<PAGE>
Filed Pursuant to Rule 424(c)
Registration No. 333-12417
SUPPLEMENT TO PROSPECTUS DATED NOVEMBER 12, 1996
OF RADIUS INC. (THE "COMPANY")
This Supplement is a part of the Prospectus and must be timely delivered to
any purchaser of the securities offered by the selling shareholders or, if
applicable, the Company.
CHANGES IN MANAGEMENT. Henry V. Morgan joined the Company on February 24,
1997 as Chief Financial Officer and Senior Vice President, Finance and
Administration. During 1995 and 1996, Mr. Morgan was Chief Financial Officer
of Connect, Inc., Mountain View, California, an Internet-based interactive
commerce applications software company. From 1989 through 1994, Mr. Morgan
was Chief Financial Officer of Logitech International, S.A., a computer mouse
manufacturer.
On February 25, 1997, the shareholders approved the addition of Mark Housley,
Dee Cravens and John C. Kirby to the Company's Board of Directors.
Mr. Cravens has been Vice President of Worldwide Corporate Marketing and
Communications at Adaptec, Inc. since February 1996. Mr. Cravens was Vice
President of Marketing of the Company from 1992 until 1996. Before joining
the Company, Mr. Cravens was a principal of the Cravens Group, a marketing
company for technology related businesses. Mr. Cravens is a board member of
the USL Entertainment Council and the IMagic Technology Group.
Mr. Kirby has been a principal and Executive Vice President of KH Consulting
Group since 1986. Mr. Kirby is responsible for this firm's reorganization
and financial restructuring practice. In this capacity, Mr. Kirby has
represented various debtors, secured parties, trade creditors and corporate
buyers and frequently assumes a management role in the client. Since early
1991, Mr. Kirby has been President and CEO of Cabrillo Crane & Rigging, Inc.,
a wholly-owned subsidiary of Wells Fargo Bank. From 1992 until 1994, Mr.
Kirby was Vice President and CFO of Everex Systems, Inc.
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.
AMENDMENT TO 1995 STOCK OPTION PLAN. On February 25, 1997, the Company's
shareholders approved an increase, by 2,716,620, in the number of shares
subject to the Company's 1995 Stock Option Plan.
SUITABILITY STANDARDS FOR CALIFORNIA RESIDENTS. The California Department of
Corporations requires that any California resident who purchases these
securities meet certain minimum financial standards: namely, the purchaser
must (i) have an annual gross income of $65,000 and a net worth of $250,000,
or a net worth of $500,000 (in each case excluding home, home furnishings and
personal automobiles), (ii) be a bank, savings and loan association, trust
company, insurance company, investment company registered under the
Investment Company Act of 1940, pension and profit sharing trust, or
corporation or other entity which, together with such corporation's or other
entity's affiliates, has a net worth on a consolidated basis according to its
most recently prepared financial statements (which have been reviewed, but
not necessarily audited, by outside accountants) of not less than $14.0
million, and subsidiaries of the foregoing (other than a person formed for
the sole purpose of purchasing such securities), or (iii) be an "accredited
investor" within the meaning of Regulation D under the Securities Act of
1933. Upon receipt of the Prospectus and this Supplement, such purchaser
must represent that it meets these suitability standards by signing and
returning a copy of this Supplement to the selling shareholder or, if
applicable, the Company.
NO CALIFORNIA RESIDENT WILL BE ALLOWED TO PURCHASE THESE SECURITIES UNLESS IT
MEETS THESE INVESTOR SUITABILITY REQUIREMENTS.
<PAGE>
RESULTS FOR THREE AND SIX MONTHS ENDED MARCH 31, 1997.
RADIUS INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1997 1996 (1)
----------- ---------------
(unaudited)
<S> <C> <C>
ASSETS:
Current assets:
Cash $ 1,408 $ 2,974
Accounts receivable, net 11,612 8,123
Inventories 4,526 12,852
Investment in Splash Technology Holdings, Inc. - current portion 17,235 --
Prepaid expenses and other current assets 400 366
Income tax receivable -- 514
--------- ----------
Total current assets 35,181 24,829
Investment in Splash Technology Holdings, Inc. - noncurrent portion 21,940 19,152
Property and equipment, net 969 1,495
Deposits and other assets 50 50
--------- ----------
$58,140 $45,526
--------- ----------
--------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable $5,081 $5,004
Accrued payroll and related expenses 1,447 2,678
Accrued warranty costs 402 478
Other accrued liabilities 1,825 2,545
Accrued income taxes 2,042 2,227
Accrued restructuring and other charges 106 425
Short-term borrowings 3,809 1,922
Obligation under capital leases - current portion 646 1,074
--------- ----------
Total current liabilities 15,358 16,353
Long term borrowings 21,940 21,940
Obligations under capital leases - noncurrent portion 60 273
Commitments and contingencies
Convertible preferred stock 3,000 3,000
Shareholders' equity:
Common stock 168,928 168,746
Unrealized gain on available-for-sale securities 39,175 19,152
Accumulated deficit (190,353) (183,968)
Accumulated translation adjustment 32 30
--------- --------
Total shareholders' equity 17,782 3,960
--------- --------
$58,140 $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.
2
<PAGE>
RADIUS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data; unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales $ 8,249 $30,575 $19,051 $ 63,227
Commissions and royalties 1,898 -- 3,193 --
--------- -------- --------- --------
Total net sales 10,147 30,575 22,244 63,227
Cost of sales 8,409 25,098 15,435 53,705
--------- -------- --------- --------
Gross profit 1,738 5,477 6,809 9,522
--------- -------- --------- --------
Operating expenses:
Research and development 997 1,519 1,901 5,149
Selling, general and administrative 5,223 6,951 9,321 16,912
--------- -------- --------- --------
Total operating expenses 6,220 8,470 11,222 22,061
--------- -------- --------- --------
Loss from operations (4,482) (2,993) (4,413) (12,539)
Other income (expense), net (7) 18,132 (12) 19,269
Interest expense (757) (971) (1,494) (2,154)
--------- -------- --------- --------
Income (loss) before income taxes (5,246) 14,168 (5,919) 4,576
Provision for income taxes 195 249 316 440
--------- -------- --------- --------
Net income (loss) $(5,441) $13,919 $(6,235) $ 4,136
--------- -------- --------- --------
--------- -------- --------- --------
Preferred stock dividend 75 -- 150 --
Net income (loss) applicable to $(5,516) $13,919 $(6,385) $ 4,136
common shareholders --------- -------- --------- --------
--------- -------- --------- --------
Net income (loss) per share:
Net income (loss) per share applicable to $ (0.10) $ 0.77 $ (0.12) $ 0.23
common shareholders --------- -------- --------- --------
--------- -------- --------- --------
Common and common equivalent shares used 54,879 18,082 54,770 18,058
in computing net income (loss) per share --------- -------- --------- --------
--------- -------- --------- --------
</TABLE>
See accompanying notes.
3
<PAGE>
RADIUS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(in thousands, unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31,
-----------------
1997 1996
------ ------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(6,235) $4,136
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization 580 1,128
Gain on the sale of the Color Hard Copy Group -- (16,993)
(Increase) decrease in assets:
Accounts receivable (3,487) 33,519
Inventories 8,326 1,084
Prepaid expenses and other current assets (34) 1,190
Income tax receivable 514 2
Increase (decrease) in liabilities:
Accounts payable 77 (28,137)
Accrued payroll and related expenses (1,231) (1,404)
Accrued warranty costs (76) (2,728)
Other accrued liabilities (720) (777)
Accrued restructuring costs (319) (574)
Accrued income taxes (185) 179
------- --------
Total adjustments 3,445 (13,511)
------- --------
Net cash used in operating activities (2,790) (9,375)
Cash flows from investing activities:
Capital expenditures (54) (201)
Deposits and other assets -- 84
Net proceeds from the sale of the Color Hard Copy Group -- 16,438
------- --------
Net cash provided by (used in) investing activities (54) 16,321
Cash flows from financing activities:
Short-term borrowings, net 1,887 (8,109)
Principal payments of long-term debt and capital leases (641) (834)
Issuance of common stock 32 16
------- --------
Net cash provided by (used in) financing activities 1,278 (8,927)
------- --------
Net decrease in cash and cash equivalents (1,566) (1,981)
Cash and cash equivalents, beginning of period 2,974 4,760
------- --------
Cash and cash equivalents, end of period $ 1,408 $ 2,779
------- --------
------- --------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest paid $ 1,489 $ 1,084
------- --------
------- --------
Income taxes paid $ 7 $ 259
------- --------
------- --------
Non-cash financing activity:
Dividend to be paid in stock $ 150 $ --
------- --------
------- --------
</TABLE>
See accompanying notes.
4
<PAGE>
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 March 31, 1997 and for the three and six months ended March
31, 1997 and 1996 are unaudited. In the opinion of management, the
consolidated financial statements reflect all adjustments (consisting only of
normal recurring items) necessary for a fair presentation in conformity with
generally accepted accounting principles. Preparing financial statements
requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses. Examples
include provisions for returns and bad debts and the length of product life
cycles. The information included in this Form 10-Q should be read in
conjunction with the Consolidated Financial Statements and notes thereto
included in the Company's Annual Report on Form 10-K for the 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):
MARCH 31, SEPTEMBER 30,
1997 1996
----------- --------------
(unaudited)
Raw materials $ 21 $ 124
Work in process 1,086 4,488
Finished goods 3,418 8,240
--------- ----------
$4,526 $12,852
--------- ----------
--------- ----------
Cost of sales for the three and six month periods ended March 31, 1997
includes write down reserves for obsolete, slow-moving, or non-salable
inventory of $3.6 million.
NOTE 3. COMMITMENTS AND CONTINGENCIES
(a) On November 16, 1995, Electronics for Imaging, Inc. ("EFI") filed a suit
in the United States District Court in the Northern District of California
alleging that the Company infringes a patent allegedly owned by EFI.
Although the complaint does not specify which of the Company's products
allegedly infringe the patent, subsequent pleading indicates that EFI alleges
that the Company's Color Server products allegedly infringe. In January
1996, the Company completed the divestiture of the Color Server Group.
The Company has filed an answer denying all material allegations, and has
filed counterclaims against EFI alleging causes of action for interference
with prospective economic benefit, antitrust violations, and unfair business
practices. EFI's motion to dismiss or sever the Company's amended
counterclaims was granted in part and the ruling permitted the Company to
file an amended counterclaim for antitrust violations. The Company has filed
an amended antitrust claim. The Company believes it has meritorious defenses
to EFI's claims and is defending them vigorously. In addition, the Company
believes it 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.
5
<PAGE>
(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 advertised that the viewing areas of their
computer monitors are larger than in fact they are.
The Company was served with the Shapiro complaint on August 22, 1995 and was
served with the Maizes complaint on January 5, 1996. Defendants' petition to
the California State Judicial Council to coordinate the Shapiro case with
similar cases brought in other California jurisdictions was granted in part
and 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. Extended settlement
discussions began in connection with a successful demurrer in the California
case. On March 11, 1997, all but two of the named defendants agreed to settle
the suits, subject to final court approval. 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. Final court approval
is expected after a court hearing currently set for June 30, 1997. The
Company's estimate of the impact of this settlement, excluding the attorneys
fees and publication costs, is that it will not be material to its financial
condition or results of operations.
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
$39.2 million based upon the closing price of $25.00 per share on March 27,
1997 is recorded, net of deferred taxes of none, as a component of
shareholders' equity at March 31, 1997.
NOTE 5. 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 income (loss) per share applicable to common shareholders
as reported for the three and six months ended March 31, 1997 and 1996. The
Company does not expect the new diluted calculation to be materially
different from fully diluted earnings per share.
6
<PAGE>
NOTE 6. SUBSEQUENT EVENTS
Effective in the third fiscal quarter, the Company licensed certain
technology from Reply Corporation 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. A royalty
payment will be due on products incorporating such technology pursuant to the
license and in connection with such purchase. The purchase price of such
assets and inventory is expected to be less than $500,000.
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 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 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;
(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 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.
On March 31, 1997 the Company licensed certain technology from Reply
Corporation (see Note 6 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" 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 will be
marketed to the Company's existing customers and as well as to a broader
customer base.
7
<PAGE>
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 31, MARCH 31,
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 82.9 82.1 69.4 84.9
------- ------ ------- -------
Gross profit 17.1 17.9 30.6 15.1
------- ------ ------- -------
Operating expenses:
Research and development 9.8 5.0 8.5 8.1
Selling, general and administrative 51.5 22.7 41.9 26.7
------- ------ ------- -------
Total operating expenses 61.3 27.7 50.4 34.9
------- ------ ------- -------
Income (loss) from operations (44.2) (9.8) (19.8) (19.8)
Other income(expense), net (0.1) 59.3 (0.1) 30.5
Interest Expense (7.5) (3.2) (6.7) (3.4)
------- ------ ------- -------
Income (loss) before income taxes (51.7) 46.3 (26.6) 7.2
Provision for income taxes 1.9 0.8 1.4 0.7
------- ------ ------- -------
Net income (loss) (53.6)% 45.5% (28.0)% 6.5%
------- ------ ------- -------
------- ------ ------- -------
</TABLE>
NET SALES
The Company's net sales decreased 66.8% to $10.1 million in the second
quarter of fiscal 1997 from $30.6 million for the same quarter in fiscal
1996. Net sales for the first six months of fiscal 1997 decreased 64.8% to
$22.2 million from $63.2 million in the same period of fiscal 1996. The
decline is due to three primary factors: first is the result of the Company's
efforts to refocus its business on higher margin products; the second is the
divestiture of certain of its former business units; and the third is a
result of 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. As a
result of these factors, product sales decreased 73.8% and 69.9% for the
second quarter and the first six months of fiscal 1997 from the corresponding
periods of fiscal 1996. They also account for the decrease of the Company's
export sales to 20.4% of net sales in the second quarter of fiscal 1997 from
53.1% of net sales in the same quarter of fiscal 1996. Export sales declined
to 15.2% of net sales for the six month period in fiscal 1997, compared to a
58.4% of net sales for the corresponding period in fiscal 1996. These factors
also lead to the commission and royalties of $1.9 million and $3.2 million
for the second quarter and the first six months of fiscal 1997, respectively.
One customer, Ingram Micro, accounted for 55.0% and 69.4% of the Company's
net sales for the three and six months ended March 31,1997, respectively.
For the corresponding periods of fiscal 1996, the same customer accounted for
29.8% and 34.4% of the Company's net sales.
GROSS PROFIT
The Company's gross profit margin was 17.1% and 30.6% for the three and six
month periods ended March 31, 1997, as compared with 17.9% and 15.1% for the
corresponding periods in fiscal 1996. The decrease in gross profit margin
for the three month period was primarily due to a net charge of $3.6 million
relating to inventory write downs. Excluding the charge for inventory write
down reserves, gross profit margin would have been 53% and 47% for the three
and six month periods ended March 31, 1997, respectively, which increase was
primarily attributed to the Company's focus on higher margin products and
continuing efforts to reduce product costs and controlling expenses.
8
<PAGE>
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 remain at current levels for subsequent quarters or for the
entire fiscal year.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses decreased to $0.9 million or 9.8% of net
sales in the second quarter of fiscal 1997 from $1.5 million or 5.0% of net
sales in the same quarter of fiscal 1996. Research and development expenses
decreased from $5.1 million or 8.1% of net sales for the fist six months of
fiscal 1996 to $1.9 million or 8.5% of net sales for the corresponding period
of fiscal 1997. 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. 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 decreased to $5.2 million or
51.5% of net sales in the second quarter of fiscal 1997 from $7.0 million
or 22.7% of net sales in the same quarter of fiscal 1996. Included in the
second quarter of fiscal 1997 expenses is a charge of $1.2 million for
increasing the allowance for doubtful accounts due to one account which the
Company determined was unlikely to be collected in full. Selling, general
and administrative expenses decreased from $16.9 million or 26.7% of net
sales for the first six months of fiscal 1996 to $9.3 million or 41.9% of net
sales for the corresponding period in fiscal 1997. 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. 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 second quarter of fiscal 1997. The
Company had other income of $18.1 million in the second quarter of fiscal
1996 resulting from income of approximately $17.2 million, primarily related
to product group divestitures.
INTEREST EXPENSE
Interest expense was $0.8 million in the second quarter of fiscal 1997 as
compared to $1.0 million in the same period of 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 $5.4 million
and $6.2 million for the three and six months ended March 31, 1997,
respectively, as compared to a net income of $13.9 million and $4.1 million
for the three and six months ended March 31, 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 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,
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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 March 31, 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. Plaintiffs in each case purport to represent alleged
classes of similarly situated persons and/or the general public, and allege
that the defendants falsely advertised that the viewing areas of their
computer monitors are larger than in fact they are.
Although the Company believes it has meritorious defenses to the plaintiffs'
claims, due to the costs of defense regardless of outcome, 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. 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. Final court approval
is expected after a court hearing currently set for June 30, 1997. See Note
3 to Consolidated Financial Statements - Commitments and Contingencies.
FINANCIAL CONDITION
The Company's cash decreased approximately $1.6 million in the first half
of fiscal 1997 to $1.4 million at March 31, 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 half 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 $1.4 million of cash and cash equivalents
available at March 31, 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.
Under this agreement the Company has granted to IBM Credit a security
interest in substantially all of its assets including its securities in
Splash, Portrait Displays, Inc. ("PDI"), and UMAX Computer Corporation
("UMAX"). The securities in Splash are valued at $39.2 million on March 31,
1997, net of taxes which are estimated to be zero, and based on a closing
price of $25 per share as of such date. As the Company is an affiliate of
Splash, it can only sell its shares subject to the SEC Rule 144 volume
limitations, and is eligible to do so at this time.
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
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below $25 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.
The Company is currently negotiating with IBM Credit so that the "excess
value" of the Splash Common Stock is only excluded when it is below $22 per
share and expects to complete this negotiation within the third quarter.
There can be no assurance that this negotiation will be concluded favorably
to the Company.
Because of the exclusion of Splash Common Stock from the borrowing base
calculation when it is below $25 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 $5 million 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.
As of March 31, 1997 the Company was in compliance with all of the financial
covenants under the amended loan agreement dated February 14, 1997. 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 10K for the 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. This consent was
granted prior to the Company's entering into the agreement with Reply
Corporation. 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."
The Company believes it has sufficient funds to finance its operations for
the remainder of the fiscal year. However, the level of operations which it
believes will be able to sustain for the next 6 months will be significantly
lower than historical periods, particularly in the research and development,
sales and marketing and general administrative areas. Additional funds will
be needed to finance the Company's operations, product development plans and
for other purposes if the Company's operating expenses are higher than
anticipated. Additional financing will be required if the Company desires to
acquire or invest in additional complementary businesses or products or to
obtain the right to use complementary technologies. While the Company plans
to generate cash by divesting certain liquid assets and is 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.
The date of this Supplement is June 10, 1997.
* * * * *
Acknowledgment of Purchaser who is a California Resident
The undersigned represents that he, she or it meets the suitability standards
of the California Department of Corporations described above and understands
that the selling shareholder and the Company will rely on this acknowledgment.
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signature date
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print name (and title if applicable)
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