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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 28, 1996.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13(d) OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO .
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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 NO X
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THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S COMMON STOCK ON FEBRUARY
10, 1997 WAS 54,660,475.
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RADIUS INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE
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Item 1. Financial Statements
Consolidated Balance Sheets at December 31, 1996 and
September 30, 1996 3
Consolidated Statements of Operations for the Three
Months Ended December 31, 1996 and 1995 4
Consolidated Statements of Cash Flows for the Three
Months Ended December 31, 1996 and 1995 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
PART II. OTHER INFORMATION
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Item 1. Legal Proceedings 21
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 22
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PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RADIUS INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1996 (1)
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(unaudited)
<S> <C> <C>
ASSETS:
Current assets:
Cash $ 1,798 $ 2,974
Accounts receivable, net 10,827 8,123
Inventories 11,702 12,852
Investment in Splash Technology Holdings, Inc. - current portion 13,318 -
Prepaid expenses and other current assets 387 366
Income tax receivable 514 514
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Total current assets 38,546 24,829
Investment in Splash Technology Holdings, Inc. - noncurrent portion 25,857 19,152
Property and equipment, net 1,243 1,495
Deposits and other assets 50 50
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$ 65,696 $ 45,526
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LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 4,946 $ 5,004
Accrued payroll and related expenses 2,086 2,678
Accrued warranty costs 497 478
Other accrued liabilities 2,413 2,545
Accrued income taxes 2,369 2,227
Accrued restructuring and other charges 409 425
Short-term borrowings 3,835 1,922
Obligation under capital leases - current portion 859 1,074
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Total current liabilities 17,414 16,353
Long term borrowings 21,940 21,940
Obligations under capital leases - noncurrent portion 116 273
Commitments and contingencies
Convertible preferred stock 3,000 3,000
Shareholders' equity:
Common stock 168,853 168,746
Unrealized gain on available-for-sale securities 39,175 19,152
Accumulated deficit (184,837) (183,968)
Accumulated translation adjustment 35 30
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Total shareholders' equity 23,226 3,960
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$ 65,696 $ 45,526
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</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
DECEMBER 31,
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1996 1995
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<S> <C> <C>
Sales $10,802 $32,652
Commissions and royalties 1,295 -
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Total net sales 12,097 $32,652
Cost of sales 7,026 28,607
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Gross profit 5,071 4,045
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Operating expenses:
Research and development 904 3,630
Selling, general and administrative 4,098 9,961
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Total operating expenses 5,002 13,591
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Income (loss) from operations 69 (9,546)
Other income (expense), net (5) 1,137
Interest expense (737) (1,183)
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Loss before income taxes (673) (9,592)
Provision for income taxes 121 191
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Net loss $ (794) $ (9,783)
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Preferred stock dividend 75 -
Net loss applicable to common shareholders $ (869) $ (9,783)
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Loss per share:
Net loss per share applicable to common shareholders $ (0.02) $ (0.57)
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Common shares used in computing net loss per share 54,660 17,248
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</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>
THREE MONTHS ENDED
DECEMBER 31,
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1996 1995
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<S> <C> <C>
Cash flows from operating activities:
Net loss $ (794) $ (9,783)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 302 654
(Increase) decrease in assets:
Accounts receivable (2,699) 36,305
Inventories 1,150 2,507
Prepaid expenses and other current assets (21) (9,755)
Income tax receivable - 2
Increase (decrease) in liabilities:
Accounts payable (58) (30,212)
Accrued payroll and related expenses (592) 268
Accrued warranty costs 19 (660)
Other accrued liabilities (132) (689)
Accrued restructuring costs (16) (33)
Accrued income taxes 142 (29)
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Total adjustments (1,905) (1,642)
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Net cash used in operating activities (2,699) (11,425)
Cash flows from investing activities:
Capital expenditures (50) (195)
Deposits and other assets - 5
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Net cash used in investing activities (50) (190)
Cash flows from financing activities:
Short-term borrowings, net 1,913 14,306
Principal payments of long-term debt and capital leases (372) (470)
Issuance of common stock 32 9
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Net cash provided by financing activities 1,573 13,845
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Net increase (decrease) in cash and cash equivalents (1,176) 2,230
Cash and cash equivalents, beginning of period 2,974 4,760
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Cash and cash equivalents, end of period 1,798 $ 6,990
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Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest paid $ 715 $ 934
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Income taxes paid $ 55 $ 218
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Non-cash financing activity:
Dividend to be paid in stock $ 75 $ -
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</TABLE>
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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 December 31, 1996 and for the three months ended December 31, 1996 and
1995 are unaudited. In the opinion of management, the consolidated financial
statements reflect all adjustments (consisting only of normal recurring items)
necessary for a fair presentation of the financial position and results of
operations for the interim periods presented. These consolidated financial
statements should be read in conjunction with the Consolidated Financial
Statements and notes thereto included in the Company's Annual Report on Form 10-
K for the year ended September 30, 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):
DECEMBER 31, SEPTEMBER 30,
1996 1996
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(unaudited)
Raw materials $ 5 $ 124
Work in process 3,159 4,488
Finished goods 8,538 8,240
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$ 11,702 $ 12,852
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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.
(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
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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. Such discussions have been
complicated by the refusal of a small number of the defendants to participate in
the proposed settlement and a preliminary settlement of both cases is
anticipated soon. In the opinion of management, based on the facts known at this
time, the eventual outcome of these cases may have a material adverse effect on
the results of operations or financial position of the Company in the financial
period in which they are resolved. In addition, whether or not the eventual
outcomes of these cases have a material adverse effect on the results of
operations or financial condition of the Company, the costs of defense,
regardless of outcome, may have a material adverse effect on the results of
operations and financial condition of the Company.
(c) On April 17, 1996, the Company was served with a complaint filed by Colorox
Corporation ("Colorox"), in the Circuit Court of the State of Oregon, County of
Multnomah, case no. 9604-02481, which alleges that the Company breached an
alleged oral contract to sell its dye sublimation printer business to Colorox
for $200,000, and seeks both specific performance of the alleged contract and
alleged damages of $2.5 million. The Company believes it has meritorious
defenses to the plaintiff's claims and intends to defend them vigorously.
Nevertheless, the costs of defense, regardless of outcome, could have an adverse
effect on the results of operations and financial condition of the Company. On
February 4, 1997, the Company agreed to settle this lawsuit on terms management
considers less than material.
(d) The Company is involved in a number of other judicial and administrative
proceedings incidental to its business. The Company intends to defend such
lawsuits vigorously and although adverse decisions (or settlements) may occur in
one or more of such cases, the final resolution of these lawsuits, individually
or in the aggregate, is not expected to have a material adverse effect on the
financial position of the Company. However, depending on the amount and timing
of an unfavorable resolution of these lawsuits, it is possible that the
Company's future results of operations or cash flows could be materially
adversely affected in a particular period. In addition, the costs of defense,
regardless of the outcome, could have a material adverse effect on the results
of operations and financial condition of the Company.
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 (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 1.7 million
shares, is accounted for in accordance with FASB 115. The unrealized gain of
$39.2 million based upon the closing price of $22.50 per share on December 27,
1996 is recorded, net of deferred taxes, as a component of shareholders' equity
at December 31, 1996.
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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 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 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 and
(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.
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 -- Certain Factors That May
Affect the Company's Future Results of Operations."
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain operational
data as a percentage of net sales (may not add due to rounding).
THREE MONTHS ENDED DECEMBER 31,
---------------------------------
1996 1995
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Net sales 100.0% 100.0%
Cost of sales 58.1 87.6
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Gross profit 41.9 12.4
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Operating expenses:
Research and development 7.5 11.1
Selling, general and administrative 33.9 30.5
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Total operating expenses 41.4 41.6
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Income (loss) from operations 0.5 (29.2)
Other income (expense), net 0.0 3.5
Interest expense (6.1) (3.6)
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Loss before income taxes (5.6) (29.4)
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Provision for income taxes 1.0 0.6
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Net loss (6.6)% (30.0)%
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NET SALES
The Company's net sales decreased 63.0% to $12.1 million in the first quarter of
fiscal 1997 from $32.7 million for the same quarter in fiscal 1996. This
decline was primarily due to the sale by the Company of its Color Server Group
and as 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. In the first
quarter of fiscal 1997, the Company
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recorded approximately $1.2 million of commissions and royalties. As a result
of the sale of the Color Server Group (as described more fully in
"Management's Discussion and Analysis of Financial Condition --Certain
Factors That May Affect the Company's Future Results of Operations" and
"--Business Divestitures"), the Company has recorded no revenue from sales of
color server products since the second quarter of its 1996 fiscal year. The
Company recorded sales from its color server products of approximately $7.0
million for the first quarter of its 1996 fiscal year.
One customer, Ingram Micro, accounted for 81.5% and 37.5% of the Company's net
sales for the first quarter of fiscal 1997 and 1996, respectively.
The Company's export sales decreased to 10.9% of net sales in first quarter of
fiscal 1997 from 63.4% of net sales in the same quarter of fiscal 1996 primarily
as a result of the exclusive distributor relationships for Japan and Europe. The
Company now earns commissions on any sales to such regions and therefore will
only recognize as net sales a portion of the sales price of any product sold
through such distributor arrangements as compared with recognizing the entire
sales price of the products sold under its prior arrangements. Even if sales for
such regions increase or remain similar to historic levels, the Company would
recognize a lesser amount of net sales for such regions as compared to historic
levels. Accordingly, the Company anticipates a decline in the percentage of net
sales attributable to the Asia-Pacific and European sales regions and, as
described above, the Company could also experience a decline in the dollar
amount of net sales attributable to such regions. Export sales are also subject
to the normal risks associated with doing business in foreign countries such as
longer payment cycles, greater difficulties in accounts receivable collection,
export controls and other government regulations and, in some countries, a
lesser degree of intellectual property protection as compared to that provided
under the laws of the United States.
GROSS PROFIT
The Company's gross profit margin was 41.9% and 12.4% for the first quarters of
fiscal 1997 and 1996, respectively. The increase in gross margin was primarily
due to the Company's focus on higher margin products and continuing efforts to
reduce product costs and controlling expenses.
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 7.5% of net sales
in the first quarter of fiscal 1997 from $3.6 million or 11.1% of net sales in
the same quarter of fiscal 1996. The Company decreased its research and
development expenses primarily by reducing expenses related to headcount
resulting from the Company's efforts to refocus its business and business
divestitures. 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. 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 $4.1 million or 33.9%
of net sales in the first quarter of fiscal 1997 from $10.0 million or 30.5% of
net sales in the same quarter of fiscal 1996. 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.
OTHER INCOME (EXPENSE), NET
There was no other income recorded in the first quarter of fiscal 1997. Other
income of $1.1 million in the first quarter of fiscal 1996 resulted from income
of approximately $1.5 million from the Company's sale of its monochrome display
monitor business partially offset by other miscellaneous expenses.
INTEREST EXPENSE
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Interest expense was $0.7 million in the first quarter of fiscal 1997 as
compared to $1.2 million in the same period of fiscal 1996. This decrease was
due to lower average interest rates on lower average borrowings.
PROVISION FOR INCOME TAXES
The Company recorded a tax provision of $121,000 for the first quarter of fiscal
1997 as compared to a provision for taxes for the first quarter of fiscal 1996
of $191,000. The tax provision is primarily comprised of state and foreign
taxes.
FASB Statement 109 provides for the recognition of deferred tax assets if
realization of such assets is more likely than not. The Company's valuation
allowance reduced the deferred tax asset to the amount realizable. The Company
has provided a full valuation allowance against its net deferred tax assets due
to uncertainties surrounding their realization. Due to the net losses reported
in prior years and as a result of the material changes in operations,
predictability of earnings in future periods is uncertain. The Company will
evaluate the realizability of the deferred tax asset on a quarterly basis.
As a result of the issuance of Common Stock and Series A Convertible Preferred
Stock in exchange for accounts payable and other liabilities of the Company in
September 1996, the Company experienced a "change in ownership" as defined under
Section 382 of the Internal Revenue Code. Accordingly, utilization of net
operating loss and tax credit carryforwards will be subject to an approximately
$2.0 million annual limitation due to the ownership change limitations provided
by the Internal Revenue Code of 1986 (and similar state provisions), except
under limited circumstances. This limitation will result in the expiration of
all of the tax credit carryforwards and a substantial portion of the net
operating loss carryforwards before they may be utilized.
NET LOSS
As a result of the above factors, the Company had a net loss of $0.8 million for
the first quarter of fiscal 1997, as compared to a net loss of $9.8 million for
the same period in fiscal 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, 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 December 31, 1996, the Company had issued 836,674 shares of its Common
Stock due to the settlements and 99,630 shares remained to be issued.
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FINANCIAL CONDITION
The Company's cash decreased approximately $1.2 million in the first quarter
of fiscal 1997 to $1.8 million at December 31, 1996 as compared to the ending
balance at September 30, 1996. This decrease was primarily due to interest
payments associated with the Company's indebtedness with IBM Credit.
The Company also holds securities in Splash, Portrait Display Labs ("PDL")
and UMAX Computer Corporation ("UMAX"), which have been pledged to IBM
Credit. Splash became a public company on October 9, 1996, however, these
securities are "restricted securities" under Rule 144 promulgated under the
Securities Act and will become available for sale in January 1998, subject to
certain volume, manner of sale, notice and availability of public information
requirements of such rule. However, the Company also will have certain
registration rights with respect to those securities commencing in April
1997. Because PDL and UMAX are private companies, there is no market for
such securities and there can be no assurance that one will develop in the
future. In addition, as described under "-- Business Divestitures -- Color
Server Group Divestiture," the Company will be required to sell its
securities in Splash over no longer than a three year period ending October
9, 1999 if amounts are outstanding under the loan with IBM Credit.
The Company has granted to IBM Credit a security interest in substantially
all of its assets to secure the Company's various obligations to IBM Credit.
The Company has also granted to Mitsubishi Electronics a security interest
(securing an amount up to $4.4 million) in all of the Company's technology
and intellectual property rights related to and incorporated into the
Company's PressView products.
The Company's principal source(s) of liquidity currently are cash generated
by operations, if any, and an up to $5.0 million working line of credit
provided by IBM Credit pursuant to the terms of the restructured loan with
IBM Credit. This working line of credit is not expected to provide the
Company with a significant source of liquidity for the foreseeable future.
Accordingly, for the immediate future, the Company intends to finance its
working capital needs through cash generated from operations, if any. As
described above, the Company has minority ownership interests in Splash, UMAX
and PDL. The Company has certain registration rights with respect to the
shares of Common Stock of Splash owned by it and, as a result, the shares of
Common Stock of Splash could, if the market price of the Common Stock of
Splash does not decline, provide the Company with an additional source of
liquidity in the future provided that the restructured loan from IBM Credit
is first repaid with any proceeds from the sale of the Splash Common Stock
and that the Company's Series A Convertible Preferred Stock has either been
redeemed or converted into Common Stock. 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."
In connection with the debt for equity exchange which was consummated in
September 1996, (the "Plan"), IBM Credit received 750,000 shares of the
Company's Series A Convertible Preferred Stock and warrants to purchase
600,000 shares of Common Stock in consideration of the cancellation of $3.0
million of indebtedness to IBM Credit and for an additional advance of
$470,000. In addition, IBM Credit has restructured the terms of the
Company's remaining approximately $23.4 million indebtedness into a working
line of credit and a term loan. The Company has an up to $5.0 million
working line of credit and IBM Credit will extend advances under this line of
credit in an amount not to exceed the borrowing base (which is defined as (i)
the lesser of 10% of the gross value of eligible inventory or $500,000; plus
(ii) 80% of the Company's eligible domestic accounts receivable; plus (iii)
the lesser of 50% of the gross value of certain eligible Japanese and
European accounts receivable or $500,000). The $470,000 advanced by IBM
Credit pursuant to the Plan is included in this working line of credit but
will not be included in the calculation of the borrowing base. The initial
amount of indebtedness outstanding under this line of credit at September 30,
1996 was $1.5 million. The remaining $21.9 million balance of the Company's
indebtedness to IBM Credit has been converted to a four-year term loan. As of
December 31, 1996, amounts outstanding under this line of credit and term
loan were $3.8 million and $21.9 million, respectively, which had weighted
interest rates of 10.5% and 11.5%, respectively. Principal on such term loan
will be repaid on a mandatory prepayment schedule. The restructured loan
with IBM Credit is subject to mandatory prepayment as follows: (i) upon the
disposition of any assets of the Company outside of the ordinary course of
business, all net proceeds to the Company must be applied towards the
Company's obligations under the loan; (ii) upon the closing of any financing,
10% of the proceeds must be applied towards the Company's obligations under
the loan; (iii) upon the thirtieth day following the end of each fiscal
quarter, an amount of no less than 50% of operating cash flow for such prior
fiscal quarter must be applied towards the Company's obligations under the
loan; and (iv) upon the receipt of any other amounts other than sales of
inventory or used or obsolete equipment in the ordinary course of business,
and not otherwise described in the preceding clause (i) - (iii), all of
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such amounts must be applied towards the Company's obligations under the
loan. If the Company's obligations under the term loan, as well as finance
charges and amounts outstanding in excess of the "borrowing base" (described
above) under the working line of credit, are repaid, IBM Credit can require
such proceeds to be applied towards a redemption of the Series A Convertible
Preferred Stock. In addition, the Company is required to deposit its
revenues in accounts controlled by IBM Credit. At any time, regardless of
whether the Company is in default of its obligations to IBM Credit, IBM
Credit is permitted to apply these amounts towards the repayment of any of
the Company's obligations to IBM Credit. As a result of IBM Credit's control
over the Company's cash flow and these prepayment and redemption provisions,
together with the other terms and covenants of the restructured loan
agreement, the Company's ability to generate working capital or to undertake
a variety of other merger, disposition or financing activities will be
substantially restricted. 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."
As a result of IBM's control over the Company's cash flow and these
restrictions on 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."
Because of the Company's loss for the first quarter of fiscal 1997, the
Company failed to comply with several financial covenants of its restructured
loan agreement with IBM Credit (specifically, revenues to working capital
ratio, net profits to revenues ratio and working capital). The Company
obtained a waiver from IBM Credit of this noncompliance. There can be no
assurance that IBM Credit will grant any additional waivers in the event that
the Company fails to comply with these financial covenants in the future.
Previously, the Company funded its operations through the public and private
sale of equity securities, bank loans and cash flow from operations. The
Company completed a private placement during the third quarter of the 1995
fiscal year, the proceeds of which were utilized to build inventory of
MacOS-compatible systems components and reduce other vendor payables. This
business never generated a positive gross margin and the Company subsequently
sold its MacOs business in February 1996. In this private placement, the
Company sold 2,509,319 shares of its Common Stock resulting in net proceeds
to the Company of approximately $21.4 million. Other than the loan from IBM
Credit, the Company currently has no other bank loans. 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."
At December 31, 1996, the Company's principal commitments consisted of
obligations under its restructured loan agreement with IBM Credit and its
obligations under building and capital leases. See Notes 2 and 3 to
Consolidated Financial Statements on Form 10-K for year ended September 30,
1996. The Company is also a party to various litigation proceedings, the
costs of defending which or the outcome of which could adversely affect the
Company's liquidity. See " -- Legal Proceedings."
Recently, the Company's limited cash resources have restricted the Company's
ability to purchase inventory which in turn has limited its ability to
procure and sell products and has resulted in additional costs for expedited
deliveries. The adverse effect on the Company's results of operations due to
its limited cash resources can be expected to continue until such time as the
Company is able to return to profitability, or generate additional cash from
other sources. There can be no assurance that the Company will be able to do
so.
The Company believes it has sufficient funds to finance its operations for
the remaining fiscal year. However, the level of operations which it believes
will be able to sustain for the next 9 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. During fiscal 1997, additional financing will also be required
if the Company desires to
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acquire or invest in 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.
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
Although the Company achieved a small amount of operating income for the
first quarter, the Company experienced operating losses in each of its prior
four fiscal years. In the future, the Company's ability to achieve and
subsequently sustain profitable operations will depend upon a number of
factors, including the Company's ability to control costs; the Company's
ability to service its outstanding indebtedness to IBM Credit; the Company's
ability to realize appreciation in minority ownership interests in Splash
and other investments; the Company's ability to 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 and issued
a substantial amount of equity in the Company to its creditors in satisfaction
of approximately $45.9 million in claims and indebtedness during the fourth
quarter of fiscal 1996. 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. 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
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increase net sales in order to finance its working capital needs with cash
generated by operations. Furthermore, pursuant to the restructured loan with
IBM Credit, the Company is required to deposit its revenues in accounts
subject to control by IBM Credit. At any time, regardless of whether the
Company is in default of its obligations to IBM Credit, IBM Credit is
permitted to apply these amounts towards the repayment of any of the
Company's obligations to IBM Credit. This loan is also subject to mandatory
prepayment as follows: (i) upon the disposition of any assets of the Company
outside of the ordinary course of business, all net proceeds to the Company
must be applied towards the Company's obligations under the loan; (ii) upon
the closing of any financing, 10% of the proceeds must be applied towards the
Company's obligations under the loan; (iii) upon the thirtieth day following
the end of each fiscal quarter, an amount of no less than 50% of operating
cash flow for such prior fiscal quarter must be applied towards the Company's
obligations under the loan; and (iv) upon the receipt of any other amounts
other than sales of inventory or used or obsolete equipment in the ordinary
course of business, and not otherwise described in the preceding clause (i) -
(iii), all of such amounts must be applied towards the Company's obligations
under the loan. If the Company's obligations under the term loan, as well as
finance charges and amounts outstanding in excess of the "borrowing base"
(described below) under the working line of credit described below, are
repaid, IBM Credit can require such proceeds to be applied towards a
redemption of the Series A Convertible Preferred Stock. IBM Credit's control
over the Company's financial resources as well as these prepayment provisions
will place a further strain on the ability of the Company to fund its working
capital needs internally. Accordingly, there can be no assurance that the
Company will be able to successfully fund its working capital needs
internally.
The restructured loan also provides for a working line of credit of up to
$5.0 million. However, the Company will only be able to borrow amounts up to
the "borrowing base" which is defined as the sum of (i) the lesser of 10% of
the gross value of eligible inventory or $500,000; plus (ii) 80% of the value
of eligible domestic accounts receivable; plus (iii) the lesser of 50% of the
gross value of certain Japanese and European accounts receivable or $500,000.
Upon the closing of the restructured loan, approximately $1.5 million, or an
amount equal to the current borrowing base was deemed to be outstanding under
this line of credit. Therefore, in order to draw on this working line of
credit, the Company will need to increase the amount of the borrowing base by
increasing the amount of certain of its accounts receivable or repay amounts
outstanding under this line of credit. Because most of the Company's cash
flow must be applied towards prepayment of the term loan and, towards the
redemption of the Series A Convertible Preferred Stock, prior to reducing any
amounts outstanding under the working line of credit, there can be no
assurance that the Company will be able to significantly reduce this working
line of credit. Accordingly, there can be no assurance that this working
line of credit will provide a significant source of working capital.
The Company's ability to sell assets in order to satisfy its working capital
needs will also be restricted by the terms of the Series A Convertible
Preferred Stock and the terms of the restructured loan. The Series A
Convertible Preferred Stock will be redeemable at the option of IBM Credit
upon certain dispositions and, as described above, the Company is required to
apply the proceeds of any disposition towards repayment of the term loan
component of the restructured loan.
The restructured loan also imposes certain operating and financial
restrictions on the Company and requires the Company to maintain certain
financial covenants such as minimum cash flow levels, restricts the ability
of the Company to incur additional indebtedness, pay dividends, create liens,
sell assets or engage in mergers or acquisitions, or make certain capital
expenditures. The failure to comply with these covenants would constitute a
default under the loan, which is secured by substantially all of the
Company's assets. In the event of such a default, IBM Credit could elect to
declare all of the funds borrowed pursuant thereto to be due and payable
together with accrued and unpaid interest proceeding and to apply all amounts
on deposit in the Company's bank accounts, which could result in the Company
becoming a debtor in a bankruptcy. The loan restrictions could limit the
ability of the Company to effect future financings or otherwise restrict
corporate activities. Even if additional financing could be obtained, there
can be no assurance that it would be on terms that are favorable or
acceptable to the Company.
As of December 31, 1996, the Company was not in compliance with all of the
financial covenants under the restructured loan agreement (specifically, net
profit to revenue ratio and interest coverage ratio) however, IBM Credit has
waived such defaults. There can be no assurance that IBM Credit will grant
additional waivers in future periods in the event the Company is not in
compliance with such covenants. See Note 2 to Consolidated Financial
Statements contained in the Company's Annual Report on Form 10-K for the year
ended September 30, 1996.
The restructured loan may also limit the Company's ability to respond to
changing business and economic conditions, insofar as such conditions may
affect the financial condition and financing requirements of the Company. If
the Company is unable to generate sufficient cash flows from operations in
the future, it may be required to refinance all or a portion of its existing
indebtedness to IBM Credit (which indebtedness can be repaid without
prepayment penalties) or to obtain additional financing. There can be no
assurance that any such refinancing would be possible or that any additional
financing could be obtained on terms that are favorable or acceptable to the
Company. See "--Financial Condition."
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VOLATILITY OF STOCK PRICE
Immediately prior to the consummation of the Plan, the Company had
outstanding approximately 18,147,099 shares of Common Stock, most of which
were freely tradeable. Upon the effectiveness of the Registration Statement
relating to the resale of the securities issued pursuant to the Plan, the
number of freely tradeable shares of Common Stock increased by almost 200%
and, upon the conversion of the Series A Convertible Preferred Stock, up to
an additional 17,921,393 shares may be eligible for public resale, an
increase of almost 300% from the number of outstanding shares of Common Stock
prior to the consummation of the Plan. Furthermore, none of the creditors
who received shares of Common Stock pursuant to the Plan have entered into
any agreements restricting their ability to resell the shares of Common Stock
which they received. As a result of this substantially larger public float,
it is likely that a substantial number of creditors may seek to resell their
shares at times when there is an insufficient demand for shares of Common
Stock. In such an event, the trading price of the Common Stock will be
materially and adversely affected. The Company believes that sales by former
creditors have played a significant role in the decline of the trading price
of the Common Stock since November 1996.
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 recent 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 tradeable
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. See "--Litigation Settlement."
DEPENDENCE ON AND COMPETITION WITH APPLE
Historically, substantially all of the Company's products have been designed
for and sold to users of Apple 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. Recently, Apple has announced large losses,
management changes, headcount reductions, and other significant events which
have led or could lead to uncertainty in the market regarding Apple's
business and products. In addition, news reports indicating that Apple may
be or may have been the target of merger, acquisition, or takeover
negotiations, have led or could lead to uncertainty in the market regarding
Apple's business and products.
As software applications for the color publishing and multimedia markets
become more available on platforms other than Macintosh, it is likely that
these other platforms will continue to gain acceptance in these markets. For
example, newer versions of the Microsoft Windows operating system support
high performance graphics and video applications similar to those offered on
the Macintosh. There is a risk that this trend will reduce the support given
to Macintosh products by third party developers and could substantially
reduce demand for Macintosh products and peripherals in the Company's target
markets over the long term.
A number of the Company's products compete with products marketed by Apple.
As a competitor of the Company, Apple could in the future take steps to
hinder the Company's development of compatible products and slow sales of the
Company's products. The Company's business is based in part on supplying
products that meet the needs of high-end customers that are not fully met by
Apple's products. As Apple improves its products or bundles additional
hardware or software into its computers, the potential market for Radius
products that provide those capabilities will be reduced. For example, the
Company believes that the on-board performance capabilities included in
Macintosh Power PC products have reduced and continue to reduce overall sales
for the Company's graphics cards. In the past, the Company has developed new
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products as Apple's progress has rendered existing Company products obsolete.
However, in light of the Company's current financial condition and reduced
research and development expenditures there can be no assurance that the
Company will continue to develop new products on a timely basis or that any
such products will be successful. In order to develop products for the
Macintosh on a timely basis, the Company depends upon access to advance
information concerning new Macintosh products. A decision by Apple to cease
sharing advance product information with the Company would adversely affect
the Company's business.
New products anticipated from and introduced by Apple could cause customers
to defer or alter buying decisions due to uncertainty in the marketplace, as
well as presenting additional direct competition for the Company. For
example, the Company believes that Apple's transition during 1994 to Power PC
products caused delays and uncertainties in the marketplace and had the
effect of reducing demand for the Company's products. In addition, sales of
the Company's products have been adversely affected by Apple's 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.
DEPENDENCE ON LIMITED NUMBER OF MANUFACTURERS AND SUPPLIERS
The Company outsources the manufacturing and assembly of its products to
third party manufacturers. Although the Company uses a number of
manufacturer/assemblers, each of its products is manufactured and assembled
by a single manufacturer. The failure of a manufacturer to ship the
quantities of a product ordered by the Company could cause a material
disruption in the Company's sales of that product. In the past, most
recently in the fourth quarter of fiscal 1996, the Company has experienced
substantial delays in its ability to fill customer orders for displays and
other products, due to the inability of certain manufacturers to meet their
volume and schedule requirements and, more recently, due to the Company's
shortages in available cash. Such shortages have caused some manufacturers
to put the Company on a cash or prepay basis and/or to require the Company to
provide security for their risk in procuring components or reserving
manufacturing time, and there is a risk that manufacturers will discontinue
their relationship with the Company. In the past, most recently the fourth
quarter of fiscal 1996, the Company has been vulnerable to delays in
shipments from manufacturers because the Company has sought to manage its use
of working capital by, among other things, limiting the backlog of inventory
it purchases. This vulnerability has been exacerbated by the Company's
shortages in cash reserves. Delays in shipments from manufacturers can cause
fluctuations in the Company's short term results and contribute to order
cancellations. The Company currently has arranged payment terms for certain
of its major manufacturers such that certain of the Company's major customers
pay these manufacturers directly for products ordered and shipped. In the
event these customers do not pay these manufacturers, there can be no
assurance that such manufacturers will not cease supplying the Company. In
addition, as a condition to continuing its manufacturing arrangement with the
Company, the Company granted Mitsubishi Electronics, the manufacturer of the
Company's PressView products, a security interest in all of the Company's
technology and intellectual property rights related to and incorporated into
the Company's PressView products. There can be no assurance that other
manufacturers will not require special terms in order to continue their
relationship with the Company.
The Company is also dependent on sole or limited source suppliers for certain
key components used in its products, including certain 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.
Therefore, these suppliers are not obligated to supply products to the
Company for any specific period, in any specific
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quantity or at any specific price, except as may be provided in a particular
purchase order. Although the Company expects that these suppliers will
continue to meet its requirements for the components, there can be no
assurance that they will do so, particularly in light of the Company's
financial condition. The Company's reliance on a limited number of suppliers
involves a number of risks, including the absence of adequate capacity, the
unavailability or interruption in the supply of key components and reduced
control over delivery schedules and costs. The Company expects to continue
to rely on a limited number of suppliers for the foreseeable future. If
these suppliers became unwilling or unable to continue to provide these
components the Company would have to develop alternative sources for these
components which could result in delays or reductions in product shipments
which could have a material adverse effect on the Company's business,
operating results and financial condition. Certain suppliers, due to the
Company's shortages in available cash, have put the Company on a cash or
prepay basis and/or required the Company to provide security for their risk
in procuring components or reserving manufacturing time, and there is a risk
that suppliers will discontinue their relationship with the Company.
The introduction of new products presents additional difficulties in
obtaining timely shipments from suppliers. Additional time may be needed to
identify and qualify suppliers of the new products. Also, the Company has
experienced delays in achieving volume production of new products due to the
time required for suppliers to build their manufacturing capacity. An
extended interruption in the supply of any of the components for the
Company's products, regardless of the cause, could have an adverse impact on
the Company's results of operations. The Company's products also incorporate
components, such as VRAMs, DRAMs and ASICs that are available from multiple
sources but have been subject to substantial fluctuations in availability and
price. Since a substantial portion of the total material cost of the
Company's products is represented by these components, significant
fluctuations in their price and availability could affect its results of
operations.
As a result of the consummation of the Plan, certain suppliers and
manufacturers agreed to settle amounts owed by the Company for an amount
substantially less than the amount of the balance owed. Accordingly, certain
suppliers and manufacturers may be reluctant to continue to do business with
the Company in the future.
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. Technological innovation is particularly
important for the Company, since its business is based on its ability to
provide functionality and features not included in Apple's products. As
Apple introduces new products with increased functionality and features, the
Company's business will be adversely affected unless it develops new products
that provide advantages over Apple's latest offerings. As a result of the
Company's financial condition, it has had to significantly reduce its
research and development expenditures. For the first quarter of fiscal 1997,
the Company spent approximately $904,000 on research and development as
compared with approximately $3.6 million for the first quarter of fiscal
1996. Furthermore, as described in "-- Need for Additional Financing; Loan
Restrictions," the terms of the restructured loan with IBM Credit will
restrict the Company's ability to fund its working capital needs and, as a
result, the ability of the Company to maintain historical levels of research
and development expenditures which could adversely affect its ability to
develop new products. 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.
The Company anticipates that the video editing industry will follow the
pattern of the professional publishing industry in which desktop publishing
products, including those produced by Radius, replaced more expensive,
proprietary products, and the Company also anticipates that this evolution
will lead to an increase in the purchase and use of video editing products.
As a result, the Company has devoted significant resources to this product
line. There can be no assurance that this evolution will occur in the video
editing industry as expected by the Company, or that even if it does occur
that it will not occur at a slower pace than anticipated. There can also be
no assurance that any video editing products developed by the Company will
achieve consumer acceptance or broad commercial success. For example, the
Company initially began its MacOS compatible systems business in the third
quarter of fiscal 1995 and devoted substantial financial resources, including
raising approximately $21.4 million in a private placement of its Common
Stock and borrowing an additional $20.0 million from IBM Credit, and
incurring significant research and development and sales and marketing
expenses. This business was never profitable and the Company sold this line
of business in February 1996. In the event that the increased use of such
video editing products does not occur or in the event that the Company is
unable to successfully develop and market such products, the Company's
business, operating results and financial condition would be materially
adversely affected.
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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. Such orders
are in turn dependent upon the continued viability and financial condition of
these distributors and resellers as well as on their ability to resell such
products and maintain appropriate inventory levels. Furthermore, many of
these distributors and resellers generally carry the product lines of a
number of companies, are not subject to minimum order requirements and can
discontinue marketing the Company's products at any time. Accordingly, the
Company must compete for the focus and sales efforts of these third parties.
Because certain of the Company's major suppliers have arrangements with the
Company pursuant to which certain of the Company's major customers are
responsible for payment of goods sent to the Company, the Company is
dependent on certain resellers to make payments to its suppliers. In
addition, due in part to the historical volatility of the personal computer
industry, certain of the Company's resellers have from time to time
experienced declining profit margins, cash flow shortages and other financial
difficulties. The future growth and success of the Company will continue to
depend in large part upon its indirect distribution channels, including its
reseller channels. If its resellers or other distributors were to experience
financial difficulties, the Company's results of operations could be
adversely affected.
INTERNATIONAL SALES
Prior to the second fiscal quarter of 1996, the Company's international sales
were primarily made through distributors and the Company's subsidiary in
Japan. Effective April 1, and July 1, 1996 the Company appointed an exclusive
distributor for Japan and Europe, respectively. The Company expects that
international sales, particularly sales to Japan, will represent a
significant portion of its business activity and that it will be subject to
the normal risks of international sales such as currency fluctuations, longer
payment cycles, export controls and other governmental regulations and, in
some countries, a lesser degree of intellectual property protection as
compared to that provided under the laws of the United States. In addition,
demand for the Company's products in Japan has been affected by the
transition of its Japanese sales and marketing efforts from Radius'
subsidiary to a distributor. In addition, as a result of its new exclusive
distributor arrangements with respect to Europe and Japan, the Company will
only recognize as net revenue the amount of the commission received from sale
of its products as compared with the entire sales price of the product sold.
Accordingly, revenues attributable to such regions could be significantly
less than prior periods even though demand for the Company's products may
remain constant. Furthermore, a reduction in sales efforts or financial
viability of this distributor could adversely affect the Company's net sales
and its ability to provide service and support to Japanese customers.
Additionally, fluctuations in exchange rates could affect demand for the
Company's products. If for any reason exchange or price controls or other
restrictions on foreign currencies are imposed, the Company's business,
operating results and financial condition could be materially adversely
affected.
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant degree upon the continued
contributions of its key management, marketing, product development and
operational personnel and the Company's ability to retain and continue to
attract highly skilled personnel. The Company does not carry any key person
life insurance with respect to any of its personnel. Competition for
employees in the computer industry is intense, and there can be no assurance
that the Company will be able to attract and retain qualified employees.
Many members of the Company's management have departed within the past year,
including its former Chief Financial Officer and three other Vice Presidents,
and the Company has also had substantial
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layoffs and other employee departures. The Company's current Chief Financial
Officer has announced her resignation, which is effective April 1, 1997.
Because of the Company's financial difficulties, it has become increasingly
difficult for it to hire new employees and retain key management and current
employees. Moreover, because voting control of the Company rests in the hands
of the Company's former creditors, such persons could, if acting together,
effectuate changes in Board composition or management.
DEPENDENCE ON PROPRIETARY RIGHTS
The Company relies on a combination of patent, copyright, trademark and trade
secret protection, nondisclosure agreements and licensing arrangements to
establish and protect its proprietary rights. The Company has a number of
patents and patent applications and intends to file additional patent
applications as it considers appropriate. There can be no assurance that
patents will issue from any of these pending applications or, if patents do
issue, that any claims allowed will be sufficiently broad to protect the
Company's technology. In addition, there can be no assurance that any
patents that may be issued to the Company will not be challenged, invalidated
or circumvented, or that any rights granted thereunder would provide
proprietary protection to the Company. The Company has a number of
trademarks and trademark applications. There can be no assurance that
litigation with respect to trademarks will not result from the Company's use
of registered or common law marks, or that, if litigation against the Company
were successful, any resulting loss of the right to use a trademark would not
reduce sales of the Company's products in addition to the possibility of a
significant damages award. Although, the Company intends to defend its
proprietary rights, policing unauthorized use of proprietary technology or
products is difficult, and there can be no assurance that the Company's
efforts will be successful. The laws of certain foreign countries may not
protect the proprietary rights of the Company to the same extent as do the
laws of the United States.
The Company has received, and may receive in the future, communications
asserting that its products infringe the proprietary rights of third parties,
and the Company is engaged and has been engaged in litigation alleging that
the Company's products infringe others' patent rights. As a result of such
claims or litigation, it may become necessary or desirable in the future for
the Company to obtain licenses relating to one or more of its products or
relating to current or future technologies, and there can be no assurance
that it would be able to do so on commercially reasonable terms.
CONTROL BY CREDITORS
After the consummation of the Plan, the Company's unsecured creditors and IBM
Credit owned in the aggregate approximately 69.7% of the voting power of the
Company (assuming exercise of all available options, such creditors would own
approximately 67% of the voting power of the Company). IBM Credit owns
approximately 9.2% of the Company's voting power and the Committee Members
own approximately 38.6% of the voting power of the Company. After the
consummation of the Plan, the Company's four largest unsecured creditors, SCI
Technology, Inc., Mitsubishi Electronics, Hamilton Hallmark/Avnet Co. and
Manufacturers Services Limited, Inc. owned approximately 16.2%, 6.7%, 5.3%
and 2.9%, respectively, of the voting power of the Company after the
consummation of the Plan. All of the Company's creditors acting together
would have voting control of the management and direction of the Company and
could also impede a merger, consolidation, takeover or other business
combination involving the Company or discourage a potential acquiror from
making a tender offer or otherwise attempting to obtain control of the
Company. The Committee Members have acted cooperatively with respect to the
negotiation of the Plan, and the Company expects such creditors to continue
to act cooperatively with respect to their ownership of the Company's
securities.
One Committee Member, Carl Carlson of Mitsubishi Electronics joined the Board
of Directors in September 1996.
The Company also intends to continue to do business with many of its
unsecured creditors, including Mitsubishi Electronics and SCI Technology,
Inc., each of whom beneficially own more than 5% of the Company's Common
Stock. As a result, such creditors may be able to influence the terms of any
business relationship between the Company and such creditor.
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
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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. This dividend may be paid in cash or Common Stock of the
Company. 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 $0.50 per share on December 30, 1996, an additional 150,000 shares could
be issuable as a dividend on the Series A Convertible Preferred Stock at the
end of each quarter. 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 September 30, 1996, there were 1,135,347 shares of Common Stock
reserved for issuance upon exercise of outstanding options by employees and
consultants. As of such date there were an additional 1,695,331 shares of
Common Stock available for issuance under options to be granted to employees
and consultants and 125,321 shares reserved for issuances for purchases under
the Company's Employee Stock Purchase Plan. Additionally, 173,126 shares of
Common Stock were reserved for issuance under the Company's stock option
plans for non-employee directors, 32,812 of which were subject to outstanding
options. The Company has amended its 1995 Stock Option Plan (the "1995
Plan") to increase the number of shares available for issuance thereunder by
2,716,620 shares, subject to shareholder approval 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 tradeable shares of Common Stock outstanding
which could exert downward pressure on the trading price of the Common Stock.
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 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 for the
entire month of December), 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 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
(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.
(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. Such discussions have been complicated by the refusal of a small
number of the defendants to participate in the proposed settlement and a
preliminary settlement of both cases is anticipated soon. In the opinion of
management, based on the facts known at this time, the eventual outcome of
these cases may have a material adverse effect on the results of operations
or financial position of the Company in the financial period in which they
are resolved. In addition, whether or not the eventual outcomes of these
cases have a material adverse effect on the results of operations or
financial condition of the Company, the costs of defense, regardless of
outcome, may have a material adverse effect on the results of operations and
financial condition of the Company.
(c) On April 17, 1996, the Company was served with a complaint filed by
Colorox Corporation ("Colorox"), in the Circuit Court of the State of Oregon,
County of Multnomah, case no. 9604-02481, which alleged that the Company
breached an alleged oral contract to sell its dye sublimation printer
business to Colorox for $200,000, and this complaint sought both specific
performance of the alleged contract and alleged damages of $2.5 million. On
February 4, 1997, the Company agreed to settle this lawsuit on terms
management believes will not have a material effect on the business, results
of operations or financial condition of the Company.
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(d) The Company is involved in a number of other judicial and administrative
proceedings incidental to its business. The Company intends to defend such
lawsuits vigorously and although adverse decisions (or settlements) may occur
in one or more of such cases, the final resolution of these lawsuits,
individually or in the aggregate, is not expected to have a material adverse
effect on the financial position of the Company. However, depending on the
amount and timing of an unfavorable resolution of these lawsuits, it is
possible that the Company's future results of operations or cash flows could
be materially adversely affected in a particular period. In addition, the
costs of defense --regardless of the outcome -- could have a material adverse
effect on the business, results of operations and financial condition of the
Company.
ITEM 5. OTHER INFORMATION
On January 31, 1997, Henry V. ("Hank") Morgan agreed to join the Company as
Chief Financial Officer and Senior Vice President, Finance and
Administration. The Company expects Mr. Morgan to begin work on February 24,
1997. 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
--------
The following exhibits are filed with this Quarterly Report:
10.01 Employment Agreement by and between Registrant and Mark Housley dated
December 20, 1996.
11.01 Computation of per share earnings.
27.01 Financial Data Schedule (EDGAR version only).
(b) Reports on Form 8-K
-------------------
On December 5, 1996 an optional report pursuant to Item 5 of Form 8-K was
filed by the Company for the purpose of making available certain financial
data. The Company's Unaudited Consolidated Statement of Operations for the
twelve months ended September 30, 1996 was filed therewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: February 10, 1997 RADIUS INC.
By:/s/
----------------------------
Cherrie L. Fosco
Chief Financial Officer
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Exhibit 10.01
December 19, 1996
Mr. Mark Housley
772 Rosewood Drive
Palo Alto, CA 94303
Re: EMPLOYMENT TERMS
Dear Mr. Housley:
Pursuant to our recent discussions, this letter sets forth the terms of your
future employment with Radius Inc. (the "Company") as well as our understanding
with respect to any termination of such employment relationship.
1. POSITION AND DUTIES: You will be employed by the Company as its President
and Chief Operating Officer reporting to the Company's Chief Executive Officer,
Charles W. Berger. You accept employment with the Company on the terms and
conditions set forth in this Agreement, and you agree to devote your full
business time, energy and skill to your duties at the Company. These duties
will include, but not be limited to, any duties consistent with your position,
as well as any other reasonable duties which may be assigned to you from time to
time by the Chief Executive Officer or the Board of Directors (the "Board").
These duties will begin on January 6, 1997. In the event that the Company's
Chief Executive Officer resigns or is removed, then you will be offered such
additional position if the Board is satisfied with your performance and you will
report to the Chairman of the Board.
At the next Board of Directors meeting, the Board will appoint you to a position
on the Board.
2. TERM OF EMPLOYMENT: Your employment by the Company is for no specified
term, and may be terminated by you or the Company at any time, with or without
cause, subject to the provisions of Paragraphs 4 and 5 below.
3. COMPENSATION: You will be compensated by the Company for your services as
follows:
(a) SALARY: You will be paid a monthly salary of $16,667.00, less
applicable withholding, in accordance with the Company's normal payroll
procedures. Your salary will be reviewed by the Chief Executive Officer and the
Board on an annual basis, and may be subject to upward adjustment based upon
various factors including, but not limited to, your performance, the Company's
profitability, and the prevailing annual inflation rate.
(b) BONUS: You will be eligible to receive a semi-annual bonus at the end
of each fiscal half year (March 31 and September 30). For the fiscal half year
ending March 31, 1997, your target and guarantied bonus is $25,000 (i.e., 50% of
base pay), based on operating margin goals (per the 1997 Plan attached as
Schedule 1) with a 50% accelerator over 100% performance and a 200% performance
cap. For the second half
Housley Letter Agreement 1
<PAGE>
year ending September 30, 1997, your target bonus is $50,000 and the
guarantied bonus is $25,000. Thereafter, there is no guarantied bonus, the
target bonus will remain 50% of base pay and unless performance equals or
exceeds 80% of the operating margin goal, no bonus will be paid. Operating
margin goals will be reestablished each year with Board approval. The same
operating margin goals will apply to all officers participating in this form
of bonus compensation program. If the Board terminates the program after
fiscal year 1997, then you and the Company will negotiate an alternative
form of program which provides reasonably equivalent incentive.
(c) BENEFITS: You will have the right, on the same basis as other
executive employees of the Company, to participate in and to receive benefits
under all of the Company's medical, disability or other plans, as well as under
the Company's vacation and business expense reimbursement policies.
(d) STOCK OPTIONS: You will be granted a nonqualified stock option to
purchase 1,000,000 shares of the Company's common stock (the "Shares"). The
exercise price of the Shares will be equal to the closing price of the Company's
common stock on the NASDAQ Small Cap Market System on the last trading day prior
to the date the option is granted. The option will be granted on the business
day following the date on which you sign and return this letter. Your option
will vest starting on your first day of employment with the Company as Chief
Operating Officer at the rate of 4% per month in arrears. The Company will
prepare and file with the Securities and Exchange Commission a registration
statement on Form S-8 covering all of the Shares. The form of option agreement
is attached as Schedule 2.
4. BENEFITS UPON VOLUNTARY TERMINATION: In the event that you voluntarily
resign from your employment with the Company, you shall be entitled to no
compensation or benefits from the Company other than those earned under
Paragraph 3 through the date of your termination. You agree that in the event
you voluntarily terminate your employment with the Company, you shall provide
the Company with one month's written notice of your termination. The Company
may, in its sole discretion, elect to waive all or any part of such notice
period and accept your voluntary termination at an earlier date.
5. BENEFITS UPON OTHER TERMINATION: In the event your employment is
terminated by the Company for the reasons set forth below, you shall be entitled
to the following:
(a) TERMINATION FOR CAUSE: If your employment is terminated by the
Company for cause, you shall be entitled to no compensation or benefits from the
Company other than those earned under Paragraph 3 through the date of your
termination. For purposes of this Agreement, a termination "for cause" occurs
if you are terminated for any of the following reasons: (i) theft, dishonesty,
or falsification of any employment or Company records; (ii) improper material
disclosure of the Company's confidential or proprietary information; (iii) your
conviction of a felony which materially impairs your ability to perform your
duties under this Agreement; (iv) any material violation by you of the Company's
insider trading policy; or (v) your willful and persistent refusal to follow the
instructions of the Chief Executive Officer or the Board.
(b) TERMINATION FOLLOWING AN ACQUISITION. In the event of the sale of all
or substantially all of the assets of the Company, the merger or consolidation
of the Company with or into another corporation, the acquisition of more than
fifty percent
Housley Letter Agreement 2
<PAGE>
(50%) of the outstanding shares of the Company by a single person or a group
of related persons (such events are collectively referred to hereinafter as
an "Acquisition") following which you are not offered your position as
President and Chief Operating Officer of the surviving entity, the Board of
Directors of the surviving entity (the "Surviving Board") may at its option
request that you remain available to assist the surviving entity on up to a
full time basis for six months following the effective date of the
Acquisition and for up to an additional six months at up to 20% of full time.
If you comply with the Surviving Board's request to assist the surviving
entity during this 12 month period (the "Transition Period") or if the
Surviving Board elects not to request your services during the Transition
Period, you will be entitled to the following benefits: (i) you will
continue to receive your normal salary and benefits during the Transition
Period and (ii) your option will vest as set forth below. During the
Transition Period you will continue to vest at the rate of 4% per month. At
the end of the Transition Period any remaining unvested shares will
immmediately vest. However, in no event will the total number of Shares
available to you under your options be increased. The Transition Shares will
vest on a monthly basis over the Transition Period (i.e. 1/12 of the total
Transition Shares per month).
(c) OTHER TERMINATION: If your employment is terminated by the Company
for any reason other than cause (including your death or disability) or
following an Acquisition, you shall continue to be paid for the next six months
at your then-current salary rate, less applicable withholding, in accordance
with the Company's normal payroll procedures. You shall also continue to vest
in the Shares according to the schedule specified in Paragraph 3(e) during the
six month period that you continue to receive your salary from the Company, and
your option will remain exercisable for a period of three additional months
after your option stops vesting. In addition to the severance benefits
described in this Paragraph, you shall also be entitled to receive any
compensation and benefits which you have earned under Paragraph 3(c) through the
date of your termination.
(d) RELEASE: The Company's obligations to provide you with the severance
benefits described in Sections 5(b) and (c) above will be contingent upon your
execution (at the time your employment is terminated) of the Release attached to
this Agreement (as Schedule 3) and the completion of the seven (7) day
revocation period described in the Release, if applicable.
6. CONFIDENTIAL AND PROPRIETARY INFORMATION: Upon your employment you agree
to sign the Company's standard Employee Nondisclosure and Invention Assignment
Agreement attached as Schedule 4. You further agree that you shall not breach
any obligation which you have to any of your former employers with respect to
their confidential or proprietary information during your employment with the
Company.
7. EMPLOYMENT ELIGIBILITY VERIFICATION: You agree to provide the Company with
appropriate documentation establishing your identity and eligibility for
employment in the United States within three days of your employment as required
by the Immigration and Reform Control Act of 1986.
8. DISPUTE RESOLUTION: In the event of any dispute or claim relating to or
arising out of our employment relationship or this Agreement (including, but not
limited to, any claims of wrongful termination or age or other discrimination),
we agree that all such disputes shall be fully and finally resolved by binding
confidential arbitration conducted by the American Arbitration Association in
Santa Clara County, California;
Housley Letter Agreement 3
<PAGE>
provided, however, that this arbitration provision shall not apply to any
disputes or claims relating to or arising out of your misuse or
misappropriation of the Company's trade secrets or proprietary information.
9. ATTORNEYS' FEES: The prevailing party shall be entitled to recover from
the losing party its attorneys' fees and costs incurred in any action brought to
enforce any right arising out of this Agreement.
10. INTERPRETATION: This Agreement shall be interpreted in accordance with and
governed by the laws of the State of California.
11. ASSIGNMENT: In view of the personal nature of the services to be performed
under this Agreement by you, you shall not have the right to assign or transfer
any of your obligations hereunder.
12. ENTIRE AGREEMENT: This letter constitutes the entire Agreement between you
and the Company regarding the terms and conditions of your employment, and it
supersedes all prior negotiations, representations or agreements between you and
the Company regarding your employment, whether written or oral.
13. MODIFICATION: This Agreement, and the Release attached hereto, may only be
modified or amended by a supplemental written agreement signed by you and an
authorized member of the Board.
We look forward to working with you at Radius Inc. Please sign this letter on
the space provided below to acknowledge your acceptance of the terms of this
Agreement.
Sincerely,
Charles W. Berger
Chairman and Chief Executive Officer
I agree to and accept employment with Radius Inc. on the terms and conditions
set forth above.
Date: December 20, 1996 By: /s/
-----------------------------------
Mark Housley
Housley Letter Agreement 4
<PAGE>
EXHIBIT 11.01
COMPUTATION OF NET LOSS PER SHARE
(in thousands, except per share data)
THREE MONTHS ENDED
DECEMBER 31,
1996 1995
-------- --------
Primary:
Average common shares outstanding 54,660 17,248
Net effect of dilutive stock
options - based on the modified treasury
stock method using average
market price - -
------- -------
Totals 54,660 17,248
------- -------
------- -------
Net loss applicable to common shareholders $(869) $(9,783)
------- -------
------- -------
Per share amount $(0.02) $(0.57)
------- -------
------- -------
Fully diluted:
Average common shares outstanding 54,660 17,248
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 - -
------- -------
Totals 54,660 17,248
------- -------
------- -------
Net loss applicable to common shareholders $(869) $(9,783)
------- -------
------- -------
Per share amount* $(0.02) $(0.57)
------- -------
------- -------
* The primary net loss per share is shown in the statements of operations.
Net loss per share under the primary and fully diluted calculations are
equivalent.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> DEC-31-1996
<CASH> 1798
<SECURITIES> 0
<RECEIVABLES> 12863
<ALLOWANCES> (2036)
<INVENTORY> 11702
<CURRENT-ASSETS> 38546
<PP&E> 35364
<DEPRECIATION> (34121)
<TOTAL-ASSETS> 65696
<CURRENT-LIABILITIES> 17414
<BONDS> 116
0
3000
<COMMON> 168853
<OTHER-SE> (145627)
<TOTAL-LIABILITY-AND-EQUITY> 65696
<SALES> 12097
<TOTAL-REVENUES> 12097
<CGS> 7026
<TOTAL-COSTS> 7026
<OTHER-EXPENSES> 5002
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 737
<INCOME-PRETAX> (673)
<INCOME-TAX> 121
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (794)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
