-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FiGcctmthxO5Y4sZnPA0HJg76D2YSHjmKvfNU5sX1Dt7Ye6CEodzgYdz65uLGUz8 7bK1GYjq2cMfXs+icpzM1A== 0000912057-96-025762.txt : 19961113 0000912057-96-025762.hdr.sgml : 19961113 ACCESSION NUMBER: 0000912057-96-025762 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 19961112 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: RADIUS INC CENTRAL INDEX KEY: 0000805574 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 680101300 STATE OF INCORPORATION: CA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-12417 FILM NUMBER: 96659954 BUSINESS ADDRESS: STREET 1: 215 MOFFETT PARK DRIVE CITY: SUNNYVALE STATE: CA ZIP: 94089-1374 BUSINESS PHONE: 4085416100 MAIL ADDRESS: STREET 1: RADIUS INC STREET 2: 215 MOFFETT PARK DR CITY: SUNNYVALE STATE: CA ZIP: 94089-1374 S-1/A 1 FORM S-1/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 12, 1996 REGISTRATION NO. 333-12417 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------- AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------------------- RADIUS INC. (Exact Name of Registrant as Specified in Its Charter) CALIFORNIA 3577 68-0101300 (State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Incorporation or Organization) Classification Code Number) Identification No.)
----------------------- ----------------------- 215 MOFFETT PARK DRIVE SUNNYVALE, CALIFORNIA 94089 (408) 541-6100 (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices) ----------------------- ----------------------- CHARLES W. BERGER PRESIDENT AND CHIEF EXECUTIVE OFFICER RADIUS INC. 215 MOFFETT PARK DRIVE SUNNYVALE, CALIFORNIA 94089 (408) 541-6100 (Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent For Service) ------------------------ COPIES TO: EDWIN N. LOWE, ESQ. JEFFREY R. VETTER, ESQ. FENWICK & WEST LLP TWO PALO ALTO SQUARE, SUITE 800 PALO ALTO, CALIFORNIA 94306 (415) 494-0600 ------------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: FROM TIME TO TIME FOR A PERIOD OF TWO YEARS AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT OR UNTIL THE EARLIER OF SALE OF ALL SHARES REGISTERED HEREUNDER. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. /X/ If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of earlier effective registration statement for the same offering. / / ---------------- If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of earlier effective registration statement for the same offering. / / ---------------- If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / ------------------- CALCULATION OF REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF BE REGISTERED REGISTERED OFFERING PRICE PER SHARE AGGREGATE OFFERING PRICE REGISTRATION FEE - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ COMMON STOCK 36,372,198 SHARES $1.344 (1) $48,884,234.11 (1) $16,856.63 - ------------------------------------------------------------------------------------------------------------------------------------ SERIES A CONVERTIBLE PREFERRED STOCK 750,000 SHARES COMMON STOCK ISSUABLE UPON CONVERSION OF SERIES A CONVERTIBLE PREFERRED STOCK (3) 6,075,333 SHARES $1.344 (2) $8,165,247.55 (2) $2,815.60 - ------------------------------------------------------------------------------------------------------------------------------------ WARRANTS TO PURCHASE COMMON STOCK 600,000 WARRANTS COMMON STOCK ISSUABLE UPON EXERCISE OF WARRANTS (4) 600,000 SHARES $1.00 (2) $600,000 (2) $206.90 (2) - ------------------------------------------------------------------------------------------------------------------------------------ COMMON STOCK (5) $600,000 (2) $206.90 - ------------------------------------------------------------------------------------------------------------------------------------ COMMON STOCK (6) 11,046,060 SHARES $1.344 (7) $14,845,904.64 (7) $5,119.28 - ----------------------------------------------------------------------------------------------------------------------------------- WARRANTS TO PURCHASE COMMON STOCK 200,000 WARRANTS COMMON STOCK ISSUABLE UPON EXERCISE OF WARRANTS (4) 200,000 SHARES $1.00 (8) $200,000 (8) $60.61 (8) - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL $73,295,386.30 $25,265.92 - ----------------------------------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------------------------------
(1) Calculated and previously paid pursuant to Rule 457(c) solely for the purpose of calculating the amount of the registration fee. (2) Calculated and previously paid pursuant to Rule 457(i) for the purpose of calculating the amount of the registration fee. (3) Represents the maximum number of shares of Common Stock issuable upon conversion of the Company's Series A Convertible Preferred Stock. Also includes an indeterminate number of additional shares of Common Stock which may become issuable pursuant to the anti-dilution provisions of the Series A Convertible Preferred Stock. (4) Also includes an indeterminate number of additional shares of Common Stock which may become issuable pursuant to the anti-dilution provisions of the Warrants. (5) Represents shares of Common Stock which may be issued in lieu of cash dividends on the Series A Convertible Preferred Stock for the next two years. (6) Represents shares of Common Stock issuable pursuant to Rights. (7) Calculated pursuant to Rule 457(f) solely for the purpose of calculating the registration fee. (8) Calculated pusuant to Rule 457(i) for the purpose of calculating the registration fee. ------------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SUBJECT TO COMPLETION DATED NOVEMBER 12, 1996 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. RADIUS INC. ------------------ SHARES OF COMMON STOCK HAVING AN AGGREGATE MARKET PRICE OF $600,000 ------------------ 750,000 SHARES OF SERIES A CONVERTIBLE PREFERRED STOCK 800,000 WARRANTS TO PURCHASE COMMON STOCK 54,293,591 SHARES OF COMMON STOCK ----------------- RADIUS INC., (THE "COMPANY" OR "RADIUS") IS OFFERING A NUMBER OF SHARES OF COMMON STOCK HAVING A FAIR MARKET VALUE OF $600,000 FOR THE PAYMENT OF DIVIDENDS IN SHARES OF COMMON STOCK ON THE COMPANY'S SERIES A CONVERTIBLE PREFERRED STOCK. THESE SHARES OF COMMON STOCK ARE BEING OFFERED IN THE EVENT THAT THE COMPANY ELECTS TO PAY ALL OF ITS DIVIDEND OBLIGATIONS ON THE SERIES A CONVERTIBLE PREFERRED STOCK FOR THE NEXT TWO YEARS IN SHARES OF ITS COMMON STOCK INSTEAD OF CASH. SEE "DESCRIPTION OF CAPITAL STOCK -- PREFERRED STOCK - -- SERIES A CONVERTIBLE PREFERRED STOCK" AND "PLAN OF DISTRIBUTION." SUCH SHARES OF COMMON STOCK ARE BEING OFFERED ON A CONTINUOUS BASIS PURSUANT TO RULE 415 ("RULE 415") UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") DURING A PERIOD WHICH WILL BE TWO YEARS IN LENGTH. SEE "PLAN OF DISTRIBUTION." THE REMAINING 54,293,591 SHARES OF COMMON STOCK, 750,000 SHARES OF SERIES A CONVERTIBLE PREFERRED STOCK AND 800,000 WARRANTS TO PURCHASE COMMON STOCK (THE "WARRANTS") ARE BEING OFFERED BY THE SELLING SECURITYHOLDERS. OF THE SHARES OF COMMON STOCK BEING OFFERED BY THE SELLING SECURITYHOLDERS, UP TO 6,075,333 SHARES ARE BEING OFFERED UPON CONVERSION OF THE SERIES A CONVERTIBLE PREFERRED STOCK, 800,000 SHARES ARE BEING OFFERED UPON EXERCISE OF THE WARRANTS AND 11,046,060 SHARES ARE BEING OFFERED UPON ISSUANCE PURSUANT TO THE TERMS OF CERTAIN RIGHTS ("RIGHTS") PREVIOUSLY ISSUED TO THE COMPANY'S UNSECURED CREDITORS. SUCH SHARES ARE ALSO BEING OFFERED ON A CONTINUOUS BASIS PURSUANT TO RULE 415, DURING A PERIOD WHICH WILL ALSO BE TWO YEARS IN LENGTH. SEE "PRINCIPAL AND SELLING SECURITYHOLDERS" AND "PLAN OF DISTRIBUTION." DIVIDENDS ON THE SERIES A CONVERTIBLE PREFERRED STOCK ARE CUMULATIVE FROM THE DATE OF ISSUANCE AT A RATE OF 10% PER ANNUM AND ARE PAYABLE ON A QUARTERLY BASIS AND ARE PAYABLE IN CASH OR IN SHARES OF THE COMPANY'S COMMON STOCK AT THE COMPANY'S DISCRETION. THE SERIES A CONVERTIBLE PREFERRED STOCK WILL BE CONVERTIBLE INTO AN AGGREGATE OF 5,523,030 SHARES OF COMMON STOCK OF THE COMPANY, OR, IN CERTAIN CIRCUMSTANCES, 6,075,333 SHARES OF COMMON STOCK. THE SERIES A CONVERTIBLE PREFERRED STOCK WILL BE REDEEMABLE AT THE OPTION OF THE HOLDERS OF A MAJORITY OF THE OUTSTANDING SHARES OF SERIES A CONVERTIBLE PREFERRED STOCK AT AN AGGREGATE REDEMPTION PRICE OF $3.0 MILLION PLUS ACCRUED BUT UNPAID DIVIDENDS (THE "LIQUIDATION PRICE") UPON THE OCCURRENCE OF CERTAIN EVENTS. THE SERIES A CONVERTIBLE PREFERRED STOCK WILL BE REDEEMABLE AT THE OPTION OF RADIUS AT A PREMIUM UPON THE OCCURRENCE OF CERTAIN EVENTS. IN ADDITION, THE SERIES A CONVERTIBLE PREFERRED STOCK WILL BE AUTOMATICALLY CONVERTIBLE INTO SHARES OF COMMON STOCK UPON THE OCCURRENCE OF CERTAIN EVENTS. SEE "DESCRIPTION OF CAPITAL STOCK -- PREFERRED STOCK -- SERIES A CONVERTIBLE PREFERRED STOCK." EACH WARRANT ENTITLES THE HOLDER TO PURCHASE ONE SHARE OF COMMON STOCK OF THE COMPANY, AT AN EXERCISE PRICE EQUAL TO $1.00, SUBJECT TO ADJUSTMENT IN CERTAIN CIRCUMSTANCES, AT ANY TIME. EACH WARRANT IS EXERCISABLE FOR A PERIOD OF FOUR YEARS. SEE "DESCRIPTION OF CAPITAL STOCK -- WARRANTS." NO UNDERWRITING DISCOUNTS OR COMMISSIONS OR EXPENSES ARE PAYABLE OR APPLICABLE IN CONNECTION WITH THE SALE OF SUCH SECURITIES. THE COMMON STOCK OF THE COMPANY IS QUOTED ON THE NASDAQ SMALLCAP MARKET (THE "NASDAQ SMALLCAP MARKET") UNDER THE SYMBOL "RDUS." THE SHARES OF COMMON STOCK OFFERED HEREBY BY THE SELLING SECURITYHOLDERS WILL BE SOLD FROM TIME TO TIME AT THEN PREVAILING MARKET PRICES, AT PRICES RELATING TO PREVAILING MARKET PRICES OR AT NEGOTIATED PRICES. THERE IS CURRENTLY NO PUBLIC MARKET FOR THE SERIES A CONVERTIBLE PREFERRED STOCK OR THE WARRANTS AND THERE CAN BE NO ASSURANCE THAT A PUBLIC MARKET FOR SUCH SECURITIES WILL EVER DEVELOP. THE COMPANY DOES NOT INTEND TO APPLY TO HAVE SUCH SECURITIES LISTED ON ANY NATIONAL SECURITIES EXCHANGE, THE NASDAQ NATIONAL MARKET SYSTEM OR THE NASDAQ SMALLCAP MARKET. SEE "RISK FACTORS -- LACK OF PUBLIC MARKET FOR SERIES A CONVERTIBLE PREFERRED STOCK AND WARRANTS." ON NOVEMBER 7, 1996, THE CLOSING PRICE OF THE COMMON STOCK ON THE NASDAQ SMALLCAP MARKET WAS $1 7/16. ------------------------ SEE "RISK FACTORS" COMMENCING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH A PURCHASE OF THE SECURITIES OFFERED HEREBY. ------------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PROCEEDS TO PRICE TO THE UNDERWRITING PROCEEDS TO SELLING PUBLIC DISCOUNT COMPANY(1)(2) SECURITYHOLDERS(2)(3) ------ -------- ------------- --------------------- PER SHARE OF COMMON STOCK OFFERED BY THE SELLING SECURITYHOLDERS SEE TEXT ABOVE NONE SEE TEXT ABOVE SEE TEXT ABOVE PER SHARE OF COMMON STOCK OFFERED BY THE COMPANY SEE TEXT ABOVE NONE SEE TEXT ABOVE SEE TEXT ABOVE PER SHARE OF SERIES A CONVERTIBLE PREFERRED STOCK OFFERED BY THE SELLING SECURITYHOLDERS SEE TEXT ABOVE NONE SEE TEXT ABOVE SEE TEXT ABOVE PER WARRANT OFFERED BY THE SELLING SECURITYHOLDERS SEE TEXT ABOVE NONE SEE TEXT ABOVE SEE TEXT ABOVE TOTAL - --------------
(1) THE COMPANY WILL NOT RECEIVE ANY CASH PROCEEDS FROM THE ISSUANCE OF THE SECURITIES OFFERED BY THE COMPANY HEREBY. RATHER, THE COMMON STOCK OFFERED BY THE COMPANY HEREBY MAY BE ISSUED AS PAYMENT OF CERTAIN DIVIDEND OBLIGATIONS ON THE SERIES A CONVERTIBLE PREFERRED STOCK. SEE "PLAN OF DISTRIBUTION." (2) THE COMPANY WILL PAY AGGREGATE EXPENSES OF REGISTRATION ESTIMATED AT $250,000. (3) THE COMPANY WILL NOT RECEIVE ANY PROCEEDS FROM THE SALE OF SECURITIES OFFERED HEREBY BY THE SELLING SECURITYHOLDERS. THE DATE OF THIS PROSPECTUS IS NOVEMBER __, 1996. 2 AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance therewith, files reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). Such reports, proxy statements and other information filed by the Company can be inspected and copied at the public reference facilities of the Commission located at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices at Seven World Trade Center, 13th Floor, New York, New York 10048; and Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such material can also be obtained from the Public Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The Commission maintains a World Wide Web site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the Commission. The address of the Commission's World Wide Web site is http://www.sec.gov. The Company's Common Stock is quoted for trading on the Nasdaq SmallCap Market and reports, proxy statements and other information concerning the Company may be inspected at the offices of the National Association of Securities Dealers, Inc., 9513 Key West Avenue, Rockville, Maryland 20850. The Company has filed with the Commission a Registration Statement on Form S-1 under the Securities Act of 1933, as amended (the "Securities Act"), with respect to the securities offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. For further information with respect to the Company and the securities offered hereby, reference is made to the Registration Statement and the exhibits and schedules filed therewith. Statements contained in this Prospectus as to the contents of any contract or any other document referred to are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. A copy of the Registration Statement may be inspected, without charge, at the offices of the Commission in Washington, D.C. and copies of all or any part of the Registration Statement may be obtained from the Public Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, upon the payment of the fees prescribed by the Commission. No dealer, salesperson or other person has been authorized to give any information or to make any representation not contained in this Prospectus and, if given or made, such information or representation must not be relied upon as having been authorized by the Company. This Prospectus does not constitute an offer to sell or solicitation of an offer to buy any of the securities offered hereby in any jurisdiction to any person to whom it is unlawful to make such offer or solicitation in such jurisdiction. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create any implication that the information herein is correct as of any time subsequent to the date hereof or that there has been no change in the affairs of the Company since such date. 3 PROSPECTUS SUMMARY THE OFFERING Securities Offered by the Company. . . . . . . . Shares of Common Stock, having an aggregate market value of $600,000 which may be issued in lieu of the Company's obligation to pay an aggregate of $600,000 in cash dividends payable on the Series A Convertible Preferred Stock for the next two years. Securities Offered by the Selling Securityholders. . . . . . . . . . . . . . . . . 54,293,591 shares of Common Stock, 750,000 shares of Series A Convertible Preferred Stock and 800,000 Warrants to purchase Common Stock. Common Stock outstanding after the Offering. . . 72,819,490 shares (1) Use of Proceeds. . . . . . . . . . . . . . . . . The Company may issue shares of Common Stock with an aggregate market value of $600,000 in lieu of its obligation to pay $600,000 in cash dividends on the Series A Convertible Preferred Stock. The Company will not receive any of the proceeds from the sale of securities by the Selling Securityholders. The Company will bear estimated expenses of registration of approximately $250,000. See "Plan of Distribution." Nasdaq SmallCap Market symbol. . . . . . . . . . RDUS SUMMARY FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS ENDED YEARS ENDED SEPTEMBER 30 (2), JUNE 30 (2), -------------------------------------------------------------- ------------------ 1995 1994(3) 1993(3) 1992(3) 1991(3) 1996 1995 ---- ------- ------- ------- ------- ---- ----- STATEMENT OF OPERATIONS DATA: Net sales. . . . . . . . . . . . $308,133 $324,805 $337,373 $284,598 $199,033 $83,261 $251,007 Income (loss) from operations. . (104,182) (80,830) (34,583) 20,483 9,485 (11,585) 3,620 Net income (loss). . . . . . . . (131,742) (77,475) (20,139) 13,032 6,204 8,849 (13,857) Net income (loss) per share. . . (8.75) (5.70) (1.56) 1.04 0.54 0.49 (0.96) Shares used to compute income (loss) per share . . . . . . 15,049 13,598 12,905 12,485 11,473 17,950 14,386 JUNE 30, 1996 (2) ------------------- BALANCE SHEET DATA: Working capital (working capital deficiency) . . . . . . . . $(49,183) Total assets . . . . . . . . . . . . . . . . . . . . . . . . 43,878 Current Liabilities. . . . . . . . . . . . . . . . . . . . . 91,444 Shareholders' equity (net capital deficiency). . . . . . . . (47,887)
- ----------------------------------- (1) Based on shares outstanding as of October 31, 1996. Excludes (i) 1,195,124 shares of Common Stock issuable upon the exercise of options outstanding under the Company's Stock Option Plans at a weighted average exercise price of $4.34 per share, (ii) 1,818,103 shares of Common Stock reserved for issuance under the Company's Stock Option Plans and Employee Stock Purchase Plan, and (iii) approximately 4,706,668 shares to be reserved for issuance under the Company's 1996 Stock Option Plan (the "1996 Plan") which the Company intends to adopt in the near future (until conversion of the Series A Convertible Preferred Stock into Common Stock, 2,865,658 shares will be reserved for issuance pursuant to the 1996 Plan). Assumes that (i) all dividends on the Series A Convertible Preferred Stock will be paid in shares of Common Stock based upon a per share price of $1 11/32, the last reported sales price of the Company's Common Stock on the Nasdaq SmallCap Market on September 16, 1996, (ii) 6,075,333 shares of Common Stock, the maximum number of shares issuable upon conversion of the Series A Convertible Preferred Stock, will be issued, (this amount of shares is only issuable in the event that the trading price of the Common Stock exceeds certain levels and the Series A Convertible Preferred Stock is not otherwise redeemed. Otherwise the Series A Preferred Stock is convertible into an aggregate of 5,523,030 shares of Common Stock) and (iii) all 800,000 shares of Common Stock issuable upon exercise of Warrants are issued. See "Description of Capital Stock -- Preferred Stock -- Series A Convertible Preferred Stock" and "-- Warrants." (2) The Company's fiscal year ends on the Saturday closest to September 30 and includes 53 weeks in fiscal 1993 and 52 weeks in all other fiscal years presented. During fiscal 1995, the Company changed its fiscal year end from the Sunday closest to September 30 to the Saturday closest to September 30 for operational efficiency purposes. For clarity of presentation, all fiscal periods are reported as ending on a calendar month end. (3) These periods have been restated to reflect the Merger of Radius and SuperMac Technology, Inc. ("SuperMac") in fiscal 1994 which has been accounted for as a pooling of interests. See Note 10 of Notes to the Consolidated Financial Statements. The consolidated financial statements for all periods prior to fiscal 1994 have not been restated to adjust SuperMac's fiscal year end to that of Radius. Such periods include Radius' results of operations and balance sheet data on a September 30 fiscal year basis and SuperMac's on a December 31 calendar year basis. 4 THE COMPANY Radius Inc. (the "Company" or "Radius") designs, develops, markets and supports color publishing and digital video computer products for leading edge computer users in the publishing, video and education markets. The Company's current product line includes: accelerated color graphics products that facilitate the creation and manipulation of graphical images; video systems and software that can acquire and manipulate video and audio information; and high resolution color reference displays that allow users to view text, graphics, images and video. The primary target markets for the Company's products are color publishing and multimedia. These markets encompass creative professionals involved in such areas as color prepress, graphic arts, video editing, video and multimedia production and playback, and corporate training. To date substantially all of the Company's products have been designed for and sold to users of Macintosh computer products (the "Macintosh") manufactured by Apple Computer, Inc. ("Apple") as Apple products have been the preferred platform in the Company's target markets. As shown in the accompanying consolidated financial statements, the Company has incurred substantial operating losses and until recently, had a deficiency in assets and working capital. Management has implemented a number of actions to address this situation including: refocusing its efforts on providing solutions for high end digital video and graphics customers; discontinuing sales of mass market and other low value added products; divesting its color server and monochrome display businesses and its MacOS compatible systems product line; significantly reducing expenses and headcount; subleasing all or a portion of its current facility given its reduced occupancy requirements; and investigating various strategic partnering opportunities. See "Risk Factors -- Continuing Operating Losses, Going Concern Considerations." Immediately prior to the consummation of the debt for equity exchange described under "Recent Developments--Debt for Equity Exchange," the Company had approximately 18,147,099 shares of Common Stock outstanding. As a result of the consummation of the Plan described below, an additional 36,294,198 shares of Common Stock were issued to creditors of the Company, as well as Warrants to purchase 800,000 shares of Common Stock and 750,000 shares of Series A Convertible Preferred Stock convertible into up to an aggregate of 6,075,333 shares of Common Stock. In the event that the Series A Convertible Preferred Stock is converted into Common Stock, up to an additional 11,046,060 shares of Common Stock will be issued pursuant to the Rights and an additional 1,841,010 shares of Common Stock will be reserved for issuance pursuant to the Company's Stock Option Plans. Upon the effectiveness of the Registration Statement of which this Prospectus forms a part, such shares of Common Stock will generally be freely tradeable. Such issuances and tradability of these shares could have a materially adverse impact on the trading price of the Common Stock. See "Risk Factors--Volatility for Stock Price" and "--Shares Eligible for Future Sale." The Company's executive offices are located at 215 Moffett Park Drive, Sunnyvale, CA 94089, and its telephone number is (408) 541-6100. RECENT DEVELOPMENTS DEBT FOR EQUITY EXCHANGE As of June 30, 1996, the Company had total assets of approximately $43.9 million and total current liabilities of approximately $91.4 million. The Company was also delinquent in its accounts payable as payments to certain vendors were not being made in accordance with vendor terms. As of June 30, 1996, the Company had outstanding accounts payable, short-term borrowings and current portions of obligations under capital leases of approximately $62.2 million, of which approximately $38.0 million was outstanding under accounts payable, approximately $22.9 million represented short-term borrowings and approximately $1.3 million represented current portions of obligations under capital leases. Several vendors had initiated legal action to collect allegedly delinquent accounts and at least two vendors had orally threatened the Company with initiation of insolvency or bankruptcy proceedings. As a result, the Company established an unofficial unsecured creditors committee (the "Unofficial Creditors Committee") consisting of eight of its larger unsecured creditors (the "Committee Members") in an effort to resolve the delinquent accounts payable, capital deficiency and creditor litigation issues outside of insolvency or bankruptcy proceedings. 5 The Company sought to resolve these claims outside of bankruptcy or insolvency proceedings in order to avoid the significant costs and uncertainties that would arise in such proceedings, including the likely demoralization of employees, customers and distributors. The Company, the Unofficial Creditors Committee and the Company's secured creditor, IBM Credit Corporation ("IBM Credit"), agreed to a plan (the "Plan") pursuant to which creditors received equity in the Company in satisfaction of all or a portion of their claims. Pursuant to the Plan, IBM Credit, the Company's secured creditor, received Series A Convertible Preferred Stock in satisfaction of $3.0 million of the Company's approximately $26.4 million secured indebtedness to IBM Credit and in consideration of restructuring its loan with the Company, including extension by IBM Credit of an additional advance of approximately $470,000 for making Discount Payments (defined below). The Company's unsecured creditors with claims of approximately $47.8 million (including a $1.0 million reserve for unknown or unresolved claims) received either shares of Common Stock or, in the case of certain creditors most of which had claims of less than $50,000 ("Convenience Class Creditors"), a discounted cash payment (approximately $470,000 in the aggregate) in satisfaction of claims of approximately $1.9 million. The Company also issued Warrants to purchase 600,000 shares of Common Stock to IBM Credit and Warrants to purchase 200,000 shares of Common Stock to Mitsubishi Electronics America, Inc. ("Mitsubishi Electronics"). While the issuance of the Series A Convertible Preferred Stock, the Common Stock and the Warrants did not require the approval of the Company's shareholders, an increase in the authorized number of shares of Common Stock, which was necessary to implement this Plan, required shareholder approval, which approval was obtained at a special meeting of shareholders on August 27, 1996. Pursuant to the Plan, unsecured creditors received 36,294,198 shares of Common Stock, or 60% of the outstanding Common Stock of the Company after consummation of the Plan (including 791,280 shares issued to the Radius Creditors Trust for the purpose of satisfying a portion of any unknown or unresolved claims). The Company's secured creditor, IBM Credit, received 750,000 shares of Series A Convertible Preferred Stock. The Series A Convertible Preferred Stock is convertible into an aggregate of 5,523,030 shares of Common Stock of the Company (or 6,075,333 shares in certain circumstances, see "Description of Capital Stock -- Preferred Stock -- Series A Convertible Preferred Stock"). The unsecured creditors also received Rights ("Rights") to receive an aggregate of 11,046,060 additional shares of the Company's Common Stock in the event that the Series A Convertible Preferred Stock is converted into Common Stock so that the number of shares of Common Stock received by such unsecured creditors continues to represent 60% of the Company's outstanding Common Stock. In addition, the Company intends to adopt a new stock option plan to reserve for issuance thereunder (together with the Company's other stock option plans) approximately 10% of the outstanding shares of the Company's Common Stock. Therefore, shareholders holding shares of Common Stock immediately prior to the closing under the Plan ("Existing Shareholders") represent approximately 30% of outstanding shares of Common Stock immediately after the Plan was consummated. Because the Series A Convertible Preferred Stock will vote on an as-converted basis, Existing Shareholders represent approximately 28% of the voting power of the Company, assuming all options are exercised. If and when the Series A Convertible Preferred Stock is converted into Common Stock, Existing Shareholders will then represent 23% of the outstanding shares of Common Stock assuming no other issuances of the Company's securities and exercise of all options available for issuance. Unsecured creditors accepting equity in satisfaction of their claims generally had claims in excess of $50,000 ("Major Creditors") and represented accounts payable or other claims in the aggregate of approximately $45.9 million (including a $1.0 million reserve for unknown or unresolved claims), of which approximately $29.3 million represented claims of the Committee Members. The Committee Members included SCI Technology, Inc., Mitsubishi Electronics, Hamilton Hallmark/Avnet Co., Manufacturers Services Limited, Avex Electronics, Inc., TechData Corporation, Quantum and Mitsubishi International Corporation, which were generally the Company's largest unsecured creditors, with claims of approximately $12.3 million, $5.1 million, $4.0 million, $2.2 million, $2.1 million, $1.6 million, $1.6 million and $380,000, respectively. The remaining unpaid indebtedness of approximately $1.9 million owed to its Convenience Class Creditors was repaid at an average discount of approximately 75% of the amount of the applicable claim (the amounts paid to the Convenience Class Creditors are referred to as the "Discount Payment"). The Company repaid these creditors from the proceeds of an additional advance of approximately $470,000 from IBM Credit which was made for the purpose of making Discount Payments. The Company was unable to conclude settlements with 10 unsecured creditors with aggregate claims of approximately $200,000. The Company has issued 791,280 shares of Common Stock and an additional 240,824 Rights to the Radius Creditors Trust, for the purposes of satisfying any unknown claims or claims not settled. Since September 13, 1996, the Radius Creditors Trust has transferred 347,027 shares of Common Stock and 105,617 Rights to four additional creditors, leaving a balance of 444,253 shares of Common Stock and 135,207 Rights in the trust. The Company intends to repay any additional remaining unsatisfied or unknown claims out of cash generated from operations, however, there can be no assurance that these creditors will not seek to enforce their claims or that the Company will have sufficient available funds to repay such creditors on a timely basis. Approximately 50 persons whom the Company believed to be creditors claimed that no balance was owed to such creditors. There can be no assurance that such persons will not, in the future, assert claims against the Company. 6 The Company has no other plans to meet its future working capital needs other than through cash generated from operations. For the nine months ended June 30, 1996, the Company had an operating loss of approximately $11.6 million. If the Company is unable to increase net sales and/or reduce operating expenses, it may need to divest assets or businesses or seek additional financing to meet its working capital needs. There can be no assurance that the Company will be able to divest its assets, on favorable terms, if at all or that such financing will be available to the Company. See "Risk Factors -- Need for Additional Financing -- Loan Restrictions." There can also be no assurance that the Company will maintain or increase profitability. NASDAQ NATIONAL MARKET DELISTING Until late June 1996, the Company's Common Stock was listed on the Nasdaq National Market System (the "Nasdaq National Market"). As a requirement to the continued listing of the Company's Common Stock on the Nasdaq National Market, the National Association of Securities Dealers, Inc. (the "NASD") required the Company to obtain the approval of the Plan by a majority of the total votes cast at a shareholders' meeting. The NASD had required that the Company file preliminary proxy materials with the Commission with respect to the foregoing by April 10, 1996 and that the Plan be approved by the Company's shareholders by June 30, 1996 as a condition to the Company's continued listing on the Nasdaq National Market. Inasmuch as the Company failed to reach an agreement in principle with IBM Credit and the Unofficial Creditors Committee until late June 1996, the Company was not able to meet these conditions. Accordingly, the NASD has delisted the Company's Common Stock from the Nasdaq National Market for failure to satisfy the minimum net worth requirement. The Company's Common Stock is now listed on the Nasdaq SmallCap Market (the "Nasdaq SmallCap Market") and the Company will be required to meet the continued listing requirements of the Nasdaq SmallCap Market. The Company will be required to maintain capital and surplus of $1.0 million. As a result of the Company's substantial losses incurred for the 1996 fiscal year, if the Company experiences a significant loss in a subsequent quarterly or annual period, the Company would have insufficient capital and surplus to satisfy the continued listing requirements of the Nasdaq SmallCap Market. In addition, as of November 7, 1996, the closing price of the Common Stock was $1 7/16 per share. In the future, any failure of the Company to maintain a minimum bid price per share of $1.00 for a period of 10 consecutive business days would require it to have $2.0 million in capital and surplus as well as a market value of its publicly traded securities of $1.0 million. If the Company fails to maintain this minimum bid price as well as a $2.0 million capital and surplus, it will have 90 days to comply with such minimum bid requirement. As described under "Risk Factors - -- Volatility of Stock Price," the substantial increase in tradable shares of Common Stock could materially and adversely affect the market price of the Common Stock and if the Company has insufficient capital and surplus, the Common Stock would be subject to delisting. See "Risk Factors -- Possible Delisting of Common Stock from the Nasdaq SmallCap Market." Year End Results Based on preliminary sales, sales orders, operating and other financial data through September 30, 1996, the Company believes that net revenues for the three months ended September 30, 1996 were approximately $7.0 million, as compared to $57.1 million for the same period in fiscal 1995. Net loss for the three months ended September 30, 1996 was approximately $9.8 million as compared to $117.9 million for the same period in fiscal 1995. Fourth quarter results were negatively affected by significant product shortages during the quarter. Radius PressView and Precision View displays were not shipped by Radius' vendor until the last two weeks of the quarter because of the length of time required to negotiate a new manufacturing agreement. As there was a substantial backlog for these products at the beginning of the quarter, the delay in shipments resulted in a lack of supply for customers and resellers. Similarly, the Company's Video Vision PCI was in short supply during the quarter. This product was being manufactured by a new turnkey manufacturing partner for the product and delays were experienced during the commencement and initial start-up process of this relationship. Fourth quarter 1996 results also included a one time charge of $3.5 million resulting from the restructuring which was completed during the quarter. Net revenues for the entire 1996 fiscal year were approximately $90.3 million as compared to $308.1 million for the prior year. Net loss was approximately $975,000 as compared to $131.7 million for the prior fiscal year. RISK FACTORS INVESTORS SHOULD CONSIDER CAREFULLY THE FOLLOWING FACTORS, IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, BEFORE PURCHASING THE SHARES OF COMMON STOCK OFFERED HEREBY. CONTINUING OPERATING LOSSES; GOING CONCERN CONSIDERATIONS The Company experienced operating losses in each of the fiscal quarters ended March 31, 1996 and December 31, 1995, for the nine months ended June 30, 1996 and in each of the fiscal years ended September 30, 1993, 1994 and 1995. In addition, based on preliminary operating results for the fiscal year ending September 30, 1996, the Company will also experience a substantial operating loss for the 1996 fiscal year. Furthermore, the Company's independent auditors have included in their report for the fiscal year ending September 30, 1995 a statement as to the substantial doubt about the Company's ability to continue as a going concern. In the future, the Company's ability to 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 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 continued commercial acceptance of Apple computers and the rate and mix of Apple computers and related products sold; competitive factors such as new product introductions, product enhancements and aggressive marketing and pricing practices; general economic conditions; and other factors. The Company has faced and expects to continue to face increased competition in graphic cards as a result of Apple's transition of its product line to the PCI Bus. For these and other reasons, there can be no assurance that the Company will be able to achieve or maintain profitability in the near term, if at all. 7 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 relationship 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. 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. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." NEED FOR ADDITIONAL FINANCING; LOAN RESTRICTIONS The Company intends to finance its working capital needs through cash generated by operations 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 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 8 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, which could result in the Company becoming a debtor in a bankruptcy proceeding and to apply all amounts on deposit in the Company's bank accounts. 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. 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 "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." 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 of which this Prospectus is a part, the number of freely tradeable shares will increase 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 price of the Company's Common Stock has fluctuated widely in the past. Management believes that such fluctuations may have been caused by announcements of new products, quarterly fluctuations in the results of operations and other factors, including changes in conditions of the personal computer industry in general and of Apple Computer in particular, and changes in the Company's results of operations and financial condition. Stock markets, and stocks of technology companies in particular, have experienced extreme price volatility in recent years. This volatility has had a substantial effect on the market prices of securities issued by the Company and other high technology companies, often for reasons unrelated to the operating performance of the specific companies. Due to the factors referred to herein, the dynamic nature of the Company's industry, general economic conditions and other factors, the Company's future operating results and stock prices may be subject to significant volatility in the future. Such stock price volatility for the Common Stock has in the past provoked securities litigation, and future volatility could provoke litigation in the future that could divert substantial management resources and have an adverse effect on 9 the Company's results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations --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 personal computers, and it is expected that sales of products for such computers will continue to represent substantially all of the sales of the Company for the foreseeable future. The Company's operating results would be adversely affected if Apple should lose market share, if Macintosh sales were to decline or if other developments were to adversely affect Apple's business. Furthermore, any difficulty that may be experienced by Apple in the development, manufacturing, marketing or sale of its computers, or other disruptions to, or uncertainty in the market regarding, Apple's business, resulting from these or other factors could result in reduced demand for Apple computers, which in turn could materially and adversely affect sales of the Company's products. Recently, Apple has announced large losses, management changes, headcount reductions, and other significant events which 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, recently introduced versions of the Windows operating environment support high performance graphics and video applications similar to those offered on the Macintosh. There is a risk that this trend will reduce the support given to Macintosh products by third party developers and could substantially reduce demand for Macintosh products and peripherals over the long term. A number of the Company's products compete with products marketed by Apple. As a competitor of the Company, Apple could in the future take steps to hinder the Company's development of compatible products and slow sales of the Company's products. The Company's business is based in part on supplying products that meet the needs of high-end customers that are not fully met by Apple's products. As Apple improves its products or bundles additional hardware or software into its computers, it reduces the market for Radius products that provide those capabilities. For example, the Company believes that the on-board performance capabilities included in Macintosh Power PC products have reduced and continue to reduce overall sales for the Company's graphics cards. In the past, the Company has developed new products as Apple's progress has rendered existing Company products obsolete. However, in light of the Company's current financial condition there can be no assurance that the Company will continue to develop new products on a timely basis or that any such products will be successful. In order to develop products for the Macintosh on a timely basis, the Company depends upon access to advance information concerning new Macintosh products. A decision by Apple to cease sharing advance product information with the Company would adversely affect the Company's business. New products anticipated from and introduced by Apple could cause customers to defer or alter buying decisions due to uncertainty in the marketplace, as well as presenting additional direct competition for the Company. For example, the Company believes that Apple's transition during 1994 to Power PC products caused delays and uncertainties in the 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 revamping of its entire product line from Nubus-based to PCI Bus-based computers. In the past, transitions in Apple's products have been accompanied by shortages in those products and in key components for them, leading to a slowdown in sales of those products and in the development and sale by the Company of compatible products. In addition, it is possible that the introduction of new Apple products with improved performance capabilities may create uncertainties in the market concerning the need for the performance enhancements provided by the Company's products and could reduce demand for such products. COMPETITION The markets for the Company's products are highly competitive, and the Company expects competition to intensify. Many of the Company's current and prospective competitors have significantly greater financial, technical, manufacturing and marketing resources than the Company. The Company believes that its ability to compete will depend on a number of factors, including the amount of financial resources available to the Company, whether the Company can reach an accommodation with its creditors, success and timing of new product developments by the Company and its competitors, product performance, price and quality, breadth of distribution and customer support. There can be no assurance that the Company will be able to compete 10 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. See "Business -- Competition." 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, the Company has at times experienced substantial delays in its ability to fill customer orders for displays and other products, due to the inability of certain 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, 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. More recently, 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 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. 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. TECHNOLOGICAL CHANGE; CONTINUING NEED TO DEVELOP NEW PRODUCTS 11 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 1996 fiscal year the Company spent approximately $7.5 million on research and development as compared with approximately $19.3 million for the same period in the prior fiscal year. 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 increase research and development expenditures. 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. 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 increase in inventory reserves. The long lead times -- as much as three to five months -- associated with the procurement of certain components (principally displays and ASICs) exposes the Company to greater risk in forecasting the demand for new products. There can be no assurance that the Company's forecasts regarding new product demand and its estimates of appropriate inventory levels will be accurate. Moreover, no assurance can be given that the Company will be able to cause all of its new products to be manufactured at acceptable manufacturing yields, 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, 12 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 net sales and that it will be subject to the normal risks of international sales such as currency fluctuations, longer payment cycles, export controls and other governmental regulations and, in some countries, a lesser degree of intellectual property protection as compared to that provided under the laws of the United States. In addition, demand for the Company's products in Japan could be affected by the transition of its Japanese sales and marketing efforts from Radius' subsidiary to a distributor. 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 Chief Financial Officer and three other Vice Presidents, and the Company has also had substantial layoffs and other employee departures. In addition, the Company's current Vice President of Finance and Corporate Controller has announced her intention to resign in the near future. 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 creditors as a group, such creditors 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, 13 and there can be no assurance that it would be able to do so on commercially reasonable terms. See "Business -- Patents and Licenses." CONTROL BY CREDITORS Upon 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. The Company's four largest unsecured creditors, SCI Technology, Inc., Mitsubishi Electronics America, Inc., Hamilton Hallmark/Avnet Co. and Manufacturers Services Limited, Inc. own approximately 16.2%, 6.7%, 5.3% and 2.9%, respectively, of the voting power of the Company. 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. Subsequent to September 13, 1996, two Committee Members, Carl Carlson of Mitsubishi Electronics America, Inc. and Michael Ledbetter of SCI Systems, Inc. have joined the Board of Directors. These two directors constitute half of the current Board members. The Company also intends to continue to do business with many of its unsecured creditors, including Mitsubishi Electronics America, Inc. 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. See "Certain Transactions." LACK OF PUBLIC MARKET FOR SERIES A CONVERTIBLE PREFERRED STOCK AND WARRANTS There has been no public market for the Series A Convertible Preferred Stock or the Warrants and the Company does not intend to list such securities on any national securities exchange, the Nasdaq National Market System or the Nasdaq SmallCap Market. Accordingly, it is unlikely that an active public market for such securities will ever develop. Trading, if any, of such securities would be conducted in the over-the-counter market in what are commonly referred to as the "pink sheets." As a result, purchasers may find it more difficult to dispose of, or to obtain accurate quotations as to the value of, these securities. Consequently, this lack of a public market may affect the ability of purchasers in this offering to sell such securities in the secondary market. 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 the date of this Prospectus (the "Effective Date"), there will be approximately 54,451,586 shares of Common Stock outstanding, substantially all of which will be available for sale without restriction under the Securities Act of 1933, as amended (the "Act") (as compared with approximately 18,147,099 shares of Common Stock outstanding as of August 31, 1996) except for those shares which are held by affiliates of the Company. If the Series A Convertible Preferred Stock is converted and if the Warrants 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. The Company is offering 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 and are included in the Registration Statement of which this Prospectus is a part and 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 October 31, 1996 there were 1,195,124 shares reserved for issuance upon exercise of options outstanding under the Company's stock option plans (collectively, the "Plans"). As of such date there were an additional 1,692,782 shares of 14 Common Stock available for issuance under options to be granted under the Plans and 125,321 shares reserved for issuances for purchases under the Company's Employee Stock Purchase Plan. 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. The Company intends to adopt a new stock option plan covering 2,865,658 shares of its Common Stock (which plan will be amended to cover an aggregate of 4,706,668 shares of Common Stock in the event that the Series A Convertible Preferred Stock is converted into Common Stock). The Company intends to file a registration statement on Form S-8 to register the additional shares of Common Stock to be covered by this new plan. Accordingly, shares subject to options granted under such plan will be available for sale in the public market after the effective date of such registration statement. In the event that the Series A Convertible Preferred Stock is not converted or the Warrants are not exercised during the term of this offering, the holders of such securities have demand registration rights with respect to the shares of Common Stock issuable upon conversion of the Series A Convertible Preferred Stock or upon exercise of the Warrants which were not converted or exercised during such period. IBM Credit also has demand registration rights with respect to any shares of Common Stock which are paid in lieu of cash dividends on the Series A Convertible Preferred Stock after such two-year period. These demand registration rights will permit such holders to cause the Company, on up to two occasions, to register such unsold shares of underlying Common Stock commencing two years after the effectiveness of the Registration Statement of which this Prospectus forms a part. All expenses incurred in connection with such registrations (other than underwriters' discounts and commissions) will be borne by the Company. These registration rights will expire once all the securities covered thereby may be sold pursuant to Rule 144 in a three month period without registration. Such expiration date will be no earlier than September 1998. See "Description of Capital Stock -- Registration Rights." 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 "Recent Developments -- Nasdaq National Market Delisting," the Common Stock could be delisted from the Nasdaq SmallCap Market if the Company fails to maintain capital and surplus of $1.0 million. Because of the substantial losses experienced by the Company for the 1996 fiscal year, 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. The Company's Common Stock is also subject to delisting in the event that the price of the Common Stock drops below $1.00 per share for 10 consecutive trading days (the last reported sales price for the Common Stock on the Nasdaq SmallCap Market on November 7, 1996 was $1 7/16 per share). Because of the substantial increase in the number of tradable shares of Common Stock, there could be downward pressure on the trading price of the Common Stock, which could cause the Company to fail to meet the minimum bid price requirement for the Nasdaq SmallCap Market. 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 $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. See "--Volatility of Stock Price" and "Recent Developments -- Nasdaq National Market Delisting." USE OF PROCEEDS The Company will not receive any cash proceeds from the issuance of the shares of Common Stock offered by it hereby. The Company may issue such shares of Common Stock in lieu of its obligation to pay cash dividends of $600,000 for the next two years on the Series A Convertible Preferred Stock. The Company will not receive any proceeds from the sale of securities by the Selling Securityholders. The Company will bear estimated expenses of approximately $250,000. 15 PRICE RANGE OF COMMON STOCK The Company's Common Stock has been quoted on the Nasdaq National Market from August 21, 1991 until July 1, 1996. The Company's Common stock is now quoted on the Nasdaq SmallCap Market under the symbol "RDUS." The high and low sales prices for the Common Stock are indicated below. Year Ended September 30, 1995 Low High - ----------------------------- ---- ----- First Quarter 7 5/8 10 1/4 Second Quarter 9 14 1/2 Third Quarter 9 1/2 13 3/4 Fourth Quarter 6 15/16 12 1/2 Year Ending September 30, 1996 - -------------------------------- First Quarter 1 15/16 7 1/8 Second Quarter 15/16 2 1/2 Third Quarter 2 3/16 4 5/8 Fourth Quarter 1 1/4 2 13/16 Year Ending September 30, 1997 - ------------------------------ First Quarter (through November 7, 1996) 1 3/16 1 7/8 As of November 7, 1996, the last sales price as reported on the Nasdaq SmallCap Market for the Common Stock was $1 7/16. On October 31, 1996, there were approximately 3,652 holders of record of the Company's Common Stock. DIVIDEND POLICY The Company has never declared or paid any cash dividends on its Common Stock. As explained under "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" contained elsewhere in this Prospectus, funds will be required to support future losses and working capital needs for these reasons. The terms of the Company's restructured loan agreement with IBM Credit prohibits the payment of any cash dividends so long as the loans are outstanding. In addition, the 10% annual cumulative dividend on the Series A Convertible Preferred Stock must be paid before any dividends may be paid on the Common Stock. The Company currently anticipates that it will retain any future earnings for use in its business and does not anticipate paying any cash dividends in the foreseeable future. The payment of any future dividends will be at the discretion of the Company's Board of Directors and will depend upon, among other things, future earnings, operations, capital requirements, the general financial condition of the Company, general business conditions and contractual restrictions on payment of dividends, if any. 16 CAPITALIZATION The following table is intended to provide certain information to illustrate the effects of the consummation of the Plan on the Company's capitalization. The table sets forth (i) the historical capitalization of the Company as of June 30, 1996, and (ii) such capitalization, as adjusted to reflect (i) the settlement of approximately $46.8 million (not including the $1.0 million reserve allocated to the Radius Creditors Trust) of accounts payable, accrued liabilities and customer credit balances in exchange for $470,000 in cash (together with the $1.4 million gain from such discounted cash payment) and 36,294,198 shares of Common Stock; (ii) the additional advance of $470,000 from IBM Credit; (iii) the restructuring of the IBM Credit loan and the issuance of 750,000 shares of Series A Convertible Preferred Stock to IBM Credit; the reversal of the restructuring accrual of $2.4 million related to the settlement of the related cancellation fees accrued; and (iv) the issuance of Common Stock having a market value of $600,000 in lieu of cash dividend payments for the first eight quarterly dividend payments on the Series A Convertible Preferred Stock (based upon an assumed market price of $1 11/32 per share, the last sales price on the Nasdaq SmallCap Market on September 16, 1996). The as adjusted amounts assume that the carrying value of the claims settled equals the value of the equity securities issued. The difference, to be determined, between the two values will not affect the combined total of Common Stock and accumulated deficit.
AS HISTORICAL ADJUSTED (1) ---------- ------------ Capitalization: Current Liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . 91,444 25,594 Obligations under capital leases - noncurrent portion. . . . . . . . . 321 321 Long-term liabilities. . . . . . . . . . . . . . . . . . . . . . . . . -- 18,420 ----------- ---------- Preferred Stock, no par value; 2,000,000 shares authorized, no shares issued and outstanding, historical; 2,000,000 shares authorized, 750,000 shares of Series A Convertible Preferred Stock issued and outstanding, as adjusted . . . . . . . -- 3,000 Common Stock, no par value; 50,000,000 shares authorized, 18,147,099 shares issued and outstanding, historical; 100,000,000 shares authorized, 54,887,726 shares outstanding, as adjusted. . . . . . . . . . . . . . . . . . . . . 126,243 171,743 Accumulated translation adjustment . . . . . . . . . . . . . . . . . 14 14 Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . (174,144) (170,914) ----------- ----------- Total capitalization . . . . . . . . . . . . . . . . . . . . $ 43,878 $48,178 ----------- ---------- ----------- ----------
- ----------------------- (1) Excludes shares issuable upon exercise of any Warrants, conversion of Series A Convertible Preferred Stock or pursuant to Rights. Also assumes no exercise of stock options granted or to be granted under the Company's stock option plans. 17 SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data should be read in conjunction with the consolidated financial statements and the notes thereto included elsewhere herein. The consolidated statements of operations data set forth below with respect to the years ended September 30, 1995, 1994 and 1993 and the consolidated balance sheet data at September 30, 1995 and 1994 are derived from, and are qualified by reference to, the audited consolidated financial statements included elsewhere herein and should be read in conjunction with those financial statements and the notes thereto. The consolidated statements of operations data for the years ended September 30, 1992 and 1991 and the consolidated balance sheet data as of September 30, 1993, 1992 and 1991 are derived from audited consolidated financial statements not included herein. The selected consolidated financial data set forth below as of and for the nine- month periods ended June 30, 1996 and 1995 are derived from the unaudited consolidated financial statements of the Company and, in the Company's opinion, include all adjustments, consisting only of normal recurring adjustments necessary to present fairly the financial position and results of operations for those periods. The results of operations for the nine months ended June 30, 1996 are not necessarily indicative of the results that may be expected for any other interim period or for the fiscal year ending September 30, 1996.
FISCAL YEAR ENDED SEPTEMBER 30, (1) --------------------------------------------------------------------- 1995 1994 (2) 1993 (2) 1992 (2) 1991 (2) ----- -------- -------- ------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Net sales $308,133 $324,805 $337,373 $284,598 $199,033 Cost of sales 302,937 276,948 254,321 181,198 130,918 -------- -------- -------- -------- -------- Gross profit 5,196 47,857 83,052 103,400 68,115 -------- -------- -------- -------- -------- Operating expenses: Research and development 19,310 33,956 33,503 21,093 14,576 Selling, general and administrative 90,068 94,731 84,132 61,824 44,054 -------- -------- -------- -------- -------- Total operating expenses 109,378 128,687 117,635 82,917 58,630 -------- -------- -------- -------- -------- Income (loss) from operations (104,182) (80,830) (34,583) 20,483 9,485 Other income (expense), net (6,068) (1,245) 70 878 731 Litigation settlement (12,422) -- -- -- -- -------- -------- -------- -------- -------- Income (loss) before income taxes and cumulative effect of a change in accounting principle (122,672) (82,075) (34,513) 21,361 10,216 Provision (benefit) for income taxes 9,070 (4,600) (13,774) 8,329 4,012 -------- -------- -------- -------- -------- Income (loss) before cumulative effect of a change in accounting principle (131,742) (77,475) (20,739) 13,032 6,204 Cumulative effect of a change in method of accounting for income taxes -- -- 600 -- -- -------- -------- -------- -------- -------- Net income (loss) $(131,742) $(77,475) $(20,139) $13,032 $6,204 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Net income (loss) per share: Income (loss) before cumulative effect of a change in accounting principle $ (8.75) $ (5.70) $ (1.61) $ 1.04 $ 0.54 Cumulative effect of a change in method accounting for income taxes -- -- 0.05 -- -- -------- -------- -------- -------- -------- Net income (loss) per share $ (8.75) $ (5.70) $ (1.56) $ 1.04 $ 0.54 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Common and common equivalent shares used in computing net income (loss) per share 15,049 13,598 12,905 12,485 11,473 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- NINE MONTHS ENDED JUNE 30, ------------------------- 1996 1995 ---- ---- CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Net sales $83,261 $251,007 Cost of sales 67,175 184,882 -------- -------- Gross profit 16,086 66,125 -------- -------- Operating expenses: Research and development 6,241 13,780 Selling, general and administrative 21,430 48,725 -------- -------- Total operating expenses 27,671 62,505 -------- -------- Income (loss) from operations (11,585) 3,620 Other income (expense), net 21,090 (4,605) Litigation settlement -- (12,422) -------- -------- Income (loss) before income taxes and cumulative effect of a change in accounting principle 9,505 (13,407) Provision (benefit) for income taxes 656 450 -------- -------- Income (loss) before cumulative effect of a change in accounting principle 8,849 (13,857) Cumulative effect of a change in method of accounting for income taxes -- -- -------- -------- Net income (loss) $8,849 $(13,857) -------- -------- -------- -------- Net income (loss) per share: Income (loss) before cumulative effect of a change in accounting principle $ 0.49 $(0.96) Cumulative effect of a change in method accounting for income taxes -- -- -------- -------- Net income (loss) per share $ 0.49 $ (0.96) -------- -------- -------- -------- Common and common equivalent shares used in computing net income (loss) per share 17,950 14,386 ------ ------- ------ -------
18
SEPTEMBER 30, (1) -------------------------------------------------------------------- 1995 1994 (2) 1993 (2) 1992 (2) 1991 (2) JUNE 30, 1996 ---- ------- -------- ------- -------- ------------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Working capital (Working capital deficiency) ($59,334) $29,856 $ 86,711 $ 84,303 $ 60,748 $(49,183) Total assets 87,878 126,859 172,275 150,658 106,306 43,878 Long-term debt---concurrent portion 1,331 2,857 3,975 1,935 2,707 321 Shareholders' equity (Net capital deficiency) (57,117) 35,691 98,155 96,631 70,400 (47,887)
(1) The Company's fiscal year ends on the Saturday closest to September 30 and includes 53 weeks in fiscal 1993 and 52 weeks in all other fiscal years presented. During fiscal 1995, the Company changed its fiscal year end from the Sunday closest to September 30 to the Saturday closest to September 30 for operational efficiency purposes. For clarity of presentation, all fiscal periods are reported as ending on a calendar month end. (2) These periods have been restated to reflect the Merger of Radius and SuperMac which has been accounted for as a pooling of interests. See Note 10 of Notes to the Consolidated Financial Statements. The consolidated financial statements for all periods prior to fiscal 1994 have not been restated to adjust SuperMac's fiscal year end to that of Radius. Such periods include Radius' results of operations and balance sheet data on a September 30 fiscal year basis and SuperMac's on a December 31 calendar year basis. 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD LOOKING STATEMENTS AS A RESULT OF THE RISKS DESCRIBED BELOW AND ELSEWHERE IN THIS PROSPECTUS. OVERVIEW As shown in the accompanying consolidated financial statements, the Company has incurred recurring operating losses and until recently, had a deficiency in assets and working capital. In addition, the Company has recently restructured its loan agreement with IBM Credit. The Company has granted a security interest in most of its assets to IBM Credit. Since the end of its last fiscal year, the Company's relatively limited cash resources have restricted the Company's ability to purchase inventory, which in turn has limited its ability to manufacture and sell products and has resulted in additional costs for expedited deliveries. The adverse effect on the Company's results of operations due to its limited cash resources can be expected to continue until such time as the Company is able to return to profitability, or generate additional cash from other sources. These conditions raise concerns about the Company's ability to continue operations as a going concern. In addition to the Plan described below, management has implemented a number of actions to address these conditions including: refocusing its efforts on providing solutions for high end digital video and graphics customers; discontinuing sales of mass market and other low value added products; divesting its color server, monochrome display businesses and its MacOS compatible systems products and other product lines; significantly reducing expenses and headcount; subleasing all or a portion of its current facility given its reduced occupancy requirements; and investigating various strategic partnering opportunities and other divestitures. In September 1996, the Company, IBM Credit and its unsecured creditors consummated a debt-for-equity exchange (the "Plan"). Unsecured creditors forgave approximately $45.9 million of claims (including a $1.0 million reserve for unknown or unresolved claims) in consideration of the issuance of 36,294,198 shares of Common Stock and Rights to receive 11,046,060 additional shares of Common Stock in the event that the Series A Convertible Preferred Stock is converted into Common Stock (such numbers include 791,280 and 240,824 shares of Common Stock and Rights, respectively, issued to the Radius Creditors Trust for the purpose of satisfying a portion of any unknown or unresolved claims). Certain unsecured creditors, most of which had claims of less than $50,000 (representing an aggregate of approximately $1.9 million in claims), were paid cash at an average discount of approximately 75% of the amount of the claim in satisfaction of their claims. The Company's secured creditor, IBM Credit, received 750,000 shares of Series A Convertible Preferred Stock and Warrants to purchase 600,000 shares of Common Stock in satisfaction of $3.0 million of indebtedness and restructuring the terms of the Company's remaining approximately $23.4 million indebtedness to IBM Credit. As of October 3, 1996, the Company granted 200,000 Warrants to purchase shares of Common Stock to Mitsubishi Electronics America, Inc. in consideration of the extension of open credit terms to the Company. After the consummation of the Plan, to the Company's knowledge, there remained unsatisfied claims against the Company, which the Company has not disputed, of approximately $200,000. The Company has issued an aggregate of 791,280 shares of Common Stock and an additional 240,504 Rights to the Radius Creditors Trust, for the purpose of satisfying a portion of any such remaining or previously unknown claims. As of November 7, 1996 the Company believes that approximately 444,253 shares of Common Stock and 135,207 Rights remained in the Radius Creditors Trust. There can be no assurance that this amount will be sufficient to satisfy any such claims. If the Company cannot settle or repay these remaining claims or any previously unknown claims, there can be no assurance that such claimants will not institute enforcement proceedings in order to collect their claims. Any such proceedings could have a material adverse effect on the Company's business, results of operations and financial condition. In addition, of the approximately 300 persons the Company believed to be Convenience Class Creditors, approximately 50 persons claimed that no balance was owed to such creditors. There can be no assurance that such creditors will not, in the future, assert claims against the Company. See "Recent Developments -- Debt for Equity Exchange." The adverse effect on the Company's results of operations due to its limited cash resources can be expected to continue until such time as the Company is able to return to operational profitability, or generate additional cash from other sources. There can be no assurance that the Company will be able to do so. See "Risk Factors -- Continuing Operating Losses; Going Concern Considerations." Based on preliminary sales, sales orders, operating and other financial data through September 30, 1996, the Company believes that net revenues for the three months ended September 30, 1996 were approximately $7.0 million, as compared to $57.1 million for the same period in fiscal 1995. Net loss for the three months ended September 30, 1996 was approximately $9.8 million as compared to $117.9 million for the same period in fiscal 1995. Fourth quarter results were negatively affected by significant product shortages during the quarter. Radius PressView and Precision View displays were not shipped by Radius' vendor until the last two weeks of the quarter because of the length of time required to negotiate a new manufacturing arrangement. As there was a substantial backlog for these products at the beginning of the quarter, the delay in shipments resulted in a lack of supply for customers and resellers. Similarly, the Company's Video Vision PCI was in short supply during the quarter. This product was being manufactured by a new turnkey manufacturing partner for the product and delays were experienced during the commencement and initial start-up process of this relationship. Fourth quarter 1996 results also included a one time charge of $3.5 million resulting from the restructuring which was completed during the quarter. Net revenues for the entire 1996 fiscal year were approximately $90.3 million as compared to $308.1 million for the prior year. Net loss was approximately $975,000 as compared to $131.7 million for the prior fiscal year. The Company experienced net operating losses in the fiscal quarters ended March 31, 1996 and December 31, 1995, and in each of the fiscal years ended September 30, 1996, 1995, 1994 and 1993. The Company's ability to continue operations will depend, initially, upon the Company's ability to repay creditors with whom accommodations cannot be reached (assuming such remaining creditors do not institute enforcement proceedings against the Company). In the future, the Company's ability to sustain profitable operations will depend upon a number of other factors, including 20 the Company's ability to control costs; the Company's ability to service and repay its restructured indebtedness to IBM Credit; the Company's ability to develop innovative and cost-competitive new products and to bring those products to market in a timely manner; the continual commercial acceptance of Apple computers and the rate and mix of Apple computers and related products sold; competitive factors such as new product introductions, product enhancements and aggressive marketing and pricing practices; general economic conditions; and other factors. The Company has faced and expects to continue to face increased competition in graphic cards as a result of Apple's transition of its product line to the PCI Bus. For these and other reasons, there can be no assurance that the Company will be able to achieve or maintain profitability in the near term, if at all. See "Risk Factors -- Continuing Operating Losses; Going Concern Considerations," and "-- Need for Additional Financing; Loan Restrictions." 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 its 1995 fiscal year, shortages of available cash have delayed the Company's receipt of products from suppliers and increased shipping and other costs. The Company recognizes sales upon shipment of product, and allowances are recorded for estimated uncollectable amounts, returns, credits and similar costs, including product warranties and price protection. Due to the inherent uncertainty of such estimates, there can be no assurance that the Company's forecasts regarding bookings, collections, rates of return, credits and related matters will be accurate. A significant portion of the operating expenses of the Company are relatively fixed in nature, and planned expenditures are based primarily on sales forecasts which, as indicated above, are uncertain. Any inability on the part of the Company to adjust spending quickly enough to compensate for any failure to meet sales forecasts or to receive anticipated collections, or any unexpected increase in product returns or other costs, could also have an adverse impact on the Company's operating results. See "Risk Factors -- Fluctuations in Operating Results." 21 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).
NINE MONTHS ENDED YEAR ENDED SEPTEMBER 30, JUNE 30, --------------------------------- ----------------------- 1995 1994 1993 1996 1995 ---- ---- ----- ---- ----- Net sales 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales 98.3 85.3 75.4 80.7 73.7 ---- ------ ------ ------ ------ Gross profit 1.7 14.7 24.6 19.3 26.3 ------ ------ Operating expenses: Research and development 6.3 10.5 9.9 7.5 5.5 Selling, general, and administrative 29.2 29.2 24.9 25.7 19.4 ----- ---- ----- ------- ------ Total operating expenses 35.5 39.6 34.9 33.2 24.9 ----- ----- ----- ------ ------ Income (loss) from operations (33.8) (24.9) (10.3) (13.9) 1.4 Other income (expense), net (2.0) (0.4) 25.3 (1.8) Litigation settlement (4.0) -- -- -- (4.9) ----- ------- ------- ------ ----- Income (loss) before income taxes (39.8) (25.3) (10.2) 11.4 (5.3) Provision (benefit) for income taxes 2.9 (1.4) (4.1) 0.8 0.2 ---- ------ ------- ------ ----- Income (loss) before cumulative effect of a change in accounting principle (42.8) (23.9) (6.1) 10.6 (5.5) Cumulative effect of change in method of accounting for income taxes -- -- 0.2 -- -- ------ ------- ----- ------ ------ Net income (loss) (42.8)% (23.9)% (6.0)% 10.6 % (5.5)% -------- -------- ------- ------- ------ -------- -------- ------- ------- ------
NINE MONTHS ENDED JUNE 30, 1996 COMPARED TO NINE MONTHS ENDED JUNE 30, 1995 NET SALES. Net sales for the first nine months of fiscal 1996 decreased 66.8% to $83.3 million from $251.0 million in the same period in fiscal 1995. This decline was primarily due to the Company's efforts to refocus its business which included exiting markets for high-volume low-margin displays, reduced sales of the Company's video and graphics products caused by Apple's shift from Nubus to PCI Bus computers, and business divestitures. As a result of the sale by the Company of its Color Server Group, the Company recorded no revenue from sales of color server products in the third and second quarter of its 1996 fiscal year and recorded approximately $7.0 million of net sales for the first quarter of its 1996 fiscal year. The Company anticipates significantly lower overall net sales in the immediate future as a result of the Company's decision to focus its efforts on providing solutions for high end digital video and graphics customers, discontinue selling mass market displays and other low value added products, and the divestiture of certain businesses such as its color server group and MacOS compatible systems. Revenues attributable to the Company's Color Server Group were $21.7 million for the nine months ended June 30, 1995. Had the net sales of the Color Server Group not been included in net sales for the nine months ended June 30, 1995 and 1996, net sales for such periods would have been $229.3 million and $76.3 million, respectively. See "-- Business Divestitures." One customer accounted for 39.0% of the Company's net sales for the nine months ended June 30, 1996. For the corresponding period of fiscal 1995, one customer accounted for 25.1% of the Company's net sales. The Company's export sales for the nine months ended June 30, 1996 was 52.8% of net sales. The Company anticipates a decline in the percentage of net sales attributable to the Asia-Pacific and European sales regions in connection with the appointments of a Japanese and a European distributor. Export sales are subject to the normal risks associated with doing business in foreign countries such as currency fluctuations, longer payment cycles, greater difficulties in accounts receivable collection, export controls and other government regulations and, in some countries, a lesser degree of intellectual property protection as compared to that provided under the laws of the United States. The Company hedges substantially all of its trade receivables denominated in foreign currency through the use of foreign currency forward exchange contracts based on third party commitments. Gains and losses 22 associated with currency rate changes on forward contracts are recognized in the Company's consolidated statements of operations upon contract settlement and were not material in the first nine months of fiscal 1996 or 1995. GROSS PROFIT. The Company's gross profit margin was 19.3% for the nine month period ending June 30, 1996, as compared with 26.3% for the corresponding period in fiscal 1995. The decline in gross margin was primarily due to pricing pressure, greater competition in PCI Bus products than in Nubus products, and price declines on lower margin displays related to the Company's exit from that business. In addition, the Color Server Group had gross profit margin of 34.9% for the nine months ended June 30, 1995. Had the Color Server Group business been excluded from the calculation of gross profit margin for such period, the Company's gross profit margin would have been 22.6% for the nine months ended June 30, 1995. The Company anticipates continued price reductions and margin pressure within its industry. The Company is responding to these trends by focusing on higher margin products, taking further steps to reduce product costs and controlling expenses. There can be no assurance that the Company's gross margins will recover or remain at current levels. RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses decreased from $13.8 million or 5.5% of net sales for the first nine months of fiscal 1995 to $6.2 million or 7.5% of net sales for the corresponding period in fiscal 1996. The Company decreased its research and development expenses primarily by reducing expenses related to headcount resulting from the Company's efforts to refocus its business and business divestitures. The increase in research and development expenses expressed as a percentage of net sales for the nine months ended June 30, 1996, 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. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses decreased from $48.7 million or 19.4% of net sales for the first nine months of fiscal 1995 to $21.4 million or 25.7% of net sales for the corresponding period in fiscal 1996. Expenses in the nine month period of fiscal 1995 included a reduction of approximately $2.1 million of merger-related restructuring reserves to reflect current requirements. During the second quarter of fiscal 1996, the building in which the Company leases its headquarters was sold. In connection with the sale, the Company terminated its existing lease and entered into a lease with the new owner of the building. In connection with the final terms of this new lease, expenses in the third quarter of fiscal 1996 included a reduction of approximately $913,000 of restructuring reserves to reflect current requirements. The Company anticipates that the change of rental terms will help reduce the Company's occupancy costs and long-term lease obligations. The Company decreased its selling, general and administrative expenses primarily by reducing expenses related to headcount resulting from the Company's efforts to refocus its business and business divestitures. The increase in selling, general and administrative expenses expressed as a percentage of net sales was primarily attributed to the decrease in net sales and the Company's refocusing on higher-end products, rather than high-volume lower-margin products. OTHER INCOME (EXPENSE), NET. Other income was $21.1 million for the nine months ended June 30, 1996, as compared to other expense of $4.6 million for the corresponding period in fiscal 1995. The increase was due primarily to other income of approximately of $23.8 million resulting from the Company's divestitures of three business lines, including the Color Server Group, partially offset by approximately $3.1 million in interest expense on amounts outstanding under the Company's loan agreements. PROVISION FOR INCOME TAXES. The Company recorded a tax provision of $656,000 for the nine months ended June 30, 1996 as compared to a provision for taxes for the comparable period of fiscal 1995 of $450,000. The tax provision is primarily comprised of foreign taxes. FASB Statement 109 provides for the recognition of deferred tax assets if realization of such assets is more likely than not. The Company's valuation allowance reduced the deferred tax asset to the amount realizable. The Company has provided a full valuation allowance against its net deferred tax assets due to uncertainties surrounding their realization. Due to the net losses reported in the prior three years and as a result of the material changes in operations reported in its 1995 fiscal fourth quarter, predictability of earnings in future periods is uncertain. The Company will evaluate the realizability of the deferred tax asset on a quarterly basis. 23 As a result of the issuance of Common Stock and Series A Convertible Preferred Stock in exchange for certain liabilities of the Company, the Company has experienced a "change of ownership" as defined under Section 382 of the Internal Revenue Code. Accordingly, the net operating loss and tax credit carryforwards will be subject to a substantial annual limitation regarding their utilization against future tax liabilities. This limitation will result in the expiration of all of the tax credit carryforwards and a substantial portion of the net operating loss carryforwards. NET INCOME (LOSS). As a result of the above factors, the Company had net income of $8.8 million for the nine months ended June 30, 1996, as compared to a net loss of $13.9 million for the nine months ended June 30, 1995. FISCAL 1995 COMPARED TO FISCAL 1994 NET SALES. The Company's net sales decreased 5.1% to $308.1 million in fiscal 1995 from $324.8 million in fiscal 1994. Fiscal 1995 net sales were reduced by approximately $11.4 million due to reserves taken by the Company in anticipation of future price reductions on a number of its graphics cards, MacOS compatible systems and other products that are designed for Apple's NuBus-based computers which have been largely replaced by Apple's recently introduced PCI Bus-based computers. During the 1995 fiscal year, net sales of graphics cards declined substantially due primarily to reduced demand resulting from Apple's incorporation of built-in graphics capabilities in its PowerPC based Macintosh systems. Net sales from displays, accelerator cards and printers also declined during the 1995 fiscal year. These declines were largely offset by sales of MacOS compatible systems which were first introduced in the 1995 fiscal year and by a substantial increase of approximately $13.5 million in net sales from the Company's color server products. In January 1996, the Company completed the sale of its color server business and in February, 1996, its MacOS business. While net sales from the Company's digital video products increased slightly during the fiscal year, the Company anticipates lower revenue from this product line until the introduction of new products now under development. There can be no assurance that the Company will be able to successfully develop, introduce and market these new products or that these products will achieve commercial success. The Company anticipates significantly lower overall net sales in fiscal 1996 as a result of the Company's decision to focus its efforts on providing solutions for high end digital video and graphics customers, discontinue selling mass market displays and other low value added products, and the divestiture of certain businesses such as its color server group and MacOS compatible systems. Net sales attributable to the Company's Color Server Group and MacOS compatible systems were approximately $29.3 million and $21.8, respectively for fiscal 1995. Had the net sales of these businesses not been included in net sales for the 1995 fiscal year, the Company's net sales for such fiscal year would have been approximately $257 million. Export sales represented approximately 40.4%, 34.5%, and 32.0% of net sales for fiscal 1995, 1994 and 1993, respectively. See Note 7 of Notes to Consolidated Financial Statements. Export sales are subject to the normal risks associated with doing business in foreign countries such as currency fluctuations, longer payment cycles, greater difficulties in accounts receivable collection, export controls and other government regulations and, in some countries, a lesser degree of intellectual property protection as compared to that provided under the laws of the United States. GROSS PROFIT. The Company's gross profit margin including restructuring and other charges declined to 1.7% in fiscal 1995, compared to 14.7%, in fiscal 1994. The Company's gross profit margin excluding the restructuring and other charges declined to 16.9% in fiscal 1995, compared to 27.3% in fiscal 1994. Excluding restructuring and other charges, the Company's gross profit margin declined primarily due to lower sales of higher margin graphics cards, costs incurred to process higher than expected product returns resulting from the consolidation of the Radius and SuperMac product lines and slower than expected sell through of its Radius Telecast digital video product, significant price erosion on NuBus based MacOS compatible systems combined with high production costs for these systems, the sale of end of life products, and increased pricing pressures. The Company anticipates continued competitive pricing actions resulting in declining prices in its industry. In addition, the Color Server Group and MacOS businesses had gross profit (loss) of approximately $9.8 million and ($19.2 million), respectively for fiscal 1995. Had those businesses not been included in the calculation of the Company's gross profit for fiscal 1995, gross profit for such fiscal year would have been approximately $14.6 million, with a gross profit margin of approximately 5.7%. 24 RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses decreased to $19.3 million, or 6.3% of net sales, in fiscal 1995 from $34.0 million, or 10.5% of net sales, in fiscal 1994. The Company's research and development expenses in fiscal 1994 included restructuring and other charges of $4.3 million. No restructuring and other charges were included in research and development expenses in fiscal 1995. The remainder of the decrease in research and development expenses during the fiscal year was primarily due to the reduction of expenses as a result of the Company's restructuring following the Merger. The merger-related restructuring resulted in reduced costs primarily related to headcount, depreciation, and facilities. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses including restructuring and other charges decreased to $90.1 million, or 29.2% of net sales, in fiscal 1995 from $94.7 million, or 29.2% of net sales, in fiscal 1994. Selling, general and administrative expenses excluding restructuring and other charges decreased to $79.2 million, or 25.7% of net sales, in fiscal 1995 from $84.0 million, or 25.9% of net sales, in fiscal 1994. The decrease in selling, general and administrative expenses during the fiscal year was primarily due to the reduction of expenses as a result of the Company's restructuring following the Merger. The merger- related restructuring resulted in reduced costs primarily related to headcount, depreciation and facilities. PROVISION FOR INCOME TAXES. The Company's annual combined federal and state effective income tax rates were approximately (7.4%) (expense) in fiscal 1995 and 6% (benefit) in fiscal 1994. In fiscal 1995, the rate differs from the combined statutory rate in effect during the period primarily as a result of the impact of not benefiting the 1995 operating losses and the reversal of existing deferred tax assets. The fiscal 1994 rate differs from the combined statutory rate in effect during the period primarily as a result of non-deductible merger related costs, the one time write-off of purchased research and development which is not tax deductible and the impact of not benefiting a significant portion of the 1994 operating loss. FASB Statement 109 provides for the recognition of deferred tax assets if realization of such assets is more likely than not. The Company's valuation allowance reduced the deferred tax asset to the amount realizable. The Company has provided a full valuation allowance against its net deferred tax assets due to uncertainties surrounding their realization. Due to the net losses reported in the prior three years and as a result of the material changes in operations reported in its 1995 fiscal fourth quarter, predictability of earnings in future periods is uncertain. The Company will evaluate the realizability of the deferred tax asset on a quarterly basis. OTHER INCOME (EXPENSE). Other expense increased 387.4% to $6.1 million in fiscal 1995 from $1.2 million in fiscal 1994. This increase was due primarily to increased interest expense for outstanding borrowings and increased cash discounts offered to customers for early payment and flooring charges relating to the Company's accounts receivable. NET INCOME (LOSS). As a result of the above factors net loss increased 69.9% to $131.7 million in fiscal 1995 from $77.5 million in fiscal year 1994. The Color Server Group had net income of approximately $3.5 million for fiscal 1995, had this business not been included in the calculation of the Company's net loss for fiscal 1995, the Company would have had a net loss of approximately $135.2 million for such fiscal year. FISCAL 1994 COMPARED TO FISCAL 1993 NET SALES. The Company's net sales decreased 3.7% to $324.8 million in fiscal 1994 from $337.4 million in fiscal 1993. The Company believes that this decline in net sales was in part attributable to the customers postponing purchasing decisions during the fourth quarter as a result of uncertainty as to which of the Company's product lines would be supported and which would be discontinued following the Merger. Sales were flat for the nine months ended June 30, 1994 prior to the Merger. Net sales of video products and displays increased but this increase was offset by pricing pressure on graphics cards. Demand was lower than anticipated for graphics cards due to the introduction of the Power Macintosh by Apple and the resulting customer uncertainty surrounding the need for graphics acceleration given the built-in video capabilities of this new product. GROSS PROFIT. The Company's gross profit margin including the restructuring and other charges declined to 14.7% in fiscal 1994, compared to 24.6%, in fiscal 1993. The Company's gross profit margin excluding the restructuring charges declined to 27.3% in fiscal 1994, compared to 31.8% in fiscal 1993. See Note 8 of Notes to Consolidated Financial Statements regarding the restructuring and other charges for SuperMac in December 1993 and Merger related restructuring and other 25 charges in September 1994. Excluding the restructuring charges, the decline in gross margins was due to increased pricing pressures and a change in the product mix favoring lower margin displays over higher margin graphics accelerator cards. RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses increased slightly to $34.0 million, or 10.5% of net sales, in fiscal 1994 from $33.5 million, or 9.9% of net sales, in fiscal 1993. The relatively flat absolute dollar expenditures in research and development activities were due to recording significant restructuring and other charges related to development project cancellations, equipment disposal, and severance in fiscal 1994 offset by the decrease in expenditures in fiscal 1994 as a result of the cancellation of Radius' efforts to develop a variety of technologies originally intended for a minicomputer-class server product. Additionally, the research and development expenses appeared flat due to the SuperMac 1993 restructuring of $2.0 million for development project cancellations included in both the fiscal 1993 and fiscal 1994 results of operations. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased to $94.7 million, or 29.2% of net sales, in fiscal 1994 from $84.1 million, or 24.9% of net sales, in fiscal 1993. The increase in absolute dollars was primarily due to increased personnel expense, market development expenses, restructuring and other charges in fiscal 1994 and the Company's investment in its information system. The 1993 restructuring and other charges included the elimination of excess facilities, capital equipment write-offs, severance payments and the termination of certain contractual agreements. Restructuring and other charges for fiscal 1994 included the elimination of duplicative facilities, property and equipment and other assets, severance payments, as well as transaction fees and costs incidental to the Merger. PROVISION FOR INCOME TAXES. The Company's annual combined federal and state effective income tax rates were approximately 6% in fiscal 1994 and 40% in fiscal 1993 before the cumulative effect of the change in method of accounting for income taxes. The fiscal 1994 rate differs from the combined statutory rate in effect during the period primarily as a result of non-deductible merger related costs, the one time write-off of purchased research and development which is not tax deductible and the impact of not benefiting a significant portion of the 1994 operating loss. The 1993 rate differs from the combined statutory rate in effect during the period primarily as a result of the utilization of the research and development tax credit. OTHER INCOME (EXPENSE). Other expense increased to $1.2 million in fiscal 1994 from other income of $70,000 in fiscal 1993. The increase in other expense was due primarily to reduced interest earned on cash balances, increased interest expense on outstanding borrowings, the offering of cash discounts to customers for early payment and flooring charges relating to the Company's accounts receivable. NET INCOME (LOSS). As a result of the above factors, net loss increased 285.6% to $77.5 million in fiscal 1994 from $20.1 million in fiscal 1993. RESTRUCTURING, MERGER AND OTHER CHARGES During fiscal 1993, 1994 and 1995, four restructuring and other charges were recorded. Radius recorded a $15.5 million restructuring charge during the third quarter of fiscal 1993 in connection with the implementation of a program designed to reduce costs and improve operating efficiencies. SuperMac recorded a $16.6 million restructuring charge during December 1993 in connection with a program to realign its inventory and facility and personnel resources. Subsequently, the two companies merged and incurred a restructuring charge of $43.4 million. In September 1995, Radius recorded $57.9 million restructuring charge in connection with the Company's efforts to refocus and streamline its business. A discussion of each of these events follows. RADIUS JUNE 1993 RESTRUCTURING AND OTHER CHARGES. In June 1993, Radius announced a restructuring program designed to reduce costs and improve operating efficiencies. The program included, among other things, the write-down of inventory following Radius' decision to phase out its older generation of products, lease termination expenses, capital equipment write-offs, severance payments, and costs associated with the discontinuation of Radius' minicomputer- class server product. The restructuring program costs of $15.5 million were recorded during the third quarter of fiscal 1993. These charges (in thousands) are included in: cost of sales ($10,993); research and development ($411); and selling, general and administrative expenses ($4,096). The Company completed this restructuring event by the end of calendar 1994. There were no material changes in the restructuring plan or in the estimates of the restructuring costs from the recognition of the charge in June 1993 with the completion of the restructuring program in December 1994. 26 SUPERMAC DECEMBER 1993 RESTRUCTURING AND OTHER CHARGES. In December 1993, SuperMac recorded charges of $16.6 million in connection with a program to adjust inventory levels, eliminate excess facilities, terminate certain projects and contract arrangements and reduce the number of employees. The charges (in thousands) are included in: cost of sales ($13,352); research and development ($2,000); and selling, general and administrative expenses ($1,238). There have been no material changes in the restructuring plan or in the estimates of the restructuring costs. The Company has $236,000 remaining in its restructuring reserve related to facility costs, the balance of which is expected to be eliminated in fiscal 1996. As noted in the Consolidated Financial Statements, the consolidated results for the Company in both the twelve months ended September 30, 1994 and the fiscal period ended 1993 include SuperMac's $16.6 million charge. RADIUS FISCAL 1994 MERGER RELATED RESTRUCTURING AND OTHER CHARGES. In the fourth quarter of fiscal 1994, the Company recorded charges of $43.4 million in connection with the Merger of Radius and SuperMac. These charges include the discontinuance of duplicative product lines and related assets; elimination of duplicative facilities, property and equipment and other assets; and personnel severance costs as well as transaction fees and costs incidental to the merger. The charges (in thousands) are included in: net sales ($3,095); cost of sales ($25,270); research and development ($4,331); and selling, general and administrative expenses ($10,711). The elements of the total charge as of June 30, 1996 are as follows (in thousands):
Representing ------------------------------------ Cash Outlays ----------------------------- Asset Provision Write-Downs Completed Future Adjust inventory levels $22,296 $19,200 $3,096 $ - Excess facilities 2,790 400 2,261 129 Revision of the operations business model 9,061 7,078 1,268 715 Employee severance 6,311 - 6,311 - Merger related costs 2,949 - 2,949 - -------- ------- ------- ------- Total charges $43,407 $26,678 $15,885 $ 844
The adjustment of inventory levels reflects the discontinuance of duplicative product lines. The provision for excess facility costs represents the write-off of leaseholds and sublease costs of Radius' previous headquarters, the consolidation into one main headquarters and the consolidation of sales offices. The revision of the operations business model reflects the reorganization of the combined Company's manufacturing operations to mirror Radius' manufacturing reorganization in 1993. This reorganization was designed to outsource a number of functions that previously were performed internally, reduce product costs through increased efficiencies and lower overhead, and focus the Company on a limited number of products. Employee severance costs are related to employees or temporary employees who were released due to the revised business model. Approximately 250 employees were terminated in connection with the Merger. The provision for merger related costs is for the costs associated with the Merger transaction, such as legal, investment banking and accounting fees. The Company has spent $15.9 million of cash for restructuring through June 30, 1996. The Company expects to have substantially completed the restructuring by September 1996. During fiscal 1995, approximately $2.1 million of merger related restructuring reserves were reversed and recorded as an expense reduction due to changes in estimated requirements. RADIUS FISCAL 1995 RESTRUCTURING AND OTHER CHARGES. In September 1995, Radius recorded charges of $57.9 million in connection with the Company's efforts to restructure its operations by refocusing its business on the color publishing and multimedia markets. The charges primarily included a writedown of inventory and other assets. Additionally, the charges included expenses related to the cancellation of open purchase orders, excess facilities and employee severance. The charges (in thousands) are included in cost of sales ($47,004), and selling, general and administrative expense ($10,861). The elements of the total charge as of June 30, 1996 are as follows (in thousands): 27
REPRESENTING --------------------------------- Cash Outlays ------------ Asset Provision Write-Downs Completed Future Adjust inventory levels $33,138 $ 32,300 $838 $ - Excess facilities 2,004 404 1,415 185 Cancellation fees and asset write-offs 19,061 5,196 18 13,847 Employee severance 3,662 - 2,552 1,110 -------- ------- ------ ------- Total charges $57,865 $37,900 $4,823 $15,142
The adjustment of inventory levels reflects the discontinuance of several product lines. Revenues and gross profit (loss) for significant product lines discontinued were as follows: Mac-OS compatible systems were approximately $21.8 million and $(19.2) million, respectively; and low-margin displays were approximately $82.9 million and $19.6 million, respectively. The provision for excess facility costs represent the write-off of leasehold improvements and the costs associated with anticipated reductions in facilities. The cancellation fees and asset write-offs reflect the Company's decision to refocus its efforts on providing solutions for the color publishing and multimedia markets. Employee severance costs are related to employees or temporary employees who have been or will be released due to the restructuring. As of June 30, 1996, approximately 228 positions of the 240 total planned had been eliminated in connection with the restructuring. The Company had spent approximately $4.8 million of cash for this restructuring during the nine months ended June 30, 1996 and during the quarter ended June 30, 1996, approximately $913,000 of restructuring charges were reversed and recorded as an expense reduction due to changes in estimated requirements. As of June 30, 1996, the Company had cash of $3.3 million. The Company expects to have substantially completed the restructuring by the end of September 1996. LITIGATION SETTLEMENT In September 1992, the Company and certain of its officers and directors were named as defendants in a securities class action litigation brought in the United States District Court for the Northern District of California that sought unspecified damages, prejudgment and post judgment interest, attorneys' fees, expert witness fees and costs, and equitable relief. In July 1994, SuperMac Technology, Inc. ("SuperMac") and certain of its officers and directors, several venture capital firms and several of the underwriters of SuperMac's May 1992 initial public offering and its February 1993 secondary offering were named as defendants in a class action litigation brought in the same court that sought unspecified damages, prejudgment and post judgment interest, attorneys' fees, experts' fees and costs, and equitable relief (including the imposition of a constructive trust on the proceeds of defendants' trading activities). In June 1995, the Court approved the settlement of both litigations and entered a Final Judgment and Order of Dismissal. Under the settlement of the litigation brought in 1992 against the Company, the Company's insurance carrier paid $3.7 million in cash and the Company 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 September 30, 1996, the Company had issued 836,674 shares of its Common Stock due to the settlements and 99,630 shares remained to be issued. BUSINESS DIVESTITURES COLOR SERVER GROUP DIVESTITURE. In January 1996, the Company completed the sale of its Color Server Group ("CSG") to Splash Merger Company, Inc. (the "Buyer"), a wholly owned subsidiary of Splash Technology Holdings, Inc. (the "Parent"), a corporation formed by various investment entities associated with Summit Partners. The Company received approximately $17.2 million in cash and 4,282 shares of the Parent's 6% Series B Redeemable and Convertible Preferred Stock 28 (the "Series B Preferred Stock"). An additional $4.7 million was placed in escrow to secure certain post-closing and indemnification obligations. In April 1996, approximately $2.3 million was released from this escrow to the Company and the Company also received approximately $1.5 million as a result of post-closing adjustments. The shares of Series B Preferred Stock are convertible by the Company at any time into approximately 19.9% of the Parent's Common Stock outstanding as of the closing of the transaction. The Company has not converted the Series B Preferred Stock into Common stock of the Parent. Furthermore, such stock has been pledged to IBM Credit. In connection with IBM Credit agreeing to subordinate its security interest in certain technology and intellectual property rights incorporated in the Company's Pressview products to the security interest granted to Mitsubishi Electronics, the Company granted IBM Credit an option to purchase 428 shares of Series B Preferred Stock at $0.01 per share. IBM Credit has exercised this option and the Company has assigned 428 of its shares of Series B Preferred Stock to IBM Credit. In addition, under the terms of the new loan agreement with IBM Credit, IBM Credit has the right to require Radius to sell up to 50% of its Series B Preferred Stock (or the shares of Common Stock into which such Series B Preferred Stock is convertible) within one year of the initial public offering of Parent, which occurred on October 9, 1996, and up to 25% of its Series B Preferred Stock (or the shares of Common Stock into which such Series B Preferred Stock is convertible) during each of the second and third year following such initial public offering. If the balance due under the term loan with IBM Credit exceeds 90% of the market value of such Series B Preferred Stock (or the shares of Common Stock into which such Series B Preferred Stock is convertible) after the initial public offering of Parent, IBM Credit can require Radius to sell such securities to repay such term loan. The shares of Series B Preferred Stock also will be redeemable by the Parent at any time, and will be subject to mandatory redemption beginning on the sixth anniversary of issuance, in each case at a redemption price of $1,000 per share plus accrued dividends. The Company has certain indemnification obligations in connection with the patent lawsuit brought by Electronics for Imaging, Inc. The net proceeds of the CSG transaction were paid to Silicon Valley Bank ("SVB"), in order to repay the Company's indebtedness to SVB, and to IBM Credit, in order to reduce the Company's outstanding indebtedness to IBM Credit. See "Unaudited Pro Forma Financial Information." PORTRAIT DISPLAY LABS. In January 1996, the Company entered into a series of agreements with Portrait Display Labs, Inc. ("PDL"). The agreements assigned the Company's pivoting technology to PDL and canceled PDL's on-going royalty obligation to the Company under an existing license agreement in exchange for a one-time cash payment. The Company did not receive any material amount of payments under such license agreement. PDL also granted the Company a limited license back to the pivoting technology. Under these agreements, PDL also settled its outstanding receivable to the Company by paying the Company $500,000 in cash and issuing to the Company 214,286 shares of PDL's Common Stock. The cash proceeds were paid to IBM Credit. UMAX DATA SYSTEMS, INC. In February 1996, the Company sold its MacOS compatible systems business to UMAX Computer Corporation ("UCC"), a company formed by UMAX Data Systems, Inc. ("UMAX"). The Company received approximately $2.3 million in cash and debt relief, and 1,492,500 shares of UCC's Common Stock, representing approximately 19.9% of UCC's then outstanding shares of Common Stock. The cash proceeds were paid to IBM Credit and the shares of UCC Common Stock were pledged to IBM Credit. DISPLAY TECHNOLOGIES ELECTROHOME INC. In December 1995, the Company completed the sale of its monochrome display monitor business to Display Technologies Electrohome Inc. ("DTE"). DTE purchased Radius' monochrome display monitor business and certain assets related thereto, for approximately $200,000 in cash and cancellation of $2.5 million of the Company's indebtedness to DTE. In addition, DTE and Radius canceled outstanding contracts relating to DTE's manufacture and sale of monochrome display monitors to Radius. LIQUIDITY AND CAPITAL RESOURCES The Company's cash and cash equivalents decreased approximately $11.2 million during fiscal 1995 to approximately $4.8 million at September 30, 1995, as compared with the fiscal 1994 ending balance of cash and cash equivalents of $16.0 million. Approximately $1.6 million of the $4.8 million of cash and cash equivalents available at September 30, 1995 was restricted under various letters of credit. The decrease in the Company's cash and cash equivalents during fiscal 1995 was primarily attributable to expenditures made in connection with the development and introduction of the Company's MacOS compatible systems. The Company's cash increased approximately $500,000 in the third quarter of fiscal 1996 to $3.3 million at June 30, 1996 as compared to the ending balance at March 31, 1996 of $2.8 million. Approximately $400,000 of the $3.3 million of cash and cash equivalents available at June 30, 1996 was restricted under various letters of credit. 29 The Company also holds securities in Splash Technology Holdings, Inc. and UMAX Computer Corporation ("UMAX"), which securities have been pledged to IBM Credit. Splash Technology Holdings, Inc. recently became a public company, 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. The Company also has certain registration rights with respect to those securities. Because UMAX is a private company, there is no market for such securities. In addition, as described under "-- Business Divestitures -- Color Server Group Divestiture," the Company will be required to sell its securities in Splash Technology Holdings, Inc. over no longer than a three year period after such Company's initial public offering 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 of liquidity is 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, however this working line of credit is not expected to provide the Company with a significant source of liquidity for the foreseeable future. Accordingly, the Company intends to finance its working capital needs through cash generated from operations. See "Risk Factors -- Need for Additional Financing; Loan Restrictions." In connection with 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 $500,000. In addition, IBM Credit has restructured the terms of the 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 current indebtedness to be outstanding under this line of credit is $1.5 million, the amount of the borrowing base on the date of the closing of the restructured loan. The remaining $21.9 million balance of the Company's indebtedness to IBM Credit has been converted to a four-year term loan. 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 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 "Risk Factors -- 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. 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 "Risk Factors -- Need for Additional Financing; Loan Restrictions." 30 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. See "Risk Factors -- Technological Change; Continuing Need to Develop Products." 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. Capital expenditures were approximately $215,000 during the nine months ended June 30, 1996 and were $1.9 million in fiscal 1995 and $3.5 million in fiscal 1994 and were primarily for leasehold improvements and upgrading the Company's management information systems. The Company has no present plans for any significant amount of capital expenditures in the future. At October 31, 1996, the Company's principal commitments consisted of obligations under its credit agreement with IBM Credit and its obligations under building and capital leases. See Notes 2 and 3 to Consolidated Financial Statements. 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 "Business -- 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 manufacture and sell products and has resulted in additional costs for expedited deliveries. The adverse effect on the Company's results of operations due to its limited cash resources can be expected to continue until such time as the Company is able to return to profitability, or generate additional cash from other sources. 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 next 12 months. Additional funds will be needed to finance the Company's operations, product development plans and for other purposes if the Company's operating expenses are higher than anticipated. Additional financing will also be required if the Company desires to acquire or invest in complementary businesses or products or to obtain the right to use complementary technologies. While the Company is now investigating possible financing opportunities, there can be no assurance that additional financing will be available when needed or, if available, that the terms of such financing will not adversely affect the Company's results of operations. 31 BUSINESS Overview The Company designs, develops, manufactures, markets and supports color publishing and digital video computer products for creative professionals. The Company's current product line includes: accelerated color graphics products that facilitate the creation and manipulation of graphical images; video systems and software that can acquire and manipulate video and audio information; and high resolution color reference displays that allow users to view text, graphics, images and video. The primary target markets for the Company's products are color publishing and multimedia. These markets encompass creative professionals involved in such areas as color prepress, graphic arts, video editing, video and multimedia production and playback, and corporate training. To date substantially all of the Company's products have been designed for and sold to users of Macintosh computer products (the "Macintosh") manufactured by Apple Computer, Inc. ("Apple") as Apple products have been the preferred platform in the Company's target markets. As shown in the accompanying consolidated financial statements, the Company has incurred substantial operating losses and, until recently, had a deficiency in assets and working capital. Management has implemented, a number of actions to address this situation including: refocusing its efforts on providing solutions for high end digital video and graphics customers; discontinuing sales of mass market and other low value added products; divesting its color server and monochrome display businesses and its MacOS compatible systems products and other product lines; significantly reducing expenses and headcount; subleasing all or a portion of its current facility given its reduced occupancy requirements; and investigating various strategic partnering opportunities. The Company, IBM Credit and its unsecured creditors recently consummated the Plan pursuant to which the Company's creditors received equity in satisfaction of their claims. The Company issued 36,294,198 shares of Common Stock in satisfaction of approximately $45.9 million in unsecured claims (including a $1.0 million reserve for unknown or unresolved claims) and repaid approximately $1.9 million of unsecured claims, most of which were less than $50,000, at an average discount of approximately 75% of the amount of the claim. Of these shares of Common Stock issued pursuant to the Plan, 791,280 were issued to the Radius Creditors Trust for the purpose of satisfying unresolved or unknown claims. The Company also issued 750,000 shares of its Series A Convertible Preferred Stock and Warrants to purchase 600,000 shares of Common Stock in satisfaction of $3.0 million indebtedness to IBM Credit and in consideration of restructuring its remaining approximately $23.4 million indebtedness to IBM Credit. The Company also issued Rights to receive an additional 11,046,060 shares of Common Stock to its unsecured creditors who received Common Stock in the event that the Series A Convertible Preferred Stock is converted into Common Stock (including 240,824 Rights issued to the Radius Creditors Trust). As of October 13, 1996, the Company granted 200,000 Warrants to Mitsubishi Electronics in consideration of the extension of open credit terms to the Company. See "Recent Developments -- Debt for Equity Exchange." The Company's executive offices are located at 215 Moffett Park Drive, Sunnyvale, CA 94089, and its telephone number is (408) 541-6100. PRODUCTS AND APPLICATIONS A summary of some of the Company's principal products and their typical applications is set forth below:
PRODUCT CATEGORY PRODUCT MARKET/APPLICATION SUGGESTED RETAIL PRICE - ---------------- ------- ------------------ ---------------------- Accelerated Color ThunderPower 30/1920 $1,999 ThunderColor 30/1600 Color publishing, prepress, graphics 2,499 Graphics Products Thunder Color 30/1152 design and professional color imaging 1,999 (PCI-based) Thunder 30/1600 1,199 Thunder 30/1152 999 Precision Color 8/1600 399 Precision Color 24/1600 599 Color Engine 999
32
PRODUCT CATEGORY PRODUCT MARKET/APPLICATION SUGGESTED RETAIL PRICE - ---------------- ------- ------------------ ---------------------- (NuBus-based) Thunder IV GX1600 $1,199 Thunder IV GX1360 1,099 Thunder/24 GT 599 Precision Color Pro 24X 649 PrecisionColor 8XJ 599 Color Reference PressView 21SR Color publishing, prepress and graphics design 3,999 Displays PressView 17SR 2,499 Precision View 21 2,749 Color Management ProSense Display Color publishing and prepress 799 Products Calibrator Color Composer
ACCELERATED COLOR GRAPHICS PRODUCTS The Radius graphics product families offer a wide range of user choices to enhance the graphics performance of Apple Macintosh computers based on both the NuBus and PCI bus architectures. The choices range from an entry level accelerated 8-bit color graphics card (256 colors with up to 1 million pixels of color display information) to a variety of accelerated 24-bit color graphics cards (up to 16.7 million colors). All of the Company's graphics card products offer a range of high speed QuickDraw acceleration features and support numerous Radius, Apple and other third-party displays ranging from 13-inches to 21-inches in size. The Company's graphics card products also allow the user to switch resolutions "on-the-fly" without having to reboot the computer. The Thunder (PCI), ThunderPower (PCI), ThunderColor (PCI) and Thunder IV (NuBus) class graphics cards offer enhanced resolutions, as well as a number of other acceleration capabilities for Adobe Photoshop, a popular application for working with computer images. These graphics cards also feature hardware pan and zoom capability, enabling users to quickly change the size and the amount of the information on their color display. The Company believes these capabilities allow users working with large amounts of detailed information to be more productive because they can quickly accomplish a variety of tasks using these hardware-based acceleration features. The ThunderColor (PCI), Thunder 30 (PCI), and Thunder IV (NuBus) graphics cards include multiple 66 MHz AT&T digital signal processors ("DSPs") that accelerate Adobe Photoshop. Having parallel processing DSPs rather than the base Macintosh's CPU perform the millions of computations required to manipulate Photoshop images means that customers can produce finished results more quickly and are more productive in their creative and production process. These cards include chip technology that enables users to use Photoshop's CMYK color mode faster than the native Macintosh. This is attractive to imaging professionals who use Photoshop to work with and edit images comprised of 'ink' data which is ready for printing. The Company believes this special "CMYK acceleration" technology makes working with ink images on a computer display more interactive. DIGITAL VIDEO SYSTEMS AND SOFTWARE Radius offers a number of products for the non-linear digital video editing and production market. Non-linear digital editing enables video editors to manipulate pictures and sound in a faster, easier and more cost effective manner than traditional analog tape-based systems. Editors can randomly access and digitally "cut and paste" images, videos and sound clips avoiding the tedious process of winding and rewinding of linear tape and the subsequent physical cutting and splicing of film segments. VideoVision Studio and VideoVision PCI, Radius' leading desktop video product, was the first fully QuickTime compatible video editing and production system that supported full-screen (640 x 480 pixels), full-motion video at 60- fields per-second. VideoVision Studio offers JPEG video compression/decompression capabilities, 16-bit C.D. stereo audio, and 33 allows users to output their finished product directly and easily to videotape. VideoVision Studio is compatible with QuickTime based software applications for editing, effects, titling, graphics, animation and audio. Radius Telecast (NuBus) offers broadcast quality digital video for short form projects. Radius Telecast features include: high-quality, Betacam SP component, S-video and composite digitizing and play back; QuickTime-compliant video system software; 16-bit analog audio; and a 19" rack-mountable design. Radius Telecast is designed to provide full QuickTime support, a high degree of studio integration and professional video and audio support. Radius also offers a QuickTime compliant digital video non linear editing, compositing and animation software applications that facilitate the creation and editing of digital video content. Radius Edit 2.0 is a non-linear professional digital video editing solution that features an intuitive user interface, FX templates, built-in titling, multiple key frames, batch digitizing and picture-in-picture capabilities. Radius Edit 2.0 also offers a variety of high-quality special effects for digital video editing including pan-zoom-rotating, chroma keying and compositing. DISPLAYS The Company currently offers a variety of large color reference displays designed for desktop color publishers and graphic artists. The PressView SR series (PressView 21SR and PressView 17SR) is designed to offer the color accuracy, resolution and clarity needed for high quality color prepress, media authoring, photography, medical imaging and scientific image processing. These color reference displays offer consistent and accurate color preproofing at resolutions of up to 1600 by 1200 pixels. The PrecisionView 21 also offers resolutions of up to 1600 by 1200 pixels but at a lower price point. The PressView SR series supports Kodak PrecisionColor, Agfa FotoFlow, Apple ColorSync 2.0 and EFI Color management systems to ensure color accuracy. In the past, the Company has also offered a variety of monochrome displays. As part of its strategy to refocus its business, the Company entered into a definitive agreement on December 21, 1995 to sell its monochrome display business to Display Technologies Electrohome Inc. For a more complete discussion see "Management's Discussion and Analysis of Financial Condition -- Business Divestitures." COLOR MANAGEMENT PRODUCTS Color peripherals tend to vary over time from their original specifications, thus causing significant color variances. Display calibrators control the way peripherals produce color, making the color more consistent and predictable. The Company's Prosense Display Calibrator works with sensing technology and Macintosh software to measure the actual color performance of a display and then adjust information in the Macintosh graphics card so that the colors will be accurate. This product also communicates with a number of third party color management systems to provide color information about the display so that color can be managed from one peripheral to another. TECHNOLOGY AND PRODUCT DEVELOPMENT The Company's research and development efforts are focused on creating new products and technologies for customers who create, review, approve and utilize high resolution color images and moving video. Current research and development efforts include: (i) performance improvements and cost reductions of current products; (ii) development of 3D graphics subsystems; (iii) development of application software to facilitate the creation and manipulation of video and high resolution still images; (iv) development of integrated software that improves ease of use and functionality of the Company's graphics cards, digital video cards, and color reference displays; and (v) development of next generation technology to enable new methods of displaying and creating information with greater flexibility, speed, and quality. The Company believes that the competitive nature of the computer industry, along with the rapid pace of technological evolution, requires that it continue to introduce innovative products on a timely basis to compete effectively. During the nine months ended June 30, 1996 and fiscal 1995, 1994 and 1993, the Company's expenditures for research and development totaled $6.2 million, $19.3 million, $34.0 million, and $33.5 million, respectively. To date, all of the Company's research and development expenditures have been charged to operations as incurred. Because of its financial condition, the Company does not anticipate having research and development expenditures equal to its historical levels, which could adversely affect the Company's ability to develop and introduce new products. See "Risk Factors -- Need for Additional Financing; Loan Restrictions." 34 There can be no assurance that the Company's development efforts will result in commercially successful products, or that the Company's products will not be rendered obsolete by changing technology or new products introduced by others. Additionally, should the Company fail to introduce new products on a timely basis, the Company's operating results could be adversely affected. In the past, the Company expended substantial resources towards its MacOS product line which did not achieve profitability and which was subsequently sold. See "Risk Factors -- Technological Change; Continuing Need to Develop New Products." The principles and features underlying the design of the Company's products are: identification and reduction of performance bottlenecks in graphics and video systems; providing consistency of color fidelity across products and applications; utilization of ASIC technology; and innovation within standard operating system environments. IDENTIFICATION AND REDUCTION OF BOTTLENECKS IN GRAPHICS AND VIDEO SYSTEMS The Company analyzes the performance of applications and hardware products within the environment of the host CPU and operating system with the goal of determining which parts of the overall solution are most resource and time intensive so that products can be developed which outperform the existing solutions. The Company has developed considerable knowledge of system software such as Apple's QuickDraw and QuickTime and critical application software such as Adobe Photoshop. The Company believes that its ability to eliminate bottlenecks in a manner that is compatible with existing Apple and third party products is a significant advantage in the marketplace. PROVIDING CONSISTENCY OF COLOR FIDELITY ACROSS PRODUCTS AND APPLICATIONS The Company strives to provide users with the most accurate and repeatable color available. The Company's high-end color reference displays provide tools to calibrate the display with both objective standards and visual perception, and to adjust the color range of the display to fit user needs. UTILIZATION OF ASIC TECHNOLOGY On a selective basis, the Company uses its in-house integrated computer aided engineering capabilities to develop proprietary ASIC chips for use in its own products. The use of ASIC chips allows the Company to increase performance while reducing chip count and board size which thereby reduces cost. ASICs are used heavily throughout the Company's graphics card line. In some cases, however, commercially available devices offer better overall price/performance than proprietary ASICs (given the development cost involved), and the Company's strategy is to make the tradeoff on a product-by-product basis to provide the most cost-effective solution. INNOVATION WITHIN STANDARD OPERATING SYSTEM ENVIRONMENTS In order to maintain compatibility with the broad existing base of installed hardware and software, the Company seeks to innovate in conjunction with existing standards. For example, the Company's graphics cards are compatible with third party graphics software (such as Adobe Photoshop and Quark Pagemaker) as well as NuBus and PCI-based computers. Similarly, the Company's digital video cards are tightly integrated into Apple's standard QuickTime environment. MARKETING, SALES AND DISTRIBUTION The Company employs a two-tiered distribution model whereby it sells its products primarily through a limited number of distributors and master resellers that in turn distribute the Company's products to a variety of resellers including superstores, independent dealers, educational resellers, systems integrators, value added resellers and mail order resellers. The Company's distributors and master resellers purchase products at discounts from suggested retail prices based on purchase volumes. In the United States, the Company sells its products primarily through the following major distributors and master resellers: Ingram Micro, Inc.; and MicroAge. The Company's business and financial results are highly dependent on the success of these distributors and master resellers. To assist these domestic distributors and master resellers and to provide marketing, training and technical support, the Company maintains field sales facilities in a number of locations throughout the United States. See "Risk Factors -- Dependence on Indirect Distribution Channels." 35 Radius provides market development funds that give distributors and master resellers incentives to increase sales, improve reporting and achieve a product mix favoring higher margin products. Internationally, sales are made through worldwide distributors, which market, sell and service the Company's products, and until the second quarter of 1996, the Company's wholly owned subsidiary located in Tokyo, Japan. Currently has entered into exclusive distributor arrangements for Japan and Europe. The Company maintains international sales offices in Surrey, England; Hamburg, Germany; and Paris, France. For the nine months ended June 30, 1996, and for the fiscal years ended September 30, 1995, 1994 and 1993, the Company's export sales accounted for approximately 52.8%, 40.4%, 34.5% and 32.0%, respectively, of the Company's net sales. See Note 7 of Notes to Consolidated Financial Statements. The Company's export sales are subject to certain risks common to international operations, such as currency fluctuations and governmental regulation. See "Risk Factor -- International Sales." For the nine months ended June 30, 1996 and for the fiscal years ended September 30, 1995, 1994 and 1993, Ingram Micro, Inc. accounted for approximately 39.0%, 34.0%, 13.5% and 11.5% of the Company's net sales, respectively. Many of the Company's distributors and master resellers have the right to return products purchased from the Company. While the Company provides for estimated product returns, if in the future the Company were to experience returns from customers significantly in excess of this estimate, such returns could have a material adverse effect on the Company's results of operations. The Company's marketing programs support worldwide sales and distribution of its products. The Company's principal marketing activities include frequent participation in industry trade shows and seminars, advertising in major trade publications worldwide, public relations activities with the trade and business press, publication of technical articles, distribution of sales literature and product specifications and communications with its installed base of end users. The Company's marketing programs are designed to generate sales leads for its distributors and master resellers as well as to enhance the Company's brand name recognition. MANUFACTURING AND SUPPLIERS As a result of the Company's outsourcing of manufacturing, substantially all of the Company's assembly, quality control testing, packaging and other manufacturing operations are performed by the Company's suppliers, contract manufacturers, and other subcontractors. The Company has developed a quality assurance program with these third parties. The Company attempts to utilize standard parts and components available from multiple vendors. However, certain components used in the Company's products are available only from sole or limited suppliers, such as certain ASICs from LSI Logic NEC and certain VideoVision parts from Toshiba. The Company's products also incorporate components, such as video random access memory, that are available from multiple sources but have been subject to substantial fluctuations in availability and price. Although the Company has been able to obtain an adequate supply of such components in the past, there can be no assurance that it will be able to obtain an adequate supply in the future. See "Risk Factors -- Dependence on Limited Number of Manufacturers and Suppliers." COMPETITION The color publishing and multimedia markets are, and are expected to remain, highly competitive. The Company's principal competitors in the color publishing market include Apple, ATI Technology and Diamond Multimedia Systems. The Company's principal competitors in the multimedia market include Truevision (formerly RasterOps Corporation), Data Translation, Inc., Matrox, Inc., Avid Technology, Inc., VideoLogic, Inc. and Fast Electronics GmbH. The market for the Company's products is evolving, and it is difficult to predict all future sources of competition. Although Apple is principally a supplier of general purpose computing platforms upon which third parties are encouraged to build more complete solutions, the Company also faces competition from Apple. Apple markets a number of products, including computer systems and color displays, that compete directly or indirectly with the Company. Apple also could introduce additional products, add functionality to their computer systems that is similar to that provided by certain of the Company's products, or alter its systems' architecture in a manner that could adversely affect the Company's ability to compete. For example, Apple's PowerPC based products which have on-board graphic functionality and faster processing speed, could 36 be considered competitors of specific product lines of the Company's. See "Risk Factors -- Dependence on and Competition with Apple." The Company believes that the principal competitive factors for its product line are product performance, breadth of distribution, brand name recognition, price and customer support. There can be no assurance that the Company will be able to compete successfully with respect to these factors. In addition, many of the Company's current and prospective competitors have significantly greater technical, manufacturing and marketing resources than the Company. See "Risk Factors -- Competition." PATENTS AND LICENSES 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. See "Risk Factors --Dependence on Proprietary Rights." EMPLOYEES As of October 31, 1996, the Company had approximately 110 full time employees. The Company's success will depend, in large measure, on its ability to attract and retain highly qualified technical, marketing, engineering and management personnel, who are in great demand. See "Risk Factors -- Dependence on Key Personnel." The Company's employees are not represented by any collective bargaining agreements, and the Company has never experienced a work stoppage. The Company believes that its employee relations are good. PROPERTIES The Company's primary facility is located in Sunnyvale, California and consists of leased space of approximately 40,000 square feet. The Company believes that its current facilities are adequate for its needs. The lease on the primary facility will expire in March 1998. The Company has subleased to other companies approximately 281,000 square feet of facilities which the Company is currently not using. The Company maintains field sales facilities in a number of locations throughout the United States as well as in Surrey, England; Paris, France; Hamburg, Germany; and Tokyo, Japan. See Note 3 of Notes to Consolidated Financial Statements. 37 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 has indemnification rights with respect to EFI's claims. A motion for summary judgment based on these indemnification rights disposing of EFI's claims 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 business, the Company has certain indemnification obligations for which approximately $2.3 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 advertise that the viewing areas of their computer monitors are larger than in fact they are. The Company was served with the Shapiro complaint on August 22, 1995 and was served with the Maizes complaint on January 5, 1996. Defendants' petition to the California State Judicial Council to coordinate the Shapiro case with similar cases brought in other California jurisdictions was granted in part and it is anticipated that the coordinated proceedings will be held in Superior Court of California, San Francisco County. An amended consolidated complaint was filed on March 26, 1996. Discovery proceedings are scheduled to begin. The Company believes it has meritorious defenses to the plaintiffs' claims and is defending them vigorously. In the opinion of management, based on the facts known at this time, the eventual outcome of these cases may have a material adverse effect on the results of operations or financial position of the Company in the financial period in which they are resolved. In addition, whether or not the eventual 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 lawsuit also alleges that an officer of the Company interfered with the alleged contract. The Company believes it has meritorious defenses to the plaintiff's claims and intends to defend them vigorously. Nevertheless, the costs of defense, regardless of outcome, could have an adverse effect on the results of operations and financial condition of the Company. (d) The Company is involved in a number of other judicial and administrative proceedings incidental to its business, including litigation by alleged trade creditors who did not participate in the Plan. 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. 38 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The executive officers and directors of the Company are as follows: NAME AGE POSITION ------ ----- ---------- Charles W. Berger. . . . 42 Chairman of the Board of Directors, Chief Executive Officer and President Mary E. Godwin . . . . . 37 Vice President, Operations Gregory M. Millar. . . . 40 Vice President, Engineering and Chief Technology Officer Michael D. Boich(1)(2) . 42 Director Carl A. Carlson(1) . . . 50 Director Michael W. Ledbetter(2). 46 Director ------------------ (1) Member of the Audit Committee. (2) Member of the Compensation Committee. Mr. Berger was appointed President, Chief Executive Officer and a director of the Company in March 1993 and Chairman of the Board of Directors in March 1994. From April 1992 until he joined the Company, Mr. Berger was Senior Vice President, Worldwide Sales, Operations and Support for Claris Corporation ("Claris"), a subsidiary of Apple that develops and markets application software. From February 1991 to April 1992, he was President of Sun Microsystems Federal, Inc., a subsidiary of Sun Microsystems, Inc. ("Sun"), a manufacturer of computer work stations. From July 1989 to February 1991, he served as Vice President of Business Development for Sun, and from March 1989 to July 1989, he was Sun's Vice President of Product Marketing. From April 1982 to March 1989, Mr. Berger held numerous management positions involving sales, marketing, business development and finance for Apple. Ms. Godwin was appointed Vice President, Operations in August 1995 and prior to assuming that position served as the Company's Director of Operations Engineering beginning when she joined the Company in July 1993 . Prior to joining the Company, Ms. Godwin spent seven years with Apple as a supply base manager, and seven years with Xerox Corporation ("Xerox"), a diversified manufacturer of document copying and processing equipment, as a technical specialist. Mr. Millar was appointed Vice President, Engineering and Chief Technology Officer in October 1995 and prior to assuming that position served as the Company's Vice President, Research from October 1993 to October 1995, and as Vice President, Engineering from July 1991 to October 1993. From January 1989 to July 1991, he held various managerial positions in the Company including General Manager of the Advanced Development Group, General Manager of the Macintosh Business Unit and Director of Software Development. Prior to joining the Company, Mr. Millar was Vice President of Engineering and a founder of Infa Corporation, a pen-based computing company, from June 1987 to December 1988. Mr. Boich has been a director of the Company since its inception in May 1986 and was the Chairman of the Board of Directors from April 1991 until March 1994. Mr. Boich has been President and Chief Executive Officer of Rendition, Inc., a developer of graphics chips, since March 1994. Mr. Boich served as the Company's President and Chief Executive Officer from its inception until April 1991 and again assumed these positions from September 1992 through February 1993. From July 1985 to April 1986, Mr. Boich worked as an independent data communications consultant. From March 1982 to July 1985, Mr. Boich was employed by Apple, where he was part of the original Macintosh development team and was responsible for applications software acquisitions and promoting third-party software development for the Macintosh. 39 Mr. Carlson had been a director of the Company since September 1996. Mr. Carlson has been Assistant Vice President--Credit of Mitsubishi Electronics America, Inc., an Electronic Components company, since 1982. Mr. Ledbetter has been a director of the Company since October 1996. Mr. Ledbetter had been the Corporate Asset Manager of SCI Systems, Inc., an electronic manufacturing services company since June 1990. Both Mr. Carlson and Mr. Ledbetter were active on the Creditors Committee on behalf of their respective employers. ELECTION OF DIRECTORS Directors are elected by the shareholders at each annual meeting of shareholders to serve until the next annual meeting of shareholders at which such directors are to be elected or until their successors are duly elected and qualified, or until their earlier resignation or removal. Officers are chosen by, and serve at the discretion of, the Board of Directors. COMPENSATION OF DIRECTORS During fiscal 1995, the Board adopted a director compensation policy pursuant to which all directors appointed to the Board on or after June 1995 will receive $1,500 for each Board meeting attended. This compensation policy was implemented to facilitate the recruitment of additional directors. The directors of the Company appointed prior to June 1995 do not currently receive compensation for services on the Board or any committee thereof. The 1994 Directors Stock Option Plan (the "1994 Directors Plan") was adopted by the Company's Board on December 14, 1994 and approved by the Company's shareholders on February 15, 1995. A total of 155,000 shares of the Company's Common Stock have been reserved for issuance under the 1994 Directors Plan (consisting of 100,000 shares allocated to the 1994 Directors Plan at the time of its adoption by the Board plus 55,000 shares that were authorized for issuance, but not issued or subject to outstanding options, under the Company's 1990 Directors' Stock Option Plan (the "Prior Directors Plan") as of February 15, 1995). In addition, shares of the Company's Common Stock issuable upon exercise of outstanding stock options granted under the Prior Directors Plan that expire or become unexercisable for any reason after February 15, 1995 will be available for issuance under the 1994 Directors Plan. A total of 23,750 shares of Common Stock from the Prior Directors Plan have been added to the 1994 Directors Plan since February 15, 1995 as a result of the expiration of stock options under the Prior Directors Plan. The 1994 Directors Plan provides for the grant of 10,000 nonqualified stock options ("NQSOs") to non-employee members of the Board upon appointment to the Board and annual grants of 2,500 NQSOs on each anniversary of a director's initial grant under either the Prior Directors Plan or the 1994 Directors Plan, provided the Director continues to serve on the Board at such time. In addition, each director who received a grant to purchase 1,250 shares under the Prior Directors Plan after August 30, 1994 and before February 15, 1995 was eligible to receive a one time grant under the 1994 Directors Plan to purchase 1,250 shares of the Company's Common Stock. Although options granted prior to termination of the Prior Directors Plan remain outstanding in accordance with their terms, no further options may be granted under the Prior Directors Plan. During fiscal 1995, the following directors received options to purchase shares of the Company's Common Stock under the 1994 Directors Plan and/or the Prior Directors Plan: Mr. Pratt received an option to purchase 10,000 shares at exercise price of $12.00 per share; Mr. Boich received an option to purchase 2,500 shares at an exercise price of $10.88 per share; and Mr. McKenna received two options to purchase a total of 2,500 shares at an exercise price of $8.00. During fiscal 1995 and during fiscal 1996, the following individuals who resigned from the Board received options to purchase shares of the Company's Common Stock under the 1994 Directors Plan and/or the Prior Directors Plan: William Campbell, who resigned effective as of April 1995, received two options to purchase a total of 2,500 shares at an exercise price of $8.00 per share. Lawrence G. Finch, who resigned effective as of October 1995, received an option to purchase 2,500 shares at exercise price of $7.44 per share. Michael A. McConnell whose term ended in February 1996 received an option to purchase 10,000 shares at exercise price of $10.56 per share. All director stock options were granted at the market price of the Company's Common Stock on the date of grant. 40 EXECUTIVE COMPENSATION The following table sets forth information concerning the compensation awarded to, earned by or paid for services rendered in all capacities to the Company during each of the fiscal years ended September 30, 1994, 1995 and 1996 (except as otherwise indicated) by (i) the Company's Chief Executive Officer and (ii) the Company's two other most highly compensated executive officers who were serving as executive officers as of September 30, 1996 (collectively, the "Named Executive Officers"). No other officer who held office at September 30, 1996 met the definition of "most highly compensated executive officer" within the meaning of the SEC's executive compensation disclosure rules for this period.
SUMMARY COMPENSATION TABLE Annual Compensation ------------------- Long Term Compensation ------------ Other Securities Annual ----- Underlying All Other Name and Principal Position Year Salary($) Bonus($) Compensation($) Options(#) Compensation($)(1) - ---------------------------- ----- --------- --------- --------------- ---------- ------------------ Charles W. Berger (2) 1996 275,000 100,000 77,459 (3) 50,000 34,333 (4) President, CEO and 1995 275,000 48,700 77,459 (3) 62,500 35,600 (4) Chairman of the Board of Directors 1994 225,000 117,500 88,417 (3) -- 35,600 (4) Gregory M. Millar 1996 182,769 45,000 -- 22,500 1,000 Vice President, Engineering 1995 180,000 167,700 (5) -- 40,250 1,000 and Chief Technology Officer 1994 150,000 38,900 -- -- 1,000 Mary E. Godwin 1996 140,000 47,000 -- 22,500 1,000 Vice President, Operations 1995 129,540 18,374 -- 13,500 1,000 1994 115,884 29,025 -- 7,500 1,000
- -------------------------------------- (1) Includes the Company's $1,000 matching payment under the Company's 401(k) Plan. (2) Mr. Berger joined the Company in March 1993. (3) Consists of a payment to Mr. Berger to pay for outstanding mortgage interest on his home. (4) Includes $34,600 for each of 1994 and 1995, and $33,333 for 1996, of principal and interest forgiven on a $100,000 loan to Mr. Berger. See "Certain Transactions." (5) Includes a one-time special performance bonus of $155,000. See "Board of Directors and Compensation Committee Report on Executive Compensation." 41 STOCK OPTION GRANTS IN THE LAST FISCAL YEAR The following table sets forth further information regarding individual grants of stock options pursuant to the Company's 1986 Stock Option Plan during fiscal 1996 to each of the Named Executive Officers. In accordance with the rules of the Securities and Exchange Commission, the table sets forth the hypothetical gains or "option spreads" that would exist for the options at the end of their respective ten-year terms based on assumed annualized rates of compound stock appreciation of 5% and 10% from the dates the options were granted to the end of the respective option terms. Actual gains, if any, on option exercises are dependent on the future performance of the Company's Common Stock and overall market conditions. There can be no assurance that the potential realizable values shown in this table will be achieved.
Individual Grants --------------------------------------------------- Potential realizable value at assumed annual rates Number of of stock price securities % of total appreciation for option underlying options granted Exercise terms ($)(1) options to employees in or base Expiration -------------------------- Name granted (#) fiscal year price ($/sh) date 5% 10% - ------------------------------------------------------------------------------------------------------------------------- Charles W. Berger 50,000 (2) 3.78% 2.38 12/13/05 74,839 189,656 Gregory M. Millar 20,000 (2) 1.51% 2.38 12/13/05 29,936 75,863 2,500 (3) 0.19% 2.38 12/13/05 3,742 9,483 Mary E. Godwin 20,000 (2) 1.51% 2.38 12/13/05 29,936 75,863 2,500 (3) 0.19% 2.38 12/13/05 3,742 9,483
- ------------------------------- (1) The potential realizable value is calculated based on the term of the option at its time of grant, compounded annually. It is calculated by assuming that the stock price on the date of grant appreciates at the indicated annual rate, compounded annually for the entire term of the option and that the option is exercised and sold on the last day of its term for the appreciated stock price. Actual gains, if any, on option exercises are dependent on future performance of the Company's Common Stock and overall market conditions. There can be no assurance that the potential realizable values shown in this table will be achieved. (2) These stock options were granted with an exercise price equal to the closing fair market value of the Company's Common Stock on the date of grant. These options become exercisable with respect to 25% of the options granted on both the first and second anniversaries of their grant, and with respect to 50% of the options on the third anniversary of their grant. These options lapse within 30 days after the termination of an employment or consultancy relationship with the Company. (3) This stock option was granted with an exercise price equal to the closing fair market value of the Company's Common Stock on the date of grant. This option becomes exercisable in its entirety over one year. The option will lapse within 30 days after the termination of an employment or consultancy relationship with the Company. 42 EMPLOYMENT AND SERVICE AGREEMENTS CHARLES W. BERGER The Company and Mr. Berger entered into an employment agreement dated February 26, 1993, as amended on September 17, 1993, that provides for his at will employment until such time as either the Company or Mr. Berger terminates the employment agreement with or without cause. Under the employment agreement, the Company paid Mr. Berger a sign-on bonus of $25,000 and an initial base salary of $225,000. The employment agreement established an annual performance bonus of up to $50,000 in fiscal 1993 and up to $100,000 in fiscal 1994, unless otherwise increased by the Compensation Committee of the Board. The employment agreement also required the Company to grant Mr. Berger stock options for 250,000 shares of the Company's Common Stock at fair market value on the date of grant and to loan him $100,000. See "Certain Transactions." In the event of an acquisition following which Mr. Berger is not offered the position of President and Chief Executive Officer of the surviving company (i) the vesting of a portion of his option shares will accelerate, (ii) all remaining principal and interest under his loan will be forgiven, and (iii) Mr. Berger will, subject to certain conditions, continue to receive his salary and benefits during a twelve month transition period. For purposes of the employment agreement, an "acquisition" is defined as 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, or the acquisition of more than fifty percent (50%) of the outstanding shares of the Company by a single person or a group of related persons. If Mr. Berger's employment is terminated by the Company for any reason other than cause or following an acquisition, Mr. Berger will continue to receive his salary, and vest under his stock options for six months. INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF LIABILITY The provisions of Section 317 of the California Corporations Code, Article V of the Registrant's Articles of Incorporation and Article VI of the Registrant's Bylaws provide for indemnification to the fullest extent permitted by law for expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with any proceeding arising by reason of the fact that any person is or was a director, officer or employee of the Registrant. This indemnification may be sufficiently broad to permit indemnification of the Registrant's officers and directors for liabilities arising under the Securities Act. In addition, Article IV of the Registrant's Articles of Incorporation provides that the liability of the Registrant's directors shall be eliminated to the fullest extent permissible under the California Law. The Company has entered into Indemnity Agreements with each of its current directors to give such directors additional contractual assurances regarding the scope of the indemnification and liability limitations set forth in the Registrant's Articles of Incorporation and Bylaws. The Company currently carries a director and officer liability insurance policy with a per claim and annual aggregate coverage limit of $10 million. 43 CERTAIN TRANSACTIONS In September 1993, the Company loaned $100,000 to Charles W. Berger, the Company's President and Chief Executive Officer, as required under the terms of his Employment Agreement. The loan has a three-year term and accrues simple interest at the rate of 3.9% per annum. The loan is secured by shares of Common Stock subject to Mr. Berger's stock option, and fifty percent (50%) of the proceeds from the sale of any such shares is payable to the Company until such time as the loan is paid in full. One third of the principal amount, together with all accrued interest, was forgiven by the Company on each anniversary of the date that Mr. Berger commenced employment with the Company, which was March 22, 1993. As of June 30, 1996, no amounts remained outstanding under the loan. The Company has entered into indemnity agreements with certain officers and directors which provide, among other things, that the Company will indemnify such officer or director, under the circumstances and to the extent provided for therein, for expenses, damages, judgments, fines and settlements the officer or director may be required to pay in actions or proceedings which the officer or director is or may be made a party by reason of the officer's or director's position with the Company, and otherwise to the full extent permitted under California law and the Company's By-laws. Three shareholders of the Company, SCI Technology, Inc. ("SCI"), Mitsubishi Electronics America Corp. ("Mitsubishi" or "Mitsubishi Electronics") and Hamilton Hallmark/Avnet Co. ("HH/Avnet"), have been significant suppliers of the Company. SCI provides graphics cards; Mitsubishi supplies monitors; and HH/Avnet supplied components for the Company's systems business (which was sold to UMAX in February 1996). Mr. Ledbetter, an executive with SCI, became a director of the Company in October 1996. Mr. Carlson, an executive with Mitsubishi Electronics, became a director of the Company in September 1996. The Company's purchases from SCI for the current fiscal year and the 1995 fiscal year were approximately $35.0 million in aggregate (SCI began doing business with the Company in fiscal 1995). Purchases from Mitsubishi for the current fiscal year are expected to be approximately $25.0 million, purchases for the 1995 and 1994 fiscal years were significantly higher, at approximately $30.0 million and $10.0 million, respectively. The Company no longer does business with HH/Avnet, although purchases from HH/Avnet for the current fiscal year were approximately $6.5 million (the Company began doing business with HH/Avnet during the current fiscal year.) Each of SCI, Mitsubishi and HH/Avnet beneficially own 9,719,200, 3,999,901 and 3,188,966 shares of Common Stock respectively and 2,958,017, 1,217,361 and 970,555 Rights, respectively. All of the foregoing securities were acquired pursuant to the Plan, pursuant to which SCI, Mitsubishi and HH/Avnet accepted such securities in satisfaction claims of approximately $12.8 million, $5.1 million and $4.0 million, respectively. As of October 13, 1996, the Company granted Mitsubishi Electronics a warrant to purchase up to 200,000 shares of Common Stock at an exercise price of $1.00 per share in consideration of the extension of open credit terms to the Company. Currently, the Company's credit line is $500,000. If no higher amount of credit is extended and utilized then only 50,000 Warrants may be exercised. If $2,000,000 in credit is extended and utilized, then all 200,000 warrants will be exercisable. The warrants are exercisable for a four year period, unless Mitsubishi Electronics terminates the credit for reasons other than a default by the Company. Mitsubishi was granted a security interest of up to $4.4 million in the technology and intellectual property utilized in the Company's PressView products in order to secure the Company's payment obligations with respect to the manufacturing of the Company's PressView products. IBM Credit has been the Company's primary secured lender since February 1995. For the current fiscal year and the 1995 fiscal year, interest payments to IBM Credit were approximately $1.4 million and $2.9 million respectively. As described under "Recent Developments--Debt for Equity Exchange" the Company issued 750,000 shares of Series A Convertible Preferred Stock and Warrants to purchase 600,000 shares of Common Stock in satisfaction of $3.0 million of indebtedness to IBM Credit, as well as in consideration of restructuring the terms of the Company's remaining $23.4 million indebtedness to IBM Credit. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" for a description of the terms of the restructured IBM Credit loan. 44 The Company believes that all of the transactions set forth above were made on terms no less favorable to the Company than could have been obtained from unaffiliated third parties. All future transactions between the Company and its officers, directors and principal shareholders and their affiliates will be approved by a majority of the Board of Directors, including a majority of the independent and disinterested directors of the Board of Directors, and will be on terms no less favorable to the Company than could be obtained from unaffiliated third parties. 45 PRINCIPAL AND SELLING SECURITYHOLDERS The following table sets forth certain information known to the Company with respect to beneficial ownership of the Company's Common Stock as of November 7, 1996 for (i) each shareholder who is known by the Company to be the beneficial owner of more than 5% of the Company's Common Stock; (ii) the Chief Executive Officer and each of the Named Executive Officers; (iii) each of the Company's directors, (iv) all current directors and executive officers of the Company as a group and (v) the Selling Securityholders. This table assumes that the Selling Securityholders will sell all of the Company's securities held by them. The Company is unable to determine the exact number of shares that will actually be sold. Assignees of Selling Securityholder, if any, who acquire shares of Common Stock of the Company from the Selling Securityholder and satisfy certain conditions are entitled to the same registration rights as the Selling Securityholder. If any such assignee wishes to sell shares hereunder, this Prospectus will be amended or supplemented to name such assignee as a Selling Securityholder. Except as otherwise described below, all Selling Securityholders were creditors of the Company to whom the Company had outstanding accounts payable, and such creditors agreed to receive Common Stock and Rights in satisfaction of their claims, and the Selling Securityholders have not had any other position, office or other material relationship with the Company within the past three years. Unless otherwise noted, all Selling Securityholders and offering shares of Common Stock.
Shares Beneficially Owned After Offering (1) Shares Beneficially Owned Number of Shares --------------------- Name of Beneficial Owner Prior to Offering (1) Percent Being Offered Number Percent - ------------------------ ---------------------------- ------- ------------------ ------ ------- Executive Officers, Directors and 5% Shareholders - ------------------- Michael D. Boich (2) 214,301 * -- 214,301 * Charles W. Berger (3) 262,500 * -- 262,500 * Gregory M. Millar (4) 57,967 * -- 57,967 * Mary E. Godwin (5) 27,866 * -- 27,866 * Carl A. Carlson (6) 4,199,901 7.3% 5,417,262 0 * Michael W. Ledbetter (7) 9,719,200 17.9 12,677,217 0 * All current executive officers and directors as a group (6 persons) (8) 14,481,035 26.5 18,094,479 0 * IBM Credit Corporation (9) 6,123,030 11.2 (10) 0 * Mitsubishi Electronics America, Inc. (11) 4,199,901 7.3 5,417,262 0 * SCI Technology, Inc. (12) 9,719,200 17.9 12,677,217 0 * Hamilton Hallmark/Avnet Co. (13) 3,188,966 5.9 4,159,521 0 * Selling Securityholders - ----------------------- A&R Partners 60,577 * 79,013 0 * All American, Inc. 8,536 * 11,134 0 *
46
Shares Beneficially Owned After Offering (1) Shares Beneficially Owned Number of Shares --------------------- Name of Beneficial Owner Prior to Offering (1) Percent Being Offered Number Percent - ------------------------ ---------------------------- ------- ------------------ ------ ------- American Credit Indemnity 117,723 * 153,552 0 * AMP Incorporated 99,655 * 129,985 0 * Apple Computer Inc. 295,885 * 385,937 0 * Avex Electronics, Inc. 1,649,208 3.0 2,151,141 0 * Bell Microproducts, Inc. 156,303 * 203,874 0 * Boise Cascade Office Products Corp. 19,625 * 25,598 0 * Broniec Associates 124,781 * 162,758 0 * Cadence Design Systems Inc. 161,562 * 210,733 0 * Capetronic, Inc. 69,527 * 90,687 0 * Capital Components 2,806 * 3,660 0 * CB Commercial, Inc. 146,387 * 190,940 0 * The Cerplex Group, Inc. 237,262 * 309,472 0 * CKS Group, Inc. 159,496 * 208,038 0 * Clearbrook & Co. Ltd. 966,153 1.8 1,260,199 0 * Communication Arts 6,659 * 8,686 0 * Continental Circuits Corp. 666,177 1.2 868,927 0 * Cooley Godward Castro Huddleson & 63,436 * 82,743 0 * Tatum LLP Mike Coryell 233,198 * 304,171 0 * Craftsman Printing Inc. 99,633 * 129,956 0 * Crystal Semiconductor Inc. 23,646 * 30,842 0 * DGR Technologies 39,579 * 51,625 0 * Digital Equipment Corporation 929,474 1.7 1,212,357 0 * Discopylabs 33,703 * 43,960 0 * Douglas Stewart Co. 171,708 * 223,967 0 * Dynamic Circuits Inc. 54,246 * 70,756 0 * Entex Information Services 124,781 * 162,758 0 * Epson America Inc. 165,457 * 215,813 0 * Eric Electronics, Inc. 72,946 * 95,147 0 * Icon International, Inc. 472,207 * 615,922 0 * Inacom Corp. 146,072 * 190,529 0 * Infinity Technical Sales, Inc. 59,560 * 77,687 0 * International Communications, Inc. 70,185 * 91,546 0 * Lanier Worldwide Inc. 164,270 * 214,265 0 * Lasex 3,174 * 4,140 0 * Ramina Kachi 2,875 * 3,750 0 * Mack Technologies, Inc. 580,008 1.1 756,532 0 * Magnetek, Inc. 223,878 * 292,015 0 * Manufacturers Services Limited 1,721,137 3.2 2,244,961 0 * Marlow Industries, Inc. 72,576 * 94,664 0 * McCutchen, Doyle, Brown & Enerson 288,703 * 376,569 0 *
47
Shares Beneficially Owned After Offering (1) Shares Beneficially Owned Number of Shares --------------------- Name of Beneficial Owner Prior to Offering (1) Percent Being Offered Number Percent - ------------------------ ---------------------------- ------- ------------------ ------ ------- Merisel 872,930 1.6 1,138,604 0 * Metrowerks Corporation 1,853 * 2,417 0 * Microage Computer 885,783 1.6 1,155,369 0 * Mitsubishi International Corporation 300,797 * 392,344 0 * Morgan Stanley & Co., Inc. 475,414 * 620,105 0 * Oracle Corporation 147,202 * 192,003 0 * Pacific Rim Data Sciences 57,109 * 74,490 0 * Pan International (USA) 9,021 * 11,766 0 * Robert A. Pollock 13,452 * 17,546 0 * Proto Engineering 46,982 * 61,281 0 * PTA Corporation 8,671 * 11,310 0 * Quantum 1,266,048 2.3 1,651,367 0 * Rand Technology, Inc. 4,921 * 6,419 0 * RSVP 59,346 * 77,408 0 * Sampo Corporation of America 88,704 * 115,701 0 * San Jose Blueprint 3,303 * 4,308 0 * Sherpa Corporation 268,196 * 349,721 0 * Synopsys, Inc. 90,997 * 118,692 0 * Tech Data Corporation 1,296,908 2.4 1,691,619 0 * Tektronix, Inc. 67,982 * 88,672 0 * Telo Electronics, Inc. 7,517 * 9,805 0 * Toshiba America Electronics 227,787 * 297,114 0 * Components Inc. Total Corporate Services, Inc. 919 * 1,199 0 * Valmark Industries, Inc. 5,550 * 7,239 0 * Jean Vollum & Steven Vollum 1,449,339 2.7 1,890,519 0 * Trustee UTADTD3486 Wajilei Foundation (14) 158,000 * 182,348 0 * Mark Wiprud 233,198 * 304,171 0 * Yamamoto Mfg. (USA) Inc. 46,031 * 60,041 0 * Ziff-Davis Publishing Company Inc. 140,697 * 183,518 0 * Radius Creditors' Trust 444,253 * 579,460 0 *
- ------------------------- * Less than one percent. (1) Unless otherwise indicated below, the persons and entities named in the table have sole voting and sole investment power with respect to all shares beneficially owned, subject to community property laws where applicable. Based on 54,451,586 shares of 48 Common Stock outstanding prior to the offering. A person is deemed to be the beneficial owner of securities that can be acquired by such person within 60 days upon the exercise of Warrants or options or conversion of convertible securities. Calculations of percentages of beneficial ownership assume the exercise of Warrants or options or conversion of convertible securities by only the respective named securityholder of all Warrants, options or convertible securities convertible into Common Stock held by such securityholder which are convertible or exercisable within 60 days of November 7, 1996. Because the shares of Common Stock issuable pursuant to the Rights are issuable only in the event that the Series A Convertible Preferred Stock is converted into Common Stock, the shares of Common Stock beneficially owned by Selling Securityholders do not include an aggregate of 11,046,060 shares issuable pursuant to Rights issued to Selling Securityholders other than IBM Credit (which Selling Securityholder does not own any Rights). (2) Represents 208,676 shares held by Mr. Boich, and 5,625 shares subject to options exercisable within 60 days of November 7, 1996. (3) Represents 150 shares held by Mr. Berger as beneficial owner for his children, and 262,350 shares subject to options exercisable within 60 days of November 7, 1996. (4) Includes 43,271 shares subject to options held by Mr. Millar that are exercisable within 60 days of November 7, 1996. (5) Includes 25,203 shares subject to options held by Ms. Godwin that are exercisable within 60 days of November 7, 1996 (6) Represents shares held by Mitsubishi Electronics America, Inc., of which Mr. Carlson is an executive officer. Mr. Carlson disclaims beneficial ownership of all such shares. (7) Represents shares held by SCI Technology, Inc., of which Mr. Ledbetter is an executive officer. Mr. Ledbetter disclaims beneficial ownership of all such shares. (8) Includes the shares described in all footnotes above relating to current directors and Named Executive Officers. (9) Represents shares issuable upon conversion of Series A Convertible Preferred Stock and upon exercise of Warrants. Also assumes that 5,523,030 shares of Common Stock is issuable upon conversion of the Series A Convertible Preferred Stock. In the event the trading price of the Company's Common Stock exceeds certain levels, an aggregate of 6,075,333 shares of Common Stock could be issued upon conversion of the Series A Convertible Preferred Stock. IBM Credit is the Company's secured lender. See "Certain Transactions." IBM Credit's address is 1133 Westchester Avenue, White Plains, NY 10604. (10) IBM Credit is offering up to 6,675,333 shares of Common Stock, 750,000 shares of Series A Convertible Preferred Stock and 600,000 Warrants. (11) Does not include 1,242,459 shares of Common Stock pursuant to Rights in the event the Series A Convertible Preferred Stock is converted into Common Stock. Includes 200,000 shares issuable upon exercise of Warrants. Mitsubishi Electronics America, Inc.'s address is 5665 Plaza Drive, Cypress, CA 90630. (12) Does not include 3,019,003 shares of Common Stock issuable pursuant to Rights in the event the Series A Convertible Preferred Stock is converted into Common Stock. SCI Technology Inc.'s address is 2101 Clinton Avenue, Huntsville, AL 35805. (13) Does not include 990,565 shares of Common Stock issuable pursuant to Rights in the event the Series A Convertible Preferred Stock is converted into Common Stock. Hamilton Hallmark/Avnet Co.'s address is P.O. Box 100340, Pasadena, CA 91189. (14) Such Selling Securityholder acquired 78,000 of the shares of Common Stock offered hereby in connection with a private placement transaction occurring in June 1995 (the "Private Placement"). DESCRIPTION OF CAPITAL STOCK The authorized capital stock of the Company consists of 100,000,000 shares of Common Stock and 2,000,000 shares of Preferred Stock. As of October 31, 1996, there were outstanding approximately 54,451,586 shares of Common Stock held of record by approximately 3,652 shareholders, 750,000 shares of Preferred Stock outstanding, all of which are designated as Series A Convertible Preferred Stock and held of record by IBM Credit, and options to purchase approximately 1,195,124 shares of Common Stock. COMMON STOCK Each shareholder is entitled to one vote for each share of Common Stock held on all matters. The holders of Common Stock have no preemptive or other rights to subscribe for additional shares. All outstanding shares of Common Stock are, and those offered hereby will be, validly issued, fully paid and non assessable. Subject to preferences that may be applicable to holders of any Preferred Stock then outstanding, holders of Common Stock are entitled to such dividends as may be declared by the Board of Directors out of funds legally available therefor. Upon liquidation, dissolution or winding up of the Company, the assets legally available for distribution to shareholders are distributable ratably among the holders of the Common Stock at that time outstanding, subject to prior distribution rights of creditors of the Company and to the preferential rights of any shares of Preferred Stock then outstanding. 49 PREFERRED STOCK The Board of Directors is authorized, subject to any limitations prescribed by California law, to provide for the issuance of shares of Preferred Stock in one or more series, to establish from time to time the number of shares to be included in each such series, to fix the rights, preferences and privileges of the shares of each wholly unissued series and any qualifications, limitations or restrictions thereon, and to increase or decrease the number of shares of any such series (but not below the number of shares of such series then outstanding), without any further vote or action by the shareholders. The Board of Directors may authorize the issuance of Preferred Stock with voting or conversion rights that could adversely affect the voting power or other rights of the holders of Common Stock. Thus, the issuance of Preferred Stock may have the effect of delaying, deferring or preventing a change in control of the Company. The Company has no Preferred Stock other than the Series A Convertible Preferred Stock and has no current plan to issue any additional shares of Preferred Stock. SERIES A CONVERTIBLE PREFERRED STOCK The dividend, liquidation and certain redemption features of the Series A Convertible Preferred Stock, each of which is discussed in greater detail below, are determined by reference to the Liquidation Price of the Series A Convertible Preferred Stock, which is defined in the aggregate as $3.0 million plus any accrued but unpaid dividends. Dividends on the Series A Convertible Preferred Stock accrue cumulatively at a rate of 10% per annum of the Liquidation Price and are payable on a quarterly basis in cash or in shares of Common Stock, at the Company's discretion. The Series A Convertible Preferred Stock ranks senior to any other Preferred Stock and the Common Stock with respect to the declaration and payment of dividends. Upon dissolution, liquidation or winding up of the Company, holders of the Series A Convertible Preferred Stock will be entitled to receive from the assets of the Company available for distribution to shareholders an amount in cash or property or a combination thereof per share equal to the Liquidation Price. The Series A Convertible Preferred Stock ranks senior to the Common Stock and any other Preferred Stock which may subsequently be issued with respect to the receipt of liquidation proceeds. The Series A Convertible Preferred Stock is redeemable at the Liquidation Price the option of holders of a majority of the outstanding shares of Series A Convertible Preferred Stock upon the sale by the Company of any part of the Company's interest in Splash Technology Holdings, Inc. or its other portfolio interests, upon the occurrence of certain extraordinary events such as the sale or disposition of some or all of the Company's operating assets or businesses, the sale of the Company's inventory outside of the ordinary course of business, or the merger or consolidation of the Company with another entity (such events are referred to as "Triggering Events") which Triggering Event (or combination of Triggering Events for the prior 12 months) yields available net proceeds to the Company of $100,000 (only to the extent of the available net proceeds from such Triggering Event and subject to legal availability of funds therefor). Available net proceeds are defined as the net proceeds to the Company from a Triggering Event after any required payments to holders of the Company's indebtedness. If the holders have not elected to have their shares redeemed within 10 days after sending of the notice of the Triggering Event (the "Election Period"). In the event that such holders do not elect such redemption within the Election Period, Radius can redeem the Series A Convertible Preferred Stock (to the extent of the available net proceeds to the Company resulting from such Triggering Event and subject to the legal availability of funds therefor) at a redemption price equal to 110% of the Liquidation Price by notifying the holders of its intention to so redeem the Series A Convertible Preferred Stock within 30 days after the expiration of the Election Period (the "Second Notice"). The holders may then elect, within fifteen days of receiving the Second Notice, to convert into Common Stock. The number of shares subject to such conversion shall be equal to the amount of the available net proceeds to the Company from such Triggering Event divided by the Liquidation Price. The Series A Convertible Preferred Stock will vote on all matters submitted to a vote of the Company's shareholders together as a single class with all other classes of the Company's capital stock with each share of Series A Convertible Preferred Stock having the number of votes which would be cast if such shares were converted at the option of the holders into Common Stock on the day prior to the date of the vote except as otherwise required by applicable law. Except as described below, the Series A Convertible Preferred Stock will be subject to conversion from time to time, in whole or in part, at the option of the holder, into an aggregate of 5,523,030 shares of Common Stock with each share being convertible into 7.364 shares of Common Stock, subject to adjustment in the event of a stock dividend, stock split, combination or reclassification of the Common Stock. 50 A portion of the Series A Convertible Preferred Stock is automatically subject to conversion at any time 90 days after the effective date of the Registration Statement of which this Prospectus is a part (and if such Registration Statement is in effect or the use of this Prospectus has not been suspended) in the event that the trading price of the Company's Common Stock exceeds, for a period of 15 consecutive trading days, a price per share equal to $0.815 and a registration statement with respect to the Common Stock issuable upon conversion of such securities is in effect. Upon such an event, 93,750 shares of the Series A Convertible Preferred Stock would be convertible into an aggregate of 759,413 shares of Common Stock (or 8.1004 shares of Common Stock for each share of Series A Convertible Preferred Stock). No more than 93,750 shares of Series A Convertible Preferred Stock may be so converted in any fiscal quarter. The trading price of the Common Stock must then exceed $0.815 per share in a subsequent quarter before the Series A Convertible Preferred can be again subject to such a conversion. RIGHTS The Company issued Rights to receive an aggregate of 11,046,060 shares of Common Stock to unsecured creditors who received shares of Common Stock in satisfaction of their claims, (including 240,824 Rights to the Radius Creditors Trust). Each Right entitles the holder thereof to receive one share of Common Stock if and when all of the shares of Series A Convertible Preferred Stock is converted into Common Stock. The Rights are not transferable. The Rights contain standard antidilution provisions in the event of a stock dividend, stock split, combination or reclassification of the Common Stock. WARRANTS The Company issued Warrants to purchase an aggregate of 600,000 shares of Common Stock to IBM Credit and an aggregate of 200,000 shares of Common Stock to Mitsubishi Electronics. The Warrants are exercisable at any time, for a four-year period at an exercise price of $1.00 per share, and may also be exercised on a "net exercise" or "cashless" basis or in settlement of debt. The term of Mitsubishi's Warrants will terminate thirty days after the complete withdrawal of credit for any reason other than a default by the Company. The Warrants contain standard antidilution provisions in the event of a stock dividend, stock split, combination or reclassification of the Common Stock. The Company expects to grant Warrants to other Suppliers which extend open credit terms to the Company for up to an additional 400,000 shares of Common Stock, although such Warrants will not be included in the Registration Statement of which this Prospectus is a part. REGISTRATION RIGHTS Upon the expiration of this offering, holders of shares of Common Stock and Rights issued to its unsecured creditors as well as the Series A Convertible Preferred Stock and Warrants will have demand registration rights with respect to the shares of Common Stock held by them and the shares of Common Stock issuable upon conversion of the Series A Convertible Preferred Stock or upon exercise of the Rights and Warrants. IBM Credit will also have demand registration rights with respect to any shares of Common Stock which are paid in lieu of cash dividends on the Series A Convertible Preferred Stock. These registration rights will permit such holders to cause the Company to register such shares of Common Stock as soon as practicable after the Closing. The Company will maintain the effectiveness of any such registration statement until such shares may be sold pursuant to Rule 144 in a three-month period without registration or until it is eligible to file a registration statement on Form S-3, at which time the original registration statement will be terminated and the Company will file a registration statement on Form S-3 as soon thereafter as practicable in order to minimize any period of non-effectiveness. Notwithstanding the foregoing, upon the occurrence of certain events, the Company will be entitled to suspend the use of the Registration Statement. All expenses incurred in connection with such registrations (other than underwriters' discounts and commissions) will be borne by the Company. See "Risk Factors -- Shares Eligible For Future Sale." TRANSFER AGENT AND REGISTRAR The Transfer Agent and Registrar for the Company's Common Stock is First Interstate Bank. 51 PLAN OF DISTRIBUTION SHARES TO BE OFFERED BY THE COMPANY The Registration Statement of which this Prospectus forms a part includes shares of Common Stock with a fair market value of up to $600,000 in the event that the Company elects to make its first eight quarterly dividend payments on the Series A Convertible Preferred Stock in shares of Common Stock in lieu of cash. The Company has not entered into, and does not intend to enter into, any agreement, arrangement or understanding with any underwriter or any broker or market maker with respect to the securities offered by the Company hereby. IBM Credit received 750,000 shares of Series A Convertible Preferred Stock in connection with the Plan. Because dividends on the Series A Convertible Preferred Stock may be paid in cash or in shares of the Company's Common Stock, the Company may elect to pay such dividends in shares of Common Stock with a fair market value of $75,000 on each of the first eight quarterly dividend payment dates for the Series A Convertible Preferred Stock. The Company will not receive any cash proceeds from the issuance of Common Stock in lieu of such cash dividends. See "Recent Developments -- Debt for Equity Exchange," "Use of Proceeds" and "Description of Capital Stock." SECURITIES TO BE OFFERED BY THE SELLING SECURITYHOLDERS In connection with the Plan, the Company and the Selling Securityholders entered into a Registration Rights Agreement (the "Agreement") with the Company. The Registration Statement of which this Prospectus forms a part has also been filed pursuant to the Agreement. To the Company's knowledge, the Selling Securityholders have not entered into any agreement, arrangement or understanding with any underwriter or any particular broker or market maker with respect to the shares offered hereby, nor does the Company know the identity of the brokers or market makers which will participate in the offering. The shares of Common Stock to be offered by the Selling Securityholders hereby may be offered and sold from time to time by the Selling Securityholders. The Selling Securityholders will act independently of the Company in making decisions with respect to the timing, manner and size of each sale. Such sales may be made over the SmallCap Market or otherwise, at prices and on terms then prevailing or at prices related to the then market price, or in negotiated transactions. The shares may be sold by one or more of the following: (a) a block trade in which the broker-dealer engaged by the Selling Securityholder will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction; (b) purchases by the broker-dealer as principal and resale by such broker or dealer for its account pursuant to this Prospectus; and (c) ordinary brokerage transactions and transactions in which the broker solicits purchasers. The Company has been advised by the Selling Securityholder that it has not, as of the date hereof, entered into any arrangement with a broker-dealer for the sale of shares through a block trade, special offering, or secondary distribution of a purchase by a broker-dealer. In effecting sales, broker-dealers engaged by the Selling Securityholder may arrange for other broker-dealers to participate. Broker-dealers will receive commissions or discounts from the Selling Securityholder in amounts to be negotiated immediately prior to the sale. In offering the shares, the Selling Securityholders and any broker-dealers who execute sales for the Selling Securityholders may be deemed to be "underwriters" within the meaning of the Securities Act in connection with such sales, and any profits realized by the Selling Securityholders and the compensation of such broker-dealer may be deemed to be underwriting discounts and commissions. The Selling Securityholders have advised the Company that, during such time as they may be engaged in a distribution of the shares of Common Stock included herein, they will comply with Rules 10b-6 and 10b-7 under the Exchange Act and, in connection therewith, the Selling Shareholders have agreed not to engage in any stabilization activity in connection with any securities of the Company, to furnish copies of this Prospectus to each broker-dealer through which the shares of Common Stock included herein may be offered, and not to bid for or purchase any securities of the Company or attempt to induce any person to purchase any securities of the Company except as permitted under the Exchange Act. The Selling Securityholders have also agreed to inform the Company and broker-dealers through whom sales may be made hereunder when the distribution of the shares is completed. 52 Rule 10b-6 under the Exchange Act prohibits participants in a distribution from bidding for or purchasing for an account in which the participant has a beneficial interest, any of the securities that are the subject of the distribution. Rule 10b-7 under the Exchange Act governs bids and purchases made to stabilize the price of a security in connection with a distribution of the security. The Agreement provides that the Registration Statement of which this Prospectus forms a part will remain in effect for 24 months. Notwithstanding the foregoing, upon the occurrence of certain events, the Company may suspend the use of this Prospectus. Upon the occurrence of any of the following events, this Prospectus will be amended to include additional disclosure before offers and sales of the securities in question are made: (a) to the extent the securities are sold at a fixed price or at a price other than the prevailing market price, such price would be set forth in the Prospectus, (b) if the securities are sold in block transactions and the purchaser acting in the capacity of an underwriter wishes to resell, such arrangements would be described in the Prospectus, (c) if the Selling Securityholder sells to a broker-dealer acting in the capacity as an underwriter, such broker-dealer will be identified in the Prospectus and (d) if the compensation paid to broker-dealers is other than usual and customary discounts, concessions or commissions, disclosure of the terms of the transaction would be included in the Prospectus. The Company will bear estimated expenses of approximately $250,000 in connection with the offering of the securities offered hereby. LEGAL MATTERS The validity of the issuance of the shares of Series A Convertible Preferred Stock, Common Stock and the Warrants offered hereby will be passed upon for the Company by Fenwick & West LLP, Two Palo Alto Square, Palo Alto, California 94306. EXPERTS The consolidated financial statements of Radius Inc. at September 30, 1995 and 1994 and for each of the three years in the period ended September 30, 1995, appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon, (which contains an explanatory paragraph with respect to the uncertainty of the Company's ability to continue as a going concern as mentioned in Note 1 to the consolidated financial statements), appearing elsewhere herein, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. 53 INDEX TO FINANCIAL STATEMENTS AUDITED CONSOLIDATED FINANCIAL STATEMENTS Page ---- Report of Ernst & Young LLP, Independent Auditors F-2 Consolidated Balance Sheets at September 30, 1995 and 1994 F-3 Consolidated Statements of Operations for the Years Ended September 30, 1995, 1994 and 1993 F-4 Consolidated Statements of Shareholders' Equity for the Years Ended September 30, 1995, 1994, and 1993 F-5 Consolidated Statements of Cash Flows for the Years Ended September 30, 1995, 1994, and 1993 F-6 Notes to Consolidated Financial Statements F-7 September 30, 1995, 1994 and 1993 F-22 Schedule II: Valuation and Qualifying Accounts UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Consolidated Balance Sheet at June 30, 1996 F-23 Consolidated Statements of Operations for the Three Months Ended June 30, 1996 and 1995 and for the Nine Months Ended June 30, 1996 and 1995 F-24 Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 1996 and 1995 F-25 Notes to Consolidated Financial Statements F-26 UNAUDITED PROFORMA FINANCIAL INFORMATION P-1 F-1 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS THE BOARD OF DIRECTORS AND SHAREHOLDERS RADIUS INC. We have audited the accompanying consolidated balance sheets of Radius Inc. as of September 30, 1995 and 1994, and the related consolidated statements of operations, shareholders' equity (net capital deficiency) and cash flows for each of the three years in the period ended September 30, 1995. Our audits also included the financial statement schedule listed in the Index at page F-1. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Radius Inc. at September 30, 1995 and 1994, and the consolidated results of its operations and its cash flows for each of the three years in the period ended September 30, 1995, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. The accompanying consolidated financial statements have been prepared assuming that Radius Inc. will continue as a going concern. As more fully described in Note 1, the Company has incurred recurring operating losses, and has a deficiency in assets and working capital. In addition the Company has not complied with certain covenants of loan agreements with its lenders. These conditions raise substantial doubt about the Company's ability to continue as a going concern. (Management's plans in regard to these matters are also described in Note 1.) The financial statements do not include any adjustment to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. As discussed in Note 1 to the Consolidated Financial Statements, in 1993 the Company changed its method of accounting for income taxes. ERNST & YOUNG LLP Palo Alto, California December 8, 1995, except for Note 11, as to which the date is December 27, 1995 F-2 CONSOLIDATED BALANCE SHEETS September 30 (in thousands) 1995 1994 ---- ---- ASSETS Current assets: Cash and cash equivalents $ 4,760 $ 15,997 Accounts receivable, net of allowance for doubtful accounts of $8,502 in 1995 and $2,548 in 1994 61,644 62,145 Inventories 15,071 21,069 Prepaid expenses and other current assets 2,336 1,473 Income tax receivable 519 9,083 Deferred income taxes - 8,400 -------- -------- Total current assets 84,330 118,167 Property and equipment, net 3,031 7,728 Deposits and other assets 517 964 -------- -------- $ 87,878 $126,859 -------- -------- -------- -------- LIABILITIES AND SHAREHOLDERS' EQUITY (NET CAPITAL DEFICIENCY) Current liabilities: Accounts payable $ 73,098 $ 39,255 Accrued payroll and related expenses 5,815 4,024 Accrued warranty costs 3,170 2,255 Other accrued liabilities 11,920 6,650 Accrued income taxes 1,665 1,237 Accrued restructuring and other charges 17,013 15,148 Short-term borrowings 29,489 18,095 Obligations under capital leases - current portion 1,494 1,647 -------- -------- Total current liabilities 143,664 88,311 Obligations under capital leases-noncurrent portion 1,331 2,857 Commitments and contingencies Shareholders' equity: (Net capital deficiency) Convertible preferred stock, no par value, 1,000 shares authorized; none issued and outstanding Common stock, no par value; 50,000 shares authorized; issued and outstanding--17,143 shares in 1995 and 14,046 shares in 1994 113,791 87,017 Common stock to be issued 12,022 - Accumulated deficit (182,993) (51,251) Accumulated translation adjustment 63 (75) -------- -------- Total shareholders' equity (Net capital deficiency) (57,117) 35,691 -------- -------- $ 87,878 $126,859 -------- -------- -------- -------- See accompanying notes. F-3 CONSOLIDATED STATEMENTS OF OPERATIONS For years ended September 30 (in thousands, except per share data) 1995 1994 (1) 1993 (1) -------- -------- -------- Net sales $308,133 $324,805 $337,373 Cost of sales 302,937 276,948 254,321 -------- -------- -------- Gross profit 5,196 47,857 83,052 -------- -------- -------- Operating expenses: Research and development 19,310 33,956 33,503 Selling, general and administrative 90,068 94,731 84,132 -------- -------- -------- Total operating expenses 109,378 128,687 117,635 -------- -------- -------- Loss from operations (104,182) (80,830) (34,583) Interest and other income (loss) (3,045) (376) 705 Interest expense (3,023) (869) (635) Litigation settlement (12,422) - - -------- -------- -------- Loss before income taxes (122,672) (82,075) (34,513) Provision (benefit) for income taxes 9,070 (4,600) (13,774) -------- -------- -------- Loss before cumulative effect of a change in accounting principle (131,742) (77,475) (20,739) Cumulative effect of a change in method of accounting for income taxes - - 600 -------- -------- -------- Net loss $(131,742) $(77,475) $(20,139) -------- -------- -------- -------- -------- -------- Net loss per share: Loss before cumulative effect of a change in accounting principle $ (8.75) $ (5.70) $ (1.61) Cumulative effect of a change in method of accounting for income taxes - - 0.05 -------- -------- -------- Net loss per share $ (8.75) $ (5.70) $ (1.56) -------- -------- -------- -------- -------- -------- Common and common equivalent shares used in computing net loss per share 15,049 13,598 12,905 -------- -------- -------- -------- -------- -------- See accompanying notes. (1) This period has been restated to reflect the 1994 Merger of Radius and SuperMac which was accounted for as a pooling of interests. See Note 10 of Notes to the Consolidated Financial Statements. The consolidated financial statements for fiscal 1993 have not been restated to adjust SuperMac's fiscal year end to that of Radius. This period includes Radius' results of operations and balance sheet data on a September 30 fiscal year basis and SuperMac's on a December 31 calendar year basis. The operating results for both the twelve months ended September 30, 1994 and September 30, 1993 include the restructuring and other charges of $16.6 million recorded by SuperMac in December 1993. F-4 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended September 30, 1995, 1994 and 1993 (in thousands, except share data) Total Retained Shareholders Earnings Accumulated Equity Common (Accumulated Deferred Translation (Net Capital Stock Deficit) Compensation Adjustment Deficiency) -------- --------- ------------ ---------- ------------ Balance at September 30, 1992 (1) $60,203 $ 36,449 $ (58) $ 37 $ 96,631 Issuance of 738 shares of common stock under the SuperMac public offering 15,401 15,401 Issuance of 517 shares of common stock under Stock Option Plans 1,324 - - - 1,324 Issuance of 159 shares of common stock under the Employee Stock Purchase Plans 1,663 - - - 1,663 Tax benefit from stock options exercised 3,358 - - - 3,358 Amortization of deferred compensation - - 36 - 36 Currency translation adjustment - - - (119) (119) Net loss - (20,139) - - (20,139) ------- -------- ------- ------ -------- Balance at September 30, 1993 (1) 81,949 16,310 (22) (82) 98,155 Issuance of 350 shares of common stock under Stock Option Plans 1,800 - - - 1,800 Issuance of 170 shares of common stock under Employee Stock Purchase Plans 989 - - - 989 Issuance of 206 shares of common stock pursuant to the acquisition of VideoFusion 1,854 - - - 1,854 Tax benefit from stock options exercised 425 - - - 425 Amortization of deferred compensation - - 22 - 22 Currency translation adjustment - - - 7 7 Net loss - (77,475) - - (77,475) Elimination of SuperMac net loss for the three months ended December 31, 1993 9,914 - - 9,914 ------- -------- ------- ------ ------- Balance at September 30, 1994 87,017 (51,251) - (75) 35,691 Issuance of 214 shares of common stock under Stock Option Plans 1,254 1,254 Issuance of 162 shares of common stock under Employee Stock Purchase Plan 1,298 1,298 Issuance of 212 shares pursuant to the acquisition of VideoFusion 2,857 2,857 Settlement of Litigation-stock to be issued 12,022 12,022 Issuance of 2,509 shares of common stock through private placement 21,365 21,365 Currency translation adjustment 138 138 Net Loss (131,742) (131,742) ------- -------- ------- ------ -------- Balance at September 30, 1995 $125,813 $(182,993) - $ 63 $(57,117) -------- ---------- ------- ----- -------- -------- ---------- ------- ----- --------
See accompanying notes. (1) These periods have been restated to reflect the 1994 Merger of Radius and SuperMac which was accounted for as a pooling of interests. See Note 10 of Notes to the Consolidated Financial Statements. The consolidated financial statements for all periods prior to fiscal 1994 have not been restated to adjust SuperMac's fiscal year end to that of Radius. Such periods include Radius' results of operations and balance sheet data on a September 30 fiscal year basis and SuperMac's on a December 31 calendar year basis. F-5 CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS For years ended September 30 (in thousands) 1995 1994 1993(1) --------- -------- -------- Cash flows from operating activities: Net loss $(131,742) $(77,475) $(20,139) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 4,689 4,542 8,160 Acquired in-process research and development expenses - 2,550 - Elimination of SuperMac net loss for the three months ended December 31, 1993 - 9,914 - Non-cash restructuring and other charges 57,865 40,775 28,981 Common stock to be issued 12,022 - - (Increase) decrease in assets: Accounts receivable (5,471) (20,171) (7,543) Allowance for doubtful accounts 5,954 426 297 Inventories (27,140) (1,058) (5,633) Prepaid expenses and other current assets (862) 1,739 15 Income tax receivable 8,564 468 (9,551) Deferred income taxes 8,400 11,248 (11,322) Increase (decrease) in liabilities: Accounts payable 33,843 3,470 2,570 Accrued payroll and related expenses (1,871) (1,441) 1,014 Accrued warranty costs 915 (1,584) 438 Other accrued liabilities 5,270 (4,039) 2,171 Accrued restructuring and other charges (13,601) (6,117) - Accrued income taxes 428 (1,534) 4,585 ---------- -------- -------- Total adjustments 89,005 39,188 14,182 ---------- -------- -------- Net cash used in operating activities (42,737) (38,287) (5,957) ---------- -------- -------- Cash flows from investing activities: Capital expenditures (1,894) (3,460) (7,739) Deposits and other assets (238) 71 - Purchase of short-term investments - (2,002) (31,914) Proceeds from sale of short-term investments - 18,395 35,938 ---------- -------- -------- Net cash provided by (used in) investing activities (2,132) 13,004 (3,715) ---------- -------- -------- Cash flows from financing activities: Issuance of short-term borrowings, net 11,394 15,275 1,158 Issuance of common stock 23,917 3,214 18,388 Principal payments of long-term debt - (43) (1,388) Principal payments under capital leases (1,679) (1,179) (1,140) ---------- -------- -------- Net cash provided by financing activities 33,632 17,267 17,018 ---------- -------- -------- Net increase (decrease) in cash and cash equivalents (11,237) (8,016) 7,346 Cash and cash equivalents, beginning of period 15,997 24,013 16,667 ---------- -------- -------- Cash and cash equivalents, end of period $ 4,760 $ 15,997 $ 24,013 ---------- -------- -------- ---------- -------- --------
See accompanying notes. (1) This period has been restated to reflect the 1994 Merger of Radius and SuperMac which was accounted for as a pooling of interests. See Note 10 of Notes to the Consolidated Financial Statements. The consolidated financial statements for fiscal 1993 have not been restated to adjust SuperMac's fiscal year end to that of Radius. This period includes Radius' results of operations and balance sheet data on a September 30 fiscal year basis and SuperMac's on a December 31 calendar year basis. F-6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE ONE. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND BASIS OF PRESENTATION The consolidated financial statements include the accounts of Radius Inc. ("Radius") and its wholly owned subsidiaries after elimination of significant intercompany transactions and balances. Radius and SuperMac Technologies, Inc. ("SuperMac") merged into the combined company (the "Company") effective August 31, 1994 (the "Merger"), which was accounted for as a pooling of interests. The consolidated financial statements for fiscal 1993 have not been restated to adjust SuperMac's fiscal year end to that of Radius. This period includes Radius' results of operations and balance sheet data on a September 30 fiscal year basis and SuperMac's on a December 31 calendar year basis. FINANCIAL STATEMENTS ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Such estimates include the level of allowance for potentially uncollectible receivables and sales returns; inventory reserves for obsolete, slow-moving, or non-salable inventory; and estimated cost for installation, warranty and other customer support obligations. Actual results could differ from these estimates. MANAGEMENT'S BUSINESS RECOVERY PLANS As shown in the accompanying consolidated financial statements, the Company has incurred recurring operating losses, and has a deficiency in assets and working capital. In addition, as of September 30, 1995, the Company was not in compliance with all of its contractual obligations and financial covenants under its credit agreements. The Company also is delinquent in its accounts payables as payments to vendors are not being made in accordance with vendor terms. The Company's relatively limited cash resources have restricted the Company's ability to purchase inventory which in turn has limited its ability to manufacture and sell products and has resulted in additional costs for expedited deliveries. The adverse effect on the Company's results of operations due to its limited cash resources can be expected to continue until such time as the Company is able to return to profitability, or generate additional cash from other sources. These conditions raise concerns about the Company's ability to continue operations as an ongoing concern. Management has implemented, or has developed plans to implement, a number of actions to address these conditions including: refocusing its efforts on providing solutions for high end digital video and graphics customers; discontinuing sales of mass market and other low value added products; divesting its color server and monochrome display businesses and exploring opportunities for the divestiture of its MacOS compatible systems products and other product lines; significantly reducing expenses and headcount; subleasing all or a portion of its current facility given its reduced occupancy requirements; and investigating various strategic partnering opportunities. Additional funds will be needed to finance the Company's development plans and for other purposes, and the Company is now investigating possible financing opportunities. There can be no assurance that additional financing will be available when needed or, if available, that the terms of such financing will not adversely affect the Company's results of operations. F-7 FISCAL YEAR The Company's fiscal year ends on the Saturday closest to September 30 and includes 53 weeks in fiscal 1993 and 52 weeks in all other fiscal years presented. During fiscal 1995, the Company changed its fiscal year end from the Sunday closest to September 30 to the Saturday closest to September 30 for operational efficiency purposes. For clarity of presentation, all fiscal periods in this Form 10-K are reported as ending on a calendar month end. FOREIGN CURRENCY TRANSLATION The Company translates the assets and liabilities of its foreign subsidiaries into dollars at the rates of exchange in effect at the end of the period and translates revenues and expenses using rates in effect during the period. Gains and losses from these translations are accumulated as a separate component of shareholders' equity. Foreign currency transaction gains or losses, which are included in the results of operations, are not material. INVENTORIES Inventories are stated at the lower of cost or market. The Company reviews the levels of its inventory in light of current and forecasted demand to identify and provide reserve for obsolete, slow-moving, or non-salable inventory. Cost is determined using standard costs that approximate cost on a first-in, first-out basis. Inventories consist of the following (in thousands): September 30 1995 1994 ---------- --------- Raw materials $ 1,559 $ 4,515 Work in process 2,258 6,852 Finished goods 11,254 9,702 ---------- ---------- $ 15,071 $ 21,069 ---------- ---------- ---------- ---------- PROPERTY AND EQUIPMENT Property and equipment is stated at cost and consists of the following (in thousands): September 30 1995 1994 ----------- ----------- Computer equipment $ 17,429 $ 18,007 Machinery and equipment 12,335 14,184 Furniture and fixtures 6,023 5,562 Leasehold improvements 1,084 1,683 ----------- ----------- 36,871 39,436 Less accumulated depreciation and amortization (33,840) (31,708) ----------- ----------- $ 3,031 $ 7,728 ----------- ----------- ----------- ----------- Depreciation has been provided for using the straight-line method over estimated useful lives of three to five years. Equipment under capital leases and leasehold improvements are being amortized on the straight-line method over six years or the remaining lease term, whichever is shorter. LONG-LIVED ASSETS In 1995, the Financial Accounting Standards Board released the Statement of Financial Accounting Standards No. 121 (SFAS 121), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." SFAS 121 requires recognition of impairment of long-lived assets in the event the net book value of such assets exceeds the future undiscounted cash flows attributable to such assets. SFAS 121 is effective for fiscal years beginning after December 15, 1995. Adoption of SFAS 121 is not expected to have a material impact on the Company's financial position or results of operations. F-8 REVENUE RECOGNITION Revenue is recognized when products are shipped. Sales to certain resellers are subject to agreements allowing certain rights of return and price protection on unsold merchandise held by these resellers. The Company provides for estimated returns at the time of shipment and for price protection following price declines. WARRANTY EXPENSE The Company provides at the time of sale for the estimated cost to repair or replace products under warranty. The warranty period commences on the end user date of purchase and is normally one year for displays and digital video products and for the life of the product for graphics cards. INCOME TAXES Effective October 1, 1992, the Company adopted FASB Statement 109, "Accounting for Income Taxes." Under Statement 109, the liability method is used in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Prior to the adoption of Statement 109, income tax expense was determined using the liability method prescribed by Statement 96, which is superseded by Statement 109. Among other changes, Statement 109 changes the recognition and measurement criteria for deferred tax assets included in Statement 96. As permitted by Statement 109, the Company has elected not to restate the financial statements of any prior years. The cumulative effect of the change in method of accounting for income taxes decreased the net loss by $600,000 or $0.05 per share in fiscal 1993 on a combined basis. LOSS PER SHARE Net loss per share is computed using the weighted average number of common shares outstanding. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with a maturity from date of purchase of three months or less to be cash equivalents; investments with maturities between three and twelve months are considered to be short-term investments. Cash equivalents are carried at cost which approximates market. There were no short-term investments as of September 30, 1995 or 1994. Approximately $1.6 million of the $4.8 million of cash and cash equivalents available at September 30, 1995 was restricted under various letters of credit. OFF BALANCE-SHEET RISK AND CONCENTRATION OF CREDIT RISK The Company sells its products to direct computer resellers in the United States and to distributors in various foreign countries. The Company performs on-going credit evaluations of its customers and generally does not require collateral. The Company maintains reserves for potential credit losses. The Company also hedges substantially all of its trade accounts receivable denominated in foreign currency through the use of foreign currency forward exchange contracts based on firm third party commitments. Gains and losses associated with currency rate changes on forward contracts are recognized in the consolidated statements of operations upon contract settlement and were not material. At September 30, 1995, the Company had forward contracts to sell three different foreign currencies which totaled the equivalent of approximately $11.1 million and mature between October 1995 and November 1995. At September 30, 1995, the fair value of the Company's forward contracts approximated cost. F-9 RELATED PARTIES In fiscal 1994, the Company acquired shares of preferred stock of Portrait Display Labs ("PDL") and a warrant to purchase additional shares of PDL preferred stock in exchange for the cancellation of certain rights held by the Company to purchase all of the outstanding equity securities or assets of the predecessor entity to PDL. The warrant permitted the purchase of approximately an additional 10% interest in PDL. The Company also was granted one seat on PDL's Board of Directors. In addition, the Company licensed PDL certain pivot display technology in exchange for the payment of royalties. Product revenues were approximately $5.0 million in fiscal 1994. In fiscal 1995, the Company exercised the warrant for an additional 10% interest in PDL in exchange for cancellation of approximately $945,000 in accounts receivable. There were no product revenues for the fiscal 1995 to this related party. The receivable from PDL at September 30, 1995 was approximately $980,000. Subsequent to September 30, 1995, the Company signed a series of additional agreements with Portrait Display Labs, see Note 11 to the Consolidated Financial Statements. There were no material transactions from this or any other related party during fiscal 1993. NOTE TWO. BORROWINGS LINE OF CREDIT ARRANGEMENT In February 1995, the Company and IBM Credit Corp. ("IBM Credit") entered into a $30.0 million Inventory and Working Capital Financing Agreement (the "IBM Credit Agreement"). The IBM Credit Agreement permits advances for inventory and working capital up to the lesser of $30.0 million or 85% of eligible receivables ("Inventory and Working Capital Advances"). In September 1995, IBM Credit advanced an additional $20.0 million under the IBM Credit Agreement to finance the manufacturing of the Company's MacOS compatible products (the "MacOS Advances"). The weighted average interest rate during 1995 was approximately 12.6%. Advances bear interest at rates ranging from prime rate plus 2.25% to prime rate plus 4% and are secured by all the assets of the Company. The IBM Credit Agreement expires in March 1996. As of September 30, 1995, $50.8 million was outstanding under the IBM Credit Agreement consisting of $30.8 million in Inventory and Working Capital Advances and approximately $20.0 million in MacOS Advances. The outstanding Inventory and Working Capital Advances included $18.7 million in working capital advances supported by eligible receivables, $6.1 million in working capital advances in excess of the borrowing base, and $6.1 million in inventory advances. The $24.7 million in working capital advances are included in Short-term borrowings in the Consolidated Financial Statements. The $6.1 million in inventory advances, together with the approximately $20.0 million in MacOS Advances, are included in Accounts payable in the Consolidated Financial Statements. As of September 30, 1995, the Company was not in compliance with all of its contractual obligations and financial covenants under the IBM Credit Agreement (specifically, revenues to working capital ratio, net profit to revenue, and total liabilities to total net worth); however, IBM Credit has waived such defaults pursuant to an amendment to the IBM Credit Agreement. See Note 11 to the Consolidated Financial Statements. In addition, the Company entered into a Business Loan Agreement on March 20, 1995 with Silicon Valley Bank. The agreement, which expires on March 19, 1996, allows the Company to issue letters of credit as a sub-facility under a $5.0 million foreign accounts receivable revolving line of credit subject to an interest rate of up to the prime rate plus 1.25%. The weighted average interest rate during 1995 was approximately 13.0%. The related debt outstanding as of September 30, 1995 was $1.7 million and outstanding letters of credit were $0.8 million. The Company was not in compliance with all the terms of this credit arrangement. One of the Company's subsidiaries has a revolving line of credit with a bank in Japan. Borrowings were approximately $3.1 million at September 30, 1995. This note bears interest at the lesser of the Euro-yen rate or the bank's prime lending rate (1.5 percent at September 30, 1995, the prime rate). The weighted average interest rate during 1995 was approximately 4.9% The line of credit is renewed every six months with the next renewal in December 1995. F-10 NOTE THREE. COMMITMENTS AND CONTINGENCIES LEASES The Company leases facilities under operating leases and certain computer equipment and office furniture under capital leases. Depreciation expense for assets under capital leases is included in depreciation and amortization expense. The cost and net book value of these capitalized lease assets included in property and equipment are (in thousands): At September 30, Cost Net Book Value --------- -------------- 1995 $ 7,437 $ 2,642 1994 7,437 4,021 Future minimum lease payments at September 30, 1995, under capital leases and noncancelable operating leases are as follows (in thousands): Capital Operating Leases Leases ------- -------- 1996 $ 1,686 $ 1,837 1997 1,155 1,887 1998 280 1,843 1999 - 1,750 2000 - 1,759 ------- -------- Total minimum lease payments 3,121 $ 9,076 Amount representing interest (296) ------- Present value of minimum lease payments 2,825 Amount due within one year (1,494) ------- Amount due after one year $1,331 ------- ------- Rent expense charged to operations amounted to approximately $3.5 million, $3.0 million and $3.8 million for the years ended September 30, 1995, 1994 and 1993, respectively. The rent expense amounts for fiscal 1995, 1994 and 1993 exclude a provision for remaining lease obligations on excess facilities. See Note 8 of Notes to the Consolidated Financial Statements. Sublease income for fiscal 1995 and 1994 was approximately $0.6 million and $0.1 million. There was no sublease income for fiscal 1993. CONTINGENCIES DISPLAY SCREEN SIZE The Company was named as one of approximately 42 defendants in Shapiro et al. v. ADI Systems, Inc. et al., Superior Court of California, Santa Clara County, case no. CV751685, filed August 14, 1995. Radius was named as one of approximately 32 defendants in Maizes & Maizes et al. v. Apple Computer et al., Superior Court of New Jersey, Essex County, case no. L-13780-95, filed December 15, 1995. Plaintiffs in each case purport to represent alleged classes of similarly situated persons and/or the general public, and allege that the defendants falsely advertise that the viewing areas of their computer monitors are larger than in fact they are. The Company was served with the Shapiro complaint on August 22, 1995, and has not yet been served with the Maizes complaint. Defendants' petition to the California State Judicial Council to coordinate the Shapiro case with similar cases brought in other California jurisdictions was granted in part and it is anticipated that the coordinated proceedings will be held in Superior Court of California, San Francisco County. Discovery proceedings have not yet begun in either case. In the opinion of management, based on the facts known at this F-11 time, the eventual outcome of these cases is unlikely to have a material adverse effect on the results of operations or financial position of the Company. ELECTRONICS FOR IMAGING On November 16, 1995, Electronics for Imaging, Inc. ("EFI") filed a suit in the United States District Court in the Northern District of California alleging that the Company infringes a patent allegedly owned by EFI. Although the complaint does not specify which Radius products allegedly infringe the patent, EFI is a prime competitor of Radius in the Color Server market. Radius' Color Server products are material to its business. The Company has filed an answer denying all material allegations, and has filed counterclaims against EFI alleging causes of action for interference with prospective economic benefit, antitrust violations, and unfair business practices. The Company believes it has meritorious defenses to EFI's claims and is defending them vigorously. In addition, the Company believes it may have indemnification rights with respect to EFI's claims. In the opinion of management, based on the facts known at this time, the eventual outcome of this case is unlikely to have a material adverse effect on the results of operations or financial position of the Company. SECURITIES LITIGATION. In September 1992, the Company and certain of its officers and directors were named as defendants in a securities class action litigation brought in the United States District Court for the Northern District of California that sought unspecified damages, prejudgment and postjudgment interest, attorneys' fees, expert witness fees and costs, and equitable relief. In July 1994, SuperMac and certain of its officers and directors, several venture capital firms and several of the underwriters of SuperMac's May 1992 initial public offering and its February 1993 secondary offering were named as defendants in a class action litigation brought in the same court that sought unspecified damages, prejudgment and postjudgment interest, attorneys' fees, experts' fees and costs, and equitable relief (including the imposition of a constructive trust on the proceeds of defendants' trading activities). In June 1995, the Court approved the settlement of both litigations and entered a Final Judgment and Order of Dismissal. Under the settlement of the litigation brought in 1992 against the Company, our insurance carrier paid $3.7 million in cash and the Company will issue 128,695 shares of its Common Stock to a class action settlement fund. In the settlement of the litigation brought in 1994 against SuperMac, the Company paid $250,000 in cash and will issue into a class action settlement fund 707,609 shares of its Common Stock. The number of shares to be issued by the Company will increase by up to 100,000 if the price of the Common Stock is below $12 per share during the 60-day period following the initial issuance of shares. In connection with these settlements, the Company recorded a charge of $12.4 million in the Consolidated Financial Statements reflecting settlement costs not covered by insurance as well as related legal fees. The Company has periodically received communications from third parties asserting infringement of patent rights on certain of the Company's products and features. Management does not believe any claims made will have a material adverse effect on the results of operations or financial position of the Company. NOTE FOUR. SHAREHOLDERS' EQUITY COMMON STOCK In June 1995, the Company sold approximately 2.5 million shares of its Common Stock in a series of private placements to a small number of investors unaffiliated with the Company. Proceeds from the offering, net of commission and other related expenses were $21.4 million. The net proceeds were used for working capital. STOCK OPTIONS The Company's 1986 Stock Option Plan, as amended, authorizes the issuance of up to 2,975,000 shares of common stock upon the exercise of incentive stock options or nonqualified stock options that may be granted to officers, employees (including directors who are also employees), consultants and independent contractors. Under the plan, options are exercisable for a term of up to ten years after issuance. Options may be granted at prices ranging from 50% to 100% of the fair market value of the stock on the date of grant, as determined by the F-12 Board of Directors. Vesting of shares is also determined by the Board of Directors at the date of grant. The 1986 Stock Option Plan will expire in October 1996. On August 31, 1994, pursuant to the Merger, Radius assumed 975,239 outstanding options originally issued under the SuperMac 1988 Stock Option Plan. These options will be administered in accordance with the SuperMac 1988 Stock Option Plan until all options are exercised or expired. Under the plan, options are exercisable for a term of up to ten years after issuance. The following table summarizes the consolidated activity of the 1986 and 1988 Stock Option Plans and the 1992 Non-Employee Directors' Stock Option Plan: September 30, --------------------------------- 1995 1994 1993 Outstanding at beginning of year 2,042,481 2,208,783 2,157,040 Granted 707,590 892,131 1,219,514 Exercised (213,791) (294,042) (516,597) Canceled (838,745) (764,391) (651,174) ----------- ----------- ------------ Outstanding at September 30 1,697,535 2,042,481 2,208,783 ------------ ------------ ------------ ------------ ------------ ------------ Price range at September 30 $1.36-$28.96 $0.42-$32.18 $0.42-$30.14 ------------ ------------ ------------ ------------ ------------ ------------ Price range of options exercised $0.42-$13.13 $0.42-$13.13 $0.42-$22.35 ------------ ------------ ------------ ------------ ------------ ------------ Exercisable at September 30 1,325,222 706,474 455,241 ------------ ------------ ------------ ------------ ------------ ------------ Available for grant at September 30 415,586 281,726 331,314 ------------ ------------ ------------ ------------ ------------ ------------ The stock option activity as shown in the table for fiscal 1993 has not been restated to adjust SuperMac's fiscal year end to that of Radius. Fiscal 1993 includes Radius' activity on a September 30 fiscal year basis and SuperMac's activity on a December 31 calendar year basis. The fiscal 1994 period includes the Radius activity for fiscal year ended September 30, 1994 and SuperMac activity for the nine months ended September 30, 1994. The Company has also reserved 100,000 shares of common stock for issuance to non-employee directors pursuant to options granted under the 1994 Directors' Stock Option Plan (the "1994 Plan"). Such options may only be nonqualified stock options, must be exercised within ten years from the date of grant, and must be granted in accordance with a non-discretionary formula. Under this formula, each new director receives an option to purchase 10,000 shares when that director is first appointed to the Board and an option to purchase 2,500 shares on each anniversary of such director's appointment. As of September 30, 1995, 27,500 shares had been granted under this plan at exercise prices ranging from $7.44 to $12.00 per share. Options to purchase 1,250 shares were canceled following the resignation of a director. None of the options granted under the 1994 Plan are exercisable. Prior to the approval of the 1994 Plan, the 1990 Directors' Stock Option Plan (the "Prior Plan") was in effect. As of September 30, 1995, the Prior Plan had 33,750 options outstanding at prices ranging from $8.00 to $17.25. Such options are nonqualified stock options, must be exercised within five years from the date of grant, and were granted in accordance with a non-discretionary formula. Options unissued under the Prior Plan become available for grant under the 1994 Plan. As of September 30, 1995, options to purchase 37,500 shares became available upon the resignation of three directors. In addition, 28,750 options to purchase shares, which were never granted under the Prior Plan were transferred to the 1994 Plan. In March 1993, the Company granted a nonqualified stock option to one officer to purchase a total of 250,000 shares of common stock outside the Company's 1986 Stock Option Plan at an exercise price of $7.75 per share. This option is exercisable for a term of ten years and vests over a fifty month period commencing on the date of grant. During fiscal 1994, 150 of these shares were exercised by the officer, and as of September 30, 1995 an additional 149,850 shares were exercisable. F-13 In June 1995, the Company repriced approximately 232,000 of then outstanding options to an exercise price of $12.00 per share, the fair market value of the Company's stock on the date of the repricing. EMPLOYEE STOCK PURCHASE PLAN The Company has an employee stock purchase plan under which substantially all employees may purchase common stock through payroll deductions at a price equal to 85% of its fair market value as of certain specified dates. Stock purchases under this plan are limited to 10% of an employee's compensation, and in no event may exceed $21,250 per year. Under this plan a total of 650,000 shares of common stock have been reserved for issuance to employees. At September 30, 1995, 255,859 shares remain available for issuance under the plan. EMPLOYEE STOCK PLANS The Company account for its stock option plans and the Employee Stock Purchase Plan in accordance with provisions of the accounting Principles Board's Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees." In 1995, the Financial Accounting Standards Board released the Statement of Financial Accounting Standard No. 123 (SFAS 123), "Accounting for Stock Based Compensation." SFAS 123 provides an alternative to APB 25 and is effective for fiscal years beginning after December 15, 1995. The Company expects to continue to account for its employee stock plans in accordance with the provision of APB 25. Accordingly, SFAS 123 is not expected to have any material impact on the Company's financial position or results of operations. F-14 NOTE FIVE, FEDERAL AND STATE INCOME TAXES The provision (benefit) for income taxes consists of the following:
For years ended September 30 --------------------------------------- 1995 1994 1993 -------- ---------- --------- (in thousands) Federal: Current $ - $ (12,583) $ (3,974) Deferred 7,170 12,311 (7,505) -------- ---------- --------- 7,170 (272) (11,479) Foreign: Current 650 376 297 -------- ---------- --------- State: Current 20 (3,641) 844 Deferred 1,230 (1,063) (3,436) -------- ---------- --------- 1,250 (4,704) (2,592) -------- ---------- --------- $ 9,070 $ (4,600) $(13,774) -------- ---------- --------- -------- ---------- ---------
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities are as follows:
For years ended September 30 ----------------------------- 1995 1994 ---- ---- (in thousands) Deferred tax assets: Net operating loss carryovers $ 27,077 $ 5,100 Reserves and accruals not currently tax deductible 22,342 10,055 Restructuring reserves 22,314 - Credit carryovers 6,280 3,100 Inventory valuation differences 4,188 12,612 Depreciation 4,079 4,202 Capitalized research & development expenditures 3,202 2,193 Other - 374 ---------- ---------- Total deferred tax assets 89,482 37,636 ---------- ---------- Valuation allowance for deferred tax assets (85,086) (26,724) ---------- ---------- Deferred tax assets $ 4,396 $ 10,912 ---------- ---------- ---------- ---------- Deferred tax liabilities: State income tax $ 3,849 $ 2,512 Other 547 - ---------- ---------- Total deferred tax liabilities 4,396 2,512 ---------- ---------- Net deferred tax assets $ - $ 8,400 ---------- ---------- ---------- ----------
F-15 FASB Statement 109 provides for the recognition of deferred tax assets if realization of such assets is more likely than not. The Company's valuation allowance reduced the deferred tax asset to the amount realizable. The Company has provided a full valuation allowance against its net deferred tax assets due to uncertainties surrounding their realization. Due to the net losses reported in the prior three years and as a result of the material changes in operations reported in its 1995 fiscal fourth quarter, predictability of earnings in future periods is uncertain. The Company will evaluate the realizability of the deferred tax asset on a quarterly basis. The provision for income taxes differs from the amount computed by applying the statutory federal income tax rate to income before taxes. The sources and tax effects of the differences are as follows:
For years ended September 30 ----------------------------------------- 1995 1994 1993 ---------- ---------- ---------- (in thousands) Expected tax at statutory rate $ (42,935) $ (28,726) $ (12,080) Change in valuation allowance 49,820 26,724 - State income tax, net of federal tax benefit 1,250 (3,105) (1,707) Non-deductible merger costs - 1,054 - Non-deductible charge for purchased research and development - 763 - Research and development tax credits (497) (458) (734) Other 1,432 (852) 747 ---------- ---------- ---------- $ 9,070 $ (4,600) $ (13,774) ---------- ---------- ---------- ---------- ---------- ----------
As of September 30, 1995, the Company had net operating loss carryforwards for federal and state income tax purposes of approximately $71.0 million and $27.9 million, respectively. The state loss carryforwards will expire as follows; $8.0 million in 1998, $5.0 million in 1999; and $14.9 million in 2000, if not utilized, and the federal loss carryforwards will expire primarily in 2009 and 2010, if not utilized. In addition, the Company had tax credit carryforwards of approximately $6.3 million which will expire in 2005, if not utilized. Utilization of net operating loss and tax credit carryforwards may be subject to substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of net operating losses before utilization. F-16 NOTE SIX. STATEMENTS OF CASH FLOWS
For years ended September 30 ----------------------------------------- 1995 1994 1993 ---------- ---------- ---------- (in thousands) Supplemental disclosure of cash flow information (in thousands): Cash paid (received) during the year for: Interest $ 1,620 $ 812 $ 927 ---------- ---------- ---------- ---------- ---------- ---------- Income taxes $ (8,370) $ (8,295) $ 2,661 ---------- ---------- ---------- ---------- ---------- ---------- Supplemental schedule of noncash investing and financing activities (in thousands): Retirement of fully and partially depreciated assets $ 4,459 $ 6,025 $ 1,544 ---------- ---------- ---------- ---------- ---------- ---------- Tax benefit from stock options exercised $ - $ 425 $ 3,358 ---------- ---------- ---------- ---------- ---------- ---------- Equipment acquired pursuant to capital leases $ - $ 2,000 $ 4,138 ---------- ---------- ---------- ---------- ---------- ---------- Common stock issued pursuant to VideoFusion agreement $ 2,857 $ - $ - ---------- ---------- ---------- ---------- ---------- ----------
NOTE SEVEN. EXPORT SALES AND MAJOR CUSTOMERS The Company currently operates in one principal industry segment: the design, manufacturing and marketing of color publishing and digital video computer products. The Company's export sales were approximately $124.5 million, $112.0 million and $108.1 million in the fiscal years ended September 30, 1995, 1994 and 1993, respectively, and included export sales to Europe of approximately $57.3 million, $60.6 million, and $59.5 million, respectively. Export sales to Japan were approximately $57.2 million, $35.7 million and $33.0 million for fiscal years ended September 30, 1995, 1994 and 1993, respectively. One customer accounted for approximately 34.0%, 13.5% and 11.5% of the Company's net sales during the years ended September 30, 1995, 1994 and 1993, respectively. NOTE EIGHT. RESTRUCTURING AND OTHER CHARGES RADIUS JUNE 1993 RESTRUCTURING AND OTHER CHARGES In June 1993, Radius announced a restructuring program designed to reduce costs and improve operating efficiencies. The program included, among other things, the write-down of inventory following Radius' decision to phase out its older generation of products, lease termination expenses, capital equipment write- offs, severance payments, and costs associated with the discontinuation of Radius' minicomputer-class server product. The restructuring program costs of $15.5 million were recorded during the third quarter of fiscal 1993. These charges (in thousands) are included in: cost of sales ($10,993); research and development ($411); and selling, general and administrative expenses ($4,096). The Company completed this restructuring event by the end of calendar 1994. There were no material changes in the restructuring plan or in the estimates of the restructuring costs from the recognition of the charge in June 1993 with the completion of the restructuring program in December 1994. F-17 SUPERMAC DECEMBER 1993 RESTRUCTURING AND OTHER CHARGES In December 1993, SuperMac recorded charges of $16.6 million in connection with a program to adjust inventory levels, eliminate excess facilities, terminate certain projects and contract arrangements and reduce the number of employees. The charges (in thousands) are included in: cost of sales ($13,352); research and development ($2,000); and selling, general and administrative expenses ($1,238). There have been no material changes in the restructuring plan or in the estimates of the restructuring costs. The Company has $236,000 remaining in its restructuring reserve related to facility costs, the balance of which is expected to be eliminated in fiscal 1996. As noted in the Consolidated Financial Statements, the consolidated results for the Company in both the twelve months ended September 30, 1994 and the fiscal period ended 1993 include SuperMac's $16.6 million charge. RADIUS FISCAL 1994 MERGER RELATED RESTRUCTURING AND OTHER CHARGES In the fourth quarter of fiscal 1994, the Company recorded charges of $43.4 million in connection with the Merger of Radius and SuperMac. These charges include the discontinuance of duplicative product lines and related assets; elimination of duplicative facilities, property and equipment and other assets; and personnel severance costs as well as transaction fees and costs incidental to the merger. The charges (in thousands) are included in: net sales ($3,095); cost of sales ($25,270); research and development ($4,331); and selling, general and administrative expenses ($10,711). The elements of the total charge as of September 30, 1995 are as follows (in thousands):
Representing ------------------------------- Cash Outlays ----------------------------- Asset Provision Write-Downs Completed Future Adjust inventory levels $ 22,296 $ 19,200 $ 3,096 $ - Excess facilities 2,790 400 2,236 154 Revision of the operations business model 9,061 7,078 1,268 715 Employee severance 6,311 - 6,311 - Merger related costs 2,949 - 2,949 - ---------- ---------- ---------- ---------- Total charges $ 43,407 $ 26,678 $ 15,860 $ 869
The adjustment of inventory levels reflects the discontinuance of duplicative product lines. The provision for excess facility costs represents the write-off of leaseholds and sublease costs of Radius' previous headquarters, the consolidation into one main headquarter and the consolidation of sales offices. The revision of the operations business model reflects the reorganization of the combined Company's manufacturing operations to mirror Radius' manufacturing reorganization in 1993. This reorganization was designed to outsource a number of functions that previously were performed internally, reduce product costs through increased efficiencies and lower overhead, and focus the Company on a limited number of products. Employee severance costs are related to employees or temporary employees who were released due to the revised business model. Approximately 250 employees were terminated in connection with the Merger. The provision for merger related costs is for the costs associated with the Merger transaction, such as legal, investment banking and accounting fees. The Company has spent $15.9 million of cash for restructuring through September 30, 1995. The Company expects to have substantially completed the restructuring by September 1996. During fiscal 1995, approximately $2.1 million of merger related restructuring reserves were reversed and recorded as an expense reduction due to changes in estimated requirements. RADIUS FISCAL 1995 RESTRUCTURING AND OTHER CHARGES In September 1995, Radius recorded charges of $57.9 million in connection with the Company's efforts to refocus its business on the color publishing and multimedia markets. The charges primarily included a writedown of inventory and other assets. Additionally, it included expenses related to the cancellation of open purchase orders, excess facilities and severance. The charges (in thousands) are included in cost of sales ($47,004), and selling, general and administrative expense ($10,861). The elements of the total charge as of September 30, 1995 are as follows (in thousands): F-18
Representing ------------------------------- Cash Outlays ----------------------------- Asset Provision Write-Downs Completed Future Adjust inventory levels $ 33,138 $ 32,300 $ - $ 838 Excess facilities 2,004 404 - 1,600 Cancellation fees and asset write-offs 19,061 5,196 - 13,865 Employee severance 3,662 - - 3,662 ---------- ---------- ---------- ---------- Total charges $ 57,865 $ 37,900 $ - $ 19,965
The adjustment of inventory levels reflects the discontinuance of several product lines. Revenues and gross profit (loss) for significant product lines discontinued were as follows: MacOS-compatible systems were $21.8 million and $(19.2) million, respectively; and low-margin displays $82.9 million and $19.6 million, respectively. The provision for excess facility costs represent the write-off of leasehold improvements and the costs associated with anticipated reductions in facilities. The cancellation fees and asset write-offs reflect the Company's decision to refocus its efforts on providing solutions for the color publishing and multimedia markets. Employee severance costs are related to employees or temporary employees who have been or will be released due to the revised business model. As of December 15, 1995, approximately 157 positions of the 240 total planned had been eliminated in connection with the new business model. The Company had not spent any cash for this restructuring as of September 30, 1995. As of September 30, 1995, the Company had cash and cash equivalents of $4.8 million. See "Management's Business Recovery Plans" at Note 1 due to the Consolidated Financial Statements. The Company expects to have substantially completed the restructuring by September 1996. NOTE NINE. VIDEOFUSION ACQUISITION The Company acquired VideoFusion, Inc. ("VideoFusion") on September 9, 1994. VideoFusion is a developer of advanced digital video special effects software for Apple Macintosh and compatible computers. The Company acquired VideoFusion in exchange for approximately 890,000 shares of the Company's Common Stock, 205,900 shares of which were issued at the closing of the acquisition. The balance of the shares were to be issued in installments over a period of time contingent on the achievement of certain performance milestones and other factors. In addition, the Company was required to pay up to $1.0 million in cash based upon net revenues derived from future sales of products incorporating VideoFusion's technology. The purchase price for VideoFusion, including closing costs and the issuance of shares of Common Stock valued at $500,000 in connection with the achievement of the first milestone was approximately $2.4 million. This amount was allocated to the assets and liabilities of VideoFusion and resulted in identifiable intangibles of approximately $440,000 and an in- process research and development expense of approximately $2.2 million. The intangible asset was to be amortized over two years. The Company recognized the charge of approximately $2.7 million for in-process research and development and other costs associated with the acquisition of VideoFusion during the fourth quarter of fiscal 1994. In May 1995, the Company entered into an agreement with the former holders of VideoFusion stock to settle the contingent stock and earnout payments that were originally contemplated. Pursuant to this agreement, the Company issued approximately 212,000 shares, and paid approximately $200,000, to the former holders of VideoFusion stock. These transactions resulted in additional compensation expense of approximately $3.0 million which was recorded in fiscal 1995. NOTE TEN. MERGER WITH SUPERMAC TECHNOLOGIES, INC. On August 31, 1994, Radius merged with SuperMac in exchange for 6,632,561 shares of Radius' common stock. SuperMac was a designer, manufacturer, and marketer of products that enhanced the power and graphics performance of personal computers. The Merger was accounted for as a pooling of interests, and, accordingly, the Company's Consolidated Financial Statements and Notes to Consolidated Financial Statements have been restated to include the results of SuperMac for all periods presented. F-19 Separate results of operations for the periods prior to the Merger are as follows (in thousands):
Merger- Related Radius SuperMac Expenses Adjustment Combined --------- --------- ---------- ----------------------- Year ended September 30, 1994 Net revenues $ 162,922 $ 164,978 $ (3,095) $ - $ 324,805 Net loss (18,293) (15,775) (43,407) - (77,475) Year ended September 30, 1993 (SuperMac as of December 1993) Net revenues 134,872 202,501 - - 337,373 Net loss (17,415) (2,724) - - (20,139)
The merger related expenses reflect the recording of the merger related restructuring and other charges. Prior to the Merger, SuperMac's fiscal year end was December 31. SuperMac's separate results for fiscal 1994 have been restated to conform with the twelve months ended September 30. The Consolidated Financial Statements for all periods prior to fiscal 1994 have not been restated to adjust SuperMac's fiscal year end to that of Radius. Such periods include Radius' results of operations and balance sheet data on a September 30 fiscal year basis and SuperMac's on a December 31 calendar year basis. Therefore, the results for both the fiscal year ended September 30, 1994 and the results for the fiscal year ended 1993 include the results for SuperMac's three months ended December 31, 1993. Unaudited revenues, cost and expenses, and net loss of SuperMac for the three months ended December 31, 1993 were, $48.5 million, $64.7 million and $9.9 million, respectively. The Company incurred substantial costs in connection with the Merger and consolidation of operations. Included in the accompanying consolidated statement of operations for the year ended September 30, 1994 are merger related expenses totaling $43.4 million consisting primarily of charges for the discontinuance of duplicative product lines and related assets, elimination of duplicative facilities, property and equipment and other assets, and personnel severance costs as well as transaction fees and costs incident to the Merger. See Note 8 of Notes to the Consolidated Financial Statements. NOTE ELEVEN. SUBSEQUENT EVENTS PORTRAIT DISPLAY LABS On December 19, 1995, the Company signed a series of agreements with Portrait Display Labs, Inc. ("PDL"). The agreements assigned the Company's pivoting technology to PDL and canceled PDL's on-going royalty obligation to the Company under an existing license agreement in exchange for a one-time cash payment. PDL also granted the Company a limited license back to the pivoting technology. Under these agreements, PDL settled its outstanding receivable to the Company by paying the Company $500,000 in cash and issuing to the Company 214,286 shares of PDL's Common Stock. See Note 1 to the Consolidated Financial Statements. DISPLAY TECHNOLOGIES ELECTROHOME INC. On December 21, 1995, the Company signed a Business Purchase Agreement and an Asset Purchase and License Agreement with Display Technologies Electrohome Inc. ("DTE"). Pursuant to the agreements and subject to certain closing conditions, DTE will purchase Radius' monochrome display monitor business and certain assets related thereto, for approximately $200,000 in cash and cancellation of $2.5 million of the Company's indebtedness to DTE. In addition, DTE and Radius will cancel outstanding contracts relating to DTE's manufacture and sale of monochrome display monitors to Radius. F-20 COLOR SERVER GROUP On December 23, 1995, the Company signed a definitive agreement pursuant to which the Company will sell its Color Server business to Splash Merger Company, Inc. (the "Buyer"), a wholly owned subsidiary of Splash Technology Holdings, Inc. (the "Parent"), a corporation formed by various investment entities associated with Summit Partners. The Company will receive approximately $21,945,175 in cash (subject to certain post-closing adjustments) and 4,282 shares of the Parent's 6% Series B Redeemable and Convertible Preferred Stock (the "Series B Preferred Stock"). The shares of Series B Preferred Stock will be convertible by the Company at any time into 19.9% of the Parent's common stock outstanding as of the closing of the transaction. The shares of Series B Preferred Stock also will be redeemable by the Parent at any time, and will be subject to mandatory redemption beginning on the sixth anniversary of issuance, in each case at a redemption price of $1,000 per share plus accrued dividends. The transaction is expected to close in January 1996. Under the Inventory and Working Capital Agreement, as recently amended, with IBM Credit Corp., the Company is required to pay all of the net proceeds of the Color Server business transaction to IBM Credit Corp. in order to reduce the Company's outstanding indebtedness under that agreement. IBM CREDIT CORP. On December 14, 1995, the Company and IBM Credit Corp. ("IBM Credit") amended the Inventory and Working Capital Financing Agreement (the "IBM Credit Agreement") entered into by the Company and IBM Credit on February 17, 1995 and subsequently revised in September 1995 to fund the manufacturing of the Company's MacOS compatible systems products. See Note 2 to the Consolidated Financial Statements. Under the amendment, IBM Credit waived the Company's failure to comply with all of its contractual obligations and financial covenants under the IBM Credit Agreement. The IBM Credit Amendment, among other things, also provides that until March 31, 1996 IBM Credit will extend advances to the Company in an amount up to 90% of the Company's collections and fund the Company's payroll in the event that collections are insufficient to permit the advances needed for this purpose. Such advances and payroll funding, however, may be suspended by IBM Credit (i) immediately following a default of the IBM Credit Amendment, and (ii) following thirty (30) days notice in the event of any default of the IBM Credit Agreement. The IBM Credit Amendment also requires the Company to pay all of the net proceeds of the Color Server Group transaction to IBM Credit to reduce the Company's outstanding indebtedness under the IBM Credit Agreement. 1995 STOCK OPTION PLAN On December 20, 1995, the Company's Board of Directors adopted the 1995 Stock Option Plan to replace the 1986 Stock Option Plan that expires in 1996, and reserved 850,000 shares (plus all unissued and unexercised shares available under the existing 1986 Stock Option Plan) for issuance thereunder. The 1995 Stock Option Plan is subject to shareholder approval. See Note 4 to the Consolidated Financial Statements. F-21 SCHEDULE II --- VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
Balance at Charged to Charged Balance beginning costs and to other at end of Description of period expenses accounts Deductions(1) period ----------- --------- ---------- -------- ------------- --------- ALLOWANCE FOR DOUBTFUL ACCOUNTS: Year ended September 30, 1993 (2) $ 1,825 $ 1,272 $ 0 $ 975 $ 2,122 Year ended September 30, 1994 $ 2,018 (2) $ 1,283 $ 0 $ 753 $ 2,548 Year ended September 30, 1995 $ 2,548 $ 6,837 $ 0 $ 883 $ 8,502
_____________________________ (1) Uncollectable accounts written off. (2) The Consolidated Financial Statements for fiscal 1993 have not been restated for the change in fiscal year. This period includes Radius' results of operations and balance sheet data on a September 30 fiscal year basis and SuperMac's on a December 31 calendar year basis. F-22 RADIUS INC. CONSOLIDATED BALANCE SHEET (in thousands) JUNE 30, 1996 (unaudited) ------------- ASSETS: Current assets: Cash $ 3,264 Accounts receivable, net 22,234 Inventories 15,825 Prepaid expenses and other current assets 424 Income tax receivable 514 ---------- Total current assets 42,261 Property and equipment, net 1,475 Deposits and other assets 142 ---------- $ 43,878 ---------- ---------- LIABILITIES AND SHAREHOLDERS' EQUITY (Net capital deficiency) Current liabilities: Accounts payable $ 37,952 Accrued payroll and related expenses 2,196 Accrued warranty costs 687 Other accrued liabilities 8,866 Accrued income taxes 2,056 Accrued restructuring and other charges 15,474 Short-term borrowings 22,920 Obligations under capital leases - current portion 1,293 ---------- Total current liabilities 91,444 Obligations under capital leases - noncurrent portion 321 Shareholders' equity: (Net capital deficiency) Common stock 126,243 Common stock to be issued - Accumulated deficit (174,144) Accumulated translation adjustment 14 ---------- Total shareholders' equity (Net capital deficiency) (47,887) ---------- $ 43,878 ---------- ---------- See accompanying notes. F-23 RADIUS INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data; unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED JUNE 30, JUNE 30, ------------------------- ------------------------------ 1996 1995 1996 1995 --------- ---------- ---------- ---------- Net sales $ 20,034 $ 87,325 $ 83,261 $ 251,007 Cost of sales 13,470 65,211 67,175 184,882 --------- ---------- ---------- ---------- Gross profit 6,564 22,114 16,086 66,125 --------- ---------- ---------- ---------- Operating expenses: Research and development 1,092 4,990 6,241 13,780 Selling, general and administrative 4,518 18,442 21,430 48,725 --------- ---------- ---------- ---------- Total operating expenses 5,610 23,432 27,671 62,505 --------- ---------- ---------- ---------- Income (loss) from operations 954 (1,318) (11,585) 3,620 Other income (expense), net 3,975 (1,531) 21,090 (4,605) Settlement of litigation -- -- -- (12,422) --------- ---------- ---------- ---------- Income (loss) before income taxes 4,929 (2,849) 9,505 (13,407) Provision for income taxes 216 263 656 450 --------- ---------- ---------- ---------- Net income (loss) $ 4,713 $ (3,112) $ 8,849 $ (13,857) --------- ---------- ---------- ---------- --------- ---------- ---------- ---------- Income (loss) per share: Net income (loss) per share $ 0.26 $ (0.21) $ 0.49 $ (0.96) --------- ---------- ---------- ---------- --------- ---------- ---------- ---------- Common and common equivalent shares used in computing net income (loss) per share 18,412 14,791 17,950 14,386 --------- ---------- ---------- ---------- --------- ---------- ---------- ----------
See accompanying notes. F-24 RADIUS INC. CONSOLIDATED STATEMENTS OF CASH FLOWS INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (in thousands, unaudited)
NINE MONTHS ENDED JUNE 30, ------------------------ 1996 1995 --------- --------- Cash flows from operating activities: Net income (loss) $ 8,849 $ (13,857) Adjustments to reconcile net income (loss) to net cash (used in) operating activities: Depreciation and amortization 1,470 2,988 Gain on the sale of the Color Hard Copy Group (20,638) - Common stock to be issued - 12,022 Loss on the disposal of fixed assets 301 - (Increase) decrease in assets: Accounts receivable 39,202 (16,751) Allowance for doubtful accounts (2,900) (1,610) Inventories (2,162) (17,292) Prepaid expenses and other current assets 1,912 545 Income tax receivable 5 8,390 Increase (decrease) in liabilities: Accounts payable (31,584) 17,064 Accrued payroll and related expenses (3,489) (297) Accrued warranty costs (2,373) 623 Other accrued liabilities (1,914) 308 Accrued restructuring costs (1,539) (13,477) Accrued income taxes 391 75 --------- ---------- Net cash used in operating activities (14,469) (21,269) Cash flows from investing activities: Capital expenditures (215) (2,848) Goodwill - (2,692) Deposits and other assets 375 (1,233) Net proceeds from the sale of the Color Hard Copy Group 20,163 - --------- ---------- Net cash provided by (used in) investing activities 20,323 (6,773) Cash flows from financing activities: Principal payments of short-term borrowings, net (6,569) 3,414 Principal payments of long-term debt and capital leases (1,211) (1,301) Issuance of common stock 430 26,200 --------- ---------- Net cash provided by (used in) financing activities (7,350) 28,313 --------- ---------- Net increase (decrease) in cash and cash equivalents (1,496) 271 Cash and cash equivalents, beginning of period 4,760 15,997 --------- ---------- Cash and cash equivalents, end of period $ 3,264 $ 16,268 --------- ---------- --------- ---------- Supplemental disclosure of cash flow information: Cash paid during the period for: Interest paid $ 2,804 $ 2,009 --------- ---------- --------- ---------- Income taxes paid $ 260 $ - --------- ---------- --------- ----------
See accompanying notes. F-25 RADIUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. BASIS OF PRESENTATION The consolidated financial statements of Radius Inc. ("Radius") as of June 30, 1996 and for the three and nine months ended June 30, 1996 and 1995 are unaudited. In the opinion of management, the consolidated financial statements reflect all adjustments (consisting only of normal recurring items) necessary for a fair presentation of the financial position and results of operations for the interim periods presented. These consolidated financial statements should be read in conjunction with the Audited Consolidated Financial Statements and notes thereto included elsewhere herein. During the first quarter of its 1995 fiscal year, the Company changed its fiscal year end from the Sunday closest to September 30 to the Friday closest to September 30. During the second quarter of its 1995 fiscal year, the Company changed its fiscal year end to the Saturday closest to September 30 for operational efficiency purposes. For clarity of presentation, all fiscal periods are reported as ending on a calendar month end. NOTE 2. INVENTORIES Inventories, stated at the lower of cost or market, consist of (in thousands): JUNE 30, 1996 -------- Raw materials $ 539 Work in process 3,113 Finished goods 12,173 -------- $ 15,825 -------- -------- 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. 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 business, the Company has certain indemnification obligations for which approximately $2.3 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 F-26 persons and/or the general public, and allege that the defendants falsely advertise that the viewing areas of their computer monitors are larger than in fact they are. The Company was served with the Shapiro complaint on August 22, 1995 and was served with the Maizes complaint on January 5, 1996. Defendants' petition to the California State Judicial Council to coordinate the Shapiro case with similar cases brought in other California jurisdictions was granted in part and it is anticipated that the coordinated proceedings will be held in Superior Court of California, San Francisco County. An amended consolidated complaint was filed on March 26, 1996. Discovery proceedings are scheduled to begin. The Company believes it has meritorious defenses to the plaintiffs' claims and is defending them vigorously. In the opinion of management, based on the facts known at this time, the eventual outcome of these cases may have a material adverse effect on the results of operations or financial position of the Company in the financial period in which they are resolved. In addition, whether or not the eventual 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 lawsuit also alleges that an officer of the Company interfered with the alleged contract. The Company believes it has meritorious defenses to the plaintiff's claims and intends to defend them vigorously. Nevertheless, the costs of defense, regardless of outcome, could have an adverse effect on the results of operations and financial condition of the Company. (d) The Company is involved in a number of other judicial and administrative proceedings incidental to its business, including litigation by alleged trade creditors who did not participate in the Plan. 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. BUSINESS DIVESTITURES COLOR SERVER GROUP DIVESTITURE In January 1996, the Company completed the sale of its Color Server Group ("CSG") to Splash Merger Company, Inc. (the "Buyer"), a wholly owned subsidiary of Splash Technology Holdings, Inc. (the "Parent"), a corporation formed by various investment entities associated with Summit Partners. Through June 30, 1996 the Company has received approximately $21.0 million in cash and an additional $2.4 million is being maintained in escrow for certain post-closing adjustments and to secure certain indemnification obligations. The Company also received 4,282 shares of the Parent's 6% Series B Redeemable and Convertible Preferred Stock (the "Series B Preferred Stock"). The shares of Series B Preferred Stock will be convertible by the Company at any time into approximately 19.9% of the Parent's common stock outstanding as of the closing of the transaction. The Company has not converted the Series B Preferred Stock. In June 1996, the Company granted IBM Credit Corp. ("ICC"), its secured lender, an option to purchase 428 shares of Series B Preferred as a fee for the restructuring of the terms of its credit agreement with ICC. The shares of Series B Preferred Stock also will be redeemable by the Parent at any time, and will be subject to mandatory redemption beginning on the sixth anniversary of issuance, in each case at a redemption price of $1,000 per share plus accrued dividends. These shares of Series B Preferred Stock have been pledged to ICC. The Company has certain indemnification obligations in connection with the patent lawsuit brought by Electronics for Imaging, Inc. The net proceeds from the sale of the Color Server Group were paid to Silicon Valley Bank ("SVB") in order to repay the Company's indebtedness to SVB, and to ICC, in order to reduce the Company's outstanding indebtedness to ICC. PORTRAIT DISPLAY LABS In January 1996, the Company entered into a series of agreements with Portrait Display Labs, Inc. ("PDL"). The agreements assigned the Company's pivoting technology to PDL and canceled PDL's on-going royalty obligation to the Company under an existing license agreement in exchange for a one-time cash payment. PDL also granted the Company a limited license back to the pivoting F-27 technology. Under these agreements, PDL also settled its outstanding receivable to the Company by paying the Company $500,000 in cash and issuing to the Company 214,286 shares of PDL's Common Stock. These shares of PDL Common Stock have been pledged to ICC. UMAX DATA SYSTEMS, INC. In February 1996, the Company sold its MacOS compatible systems business to UMAX Computer Corporation ("UCC"), a company formed by UMAX Data Systems, Inc. ("UMAX"). The Company received approximately $2.3 million in cash and debt relief, and 1,492,500 shares of UCC's Common Stock, representing approximately 19.9% of UCC's then outstanding shares of Common Stock. The Company has a right to receive royalties based on UCC's net revenues related to the MacOS compatible systems business. These shares of UCC Common Stock have been pledged to ICC. NOTE 5. RESTRUCTURING RESERVE REVERSAL During the quarter ended June 30, 1996, the Company reversed approximately $913,000 of restructuring reserves as a result of a favorable settlement related to facility lease cancellation fees. NOTE 6. SUBSEQUENT EVENTS In September 1996, the Company, IBM Credit and its unsecured creditors consummated a debt-for-equity exchange (the "Plan"). Unsecured creditors forgave approximately $45.9 million of claims (including a $1.0 million reserve for unknown or unresolved claims) in consideration of the issuance of 36,294,198 shares of Common Stock and Rights to receive 11,046,060 additional shares of Common Stock in the event that the Series A Convertible Preferred Stock is converted into Common Stock (such numbers include 791,280 shares of Common Stock and 280,824 Rights issued to the Radius Creditors Trust for the purpose of satisfying a portion of unknown or unresolved claims). Certain unsecured creditors, most of which had claims of less than $50,000 (representing approximately $1.9 million in claims), were paid cash at an average discount of approximately 75% of the amount of the claim in satisfaction of their claims. The Company's secured creditor, IBM Credit, received 750,000 shares of Series A Convertible Preferred Stock and Warrants to purchase 600,000 shares of Common Stock in satisfaction of $3.0 million of indebtedness and restructuring the terms of the Company's remaining approximately $23.4 million indebtedness to IBM Credit. After the consummation of the Plan, to the Company's knowledge, there remained unsatisfied unsecured claims against the Company, which the Company does not dispute, of approximately $200,000. The Company has issued an aggregate of 791,280 shares of Common Stock and an additional 240,824 Rights to the Radius Creditors Trust, for the purpose of satisfying a portion of any such remaining or previously unknown claims. There can be no assurance that this amount will be sufficient to satisfy any such claims. If the Company cannot settle or repay these remaining claims or any previously unknown claims, there can be no assurance that such claimants will not institute enforcement proceedings in order to collect their claims. Any such proceedings could have a material adverse effect on the Company's business, results of operations and financial condition. Of the approximately 300 persons the Company believed to be Convenience Class Creditors, approximately 50 persons claimed that no balance was owed to such creditors. There can be no assurance that such creditors will not, in the future, assert claims against the Company. F-28 PRO FORMA UNAUDITED FINANCIAL INFORMATION In January 1996, the Company completed the sale (the "Disposition") of its Color Server Group ("CSG") to Splash Technology Holdings, Inc. ("Splash"), a corporation formed by various investment entities associated with Summit Partners. The Company received approximately $21.0 million in cash ($2.4 million remains in escrow to secure certain indemnification obligations), and also received 4,282 shares of Splash 6% Series B Redeemable and Convertible Preferred Stock. The net proceeds of the CSG transaction were used to repay certain indebtedness of the Company. Reference is made to "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the historical financial statements included elsewhere in this Prospectus for a further description of the CSG transaction. The Unaudited Pro Forma Statements of Operations for the nine months ended June 30, 1996 and the twelve months ended September 30, 1995 reflect the elimination of net revenue, cost of sales and operating expenses related to CSG. The Unaudited Pro Forma Statements of Operations assumes that the Disposition and the other referenced events were completed at the beginning of the relevant reporting period. No Pro Forma Unaudited Balance Sheet is presented as the Disposition has been reflected in the unaudited consolidated balance sheet as of June 30, 1996 included elsewhere herein. The pro forma financial information does not purport to be indicative of the results of operations that would actually have been reported had the transaction underlying the pro forma adjustments actually been consummated on such dates or of the results of operations that may be reported by the Company in the future. The accompanying pro forma financial information should be read in conjunction with the historical financial statements of the Company and the related notes thereto. P-1 RADIUS INC. PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS TWELVE MONTHS ENDED SEPTEMBER 30, 1995 (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
LESS: TOTAL RADIUS INC. COLOR HARD COPY LESS: AS CONSOLIDATED GROUP INTEREST ADJUSTED -------------- ----------------- -------------- --------------- Net revenue $308,133 $29,328 $278,805 Cost of sales 302,937 19,559 283,378 -------------- ----------------- --------------- Gross margin 5,196 9,769 (4,573) Operating expenses 109,378 6,300 103,078 -------------- ----------------- --------------- Operating income (loss) (104,182) 3,469 (107,651) Other income (expense), net (6,068) 0 1,675 (A) (4,393) -------------- ----------------- -------------- --------------- Litigation settlement (12,422) 0 (12,422) -------------- ----------------- -------------- --------------- Income (loss) before income taxes ($122,672) $3,469 $1,675 ($124,466) Provision for income taxes 9,070 -- -- 9,070 -------------- ----------------- -------------- --------------- Net income (loss) ($131,742) $3,469 $1,675 ($133,536) -------------- ----------------- -------------- --------------- -------------- ----------------- -------------- --------------- Net loss per share: Net loss per share ($8.75) ($8.87) -------------- --------------- -------------- --------------- Common and common equivalent shares used in computing net loss per share 15,049 15,049 -------------- --------------- -------------- ---------------
P-2 RADIUS INC. UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS NINE MONTHS ENDED JUNE 30, 1996 (IN THOUSANDS, EXCEPT PER SHARE DATA)
LESS: RADIUS INC. COLOR SERVER LESS: TOTAL CONSOLIDATED GROUP INTEREST AS ADJUSTED -------------- ----------------- -------------- --------------- Net revenue $83,261 $6,967 $76,294 Cost of sales 67,175 4,722 62,453 -------------- ----------------- --------------- Gross margin 16,086 2,245 13,841 Operating expenses 27,671 1,302 26,369 -------------- ----------------- --------------- Operating income (loss) (11,585) 943 (12,528) Other income (expense), net 21,090 -- 593 (A) 21,683 -------------- ----------------- -------------- --------------- Income before income taxes 9,505 943 593 9,155 Provision for income taxes 656 -- -- 656 -------------- ----------------- -------------- Net income $8,849 $943 593 $8,499 -------------- ----------------- -------------- --------------- -------------- ----------------- -------------- --------------- Net income per share: Net income per share $0.49 $0.47 -------------- --------------- -------------- --------------- Common and common equivalent shares used in computing net loss per share 17,950 17,950 -------------- --------------- -------------- ---------------
NOTE TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS (A) Reduction of approximately $593,000 and approximately $1.7 million in interest expense recorded by the Company during the nine months ended June 30, 1996 and the twelve months ended September 30, 1995, respectively, to reflect the use of the proceeds to reduce outstanding obligations under the Company's line of credit agreements. P-3 - -------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY SECURITIES IN ANY JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. ---------------------------- TABLE OF CONTENTS PAGE ---- AVAILABLE INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . 3 PROSPECTUS SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . 4 THE COMPANY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 USE OF PROCEEDS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 PRICE RANGE OF COMMON STOCK. . . . . . . . . . . . . . . . . . . . . . 16 DIVIDEND POLICY. . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 CAPITALIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 SELECTED FINANCIAL DATA. . . . . . . . . . . . . . . . . . . . . . . . 18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . 20 BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 CERTAIN TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . 44 PRINCIPAL AND SELLING SECURITYHOLDERS. . . . . . . . . . . . . . . . . 46 DESCRIPTION OF CAPITAL STOCK . . . . . . . . . . . . . . . . . . . . . 49 PLAN OF DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . . . 52 LEGAL MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 EXPERTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . F-1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- RADIUS INC. ---------------- SHARES OF COMMON STOCK HAVING AN AGGREGATE MARKET PRICE OF $600,000 ------------------ 750,000 SHARES OF SERIES A CONVERTIBLE PREFERRED STOCK WARRANTS TO PURCHASE 800,000 SHARES OF COMMON STOCK 54,293,591 SHARES OF COMMON STOCK ----------------- ----------------- PROSPECTUS ----------------- ----------------- November , 1996 ------ - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The estimated expenses to be paid by the Registrant in connection with this offering are as follows: Securities and Exchange Commission registration fee. . $25,205.30 Nasdaq SmallCap Market filing fee. . . . . . . . . . . 4,466 Accounting fees and expenses . . . . . . . . . . . . . 25,000 Legal fees and expenses. . . . . . . . . . . . . . . . 75,000 Printing . . . . . . . . . . . . . . . . . . . . . . . 50,000 Printing and engraving stock certificates. . . . . . . 5,000 Blue sky fees and expenses . . . . . . . . . . . . . . 20,000 Transfer agent and registrar fees and expenses . . . . 10,000 Miscellaneous. . . . . . . . . . . . . . . . . . . . . 35,328.70 ---------- Total. . . . . . . . . . . . . . $ 250,000 ---------- ---------- ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The provisions of Section 317 of the California Corporations Code, Article V of the Registrant's Articles of Incorporation and Article VI of the Registrant's Bylaws provide for indemnification to the fullest extent permitted by law for expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with any proceeding arising by reason of the fact that any person is or was a director, officer or employee of the Registrant. This indemnification may be sufficiently broad to permit indemnification of the Registrant's officers and directors for liabilities arising under the Securities Act. In addition, Article IV of the Registrant's Articles of Incorporation provides that the liability of the Registrant's directors shall be eliminated to the fullest extent permissible under the California Law. The Registrant has entered into Indemnity Agreements with each of its current directors to give such directors additional contractual assurances regarding the scope of the indemnification and liability limitations set forth in the Registrant's Articles of Incorporation and Bylaws. The Registrant currently carries a director and officer liability insurance policy with a per claim and annual aggregate coverage limit of $10 million. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. Since June 30, 1993, the Company has sold and issued the following unregistered securities: (a) In June 1995, the Company issued an aggregate of 2,509,319 shares of its Common Stock to 18 unaffiliated investors, including Wajilei Foundation, for aggregate proceeds of approximately $21.5 million. These securities were issued in reliance on Section 4(2) of, or Regulation D promulgated under, the Securities Act. (b) In June 1995, the Company settled shareholder litigation with certain shareholders of Radius and SuperMac Technologies, Inc., for a combination of cash and shares of the Company's Common Stock. In November and December 1995 and in June 1996, the Company issued 188,605, 70,525 and 577,544 shares of Common Stock, respectively. There are 99,630 shares of Common Stock remaining to be issued. These securities were and will be issued in reliance on Section 3(a)(10) of the Securities Act. (c) In September 1996, the Company issued 36,294,198 shares of Common Stock and Rights to receive 11,046,060 shares of Common Stock in the event that the Series A Convertible Preferred Stock is converted into Common Stock to unsecured creditors in satisfaction of approximately $45.9 million in claims against the Company. These securities were issued in reliance on Section 4(2) of, or Regulation D promulgated under, the Securities Act. (d) In September 1996, the Company issued 750,000 shares of Series A Convertible Preferred Stock and Warrants to purchase 600,000 shares of Common Stock to IBM Credit in satisfaction of $3.0 million of indebtedness and for restructuring the terms of the Company's indebtedness to IBM Credit. These securities were issued in reliance on Section 4(2) of, or Regulation D promulgated under, the Securities Act. (e) In October 1996, the Company issued Warrants to purchase 200,000 shares of Common Stock to Mitsubishi Electronics in consideration of the extension of open credit terms. These securities were issued in reliance in section 4(2) of, or Regulation D promulgated under, the Securities Act. II-1 There were no underwriters employed in connection with any of the transactions set forth in Item 15. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) The following exhibits are filed herewith:
EXHIBIT NUMBER EXHIBIT TITLE - ------ --------------- 2.01 -- Agreement and Plan of Reorganization dated May 20, 1994 between Radius Inc. and SuperMac Technology, Inc. (1) 2.02 -- Modification Agreement dated July 21, 1994 to Agreement and Plan of Reorganization between Radius Inc. and SuperMac Technology, Inc. (1) 2.03 -- Agreement and Plan of Reorganization dated July 19, 1994 between Radius Inc. and VideoFusion, Inc. (2) 2.04 -- First Amendment to Agreement and Plan of Reorganization between Radius Inc. and VideoFusion, Inc. dated August 25, 1994. (3) 2.05 -- Second Amendment to Agreement and Plan of Reorganization between Radius Inc. and VideoFusion, Inc. dated September 6, 1994. (3) 2.06 -- Third Amendment to Agreement and Plan of Reorganization between Radius Inc. and VideoFusion, Inc. dated May 10, 1995. (3) 2.07 -- Merger Agreement (the "Merger Agreement") dated as of December 21, 1995 among Radius Inc., Splash Technology, Inc., Summit Subordinated Debt Fund, L.P., Summit Ventures IV, L.P., Summit Investors II, L.P., Splash Technology Holdings, Inc. and Splash Merger Company, Inc. (4) 2.08 -- Amendment No. 1 to Merger Agreement dated as of January 30, 1996. (4) 3.01 A Registrant's Sixth Amended and Restated Articles of Incorporation. (5) B Certificate of Amendment of Registrant's Sixth Amended and Restated Articles of Incorporation. (3) C Certificate of Amendment of Registrant's Sixth Amended and Restated Articles of Incorporation.* D Certificate of Determination of Preferences of Series A Convertible Preferred Stock of Radius Inc.* 3.02 -- Registrant's Bylaws. (6) 4.01 -- Specimen Certificate for shares of Common Stock of the Registrant. (7) 4.02 -- Specimen Certificate for shares of Series A Convertible Preferred Stock of the Registrant.* 4.03 A Warrant dated September 13, 1995 between IBM Credit Corporation and the Registrant.* B Warrant dated October 13, 1996, between Mitsubishi Electronics America, Inc. and the Registrant. 4.04 -- Form of Registration Rights Agreement between the Registrant and certain shareholders.*
II-2
EXHIBIT NUMBER EXHIBIT TITLE - ------ --------------- A The Registrant's Sixth Amended and Restated Articles of Incorporation. (5) B Certificate of Amendment of Registrant's Sixth Amended and Restated Articles of Incorporation. (3) C Certificate of Amendment of Registrant's Sixth Amended and Restated Articles of Incorporation. (See exhibit 3.01) D Certificate of Determination of Preferences of Series A Convertible Preferred Stock of Radius Inc. (See exhibit 3.01). 4.05 -- The Registrant's Bylaws. (6) 4.06 -- Non-Plan Stock Option Grant to Charles W. Berger. (8) 4.07 -- Form of Subscription Agreement.* 4.08 -- Form of Right. 5.01 -- Opinion of Fenwick & West LLP regarding the legality of the securities being offered. 10.01 A Registrant's 401(k) Savings and Investment Plan. (9) B Amendment to Registrant's 401(k) Savings and Investment Plan. (3) C Registrant's 401(k) Savings and Investment Plan Loan Policy. (3) 10.02 -- Registrant's 1995 Stock Option Plan. (3) 10.03 -- Form of Stock Option Agreement and Exercise Request as currently in effect under 1995 Stock Option Plan. (3) 10.04 -- Registrant's 1990 Employee Stock Purchase Plan and related documents. (10) 10.05 -- Registrant's 1994 Directors' Stock Option Plan. (3) 10.06 -- Form of Indemnity Agreement with Directors. (7) 10.07 -- Credit Agreement by and among Radius Inc., the certain financial institutions, and Silicon Valley Bank, dated March 20, 1995. (11) 10.08 A Credit Agreement by and among Radius Inc., the certain financial institutions, and International Business Machines Credit Corporation, dated February 17, 1995. (11) B Acknowledgment, Waiver and Amendment to Radius Inc. Inventory and Working Capital Financing Agreement by and between Radius Inc. and International Business Machines Credit Corporation dated December 14, 1995. (3) 10.09 A Lease Agreement by and between Registrant and the Equitable Life Assurance Society of the United States dated June 22, 1988, as amended by the Commencement of Term Agreement dated February 13, 1989 and Amendment No. One dated July 20, 1989, and related documents (1710 Fortune Drive, San Jose, California offices). (7) B Second Amendment to Lease dated January 27, 1993 amending Lease Agreement by and between Registrant and the Fortune Drive Partners (successor in interest to the Equitable Life Assurance Society of the United States) dated June 22, 1988 (1710 Fortune Drive, San Jose, California offices). (12)
II-3
EXHIBIT NUMBER EXHIBIT TITLE - ------ --------------- 10.10 -- Lease Agreement by and between Registrant and Board of Administration, as Trustee for the Police and Fire Department Fund, and Board of Administration, as Trustee for the Federated City Employees Retirement Fund dated December 11, 1990, and related documents (Milpitas, California warehouse space). (5) 10.11 -- Lease Agreement by and between Registrant and South Bay/Copley Associates III Joint Venture dated May 11, 1992; Sublease by and between Core Industries, Inc. and Registrant dated May 12, 1992; and related documents (2040 Fortune Drive, San Jose California offices). (13) 10.12 A Lease Agreement between SuperMac Technologies, Inc. and Connecticut General Life Insurance Company dated as of November 13, 1993 (215 Moffett Park Drive, Sunnyvale, California offices). (14) B Office Lease dated March 18, 1996 between Registrant and CIGNA. 10.13 -- Employment Agreement by and between Registrant and Charles W. Berger dated February 26, 1993 as amended on September 17, 1993. (15) 10.14 -- Full Recourse Promissory Note with Charles W. Berger. (15) 10.15 -- SuperMac Technology, Inc.'s 1988 Stock Option Plan ("Option Plan"). (16) 10.16 -- SuperMac Technology, Inc.'s Form of Incentive Stock Option Agreement under the Option Plan. (16) 10.17 -- SuperMac Technology, Inc.'s Form of Supplemental Stock Option Agreement under the Option Plan. (16) 10.18 -- SuperMac Technology, Inc.'s Form of Early Exercise Stock Purchase Agreement under the Option Plan. (16) 10.19 -- Distribution Agreement between Radius Inc. and Ingram Micro, Inc. dated June 5, 1991 as amended on April 1, 1992, May 31, 1995 and July 14, 1995. (17) 10.20 -- Amended and Restated Working Capital and Term Loan Agreement dated as of August 30, 1996 between IBM Credit Corporation and the Registrant. 11.01 -- Computation of per share earnings.* 21.01 -- List of Registrant's subsidiaries. (3) 23.01 -- Consent of Ernst & Young LLP, Independent Auditors. 23.02 -- Consent of Fenwick & West LLP (included in Exhibit 5.01).
II-4 EXHIBIT NUMBER EXHIBIT TITLE - ----- ------------- 24.01 -- Power of Attorney (see page II-7). - ------------ (1) Incorporated by reference to exhibits to the Company's Amendment No. 2 (File No. 33-79732) to Form S-4 filed on July 25, 1994. (2) Incorporated by reference to exhibits to the Company's Report on Form 10-Q filed on August 17, 1994. (3) Incorporated by reference to exhibits to the Company's Report Form 10-K filed on December 15, 1995. (4) Incorporated by reference to exhibits to the Company's Report on Form 10-Q filed on February 13, 1996 (5) Incorporated by reference to exhibits to the Company's Report on Form 10-K filed on December 24, 1990. (6) Incorporated by reference to exhibits to the Company's Registration Statement on Form S-8 filed on April 29, 1992 (File No. 33-47525). (7) Incorporated by reference to exhibits to the Company's Registration Statement on Form S-1 (File No. 33-35769) which became effective on August 16, 1990. (8) Incorporated by reference to exhibits to the Company's Registration Statement on Form S-8 filed on November 15, 1993 (File No. 33-71636). (9) Incorporated by reference to exhibits to the Company's Report on Form 10-K filed on December 28, 1992. (10) Incorporated by reference to exhibits to the Company's Report on Form 10-K filed on December 30, 1991. (11) Incorporated by reference to exhibits to the Company's Report on Form 10-Q filed on May 10, 1995. (12) Incorporated by reference to exhibits to the Company's Report on Form 10-Q filed on August 18, 1993. (13) Incorporated by reference to exhibits to the Company's Report on Form 10-Q filed on August 12, 1992. (14) Incorporated by reference to exhibits to SuperMac's Form S-1 (File No. 33-58158) filed on February 11, 1993. (15) Incorporated by reference to exhibits to the Company's Report on Form 10-K filed on January 3, 1994. (16) Incorporated by reference to exhibits to SuperMac Technology, Inc.'s Registration Statement on Form S-1, as amended (File No. 33-46800), which became effective on May 15, 1992. (17) Incorporated by reference to exhibits to the Company's Report on Form 10-Q filed on August 15, 1995. - --------------------- * Previously filed. II-5 (b) The following financial statement schedule is filed herewith: Schedule II -- Valuation and Qualifying Accounts (See page F-22) Other financial statement schedules are omitted because the information called for is not required or is shown either in the Financial Statements or the Notes thereto. ITEM 17. UNDERTAKINGS. The undersigned Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement: (i) to include any prospectus required by Section 10(a)(3) of the Securities Act of 1933 (the "Securities Act"); (ii) to reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post- effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information in the Registration Statement; and (iii) to include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement; PROVIDED, HOWEVER, that paragraphs (i) and (ii) do not apply if the information required to be included in a post-effective amendment is contained in periodic reports filed with or furnished to the Securities and Exchange Commission by the Registrant pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act") that are incorporated by reference in the Registration Statement. (2) That, for the purpose of determining any liability under the Securities Act, each post-effective amendment shall be deemed a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial BONA FIDE offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions described under Item 15 above, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-6 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Amendment to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Sunnyvale, State of California, on the 12th day of November, 1996. RADIUS INC. By: /s/ Charles W. Berger ------------------------ Charles W. Berger President and Chief Executive Officer POWER OF ATTORNEY KNOW ALL BY THESE PRESENTS that each individual whose signature appears below constitutes and appoints Charles W. Berger and Cherrie L. Fosco, and each of them, his or her attorneys-in-fact and agents, each with the power of substitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, and to sign any registration statement for the same offering covered by this Registration Statement that is to be effective upon filing pursuant to Rule 462(b) promulgated under the Securities Act of 1933, and all post-effective amendments thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in- fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or his, her or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act, this Amendment to the Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - --------- ----- ----- PRINCIPAL EXECUTIVE OFFICER: /s/ Charles W. Berger President, Chief Executive November 12, 1996 - ---------------------------------- Officer and Chairman of the Charles W. Berger Board of Directors PRINCIPAL FINANCIAL OFFICER: /s/ Charles W. Berger Acting Chief Financial Officer November 12, 1996 - ---------------------------------- Charles W. Berger PRINCIPAL ACCOUNTING OFFICER: /s/ Cherrie L. Fosco Vice President and November 12, 1996 - ---------------------------------- Corporate Controller Cherrie L. Fosco ADDITIONAL DIRECTORS: * Director November 12, 1996 - --------------------------------- Michael D. Boich /s/ Carl A. Carlson Director November 12, 1996 - --------------------------------- Carl A. Carlson Director November 12, 1996 - --------------------------------- Michael W. Ledbetter * By: /s/ Charles W. Berger Attorney-in-fact November 12, 1996 - --------------------------------- Charles W. Berger
II-7 EX-4.03B 2 EXHIBIT 4-03B EXHIBIT 4.03B THE SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE. NO SALE OR OTHER DISPOSITION OR PLEDGE OF THESE SECURITIES MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATING THERETO OR AN EXEMPTION THEREFROM OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT A PROPOSED DISPOSITION OR PLEDGE IS PERMITTED UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS OR A NO ACTION LETTER OR INTERPRETIVE OPINION OF THE STAFF OF THE SECURITIES AND EXCHANGE COMMISSION THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE ACT. RADIUS INC. WARRANT VOID AFTER OCTOBER 13, 2000 1. THE WARRANT. (a) THE GRANTING OF A WARRANT. This Warrant is executed and delivered by Radius Inc., a California corporation (the "COMPANY"), to Mitsubishi Electronics America, Inc. ("Holder") in consideration of the extension of open credit terms to the Company in an amount not less than $500,000 as of the effective date. (b) NUMBER AND PRICE OF SHARES SUBJECT TO WARRANT. Subject to the terms and conditions herein set forth, Holder is entitled to purchase from the Company, at any time commencing on the date hereof (the "EXERCISE COMMENCEMENT DATE") until this Warrant has expired in accordance with subparagraph (e) below, 200,000 shares of fully paid and non-assessable shares of Common Stock of the Company (the "SHARES") at a purchase price of one dollar per share (the "WARRANT PRICE"). The number and purchase price of such shares are subject to adjustment pursuant to paragraph 2 hereof. This Warrant will be exercisable by the holder at any time after the earlier to occur of (i) effectiveness of a Registration Statement pursuant to the Securities Act of 1933, as amended, with respect to the Shares, or (ii) six months from the date of the issuance hereof by its giving to the Company written notice of its intent to exercise ("EXERCISE NOTICE") on or before the expiration of this Warrant, in the form attached hereto as ATTACHMENT 1. Upon giving such notice, the Holder will surrender this Warrant at the principal office of the Company and pay the full purchase price for the Shares to be acquired upon payment in cash or by check. Notwithstanding the total number of shares subject to this warrant, the warrant may be exercised only in proportion to the highest amount of open term trade credit utilized by the Company prior to the first exercise of the warrant. Specifically, for every $100,000 of credit utilized at a point in time, then Holder is thereafter entitled to exercise 10,000 warrants up to 200,000. If $500,000 credit is utilized, then 50,000 warrants are exercisable. If $2,000,000 credit is utilized, then all 200,000 warrants are exercisable. In any event, the minimum number of warrants exercisable is 50,000, provided that at least $500,000 in open credit is actually EXTENDED to the Company as of the effective date of this warrant. (c) NET EXERCISE. In lieu of exercising this Warrant pursuant to Section 1(b) above, the holder may elect to receive a number of Shares to be calculated as follows: X = Y(A-B) ------ A where X = the number of shares of Common Stock to be issued to the holder. Y = the number of shares of Common Stock requested to be exercised under this Warrant. A = the fair market value of one (1) share of Common Stock. B = the Exercise Price. For purposes of the above calculation, current fair market value of Common Stock shall mean with respect to each share of Common Stock: (i) if traded on a national securities exchange or the Nasdaq National Market (or similar national quotation system), the fair market value shall be deemed to be the closing price (last reported sale) on the day the current fair market value of the securities is being determined; (ii) if traded over-the-counter, the fair market value shall be deemed to be the closing bid price quoted on the day the current fair market value of the securities is being determined; or (iii) if at any time the Common Stock is not traded as described in (i) or (ii) above, the current fair market value shall be the highest price per share which the Company could obtain from a willing buyer (not a current employee or director) for shares of Common Stock sold by the Company, from authorized but unissued shares, as determined in good faith by its Board of Directors, unless the Company shall become subject to a merger, acquisition or other consolidation pursuant to which the Company is not the surviving party, in which case the fair market value shall be deemed to be the value received by the holders of the Company's Common Stock on a common equivalent basis pursuant to such merger or acquisition. (d) EFFECT OF EXERCISE. This Warrant shall be deemed to have been exercised immediately prior to the close of business on the date of its surrender for exercise as provided above, and the person entitled to receive the Shares issuable upon such exercise shall be treated -2- for all purposes as the holder of record of such shares as of the close of business on such date. As soon as practicable on or after such date, the Company shall issue and deliver to the person or persons entitled to receive the same a certificate or certificates for the number of Shares issuable upon such exercise. (e) TERM. Unless earlier exercised in whole, this Warrant shall terminate and expire as of 5:00 p.m. local California time on the earlier of (I) the fourth anniversary of the effective date of this Agreement or (II) thirty days after any complete withdrawal of open credit terms to the Company by Mitsubishi Electronics America, Inc. other than a withdrawal caused by the failure of the Company to timely repay previously extended credit according to its terms after ten days notice. (f) PARTIAL EXERCISE. This Warrant may be exercised by the holder from time to time as to all or a portion of the Shares subject hereto. In the event that this Warrant is exercised as to only a portion of the Shares subject hereto, the Company will, upon issuance of the Shares so acquired, deliver to the holder a new Warrant representing the remaining Shares subject hereto. 2. (a) ADJUSTMENT OF WARRANT PRICE AND NUMBER OF SHARES. In case at any time or from time to time on or after the effective date hereof all holders of the Common Stock of the Company (or any shares of stock or other securities at the time receivable upon the exercise of this Warrant) shall have received, or, on or after the record date fixed for the determination of eligible shareholders, shall have become entitled to receive, without payment therefor, other or additional stock of the Company by way of dividend, then and in each case, the holder of this Warrant shall, upon the exercise hereof, be entitled to receive, in addition to the number of shares of Common Stock receivable thereupon, and without payment of any additional consideration therefor, the amount of such other or additional stock of the Company which such holder would hold on the date of such exercise had it been the holder of record of such Common Stock on the date hereof and had thereafter, during the period from the date hereof to and including the date of such exercise, retained such shares and/or all other additional stock receivable by it as aforesaid during such period, giving effect to all adjustments called for during such period by paragraphs (b) and (c) of this paragraph 2. (b) ADJUSTMENT FOR RECLASSIFICATION, REORGANIZATION OR MERGER. In case of any reclassification or change of the outstanding securities of the Company or of any reorganization of the Company (or any other corporation the stock or securities of which are at the time receivable upon the exercise of this Warrant) on or after the date hereof, or in case, after such date, the Company (or any such other corporation) shall merge with or into another corporation or convey all or substantially all of its assets to another corporation, then and in each such case the holder or this Warrant, upon the exercise hereof at any time after the consummation of such reclassification, change, reorganization, merger or conveyance, shall be entitled to receive, in lieu of the stock or other securities and property receivable upon the exercise hereof prior to such consummation, the stock or other securities or property to which such holder would have been entitled upon such consummation if such holder had exercised this Warrant immediately prior thereto, all subject to further adjustment as provided in paragraphs (a) and (c); in each such case, -3- the terms of this paragraph 2 shall be applicable to the shares of stock or other securities properly receivable upon the exercise of this Warrant after such consummation. (c) STOCK SPLITS AND REVERSE STOCK SPLITS. If at any time on or after the date hereof the Company shall subdivide its outstanding shares of Common Stock into a greater number of shares, the Warrant Price in effect immediately prior to such subdivision shall be proportionately reduced and the number of shares receivable upon exercise of the Warrant shall be proportionately increased; and, conversely, if at any time on or after the date hereof the outstanding number of shares of Common Stock shall be combined into a smaller number of shares, the Warrant Price in effect immediately prior to such combination shall be proportionately increased and the number of shares receivable upon exercise of the Warrant shall be proportionately decreased. 4. Holder represents and warrants to, and agrees with, the Company, that: (a) PURCHASE FOR OWN ACCOUNT. This Warrant and the Warrant Shares are being acquired for investment for Holder's own account, not as a nominee or agent, and not with a view to the public resale or distribution thereof within the meaning of the Act, and such Holder has no present intention of selling, granting any participation in, or otherwise distributing the same. (b) DISCLOSURE OF INFORMATION. Holder has received or has had full access to all the information it considers necessary or appropriate to make an informed investment decision with respect to the Warrant. Holder has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the Warrant and the Warrant Shares and to obtain additional information necessary to verify any information furnished to Holder or to which Holder had access. (c) INVESTMENT EXPERIENCE. Holder understands that the receipt of the Warrants and the purchase of the Warrant Shares involves substantial risk. Holder: (i) has experience as an investor in securities of companies in the development stage and acknowledges that it is able to fend for itself, can bear the economic risk of such investment in the Warrants and Warrant Shares and has such knowledge and experience in financial or business matters that Holder is capable of evaluating the merits and risks of this investment in the Warrants and Warrant Shares and protecting its own interests in connection with this investment and/or (ii) has a preexisting personal or business relationship with the Company and certain of its officers, directors or controlling persons of a nature and duration that enables Holder to be aware of the character, business acumen and financial circumstances of such persons. (d) RESTRICTED SECURITIES. Holder understands that the Warrants and the Warrant Shares are characterized as "restricted securities" under the Securities Act inasmuch as they are being acquired from the Company in a transaction not involving a public offering and that under the Securities Act and applicable regulations thereunder such securities may be resold without registration under the Securities Act only in certain limited circumstances. In this connection, Holder represents that Holder is familiar with Rule 144 of the U.S. Securities and Exchange Commission, as presently in effect, and understands the resale limitations imposed -4- thereby and by the Securities Act. Holder understands that the Company is under no obligation to register any of the securities sold hereunder except as provided in any written registration rights agreement between the Company and Holder. Holder understands that no public market now exists for the Warrant any of the Warrant Shares and that it is uncertain whether a public market will ever exist for the Warrant Shares. (e) FURTHER LIMITATIONS ON DISPOSITION. Without in any way limiting the representations set forth above, Holder further agrees not to make any disposition of the Warrant or all or any portion of the Warrant Shares unless and until: (i) there is then in effect a registration statement under the Securities Act covering such proposed disposition and such disposition is made in accordance with such registration statement; or (ii) (A) Holder shall have notified the Company of the proposed disposition and shall have furnished the Company with a statement of the circumstances surrounding the proposed disposition, and (ii) Holder shall have furnished the Company, at the expense of Holder or its transferee, with an opinion of counsel, reasonably satisfactory to the Company, that such disposition will not require registration of such securities under the Securities Act. Notwithstanding the provisions of paragraphs (i) and (ii) above, no such registration statement or opinion of counsel shall be required: (1) for any transfer of any Warrant Shares in compliance with SEC Rule 144 or (2) for the transfer by gift, will or intestate succession by Holder to his or her spouse or lineal descendants or ancestors or any trust for any of the foregoing; PROVIDED that in each of the foregoing cases the transferee agrees in writing to be subject to the terms of this Section 4 to the same extent as if the transferee were the original Holder hereunder. (f) LEGENDS. It is understood that the certificates evidencing the Warrant Shares will bear the legends set forth below: (i) THE SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE. NO SALE OR OTHER DISPOSITION OR PLEDGE OF THESE SECURITIES MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATING THERETO OR AN EXEMPTION THEREFROM OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT A PROPOSED DISPOSITION OR PLEDGE IS PERMITTED UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS OR A NO ACTION LETTER OR INTERPRETIVE OPINION OF THE STAFF OF THE SECURITIES AND EXCHANGE COMMISSION THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE ACT. (ii) Any legend required by the laws of the State of California, including any legend required by the California Department of Corporations and Sections 417 and 418 if the California Corporations Code or any other state securities laws. -5- The legend set forth in (i) above shall be removed by the Company from any certificate evidencing Warrant Shares upon delivery to the Company of an opinion by counsel, reasonably satisfactory to the Company, that a registration statement under the Securities Act is at that time in effect with respect to the legended security or that such security can be freely transferred in a public sale without such a registration statement being in effect and that such transfer will not jeopardize the exemption or exemptions from registration pursuant to which the Company issued the Warrant Shares. (g) ACCREDITED INVESTOR STATUS. Holder is an "accredited investor" within the meaning of Regulation D promulgated under the 1933 Act. 5. OTHER ADJUSTMENTS. Except as provided in paragraph 2, no adjustment on account of dividends or interest on Common Stock will be made upon the exercise hereof. 6. NO FRACTIONAL SHARES. No fractional shares of Common Stock will be issued in connection with any subscription hereunder. In lieu of any fractional shares which would otherwise be issuable, the Company shall pay cash equal to the product of such fraction multiplied by the fair market value of one share of Common Stock on the date of exercise, as determined in good faith by the Company's Board of Directors. 7. NO SHAREHOLDER RIGHTS. This Warrant shall not entitle its holder to any of the rights of a shareholder of the Company. 8. EXERCISE OF WARRANT. The holder's ability to exercise this Warrant is subject to the Company having obtained all necessary governmental approvals prior to such exercise. The Company shall use its best efforts to obtain such consents after the date hereof. Subject to such approvals, this Warrant may be exercised by the registered holder or its registered assigns, in minimum increments of 50,000 shares of Common Stock (or any remaining shares of Common Stock subject to this Warrant if the number of shares of Common Stock subject to this Warrant is less than 50,000) by the surrender of this Warrant at the principal office of the Company, accompanied by payment in full of the Warrant Price as described above. A Warrant shall be deemed to have been exercised immediately prior to the close of business on the date of its surrender for exercise as provided above, and the person entitled to receive the shares of Common Stock issuable upon such exercise shall be treated for all purposes as the holder of such Shares of record as of the close of business on such date. As promptly as practicable on or after such date, the Company shall issue and deliver to the person or persons entitled to receive the same, a certificate or certificates for the number of full shares of Common Stock issuable upon such exercise, together with cash in lieu of any fraction of a share as provided above. 9. CERTIFICATE OF ADJUSTMENT. Whenever the Warrant Price is adjusted, as herein provided, upon written request by the holder, the Company shall deliver to the record holder of this Warrant a certificate of an officer of the Company setting forth the Warrant Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment. -6- 10. RESTRICTIONS ON TRANSFER OF WARRANT. This Warrant and all rights hereunder are transferable, in whole or in part. The terms of this Warrant shall be binding upon the successors and assigns of the holder. 11. MARKET STANDOFF AGREEMENT. Each holder hereby agrees that it shall not, to the extent requested by an underwriter of securities of the Company, sell or otherwise transfer or dispose of any Shares (other than to donees or partners of the holder who agree to be similarly bound) for up to one hundred eighty (180) days following the effective date of a registration statement of the Company filed under the Act; PROVIDED, HOWEVER, that all officers and directors of the Company then holding Common Stock of the Company enter into similar agreements. In order to enforce the foregoing covenant, the Company shall have the right to place restrictive legends on the certificates representing the Shares and to impose stop transfer instructions with respect to the Shares (and the shares or securities of every other person subject to the foregoing restriction) until the end of such period. 12. MISCELLANEOUS. This Warrant shall be governed by the laws of the State of California. The headings in this Warrant are for purposes of convenience and reference only, and shall not be deemed to constitute a part hereof. Neither this Warrant nor any term hereof may be changed, waived, discharged or terminated except by an instrument in writing signed by the Company and the registered holder hereof. All notices and other communications from the Company to the holder of this Warrant shall be mailed by first-class registered or certified mail, postage prepaid, to the address furnished to the Company in writing by the last holder of this Warrant who shall have furnished an address to the Company in writing. ISSUED this 13th day of October 1996 (the "effective date" of this agreement). HOLDER RADIUS INC. By: By: ------------------------- ---------------------- -7- ATTACHMENT 1 EXERCISE NOTICE 1. The undersigned hereby elects to purchase _______ shares of the Common Stock of Radius Inc. pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price of such shares in full. The highest amount of open credit utilized by the Company prior to the initial exercise of the warrant was $___________. 2. Please issue a certificate representing said shares in the name of the undersigned or in such other name as specified below: --------------------------------- (Name) --------------------------------- --------------------------------- --------------------------------- (Address) 3. The undersigned represents it is acquiring the shares solely for its own account and not as a nominee for any other party and not with a view toward the resale or distribution thereof except in compliance with applicable securities laws. ------------------------------ --------------------------------- (Date) (Signature) -8- EX-4.08 3 EXHIBIT 4-08 THE SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE. THESE SECURITIES ARE NON TRANSFERABLE. NO SALE OR OTHER DISPOSITION OR PLEDGE OF THE SHARES OF COMMON STOCK ISSUABLE PURSUANT HERETO MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATING THERETO OR AN EXEMPTION THEREFROM OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT A PROPOSED DISPOSITION OR PLEDGE IS PERMITTED UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS OR A NO ACTION LETTER OR INTERPRETIVE OPINION OF THE STAFF OF THE SECURITIES AND EXCHANGE COMMISSION THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE ACT. RADIUS INC. COMMON STOCK RIGHT *Non-Transferable* Sunnyvale, California __________Rights September 13, 1996 1. THE RIGHT. (a) GRANTING OF RIGHTS. This Right is executed and delivered by Radius Inc., a California corporation (the "COMPANY"), to ____________________ ("Holder"). (b) NUMBER OF SHARES SUBJECT TO RIGHT. Subject to the terms and conditions herein set forth, Holder is entitled to receive from the Company, upon the conversion of all of the 750,000 shares of the Company's Series A Convertible Preferred Stock (the "Series A Convertible Preferred Stock") into shares of the Company's Common Stock until this Right has expired in accordance with subparagraph (e) below, an aggregate of ________ shares of fully paid and non-assessable shares of Common Stock of the Company (the "SHARES"). The number of such shares are subject to adjustment pursuant to paragraph 2 hereof. (c) PARTIAL CONVERSION OF SERIES A PREFERRED STOCK. Notwithstanding the provisions of paragraph 1(b), in the event that on any occasion less than 750,000 shares of Series A Convertible Preferred Stock are converted into Common Stock, Holder shall be entitled to receive a lesser number of shares of fully paid and non-assessable shares of Common Stock, and the Shares shall be reduced by a like number as follows: N = TXC 750,000 where N = the number of shares of Common Stock to be issued to the holder. T = the number of Shares originally covered by this Right as of September 13, 1996. C = the number of shares of Series A Convertible Preferred Stock which are to be converted into Common Stock. (d) EFFECT OF CONVERSION. The shares of Common Stock issuable pursuant to this Right shall be deemed to have been issued immediately prior to the close of business on the date of the conversion of the Series A Convertible Preferred Stock as provided above, and the person entitled to receive the Shares shall be treated for all purposes as the holder of record of such shares as of the close of business on such date. As soon as practicable on or after such date, the Company shall issue and deliver to the person or persons entitled to receive the same a certificate or certificates for the number of Shares issuable upon such conversion. (e) TERM. This Right shall terminate and expire as follows: (i) as of 5:00 p.m. local California time on the date that no shares of the Company's Series A Convertible Preferred Stock remain outstanding, or (ii) upon the sale, transfer, assignment, pledge or hypothecation or other disposition of all or any portion of the Rights represented by this certificate. (f) PARTIAL EXERCISE. In the event that only a portion of the Shares subject hereto are issued as a result of the partial conversion of the Series A Convertible Preferred Stock described in paragraph 1(c) above, the Company will, upon issuance of the Shares so acquired, deliver to the holder a new Right representing the remaining Shares subject hereto. 2. (a) ADJUSTMENT OF NUMBER OF SHARES. In case at any time or from time to time on or after the effective date hereof the holders of the Common Stock of the Company (or any shares of stock or other securities at the time receivable pursuant to this Right) shall have received, or, on or after the record date fixed for the determination of eligible shareholders, shall have become entitled to receive, without payment therefor, other or additional stock of the Company by way of dividend, then and in each case, the holder of this Right shall, upon the exercise hereof, be entitled to receive, in addition to the number of shares of Common Stock receivable thereupon, and without payment of any additional consideration therefor, the amount of such other or additional stock of the Company which such holder would hold on the date of such exercise had it been the holder of record of such Common Stock on the date hereof and had thereafter, during the period from the date hereof to and including the date of such exercise, retained such shares and/or all other additional stock receivable by it as aforesaid during such period, giving effect to all adjustments called for during such period by paragraphs (b) and (c) of this paragraph 2. 2 (b) ADJUSTMENT FOR RECLASSIFICATION, REORGANIZATION OR MERGER. In case of any reclassification or change of the outstanding securities of the Company or of any reorganization of the Company (or any other corporation the stock or securities of which are at the time receivable pursuant to the terms of this Right) on or after the date hereof, or in case, after such date, the Company (or any such other corporation) shall merge with or into another corporation or convey all or substantially all of its assets to another corporation, then and in each such case the holder of this Right, upon the conversion of Series A Convertible Preferred Stock at any time after the consummation of such reclassification, change, reorganization, merger or conveyance, shall be entitled to receive, in lieu of the stock or other securities and property receivable pursuant hereto prior to such consummation, the stock or other securities or property to which such holder would have been entitled upon such consummation if the Series A Convertible Preferred Stock was covered immediately prior thereto, all subject to further adjustment as provided in paragraphs (a) and (c); in each such case, the terms of this paragraph 2 shall be applicable to the shares of stock or other securities properly receivable pursuant to this Right after such consummation. (c) STOCK SPLITS AND REVERSE STOCK SPLITS. If at any time on or after the date hereof the Company shall subdivide its outstanding shares of Common Stock into a greater number of shares, the number of shares receivable pursuant to this Right shall be proportionately increased; and, conversely, if at any time on or after the date hereof the outstanding number of shares of Common Stock shall be combined into a smaller number of shares, the number of shares receivable pursuant to this Right shall be proportionately decreased. 3. OTHER ADJUSTMENTS. Except as provided in paragraph 2, no adjustment on account of dividends or interest on Common Stock will be made upon the exercise hereof. 4. NO FRACTIONAL SHARES. No fractional shares of Common Stock will be issued hereunder. In lieu of any fractional shares which would otherwise be issuable, the Company shall pay cash equal to the product of such fraction multiplied by the fair market value of one share of Common Stock on the date of exercise, as determined in good faith by the Company's Board of Directors. 5. NO SHAREHOLDER RIGHTS. This Right shall not entitle its holder to any of the rights of a shareholder of the Company. 6. APPROVALS. The holder's ability to receive shares of Common Stock pursuant to this Right is subject to the Company having obtained all necessary governmental approvals prior to any issuance of shares hereunder. The Company shall use its best efforts to obtain such consents after the date hereof. 7. RESTRICTIONS ON TRANSFER OF RIGHT. THIS RIGHT AND ALL RIGHTS HEREUNDER ARE NOT TRANSFERABLE, IN WHOLE OR IN PART. 8. MARKET STANDOFF AGREEMENT. No shares of Common Stock may be issued hereunder, unless to the extent requested by an underwriter of securities of the Company, holder agrees in writing not to sell or otherwise transfer or dispose of any Shares (other than to donees 3 or partners of the holder who agree to be similarly bound) for up to one hundred eighty (180) days following the effective date of a registration statement of the Company filed under the Act. 9. MISCELLANEOUS. This Right shall be governed by the laws of the State of California. The headings in this Right are for purposes of convenience and reference only, and shall not be deemed to constitute a part hereof. Neither this Right nor any term hereof may be changed, waived, discharged or terminated except by an instrument in writing signed by the Company and the registered holder hereof. All notices and other communications from the Company to the holder of this Right shall be mailed by first-class registered or certified mail, postage prepaid, to the address furnished to the Company in writing by the last holder of this Right who shall have furnished an address to the Company in writing. ISSUED this 13th day of September 1996. RADIUS INC. By: ------------------------------ Charles W. Berger, Chairman of the Board, Chief Executive Officer and President 4 EX-5.01 4 EXHIBIT 5-01 EXHIBIT 5.01 November 12, 1996 Radius Inc. 215 Moffett Park Drive Sunnyvale, California 94089 Gentlemen/Ladies: At your request, we have examined the Registration Statement on Form S-1 (the "REGISTRATION STATEMENT") filed by you with the Securities and Exchange Commission on September 20, 1996 in connection with the registration under the Securities Act of 1933, as amended, of (i) 750,000 shares of Series A Convertible Preferred Stock of Radius (the "SERIES A PREFERRED"), (ii) warrants to purchase 800,000 shares of Common Stock of Radius (the "WARRANTS"), (iii) 36,372,198 shares of Common Stock of Radius (together with the Series A Preferred and the Warrants, the "OUTSTANDING SECURITIES"), (iv) up to 6,075,333 shares of Common Stock of Radius issuable upon conversion of the Series A Preferred (the "CONVERSION SHARES"), (v) up to 800,000 shares of Common Stock of Radius issuable upon exercise of the Warrants (the "WARRANT SHARES"), (vi) up to 11,046,060 shares of Common Stock of Radius issuable pursuant to Rights issued by Radius on September 13, 1996 (the "RIGHTS SHARES"), and (vii) shares of Common Stock of Radius having a market value of up to $600,000.00 which may be issued by Radius in lieu of cash dividends on the Series A Preferred (the "DIVIDEND SHARES"). In rendering this opinion, we have examined the following: (1) the Registration Statement, together with the Exhibits filed as a part thereof; (2) the Prospectus prepared in connection with the Registration Statement; (3) the minutes of meetings and actions by written consent of the shareholders and Board of Directors which you have provided to us; (4) the shareholder lists dated July 29, 1996 and September 30, 1996 you have provided to us, and a list of holders of stock options dated as of October 28, 1996 you have provided to us; and (5) The Articles of Incorporation of Radius, as amended through September 6, 1996 and the Bylaws of Radius, both as certified by Radius on November 12, 1996. In our examination of documents for purposes of this opinion, we have assumed, and express no opinion as to, the genuineness of all signatures on original documents, the authenticity Radius Inc. November 12, 1996 Page 2 of all documents submitted to us as originals, the conformity to originals of all documents submitted to us as copies, the lack of any undisclosed terminations, modifications, waivers or amendments to any documents reviewed by us and the due execution and delivery of all documents where due execution and delivery are prerequisites to the effectiveness thereof. As to matters of fact relevant to this opinion, we have relied solely upon our examination of the documents referred to above and have assumed the current accuracy and completeness of the information and records included in the documents referred to above. We have made no independent investigation or other attempt to verify the accuracy of any of such information or to determine the existence or non-existence of any other factual matters; however, we are not aware of any facts that would lead us to believe that the opinions expressed herein are not accurate. Based upon the foregoing, it is our opinion that: 1. The Outstanding Shares are legally issued, fully paid and nonassessable; and 2. Each of the Conversion Shares and the Dividend Shares, the Warrant Shares and the Rights Shares when issued in accordance with the terms of the Series A Preferred, the Warrants and the Rights, respectively, and in the manner referred to in the Prospectus associated with the Registration Statement, will be legally issued, fully paid and nonassessable. We consent to the use of this opinion as an exhibit to the Registration Statement and further consent to all references to us, if any, in the Registration Statement, the Prospectus constituting a part thereof and any amendments thereto. This opinion speaks only as of its date and is intended solely for the your use as an exhibit to the Registration Statement for the purpose of the above sale of the securities described above and is not to be relied upon for any other purpose. Very truly yours, /S/ FENWICK & WEST LLP EX-10.12B 5 EXHIBIT 10-12B OFFICE LEASE DATED MARCH 18, 1996 (Exhibit B to the Closing Memorandum Agreement dated March 18, 1996) 0. INCORPORATION. Radius Inc. ("Tenant") and Connecticut General Life Insurance Company ("Cigna") entered into a lease of real property effective November 13, 1992 (the "Old Lease"). Tenant and Cigna have agreed to terminate the Old Lease along with all amendments and supplements to it in connection with Integrated Systems, Inc.'s ("Landlord's) purchase of the real property. The Old Lease is attached. Landlord and Tenant have agreed to lease a portion of the real property on all the terms set forth in the Old Lease except as set forth below (the "Lease"). Therefore, all of the provisions of the Old Lease are incorporated and made a part of this Lease, except as set forth below, and this Lease supersedes the Old Lease as of the closing of Landlord's purchase of the real property. 1. PARTIES. Section 1 is replaced with the following: "This Lease is made by and between Integrated Systems, Inc. and Radius Inc., both California corporations. Therefore, the word "Tenant" is substituted wherever Supermac Technology, Inc. is referred to in the Old Lease." 2. PREMISES. Section 2 is replaced with the following: "Landlord hereby leases to Tenant and Tenant hereby leases from Landlord those certain premises situated at 215 Moffett Park Drive in Sunnyvale, California consisting of approximately 44,241 rentable square feet of space depicted on Exhibit A (the "Premises"). Tenant will have begun relocating from all other portions of the building on March 18, 1996 and will have completed such relocation prior to April 15, 1996 in stages as described in Exhibit C (with Landlord occupying or using such portions on the same timetable), and Landlord will complete certain tenant improvements pursuant to Exhibit C (the "Improvements" as defined in Exhibit C) thereafter. During the term, Landlord also authorizes the use of the common areas appurtenant to the Premises and defined as the "Outside Area" in Section 11 below and the use of the personal property on the Premises identified in Exhibit E according to Exhibit E. The Premises are part of a building (the "Building") located on the legal parcel described in Exhibit B (the "Parcel"). The Building in which the Premises are located, the Parcel, and the Outside Area are collectively referred to below as the "Complex"." 3. TERM. Section 3 is replaced with the following: "The term will begin on the closing of the purchase of the Parcel by Landlord (the "Commencement Date" which is estimated to be on March 18, 1996) and will expire two years thereafter (estimated to be on March 17, 1998.) Notwithstanding the foregoing, Tenant, in its sole discretion, can elect to terminate the Lease early on ninety days' written notice to Landlord provided that Tenant is not in default or cures such default at the time of tendering notice." 4. RENT. Section 4F is deleted and Sections 4B, D and E are replaced with the following: "B. MONTHLY INSTALLMENT. Subject to adjustment as set forth in Section 22 below (holding over), the Monthly Installment is: $ 42,028.95 ($.95 times the square footage inserted into Section 2 above)." "D. ADDITIONAL RENT. All other charges due from Tenant to Landlord under this Lease will be deemed "Additional Rent" and will be paid in addition to the Monthly Installment after notice to Tenant. In the event of Tenant's failure to pay Additional Rent, Landlord will have all of the same rights and remedies as Landlord has for the nonpayment of a Monthly Installment." "E. PLACE OF PAYMENT. Rent will be payable to Landlord in US currency at the Building or such other place as Landlord may reasonably designate in writing from time to time." 5. SECURITY DEPOSIT. This Section is deleted. 6. There are no changes to this Section. 7. TAXES AND ASSESSMENTS. Section 7B is deleted. 8. INSURANCE. The last sentence of Section 8B and the last two sentences of Section 8C are deleted. Landlord and Tenant agree to review the specific coverages from time to time to ensure that redundant coverages and waste are minimized. 9. UTILITIES. This Section is replaced with the following: "Tenant will pay for all telephone charges and any other direct services to the Premises arranged for by Tenant. Landlord will pay for all other services provided to the Complex, such as electricity, gas, water, sewage, and scavenger. Tenant will use no more than customary and reasonable amounts of such services and will comply with Landlord's reasonable conservation measures upon request. " 10. REPAIRS. All provisions of this Section except the final paragraph are replaced with the following: "Subject to the provisions of Section 16, Landlord will maintain the Premises in good condition and repair. However, Tenant will reimburse Landlord as Additional Rent for any repairs resulting from Tenant's (including employees, visitors and agents) intentional misconduct or gross negligence. Tenant will exercise reasonable care in its use of the Premises and promptly notify Landlord of any need for repairs." 11. OUTSIDE AREA. This Section is amended as follows. The last paragraph is deleted. The rights referred to in the first paragraph are NON-exclusive. And the Outside Area is defined also to include those common areas of the Building which Tenant must use in order to have access to the Premises. Except for a limited number of designated visitor spaces for Landlord, the required number of handicap access spaces and a space for the "employee of the month", parking spaces will be not be designated for exclusive use, rather they will be utilized on a first come, first use basis. 12. CHARGES. This Section is deleted. 13. ALTERATIONS. Section 13B will not apply to any of the improvements performed pursuant to Exhibit C. 14. There are no changes to this Section. 15. DEFAULT. Section 15A is amended by adding the following as a final paragraph: "(9) Or Tenant's failure to return or maintain the personal property as set forth in Exhibit E, or at Landlord's election, Tenant's material, uncured breach of any warranty contained in the bill of sale from Tenant to Landlord of the personal property whose use is governed by Exhibit E." 16. DESTRUCTION. Section 16 is modified as follows: Tenant will have no duty under this Section to reimburse Landlord for the deductible under Landlord's insurance coverage, i.e., the parenthetical expression in the middle of the second paragraph of the Section is deleted as is the last three and one half lines of the third paragraph beginning after "damage or destruction". 17-21. There are no changes to these Sections. 22. HOLDING OVER. This Section is amended by replacing "expiration" with "expiration or other termination" wherever "expiration" is used; and "monthly rent" in the eighth line is replaced with "Monthly Installment". 23. NOTICES. The address for Landlord and Tenant is replaced with the following new information: "Landlord: Integrated Systems, Inc. [215] Moffett Park Drive Sunnyvale, CA 94089-1374 attn: Chief Executive, Administrative, Legal or Financial Officer" "Tenant: Radius Inc. 215 Moffett Park Drive Sunnyvale, CA 94809-1374 attn: Chief, Executive, Administrative, Legal or Financial Officer" 24. There is no change to this Section. 25. ASSIGNMENT. This Section is replaced with the following: "Because of the unique nature of the larger transaction among Landlord, Tenant and Cigna and the bargain element of the Lease, under no circumstances will Tenant be allowed to assign this Lease or sublease any portion of the Premises, except to an "Affiliate" after ten days' notice to Landlord. An "Affiliate" for purposes of this Section is a wholly owned subsidiary of Tenant as well as UMAX Computer Corp. and Splash Technology, Inc., which corporations were occupants of the Premises upon the termination of the Old Lease, provided that (i) each such Affiliate agrees to be bound by the provisions of this Lease, (ii) UMAX Computer Corp. vacates the Premises by April 15, 1996 and (iii) Splash Technology, Inc. vacates the Premises within 90 days after the Commencement Date. Also, in the event Tenant desires to assign this Lease to the survivor of any merger with a third party, Tenant will seek Landlord's approval prior to the merger and Landlord will not unreasonably withhold or delay its consent. However, Landlord can elect to expand into the Premises and terminate the lease as of the effective date of the merger by so notifying Tenant, unless the survivor agrees to increase the Monthly Installment by 150% and promptly notifies Landlord of such election. Any other attempt to assign or sublease will be null and void at Landlord's election. In the case of any other effective assignment or sublease, Landlord will have the right of first refusal to lease the space on the same terms and the right to one half of the net proceeds of any such assignment or sublease. Despite any assignment or sublease, Tenant will remain liable for the performance of all tenant obligations under this Lease." 26-31. There are no changes to these Sections. 32. PARKING. Add at the end of the first sentence: "and is consistent with Landlord's general signage plan which Landlord may establish in its discretion." It is understood that the two large exterior "Radius" signs at two corners of the Building will be replaced by Landlord at its expense with its own signage. Tenant's signage will include a monument at the entrance to the parking lot and one other directional sign referring to the location of the Radius lobby. 33-36. There are no changes to these Sections. 37. BROKERS. The references to CPS Commercial Brokerage and Cornish & Carey Commercial Real Estate are deleted. 38. There is no change to this Section. 39. Section 39D is amended as follows: the clause "occurring during the Lease Term (including any extensions thereof)" in the final two lines of the first paragraph is replaced with "occurring during Tenant's use or occupancy of any portion of the Complex". 40-42. These Sections are deleted. In witness whereof, the parties execute this Lease. Landlord: Integrated Systems, Inc. Tenant: Radius Inc. _______________________________ ______________________________ By: date By: date (List of exhibits) Exhibit A -- the Premises (replaced with a new Exhibit A) Exhibit B -- the real property legal description (no change) Exhibit C -- the Improvements (replaced with a new Exhibit C) Exhibit D -- Truck parking area (no change) Exhibit E -- Personal Property use (replaced with a new Exhibit E) Exhibit F -- Complex landscaping (no change) EXHIBIT "A" (attach floorplan) EXHIBIT "C" IMPROVEMENTS Exhibit C to the Old Lease is replaced with the following new Exhibit C. Landlord and Tenant have agreed on the improvements to be constructed on or about the Premises. These improvements are set forth in the attached final plans and specifications (the "Improvements"). Landlord will bear the cost of the Improvements except for $0 (or the costs associated with a specific scope of work identified on Schedule C-1, if applicable) ("Tenant's Share"). Prior to and after the Commencement Date, Tenant will consolidate within the Premises as reasonably required by Landlord to permit the construction work to be performed expeditiously and to permit Landlord to occupy the balance of the Building in stages between March 18, 1996 and April 30, 1996 as described in the attached plans. Promptly after the Commencement Date, Landlord will retain a general contractor to construct the Improvements. Landlord will direct the general contractor to construct the Improvements as quickly as the work can be performed in a commercially reasonable manner by no later than April 30, 1996. There may be some disruption to Tenant's use of the Premises during construction, and Tenant will reasonably cooperate with the general contractor and its subcontractors in facilitating the performance of the work. Tenant will not attempt to withhold or delay any payment nor seek compensation as a result of any of these inconveniences. No changes in the scope of work for the Premises will be made without Landlord's and Tenant's prior written approval. Otherwise, changes in the plans and specifications will be made only to accommodate the reasonable requests of the permitting authorities. If Tenant requests a change that either delays completion or increases costs and the change is approved, the related costs be shall added to Tenant's Share. Upon substantial completion of the Improvements, Landlord will so notify Tenant and the parties will schedule a walk through with the general contractor or construction manager. If reasonably satisfied, Tenant will promptly sign an acceptance of the Improvements, subject only to the performance of any "punch list" items, which do not materially impair the use of the final Premises. Upon such acceptance, Tenant will tender payment of Tenant's Share to Landlord. Tenant's unreasonable refusal to promptly accept the Improvements or to relocate on a timely basis will be a material breach of this Lease, if Landlord is thereby prevented from occupying the remainder of the Building by between March 18, 1996 and April 30, 1996 according to the schedule attached to the plans referred to above. In such event and in addition to the remedies identified in Section 15 of the Lease, because actual damages are impractical to calculate and because of the obvious bargain element in the regular rental rate, the Monthly Installment will automatically increase by 150% until the breach has been cured to Landlord's reasonable satisfaction, provided that Tenant has had a reasonable opportunity to cure the breach prior to the increase. (attach 3 page plan and timetable) EXHIBIT "E" LICENSE TO USE CERTAIN PERSONAL PROPERTY Exhibit E to the Old Lease is replaced with the following new Exhibit E. During the term, Tenant is authorized to use the personal property identified on Schedule 0 on an exclusive basis. Tenant will relocate such property at its own expense prior to the Commencement Date to the Premises depicted on Exhibit A. Tenant will use reasonable care in the use and relocation of such property and will return such property to Landlord in good condition, normal wear and tear excepted, upon termination of the Lease. During the term, Tenant is also authorized to use the personal property identified on Schedule 0 on a shared or nonexclusive basis (e.g., the existing telephone system). All items of personal property will be clearly marked by Tenant as Landlord's property throughout such period of use. Tenant will promptly notify Landlord if the property requires repair, which will be the responsibility of Landlord, unless the repair is necessitated by Tenant's (including employees, visitors and agents) gross negligence or intentional misconduct. Landlord is also responsible for insuring the property and paying related real and personal property taxes accruing after Landlord takes title to such property. Landlord will have no obligation to replace any item, unless its cost is fully covered by insurance. Tenant agrees to execute such other documents or perform such other acts as may be reasonably be necessary in Landlord's discretion to ensure that Landlord's title to such property remains unimpaired by creditors or representatives of Tenant, e.g., filing financing statements. Under no circumstances will Tenant challenge Landlord's ownership of the personal property or attempt to offset the value of the personal property against any obligation owed to Landlord during or after the term. During the term, Landlord will continue to operate the cafeteria through a subcontractor and Tenant will be authorized to use the cafeteria subject to Landlord's and the subcontractor's reasonable rules and regulations. The cafeteria will not be obligated to provide services other than lunch Monday through Friday. In the event of a material breach of this Lease by Tenant, including the failure to pay a Monthly Installment or Additional Rent, Tenant's rights to use the personal property and the cafeteria without additional charge will be automatically suspended after Tenant has had a reasonable opportunity to cure such breach until the breach is cured to Landlord's reasonable satisfaction. Schedule 0 -- List of personal property transferred Herman Miller Panel System - - 224 cubicles or office panel systems, including one each of task chair, two drawer meridian file, a file, box/box and flipper storage(2), whether freestanding or located within offices (including those in areas to be occupied by transferee) - - 100 cubicles or office panel systems leased from CIT Equipment Leasing pursuant to a lease dated May 19, 1993, , including the same components of the 224 nonleased cubicles, whether freestanding or located within offices (including those in areas to be occupied by transferee) The contents of conference rooms and cubicles used as conference rooms, including tables, chairs and audio visual equipment ** Board room contents, including tables, chairs, visual aids, cabinetry (and specifically excluding rolling white board and overhead projector) Board room kitchen counter and dishwasher Conference with big screen and rear projection (excluding special effects computer) Lobby furniture Cafeteria equipment, including cooking fixtures, pots, pans, ovens, sinks and stainless steel tables (specifically excluding cafeteria vending and beverage disbursement equipment owned by vendors) Northern Telecom telephone system, including telephones, SMDR, voicemail and related peripheral equipment and wiring ** Data cabling and racks * Hughes cardkey system, including computer, cameras, vcrs' and related printers * * During the term of Radius' lease with Integrated, Radius will be able to use portions of the telephone system, Hughes cardkey system and data cabling and racks on a non exclusive basis. ** During the term of Radius' lease with Integrated, Radius will be able to use the conference room/office contents located within the Premises as well as the telephone handsets within the Premises on an exclusive basis. (attach "Old Lease") EX-10.20 6 EXHIBIT 10-20 AMENDED AND RESTATED WORKING CAPITAL FINANCING AND TERM LOAN AGREEMENT This AMENDED AND RESTATED WORKING CAPITAL FINANCING AND TERM LOAN AGREEMENT (as amended, supplemented or otherwise modified from time to time, this "Agreement") is hereby made this 30th day of August, 1996, by and between IBM CREDIT CORPORATION with a place of business at 5000 Executive Parkway, Suite 450, San Ramon, CA 94583 ("IBM Credit"), and RADIUS INC. with a place of business at 215 Moffett Park Drive, Sunnyvale, CA 94089 ("Customer"). RECITALS WHEREAS, Customer and IBM Credit entered into that certain Inventory and Working Capital Financing Agreement dated as of February 17, 1995 (as amended, supplemented or otherwise modified prior to the date hereof, the "Existing Financing Agreement") pursuant to which Customer requested that IBM Credit finance Customer's acquisition of inventory and equipment and finance Customer's working capital requirements; WHEREAS, Customer has been in default of the terms and conditions of the Existing Financing Agreement and has been in default of payments to its other creditors; WHEREAS, on or about January 29, 1996 certain of the largest unsecured creditors of Customer formed a committee (the "Unsecured Creditors Committee") to resolve Customer's payment defaults to its unsecured creditors; WHEREAS, Customer and IBM Credit have agreed that IBM Credit shall not finance Customer's purchases of Products (as defined in the Existing Financing Agreement) from Authorized Suppliers (as defined in the Existing Financing Agreement); WHEREAS, IBM Credit is willing to agree to restructure the indebtedness of Customer under the Existing Financing Agreement by (1) converting Three Million ($3,000,000.00) of such indebtedness to senior convertible preferred stock of Customer, (2) continuing a portion of such indebtedness under a secured working capital line of credit and (3) continuing the remaining portion of such indebtedness as a secured term loan; NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree that the Existing Financing Agreement is hereby amended and restated in its entirety to read as follows: Section 1. DEFINITIONS 1.1 Special Definitions. The following terms shall have the following respective meanings in this Agreement: 1 "A/R Advance": any loan or advance of funds made by IBM Credit to Customer pursuant to Section 2.2 of this Agreement. "A/R Advance Date": the Business Day on which IBM Credit makes an A/R Advance under this Agreement. "A/R Finance Charges": as defined on Attachment A. "Abacus": Abacus, Ltd., successor in interest to Gradeup, Ltd. and a wholly- owned subsidiary of Computers Unlimited (Europe). "Accounts": as defined in the U.C.C. "Advance": any loan or other extension of credit by IBM Credit to Customer pursuant to this Agreement including, without limitation, A/R Advances and the Term Loan. "Affiliate": with respect to the Customer, any Person meeting one of the following: (i) at least 10% of such Person's equity is owned, directly or indirectly, by Customer; (ii) at least 10% of Customer's equity is owned, directly or indirectly, by such Person; or (iii) at least 10% of Customer's equity and at least 10% of such Person's equity is owned, directly or indirectly, by the same Person or Persons. All of Customer's officers, directors, joint venturers, and partners shall also be deemed to be Affiliates of Customer for purposes of this Agreement. "Approved Officer": the chief executive officer, chief financial officer or other officer of Radius approved in writing by IBM Credit. "Auditors": a nationally recognized firm of independent certified public accountants selected by Customer and satisfactory to IBM Credit. "Available Credit": at any time, (1) the Maximum Advance Amount less (2) the Outstanding A/R Advances at such time. "Average Daily Balance": the sum of the Outstanding A/R Advances or Outstanding Term Loan, as the case may be, as of the end of each day during a calendar month, divided by the number of days in the calendar month. "Borrowing Base": as defined in Attachment A. "Business Day": any day other than a Saturday, Sunday or other day on which commercial banks in New York, New York are generally closed or on which IBM Credit is closed. "Closing Date": the date on which the conditions precedent to the effectiveness of this Agreement set forth in Section 5.1 hereof are satisfied or waived in writing by IBM Credit. "Code": the Internal Revenue Code of 1986, as amended or any successor statute. "Collateral": as defined in Section 4.1. 2 "Collateral Management Report": a report to be delivered by Customer to IBM Credit from time to time, as provided herein, signed by an Approved Officer, in the form of Attachment F hereto, detailing and certifying, among other items: Customer's Eligible Accounts, Customer's Eligible Foreign Accounts, the amounts and aging of all of Customer's Accounts, the amounts and aging of Customer's accounts payable as of a specified date, all of Customer's IBM Credit borrowing activity during a specified period and the total amount of Customer's Borrowing Base as well as Customer's Outstanding A/R Advances, Outstanding Term Loan, Available Credit and any Shortfall Amount as of a specified date. "Compliance Certificate": a certificate substantially in the form of Attachment C. "Default": either (1) an Event of Default or (2) any event or condition which, but for the requirement that notice be given or time lapse or both, would be an Event of Default. "Delinquency Fee Rate": as defined on Attachment A. "Eligible Account": as defined in Section 3.1. "Eligible Foreign Account": an account of Customer for which the account debtor is QMS (Japan) or Abacus that, but for (i) such account being payable in other than U.S. dollars and (ii) the account debtor for such account not being a resident of the United States, constitutes an Eligible Account. "Eligible Inventory": inventory of the Customer that (i) is in the possession or under the control of Customer, (ii) is located in a jurisdiction in the United States where IBM Credit has filed effective financing statements, (iii) is subject to the perfected security interest of IBM Credit that is prior to all other security interests in or liens on such inventory, (iv) is being held by Customer for sale to customers in the ordinary course of business and (v) is not inventory constituting spare parts. "Environmental Laws": all statutes, laws, judicial decisions, regulations, ordinances, and other governmental restrictions relating to pollution, the protection of the environment, occupational health and safety, or to emissions, discharges or release of pollutants, contaminants, hazardous substances or wastes into the environment. "Environmental Liability": any claim, demand, obligation, cause of action, allegation, order, violation, injury, judgment, penalty or fine, cost or expense, resulting from the violation or alleged violation of any Environmental Laws or the imposition of any Lien pursuant to any Environmental Laws. "ERISA": the Employee Retirement Income Security Act of 1974, as amended, or any successor statutes. "Event of Default": as defined in Section 9.1. 3 "Financial Statements": the consolidated and consolidating balance sheets, statements of operations, statements of cash flows and statements of changes in shareholder's equity of Customer and its Subsidiaries for the period specified, prepared in accordance with GAAP and consistent with prior practices. "GAAP": generally accepted accounting principles in the United States as in effect from time to time. "Governmental Authority": any nation or government, any state or other political subdivision thereof, and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, and any corporation or other entity owned or controlled (through stock or capital ownership or otherwise) by any of the foregoing. "Hazardous Substances": all substances, wastes or materials, to the extent subject to regulation as "hazardous substances" or "hazardous waste" under any Environmental Laws. "Indebtedness": with respect to any Person, (1) all obligations of such Person for borrowed money or for the deferred purchase price of property or services (other than trade liabilities incurred in the ordinary course of business and payable in accordance with customary practices) or which is evidenced by a note, bond, debenture or similar instrument, (2) all obligations of such Person under capital leases, (3) all obligations of such Person in respect of letters of credit, banker's acceptances or similar obligations issued or created for the account of such Person, (4) liabilities arising under any interest rate protection, future, option swap, cap or hedge agreement or arrangement under which such Person is a party or beneficiary, (5) all obligations under guaranties of such Person and (6) all liabilities secured by any Lien on any property owned by such Person even though such Person has not assumed or otherwise become liable for the payment thereof. For purposes of clarification, Customer and IBM Credit acknowledge that preferred stock of Customer held by IBM Credit shall not be considered "Indebtedness" as defined herein. "Investment": with respect to any Person (the "Investor"), (1) any investment by the Investor in any other Person, whether by means of share purchase, capital contribution, purchase or other acquisition of a partnership or joint venture interest, loan, time deposit, demand deposit or otherwise, and (2) any guaranty by the Investor of any Indebtedness or other obligation of any other Person. "Lien(s)": any lien, claim, charge, pledge, security interest, deed of trust, mortgage, other encumbrance or other arrangement having the practical effect of the foregoing, including the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement. "Line of Credit": as defined in Section 2.1. "Material Adverse Effect": a material adverse effect (1) on the business, operations, results of operations, assets, or financial condition of the Customer, (2) on the aggregate value of the Collateral or the aggregate amount which IBM Credit would be likely to receive (after giving 4 consideration to reasonably likely delays in payment and reasonable costs of enforcement) in the liquidation of such Collateral to recover the Obligations in full, or (3) on the rights and remedies of IBM Credit under this Agreement. "Maximum Advance Amount": at any time, the lesser of (1) the Line of Credit and (2) the Borrowing Base at such time. "Obligations": all covenants, agreements, warranties, duties, representations, loans, advances, interest (including interest accruing on or after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to Customer, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding), fees, reasonable expenses, indemnities, liabilities and Indebtedness of any kind and nature whatsoever now or hereafter arising, owing, due or payable from Customer to IBM Credit. "Other Agreements": all security agreements, mortgages, leases, instruments, documents, guarantees, schedules, contracts and similar agreements executed by Customer and delivered to IBM Credit, pursuant to this Agreement or otherwise, and all amendments, supplements and other modifications to the foregoing from time to time. "Other Charges": as set forth in Attachment A. "Outstanding Advances": at any time of determination, the sum of the Outstanding A/R Advances and the Outstanding Term Loan. "Outstanding A/R Advances": at any time of determination, the sum of (1) the unpaid principal amount of all A/R Advances made by IBM Credit under this Agreement; and (2) any finance charge, fee, expense or other amount related to A/R Advances charged to Customer's account with IBM Credit. "Outstanding Term Loan": at any time of determination, the sum of (1) the unpaid principal amount of the Term Loan; and (2) any finance charge, fee, expense or other amount related to the Term Loan charged to Customer's account with IBM Credit. "Permitted Indebtedness": any of the following: (1) Indebtedness to IBM Credit; (2) Indebtedness described in Section VII of Attachment B; (3) guaranties in favor of IBM Credit; (4) guaranties on behalf of Subsidiaries of Customer in favor of other creditors in an aggregate amount at any time not exceeding fifty thousand dollars ($50,000.00); (5) Customer's obligations under its lease relating to 215 Moffett Park Drive, Sunnyvale, CA. as in existence on the date hereof; 5 (6) Purchase Money Indebtedness incurred to purchase equipment to be used in Customer's business in an amount not to exceed $250,000 per fiscal quarter; and (7) Other Indebtedness consented to by IBM Credit in writing prior to the incurrence thereof. "Permitted Liens": any of the following: (1) Liens which are the subject of an intercreditor agreement, in effect from time to time between IBM Credit and any other secured creditor; (2) Liens described in Section I of Attachment B; (3) Liens of warehousemen, mechanics, materialmen, workers, repairmen, common carriers, landlords and other similar Liens arising by operation of law or otherwise, not waived in connection herewith, for amounts that are not yet due and payable or being contested in good faith by appropriate proceedings promptly instituted and diligently conducted if an adequate reserve or other appropriate provisions shall have been made therefor as required to be in conformity with GAAP and an adverse determination in such proceedings could not reasonably be expected to have a Material Adverse Effect; (4) attachment or judgment Liens individually or in the aggregate not in excess of fifty thousand dollars ($50,000.00) (exclusive of (A) any amounts that are duly bonded to the satisfaction of IBM Credit or (B) any amount fully covered by insurance as to which the insurance company has acknowledged its obligation to pay such judgment in full); (5) easements, rights-of-way, restrictions and other similar encumbrances incurred in the ordinary course of business which, in the aggregate, are not substantial in amount and which do not materially detract from the value of the property subject thereto or materially interfere with the ordinary conduct of the business of Customer; (6) extensions and renewals of the foregoing permitted Liens; provided that (A) the aggregate amount of such extended or renewed Liens do not exceed the original principal amount of the Indebtedness which it secures, (B) such Liens do not extend to any property other than property already previously subject to the Lien and (C) such extended or renewed Liens are on terms and conditions no more restrictive than the terms and conditions of the Liens being extended or renewed; (7) Liens for taxes, assessments or governmental charges not delinquent or being contested, in good faith, by appropriate proceedings promptly instituted and diligently conducted if an adequate reserve or other appropriate provisions shall have been made therefor as required in 6 order to be in conformity with GAAP and an adverse determination in such proceedings could not reasonably be expected to have a Material Adverse Effect; (8) Liens arising out of deposits in connection with workers' compensation, unemployment insurance or other social security or similar legislation; (9) Purchase Money Security Interests securing Purchase Money Indebtedness constituting Permitted Indebtedness; (10) Liens in favor of IBM Credit arising pursuant to this Agreement; and (11) other Liens arising after the date hereof and consented to by IBM Credit in writing prior to the incurrence thereof. "Person": any individual, association, firm, corporation, partnership, trust, unincorporated organization or other entity whatsoever. "Policies": all policies of insurance required to be maintained by Customer under this Agreement or any of the Other Agreements. "Prime Rate": as of the date of determination, the average of the rates of interest announced by Citibank, N.A., The Chase Manhattan Bank, N.A. and Bank of America National Trust & Savings Association as their prime or base rate, as of the last Business Day of the calendar month immediately preceding the date of determination, whether or not such announced rates are the actual rates charged by such banking institutions to their most creditworthy borrowers. "Purchase Money Indebtedness": any Indebtedness (including capital leases) incurred to finance the acquisition of assets to be used in the Customer's business not to exceed the lesser of (1) the purchase price or acquisition cost of such asset and (2) the fair market value of such asset. "Purchase Money Security Interest": any security interest securing Purchase Money Indebtedness, which security interest applies solely to the particular asset acquired with the Purchase Money Indebtedness. "Request for A/R Advance": as defined in Section 2.2. "Requirement of Law": as to any Person, the articles of incorporation and by- laws of such Person, and any law, treaty, rule or regulation or determination of an arbitrator or a court or other governmental authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject. "Shortfall Transaction Fee": as defined on Attachment A. "Subsidiary": with respect to any Person, any corporation or other entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of 7 directors or other Persons performing similar functions are at the time directly or indirectly owned by such Person. "Term Loan": as defined in Section 2.9. "Termination Date": shall mean the earlier of (i) the fourth anniversary of the date of this Agreement or such other date as IBM Credit and Customer may agree to in writing from time to time and (ii) the date that is ninety (90) days following the date on which the Term Loan is paid in full. "Voting Stock": securities, the holders of which are ordinarily, in the absence of contingencies, entitled to elect the corporate directors (or persons performing similar functions). 1.2. Other Defined Terms. Terms not otherwise defined in this Agreement which are defined in the Uniform Commercial Code as in effect in the State of New York (the "U.C.C.") shall have the meanings assigned to them therein. Section 2. LINE OF CREDIT/FINANCE CHARGES/OTHER CHARGES 2.1. Line of Credit. Subject to the terms and conditions set forth in this Agreement, on and after the Closing Date to but not including the date that is the earlier of (x) the date on which this Agreement is terminated pursuant to Section 10.1 and (y) the date on which IBM Credit terminates the Line of Credit pursuant to Section 9.2, IBM Credit agrees to extend to the Customer a line of credit ("Line of Credit") in the amount set forth in Attachment A pursuant to which IBM Credit will make to the Customer, from time to time, A/R Advances in an aggregate amount at any one time outstanding not to exceed the Maximum Advance Amount. Notwithstanding any other term or provision of this Agreement, IBM Credit may, at any time and from time to time, in its sole discretion, (i) temporarily increase the amount of the Line of Credit above the amount set forth in Attachment A and decrease the amount of the Line of Credit back to the amount of the Line of Credit set forth in Attachment A, in each case upon notice to Customer and (y) make Advances pursuant to this Agreement upon the request of Customer in an aggregate amount at any one time outstanding in excess of the Line of Credit. 2.2. A/R Advances. (A) Whenever Customer shall desire IBM Credit to provide an A/R Advance, Customer shall deliver to IBM Credit (i) written notice of Customer's request for such an Advance ("Request for A/R Advance") and (ii) a Collateral Management Report. For any requested A/R Advance pursuant to which monies will be disbursed to Customer or any Person other than IBM Credit, a Request for A/R Advance shall be delivered to IBM Credit on or prior to 1:00 p.m. (New York City, NY time) one Business Day prior to the requested A/R Advance Date. The Request for A/R Advance shall specify (i) the requested A/R Advance Date and (ii) the amount of the requested A/R Advance. Customer may deliver a Request for A/R Advance via facsimile. Any Request for A/R Advance delivered to IBM Credit shall be irrevocable. (B) Subject to the terms and conditions of this Agreement, on the A/R Advance Date specified in a Request for A/R Advance, IBM Credit shall make the principal amount of each A/R Advance available to the Customer in immediately available funds to an account maintained 8 by Customer. If IBM Credit is making an A/R Advance hereunder on a day on which Customer is to repay all or any part of an Outstanding Advance (or any other amount owing hereunder), IBM Credit shall apply the proceeds of the A/R Advance to such repayment and only an amount equal to the difference, if any, between the amount of the A/R Advance and the amount being repaid shall be made available to Customer as provided in the immediately preceding sentence. (C) Each A/R Advance shall accrue a finance charge on the unpaid principal amount thereof, at a per annum rate equal to the lesser of (a) the finance charge set forth in Attachment A to this Agreement under the caption "A/R Finance Charge", and (b) the highest rate from time to time permitted by applicable law. If it is determined that amounts received from the Customer were in excess of such highest rate, then the amount representing such excess shall be considered reductions to principal of Advances. (D) Unless otherwise due and payable at an earlier date, the unpaid principal amount of each A/R Advance shall be due and payable on the Termination Date. 2.3. Finance and Other Charges. (A) Finance charges shall be calculated by multiplying the applicable Delinquency Fee Rate, Term Loan Finance Charge or A/R Finance Charge provided for in this Agreement by Customer's applicable Average Daily Balance. The Delinquency Fee Rate, the Term Loan Finance Charge and the A/R Finance Charge provided for in this Agreement are each computed on the basis of an actual day, 360 day year. (B) The Customer hereby agrees to pay to IBM Credit the charges set forth as "Other Charges" in Attachment A. The Customer also agrees to pay IBM Credit additional charges for any returned items of payment received by Customer. The Customer hereby acknowledges that any such charges are not interest but that such charges, if unpaid, will constitute part of the Outstanding Advances. (C) The finance charges and Other Charges owed under this Agreement, and any charges hereafter agreed to in writing by the parties, will be set forth in IBM Credit's monthly billing statement to Customer and shall be payable on the 15th day of each month, or IBM Credit may, in its sole discretion, add unpaid finance charges and Other Charges to the Customer's outstanding Advances. (D) If any amount owed under this Agreement, including, without limitation, any Advance, the Term Loan or any Shortfall Amount, is not paid when due (whether at maturity, by acceleration or otherwise), the unpaid amount thereof will bear a late charge from and including its due date (or in the case of any Shortfall Amount, from and including the date demand for payment is made) to but not including the date IBM Credit receives payment thereof, at a per annum rate equal to the lesser of (a) the amount set forth in Attachment A to this Agreement as the "Delinquency Fee Rate" and (b) the highest rate from time to time permitted by applicable law. In addition, if any Shortfall Amount shall not be paid when due pursuant to Section 2.5 hereof, Customer shall pay IBM Credit an additional late charge equal to the 9 Shortfall Transaction Fee. If it is determined that amounts received from Customer were in excess of such highest rate, then the amount representing such excess shall be considered reductions to principal of Advances. 2.4. Statements Regarding Customer's Account. IBM Credit will send statements of each transaction hereunder as well as monthly billing statements to Customer with respect to Advances and other charges due on Customer's account with IBM Credit. Each statement of transaction and monthly billing statement shall be deemed, absent manifest error, to be correct and shall constitute an account stated with respect to each transaction or amount described therein unless within seven (7) calendar days after such statement of transaction or billing statement is received by Customer, Customer provides IBM Credit written notice objecting that such amount or transaction is incorrectly described therein and specifying the error(s), if any, contained therein. IBM Credit may at any time adjust such statements of transaction or billing statements to comply with applicable law and this Agreement. 2.5. Shortfall. If, on any date, the Outstanding A/R Advances shall exceed the Maximum Advance Amount (such excess, the "Shortfall Amount"), then A/R Advances in an amount equal to the Shortfall Amount shall be due and payable on such date and Customer shall on such date repay the Outstanding Advances in an amount equal to such Shortfall Amount. 2.6. Application of Payments. Customer hereby agrees that all checks and other instruments delivered to IBM Credit on account of Customer's Obligations shall constitute conditional payment until such items are actually collected by IBM Credit. Customer waives the right to direct the application of any and all payments at any time or times hereafter received by IBM Credit on account of the Customer's Obligations. Subject to the provision of Section 2.10, Customer agrees that IBM Credit shall have the continuing exclusive right to apply and reapply any and all such payments to Customer's Obligations in such manner as IBM Credit may deem advisable notwithstanding any entry by IBM Credit upon any of its books and records. 2.7. Prepayment and Reborrowing By Customer. (A) All amounts received by IBM Credit, including all amounts in respect of Accounts deposited to the Special Accounts, may be credited by IBM Credit from time to time to the repayment of the Obligations under this Agreement or, in IBM Credit's sole and absolute discretion, may be disbursed to Customer. The crediting of amounts received by IBM Credit in respect of such Obligations shall in all cases be subject to the final collection thereof. (B) Customer may at any time prepay, without notice or penalty, in whole or in part amounts owed under this Agreement. IBM Credit may apply payments made to it (whether by the Customer or otherwise) to pay finance charges and other amounts owing under this Agreement first and then to the principal amount owed by the Customer. (C) Subject to the terms and conditions of this Agreement, any amount prepaid or repaid to IBM Credit in respect to the Outstanding A/R Advances may be reborrowed by Customer in accordance with the provisions of this Agreement. 2.8. Application of Collections by IBM Credit. Subject to the provisions of Section 2.10, 10 Customer agrees that IBM Credit may from time to time apply any and all monies, reserves and proceeds received or collected by IBM Credit with respect to the Accounts and other Goods or property of Customer at any time or times hereafter, including, without limitation, any and all funds collected from the Lockbox and the Special Account, to pay or prepay, as the case may be, any amounts owing by Customer to IBM Credit whether or not such amounts are then due and payable, or IBM Credit may, in its sole discretion, disburse any part of or all such monies, reserves and proceeds to Customer. Customer agrees that IBM Credit may, but shall not be obligated to, cause funds collected from the Lockbox to be swept on a daily basis. 2.9. Term Loan. (A) On the Closing Date, the portion of the Outstanding Advances pursuant to the Existing Financing Agreement in an amount to be agreed upon by Customer and IBM Credit (which amount shall include an Advance by IBM Credit to Customer hereunder on the Closing Date in an amount not to exceed $500,000 to fund Customer's settlement of claims with certain unsecured creditors) shall constitute a term loan to Customer (the "Term Loan"). The Term Loan shall be subject to the Mandatory Pre-Payments set forth in Section 2.10. Unless otherwise due and payable at an earlier date (whether by acceleration, Mandatory Pre-Payment or otherwise), the principal balance of the Term Loan shall be due and payable on August 31, 2000 (or if such date is not a Business Day, on the Business Day immediately preceding such date). (B) The Term Loan shall accrue a finance charge on the unpaid principal amount thereof, at a per annum rate equal to the lesser of (a) the finance charge set forth in Attachment A to this Agreement under the caption "Term Loan Finance Charge", and (b) the highest rate from time to time permitted by applicable law. If it is determined that amounts received from the Customer were in excess of such highest rate, then the amount representing such excess shall be considered reductions to principal of Advances. 2.10. Mandatory Pre-Payments. On each Mandatory Pre-Payment Date, the Obligations of Customer to IBM Credit shall be due and payable in an amount equal to the Mandatory Pre-Payment Amount. For purposes of this Agreement, "Mandatory Pre-Payment Date" shall mean each of the following dates: (i) the date of the consummation of any sale, transfer or other disposition by Customer of any assets (other than inventory and used or obsolete equipment in the ordinary course of business) or operations of Customer, including, without limitation, the sale, transfer or other disposition of Customer's interest in Splash Technology Holdings, Inc., UMAX Computer Corporation and Portrait Display Labs, Inc., (ii) the date of the receipt by Customer of any other Non-Operating Cash Flow, (iii) the date of the consummation of any equity investment, debt issue or capital infusion in Customer from any source, and (iv) the thirtieth (30th) day following the end of each fiscal quarter of Customer. For purposes of this Agreement, "Mandatory Pre-Payment Amount" shall mean each of the following amounts: (1) an amount equal to the proceeds of any sale, transfer or other disposition set forth in clause (i) of the definition of Mandatory Pre- Payment Date, (2) an amount equal to the amount of any Non-Operating Cash Flow received by Customer, (3) an amount equal to ten percent (10%) of the proceeds of an equity investment, debt issue or capital infusion set forth in clause (iii) of the definition of Mandatory Pre-Payment Date, and (4) an amount equal to fifty percent (50%) of the Operating Cash Flow of Customer for the immediately preceding fiscal quarter, in the case of each of clauses (1), (2) and (3) of this sentence, net of all reasonable and customary out-of-pocket costs and expenses thereof. For purposes of this Agreement, "Non-Operating Cash Flow" shall 11 mean the proceeds or other amounts received by Customer in respect of any event other than (x) for sales of inventory and used or obsolete equipment in the ordinary course of business and (y) any event described in clauses (1), (3) or (4) of the definition of Mandatory Pre-Payment Amount. For purposes of this Agreement, "Operating Cash Flow" shall mean, with respect to a fiscal quarter of Customer, the greater of (x) the Operating Cash Flow of Customer for such fiscal quarter determined on substantially the same basis set forth in Attachment D and (y) seventy-five percent (75%) of the projected Operating Cash Flow of Customer for such fiscal quarter, as set forth on Attachment D. Customer shall cause the Mandatory Pre-Payment Amounts to be transferred directly by the transferor to an account of IBM Credit specified by IBM Credit. The Mandatory Pre-Payment Amounts shall be applied to the Obligations of Customer under this Agreement in the following order: first, to pay any past-due finance charges, second, to pay any outstanding Shortfall Amount, third, to pay the Term Loan, and fourth, upon the request of IBM Credit, to redeem shares of convertible preferred stock of Customer held by IBM Credit. For purposes of clarification, Customer and IBM Credit acknowledge that Customer shall not be obligated to satisfy the Customer's obligations pursuant to the Line of Credit (other than for past-due interest and principal, including any Shortfall Amount) prior to redeeming the preferred stock held by IBM Credit. Customer shall make such arrangements and execute such agreements, documents, instruments and papers as IBM Credit may request to carry out the terms of this paragraph 2.10. 2.11. Sale of Stock Splash. During the first year following the registration of any of the common stock of Splash Technology Holdings, Inc. ("Splash") in connection with a sale of any such stock in a public offering (the "Splash Registration"), upon the request of IBM Credit, Customer shall use its best efforts to sell, as soon as possible thereafter, fifty percent (50%) of Customer's interest in Splash (as of the date hereof and excluding any shares subject to an option issued by Customer in favor of IBM Credit). During the second year following the Splash Registration, upon the request of IBM Credit, Customer shall use its best efforts to sell, as soon as possible thereafter, a percent of Customer's interest in Splash (as of the date hereof and excluding any shares subject to an option issued by Customer in favor of IBM Credit) equal to seventy-five percent (75%) minus the percent of shares sold by Customer in the previous year. During the third year following the Splash Registration, upon the request of IBM Credit, Customer shall use its best efforts to sell, as soon as possible thereafter, a percent of Customer's interest in Splash (as of the date hereof and excluding any shares subject to an option issued by Customer in favor of IBM Credit) equal to one hundred percent (100%) minus the percent of shares sold by Customer in the previous two years. In addition to the foregoing, if at any time following the Splash Registration the amount of the Outstanding Term Loan shall exceed ninety percent (90%) of the market value of Customer's interest in Splash (as of the date of determination and excluding any shares subject to an option issued by Customer in favor of IBM Credit), upon the request of IBM Credit, Customer shall use its best efforts to sell, as soon as possible thereafter, a percent of Customer's interest in Splash (as of the date hereof and excluding any shares subject to an option issued by Customer in favor of IBM Credit) equal to one hundred percent (100%) minus the percent of shares previously sold by Customer. 12 Section 3. LINE OF CREDIT ADDITIONAL PROVISIONS 3.1. Ineligible Accounts. IBM Credit and Customer agree that IBM Credit shall have the sole right to determine eligibility of Accounts from an Account debtor for purposes of determining the Borrowing Base; however, without limiting such right, the following Accounts will be deemed to be ineligible for purposes of determining the Borrowing Base: (A) Accounts created from the sale of goods and/or performance of services on non-standard terms or that allow for payment to be made more than thirty (30) days from the date of such sale or performance of services; (B) Accounts unpaid more than ninety (90) days from date of invoice; (C) Accounts payable by an account debtor if fifty percent (50%) or more of the aggregate outstanding balance of all such Accounts remain unpaid for more than ninety (90) days from the date of invoice; (D) Accounts payable by an account debtor (other than Abacus to the extent Abacus is an Affiliate of Customer solely by reason of an officer or director of Abacus being an officer or director of Customer) that is an Affiliate of Customer, or an officer, employee, agent, guarantor, stockholder or Affiliate of Customer or is related to or has common shareholders, officers or directors with Customer; (E) Accounts arising from consignment sales; (F) Accounts with respect to which the payment by the account debtor is or may be conditional; (G) Accounts with respect to which: (i) the account debtor is not a commercial entity, or (ii) the account debtor is not a resident of the United States; (H) Accounts payable by any account debtor to which Customer is or may become liable for goods sold or services rendered by such account debtor to Customer; (I) Accounts arising from the sale or lease of goods purchased for a personal, family or household purpose; (J) Accounts arising from the sale or other disposition of goods that has been used for demonstration purposes or loaned or leased by the Customer to another party; (K) Accounts which are progress payment accounts or contra accounts; 13 (L) Accounts upon which IBM Credit does not have a valid, perfected, first priority security interest; (M) Accounts payable by an account debtor that is or Customer knows will become, subject to proceedings under United States Bankruptcy Law or other law for the relief of debtors; (N) Accounts that are not payable in US dollars; (O) Accounts payable by any account debtor that is a remarketer of computer hardware or software products and whose purchases of such products from Customer have been financed by another person who pays the proceeds of such financing directly to Customer on behalf of such debtor; (P) Accounts arising from the sale or lease of goods which are billed to any account debtor but have not yet been shipped by Customer; (Q) Accounts with respect to which Customer has permitted or agreed to any extension, compromise or settlement, or made any change or modification of any kind or nature, including, but not limited to, any change or modification to the terms relating thereto; (R) Accounts that do not arise from undisputed bona fide transactions completed in accordance with the terms and conditions contained in the invoices, purchase orders and contracts relating thereto; (S) Accounts that are discounted for the full payment term specified in Customer's terms and conditions with its account debtors, or for any longer period of time; (T) Accounts on cash on delivery (C.O.D.) terms; (U) Accounts arising from maintenance or service contracts that are billed in advance of full performance of service; (V) Accounts arising from bartered transactions; (W) Accounts arising from incentive payments, rebates, discounts, credits, and refunds from a supplier; and (X) Any and all other Accounts that IBM Credit deems, in its reasonable discretion, to be ineligible. The aggregate of all Accounts that are not ineligible Accounts shall hereinafter be referred to as "Eligible Accounts". 14 3.2. Reimbursement for Charges. Customer agrees to pay for all costs and expenses of Customer's bank in respect to collection of checks and other items of payment, all fees relating to the use and maintenance of the Lockbox and the Special Account (each as defined in Section 3.3) and with respect to remittances of proceeds of the Advances hereunder. 3.3. Lockbox and Special Account. Customer and its Subsidiaries shall establish and maintain lockbox(es) (each, a "Lockbox") at the address(es) set forth in Attachment A with the financial institution(s) listed in Attachment A (each, a "Bank") pursuant to an agreement between the Customer and each Bank in form and substance satisfactory to IBM Credit. Customer shall also establish and maintain a deposit account which shall contain only proceeds of Customer's Collateral ("Special Account") with each Bank. Customer shall enter into and maintain a contingent blocked account agreement with each Bank for the benefit of IBM Credit in form and substance satisfactory to IBM Credit pursuant to which, among other things, such Bank shall agree that, upon notice from IBM Credit, disbursements from the Special Account shall be made only as IBM Credit shall direct. Customer acknowledges that IBM Credit has notified or will notify each Bank that disbursements from the Special Account shall be made only as IBM Credit shall direct, and consents to such notification. 3.4. Deposit Accounts. Customer shall cause to be maintained with each bank or other financial institution at which Customer or any of its Subsidiaries has funds (each, a "Deposit Account Institution"), an agreement between IBM Credit and such Deposit Account Institution, in form and substance satisfactory to IBM Credit, to perfect IBM Credit's security interest in such funds ("Deposit Account Agreement"). Customer shall not deposit funds into, or allow funds to remain in any account that is not subject to a Deposit Account Agreement. 3.5. Collections. Customer shall instruct all account debtors and all transferors of amounts described in Section 2.10 hereof to remit payments directly to a Lockbox or a Special Account. In addition, Customer shall have such instruction (i) printed in conspicuous type on all invoices sent to Account debtors and (ii) include as a term of any agreement with any such transferor and shall use such other reasonable efforts to cause account debtors and transferors to comply with such instructions as IBM Credit may request. Customer shall instruct the Bank to deposit all remittances to such Bank's Lockbox into its Special Account. Without limiting the Customer's foregoing obligations, if, at any time, Customer receives a remittance directly from an account debtor or other transferor, then Customer shall make entries on its books and records in a manner that shall reasonably identify such remittances and shall keep a separate account on its record books of all remittances so received and deposit the same into the Special Account. Until so deposited into the Special Account, Customer shall keep all remittances separate and apart from Customer's other property so that they are capable of identification as the proceeds of Collateral in which IBM Credit has a security interest. 3.6. Application of Remittances and Credits. Customer shall apply all remittances with respect to Accounts against the aggregate of Customer's outstanding Accounts no later than the end of the Business Day on which such remittances are deposited into the Special 15 Account. Customer also agrees to apply each remittance with respect to Accounts against its respective Account no later than three (3) Business Days from the date such remittance is deposited into the Special Account. In addition, Customer shall promptly apply any credits owing in respect to any Account when due. 3.7. Power of Attorney. Customer hereby irrevocably appoints IBM Credit, with full power of substitution, as its true and lawful attorney-in-fact with full power, in good faith and in compliance with commercially reasonable standards, in the discretion of IBM Credit, to: (A) sign the name of Customer on any document or instrument that IBM Credit shall deem necessary or appropriate to perfect and maintain perfected the security interest in the Collateral contemplated under this Agreement and the Other Agreements; (B) endorse the name of Customer upon any of the items of payment of proceeds and deposit the same in the account of IBM Credit for application to the Obligations; and upon the occurrence and during the continuance of an Event of Default as defined in Section 9.1 hereof: (C) demand payment, enforce payment and otherwise exercise all Customer's rights and remedies with respect to the collection of any Accounts; (D) settle, adjust, compromise, extend or renew any Accounts; (E) settle, adjust or compromise any legal proceedings brought to collect any Accounts; (F) sell or assign any Accounts upon such terms, for such amounts and at such time or times as IBM Credit may deem advisable; (G) discharge and release any Accounts; (H) prepare, file and sign Customer's name on any Proof of Claim in Bankruptcy or similar document against any Account debtor; (I) prepare, file and sign Customer's name on any notice of lien, claim of mechanic's lien, assignment or satisfaction of lien or mechanic's lien, or similar document in connection with any Accounts; (J) endorse the name of Customer upon any chattel paper, document, instrument, invoice, freight bill, bill of lading or similar document or agreement relating to any Account or goods pertaining thereto; (K) sign the name of Customer to requests for verification of Accounts and notices thereof to Account debtors; 16 (L) sign the name of Customer on any document or instrument that IBM Credit shall deem necessary or appropriate to enforce any and all remedies it may have under this Agreement, at law or otherwise; (M) make, settle and adjust claims under the Policies with respect to the Collateral and endorse Customer's name on any check, draft, instrument or other item of payment of the proceeds of the Policies with respect to the Collateral; and (N) take control in any manner of any term of payment of proceeds and for such purpose to notify the postal authorities to change the address for delivery of mail addressed to Customer to such address as IBM Credit may designate. The power of attorney granted by this Section is for value and coupled with an interest and is irrevocable so long as this Agreement is in effect or any Obligations remain outstanding. Nothing done by IBM Credit pursuant to such power of attorney will reduce any of Customer's Obligations other than Customer's payment Obligations to the extent IBM Credit has received monies. Section 4. SECURITY -- COLLATERAL 4.1 Grant. To secure Customer's full and punctual payment and performance of the Obligations when due (whether at the stated maturity, by acceleration or otherwise), Customer hereby grants IBM Credit a security interest in all of Customer's right, title and interest in and to all property and assets of every kind, character and description whatsoever, whether now owned or hereafter acquired or existing and wherever located, including but not limited to the following: (A) all inventory and equipment, and all parts thereof, attachments, accessories and accessions thereto, products thereof and documents therefor; (B) all accounts, contract rights, chattel paper, instruments, deposit accounts, obligations of any kind owing to Customer, whether or not arising out of or in connection with the sale or lease of goods or the rendering of services and all books, invoices, documents and other records in any form evidencing or relating to any of the foregoing; (C) general intangibles, including patents, trademarks, trade names and copyrights; (D) all rights now or hereafter existing in and to all mortgages, security agreements, leases or other contracts securing or otherwise relating to any of the foregoing; and (E) all substitutions and replacements for all of the foregoing, all proceeds of all of the foregoing and, to the extent not otherwise included, all payments under insurance or any indemnity, warranty or guaranty, payable by reason of loss or damage to or otherwise with respect to any of the foregoing. 17 All of the above assets shall be collectively defined herein as the "Collateral". Customer covenants and agrees with IBM Credit that: (a) the security provided by this Agreement is in addition to any other security from time to time held by IBM Credit and (b) the security hereby created is a continuing security interest and will cover and secure the payment and performance of all Obligations both present and future of Customer to IBM Credit pursuant to this Agreement and the Other Agreements. 4.2. Further Assurances. Customer shall, from time to time upon the request of IBM Credit, execute and deliver to IBM Credit, or cause to be executed and delivered, at such time or times as IBM Credit may request, such other and further documents, certificates and instruments that IBM Credit may deem necessary to perfect and maintain perfected IBM Credit's security interests in the Collateral and that IBM Credit may deem necessary to fully consummate all of the transactions contemplated under this Agreement and the Other Agreements. Customer shall make appropriate entries on its books and records disclosing IBM Credit's security interests in the Collateral. Section 5. CONDITIONS PRECEDENT 5.1. Conditions Precedent to the Effectiveness of this Agreement. The effectiveness of this Agreement is subject to the satisfaction of, or waiver in writing by IBM Credit of compliance with, the following conditions precedent on or prior to September 13, 1996: (A) this Agreement executed and delivered by Customer and IBM Credit and receipt by IBM Credit of all attachments hereto in form and substance satisfactory to IBM Credit in its sole discretion; (B) (i) copies of the resolutions of the Board of Directors of Customer in form and substance satisfactory to IBM Credit in its sole and absolute discretion certified by the secretary or assistant secretary of Customer authorizing the execution, delivery and performance of this Agreement and each Other Agreement executed and delivered in connection herewith, (ii) a certificate of the secretary or an assistant secretary of Customer, in form and substance satisfactory to IBM Credit in its sole and absolute discretion, certifying the names and true signatures of the officers of Customer authorized to sign this Agreement and the Other Agreements and (iii) copies of the articles of incorporation and by-laws of Customer in form and substance satisfactory to IBM Credit in its sole and absolute discretion certified by the secretary or assistant secretary of Customer; (C) certificates dated as of a recent date from the Secretary of State or other appropriate authority evidencing the good standing of Customer in the jurisdiction of its organization and in each other jurisdiction where the ownership or lease of its property or the conduct of its business requires it to qualify to do business unless the failure to so qualify could not reasonably be expected to have a Material Adverse Effect; (D) copies of all approvals and consents from any Person, in each case in form and substance satisfactory to IBM Credit in its sole and absolute discretion, which are required to 18 enable Customer to authorize, or required in connection with, (a) the execution, delivery or performance of this Agreement and each of the Other Agreements, and (b) the legality, validity, binding effect or enforceability of this Agreement and each of the Other Agreements and (c) the execution delivery or performance and legality, validity, binding effect or enforceability of the restructuring contemplated in connection herewith; (E) a lockbox agreement executed by Customer and each Bank, in form and substance satisfactory to IBM Credit; (F) a contingent blocked account agreement executed by Customer and each Bank in form and substance satisfactory to IBM Credit; (G) the security interest of the Credit Managers Association shall have been released, the security agreement between Customer and the Credit Managers Association shall have been terminated, UCC termination statements relating thereto shall have been filed, appropriate filings shall have been made terminating any filings made by the Credit Managers Association with the United States Patent and Trademark Office and the United States Copyright Office, all in form and substance satisfactory to IBM Credit in its sole and absolute discretion; (H) a favorable opinion of counsel for Customer, satisfactory to IBM Credit, in form and substance satisfactory to IBM Credit and Customer; (I) UCC-1 financing statements for each jurisdiction reasonably requested by IBM Credit executed by Customer and each guarantor whose guaranty to IBM Credit is intended to be secured by a pledge of its assets and all other statements, instruments and act (including, possession by IBM Credit) necessary to perfect IBM Credit's security interest in the Collateral; (J) Customer shall have delivered to IBM Credit convertible preferred stock of the Customer and warrants to purchase common stock of Customer, in form and substance satisfactory to IBM Credit in its sole and absolute discretion; (K) Customer and IBM Credit shall have executed a registration rights agreement in form and substance satisfactory to IBM Credit in its sole and absolute discretion, which agreement shall include terms providing for a fee to IBM Credit in an amount equal to $3,000,000 in the event the securities obtained by IBM Credit pursuant to the recapitalization (including those securities set forth in paragraph J above) are not subject to an effective registration statement on or prior to a date to be agreed upon by Customer and IBM Credit; (L) The existing creditors of Customer (other than IBM Credit) shall have either (i) converted their claims against Customer for common stock of Customer or (ii) released their claims against Customer for cash in an amount not to exceed $500,000 in the aggregate, other than current claims payable by customer in an amount satisfactory to IBM Credit, all in form and substance satisfactory to IBM Credit in its sole and absolute discretion; 19 (M) All acts necessary or desirable, in the sole and absolute discretion of IBM Credit, to the recapitalization of Customer outlined in the Private Placement Memorandum dated August 9, 1996 shall have occurred and be in full force and effect; (N) the statements, certificates, documents, instruments, financing statements, agreements and information set forth in Attachment A and Attachment B; and (O) all such other statements, certificates, documents, instruments, financing statements, agreements and other information with respect to the matters contemplated by this Agreement as IBM Credit shall have reasonably requested. 5.2 Conditions to each Advance. No Advance will be required to be made or renewed by IBM Credit under this Agreement unless, on and as of the date of such Advance, the following statements shall be true to the satisfaction of IBM Credit: (A) The representations and warranties contained in this Agreement or in any document, instrument or agreement executed in connection herewith, are true and correct in all material respects on and as of the date of such Advance as though made on and as of such date; (B) No event has occurred and is continuing or after giving effect to such Advance or the application of the proceeds thereof would result which would constitute a Default; (C) No event has occurred and is continuing which could reasonably be expected to have a Material Adverse Effect; (D) Both before and after giving effect to the making of such Advance, no Shortfall Amount exists. Except as Customer has otherwise disclosed to IBM Credit in writing prior to each request, each request (or deemed request pursuant to Section 2.2 (D)) for an Advance hereunder and the receipt (or deemed receipt) by the Customer of the proceeds of any Advance hereunder shall be deemed to be a representation and warranty by Customer that, as of and on the date of such Advance, the statements set forth in (A) through (D) above are true statements. No such disclosures by Customer to IBM Credit shall in any manner be deemed to satisfy the conditions precedent to each Advance that are set forth in this Section 5.2. Section 6. REPRESENTATIONS AND WARRANTIES To induce IBM Credit to enter into this Agreement, Customer represents and warrants to IBM Credit as follows: 6.1. Organization and Qualifications. Customer and each of its Subsidiaries (i) is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, (ii) has the power and authority to own its properties and assets and to transact the businesses in which it presently is engaged and (iii) except as otherwise disclosed in Attachment 20 B or to the extent the failure to so qualify could not reasonably be expected to have a Material Adverse Effect, is duly qualified and is authorized to do business and is in good standing in each jurisdiction where it presently is engaged in business and is required to be so qualified. 6.2. Rights in Collateral; Priority of Liens. Customer and each of its Subsidiaries owns the property granted by it, respectively, as Collateral to IBM Credit, free and clear of any and all Liens in favor of third parties except for the Permitted Liens. The Liens granted by the Customer and each of its Subsidiaries pursuant to this Agreement, the Guaranties and the Other Agreements in the Collateral constitute the valid and enforceable first, prior and perfected Liens on the Collateral, except to the extent any Liens that are prior to IBM Credit's Liens are the subject of an intercreditor agreement between IBM Credit and the holder of such Lien. 6.3. No Conflicts. The execution, delivery and performance by Customer of this Agreement and each of the Other Agreements (i) are within its corporate power; (ii) have been duly authorized by all necessary corporate action; (iii) are not in contravention in any respect of any Requirement of Law or any indenture, contract, lease, agreement, instrument or other commitment to which it is a party or by which it or any of its properties are bound; (iv) do not require the consent, registration or approval of any Governmental Authority or any other Person (except such as have been duly obtained, made or given, and are in full force and effect); and (v) will not result in the imposition of any Liens upon any of its properties (other than for Liens in favor of IBM Credit). 6.4. Enforceability. This Agreement and all of the other documents executed and delivered by the Customer in connection herewith are the legal, valid and binding obligations of Customer, and are enforceable in accordance with their terms, except as such enforceability may be limited by the effect of any applicable bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or similar laws affecting creditors' rights generally or the general equitable principles relating thereto. 6.5. Locations of Offices, Records and Inventory. The address of the principal place of business and chief executive office of Customer is as set forth on Attachment B or on any notice provided by Customer to IBM Credit pursuant to Section 7.7(C) of this Agreement. The books and records of Customer, and all of its chattel paper (other than the chattel paper delivered to IBM Credit pursuant to Section 7.14(E)) and records of Accounts, are maintained exclusively at such location. There is no jurisdiction in which Customer has any assets, equipment or inventory (except for vehicles and inventory in transit for processing) other than those jurisdictions identified on Attachment B or on any notice provided by Customer to IBM Credit pursuant to Section 7.7(C) of this Agreement. Attachment B, as amended from time to time by any notice provided by Customer to IBM Credit in accordance with Section 7.7(C) of this Agreement, also contains a complete list of the legal names and addresses of each warehouse at which the Customer's inventory is stored. None of the receipts received by Customer from any warehouseman states that the goods covered thereby are to be delivered to bearer or to the order of a named person or to a named person and such named person's assigns. 6.6. Fictitious Business Names. Customer has not used any corporate or fictitious name during the five (5) years preceding the date of this Agreement, other than those listed on Attachment B. 21 6.7. Organization. All of the outstanding capital stock of Customer has been validly issued, is fully paid and nonassessable. 6.8. No Judgments or Litigation. Except as set forth on Attachment B, no judgments, orders, writs or decrees are outstanding against Customer nor is there now pending or, to the best of Customer's knowledge after due inquiry, threatened, any litigation, contested claim, investigation, arbitration, or governmental proceeding by or against Customer. 6.9. No Defaults. Except as set forth on Attachment B, the Customer is not in default under any term of any indenture, contract, lease, agreement, instrument or other commitment to which it is a party or by which it, or any of its properties are bound. Customer has no knowledge of any dispute regarding any such indenture, contract, lease, agreement, instrument or other commitment. No Default or Event of Default has occurred and is continuing. 6.10. Labor Matters. Except as set forth on any notice provided by Customer to IBM Credit pursuant to Section 7.1(F) of this Agreement, Customer is not a party to any labor dispute. There are no strikes or walkouts or labor controversies pending or threatened against the Customer which could reasonably be expected to have a Material Adverse Effect. 6.11. Compliance with Law. Customer has not violated or failed to comply with any Requirement of Law or any requirement of any self regulatory organization. 6.12. ERISA. Each "employee benefit plan", "employee pension benefit plan", "defined benefit plan", or "multi-employer benefit plan", which Customer has established, maintained, or to which it is required to contribute (collectively, the "Plans") is in compliance with all applicable provisions of ERISA and the Code and the rules and regulations thereunder as well as the Plan's terms and conditions. There have been no "prohibited transactions" and no "reportable event" has occurred within the last 60 months with respect to any Plan. Customer has no "multi-employer benefit plan". As used in this Agreement the terms "employee benefit plan", "employee pension benefit plan", "defined benefit plan", and "multi-employer benefit plan" have the respective meanings assigned to them in Section 3 of ERISA and any applicable rules and regulations thereunder. The Customer has not incurred any "accumulated funding deficiency" within the meaning of ERISA or incurred any liability to the Pension Benefit Guaranty Corporation (the "PBGC") in connection with a Plan (other than for premiums due in the ordinary course). 6.13. Compliance with Environmental Laws. Except as otherwise disclosed in Attachment B: (A) The Customer has obtained all government approvals required with respect to the operation of its businesses under any Environmental Law. (B) (i) the Customer has not generated, transported or disposed of any Hazardous Substance; (ii) the Customer is not currently generating, transporting or disposing of any Hazardous Substance; (iii) the Customer has no knowledge that (a) any of its real property (whether owned, leased, or otherwise directly or indirectly controlled) has been used for the disposal of or has been contaminated by any Hazardous Substance, or (b) any of its business 22 operations have contaminated lands or waters of others with any Hazardous Substance; (iv) the Customer and its respective assets are not subject to any Environmental Liability and, to the best of the Customer's knowledge, any threatened Environmental Liability; (v) the Customer has not received any notice of or otherwise learned of any governmental investigation evaluating whether any remedial action is necessary to respond to a release or threatened release of any Hazardous Substance for which the Customer may be liable; (vi) the Customer is not in violation of any Environmental Law; (vii) there are no proceedings or investigations pending against Customer with respect to any violation or alleged violation of any Environmental Law; provided however, that the parties acknowledge that any generation, transportation, use, storage and disposal of certain such Hazardous Substances in Customer's or its Subsidiaries' business shall be excluded from representations (i) and (ii) above so long as, and only so long as, Customer is at all times generating, transporting, utilizing, storing and disposing such Hazardous Substances in accordance with all applicable Environmental Laws and in a manner designed to minimize the risk of any spill, contamination, release or discharge of Hazardous Substances other than as authorized by Environmental Laws. 6.14. Intellectual Property. Customer possesses such assets, licenses, patents, patent applications, copyrights, service marks, trademarks, trade names and trade secrets and all rights and other property relating thereto or arising therefrom ("Intellectual Property") as are necessary or advisable to continue to conduct its present and proposed business activities. 6.15. Licenses and Permits. Customer has obtained and holds in full force and effect all franchises, licenses, leases, permits, certificates, authorizations, qualifications, easements, rights of way and other rights and approvals which are necessary for the operation of its businesses as presently conducted. Customer is not in violation of the terms of any such franchise, license, lease, permit, certificate, authorization, qualification, easement, right of way, right or approval. 6.16. Investment Company. The Customer is not (i) an investment company or a company controlled by an investment company within the meaning of the Investment Company Act of 1940, as amended, (ii) a holding company or a subsidiary of a holding company, or an Affiliate of a holding company or of a subsidiary of a holding company, within the meaning of the Public Utility Holding Company Act of 1935, as amended, or (iii) subject to any other law which purports to regulate or restrict its ability to borrow money or to consummate the transactions contemplated by this Agreement or the Other Agreements or to perform its obligations hereunder or thereunder. 6.17. Taxes and Tax Returns. Except as otherwise disclosed on Attachment B, Customer has timely filed all federal, state, and local tax returns and other reports which it is required by law to file, and has either duly paid all taxes, fees and other governmental charges indicated to be due on the basis of such reports and returns or pursuant to any assessment received by the Customer, or made provision for the payment thereof in accordance with GAAP. The charges and reserves on the books of the Customer in respect of taxes or other governmental charges are in accordance with GAAP. No tax liens have been filed against Customer or any of its property. 6.18. Status of Accounts. Each Account is based on an actual and bona fide sale and delivery of goods or rendition of services to customers, made by Customer, in the ordinary course of its 23 business; the goods and inventory being sold and the Accounts created are its exclusive property and are not and shall not be subject to any Lien, consignment arrangement, encumbrance, security interest or financing statement whatsoever (other than Permitted Liens). The Customer's customers have accepted goods or services and owe and are obligated to pay the full amounts stated in the invoices according to their terms. There are no proceedings or actions known to Customer which are pending or threatened against any Material Account Obligor (as defined in Section 7.14(B) of this Agreement) of any of the Accounts which could reasonably be expected to result in a material adverse effect on the obligor's ability to pay the full amounts due to Customer. 6.19. Affiliate/Subsidiary Transactions. Except as set forth on Attachment B, Customer is not a party to or bound by any agreement or arrangement (whether oral or written) to which any Affiliate or Subsidiary of the Customer is a party except (i) in the ordinary course of and pursuant to the reasonable requirements of Customer's business and (ii) upon fair and reasonable terms no less favorable to Customer than it could obtain in a comparable arm's-length transaction with an unaffiliated Person. 6.20. Accuracy and Completeness of Information. All factual information furnished by or on behalf of the Customer to IBM Credit or the Auditors for purposes of or in connection with this Agreement or any Other Agreement, or any transaction contemplated hereby or thereby is or will be true and accurate in all material respects on the date as of which such information is dated or certified and not incomplete by omitting to state any material fact necessary to make such information not misleading at such time. 6.21. Recording Taxes. All recording taxes, recording fees, filing fees and other charges payable in connection with the filing and recording of this Agreement have either been paid in full by Customer or arrangements for the payment of such amounts by Customer have been made to the satisfaction of IBM Credit. 6.22. Indebtedness. Customer (i) has no Indebtedness, other than Permitted Indebtedness; and (ii) has not guaranteed the obligations of any other Person (except as permitted by Section 8.4). Section 7. AFFIRMATIVE COVENANTS Until termination of this Agreement and the indefeasible payment and satisfaction of all Obligations: 7.1. Financial and Other Information. Customer shall cause to be furnished to IBM Credit the following information within the following time periods: (A) as soon as available and in any event within ninety (90) days after the end of each fiscal year of Customer (i) audited Financial Statements (provided that, to the extent not otherwise audited by the Auditors, the consolidating Financial Statements may be unaudited) as of the close of the fiscal year and for the fiscal year, together with a comparison to the Financial Statements for the prior year, in each case accompanied by (a) either an opinion of the Auditors 24 without a "going concern" or like qualification or exception, or qualification arising out of the scope of the audit or, if so qualified, an opinion which shall be in scope and substance reasonably satisfactory to IBM Credit, (b) such Auditors' "Management Letter" to Customer, if any, (c) a written statement signed by the Auditors stating that in the course of the regular audit of the business of Customer and its consolidated Subsidiaries, which audit was conducted by the Auditors in accordance with generally accepted auditing standards, the Auditors have not obtained any knowledge of the existence of any Default under any provision of this Agreement, or, if such Auditors shall have obtained from such examination any such knowledge, they shall disclose in such written statement the existence of the Default and the nature thereof, it being understood that such Auditors shall have no liability, directly or indirectly, to anyone for failing to obtain knowledge of any such Default; (ii) if composed, a narrative discussion of the consolidated financial condition and results of operations and the consolidated liquidity and capital resources of Customer and its Subsidiaries for such fiscal year prepared by an Approved Officer; and (iii) a Compliance Certificate along with a schedule, in substantially the form of Attachment C hereto, of the calculations used in determining, as of the end of such fiscal year, whether Customer is in compliance with the financial covenants set forth in Attachment A; (B) as soon as available and in any event within forty-five (45) days after the end of each fiscal quarter of Customer (i) Financial Statements as of the end of such period and for the fiscal year to date, together with a comparison to the Financial Statements for the same periods in the prior year, all in reasonable detail and duly certified (subject to normal year-end audit adjustments and except for the absence of footnotes) by an Approved Officer of Customer as having been prepared in accordance with GAAP; (ii) if composed, a narrative discussion of the consolidated financial condition and results of operations and the consolidated liquidity and capital resources of Customer and its Subsidiaries for such period and for the fiscal year to date prepared by an Approved Officer of Customer; and (iii) a Compliance Certificate along with a schedule, in substantially the form of Attachment C hereto, of the calculations used in determining, as of the end of such fiscal quarter, whether Customer is in compliance with the financial covenants set forth in Attachment A; (C) promptly after Customer obtains knowledge of (i) the occurrence of a Default or Event of Default, or (ii) the existence of any condition or event which would result in the Customer's failure to satisfy the conditions precedent to Advances set forth in Section 5, a certificate of an Approved Officer of Customer specifying the nature thereof and the Customer's proposed response thereto, each in reasonable detail; (D) promptly after Customer obtains knowledge of (i) any proceeding(s) being instituted or threatened to be instituted by or against Customer in any federal, state, local or foreign court or before any commission or other regulatory body (federal, state, local or foreign), or (ii) any actual or prospective change, development or event which, in any such case, has had or could reasonably be expected to have a Material Adverse Effect, a certificate of an Approved Officer of Customer specifying the nature thereof and the Customer's proposed response thereto, each in reasonable detail; (E) promptly after Customer obtains knowledge that (i) any order, judgment or decree in excess of fifty thousand dollars ($50,000.00) shall have been entered against Customer or any of 25 its properties or assets, or (ii) it has received any notification of a material violation of any Requirement of Law from any Governmental Authority, a certificate of an Approved Officer of Customer specifying the nature thereof and the Customer's proposed response thereto, each in reasonable detail; (F) promptly after Customer learns of any material labor dispute to which Customer may become a party, any strikes or walkouts relating to any of its plants or other facilities, or the expiration of any labor contract to which Customer is a party or by which it is bound, a certificate of an Approved Officer of Customer specifying the nature thereof and the Customer's proposed response thereto, each in reasonable detail; (G) within five (5) Business Days after request by IBM Credit, any written certificates, schedules and reports together with all supporting documents as IBM Credit may reasonably request relating to the Collateral or the Customer's or any of its Subsidiary's business affairs and financial condition; (H) on the first Business Day of each week, a Collateral Management Report (with back-up in form and detail satisfactory to IBM Credit) as of the last Business Day of the immediately preceding week; (I) along with the Financial Statements set forth in Section 7.1(A) and (B), and at such other times as IBM Credit may request, the name, address and phone number of each of its account debtors' primary contacts for each Account on the Accounts aging report contained in its most recent Collateral Management Report; and (J) within three (3) days after the same are sent, copies of all financial statements and reports which Customer sends to its stockholders, and within three (3) days after the same are filed, copies of all financial statements, reports and any other documents which Customer may make to, or file with, the Securities and Exchange Commission or any successor or analogous governmental authority. Each certificate, schedule and report provided by Customer to IBM Credit shall be signed by an Approved Officer of Customer, which signature shall be deemed a representation and warranty that the information contained in such certificate, schedule or report is true and accurate in all material respects on the date as of which such certificate, schedule or report is made and does not omit to state a material fact necessary in order to make the statements contained therein not misleading at such time. Each financial statement delivered pursuant to this Section 7.1 shall be prepared in accordance with GAAP applied consistently throughout the periods reflected therein and with prior periods. 7.2. Location of Collateral. The inventory, equipment and other tangible Collateral shall be kept or sold at the addresses as set forth on Attachment B or on any notice provided by Customer to IBM Credit in accordance with Section 7.7(C). Such locations shall be certified quarterly to IBM Credit substantially in the form of Attachment G. 26 7.3. Changes in Customer. Customer shall provide 30 days prior written notice to IBM Credit of any change in Customer's name, chief executive office and principal place of business, organization, form of ownership or corporate structure; provided, however, that Customer's compliance with this covenant shall not relieve it of any of its other obligations or any other provisions under this Agreement or any Other Agreement limiting actions of the type described in this Section. 7.4. Corporate Existence. Customer shall (A) maintain its corporate existence, maintain in full force and effect all licenses, bonds, franchises, leases and qualifications to do business, and all contracts and other rights necessary to the profitable conduct of its business, (B) continue in, and limit its operations to, the same general lines of business as presently conducted by it unless otherwise permitted in writing by IBM Credit and (C) comply with all Requirements of Law. 7.5. ERISA. Customer shall promptly notify IBM Credit in writing after it learns of the occurrence of any event which would constitute a "reportable event" under ERISA or any regulations thereunder with respect to any Plan, or that the PBGC has instituted or will institute proceedings to terminate any Plan. Notwithstanding the foregoing, the Customer shall have no obligation to notify IBM Credit as to any "reportable event" as to which the 30-day notice requirement of Section 4043(b) has been waived by the PBGC, until such time as such Customer is required to notify the PBGC of such reportable event. Such notification shall include a certificate of an Approved Officer of Customer setting forth details as to such "reportable event" and the action which Customer proposes to take with respect thereto, together with a copy of any notice of such "reportable event" which may be required to be filed with the PBGC, or any notice delivered by the PBGC evidencing its intent to institute such proceedings. Upon request of IBM Credit, Customer shall furnish, or cause the plan administrator to furnish, to IBM Credit the most recently filed annual report for each Plan. 7.6. Environmental Matters. (A) Customer and any other Person under Customer's control (including, without limitation, agents and Affiliates under such control) shall (i) comply with all Environmental Laws in all material respects, and (ii) undertake to use commercially reasonable efforts to prevent any unlawful release of any Hazardous Substance by Customer or such Person into, upon, over or under any property now or hereinafter owned, leased or otherwise controlled (directly or indirectly) by Customer. (B) Customer shall notify IBM Credit, promptly upon its obtaining knowledge of (i) any non-routine proceeding or investigation by any Governmental Authority with respect to the presence of any Hazardous Substances on or in any property now or hereinafter owned, leased or otherwise controlled (directly or indirectly) by Customer, (ii) all claims made or threatened by any Person or Governmental Authority against Customer or any of Customer's assets relating to any loss or injury resulting from any Hazardous Substance, (iii) Customer's discovery of evidence of unlawful disposal of or environmental contamination by any Hazardous Substance on any property now or hereinafter owned, leased or otherwise controlled (directly or indirectly) by Customer, and (iv) any occurrence or condition which could constitute a violation of any Environmental Law. 27 7.7. Collateral Books and Records/Collateral Audit. (A) Customer agrees to maintain books and records pertaining to the Collateral in such detail, form and scope as is consistent with good business practice, which shall reflect IBM Credit's interest in the Collateral. (B) Customer agrees that IBM Credit or its agents may enter upon the premises of Customer at any time and from time to time, during normal business hours and upon reasonable notice under the circumstances, and at any time at all on and after the occurrence and during the continuance of an Event of Default for the purposes of (i) inspecting the Collateral, (ii) inspecting and/or copying (at Customer's expense) any and all records pertaining thereto, (iii) discussing the affairs, finances and business of Customer with any officers, employees and directors of Customer or with the Auditors and (iv) verifying Eligible Accounts, Eligible Foreign Accounts and other Collateral. Customer also agrees to provide IBM Credit with such reasonable information and documentation that IBM Credit deems necessary to conduct the foregoing activities, including, without limitation, reasonably requested samplings of purchase orders, invoices and evidences of delivery or other performance. Upon the occurrence and during the continuance of a Default which has not been waived by IBM Credit in writing, IBM Credit may conduct any of the foregoing activities in any manner that IBM Credit deems reasonably necessary. (C) Customer shall give IBM Credit thirty (30) days prior written notice of any change in the location of any Collateral, the location of its books and records or in the location of its chief executive office or place of business from the locations specified in Attachment B, and will execute in advance of such change and cause to be filed and/or delivered to IBM Credit any financing statements, landlord or other lien waivers, or other documents reasonably required by IBM Credit, all in form and substance reasonably satisfactory to IBM Credit. (D) Customer agrees to advise IBM Credit promptly, in reasonably sufficient detail, of any substantial change relating to the type, quantity or quality of the Collateral, or any event which could reasonably be expected to have a Material Adverse Effect on the value of the Collateral or on the security interests granted to IBM Credit therein. 7.8. Insurance; Casualty Loss. (A) Customer will maintain with financially sound and reputable insurance companies: (i) insurance on its properties, (ii) public liability insurance against claims for personal injury or death as a result of the use of any products sold by it and (iii) insurance coverage against other business risks, in each case, in at least such amounts and against at least such risks as are usually and prudently insured against in the same general geographical area by companies of established repute engaged in the same or a similar business. Customer will furnish to IBM Credit, upon its written request, the insurance certificates with respect to such insurance. In addition, all Policies so maintained are to name IBM Credit as an additional insured as its interest may appear. (B) Without limiting the generality of the foregoing, Customer shall keep and maintain, at its sole expense, the Collateral insured for an amount not less than the amount set forth on Attachment A from time to time opposite the caption "Collateral Insurance Amount" against all loss or damage under an "all risk" Policy in companies mutually acceptable to IBM Credit and Customer, with a lender's loss payable endorsement or mortgagee clause in form and substance 28 reasonably satisfactory to IBM Credit designating that any loss payable thereunder with respect to such Collateral shall be payable to IBM Credit. Customer agrees to instruct each insurer to give IBM Credit, by endorsement upon the Policy issued by it or by independent instruments furnished to IBM Credit, at least ten (10) days written notice before any Policy shall be altered or cancelled and that no act or default of Customer or any other person shall affect the right of IBM Credit to recover under the Policies. Customer hereby agrees to direct all insurers under the Policies to pay all proceeds with respect to the Collateral directly to IBM Credit. If Customer fails to pay any cost, charges or premiums, or if Customer fails to insure the Collateral, IBM Credit may pay such costs, charges or premiums. Any amounts paid by IBM Credit hereunder shall be considered an additional debt owed by Customer to IBM Credit due and payable by Customer immediately upon receipt of an invoice by IBM Credit. 7.9. Taxes. Customer agrees to pay, when due, all taxes lawfully levied or assessed against Customer or any of the Collateral before any penalty or interest accrues thereon unless such taxes are being contested, in good faith, by appropriate proceedings promptly instituted and diligently conducted and an adequate reserve or other appropriate provisions have been made therefor as required in order to be in conformity with GAAP and an adverse determination in such proceedings could not reasonably be expected to have a Material Adverse Effect. 7.10. Compliance With Laws. Customer agrees to comply with all Requirements of Law applicable to the Collateral or any part thereof, and to the operation of its business. 7.11. Fiscal Year. Customer agrees to maintain its fiscal year as a year ending September 30 unless Customer provides IBM Credit at least thirty (30) days prior written notice of any change thereof. 7.12. Intellectual Property. Customer shall do and cause to be done all things necessary to preserve and keep in full force and effect all registrations of Intellectual Property which the failure to do or cause to be done could reasonably be expected to have a Material Adverse Effect. 7.13. Maintenance of Property. Customer shall maintain all of its material properties (business and otherwise) in good condition and repair (ordinary wear and tear excepted) and pay and discharge all costs of repair and maintenance thereof and all rental and mortgage payments and related charges pertaining thereto and not commit or permit any waste with respect to any of its material properties. 7.14. Collateral. Customer shall: (A) from time to time upon the request of IBM Credit, provide IBM Credit with access to copies of all invoices, delivery evidences and other such documents relating to each Account; (B) promptly upon Customer's obtaining knowledge thereof, furnish to and inform IBM Credit of all material adverse information relating to the financial condition of any Account obligor whose outstanding obligations to Customer constitute two percent (2%) or more of the Accounts at such time (a "Material Account Obligor"); 29 (C) promptly upon Customer's learning thereof, notify IBM Credit in writing of any event which would cause any obligation of a Material Account Obligor to become an Ineligible Account; (D) keep all goods rejected or returned by any account debtor and all goods repossessed or stopped in transit by Customer from any account debtor segregated from other property of Customer, holding the same in trust for IBM Credit until Customer applies a credit against such account debtor's outstanding obligations to Customer or sells such goods in the ordinary course of business, whichever occurs earlier; (E) stamp or otherwise mark chattel paper and instruments now owned or hereafter acquired by it in conspicuous type to show that the same are subject to IBM Credit's security interest and immediately thereafter deliver or cause such chattel paper and instruments to be delivered to IBM Credit or any agent designated by IBM Credit with appropriate endorsements and assignments to vest title and possession in IBM Credit; until so delivered to IBM Credit or its designated agent, Customer shall hold such chattel paper and instruments as agent for IBM Credit; (F) use commercially reasonable efforts to collect all Accounts owed; (G) promptly notify IBM Credit of any loss, theft or destruction of or damage to any of the Collateral. Customer shall diligently file and prosecute its claim for any award or payment in connection with any such loss, theft, destruction of or damage to Collateral. Customer shall, upon demand of IBM Credit, make, execute and deliver any assignments and other instruments sufficient for the purpose of assigning any such award or payment to IBM Credit, free of any encumbrances of any kind whatsoever; (H) consistent with reasonable commercial practice, observe and perform all matters and things necessary or expedient to be observed or performed under or by virtue of any lease, license, concession or franchise forming part of the Collateral in order to preserve, protect and maintain all the rights of IBM Credit thereunder; (I) consistent with reasonable commercial practice, maintain, use and operate the Collateral and carry on and conduct its business in a proper and efficient manner so as to preserve and protect the Collateral and the earnings, incomes, rents, issues and profits thereof; (J) at any time and from time to time, upon the request of IBM Credit, and at the sole expense of Customer, Customer will promptly and duly execute and deliver such further instruments and documents and take such further action as IBM Credit may reasonably request for the purpose of obtaining or preserving the full benefits of this Agreement and the Other Agreements and of the rights and powers herein and therein granted, including, without limitation, the filing of any financing or continuation statements under the Uniform Commercial Code in effect in any jurisdiction with respect to the security interests granted herein and the payment of any and all recording taxes and filing fees in connection therewith; (K) promptly, but in any event within two (2) days of authorizing such credits, apply 30 rebate, price protection or other credits to the Accounts; 7.15. Subsidiaries. IBM Credit may require that any Subsidiaries of Customer become parties to this Agreement or any other agreement executed in connection with this Agreement as guarantors or sureties and grant to IBM Credit perfected first priority security interests in their assets. 7.16. On Site Collateral Verification. Customer shall from time to time upon the request of IBM Credit allow employees, agents and representatives of IBM Credit access, during normal business hours and as often as IBM Credit may request, to the premises, inventory, books and records of Customer or any of its Subsidiaries to verify the Collateral and Customer's compliance with the terms of this Agreement and to discuss the business, operations, properties and financial and other condition of the Company or any of its Subsidiaries with such officers and employees and agents, including without limitation, its independent certified public accounts, as IBM Credit may from time to time request. Customer shall use reasonable efforts to obtain permission from third party facilities where Collateral is located for IBM Credit to have access to such facilities to inspect and verify such Collateral. 7.17. Lockbox Participation and Special Account Deposits. Without limiting Customer's other Obligations, Customer acknowledges and reaffirms its obligations pursuant to Section 3.4 of this Agreement and acknowledges and reaffirms that such obligations apply to all Accounts of Customer including, without limitation, Accounts payable by account debtors that are not residents of the United States (including Accounts that are payable by Ingram Micro, Inc. (Canada), Merisel Canada, Inc., QMS (Japan) and Abacus) and Accounts payable by an account debtor that is a remarketer of computer hardware and software products whose purchases of such products from Customer have been financed by another person who pays proceeds of such financing directly to Customer on behalf of such account debtor. Customer agrees that if Customer receives a remittance directly from an account obligor, then Customer shall deposit the same into the Special Account within one Business Day of such receipt. 7.18. Further Assurances Regarding Patents, Trademarks, Tradenames and Copyrights. Customer shall do and cause to be done all things necessary to preserve and keep in full force and effect all registrations of patents, trademarks, tradenames and copyrights necessary or advisable for the profitable conduct of its business. With respect to any federal registration of any patent, trademark, tradename or copyright or the filing of any application therefor, Customer promptly shall cooperate with IBM Credit to deliver to IBM Credit a collateral assignment with respect to each such registration and application, in form and substance satisfactory to IBM Credit. IBM Credit shall prepare the form of collateral assignment based upon information provided by Customer and, upon execution by Customer, IBM Credit shall file such collateral assignment with the appropriate agency. Whenever, Customer, either by itself or through any agent, employee, licensee or designee, shall file an application for the registration of any patent, trademark, tradename or copyright with the United States Patent and Trademark Office or United States Copyright Office, Customer shall report such filing to IBM Credit within five Business Days after such filing occurs. Upon request of IBM Credit, Customer shall execute and deliver any and all agreements, instruments, documents, and papers, which IBM Credit shall prepare based upon information provided by Customer, as IBM Credit may request to evidence and/or perfect IBM Credit's security interest in any patent, trademark, tradename or copyright and the 31 goodwill and general intangibles relating thereto or represented thereby, and Customer hereby constitutes IBM Credit its attorney-in-fact to execute and file all such writings for the foregoing purposes, all acts of such attorney being hereby ratified and confirmed, such power being coupled with an interest and irrevocable until the Obligations are paid in full and this Agreement is terminated. For the purposes of enabling IBM Credit to exercise its rights and remedies under this Agreement, Customer hereby grants to IBM Credit an irrevocable, non-exclusive license (exercisable without payment of royalty or other compensation to Customer) to use, assign, license or sublicense, following the occurrence of an Event of Default and the exercise by IBM Credit of its rights and remedies with respect thereto, any of the Collateral consisting of patents, trademarks, tradenames or copyrights now owned or hereafter acquired by Customer, wherever the same may be located, including in such license reasonable access to all media in which any of the licensed items may be recorded or stored and to all computer programs used for the compilation or printout thereof. Upon payment in full of all Obligations and termination of this Agreement, the license granted by Customer pursuant to the immediately preceding sentence shall be terminated. 7.19. Collateral Reconciliation Reports. Customer shall provide to IBM Credit on each Business Day a Collateral Reconciliation Report as of the close of business on the Business Day immediately preceding the day such report is provided to IBM Credit. Such Collateral Reconciliation Report shall be in form and detail satisfactory to IBM Credit and shall include back-up documentation supporting such reconciliation in form and detail satisfactory to IBM Credit. Such Collateral Reconciliation Report shall reconcile the most recently preceding Collateral Reconciliation Report to such Collateral Reconciliation Report and shall include new sales, collections, credits issued, purchases, returns and any other item affecting the accounts receivable or inventory balance since the prior reconciliation. Such Collateral Reconciliation Report shall also include a summary of domestic gross receivables and Eligible Receivables, foreign gross receivables and Eligible Foreign Receivables, gross inventory and Eligible Inventory by location. 7.20. Listings and Reconciliations. Customer shall provide to IBM Credit on or prior to the twentieth (20th) Business Day following each fiscal month a copy of all bank statements received by Customer for such month along with a reconciliation of account balances in such account from the preceding statement to account balances in such account as of the date of such statement. 7.21. Price Protection Credits. Except as set forth on Attachment B, Customer shall not, without IBM Credit's prior consent, announce any program for price protection credits that could have the effect of reducing accounts receivable in which IBM Credit has a security interest. 7.22. Additional Reporting Requirements. Customer shall deliver to IBM Credit, on the first Business Day of each week, a listing, in form and detail satisfactory to IBM Credit in its reasonable discretion, as of the Saturday immediately preceding such Business Day, of (i) Customer's inventory, (ii) the location of such inventory and (iii) the lower of the cost (net of any applicable credits) and the fair market value of such inventory. Customer shall deliver to IBM Credit, on the last Business Day of each week, a cash flow projection, in form and detail satisfactory to IBM Credit in its reasonable discretion, for the immediately following week and 32 each week remaining in such fiscal quarter based upon Customer's best estimate of minimum levels of activity for such week to support Customer's on going business activities. Customer shall provide to IBM Credit on the first Business Day of each week, a projection, in form and detail satisfactory to IBM Credit in its reasonable discretion, for such week of Customer's Outstanding A/R Advances and Customer's Borrowing Base. 7.23. Subsidiaries. Customer shall not make any Investment in or loan to, or transfer any assets to any Subsidiary or Affiliate without the prior written consent of IBM Credit. Section 8. NEGATIVE COVENANTS Until termination of this Agreement and the indefeasible payment and satisfaction of all Obligations due hereunder: 8.1. Liens. The Customer will not, directly or indirectly mortgage, assign, pledge, transfer, create, incur, assume, permit to exist or otherwise permit any Lien or judgment to exist on any of its property, assets, revenues or goods, whether real, personal or mixed, whether now owned or hereafter acquired, except for Permitted Liens. 8.2. Disposition of Assets. The Customer will not, directly or indirectly, sell, lease, assign, transfer or otherwise dispose of any assets other than (i) sales of inventory in the ordinary course of business and short term rental of inventory as demonstrations in amounts not material to Customer, and (ii) voluntary dispositions of individual assets and obsolete or worn out property, other than patents, trademarks, trade names and copyrights, in the ordinary course of business, provided, that the aggregate book value of all such assets and property so sold or disposed of under this section 8.2 (ii) in any fiscal year shall not exceed 5% of the consolidated assets of the Customer as of the beginning of such fiscal year. 8.3. Corporate Changes. The Customer will not, without the prior written consent of IBM Credit, directly or indirectly, merge, consolidate, liquidate, dissolve or enter into or engage in any operation or activity materially different from that presently being conducted by Customer. 8.4. Guaranties. The Customer will not, directly or indirectly, assume, guaranty, endorse, or otherwise become liable upon the obligations of any other Person, except (i) by the endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of business, (ii) by the giving of indemnities or warranties in connection with the sale of inventory or other asset dispositions permitted hereunder, (iii) for guaranties in favor of IBM Credit, or (iv) on behalf of its Subsidiaries not to exceed an aggregate amount of fifty thousand dollars ($50,000.00) per annum. 8.5. Restricted Payments. The Customer will not, directly or indirectly: (i) declare or pay any dividend (other than dividends payable solely in common stock of Customer) on, or make any payment on account of, or set apart assets for a sinking or other analogous fund for, the purchase, redemption, defeasance, retirement or other acquisition of, any shares of any class of capital stock of Customer or any warrants, options or rights to purchase any such capital stock, whether 33 now or hereafter outstanding, or make any other distribution in respect thereof, either directly or indirectly, whether in cash or property or in obligations of Customer, provided, however that Customer may (x) purchase for cash from directors, officers and employees of Customer shares of capital stock in connection with the termination of any such director's, officer's or employee's service to Customer to the extent such purchases are consistent with past practices (which may not be changed without IBM Credit's prior consent) and are in an aggregate amount not exceeding fifty thousand dollars ($50,000.00) per annum and (y) redeem and pay dividends on the convertible preferred stock of Customer held by IBM Credit; or (ii) make any optional payment or prepayment on or redemption (including, without limitation, by making payments to a sinking or analogous fund) or repurchase of any Indebtedness (other than the Obligations). 8.6. Investments. The Customer will not, directly or indirectly, make, maintain or acquire any Investment in any Person other than: (A) interest bearing deposit accounts (including certificates of deposit) which are insured by the Federal Deposit Insurance Corporation ("FDIC") or a similar federal insurance program; (B) direct obligations of the government of the United States of America or any agency or instrumentality thereof or obligations guaranteed as to principal and interest by the United States of America or any agency thereof; (C) stock or obligations issued to Customer in settlement of claims against others by reason of an event of bankruptcy or a composition or the readjustment of debt or a reorganization of any debtor of Customer; (D) commercial paper of any corporation organized under the laws of any State of the United States or any bank organized or licensed to conduct a banking business under the laws of the United States or any State thereof having the short-term highest rating then given by Moody's Investor's Services, Inc. or Standard & Poor's Corporation; (E) the investments set forth on Attachment E. 8.7. Affiliate/Subsidiary Transactions. The Customer will not, directly or indirectly, enter into any transaction with any Affiliate or Subsidiary, including, without limitation, the purchase, sale or exchange of property or the rendering of any service to any Affiliate or Subsidiary of Customer except in the ordinary course of business and pursuant to the reasonable requirements of Customer's business upon fair and reasonable terms no less favorable to Customer than could be obtained in a comparable arm's-length transaction with an unaffiliated Person. 8.8. ERISA. The Customer will not (A) terminate any Plan so as to incur a material liability to the PBGC, (B) permit any "prohibited transaction" involving any Plan (other than a "multi-employer benefit plan") which would subject the Customer to a material tax or penalty on "prohibited transactions" under the Code or ERISA, (C) fail to pay to any Plan any contribution which they are obligated to pay under the terms of such Plan, if such failure would result in a material "accumulated funding deficiency", whether or not waived, (D) allow or suffer to exist any occurrence and during the continuance of a "reportable event" or any other event or 34 condition, which presents a material risk of termination by the PBGC of any Plan (other than a "multi-employer benefit plan"), or (E) fail to notify IBM Credit as required in Section 7.5. As used in this Agreement, the terms "accumulated funding deficiency" and "reportable event" shall have the respective meanings assigned to them in ERISA, and the term "prohibited transaction" shall have the meaning assigned to it in the Code and ERISA. For purposes of this Section 8.8, the terms material liability, tax, penalty, accumulated funding deficiency and risk of termination shall mean a liability, tax, penalty, accumulated funding deficiency or risk of termination which could reasonably be expected to have a Material Adverse Effect. 8.9. Additional Negative Pledges. Customer will not, directly or indirectly, create or otherwise cause or permit to exist or become effective any contractual obligation which may restrict or inhibit IBM Credit's rights or ability to sell or otherwise dispose of the Collateral or any part thereof after the occurrence and during the continuance of an Event of Default. 8.10. Storage of Collateral with Bailees and Warehousemen. Collateral shall not be stored with a bailee, warehouseman or similar party without the prior written consent of IBM Credit unless Customer, concurrently with the delivery of such Collateral to such party, causes such party to issue and deliver to IBM Credit, in form and substance satisfactory to IBM Credit, warehouse receipts in the name of IBM Credit evidencing the storage of such Collateral. 8.11. Use of Proceeds. The Customer shall not use any portion of the proceeds of any Advances other than for its general working capital requirements. 8.12. Accounts. The Customer shall not permit or agree to any extension, compromise or settlement or make any change or modification of any kind or nature with respect to any Account, including any of the terms relating thereto, which would affect IBM Credit's ability to collect payment on any Account in whole or in part, except for such extensions, compromises or settlements made by Customer in the ordinary course of its business, provided, however, that the aggregate amount of such extensions, compromises or settlements does not exceed five percent (5%) of the Customer's Accounts at any time. 8.13. Indebtedness. The Customer will not create, incur, assume or permit to exist any Indebtedness, except for Permitted Indebtedness. 8.14. Loans. The Customer will not make any loans, advances, contributions or payments of money or goods to any Subsidiary, Affiliate or parent corporation or to any officer, director or stockholder of Customer or of any such corporation (except for compensation for personal services actually rendered), except for transactions expressly authorized in this Agreement, provided, however, that Customer may make loans to its officers in an aggregate outstanding amount at any time not exceeding two hundred fifty thousand dollars ($250,000.00), and to its Subsidiaries in an aggregate outstanding amount at any time not exceeding one hundred thousand dollars ($100,000.00). 8.15. Premium Payments. Customer shall not make, directly or indirectly, any payments to suppliers at a premium above the regular invoice price on account of past due indebtedness to such supplier without the prior written consent of IBM Credit. 35 Section 9. DEFAULT 9.1. Event of Default. Any one or more of the following events shall constitute an Event of Default by the Customer under this Agreement and the Other Agreements: (A) The failure to make timely payment of the Obligations or any part thereof, within the earlier of (i) one Business Day after receiving written notice that such payment has not been made when due in accordance with the terms of any documents evidencing the same and (ii) five days after such payment becomes due in accordance with the terms of any documents evidencing the same; (B) (x) the failure to comply with or observe any term, covenant or agreement (other than pursuant to Sections 7.1 (C) (i), 8.1, 8.2 or 8.3) contained in this Agreement that is capable of being remedied by Customer if such failure shall remain unremedied for ten (10) days after written notice from IBM Credit thereof; provided that during such 10-day period Customer is diligently taking efforts necessary to remedy such failure or (y) Customer fails to comply with or observe any term, covenant or agreement contained in Sections 8.1, 8.2 or 8.3 that is capable of being remedied by Customer if such failure shall remain unremedied for 10 days; provided that during such 10-day period, Customer is diligently taking efforts necessary to remedy such failure; (C) Customer fails to comply with or observe any term, covenant or agreement contained in this Agreement other than as referred to in paragraphs (A) or (B); (D) Any representation, warranty, statement, report or certificate made or delivered by or on behalf of Customer or any of its officers, employees or agents or by or on behalf of any Subsidiary or guarantor to IBM Credit was false in any material respect at the time when made or deemed made; (E) The occurrence of any event or circumstance which could reasonably be expected to have a Material Adverse Effect; (F) Customer or any Subsidiary or guarantor shall generally not pay its debts as such debts become due, become or otherwise declare itself insolvent, file a voluntary petition for bankruptcy protection, have filed against it any involuntary bankruptcy petition, cease to do business as a going concern, make any assignment for the benefit of creditors, or a custodian, receiver, trustee, liquidator, administrator or person with similar powers shall be appointed for Customer or any Subsidiary or any of its respective properties or have any of its respective properties seized or attached, or take any action to authorize, or for the purpose of effectuating, the foregoing; provided, however, that Customer or any Subsidiary shall have a period of forty-five (45) days within which to discharge any involuntary petition for bankruptcy or similar proceeding; provided, further, however, that any of the foregoing set forth in this paragraph (F), with respect to any Subsidiary or guarantor, could reasonably be expected to have a Material Adverse Effect; (G) The use by Customer of any funds borrowed from IBM Credit under this Agreement for any purpose other than as provided in this Agreement; 36 (H) The entry of any judgment against Customer or any guarantor in an amount in excess of fifty thousand dollars ($50,000.00) and such judgment is not satisfied, dismissed, stayed or superseded by bond within thirty (30) days after the day of entry thereof (and in the event of a stay or supersedeas bond, such judgment is not discharged within thirty (30) days after termination of any such stay or bond) or such judgment is not fully covered by insurance as to which the insurance company has acknowledged its obligation to pay such judgment in full; (I) The dissolution or liquidation of Customer or any guarantor, or Customer or any guarantor or any of their directors or stockholders shall take any action to dissolve or liquidate Customer or any guarantor; (J) Any "going concern" or like qualification or exception, or qualification arising after the date of this Agreement out of the scope of an audit by an Auditor of his opinion relative to any Financial Statement delivered to IBM Credit under this Agreement; (K) There issues a warrant of distress or distraint or any similar proscription for any rent or taxes with respect to any of Customer's properties, assets or premises and such warrant shall continue for a period of two (2) Business Days from the date such warrant is issued; (L) Customer suspends business; (M) The occurrence of any event or condition which enables the holder of any Indebtedness or trade liabilities arising in one or more related or unrelated transactions, in aggregate principal amount exceeding fifty thousand dollars ($50,000.00) to accelerate the maturity thereof or the failure of Customer to pay when due any such Indebtedness or trade liabilities; (N) Any guaranty of any or all of the Customer's Obligations executed by any guarantor in favor of IBM Credit, shall at any time for any reason cease to be in full force and effect or shall be declared to be null and void by a court of competent jurisdiction or the validity or enforceability thereof shall be contested or denied by any such guarantor, or any such guarantor shall deny that it has any further liability or obligation thereunder or any such guarantor shall fail to comply with or observe any of the terms, provisions or conditions contained in any such guaranty; (O) Customer is in default under the material terms of any of the Other Agreements after the expiration of any applicable cure periods; (P) There shall occur a "reportable event" with respect to any Plan, or any Plan shall be subject to termination proceedings (whether voluntary or involuntary) and there shall result from such "reportable event" or termination proceedings a liability of Customer to the PBGC which in the reasonable opinion of IBM Credit will have a Material Adverse Effect; (Q) Any "person" (as defined in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended) acquires a beneficial interest in 50% or more of the Voting Stock of Customer; or 37 (R) Customer is in default of any of the terms or conditions of its agreements with Mitsubishi Electronics America which default allows Mitsubishi Electronics America to exercise any of its rights under any security agreement by and between Customer and Mitsubishi Electronics America. 9.2. Acceleration. Upon the occurrence and during the continuance of an Event of Default which has not been waived in writing by IBM Credit, IBM Credit may, in its sole discretion, take any or all of the following actions, without prejudice to any other rights it may have at law or under this Agreement to enforce its claims against the Customer: (a) declare all Obligations to be immediately due and payable (except with respect to any Event of Default set forth in Section 9.1(F) hereof, in which case all Obligations shall automatically become immediately due and payable without the necessity of any notice or other demand) without presentment, demand, protest or any other action or obligation of IBM Credit; and (b) immediately terminate the Line of Credit hereunder. 9.3. Remedies. (A) Upon the occurrence and during the continuance of any Event of Default which has not been waived in writing by IBM Credit, IBM Credit may exercise all rights and remedies of a secured party under the U.C.C. Without limiting the generality of the foregoing, IBM Credit may: (i) remove from any premises where same may be located any and all documents, instruments, files and records (including the copying of any computer records), and any receptacles or cabinets containing same, relating to the Accounts, or IBM Credit may use (at the expense of the Customer) such of the supplies or space of the Customer at Customer's place of business or otherwise, as may be necessary to properly administer and control the Accounts or the handling of collections and realizations thereon; (ii) bring suit, in the name of the Customer or IBM Credit and generally shall have all other rights respecting said Accounts, including without limitation the right to accelerate or extend the time of payment, settle, compromise, release in whole or in part any amounts owing on any Accounts and issue credits in the name of the Customer or IBM Credit; (iii) sell, assign and deliver the Accounts and any returned, reclaimed or repossessed merchandise, with or without advertisement, at public or private sale, for cash, on credit or otherwise, at IBM Credit's sole option and discretion, and IBM Credit may bid or become a purchaser at any such sale; and (iv) foreclose the security interests created pursuant to this Agreement by any available judicial or non-judicial procedure, or take possession of any or all of the Collateral without judicial process and enter any premises where any Collateral may be located for the purpose of taking possession of or removing the same. (B) Upon the occurrence and during the continuance of any Event of Default which has not been waived in writing by IBM Credit, IBM Credit shall have the right to sell, lease, or otherwise dispose of all or any part of the Collateral, whether in its then condition or after further preparation or processing, in the name of Customer or IBM Credit, or in the name of such other party as IBM Credit may designate, either at public or private sale or at any broker's board, in lots or in bulk, for cash or for credit, with or without warranties or representations, and upon such other terms and conditions as IBM Credit in its sole discretion may deem advisable, and IBM Credit shall have the right to purchase, including for a credit bid, at any such sale. If IBM Credit, in its sole discretion, determines that any of the Collateral requires rebuilding, repairing, maintenance or preparation, IBM Credit shall have the right, at its option, to do such of the aforesaid as it deems necessary for the purpose of putting such Collateral in such saleable form as 38 IBM Credit shall deem appropriate. The Customer hereby agrees that any disposition by IBM Credit of any Collateral pursuant to and in accordance with the terms of a repurchase agreement between IBM Credit and the manufacturer or any supplier (including any Authorized Supplier) of such Collateral constitutes a commercially reasonable sale. The Customer agrees, at the request of IBM Credit, to assemble the Collateral and to make it available to IBM Credit at places which IBM Credit shall select, whether at the premises of the Customer or elsewhere, and to make available to IBM Credit the premises and facilities of the Customer for the purpose of IBM Credit's taking possession of, removing or putting such Collateral in saleable form. If notice of intended disposition of any Collateral is required by law, it is agreed that ten (10) Business Days notice shall constitute reasonable notification. (C) IBM Credit is hereby granted, upon the occurrence and during the continuance of any Event of Default which has not been waived in writing by IBM Credit, an irrevocable, non-exclusive license to use, assign, license or sublicense all computer software programs, data bases, processes and materials used by the Customer in its businesses or in connection with any of the Collateral. (D) The net cash proceeds resulting from IBM Credit's exercise of any of the foregoing rights (after deducting all charges, costs and expenses, including reasonable attorneys' fees) shall be applied by IBM Credit to the payment of Customer's Obligations, whether due or to become due, in such order as IBM Credit may in it sole discretion elect. Customer shall remain liable to IBM Credit for any deficiencies, and IBM Credit in turn agrees to remit to Customer or its successors or assigns, any surplus resulting therefrom. (E) The enumeration of the foregoing rights is not intended to be exhaustive and the exercise of any right shall not preclude the exercise of any other legal or equitable rights, all of which shall be cumulative. 9.4. Waiver. If IBM Credit seeks to take possession of any of the Collateral by any court process Customer hereby irrevocably waives to the extent permitted by applicable law any bonds, surety and security relating thereto required by any statute, court rule or otherwise as an incident to such possession and any demand for possession of the Collateral prior to the commencement of any suit or action to recover possession thereof. In addition, Customer waives to the extent permitted by applicable law all rights of set-off it may have against IBM Credit. Customer further waives to the extent permitted by applicable law presentment, demand and protest, and notices of non-payment, non-performance, any right of contribution, dishonor, and any other demands, and notices required by law. Section 10. MISCELLANEOUS 10.1. Term; Termination. (A) This Agreement shall remain in force until the earlier of (i) the Termination Date, (ii) the date specified in a written notice by the Customer that it intends to terminate this Agreement which date shall be no less than 90 days following the receipt by IBM Credit of such written notice, and (iii) termination by IBM Credit after the occurrence and during the continuance of an Event of Default. Upon the date that this Agreement is terminated, all of 39 Customer's Obligations shall be immediately due and payable in their entirety, even if they are not yet due under their terms. (B) Until the indefeasible payment in full of all of Customer's Obligations, no termination of this Agreement or any of the Other Agreements shall in any way affect or impair the Customer's Obligations to IBM Credit including, without limitation, any transaction or event occurring prior to such termination, and IBM Credit's security interest in the Collateral. 10.2. Indemnification. The Customer hereby agrees to indemnify and hold harmless IBM Credit and each of its officers, directors, agents and assigns (collectively, the "Indemnified Persons") against all losses, claims, damages, liabilities or other expenses (including reasonable attorneys' fees and court costs now or hereinafter arising from the enforcement of this Agreement, the "Losses") to which any of them may become subject insofar as such Losses arise out of or are based upon any event, circumstance or condition (a) occurring or existing on or before the date of this Agreement relating to any financing arrangements IBM Credit may from time to time have with (i) Customer, (ii) any Person that shall be acquired by Customer or (iii) any Person that Customer may acquire all or substantially all of the assets of, or (b) directly or indirectly, relating to the execution, delivery or performance of this Agreement or the consummation of the transactions contemplated hereby or thereby or to any of the Collateral or to any act or omission of the Customer in connection therewith. Notwithstanding the foregoing, the Customer shall not be obligated to indemnify IBM Credit for any Losses incurred by IBM Credit which are a result of IBM Credit's gross negligence or willful misconduct. The indemnity provided herein shall survive the termination of this Agreement. IBM Credit shall notify Customer in writing promptly upon obtaining knowledge of any claim subject to indemnification pursuant to this paragraph 10.2 and shall use reasonable efforts to minimize the amount of any indemnified Loss. Customer agrees to pay promptly, upon demand, all reasonable costs and fees, including reasonable attorney's fees, incurred by IBM Credit in the administration, renewal, extension, modification, documentation, restructuring, "workout", enforcement or collection of any or all of the Obligations, or in any litigation, arbitration, mediation, bankruptcy or other proceeding of any type, relating thereto. 10.3. Additional Obligations. IBM Credit, without waiving or releasing any Obligation or Default of the Customer, may perform any Obligations of the Customer that the Customer shall fail or refuse to perform and IBM Credit may, at any time or times hereafter, but shall be under no obligation so to do, pay, acquire or accept any assignment of any security interest, lien, encumbrance or claim against the Collateral asserted by any person. All sums paid by IBM Credit in performing in satisfaction or on account of the foregoing and any expenses, including reasonable attorney's fees, court costs, and other charges relating thereto, shall be a part of the Obligations, payable on demand and secured by the Collateral. 10.4. LIMITATION OF LIABILITY. NEITHER IBM CREDIT NOR ANY OTHER INDEMNIFIED PERSON SHALL HAVE ANY LIABILITY WITH RESPECT TO ANY SPECIAL, INDIRECT OR CONSEQUENTIAL DAMAGES SUFFERED BY CUSTOMER IN CONNECTION WITH THIS AGREEMENT, ANY OTHER AGREEMENT OR ANY CLAIMS IN ANY MANNER RELATED THERETO. NOR SHALL IBM CREDIT OR ANY OTHER INDEMNIFIED PERSON HAVE ANY LIABILITY TO CUSTOMER OR ANY OTHER 40 PERSON FOR ANY ACTION TAKEN OR OMITTED TO BE TAKEN BY IT OR THEM HEREUNDER, EXCEPT FOR ITS OR THEIR OWN GROSS NEGLIGENCE OR WILLFUL MISCONDUCT. 10.5. Alteration/Waiver. This Agreement and the Other Agreements may not be altered or amended except by an agreement in writing signed by the Customer and by IBM Credit. No delay or omission of IBM Credit to exercise any right or remedy hereunder, whether before or after the occurrence of any Event of Default, shall impair any such right or remedy or shall operate as a waiver thereof or as a waiver of any such Event of Default. In the event that IBM Credit at any time or from time to time dispenses with any one or more of the requirements specified in this Agreement or any of the Other Agreements, such dispensation may be revoked by IBM Credit at any time and shall not be deemed to constitute a waiver of any such requirement subsequent thereto. IBM Credit's failure at any time or times to require strict compliance and performance by the Customer of any undertakings, agreements, covenants, warranties and representations of this Agreement or any Other Agreement shall not waive, affect or diminish any right of IBM Credit thereafter to demand strict compliance and performance thereof. Any waiver by IBM Credit of any Default by the Customer under this Agreement or any of the Other Agreements shall not waive or affect any other Default by the Customer under this Agreement or any of the Other Agreements, whether such Default is prior or subsequent to such other Default and whether of the same or a different type. None of the undertakings, agreements, warranties, covenants, and representations of the Customer contained in this Agreement or the Other Agreements and no Default by the Customer shall be deemed waived by IBM Credit unless such waiver is in writing signed by an authorized representative of IBM Credit. 10.6. Severability. If any provision of this Agreement or the Other Agreements or the application thereof to any Person or circumstance is held invalid or unenforceable, the remainder of this Agreement and the Other Agreements and the application of such provision to other Persons or circumstances will not be affected thereby, the provisions of this Agreement and the Other Agreements being severable in any such instance. 10.7. One Loan. All Advances heretofore, now or at any time or times hereafter made by IBM Credit to the Customer under this Agreement or the Other Agreements shall constitute one loan secured by IBM Credit's security interests in the Collateral and by all other security interests, liens and encumbrances heretofore, now or from time to time hereafter granted by the Customer to IBM Credit or any assignor of IBM Credit. 10.8. Additional Collateral. All monies, reserves and proceeds received or collected by IBM Credit with respect to Accounts and other property of the Customer in possession of IBM Credit at any time or times hereafter are hereby pledged by Customer to IBM Credit as security for the payment of Customer's Obligations and shall be applied promptly by IBM Credit on account of the Customer's Obligations in accordance with the provisions of this Agreement; provided, however, IBM Credit may release to the Customer such portions of such monies, reserves and proceeds as IBM Credit may from time to time determine, in its sole discretion. 10.9. No Merger or Novations. Neither the obtaining of any judgment nor the exercise of any power of seizure or sale shall operate to extinguish the Obligations of the Customer to IBM 41 Credit secured by this Agreement and shall not operate as a merger of any covenant in this Agreement, and the acceptance of any payment or alternate security shall not constitute or create a novation and the obtaining of a judgment or judgments under a covenant herein contained shall not operate as a merger of that covenant or affect IBM Credit's rights under this Agreement. 10.10. Paragraph Titles. The Section titles used in this Agreement and the Other Agreements are for convenience only and do not define or limit the contents of any Section. 10.11. Binding Effect; Assignment. This Agreement and the Other Agreements shall be binding upon and inure to the benefit of IBM Credit and the Customer and their respective successors and assigns; provided, that the Customer shall have no right to assign this Agreement or any of the Other Agreements without the prior written consent of IBM Credit. 10.12. Notices. Except as otherwise expressly provided in this Agreement, any notice required or desired to be served, given or delivered hereunder shall be in writing, and shall be deemed to have been validly served, given or delivered (A) upon receipt if deposited in the United States mails, first class mail, with proper postage prepaid, (B) upon receipt of confirmation or answerback if sent by telecopy, or other similar facsimile transmission, (C) one Business Day after deposit with a reputable overnight courier with all charges prepaid, or (D) when delivered, if hand-delivered by messenger, all of which shall be properly addressed to the party to be notified and sent to the address or number indicated as follows: (i) If to IBM Credit at: IBM Credit Corporation 5000 Executive Parkway, Suite #450 San Ramon, CA 94583 Attention: Remarketer Finance Center Manager Telecopy: (510) 277-5675 (ii) If to Customer at: Radius Inc. 215 Moffett Park Drive Sunnyvale, CA 94089 Attention: Chief Executive Officer Telecopy: 408-541-5271 or to such other address or number as each party designates to the other in the manner prescribed herein. 42 10.13. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto were upon the same instrument. 10.14. Amendment and Restatement. Notwithstanding anything contained herein or in any other document to the contrary, it is understood and agreed by Customer and IBM Credit that the claims of IBM Credit arising hereunder and existing as of the date hereof constitute continuing claims arising out of the obligations of Customer under the Existing Financing Agreement. Customer acknowledges and agrees that the Indebtedness represented by the Advances outstanding as of the date hereof has not been satisfied or discharged and that this Agreement amends and restates such Indebtedness and is not intended to effect a novation of the obligations of Customer which were evidenced by the Existing Financing Agreement. 10.15. Third Party Beneficiaries. This Agreement is made and entered into for the sole protection and benefit of the parties hereto and their permitted successors and assigns, and neither this Agreement nor any of the Other Agreements is intended to operate as, directly or indirectly, nor shall be construed as effecting in any way, directly or indirectly, a waiver, estoppel, discharge, release, or other modification of the parties rights against any Person, nor shall any other Person have any right of action hereunder. 10.16. General Release. Customer does hereby release, acquit and forever discharge, for itself and its successors and assigns, IBM Credit, Affiliates of IBM Credit, and each and every present and former officer, director, employee, agent, successor and assign of IBM Credit and Affiliate of IBM Credit (the "Releasees") from any and all manner of actions, causes of action, suits, debts, costs, claims and demands whatsoever, regardless of whether known or unknown, at law or in equity or under federal, state, foreign, or other law, which against the Releasees or any one or more of them Customer, ever had, now has or which can, shall or may hereafter accrue for, upon or by reason of, arising out of or in connection with any matter, cause or thing whatsoever from the beginning of the world to the day of this Agreement, excluding claims arising under ordinary product and service warranties for product and services purchased by Customer from Affiliates of IBM Credit in the ordinary course of Customer's business, but including any claims relating to Mississippi I or Mississippi II product or services. Customer hereby waives, to the fullest extent permitted by law, the benefits of any statute, law, rule, regulation or common law, which may limit the scope of the covenants and releases contained herein. Customer intends by this Release to forever release, acquit, waive and forever discharge the Releasees of and from any and all claims and rights described above, it being understood that all claims or rights which Customer or any person who claims by, through or under Customer may have against the Releasees shall be forever released, acquitted, waived and forever discharged, and such persons shall be forever barred from bringing or asserting the same in their own name or names, jointly or with or through any other person, natural, corporate or otherwise; provided, however, that Customer is not waiving any rights or claims under this Agreement arising on or after the date hereof. 43 SECTION 1542 OF THE CIVIL CODE OF THE STATE OF CALIFORNIA PROVIDES AS FOLLOWS: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." CUSTOMER IS AWARE THAT IT MAY HEREAFTER DISCOVER CLAIMS OR FACTS IN ADDITION TO OR DIFFERENT FROM THOSE IT NOW KNOWS OR BELIEVES TO BE TRUE WITH RESPECT TO THE MATTERS RELATED HEREIN. NEVERTHELESS, IT IS THE INTENTION OF CUSTOMER TO FULLY, FINALLY AND FOREVER SETTLE AND RELEASE ALL SUCH MATTERS, AND ALL CLAIMS RELATIVE THERETO, WHICH DO NOW EXIST, MAY EXIST, OR HERETOFORE HAVE EXISTED BETWEEN CUSTOMER AND THE RELEASEES. IN FURTHERANCE OF SUCH INTENTION, THE RELEASES GIVEN HEREIN SHALL BE AND REMAIN IN EFFECT AS FULL AND COMPLETE RELEASES OF ALL SUCH MATTERS, NOTWITHSTANDING THE DISCOVERY OR EXISTENCE OF ANY ADDITIONAL CLAIMS OF FACTS RELATIVE THERETO. CUSTOMER WAIVES AND RELINQUISHES ANY AND ALL RIGHTS IT MAY HAVE UNDER SECTION 1542 OF THE CALIFORNIA CIVIL CODE AS CURRENTLY WORDED OR HEREAFTER AMENDED. 10.17. SUBMISSION AND CONSENT TO JURISDICTION AND CHOICE OF LAW. TO INDUCE IBM CREDIT TO ACCEPT THIS AGREEMENT AND THE OTHER AGREEMENTS, THE CUSTOMER HEREBY IRREVOCABLY AND UNCONDITIONALLY: (A) SUBMITS ITSELF AND ITS PROPERTY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT AND ANY OTHER AGREEMENT, OR FOR THE RECOGNITION AND ENFORCEMENT OF ANY JUDGMENT IN RESPECT THEREOF, TO THE NON-EXCLUSIVE GENERAL JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK AND ANY FEDERAL DISTRICT COURT IN NEW YORK. (B) CONSENTS THAT ANY SUCH ACTION OR PROCEEDING MAY BE BROUGHT IN SUCH COURTS AND WAIVES ANY OBJECTION THAT IT MAY NOW OR HEREINAFTER HAVE TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING IN ANY SUCH COURT OR THAT SUCH ACTION OR PROCEEDING WAS BROUGHT IN AN INCONVENIENT COURT AND AGREES NOT TO PLEAD OR CLAIM THE SAME. (C) AGREES THAT SERVICE OF PROCESS IN ANY SUCH ACTION OR PROCEEDING MAY BE EFFECTED BY MAILING A COPY THEREOF BY REGISTERED OR CERTIFIED MAIL (OR ANY SUBSTANTIALLY SIMILAR FORM OF MAIL), 44 POSTAGE PREPAID, TO CUSTOMER AT ITS ADDRESS SET FORTH IN SECTION 10.12 OR AT SUCH OTHER ADDRESS OF WHICH IBM CREDIT SHALL HAVE BEEN NOTIFIED PURSUANT THERETO; (D) AGREES THAT NOTHING HEREIN SHALL AFFECT THE RIGHT TO EFFECT SERVICE OF PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT TO SUE IN ANY OTHER JURISDICTION. (E) AGREES THAT THE VALIDITY, INTERPRETATION AND ENFORCEMENT OF THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS (WITHOUT GIVING EFFECT TO CONFLICT OF LAW PROVISIONS) OF THE STATE OF NEW YORK. 10.18. JURY TRIAL WAIVER. EACH OF IBM CREDIT AND THE CUSTOMER HEREBY IRREVOCABLY WAIVES THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING (INCLUDING ANY COUNTERCLAIM) OF ANY TYPE IN WHICH IBM CREDIT AND THE CUSTOMER ARE PARTIES AS TO ALL MATTERS ARISING DIRECTLY OR INDIRECTLY OUT OF THIS AGREEMENT OR ANY DOCUMENT, INSTRUMENT OR AGREEMENT EXECUTED IN CONNECTION HEREWITH. Initials: /s/CB ---------- IN WITNESS WHEREOF, the Customer has read this entire Agreement, and has caused its authorized representatives to execute this Agreement and has caused its corporate seal to be affixed hereto as of the date first written above. RADIUS INC. By: /s/ Charles W. Berger --------------------------------------------------------- Print Name: Charles W. Berger ------------------------------------------------ Title: Chairman of the Board and Chief Executive Officer ----------------------------------------------------- 45 ACCEPTED this 30th day of August, 1996, IBM CREDIT CORPORATION By: /s/ Philip N. Morse --------------------------------------------------------- Print Name: Philip N. Morse ------------------------------------------------ Title: Director, Remarketer Financing Portfolio Controls ----------------------------------------------------- 46 EX-23.01 7 EXHIBIT 23-01 EXHIBIT 23.01 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our report dated December 8, 1995, (except Note 11 as to which the date is December 27, 1995), in the Registration Statement (Amendment No. 1 to Form S-1) and related Prospectus of Radius Inc. for the registration of 54,293,591 shares of its common stock, 750,000 shares of Series A Convertible Preferred Stock and Warrants to purchase 800,000 shares of common stock. Palo Alto, California November 8, 1996 -----END PRIVACY-ENHANCED MESSAGE-----