-----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, Fzx2idwv74k5aiX33wv4Mr4HzDOf5J02H9Go3R044T1XN8s4DNyR3sxJjBsfBX1m S1LAOuijzcA5KwHOTpVwjA== 0000912057-97-004052.txt : 19970221 0000912057-97-004052.hdr.sgml : 19970221 ACCESSION NUMBER: 0000912057-97-004052 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19961228 FILED AS OF DATE: 19970211 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: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-18690 FILM NUMBER: 97523888 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 10-Q 1 10-Q - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 28, 1996. OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13(d) OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO . --------- --------- COMMISSION FILE NUMBER: 0-18690 RADIUS INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 68-0101300 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER) 215 MOFFETT PARK DRIVE SUNNYVALE, CA 94089 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE) (408) 541-6100 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) ------------------------------------------- INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES NO X ------ ------- THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S COMMON STOCK ON FEBRUARY 10, 1997 WAS 54,660,475. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- RADIUS INC. INDEX PART I. FINANCIAL INFORMATION PAGE - ------------------------------ ---- Item 1. Financial Statements Consolidated Balance Sheets at December 31, 1996 and September 30, 1996 3 Consolidated Statements of Operations for the Three Months Ended December 31, 1996 and 1995 4 Consolidated Statements of Cash Flows for the Three Months Ended December 31, 1996 and 1995 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 PART II. OTHER INFORMATION - --------------------------- Item 1. Legal Proceedings 21 Item 5. Other Information 22 Item 6. Exhibits and Reports on Form 8-K 22 SIGNATURES 22 -2- PART 1. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS RADIUS INC. CONSOLIDATED BALANCE SHEETS (in thousands)
DECEMBER 31, SEPTEMBER 30, 1996 1996 (1) ------------ ------------- (unaudited) ASSETS: Current assets: Cash $ 1,798 $ 2,974 Accounts receivable, net 10,827 8,123 Inventories 11,702 12,852 Investment in Splash Technology Holdings, Inc. - current portion 13,318 - Prepaid expenses and other current assets 387 366 Income tax receivable 514 514 -------- -------- Total current assets 38,546 24,829 Investment in Splash Technology Holdings, Inc. - noncurrent portion 25,857 19,152 Property and equipment, net 1,243 1,495 Deposits and other assets 50 50 -------- -------- $ 65,696 $ 45,526 -------- -------- -------- -------- LIABILITIES AND SHAREHOLDERS' EQUITY: Current liabilities: Accounts payable $ 4,946 $ 5,004 Accrued payroll and related expenses 2,086 2,678 Accrued warranty costs 497 478 Other accrued liabilities 2,413 2,545 Accrued income taxes 2,369 2,227 Accrued restructuring and other charges 409 425 Short-term borrowings 3,835 1,922 Obligation under capital leases - current portion 859 1,074 -------- -------- Total current liabilities 17,414 16,353 Long term borrowings 21,940 21,940 Obligations under capital leases - noncurrent portion 116 273 Commitments and contingencies Convertible preferred stock 3,000 3,000 Shareholders' equity: Common stock 168,853 168,746 Unrealized gain on available-for-sale securities 39,175 19,152 Accumulated deficit (184,837) (183,968) Accumulated translation adjustment 35 30 -------- -------- Total shareholders' equity 23,226 3,960 -------- -------- $ 65,696 $ 45,526 -------- -------- -------- --------
(1) The balance sheet at September 30, 1996 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See accompanying notes. -3- RADIUS INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data; unaudited)
THREE MONTHS ENDED DECEMBER 31, -------------------- 1996 1995 ---- ---- Sales $10,802 $32,652 Commissions and royalties 1,295 - ------- ------- Total net sales 12,097 $32,652 Cost of sales 7,026 28,607 ------- ------- Gross profit 5,071 4,045 ------- ------- Operating expenses: Research and development 904 3,630 Selling, general and administrative 4,098 9,961 ------- ------- Total operating expenses 5,002 13,591 ------- ------- Income (loss) from operations 69 (9,546) Other income (expense), net (5) 1,137 Interest expense (737) (1,183) ------- ------- Loss before income taxes (673) (9,592) Provision for income taxes 121 191 ------- ------- Net loss $ (794) $ (9,783) ------- ------- ------- ------- Preferred stock dividend 75 - Net loss applicable to common shareholders $ (869) $ (9,783) ------- ------- ------- ------- Loss per share: Net loss per share applicable to common shareholders $ (0.02) $ (0.57) ------- ------- ------- ------- Common shares used in computing net loss per share 54,660 17,248 ------- ------- ------- -------
See accompanying notes. -4- RADIUS INC. CONSOLIDATED STATEMENTS OF CASH FLOWS INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (in thousands, unaudited)
THREE MONTHS ENDED DECEMBER 31, -------------------- 1996 1995 -------- ------- Cash flows from operating activities: Net loss $ (794) $ (9,783) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 302 654 (Increase) decrease in assets: Accounts receivable (2,699) 36,305 Inventories 1,150 2,507 Prepaid expenses and other current assets (21) (9,755) Income tax receivable - 2 Increase (decrease) in liabilities: Accounts payable (58) (30,212) Accrued payroll and related expenses (592) 268 Accrued warranty costs 19 (660) Other accrued liabilities (132) (689) Accrued restructuring costs (16) (33) Accrued income taxes 142 (29) -------- --------- Total adjustments (1,905) (1,642) -------- --------- Net cash used in operating activities (2,699) (11,425) Cash flows from investing activities: Capital expenditures (50) (195) Deposits and other assets - 5 -------- --------- Net cash used in investing activities (50) (190) Cash flows from financing activities: Short-term borrowings, net 1,913 14,306 Principal payments of long-term debt and capital leases (372) (470) Issuance of common stock 32 9 -------- --------- Net cash provided by financing activities 1,573 13,845 -------- --------- Net increase (decrease) in cash and cash equivalents (1,176) 2,230 Cash and cash equivalents, beginning of period 2,974 4,760 -------- --------- Cash and cash equivalents, end of period 1,798 $ 6,990 -------- --------- -------- --------- Supplemental disclosure of cash flow information: Cash paid during the period for: Interest paid $ 715 $ 934 -------- --------- -------- --------- Income taxes paid $ 55 $ 218 -------- --------- -------- --------- Non-cash financing activity: Dividend to be paid in stock $ 75 $ - -------- --------- -------- ---------
-5- RADIUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. BASIS OF PRESENTATION The consolidated financial statements of Radius Inc. ("Radius" or the "Company") as of December 31, 1996 and for the three months ended December 31, 1996 and 1995 are unaudited. In the opinion of management, the consolidated financial statements reflect all adjustments (consisting only of normal recurring items) necessary for a fair presentation of the financial position and results of operations for the interim periods presented. These consolidated financial statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Company's Annual Report on Form 10- K for the year ended September 30, 1996. For clarity of presentation, all fiscal periods are reported as ending on a calendar month end. NOTE 2. INVENTORIES Inventories, stated at the lower of cost or market, consist of (in thousands): DECEMBER 31, SEPTEMBER 30, 1996 1996 ----------- ------------- (unaudited) Raw materials $ 5 $ 124 Work in process 3,159 4,488 Finished goods 8,538 8,240 --------- --------- $ 11,702 $ 12,852 --------- --------- --------- --------- NOTE 3. COMMITMENTS AND CONTINGENCIES (a) On November 16, 1995, Electronics for Imaging, Inc. ("EFI") filed a suit in the United States District Court in the Northern District of California alleging that the Company infringes a patent allegedly owned by EFI. Although the complaint does not specify which of the Company's products allegedly infringe the patent, subsequent pleading indicates that EFI alleges that the Company's Color Server products allegedly infringe. In January 1996, the Company completed the divestiture of the Color Server Group. The Company has filed an answer denying all material allegations, and has filed counterclaims against EFI alleging causes of action for interference with prospective economic benefit, antitrust violations, and unfair business practices. EFI's motion to dismiss or sever the Company's amended counterclaims was granted in part and the ruling permitted the Company to file an amended counterclaim for antitrust violations. The Company has filed an amended antitrust claim. The Company believes it has meritorious defenses to EFI's claims and is defending them vigorously. In addition, the Company believes it may have indemnification rights with respect to EFI's claims. A motion for summary judgment based on these indemnification rights was filed, and the court granted this motion finding the Company immune from suit under the patent after February 22, 1995. The Company expects to vigorously defend the remaining claims of EFI and to vigorously prosecute the claims it has asserted against EFI. In the opinion of management, based on the facts known at this time, although the eventual outcome of this case is unlikely to have a material adverse effect on the results of operations or financial position of the Company, the costs of defense, regardless of outcome, may have a material adverse effect on the results of operations or financial position of the Company. In addition, in connection with the divestiture of its Color Server Group, the Company has certain indemnification obligations for which approximately $2.4 million remains held in escrow to secure such obligations in the event that the purchaser suffers any losses resulting from such litigation. (b) The Company was named as one of approximately 42 defendants in Shapiro et al. v. ADI Systems, Inc. et al., Superior Court of California, Santa Clara County, case no. CV751685, filed August 14, 1995. Radius was named as one of approximately 32 defendants in Maizes & Maizes et al. v. Apple Computer et al., Superior Court of New Jersey, Essex County, case no. L-13780-95, filed December 15, 1995. Plaintiffs in each case purport to represent alleged classes of -6- similarly situated persons and/or the general public, and allege that the defendants falsely advertised that the viewing areas of their computer monitors are larger than in fact they are. The Company was served with the Shapiro complaint on August 22, 1995 and was served with the Maizes complaint on January 5, 1996. Defendants' petition to the California State Judicial Council to coordinate the Shapiro case with similar cases brought in other California jurisdictions was granted in part and it is anticipated that the coordinated proceedings will be held in Superior Court of California, San Francisco County. An amended consolidated complaint was filed on March 26, 1996. Discovery proceedings are scheduled to begin. The Company believes it has meritorious defenses to the plaintiffs' claims and is defending them vigorously. Extended settlement discussions began in connection with a successful demurrer in the California case. Such discussions have been complicated by the refusal of a small number of the defendants to participate in the proposed settlement and a preliminary settlement of both cases is anticipated soon. In the opinion of management, based on the facts known at this time, the eventual outcome of these cases may have a material adverse effect on the results of operations or financial position of the Company in the financial period in which they are resolved. In addition, whether or not the eventual outcomes of these cases have a material adverse effect on the results of operations or financial condition of the Company, the costs of defense, regardless of outcome, may have a material adverse effect on the results of operations and financial condition of the Company. (c) On April 17, 1996, the Company was served with a complaint filed by Colorox Corporation ("Colorox"), in the Circuit Court of the State of Oregon, County of Multnomah, case no. 9604-02481, which alleges that the Company breached an alleged oral contract to sell its dye sublimation printer business to Colorox for $200,000, and seeks both specific performance of the alleged contract and alleged damages of $2.5 million. The Company believes it has meritorious defenses to the plaintiff's claims and intends to defend them vigorously. Nevertheless, the costs of defense, regardless of outcome, could have an adverse effect on the results of operations and financial condition of the Company. On February 4, 1997, the Company agreed to settle this lawsuit on terms management considers less than material. (d) The Company is involved in a number of other judicial and administrative proceedings incidental to its business. The Company intends to defend such lawsuits vigorously and although adverse decisions (or settlements) may occur in one or more of such cases, the final resolution of these lawsuits, individually or in the aggregate, is not expected to have a material adverse effect on the financial position of the Company. However, depending on the amount and timing of an unfavorable resolution of these lawsuits, it is possible that the Company's future results of operations or cash flows could be materially adversely affected in a particular period. In addition, the costs of defense, regardless of the outcome, could have a material adverse effect on the results of operations and financial condition of the Company. NOTE 4. INVESTMENT IN SPLASH TECHNOLOGY HOLDINGS, INC. In January 1996, the Company completed the sale of its Color Server Group ("CSG") to Splash Merger Company, Inc. (the "Buyer"), a wholly owned subsidiary of Splash Technology Holdings, Inc. ("Splash"), a corporation formed by various investment entities associated with Summit Partners. In fiscal 1996, the Company received approximately $21.0 million in cash and an additional $2.4 million is being maintained in escrow to secure certain indemnification obligations. The Company also received 4,282 shares of Splash's 6% Series B Redeemable and Convertible Preferred Stock (the "Series B Preferred Stock"). The shares of Series B Preferred Stock were converted into shares of Splash's common stock in connection with the initial public offering of Splash. In June 1996, the Company granted IBM Credit, its secured lender, an option to purchase 428 shares of Series B Preferred (now Splash Common Stock) in connection with the restructuring of the terms of its loan agreement with IBM Credit. These shares of Splash Common Stock have been pledged to IBM Credit. IBM Credit has not exercised its option. On October 8, 1996, Splash completed its initial public offering of common stock which reduced the Company's ownership position to approximately 14.6 percent. Consequently, the investment which will be available for sale, subject to certain market trading restrictions, approximating 1.7 million shares, is accounted for in accordance with FASB 115. The unrealized gain of $39.2 million based upon the closing price of $22.50 per share on December 27, 1996 is recorded, net of deferred taxes, as a component of shareholders' equity at December 31, 1996. -7- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS All assumptions, anticipations, and expectations contained herein are forward- looking statements that involve uncertainty and risk. Actual results could differ materially from those projected in such forward-looking statements and there are certain important factors that could cause results to differ materially from those in the forward-looking statements. Among such important factors are: (i) the ability of Radius to generate sufficient cash from operations to finance its working capital needs and to generate sufficient income to repay its indebtedness to IBM Credit in a timely manner; (ii) the value of the Company's holdings in Splash and the Company's ability to timely dispose of such holdings on favorable terms; (iii) the Company's ability to attract and retain key personnel, particularly in light of its financial condition; (iv) the Company's ability to successfully compete against Apple Computer and other competitors; (v) the continued acceptance of Macintosh computers for use by the color publishing and multimedia markets; (vi) the Company's ability to successfully develop and market products for, and the acceptance of the Company's products by, the video editing industry; (vii) the continued willingness of third party manufacturers and suppliers to assemble and/or supply components for the Company's products, particularly in light of the Company's financial condition; (viii) the ability of the Company's exclusive distributors in Europe and Japan to increase sales of the Company's products and (ix) the Company's ability to develop new products and improve on existing products, particularly in light of its significantly reduced research and development budgets. Each forward-looking statement should be read in conjunction with the entire consolidated interim financial statements and the notes thereto in Part I, Item 1 of this Quarterly Report, with the information contained in Item 2, including, but not limited to, "- Certain Factors That May Affect Future Results," and with "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in the Company's Annual Report on Form 10-K for the year ended September 30, 1996, including, but not limited to, "Management's Discussion and Analysis of Financial Condition -- Certain Factors That May Affect the Company's Future Results of Operations." RESULTS OF OPERATIONS The following table sets forth for the periods indicated certain operational data as a percentage of net sales (may not add due to rounding). THREE MONTHS ENDED DECEMBER 31, --------------------------------- 1996 1995 ---------- ---------- Net sales 100.0% 100.0% Cost of sales 58.1 87.6 --------- -------- Gross profit 41.9 12.4 --------- -------- Operating expenses: Research and development 7.5 11.1 Selling, general and administrative 33.9 30.5 --------- -------- Total operating expenses 41.4 41.6 --------- -------- Income (loss) from operations 0.5 (29.2) Other income (expense), net 0.0 3.5 Interest expense (6.1) (3.6) --------- -------- Loss before income taxes (5.6) (29.4) --------- -------- Provision for income taxes 1.0 0.6 --------- -------- Net loss (6.6)% (30.0)% --------- -------- --------- -------- NET SALES The Company's net sales decreased 63.0% to $12.1 million in the first quarter of fiscal 1997 from $32.7 million for the same quarter in fiscal 1996. This decline was primarily due to the sale by the Company of its Color Server Group and as a result of entering into exclusive distributor arrangements for Japan and Europe effective April 1, 1996 and July 1, 1996, respectively, which relationships provide for the Company to recognize as net sales, a percentage of the sales price of each product sold by those distributors as compared to the entire sales price of the product which was formerly recognized by the Company as net sales prior to the appointment of these distributors. In the first quarter of fiscal 1997, the Company -8- recorded approximately $1.2 million of commissions and royalties. As a result of the sale of the Color Server Group (as described more fully in "Management's Discussion and Analysis of Financial Condition --Certain Factors That May Affect the Company's Future Results of Operations" and "--Business Divestitures"), the Company has recorded no revenue from sales of color server products since the second quarter of its 1996 fiscal year. The Company recorded sales from its color server products of approximately $7.0 million for the first quarter of its 1996 fiscal year. One customer, Ingram Micro, accounted for 81.5% and 37.5% of the Company's net sales for the first quarter of fiscal 1997 and 1996, respectively. The Company's export sales decreased to 10.9% of net sales in first quarter of fiscal 1997 from 63.4% of net sales in the same quarter of fiscal 1996 primarily as a result of the exclusive distributor relationships for Japan and Europe. The Company now earns commissions on any sales to such regions and therefore will only recognize as net sales a portion of the sales price of any product sold through such distributor arrangements as compared with recognizing the entire sales price of the products sold under its prior arrangements. Even if sales for such regions increase or remain similar to historic levels, the Company would recognize a lesser amount of net sales for such regions as compared to historic levels. Accordingly, the Company anticipates a decline in the percentage of net sales attributable to the Asia-Pacific and European sales regions and, as described above, the Company could also experience a decline in the dollar amount of net sales attributable to such regions. Export sales are also subject to the normal risks associated with doing business in foreign countries such as longer payment cycles, greater difficulties in accounts receivable collection, export controls and other government regulations and, in some countries, a lesser degree of intellectual property protection as compared to that provided under the laws of the United States. GROSS PROFIT The Company's gross profit margin was 41.9% and 12.4% for the first quarters of fiscal 1997 and 1996, respectively. The increase in gross margin was primarily due to the Company's focus on higher margin products and continuing efforts to reduce product costs and controlling expenses. The Company anticipates continued price reductions and margin pressure within its industry. The Company is responding to these trends by focusing on higher margin products, taking further steps to reduce product costs and controlling expenses. There can be no assurance that the Company's gross margins will remain at current levels for subsequent quarters or for the entire fiscal year. RESEARCH AND DEVELOPMENT EXPENSES Research and development expenses decreased to $0.9 million or 7.5% of net sales in the first quarter of fiscal 1997 from $3.6 million or 11.1% of net sales in the same quarter of fiscal 1996. The Company decreased its research and development expenses primarily by reducing expenses related to headcount resulting from the Company's efforts to refocus its business and business divestitures. Although the Company expects research and development expenses to increase gradually over time, the Company does not expect research and development expenses to approach historical levels. The Company's ability to introduce new products or to compete successfully could be adversely affected if it is unable to increase its research and development efforts. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses decreased to $4.1 million or 33.9% of net sales in the first quarter of fiscal 1997 from $10.0 million or 30.5% of net sales in the same quarter of fiscal 1996. The Company decreased its selling, general and administrative expenses primarily by reducing expenses related to headcount resulting from the Company's efforts to refocus its business and business divestitures The increase in selling, general and administrative expenses expressed as a percentage of net sales was primarily attributed to the decrease in net sales and the Company's refocusing on higher- end products, rather than high-volume lower-margin products. OTHER INCOME (EXPENSE), NET There was no other income recorded in the first quarter of fiscal 1997. Other income of $1.1 million in the first quarter of fiscal 1996 resulted from income of approximately $1.5 million from the Company's sale of its monochrome display monitor business partially offset by other miscellaneous expenses. INTEREST EXPENSE -9- Interest expense was $0.7 million in the first quarter of fiscal 1997 as compared to $1.2 million in the same period of fiscal 1996. This decrease was due to lower average interest rates on lower average borrowings. PROVISION FOR INCOME TAXES The Company recorded a tax provision of $121,000 for the first quarter of fiscal 1997 as compared to a provision for taxes for the first quarter of fiscal 1996 of $191,000. The tax provision is primarily comprised of state and foreign taxes. FASB Statement 109 provides for the recognition of deferred tax assets if realization of such assets is more likely than not. The Company's valuation allowance reduced the deferred tax asset to the amount realizable. The Company has provided a full valuation allowance against its net deferred tax assets due to uncertainties surrounding their realization. Due to the net losses reported in prior years and as a result of the material changes in operations, predictability of earnings in future periods is uncertain. The Company will evaluate the realizability of the deferred tax asset on a quarterly basis. As a result of the issuance of Common Stock and Series A Convertible Preferred Stock in exchange for accounts payable and other liabilities of the Company in September 1996, the Company experienced a "change in ownership" as defined under Section 382 of the Internal Revenue Code. Accordingly, utilization of net operating loss and tax credit carryforwards will be subject to an approximately $2.0 million annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986 (and similar state provisions), except under limited circumstances. This limitation will result in the expiration of all of the tax credit carryforwards and a substantial portion of the net operating loss carryforwards before they may be utilized. NET LOSS As a result of the above factors, the Company had a net loss of $0.8 million for the first quarter of fiscal 1997, as compared to a net loss of $9.8 million for the same period in fiscal 1996. LITIGATION SETTLEMENT In September 1992, the Company and certain of its officers and directors were named as defendants in a securities class action litigation brought in the United States District Court for the Northern District of California that sought unspecified damages, prejudgment and post judgment interest, attorneys' fees, expert witness fees and costs, and equitable relief. In July 1994, SuperMac and certain of its officers and directors, several venture capital firms and several of the underwriters of SuperMac's May 1992 initial public offering and its February 1993 secondary offering were named as defendants in a class action litigation brought in the same court that sought unspecified damages, prejudgment and post judgment interest, attorneys' fees, experts' fees and costs, and equitable relief (including the imposition of a constructive trust on the proceeds of defendants' trading activities). In June 1995, the Court approved the settlement of both litigations and entered a Final Judgment and Order of Dismissal. Under the settlement of the litigation brought in 1992 against the Company, the Company's insurance carrier paid $3.7 million in cash and the Company issued a total of 128,695 shares of its Common Stock to a class action settlement fund. In the settlement of the litigation brought in 1994 against SuperMac, the Company paid $250,000 in cash and is to issue into a class action settlement fund a total of 707,609 shares of its Common Stock. The number of shares to be issued by the Company increased by 100,000 because the price of the Company's Common Stock was below $12 per share during the 60-day period following the initial issuance of shares. In connection with these settlements, the financial statements for the first quarter of fiscal 1995 included a charge to other income of $12.4 million, reflecting settlement costs not covered by insurance as well as related legal fees, resulting in a reduction in net income from $1.4 million to a net loss of $11.0 million or $0.78 per share for the quarter. As of December 31, 1996, the Company had issued 836,674 shares of its Common Stock due to the settlements and 99,630 shares remained to be issued. -10- FINANCIAL CONDITION The Company's cash decreased approximately $1.2 million in the first quarter of fiscal 1997 to $1.8 million at December 31, 1996 as compared to the ending balance at September 30, 1996. This decrease was primarily due to interest payments associated with the Company's indebtedness with IBM Credit. The Company also holds securities in Splash, Portrait Display Labs ("PDL") and UMAX Computer Corporation ("UMAX"), which have been pledged to IBM Credit. Splash became a public company on October 9, 1996, however, these securities are "restricted securities" under Rule 144 promulgated under the Securities Act and will become available for sale in January 1998, subject to certain volume, manner of sale, notice and availability of public information requirements of such rule. However, the Company also will have certain registration rights with respect to those securities commencing in April 1997. Because PDL and UMAX are private companies, there is no market for such securities and there can be no assurance that one will develop in the future. In addition, as described under "-- Business Divestitures -- Color Server Group Divestiture," the Company will be required to sell its securities in Splash over no longer than a three year period ending October 9, 1999 if amounts are outstanding under the loan with IBM Credit. The Company has granted to IBM Credit a security interest in substantially all of its assets to secure the Company's various obligations to IBM Credit. The Company has also granted to Mitsubishi Electronics a security interest (securing an amount up to $4.4 million) in all of the Company's technology and intellectual property rights related to and incorporated into the Company's PressView products. The Company's principal source(s) of liquidity currently are cash generated by operations, if any, and an up to $5.0 million working line of credit provided by IBM Credit pursuant to the terms of the restructured loan with IBM Credit. This working line of credit is not expected to provide the Company with a significant source of liquidity for the foreseeable future. Accordingly, for the immediate future, the Company intends to finance its working capital needs through cash generated from operations, if any. As described above, the Company has minority ownership interests in Splash, UMAX and PDL. The Company has certain registration rights with respect to the shares of Common Stock of Splash owned by it and, as a result, the shares of Common Stock of Splash could, if the market price of the Common Stock of Splash does not decline, provide the Company with an additional source of liquidity in the future provided that the restructured loan from IBM Credit is first repaid with any proceeds from the sale of the Splash Common Stock and that the Company's Series A Convertible Preferred Stock has either been redeemed or converted into Common Stock. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Certain Factors That May Affect the Company's Future Results of Operations -- Need for Additional Financing; Loan Restrictions." In connection with the debt for equity exchange which was consummated in September 1996, (the "Plan"), IBM Credit received 750,000 shares of the Company's Series A Convertible Preferred Stock and warrants to purchase 600,000 shares of Common Stock in consideration of the cancellation of $3.0 million of indebtedness to IBM Credit and for an additional advance of $470,000. In addition, IBM Credit has restructured the terms of the Company's remaining approximately $23.4 million indebtedness into a working line of credit and a term loan. The Company has an up to $5.0 million working line of credit and IBM Credit will extend advances under this line of credit in an amount not to exceed the borrowing base (which is defined as (i) the lesser of 10% of the gross value of eligible inventory or $500,000; plus (ii) 80% of the Company's eligible domestic accounts receivable; plus (iii) the lesser of 50% of the gross value of certain eligible Japanese and European accounts receivable or $500,000). The $470,000 advanced by IBM Credit pursuant to the Plan is included in this working line of credit but will not be included in the calculation of the borrowing base. The initial amount of indebtedness outstanding under this line of credit at September 30, 1996 was $1.5 million. The remaining $21.9 million balance of the Company's indebtedness to IBM Credit has been converted to a four-year term loan. As of December 31, 1996, amounts outstanding under this line of credit and term loan were $3.8 million and $21.9 million, respectively, which had weighted interest rates of 10.5% and 11.5%, respectively. Principal on such term loan will be repaid on a mandatory prepayment schedule. The restructured loan with IBM Credit is subject to mandatory prepayment as follows: (i) upon the disposition of any assets of the Company outside of the ordinary course of business, all net proceeds to the Company must be applied towards the Company's obligations under the loan; (ii) upon the closing of any financing, 10% of the proceeds must be applied towards the Company's obligations under the loan; (iii) upon the thirtieth day following the end of each fiscal quarter, an amount of no less than 50% of operating cash flow for such prior fiscal quarter must be applied towards the Company's obligations under the loan; and (iv) upon the receipt of any other amounts other than sales of inventory or used or obsolete equipment in the ordinary course of business, and not otherwise described in the preceding clause (i) - (iii), all of -11- such amounts must be applied towards the Company's obligations under the loan. If the Company's obligations under the term loan, as well as finance charges and amounts outstanding in excess of the "borrowing base" (described above) under the working line of credit, are repaid, IBM Credit can require such proceeds to be applied towards a redemption of the Series A Convertible Preferred Stock. In addition, the Company is required to deposit its revenues in accounts controlled by IBM Credit. At any time, regardless of whether the Company is in default of its obligations to IBM Credit, IBM Credit is permitted to apply these amounts towards the repayment of any of the Company's obligations to IBM Credit. As a result of IBM Credit's control over the Company's cash flow and these prepayment and redemption provisions, together with the other terms and covenants of the restructured loan agreement, the Company's ability to generate working capital or to undertake a variety of other merger, disposition or financing activities will be substantially restricted. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Certain Factors That May Affect the Company's Future Results of Operations -- Need for Additional Financing; Loan Restrictions." As a result of IBM's control over the Company's cash flow and these restrictions on the Company's excess cash flow, the Company anticipates that it will not have significant cash available for expenditures other than for its ordinary course of business operating expenses, which will be significantly lower than historical amounts. In the event the Company were unable to generate sufficient net sales or if the Company incurs unforeseen operating expenses, it may not be able to meet its operating expenses without additional financing or a restructuring of its loan agreements with IBM Credit. In the event that the Company desired to acquire any strategic technologies or businesses, it would probably be unable to do so without obtaining additional financing or the consent of IBM Credit. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Certain Factors That May Affect the Company's Future Results of Operations -- Need for Additional Financing; Loan Restrictions." Because of the Company's loss for the first quarter of fiscal 1997, the Company failed to comply with several financial covenants of its restructured loan agreement with IBM Credit (specifically, revenues to working capital ratio, net profits to revenues ratio and working capital). The Company obtained a waiver from IBM Credit of this noncompliance. There can be no assurance that IBM Credit will grant any additional waivers in the event that the Company fails to comply with these financial covenants in the future. Previously, the Company funded its operations through the public and private sale of equity securities, bank loans and cash flow from operations. The Company completed a private placement during the third quarter of the 1995 fiscal year, the proceeds of which were utilized to build inventory of MacOS-compatible systems components and reduce other vendor payables. This business never generated a positive gross margin and the Company subsequently sold its MacOs business in February 1996. In this private placement, the Company sold 2,509,319 shares of its Common Stock resulting in net proceeds to the Company of approximately $21.4 million. Other than the loan from IBM Credit, the Company currently has no other bank loans. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Certain Factors That May Affect the Company's Future Results of Operations -- Need for Additional Financing; Loan Restrictions." At December 31, 1996, the Company's principal commitments consisted of obligations under its restructured loan agreement with IBM Credit and its obligations under building and capital leases. See Notes 2 and 3 to Consolidated Financial Statements on Form 10-K for year ended September 30, 1996. The Company is also a party to various litigation proceedings, the costs of defending which or the outcome of which could adversely affect the Company's liquidity. See " -- Legal Proceedings." Recently, the Company's limited cash resources have restricted the Company's ability to purchase inventory which in turn has limited its ability to procure and sell products and has resulted in additional costs for expedited deliveries. The adverse effect on the Company's results of operations due to its limited cash resources can be expected to continue until such time as the Company is able to return to profitability, or generate additional cash from other sources. There can be no assurance that the Company will be able to do so. The Company believes it has sufficient funds to finance its operations for the remaining fiscal year. However, the level of operations which it believes will be able to sustain for the next 9 months will be significantly lower than historical periods, particularly in the research and development, sales and marketing and general administrative areas. Additional funds will be needed to finance the Company's operations, product development plans and for other purposes if the Company's operating expenses are higher than anticipated. During fiscal 1997, additional financing will also be required if the Company desires to -12- acquire or invest in complementary businesses or products or to obtain the right to use complementary technologies. While the Company plans to generate cash by divesting certain liquid assets and is investigating possible financing opportunities, there can be no assurance that additional financing will be available when needed or, if available, that the terms of such financing will not adversely affect the Company's results of operations. CERTAIN FACTORS THAT MAY AFFECT THE COMPANY'S FUTURE RESULTS OF OPERATIONS A number of uncertainties exist that could affect the Company's future operating results, including, without limitation, the following: CONTINUING OPERATING LOSSES Although the Company achieved a small amount of operating income for the first quarter, the Company experienced operating losses in each of its prior four fiscal years. In the future, the Company's ability to achieve and subsequently sustain profitable operations will depend upon a number of factors, including the Company's ability to control costs; the Company's ability to service its outstanding indebtedness to IBM Credit; the Company's ability to realize appreciation in minority ownership interests in Splash and other investments; the Company's ability to generate sufficient cash from operations or obtain additional funds to fund its operating expenses; the Company's ability to develop innovative and cost-competitive new products and to bring those products to market in a timely manner; the commercial acceptance of Apple computers and the MacOS and the rate and mix of Apple computers and related products sold; competitive factors such as new product introductions, product enhancements and aggressive marketing and pricing practices; general economic conditions; and other factors. The Company has faced and expects to continue to face increased competition in graphic cards as a result of Apple's transition of its product line to the PCI Bus. For these and other reasons, there can be no assurance that the Company will be able to achieve or subsequently maintain profitability in the near term, if at all. FLUCTUATIONS IN OPERATING RESULTS The Company has experienced substantial fluctuations in operating results. The Company's customers generally order on an as-needed basis, and the Company has historically operated with relatively small backlogs. Quarterly sales and operating results depend heavily on the volume and timing of bookings received during the quarter, which are difficult to forecast. A substantial portion of the Company's revenues are derived from sales made late in each quarter, which increases the difficulty in forecasting sales accurately. Since the end of the Company's 1995 fiscal year, shortages of available cash have restricted the Company's ability to purchase inventory and have delayed the Company's receipt of products from suppliers and increased shipping and other costs. Furthermore, because of its financial condition, the Company believes that many suppliers are hesitant to continue their relationships with or extend credit terms to the Company and potential new suppliers are reluctant to provide goods to the Company. The Company recognizes sales upon shipment of product, and allowances are recorded for estimated uncollectable amounts, returns, credits and similar costs, including product warranties and price protection. Due to the inherent uncertainty of such estimates, there can be no assurance that the Company's forecasts regarding bookings, collections, rates of return, credits and related matters will be accurate. A significant portion of the operating expenses of the Company are relatively fixed in nature, and planned expenditures are based primarily on sales forecasts which, as indicated above, are uncertain. Any inability on the part of the Company to adjust spending quickly enough to compensate for any failure to meet sales forecasts or to receive anticipated collections, or any unexpected increase in product returns or other costs, could also have an adverse impact on the Company's operating results. As a strategic response to a changing competitive environment, the Company has elected, and, in the future, may elect from time to time, to make certain pricing, service or marketing decisions or acquisitions that could have a material adverse effect on the Company's business, results of operations and financial condition. Furthermore, the Company completed a variety of business divestitures during fiscal 1996, restructured the terms of its indebtedness to IBM Credit and issued a substantial amount of equity in the Company to its creditors in satisfaction of approximately $45.9 million in claims and indebtedness during the fourth quarter of fiscal 1996. As a result, the Company believes that period-to-period comparisons of its results of operations will not necessarily be meaningful and should not be relied upon as any indication of future performance. Due to all of the foregoing factors, it is likely that in some future quarter the Company's operating results will be below the expectations of public market analysts and investors. In such event, the price of the Company's Common Stock would be likely to be materially adversely affected. NEED FOR ADDITIONAL FINANCING; LOAN RESTRICTIONS The Company intends to finance its working capital needs through cash generated by operations, sales of liquid assets and borrowings under a restructured working line of credit with IBM Credit. Because the Company has experienced operating losses in each of its prior four fiscal years, the Company must significantly reduce operating expenses and/or significantly -13- increase net sales in order to finance its working capital needs with cash generated by operations. Furthermore, pursuant to the restructured loan with IBM Credit, the Company is required to deposit its revenues in accounts subject to control by IBM Credit. At any time, regardless of whether the Company is in default of its obligations to IBM Credit, IBM Credit is permitted to apply these amounts towards the repayment of any of the Company's obligations to IBM Credit. This loan is also subject to mandatory prepayment as follows: (i) upon the disposition of any assets of the Company outside of the ordinary course of business, all net proceeds to the Company must be applied towards the Company's obligations under the loan; (ii) upon the closing of any financing, 10% of the proceeds must be applied towards the Company's obligations under the loan; (iii) upon the thirtieth day following the end of each fiscal quarter, an amount of no less than 50% of operating cash flow for such prior fiscal quarter must be applied towards the Company's obligations under the loan; and (iv) upon the receipt of any other amounts other than sales of inventory or used or obsolete equipment in the ordinary course of business, and not otherwise described in the preceding clause (i) - (iii), all of such amounts must be applied towards the Company's obligations under the loan. If the Company's obligations under the term loan, as well as finance charges and amounts outstanding in excess of the "borrowing base" (described below) under the working line of credit described below, are repaid, IBM Credit can require such proceeds to be applied towards a redemption of the Series A Convertible Preferred Stock. IBM Credit's control over the Company's financial resources as well as these prepayment provisions will place a further strain on the ability of the Company to fund its working capital needs internally. Accordingly, there can be no assurance that the Company will be able to successfully fund its working capital needs internally. The restructured loan also provides for a working line of credit of up to $5.0 million. However, the Company will only be able to borrow amounts up to the "borrowing base" which is defined as the sum of (i) the lesser of 10% of the gross value of eligible inventory or $500,000; plus (ii) 80% of the value of eligible domestic accounts receivable; plus (iii) the lesser of 50% of the gross value of certain Japanese and European accounts receivable or $500,000. Upon the closing of the restructured loan, approximately $1.5 million, or an amount equal to the current borrowing base was deemed to be outstanding under this line of credit. Therefore, in order to draw on this working line of credit, the Company will need to increase the amount of the borrowing base by increasing the amount of certain of its accounts receivable or repay amounts outstanding under this line of credit. Because most of the Company's cash flow must be applied towards prepayment of the term loan and, towards the redemption of the Series A Convertible Preferred Stock, prior to reducing any amounts outstanding under the working line of credit, there can be no assurance that the Company will be able to significantly reduce this working line of credit. Accordingly, there can be no assurance that this working line of credit will provide a significant source of working capital. The Company's ability to sell assets in order to satisfy its working capital needs will also be restricted by the terms of the Series A Convertible Preferred Stock and the terms of the restructured loan. The Series A Convertible Preferred Stock will be redeemable at the option of IBM Credit upon certain dispositions and, as described above, the Company is required to apply the proceeds of any disposition towards repayment of the term loan component of the restructured loan. The restructured loan also imposes certain operating and financial restrictions on the Company and requires the Company to maintain certain financial covenants such as minimum cash flow levels, restricts the ability of the Company to incur additional indebtedness, pay dividends, create liens, sell assets or engage in mergers or acquisitions, or make certain capital expenditures. The failure to comply with these covenants would constitute a default under the loan, which is secured by substantially all of the Company's assets. In the event of such a default, IBM Credit could elect to declare all of the funds borrowed pursuant thereto to be due and payable together with accrued and unpaid interest proceeding and to apply all amounts on deposit in the Company's bank accounts, which could result in the Company becoming a debtor in a bankruptcy. The loan restrictions could limit the ability of the Company to effect future financings or otherwise restrict corporate activities. Even if additional financing could be obtained, there can be no assurance that it would be on terms that are favorable or acceptable to the Company. As of December 31, 1996, the Company was not in compliance with all of the financial covenants under the restructured loan agreement (specifically, net profit to revenue ratio and interest coverage ratio) however, IBM Credit has waived such defaults. There can be no assurance that IBM Credit will grant additional waivers in future periods in the event the Company is not in compliance with such covenants. See Note 2 to Consolidated Financial Statements contained in the Company's Annual Report on Form 10-K for the year ended September 30, 1996. The restructured loan may also limit the Company's ability to respond to changing business and economic conditions, insofar as such conditions may affect the financial condition and financing requirements of the Company. If the Company is unable to generate sufficient cash flows from operations in the future, it may be required to refinance all or a portion of its existing indebtedness to IBM Credit (which indebtedness can be repaid without prepayment penalties) or to obtain additional financing. There can be no assurance that any such refinancing would be possible or that any additional financing could be obtained on terms that are favorable or acceptable to the Company. See "--Financial Condition." -14- VOLATILITY OF STOCK PRICE Immediately prior to the consummation of the Plan, the Company had outstanding approximately 18,147,099 shares of Common Stock, most of which were freely tradeable. Upon the effectiveness of the Registration Statement relating to the resale of the securities issued pursuant to the Plan, the number of freely tradeable shares of Common Stock increased by almost 200% and, upon the conversion of the Series A Convertible Preferred Stock, up to an additional 17,921,393 shares may be eligible for public resale, an increase of almost 300% from the number of outstanding shares of Common Stock prior to the consummation of the Plan. Furthermore, none of the creditors who received shares of Common Stock pursuant to the Plan have entered into any agreements restricting their ability to resell the shares of Common Stock which they received. As a result of this substantially larger public float, it is likely that a substantial number of creditors may seek to resell their shares at times when there is an insufficient demand for shares of Common Stock. In such an event, the trading price of the Common Stock will be materially and adversely affected. The Company believes that sales by former creditors have played a significant role in the decline of the trading price of the Common Stock since November 1996. The price of the Company's Common Stock has fluctuated widely in the past. Management believes that such fluctuations may have been caused by announcements of new products, quarterly fluctuations in the results of operations and other factors, including changes in conditions of the personal computer industry in general and of Apple Computer in particular, changes in the Company's results of operations and financial condition and recent sales of large numbers of shares of Common Stock by former creditors of the Company. Stock markets, and stocks of technology companies in particular, have experienced extreme price volatility in recent years. This volatility has had a substantial effect on the market prices of securities issued by the Company and other high technology companies, often for reasons unrelated to the operating performance of the specific companies. Due to the factors referred to herein, the dynamic nature of the Company's industry, general economic conditions, the substantially larger number of freely tradeable shares of Common Stock held by former creditors of the Company and other factors, the Company's future operating results and stock prices may be subject to significant volatility in the future. Such stock price volatility for the Common Stock has in the past provoked securities litigation, and future volatility could provoke litigation in the future that could divert substantial management resources and have an adverse effect on the Company's results of operations. See "--Litigation Settlement." DEPENDENCE ON AND COMPETITION WITH APPLE Historically, substantially all of the Company's products have been designed for and sold to users of Apple computers, and it is expected that sales of products relating to such computers will continue to represent substantially all of the Company's product sales for the foreseeable future. The Company's operating results would be adversely affected if Apple should continue to lose market share, if Macintosh sales were to decline further or if other developments were to adversely affect Apple's business. Furthermore, any difficulty that may be experienced by Apple in the development, manufacturing, marketing or sale of its computers, or other disruptions to, or uncertainty in the market regarding, Apple's business, resulting from these or other factors could result in reduced demand for Apple computers, which in turn could materially and adversely affect sales of the Company's products. Recently, Apple has announced large losses, management changes, headcount reductions, and other significant events which have led or could lead to uncertainty in the market regarding Apple's business and products. In addition, news reports indicating that Apple may be or may have been the target of merger, acquisition, or takeover negotiations, have led or could lead to uncertainty in the market regarding Apple's business and products. As software applications for the color publishing and multimedia markets become more available on platforms other than Macintosh, it is likely that these other platforms will continue to gain acceptance in these markets. For example, newer versions of the Microsoft Windows operating system support high performance graphics and video applications similar to those offered on the Macintosh. There is a risk that this trend will reduce the support given to Macintosh products by third party developers and could substantially reduce demand for Macintosh products and peripherals in the Company's target markets over the long term. A number of the Company's products compete with products marketed by Apple. As a competitor of the Company, Apple could in the future take steps to hinder the Company's development of compatible products and slow sales of the Company's products. The Company's business is based in part on supplying products that meet the needs of high-end customers that are not fully met by Apple's products. As Apple improves its products or bundles additional hardware or software into its computers, the potential market for Radius products that provide those capabilities will be reduced. For example, the Company believes that the on-board performance capabilities included in Macintosh Power PC products have reduced and continue to reduce overall sales for the Company's graphics cards. In the past, the Company has developed new -15- products as Apple's progress has rendered existing Company products obsolete. However, in light of the Company's current financial condition and reduced research and development expenditures there can be no assurance that the Company will continue to develop new products on a timely basis or that any such products will be successful. In order to develop products for the Macintosh on a timely basis, the Company depends upon access to advance information concerning new Macintosh products. A decision by Apple to cease sharing advance product information with the Company would adversely affect the Company's business. New products anticipated from and introduced by Apple could cause customers to defer or alter buying decisions due to uncertainty in the marketplace, as well as presenting additional direct competition for the Company. For example, the Company believes that Apple's transition during 1994 to Power PC products caused delays and uncertainties in the marketplace and had the effect of reducing demand for the Company's products. In addition, sales of the Company's products have been adversely affected by Apple's restructuring of its entire product line from Nubus-based to PCI Bus-based computers. In the past, transitions in Apple's products have been accompanied by shortages in those products and in key components for them, leading to a slowdown in sales of those products and in the development and sale by the Company of compatible products. In addition, it is possible that the introduction of new Apple products with improved performance capabilities may create uncertainties in the market concerning the need for the performance enhancements provided by the Company's products and could reduce demand for such products. COMPETITION The markets for the Company's products are highly competitive, and the Company expects competition to intensify. Many of the Company's current and prospective competitors have significantly greater financial, technical, manufacturing and marketing resources than the Company. The Company believes that its ability to compete will depend on a number of factors, including the amount of financial resources available to the Company, its ability to repay its indebtedness to IBM Credit, success and timing of new product developments by the Company and its competitors, product performance, price and quality, breadth of distribution, customer support and its ability to attract and retain key personnel, particularly in light of the Company's financial condition. There can be no assurance that the Company will be able to compete successfully with respect to these factors. In addition, the introduction of lower priced competitive products could result in price reductions that would adversely affect the Company's results of operations. DEPENDENCE ON LIMITED NUMBER OF MANUFACTURERS AND SUPPLIERS The Company outsources the manufacturing and assembly of its products to third party manufacturers. Although the Company uses a number of manufacturer/assemblers, each of its products is manufactured and assembled by a single manufacturer. The failure of a manufacturer to ship the quantities of a product ordered by the Company could cause a material disruption in the Company's sales of that product. In the past, most recently in the fourth quarter of fiscal 1996, the Company has experienced substantial delays in its ability to fill customer orders for displays and other products, due to the inability of certain manufacturers to meet their volume and schedule requirements and, more recently, due to the Company's shortages in available cash. Such shortages have caused some manufacturers to put the Company on a cash or prepay basis and/or to require the Company to provide security for their risk in procuring components or reserving manufacturing time, and there is a risk that manufacturers will discontinue their relationship with the Company. In the past, most recently the fourth quarter of fiscal 1996, the Company has been vulnerable to delays in shipments from manufacturers because the Company has sought to manage its use of working capital by, among other things, limiting the backlog of inventory it purchases. This vulnerability has been exacerbated by the Company's shortages in cash reserves. Delays in shipments from manufacturers can cause fluctuations in the Company's short term results and contribute to order cancellations. The Company currently has arranged payment terms for certain of its major manufacturers such that certain of the Company's major customers pay these manufacturers directly for products ordered and shipped. In the event these customers do not pay these manufacturers, there can be no assurance that such manufacturers will not cease supplying the Company. In addition, as a condition to continuing its manufacturing arrangement with the Company, the Company granted Mitsubishi Electronics, the manufacturer of the Company's PressView products, a security interest in all of the Company's technology and intellectual property rights related to and incorporated into the Company's PressView products. There can be no assurance that other manufacturers will not require special terms in order to continue their relationship with the Company. The Company is also dependent on sole or limited source suppliers for certain key components used in its products, including certain digital to analog converters, digital video chips, color-calibrated monitors and other products. Certain other semiconductor components and molded plastic parts are also purchased from sole or limited source suppliers. The Company purchases these sole or limited source components primarily pursuant to purchase orders placed from time to time in the ordinary course of business and has no guaranteed supply arrangements with sole or limited source suppliers. Therefore, these suppliers are not obligated to supply products to the Company for any specific period, in any specific -16- quantity or at any specific price, except as may be provided in a particular purchase order. Although the Company expects that these suppliers will continue to meet its requirements for the components, there can be no assurance that they will do so, particularly in light of the Company's financial condition. The Company's reliance on a limited number of suppliers involves a number of risks, including the absence of adequate capacity, the unavailability or interruption in the supply of key components and reduced control over delivery schedules and costs. The Company expects to continue to rely on a limited number of suppliers for the foreseeable future. If these suppliers became unwilling or unable to continue to provide these components the Company would have to develop alternative sources for these components which could result in delays or reductions in product shipments which could have a material adverse effect on the Company's business, operating results and financial condition. Certain suppliers, due to the Company's shortages in available cash, have put the Company on a cash or prepay basis and/or required the Company to provide security for their risk in procuring components or reserving manufacturing time, and there is a risk that suppliers will discontinue their relationship with the Company. The introduction of new products presents additional difficulties in obtaining timely shipments from suppliers. Additional time may be needed to identify and qualify suppliers of the new products. Also, the Company has experienced delays in achieving volume production of new products due to the time required for suppliers to build their manufacturing capacity. An extended interruption in the supply of any of the components for the Company's products, regardless of the cause, could have an adverse impact on the Company's results of operations. The Company's products also incorporate components, such as VRAMs, DRAMs and ASICs that are available from multiple sources but have been subject to substantial fluctuations in availability and price. Since a substantial portion of the total material cost of the Company's products is represented by these components, significant fluctuations in their price and availability could affect its results of operations. As a result of the consummation of the Plan, certain suppliers and manufacturers agreed to settle amounts owed by the Company for an amount substantially less than the amount of the balance owed. Accordingly, certain suppliers and manufacturers may be reluctant to continue to do business with the Company in the future. TECHNOLOGICAL CHANGE; CONTINUING NEED TO DEVELOP NEW PRODUCTS The personal computer industry in general, and color publishing and video applications within the industry, are characterized by rapidly changing technology, often resulting in short product life cycles and rapid price declines. The Company believes that its success will be highly dependent on its ability to develop innovative and cost-competitive new products and to bring them to the marketplace in a timely manner. Should the Company fail to introduce new products on a timely basis, the Company's operating results could be adversely affected. Technological innovation is particularly important for the Company, since its business is based on its ability to provide functionality and features not included in Apple's products. As Apple introduces new products with increased functionality and features, the Company's business will be adversely affected unless it develops new products that provide advantages over Apple's latest offerings. As a result of the Company's financial condition, it has had to significantly reduce its research and development expenditures. For the first quarter of fiscal 1997, the Company spent approximately $904,000 on research and development as compared with approximately $3.6 million for the first quarter of fiscal 1996. Furthermore, as described in "-- Need for Additional Financing; Loan Restrictions," the terms of the restructured loan with IBM Credit will restrict the Company's ability to fund its working capital needs and, as a result, the ability of the Company to maintain historical levels of research and development expenditures which could adversely affect its ability to develop new products. Continued reduction in the available cash resources of the Company could result in the interruption or cancellation of research and product development efforts which would have a material adverse effect on the business, operating results and financial condition of the Company. The Company anticipates that the video editing industry will follow the pattern of the professional publishing industry in which desktop publishing products, including those produced by Radius, replaced more expensive, proprietary products, and the Company also anticipates that this evolution will lead to an increase in the purchase and use of video editing products. As a result, the Company has devoted significant resources to this product line. There can be no assurance that this evolution will occur in the video editing industry as expected by the Company, or that even if it does occur that it will not occur at a slower pace than anticipated. There can also be no assurance that any video editing products developed by the Company will achieve consumer acceptance or broad commercial success. For example, the Company initially began its MacOS compatible systems business in the third quarter of fiscal 1995 and devoted substantial financial resources, including raising approximately $21.4 million in a private placement of its Common Stock and borrowing an additional $20.0 million from IBM Credit, and incurring significant research and development and sales and marketing expenses. This business was never profitable and the Company sold this line of business in February 1996. In the event that the increased use of such video editing products does not occur or in the event that the Company is unable to successfully develop and market such products, the Company's business, operating results and financial condition would be materially adversely affected. -17- The introduction of new products is inherently subject to risks of delay. Should the Company fail to introduce new products on a timely basis, the operating results of the Company could be adversely affected. The introduction of new products and the phasing out of older products will require the Company to carefully manage its inventory to avoid inventory obsolescence and may require increases in inventory write-down reserves. The long lead times -- as much as three to five months -- associated with the procurement of certain components (principally displays and ASICs) exposes the Company to greater risk in forecasting the demand for new products. There can be no assurance that the Company's forecasts regarding new product demand and its estimates of appropriate inventory levels will be accurate. Moreover, no assurance can be given that the Company will be able to cause all of its new products to be manufactured at acceptable manufacturing yields, that the Company will obtain market acceptance for these products or that potential manufacturers will not be hesitant to manufacture such new products as a result of the Company's financial condition. DEPENDENCE ON INDIRECT DISTRIBUTION CHANNELS The Company's primary means of distribution is through a limited number of third-party distributors and master resellers that are not under the direct control of the Company. Furthermore, the Company relies on one exclusive distributor for its sales in each of Japan and Europe. The Company does not maintain a direct sales force. As a result, the Company's business and financial results are highly dependent on the amount of the Company's products that is ordered by these distributors and resellers. Such orders are in turn dependent upon the continued viability and financial condition of these distributors and resellers as well as on their ability to resell such products and maintain appropriate inventory levels. Furthermore, many of these distributors and resellers generally carry the product lines of a number of companies, are not subject to minimum order requirements and can discontinue marketing the Company's products at any time. Accordingly, the Company must compete for the focus and sales efforts of these third parties. Because certain of the Company's major suppliers have arrangements with the Company pursuant to which certain of the Company's major customers are responsible for payment of goods sent to the Company, the Company is dependent on certain resellers to make payments to its suppliers. In addition, due in part to the historical volatility of the personal computer industry, certain of the Company's resellers have from time to time experienced declining profit margins, cash flow shortages and other financial difficulties. The future growth and success of the Company will continue to depend in large part upon its indirect distribution channels, including its reseller channels. If its resellers or other distributors were to experience financial difficulties, the Company's results of operations could be adversely affected. INTERNATIONAL SALES Prior to the second fiscal quarter of 1996, the Company's international sales were primarily made through distributors and the Company's subsidiary in Japan. Effective April 1, and July 1, 1996 the Company appointed an exclusive distributor for Japan and Europe, respectively. The Company expects that international sales, particularly sales to Japan, will represent a significant portion of its business activity and that it will be subject to the normal risks of international sales such as currency fluctuations, longer payment cycles, export controls and other governmental regulations and, in some countries, a lesser degree of intellectual property protection as compared to that provided under the laws of the United States. In addition, demand for the Company's products in Japan has been affected by the transition of its Japanese sales and marketing efforts from Radius' subsidiary to a distributor. In addition, as a result of its new exclusive distributor arrangements with respect to Europe and Japan, the Company will only recognize as net revenue the amount of the commission received from sale of its products as compared with the entire sales price of the product sold. Accordingly, revenues attributable to such regions could be significantly less than prior periods even though demand for the Company's products may remain constant. Furthermore, a reduction in sales efforts or financial viability of this distributor could adversely affect the Company's net sales and its ability to provide service and support to Japanese customers. Additionally, fluctuations in exchange rates could affect demand for the Company's products. If for any reason exchange or price controls or other restrictions on foreign currencies are imposed, the Company's business, operating results and financial condition could be materially adversely affected. DEPENDENCE ON KEY PERSONNEL The Company's success depends to a significant degree upon the continued contributions of its key management, marketing, product development and operational personnel and the Company's ability to retain and continue to attract highly skilled personnel. The Company does not carry any key person life insurance with respect to any of its personnel. Competition for employees in the computer industry is intense, and there can be no assurance that the Company will be able to attract and retain qualified employees. Many members of the Company's management have departed within the past year, including its former Chief Financial Officer and three other Vice Presidents, and the Company has also had substantial -18- layoffs and other employee departures. The Company's current Chief Financial Officer has announced her resignation, which is effective April 1, 1997. Because of the Company's financial difficulties, it has become increasingly difficult for it to hire new employees and retain key management and current employees. Moreover, because voting control of the Company rests in the hands of the Company's former creditors, such persons could, if acting together, effectuate changes in Board composition or management. DEPENDENCE ON PROPRIETARY RIGHTS The Company relies on a combination of patent, copyright, trademark and trade secret protection, nondisclosure agreements and licensing arrangements to establish and protect its proprietary rights. The Company has a number of patents and patent applications and intends to file additional patent applications as it considers appropriate. There can be no assurance that patents will issue from any of these pending applications or, if patents do issue, that any claims allowed will be sufficiently broad to protect the Company's technology. In addition, there can be no assurance that any patents that may be issued to the Company will not be challenged, invalidated or circumvented, or that any rights granted thereunder would provide proprietary protection to the Company. The Company has a number of trademarks and trademark applications. There can be no assurance that litigation with respect to trademarks will not result from the Company's use of registered or common law marks, or that, if litigation against the Company were successful, any resulting loss of the right to use a trademark would not reduce sales of the Company's products in addition to the possibility of a significant damages award. Although, the Company intends to defend its proprietary rights, policing unauthorized use of proprietary technology or products is difficult, and there can be no assurance that the Company's efforts will be successful. The laws of certain foreign countries may not protect the proprietary rights of the Company to the same extent as do the laws of the United States. The Company has received, and may receive in the future, communications asserting that its products infringe the proprietary rights of third parties, and the Company is engaged and has been engaged in litigation alleging that the Company's products infringe others' patent rights. As a result of such claims or litigation, it may become necessary or desirable in the future for the Company to obtain licenses relating to one or more of its products or relating to current or future technologies, and there can be no assurance that it would be able to do so on commercially reasonable terms. CONTROL BY CREDITORS After the consummation of the Plan, the Company's unsecured creditors and IBM Credit owned in the aggregate approximately 69.7% of the voting power of the Company (assuming exercise of all available options, such creditors would own approximately 67% of the voting power of the Company). IBM Credit owns approximately 9.2% of the Company's voting power and the Committee Members own approximately 38.6% of the voting power of the Company. After the consummation of the Plan, the Company's four largest unsecured creditors, SCI Technology, Inc., Mitsubishi Electronics, Hamilton Hallmark/Avnet Co. and Manufacturers Services Limited, Inc. owned approximately 16.2%, 6.7%, 5.3% and 2.9%, respectively, of the voting power of the Company after the consummation of the Plan. All of the Company's creditors acting together would have voting control of the management and direction of the Company and could also impede a merger, consolidation, takeover or other business combination involving the Company or discourage a potential acquiror from making a tender offer or otherwise attempting to obtain control of the Company. The Committee Members have acted cooperatively with respect to the negotiation of the Plan, and the Company expects such creditors to continue to act cooperatively with respect to their ownership of the Company's securities. One Committee Member, Carl Carlson of Mitsubishi Electronics joined the Board of Directors in September 1996. The Company also intends to continue to do business with many of its unsecured creditors, including Mitsubishi Electronics and SCI Technology, Inc., each of whom beneficially own more than 5% of the Company's Common Stock. As a result, such creditors may be able to influence the terms of any business relationship between the Company and such creditor. SHARES ELIGIBLE FOR FUTURE SALE Sales of substantial amounts of Common Stock in the public market could adversely affect the prevailing market price of the Company's Common Stock. As of November 12, 1996, the effective date of the Registration Statement on Form S-1 with respect to the securities issued pursuant to the Plan (the "Effective Date"), there were approximately 54,451,586 shares of Common Stock outstanding, substantially all of which are available for sale without restriction under the Securities Act of 1933, as amended (the "Act") (as compared with approximately 18,147,099 shares of Common Stock outstanding as of August 31, 1996) except for those shares which are held by affiliates of the Company. If the Series A Convertible -19- Preferred Stock is converted and if outstanding warrants to purchase 800,000 shares of Common Stock are exercised, up to an additional 17,921,393 shares (including 11,046,060 shares issuable pursuant to the Rights) will be available for sale in the public market. The tradability of such shares of Common Stock could materially and adversely affect the market price of the Common Stock. See "-- Volatility of Stock Price." In addition, the Company is required to pay (on a quarterly basis) an annual dividend of $300,000 (or $0.40 per share) on the Series A Convertible Preferred Stock. This dividend may be paid in cash or Common Stock of the Company. Depending upon its financial position on any dividend payment date, such dividends may be paid in the form of shares of Common Stock instead of cash. In the event such dividend is fully paid in shares of Common Stock, a number of shares having a market value of up to $75,000, the amount of such quarterly dividend, will be issued each quarter. Based on the closing price of $0.50 per share on December 30, 1996, an additional 150,000 shares could be issuable as a dividend on the Series A Convertible Preferred Stock at the end of each quarter. The Company has registered under the Act, Common Stock having a market value of $600,000 (representing the first eight quarterly dividend payments) in the event that such dividend is paid in Common Stock. Such shares will be freely tradable. Subsequent dividends in the form of shares of Common Stock will be subject to the provisions of Rule 144, including the holding period requirements. As of September 30, 1996, there were 1,135,347 shares of Common Stock reserved for issuance upon exercise of outstanding options by employees and consultants. As of such date there were an additional 1,695,331 shares of Common Stock available for issuance under options to be granted to employees and consultants and 125,321 shares reserved for issuances for purchases under the Company's Employee Stock Purchase Plan. Additionally, 173,126 shares of Common Stock were reserved for issuance under the Company's stock option plans for non-employee directors, 32,812 of which were subject to outstanding options. The Company has amended its 1995 Stock Option Plan (the "1995 Plan") to increase the number of shares available for issuance thereunder by 2,716,620 shares, subject to shareholder approval at its Annual Meeting of Shareholders in February 1997. In accordance with the terms of the debt-to-equity exchange consummated in September 1996, the 1995 Plan will be further amended or a new plan adopted in the event that the Series A Convertible Preferred Stock is converted into Common Stock so that an aggregate of 7,890,043 shares of Common Stock are covered by the 1995 Plan as amended and/or any additional plan. The Company may also seek to obtain Board and/or shareholder approval for grants of options in excess of the amounts described above. All of the shares of Common Stock to be issued upon exercise of options granted or to be granted or upon stock purchases will be available for sale in the public market, subject to the Rule 144 volume limitations applicable to affiliates. Such availability will further increase the number of freely tradeable shares of Common Stock outstanding which could exert downward pressure on the trading price of the Common Stock. POSSIBLE DELISTING OF COMMON STOCK FROM NASDAQ SMALLCAP MARKET The Company's Common Stock is listed on the Nasdaq SmallCap Market pursuant to an agreement with the NASD which requires that the Company comply with the continued listing requirements for the Nasdaq SmallCap Market. Failure to meet the continued listing requirements in the future would subject the Common Stock to delisting. As described under "Business -- Recent Developments -- Nasdaq National Market Delisting," in the Company's Annual Report on Form 10-K for the year ended September 30, 1996, the Common Stock could be delisted from the Nasdaq SmallCap Market if the Company fails to maintain capital and surplus of $1.0 million or, if the trading price of the Common Stock remains below $1.00 per share, the Company will be required to maintain capital and surplus of $2.0 million. Because of the substantial losses experienced by the Company for fiscal 1996, any significant loss experienced in a subsequent quarter could cause the Company to have insufficient capital and surplus for continued listing on the Nasdaq SmallCap Market. Because of the substantial increase in the number of tradable shares of Common Stock, there could be continued downward pressure on the trading price of the Common Stock (which has not traded over $1.00 per share for the entire month of December), which makes it less likely that the Company will meet the minimum bid price requirement for the Nasdaq SmallCap Market and, as a result, the Company would need to maintain capital and surplus of $2.0 million. Furthermore under the proposed new continued listing requirements of the Nasdaq National Market and the Nasdaq SmallCap Market, any securities with a trading price of less than $1.00 per share would become subject to delisting, regardless of capital and surplus. If the Company's Common Stock is delisted, there can be no assurance that the Company will meet the requirements for initial inclusion in the future, particularly the current $3.00 minimum per share bid requirement. Trading, if any, in the listed securities after delisting would be conducted in the over-the-counter market in what are commonly referred to as the "pink sheets." As a result, investors may find it more difficult to dispose of, or to obtain accurate quotations as to the value of, the Company's securities. -20- PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS (a) On November 16, 1995, Electronics for Imaging, Inc. ("EFI") filed a suit in the United States District Court in the Northern District of California alleging that the Company infringes a patent allegedly owned by EFI. Although the complaint does not specify which of the Company's products allegedly infringe the patent, subsequent pleading indicates that EFI alleges that the Company's Color Server products allegedly infringe. In January 1996, the Company completed the divestiture of the Color Server Group. The Company has filed an answer denying all material allegations, and has filed counterclaims against EFI alleging causes of action for interference with prospective economic benefit, antitrust violations, and unfair business practices. EFI's motion to dismiss or sever the Company's amended counterclaims was granted in part and the ruling permitted the Company to file an amended counterclaim for antitrust violations. The Company has filed an amended antitrust claim. The Company believes it has meritorious defenses to EFI's claims and is defending them vigorously. In addition, the Company believes it may have indemnification rights with respect to EFI's claims. A motion for summary judgment based on these indemnification rights was filed, and the court granted this motion finding the Company immune from suit under the patent after February 22, 1995. The Company expects to vigorously defend the remaining claims of EFI and to vigorously prosecute the claims it has asserted against EFI. In the opinion of management, based on the facts known at this time, although the eventual outcome of this case is unlikely to have a material adverse effect on the results of operations or financial position of the Company, the costs of defense, regardless of outcome, may have a material adverse effect on the results of operations or financial position of the Company. In addition, in connection with the divestiture of its Color Server Group, the Company has certain indemnification obligations for which approximately $2.4 million remains held in escrow to secure such obligations in the event that the purchaser suffers any losses resulting from such litigation. (b) The Company was named as one of approximately 42 defendants in Shapiro et al. v. ADI Systems, Inc. et al., Superior Court of California, Santa Clara County, case no. CV751685, filed August 14, 1995. Radius was named as one of approximately 32 defendants in Maizes & Maizes et al. v. Apple Computer et al., Superior Court of New Jersey, Essex County, case no. L-13780-95, filed December 15, 1995. Plaintiffs in each case purport to represent alleged classes of similarly situated persons and/or the general public, and allege that the defendants falsely advertised that the viewing areas of their computer monitors are larger than in fact they are. The Company was served with the Shapiro complaint on August 22, 1995 and was served with the Maizes complaint on January 5, 1996. Defendants' petition to the California State Judicial Council to coordinate the Shapiro case with similar cases brought in other California jurisdictions was granted in part and it is anticipated that the coordinated proceedings will be held in Superior Court of California, San Francisco County. An amended consolidated complaint was filed on March 26, 1996. Discovery proceedings are scheduled to begin. The Company believes it has meritorious defenses to the plaintiffs' claims and is defending them vigorously. Extended settlement discussions began in connection with a successful demurrer in the California case. Such discussions have been complicated by the refusal of a small number of the defendants to participate in the proposed settlement and a preliminary settlement of both cases is anticipated soon. In the opinion of management, based on the facts known at this time, the eventual outcome of these cases may have a material adverse effect on the results of operations or financial position of the Company in the financial period in which they are resolved. In addition, whether or not the eventual outcomes of these cases have a material adverse effect on the results of operations or financial condition of the Company, the costs of defense, regardless of outcome, may have a material adverse effect on the results of operations and financial condition of the Company. (c) On April 17, 1996, the Company was served with a complaint filed by Colorox Corporation ("Colorox"), in the Circuit Court of the State of Oregon, County of Multnomah, case no. 9604-02481, which alleged that the Company breached an alleged oral contract to sell its dye sublimation printer business to Colorox for $200,000, and this complaint sought both specific performance of the alleged contract and alleged damages of $2.5 million. On February 4, 1997, the Company agreed to settle this lawsuit on terms management believes will not have a material effect on the business, results of operations or financial condition of the Company. -21- (d) The Company is involved in a number of other judicial and administrative proceedings incidental to its business. The Company intends to defend such lawsuits vigorously and although adverse decisions (or settlements) may occur in one or more of such cases, the final resolution of these lawsuits, individually or in the aggregate, is not expected to have a material adverse effect on the financial position of the Company. However, depending on the amount and timing of an unfavorable resolution of these lawsuits, it is possible that the Company's future results of operations or cash flows could be materially adversely affected in a particular period. In addition, the costs of defense --regardless of the outcome -- could have a material adverse effect on the business, results of operations and financial condition of the Company. ITEM 5. OTHER INFORMATION On January 31, 1997, Henry V. ("Hank") Morgan agreed to join the Company as Chief Financial Officer and Senior Vice President, Finance and Administration. The Company expects Mr. Morgan to begin work on February 24, 1997. During 1995 and 1996, Mr. Morgan was Chief Financial Officer of Connect, Inc. - Mountain View, California, an Internet-based interactive commerce applications software company. From 1989 through 1994, Mr. Morgan was Chief Financial Officer of Logitech International, S.A., a computer mouse manufacturer. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits -------- The following exhibits are filed with this Quarterly Report: 10.01 Employment Agreement by and between Registrant and Mark Housley dated December 20, 1996. 11.01 Computation of per share earnings. 27.01 Financial Data Schedule (EDGAR version only). (b) Reports on Form 8-K ------------------- On December 5, 1996 an optional report pursuant to Item 5 of Form 8-K was filed by the Company for the purpose of making available certain financial data. The Company's Unaudited Consolidated Statement of Operations for the twelve months ended September 30, 1996 was filed therewith. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: February 10, 1997 RADIUS INC. By:/s/ ---------------------------- Cherrie L. Fosco Chief Financial Officer -22- EX-10.01 2 EXHIBIT 10.01 Exhibit 10.01 December 19, 1996 Mr. Mark Housley 772 Rosewood Drive Palo Alto, CA 94303 Re: EMPLOYMENT TERMS Dear Mr. Housley: Pursuant to our recent discussions, this letter sets forth the terms of your future employment with Radius Inc. (the "Company") as well as our understanding with respect to any termination of such employment relationship. 1. POSITION AND DUTIES: You will be employed by the Company as its President and Chief Operating Officer reporting to the Company's Chief Executive Officer, Charles W. Berger. You accept employment with the Company on the terms and conditions set forth in this Agreement, and you agree to devote your full business time, energy and skill to your duties at the Company. These duties will include, but not be limited to, any duties consistent with your position, as well as any other reasonable duties which may be assigned to you from time to time by the Chief Executive Officer or the Board of Directors (the "Board"). These duties will begin on January 6, 1997. In the event that the Company's Chief Executive Officer resigns or is removed, then you will be offered such additional position if the Board is satisfied with your performance and you will report to the Chairman of the Board. At the next Board of Directors meeting, the Board will appoint you to a position on the Board. 2. TERM OF EMPLOYMENT: Your employment by the Company is for no specified term, and may be terminated by you or the Company at any time, with or without cause, subject to the provisions of Paragraphs 4 and 5 below. 3. COMPENSATION: You will be compensated by the Company for your services as follows: (a) SALARY: You will be paid a monthly salary of $16,667.00, less applicable withholding, in accordance with the Company's normal payroll procedures. Your salary will be reviewed by the Chief Executive Officer and the Board on an annual basis, and may be subject to upward adjustment based upon various factors including, but not limited to, your performance, the Company's profitability, and the prevailing annual inflation rate. (b) BONUS: You will be eligible to receive a semi-annual bonus at the end of each fiscal half year (March 31 and September 30). For the fiscal half year ending March 31, 1997, your target and guarantied bonus is $25,000 (i.e., 50% of base pay), based on operating margin goals (per the 1997 Plan attached as Schedule 1) with a 50% accelerator over 100% performance and a 200% performance cap. For the second half Housley Letter Agreement 1 year ending September 30, 1997, your target bonus is $50,000 and the guarantied bonus is $25,000. Thereafter, there is no guarantied bonus, the target bonus will remain 50% of base pay and unless performance equals or exceeds 80% of the operating margin goal, no bonus will be paid. Operating margin goals will be reestablished each year with Board approval. The same operating margin goals will apply to all officers participating in this form of bonus compensation program. If the Board terminates the program after fiscal year 1997, then you and the Company will negotiate an alternative form of program which provides reasonably equivalent incentive. (c) BENEFITS: You will have the right, on the same basis as other executive employees of the Company, to participate in and to receive benefits under all of the Company's medical, disability or other plans, as well as under the Company's vacation and business expense reimbursement policies. (d) STOCK OPTIONS: You will be granted a nonqualified stock option to purchase 1,000,000 shares of the Company's common stock (the "Shares"). The exercise price of the Shares will be equal to the closing price of the Company's common stock on the NASDAQ Small Cap Market System on the last trading day prior to the date the option is granted. The option will be granted on the business day following the date on which you sign and return this letter. Your option will vest starting on your first day of employment with the Company as Chief Operating Officer at the rate of 4% per month in arrears. The Company will prepare and file with the Securities and Exchange Commission a registration statement on Form S-8 covering all of the Shares. The form of option agreement is attached as Schedule 2. 4. BENEFITS UPON VOLUNTARY TERMINATION: In the event that you voluntarily resign from your employment with the Company, you shall be entitled to no compensation or benefits from the Company other than those earned under Paragraph 3 through the date of your termination. You agree that in the event you voluntarily terminate your employment with the Company, you shall provide the Company with one month's written notice of your termination. The Company may, in its sole discretion, elect to waive all or any part of such notice period and accept your voluntary termination at an earlier date. 5. BENEFITS UPON OTHER TERMINATION: In the event your employment is terminated by the Company for the reasons set forth below, you shall be entitled to the following: (a) TERMINATION FOR CAUSE: If your employment is terminated by the Company for cause, you shall be entitled to no compensation or benefits from the Company other than those earned under Paragraph 3 through the date of your termination. For purposes of this Agreement, a termination "for cause" occurs if you are terminated for any of the following reasons: (i) theft, dishonesty, or falsification of any employment or Company records; (ii) improper material disclosure of the Company's confidential or proprietary information; (iii) your conviction of a felony which materially impairs your ability to perform your duties under this Agreement; (iv) any material violation by you of the Company's insider trading policy; or (v) your willful and persistent refusal to follow the instructions of the Chief Executive Officer or the Board. (b) TERMINATION FOLLOWING AN ACQUISITION. In the event of the sale of all or substantially all of the assets of the Company, the merger or consolidation of the Company with or into another corporation, the acquisition of more than fifty percent Housley Letter Agreement 2 (50%) of the outstanding shares of the Company by a single person or a group of related persons (such events are collectively referred to hereinafter as an "Acquisition") following which you are not offered your position as President and Chief Operating Officer of the surviving entity, the Board of Directors of the surviving entity (the "Surviving Board") may at its option request that you remain available to assist the surviving entity on up to a full time basis for six months following the effective date of the Acquisition and for up to an additional six months at up to 20% of full time. If you comply with the Surviving Board's request to assist the surviving entity during this 12 month period (the "Transition Period") or if the Surviving Board elects not to request your services during the Transition Period, you will be entitled to the following benefits: (i) you will continue to receive your normal salary and benefits during the Transition Period and (ii) your option will vest as set forth below. During the Transition Period you will continue to vest at the rate of 4% per month. At the end of the Transition Period any remaining unvested shares will immmediately vest. However, in no event will the total number of Shares available to you under your options be increased. The Transition Shares will vest on a monthly basis over the Transition Period (i.e. 1/12 of the total Transition Shares per month). (c) OTHER TERMINATION: If your employment is terminated by the Company for any reason other than cause (including your death or disability) or following an Acquisition, you shall continue to be paid for the next six months at your then-current salary rate, less applicable withholding, in accordance with the Company's normal payroll procedures. You shall also continue to vest in the Shares according to the schedule specified in Paragraph 3(e) during the six month period that you continue to receive your salary from the Company, and your option will remain exercisable for a period of three additional months after your option stops vesting. In addition to the severance benefits described in this Paragraph, you shall also be entitled to receive any compensation and benefits which you have earned under Paragraph 3(c) through the date of your termination. (d) RELEASE: The Company's obligations to provide you with the severance benefits described in Sections 5(b) and (c) above will be contingent upon your execution (at the time your employment is terminated) of the Release attached to this Agreement (as Schedule 3) and the completion of the seven (7) day revocation period described in the Release, if applicable. 6. CONFIDENTIAL AND PROPRIETARY INFORMATION: Upon your employment you agree to sign the Company's standard Employee Nondisclosure and Invention Assignment Agreement attached as Schedule 4. You further agree that you shall not breach any obligation which you have to any of your former employers with respect to their confidential or proprietary information during your employment with the Company. 7. EMPLOYMENT ELIGIBILITY VERIFICATION: You agree to provide the Company with appropriate documentation establishing your identity and eligibility for employment in the United States within three days of your employment as required by the Immigration and Reform Control Act of 1986. 8. DISPUTE RESOLUTION: In the event of any dispute or claim relating to or arising out of our employment relationship or this Agreement (including, but not limited to, any claims of wrongful termination or age or other discrimination), we agree that all such disputes shall be fully and finally resolved by binding confidential arbitration conducted by the American Arbitration Association in Santa Clara County, California; Housley Letter Agreement 3 provided, however, that this arbitration provision shall not apply to any disputes or claims relating to or arising out of your misuse or misappropriation of the Company's trade secrets or proprietary information. 9. ATTORNEYS' FEES: The prevailing party shall be entitled to recover from the losing party its attorneys' fees and costs incurred in any action brought to enforce any right arising out of this Agreement. 10. INTERPRETATION: This Agreement shall be interpreted in accordance with and governed by the laws of the State of California. 11. ASSIGNMENT: In view of the personal nature of the services to be performed under this Agreement by you, you shall not have the right to assign or transfer any of your obligations hereunder. 12. ENTIRE AGREEMENT: This letter constitutes the entire Agreement between you and the Company regarding the terms and conditions of your employment, and it supersedes all prior negotiations, representations or agreements between you and the Company regarding your employment, whether written or oral. 13. MODIFICATION: This Agreement, and the Release attached hereto, may only be modified or amended by a supplemental written agreement signed by you and an authorized member of the Board. We look forward to working with you at Radius Inc. Please sign this letter on the space provided below to acknowledge your acceptance of the terms of this Agreement. Sincerely, Charles W. Berger Chairman and Chief Executive Officer I agree to and accept employment with Radius Inc. on the terms and conditions set forth above. Date: December 20, 1996 By: /s/ ----------------------------------- Mark Housley Housley Letter Agreement 4 EX-11.01 3 EXHIBIT 11.01 EXHIBIT 11.01 COMPUTATION OF NET LOSS PER SHARE (in thousands, except per share data) THREE MONTHS ENDED DECEMBER 31, 1996 1995 -------- -------- Primary: Average common shares outstanding 54,660 17,248 Net effect of dilutive stock options - based on the modified treasury stock method using average market price - - ------- ------- Totals 54,660 17,248 ------- ------- ------- ------- Net loss applicable to common shareholders $(869) $(9,783) ------- ------- ------- ------- Per share amount $(0.02) $(0.57) ------- ------- ------- ------- Fully diluted: Average common shares outstanding 54,660 17,248 Net effect of dilutive stock options - based on the modified treasury stock method using quarter end market price which is greater than average market price - - ------- ------- Totals 54,660 17,248 ------- ------- ------- ------- Net loss applicable to common shareholders $(869) $(9,783) ------- ------- ------- ------- Per share amount* $(0.02) $(0.57) ------- ------- ------- ------- * The primary net loss per share is shown in the statements of operations. Net loss per share under the primary and fully diluted calculations are equivalent. EX-27.01 4 EXHIBIT 27.01 (FDS)
5 3-MOS SEP-30-1996 DEC-31-1996 1798 0 12863 (2036) 11702 38546 35364 (34121) 65696 17414 116 0 3000 168853 (145627) 65696 12097 12097 7026 7026 5002 0 737 (673) 121 0 0 0 0 (794) (0.02) (0.02)
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