.C. in consideration
of consulting services performed during the third quarter of 1997.
Upon the closing of the acquisition of the Reply technology (see Note 5 to
the financial statements), the Company will issue a warrant to Reply to
purchase 500,000 shares of the Company's Common Stock at a price of $1.25 per
share exercisable over a forty two month period.
POSSIBLE DELISTING OF COMMON STOCK FROM NASDAQ SMALLCAP MARKET
The Company's Common Stock is listed on the Nasdaq SmallCap Market pursuant
to an agreement with the NASD which requires that the Company comply with the
continued listing requirements for the Nasdaq SmallCap Market. Failure to
meet the continued listing requirements in the future would subject the
Common Stock to delisting. As described under "Business -- Recent
Developments -- Nasdaq National Market Delisting," in the Company's Annual
Report on Form 10-K for the year ended September 30, 1996, the Common Stock
could be delisted from the Nasdaq SmallCap Market if the Company fails to
maintain capital and surplus of $1.0 million or, if the trading price of the
Common Stock remains below $1.00 per share, the Company will be required to
maintain capital and surplus of $2.0 million. Because of the substantial
losses experienced by the Company for fiscal 1996, any significant loss
experienced in a subsequent quarter could cause the Company to have
insufficient capital and surplus for continued listing on the Nasdaq SmallCap
Market. Because of the
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substantial increase in the number of tradable shares of Common Stock, there
could be continued downward pressure on the trading price of the Common Stock
(which has not traded over $1.00 per share since November 1996) which makes
it less likely that the Company will meet the minimum bid price requirement
for the Nasdaq SmallCap Market and, as a result, the Company would need to
maintain capital and surplus of $2.0 million. Furthermore under the proposed
new continued listing requirements of the Nasdaq National Market and the
Nasdaq SmallCap Market, any securities with a trading price of less than
$1.00 per share would become subject to delisting, regardless of capital and
surplus. If the Company's Common Stock is delisted, there can be no
assurance that the Company will meet the requirements for initial inclusion
on such markets in the future, particularly the current $3.00 minimum per
share bid requirement. Trading, if any, in the listed securities after
delisting would be conducted in the over-the-counter market in what are
commonly referred to as the "pink sheets." As a result, investors may find
it more difficult to dispose of, or to obtain accurate quotations as to the
value of, the Company's securities.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 3 to Consolidated Financial Statements - Commitments and
Contingencies.
ITEM 5. OTHER INFORMATION
On July 18, 1997, Charles W. Berger resigned as Chief Executive Officer to
pursue other interests but will continue as a non-executive Chairman of the
Board of the Company.
At the same time, Mark Housley was appointed to the position of Chief
Executive Officer. Mr. Housley has been President and Chief Operating Officer
of the Company since January 1997. From March 1995 until October 1996, Mr.
Housley was founder and Vice President of marketing of Spectrum Wireless,
Inc., a manufacturer of wireless infrastructure products. From May 1992
until March 1995, Mr. Housley held various positions of responsibility for
the Company and its predecessor SuperMac Technologies, Inc., including Vice
President and General Manager of the Company's Color Publishing Division.
From October 1990 until May 1992, Mr. Housley was a Vice President for
Siemens in Santa Clara, a multinational manufacturer of electronic equipment,
directing product marketing and planning.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The following exhibits are filed with this Quarterly Report:
10.01 Amended and Restated Working Capital and Term Loan Agreement dated
as of May 12, 1997 between IBM Credit and the Registrant.
11.01 Computation of net (loss) income per share earnings.
27.01 Financial Data Schedule (EDGAR version only).
(b) REPORTS ON FORM 8-K
No report on Form 8-K was filed during the three months ended June 30, 1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 12, 1997 RADIUS INC.
By:/s/
---------------------------
Henry V. Morgan
Chief Financial Officer
-19-
<PAGE>
EXHIBIT 10.01
AMENDMENT No. 3
TO
AMENDED AND RESTATED WORKING CAPITAL FINANCING AND TERM LOAN AGREEMENT
This third Amendment ("Amendment") to the Amended and Restated Working
Capital and Term Loan Agreement is made as of May 12, 1997 by and between
Radius, Inc., a California corporation ("Customer") and IBM Credit
Corporation, a Delaware corporation ("IBM Credit").
RECITALS:
A. Customer and IBM Credit have entered into that certain Amended and
Restated Working Capital Financing and Term Loan Agreement dated as of August
30, 1996 (as amended, supplemented or otherwise modified from time to time,
the "Agreement").
B. Customer has requested that a certain change be made to the Section
V. Special Definitions of Attachment A to the Agreement.
C. IBM Credit is willing to accommodate Customer's request subject to
the conditions set forth below.
AGREEMENT
NOW THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, Customer and IBM Credit hereby agree as follows:
Section 1. Definitions. All capitalized terms not otherwise defined herein
shall have the respective meanings set forth in the Agreement.
Section 2. Amendment. The Agreement is hereby amended as follows:
Attachment A to the Amended and Restated Working Capital Financing and
Term Loan Agreement is hereby amended by deleting such Attachment A in its
entirety and substituting, in lieu thereof, the Attachment A attached hereto.
Such new Attachment A shall be effective as of the date specified in the new
Attachment A. The change contained in the new Attachment A is a change in the
definition of Spalsh Collateral Value in respect to when the Base Per-Share
Value will be considered $0.
Section 4. Representations and Warranties. Customer makes to IBM Credit the
following representations and warranties all of which are material and are
made to induce IBM Credit to enter into this Amendment.
Section 4.1 Accuracy and Completeness of Warranties and Representations. All
representations made by Customer in the Agreement were true and accurate and
complete in every respect as of the date made, and, as amended by this
Amendment, all representations made by Customer in the Agreement are true,
accurate and complete in every material respect as of the date hereof, and do
not fail to disclose any material fact necessary to make representations not
misleading.
<PAGE>
Section 4.2 Violation of Other Agreements. The execution and delivery of
this Amendment and the performance and observance of the covenants to be
performed and observed hereunder do not violate or cause Customer not to be
in compliance with the terms of any agreement to which Customer is a party.
Section 4.3 Litigation. Except as has been disclosed by Customer to IBM
Credit in writing, there is no litigation, proceeding, investigation or labor
dispute pending or threatened against Customer, which if adversely
determined, would materially adversely affect Customer's ability to perform
Customer's obligations under the Agreement and the other documents,
instruments and agreements executed in connection therewith or pursuant
hereto.
Section 4.4 Enforceability of Amendment. This Amendment has been duly
authorized, executed and delivered by Customer and is enforceable against
Customer in accordance with its terms.
Section 5. Ratification of Agreement. Except as specifically amended hereby,
all of the provisions of the Agreement shall remain unamended and in full
force and effect. Customer hereby, ratifies, confirms and agrees that the
Agreement, as amended hereby, represents a valid and enforceable obligation
of Customer, and is not subject to any claims, offsets or defenses.
Section 6. Governing Law. This Amendment shall be governed by and
interpreted in accordance with the laws which govern the Agreement.
Section 7. Counterparts. This Amendment may be executed in any number of
counterparts, each of which shall be an original and all of which shall
constitute one agreement.
IN WITNESS WHEREOF, this Amendment has been executed by duly authorized
officers of the undersigned as of the day and year first above written.
Radius, Inc. IBM CREDIT CORPORATION
By:_________________________________ By:_______________________________
Name: Henry V. Morgan Name: Michael Burdian
Title: SVP and CFO Title: Manager, Working Capital
Practices
ATTEST: ATTEST:
___________________________________ ___________________________________
Print Name: Lynn Cox Print Name: John J. Reilly III
<PAGE>
EXHIBIT 11.01
COMPUTATION OF NET INCOME (LOSS) PER SHARE
(in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- --------------------------
1997 1996 1997 1996
--------- -------- ---------- -----------
<S> <C> <C> <C> <C>
Primary:
Average common shares outstanding 55,207 18,164 54,915 17,830
Net effect of dilutive stock
options - based on the modified treasury
stock method using average
market price - 248 - 120
--------- -------- ---------- -----------
Totals 55,207 18,412 54,915 17,950
--------- -------- ---------- -----------
--------- -------- ---------- -----------
Net (loss) income $ (7,892) $ 4,713 $ (14,277) $ 8,849
--------- -------- ---------- -----------
--------- -------- ---------- -----------
Per share amount $ (0.14) $ 0.26 $ (0.26) $ 0.49
--------- -------- ---------- -----------
--------- -------- ---------- -----------
Fully diluted:
Average common shares outstanding 55,207 18,164 54,770 17,830
Net effect of dilutive stock
options - based on the modified treasury stock
method using quarter end market price which is
greater than average market price - 251 - 121
--------- -------- ---------- -----------
Totals 55,207 18,415 54,770 17,951
--------- -------- ---------- -----------
--------- -------- ---------- -----------
Net (loss) income $ (7,892) $ 4,713 $ (14,277) $ 8,849
--------- -------- ---------- -----------
--------- -------- ---------- -----------
Per share amount* $ (0.14) $ 0.26 $ (0.26) $ 0.49
--------- -------- ---------- -----------
--------- -------- ---------- -----------
</TABLE>
* The primary net (loss) income per share is shown in the statements of
operations. Net (loss) income per share under the primary and fully
diluted calculations are equivalent.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> JUN-30-1997
<CASH> 766
<SECURITIES> 0
<RECEIVABLES> 11620
<ALLOWANCES> (3336)
<INVENTORY> 3642
<CURRENT-ASSETS> 43221
<PP&E> 32205
<DEPRECIATION> (31870)
<TOTAL-ASSETS> 65496
<CURRENT-LIABILITIES> 17639
<BONDS> 0
0
3000
<COMMON> 169019
<OTHER-SE> (146102)
<TOTAL-LIABILITY-AND-EQUITY> 65496
<SALES> 6041
<TOTAL-REVENUES> 6041
<CGS> 5472
<TOTAL-COSTS> 5472
<OTHER-EXPENSES> 7619
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 757
<INCOME-PRETAX> (7817)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7817)
<EPS-PRIMARY> (0.14)
<EPS-DILUTED> (0.14)
</TABLE>
