-----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, ENhxaSJ1FyCKRmyNIi8AIitAVJ3w9fk7vpz9NSFyJf8bwelmWX1WtmR8dn9GvQe3 +UWzInlMRYK8lnQXRB8gpw== 0000912057-97-017265.txt : 19970514 0000912057-97-017265.hdr.sgml : 19970514 ACCESSION NUMBER: 0000912057-97-017265 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970329 FILED AS OF DATE: 19970513 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: 97602724 BUSINESS ADDRESS: STREET 1: 215 MOFFETT PARK DRIVE CITY: SUNNYVALE STATE: CA ZIP: 94089-1374 BUSINESS PHONE: 4085416100 MAIL ADDRESS: STREET 1: 215 MOFFETT PARK DR CITY: SUNNYVALE STATE: CA ZIP: 94089-1374 10-Q 1 FORM 10-Q - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 29, 1997. OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13(d) OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO . COMMISSION FILE NUMBER: 0-18690 RADIUS INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 68-0101300 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER) 215 MOFFETT PARK DRIVE SUNNYVALE, CA 94089 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE) (408) 541-6100 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) 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 MAY 12, 1997 WAS 54,939,948. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- RADIUS INC. INDEX PART I. FINANCIAL INFORMATION PAGE Item 1. Financial Statements Consolidated Balance Sheets at March 31, 1997 and September 30, 1996 3 Consolidated Statements of Operations for the Three and Six Months Ended March 31, 1997 and 1996 4 Consolidated Statements of Cash Flows for the Six Months Ended March 31, 1997 and 1996 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 PART II. OTHER INFORMATION Item 1. Legal Proceedings 18 Item 4. Submission of Matters to a Vote of Security Holders 18 Item 5. Other Information 18 Item 6. Exhibits and Reports on Form 8-K 19 SIGNATURES 19 -2- PART 1. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS RADIUS INC. CONSOLIDATED BALANCE SHEETS (in thousands)
MARCH 31, SEPTEMBER 30, 1997 1996 (1) --------- ------------- (unaudited) ASSETS: Current assets: Cash $ 1,408 $ 2,974 Accounts receivable, net 11,612 8,123 Inventories 4,526 12,852 Investment in Splash Technology Holdings, Inc. - current portion 17,235 - Prepaid expenses and other current assets 400 366 Income tax receivable - 514 --------- --------- Total current assets 35,181 24,829 Investment in Splash Technology Holdings, Inc. - noncurrent portion 21,940 19,152 Property and equipment, net 969 1,495 Deposits and other assets 50 50 --------- --------- $ 58,140 $ 45,526 --------- --------- --------- --------- LIABILITIES AND SHAREHOLDERS' EQUITY: Current liabilities: Accounts payable $ 5,081 $ 5,004 Accrued payroll and related expenses 1,447 2,678 Accrued warranty costs 402 478 Other accrued liabilities 1,825 2,545 Accrued income taxes 2,042 2,227 Accrued restructuring and other charges 106 425 Short-term borrowings 3,809 1,922 Obligation under capital leases - current portion 646 1,074 --------- --------- Total current liabilities 15,358 16,353 Long term borrowings 21,940 21,940 Obligations under capital leases - noncurrent portion 60 273 Commitments and contingencies Convertible preferred stock 3,000 3,000 Shareholders' equity: Common stock 168,928 168,746 Unrealized gain on available-for-sale securities 39,175 19,152 Accumulated deficit (190,353) (183,968) Accumulated translation adjustment 32 30 --------- --------- Total shareholders' equity 17,782 3,960 --------- --------- $ 58,140 $ 45,526 --------- --------- --------- ---------
(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 SIX MONTHS ENDED MARCH 31, MARCH 31, ------------------ ---------------- 1997 1996 1997 1996 ---- ---- ---- ---- Sales $ 8,249 $30,575 $19,051 $ 63,227 Commissions and royalties 1,898 - 3,193 - ------- ------- ------- -------- Total net sales 10,147 30,575 22,244 63,227 Cost of sales 8,409 25,098 15,435 53,705 ------- ------- ------- -------- Gross profit 1,738 5,477 6,809 9,522 ------- ------- ------- -------- Operating expenses: Research and development 997 1,519 1,901 5,149 Selling, general and administrative 5,223 6,951 9,321 16,912 ------- ------- ------- -------- Total operating expenses 6,220 8,470 11,222 22,061 ------- ------- ------- -------- Loss from operations (4,482) (2,993) (4,413) (12,539) Other income (expense), net (7) 18,132 (12) 19,269 Interest expense (757) (971) (1,494) (2,154) ------- ------- ------- -------- Income (loss) before income taxes (5,246) 14,168 (5,919) 4,576 Provision for income taxes 195 249 316 440 ------- ------- ------- -------- Net income (loss) $(5,441) $13,919 $(6,235) $ 4,136 ------- ------- ------- -------- ------- ------- ------- -------- Preferred stock dividend 75 - 150 - Net income (loss) applicable to common shareholders $(5,516) $13,919 $(6,385) $ 4,136 ------- ------- ------- -------- ------- ------- ------- -------- Net income (loss) per share: Net income (loss) per share applicable to common shareholders $ (0.10) $ 0.77 $ (0.12) $ 0.23 ------- ------- ------- -------- ------- ------- ------- -------- Common and common equivalent shares used in computing net income (loss) per share 54,879 18,082 54,770 18,058 ------- ------- ------- -------- ------- ------- ------- --------
See accompanying notes. -4- RADIUS INC. CONSOLIDATED STATEMENTS OF CASH FLOWS INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (in thousands, unaudited)
SIX MONTHS ENDED MARCH 31, --------------------------- 1997 1996 ---- ---- Cash flows from operating activities: Net income (loss) $(6,235) $ 4,136 Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 580 1,128 Gain on the sale of the Color Hard Copy Group - (16,993) (Increase) decrease in assets: Accounts receivable (3,487) 33,519 Inventories 8,326 1,084 Prepaid expenses and other current assets (34) 1,190 Income tax receivable 514 2 Increase (decrease) in liabilities: Accounts payable 77 (28,137) Accrued payroll and related expenses (1,231) (1,404) Accrued warranty costs (76) (2,728) Other accrued liabilities (720) (777) Accrued restructuring costs (319) (574) Accrued income taxes (185) 179 ------- -------- Total adjustments 3,445 (13,511) ------- -------- Net cash used in operating activities (2,790) (9,375) Cash flows from investing activities: Capital expenditures (54) (201) Deposits and other assets - 84 Net proceeds from the sale of the Color Hard Copy Group - 16,438 ------- -------- Net cash provided by (used in) investing activities (54) 16,321 Cash flows from financing activities: Short-term borrowings, net 1,887 (8,109) Principal payments of long-term debt and capital leases (641) (834) Issuance of common stock 32 16 ------- -------- Net cash provided by (used in) financing activities 1,278 (8,927) ------- -------- Net decrease in cash and cash equivalents (1,566) (1,981) Cash and cash equivalents, beginning of period 2,974 4,760 ------- -------- Cash and cash equivalents, end of period $ 1,408 $ 2,779 ------- -------- ------- -------- Supplemental disclosure of cash flow information: Cash paid during the period for: Interest paid $ 1,489 $ 1,084 ------- -------- ------- -------- Income taxes paid $ 7 $ 259 ------- -------- ------- -------- Non-cash financing activity: Dividend to be paid in stock $ 150 $ - ------- -------- ------- --------
See accompanying notes. -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 March 31, 1997 and for the three and six months ended March 31, 1997 and 1996 are unaudited. In the opinion of management, the consolidated financial statements reflect all adjustments (consisting only of normal recurring items) necessary for a fair presentation in conformity with generally accepted accounting principles. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Examples include provisions for returns and bad debts and the length of product life cycles. The information included in this Form 10-Q should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended September 30, 1996. For clarity of presentation, all fiscal periods are reported as ending on a calendar month end. NOTE 2. INVENTORIES Inventories, stated at the lower of cost or market, consist of (in thousands): MARCH 31, SEPTEMBER 30, 1997 1996 ----------- ------------- (unaudited) Raw materials $ 21 $ 124 Work in process 1,086 4,488 Finished goods 3,418 8,240 ------ ------- $4,526 $12,852 ------ ------- ------ ------- Cost of sales for the three and six month periods ended March 31, 1997 includes write down reserves for obsolete, slow-moving, or non-salable inventory of $3.6 million. NOTE 3. COMMITMENTS AND CONTINGENCIES (a) On November 16, 1995, Electronics for Imaging, Inc. ("EFI") filed a suit in the United States District Court in the Northern District of California alleging that the Company infringes a patent allegedly owned by EFI. Although the complaint does not specify which of the Company's products allegedly infringe the patent, subsequent pleading indicates that EFI alleges that the Company's Color Server products allegedly infringe. In January 1996, the Company completed the divestiture of the Color Server Group. The Company has filed an answer denying all material allegations, and has filed counterclaims against EFI alleging causes of action for interference with prospective economic benefit, antitrust violations, and unfair business practices. EFI's motion to dismiss or sever the Company's amended counterclaims was granted in part and the ruling permitted the Company to file an amended counterclaim for antitrust violations. The Company has filed an amended antitrust claim. The Company believes it has meritorious defenses to EFI's claims and is defending them vigorously. In addition, the Company believes it may have indemnification rights with respect to EFI's claims. A motion for summary judgment based on these indemnification rights was filed, and the court granted this motion finding the Company immune from suit under the patent after February 22, 1995. The Company expects to vigorously defend the remaining claims of EFI and to vigorously prosecute the claims it has asserted against EFI. In the opinion of management, based on the facts known at this time, although the eventual outcome of this case is unlikely to have a material adverse effect on the results of operations or financial position of the Company, the costs of defense, regardless of outcome, may have a material adverse effect on the results of operations or financial position of the Company. In addition, in connection with the divestiture of its Color Server Group, the Company has certain indemnification obligations for which approximately $2.4 million remains held in escrow to secure such obligations in the event that the purchaser suffers any losses resulting from such litigation. -6- (b) The Company was named as one of approximately 42 defendants in Shapiro et al. v. ADI Systems, Inc. et al., Superior Court of California, Santa Clara County, case no. CV751685, filed August 14, 1995. Radius was named as one of approximately 32 defendants in Maizes & Maizes et al. v. Apple Computer et al., Superior Court of New Jersey, Essex County, case no. L-13780-95, filed December 15, 1995. Plaintiffs in each case purport to represent alleged classes of similarly situated persons and/or the general public, and allege that the defendants falsely advertised that the viewing areas of their computer monitors are larger than in fact they are. The Company was served with the Shapiro complaint on August 22, 1995 and was served with the Maizes complaint on January 5, 1996. Defendants' petition to the California State Judicial Council to coordinate the Shapiro case with similar cases brought in other California jurisdictions was granted in part and it is anticipated that the coordinated proceedings will be held in Superior Court of California, San Francisco County. An amended consolidated complaint was filed on March 26, 1996. Discovery proceedings are scheduled to begin. The Company believes it has meritorious defenses to the plaintiffs' claims and is defending them vigorously. Extended settlement discussions began in connection with a successful demurrer in the California case. On March 11, 1997, all but two of the named defendants agreed to settle the suits, subject to final court approval. The settlement provides that class members are eligible for a $13 rebate per monitor purchased during the class period on applicable new purchases over a three year period, subject to specific limitations. Class members who are consumers and do not elect to use the rebate fully can thereafter elect to receive a $6 refund per monitor (up to a maximum of $30 per consumer class member) during the following six months. The Company is responsible only to class members who purchased Radius branded monitors during the class period of May 1, 1991 to May 1, 1995. Additionally, Radius will pay its share of publication and administration costs associated with the implementation of the settlement, pay its share of plaintiffs' stipulated attorneys' fees (estimated to be approximately $75,000 and currently payable) and will agree to abide by certain limitations in the description of its monitors. Final court approval is expected after a court hearing currently set for June 30, 1997. The Company's estimate of the impact of this settlement, excluding the attorneys fees and publication costs, is that it will not be material to its financial condition or results of operations. NOTE 4. INVESTMENT IN SPLASH TECHNOLOGY HOLDINGS, INC. In January 1996, the Company completed the sale of its Color Server Group ("CSG") to Splash Merger Company, Inc. (the "Buyer"), a wholly owned subsidiary of Splash Technology Holdings, Inc. ("Splash"), a corporation formed by various investment entities associated with Summit Partners. In fiscal 1996, the Company received approximately $21.0 million in cash and an additional $2.4 million is being maintained in escrow to secure certain indemnification obligations. The Company also received 4,282 shares of Splash's 6% Series B Redeemable and Convertible Preferred Stock (the "Series B Preferred Stock"). The shares of Series B Preferred Stock were converted into shares of Splash's common stock in connection with the initial public offering of Splash. In June 1996, the Company granted IBM Credit, its secured lender, an option to purchase 428 shares of Series B Preferred Stock (now Splash Common Stock) in connection with the restructuring of the terms of its loan agreement with IBM Credit. These shares of Splash Common Stock have been pledged to IBM Credit. IBM Credit has not exercised its option. On October 8, 1996, Splash completed its initial public offering of common stock which reduced the Company's ownership position to approximately 14.6 percent. Consequently, the investment which will be available for sale, subject to certain market trading restrictions, approximating 1.6 million shares, is accounted for in accordance with FASB 115. The unrealized gain of $39.2 million based upon the closing price of $25.00 per share on March 27, 1997 is recorded, net of deferred taxes of none, as a component of shareholders' equity at March 31, 1997. NOTE 5. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARD In February 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share" (FAS 128), which is required to be adopted on December 31, 1997. At that time, the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods. The application of the FAS 128 new "basic earnings per share" calculation results in basic earnings (loss) per share that is not materially different from net income (loss) per share applicable to common shareholders as reported for the three and six months ended March 31, 1997 and 1996. The Company does not expect the new diluted calculation to be materially different from fully diluted earnings per share. -7- NOTE 6. SUBSEQUENT EVENTS Effective in the third fiscal quarter, the Company licensed certain technology from Reply Corporation and agreed to purchase such technology along with certain assets and inventory, subject to the approval of the bankruptcy court with jurisdiction over Reply and its assets. A royalty payment will be due on products incorporating such technology pursuant to the license and in connection with such purchase. The purchase price of such assets and inventory is expected to be less than $500,000. -8- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS All assumptions, anticipations, and expectations contained herein are forward-looking statements that involve uncertainty and risk. Actual results could differ materially from those projected in such forward-looking statements and there are certain important factors that could cause results to differ materially from those in the forward-looking statements. Among such important factors are: (i) the ability of Radius to generate sufficient cash from operations to finance its working capital needs and to generate sufficient income to repay its indebtedness to IBM Credit in a timely manner; (ii) the value of the Company's holdings in Splash Technology Holdings, Inc. ("Splash") and the Company's ability to timely dispose of such holdings on favorable terms; (iii) the Company's ability to attract and retain key personnel, particularly in light of its financial condition; (iv) the Company's ability to successfully compete against Apple Computer and other competitors; (v) the continued acceptance of Macintosh computers for use by the color publishing and multimedia markets; (vi) the Company's ability to successfully develop and market products for, and the acceptance of the Company's products by, the video editing industry; (vii) the continued willingness of third party manufacturers and suppliers to assemble and/or supply components for the Company's products, particularly in light of the Company's financial condition; (viii) the ability of the Company's exclusive distributors in Europe and Japan to increase sales of the Company's products; (ix) the Company's ability to develop new products and improve on existing products, particularly in light of its significantly reduced research and development budgets; and (x) the Company's ability to successfully develop, manufacture and market the "PC on a Card" products licensed from Reply Corporation. Each forward-looking statement should be read in conjunction with the entire consolidated interim financial statements and the notes thereto in Part I, Item 1 of this Quarterly Report, with the information contained in Item 2, including, but not limited to, "- Certain Factors That May Affect Future Results," and with "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in the Company's Annual Report on Form 10-K for the year ended September 30, 1996, including, but not limited to, "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Certain Factors That May Affect the Company's Future Results of Operations." RESULTS OF OPERATIONS The Company designs, develops, assembles, markets and supports color publishing and digital video computer products for creative professionals. The Company's current product line includes: accelerated color graphics products that facilitate the creation and manipulation of graphical images; video systems and software that can acquire and manipulate video and audio information; and high resolution color reference displays that allow users to view text, graphics, images and video. The primary target markets for the Company's products are color publishing and multimedia. These markets encompass creative professionals involved in such areas as color prepress, graphic arts, video editing, video and multimedia production and playback, and corporate training. To date, substantially all of the Company's products have been designed for and sold to users of Macintosh computer products (the "Macintosh") manufactured by Apple Computer, Inc. ("Apple") as Apple products have been the preferred platform in the Company's target markets. On March 31, 1997 the Company licensed certain technology from Reply Corporation (see Note 6 to the financial statements) that will allow it to develop and market PCI bus adapter cards featuring Windows compatibility to users of Macintosh products. This technology is intended to enable a "PC on a card" which can be added to various versions of Mac compatible personal computers. When using such products, a Mac compatible user would therefore have coprocessing ability and be able to participate in various PC-based network functions without sacrificing Mac performance levels on various desktop, color publishing and other applications. These products will be marketed to the Company's existing customers and as well as to a broader customer base. -9- 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 SIX MONTHS ENDED MARCH 31, MARCH 31, 1997 1996 1997 1996 ---- ---- ---- ---- Net sales 100.0% 100.0% 100.0% 100.0% Cost of sales 82.9 82.1 69.4 84.9 ----- ----- ----- ----- Gross profit 17.1 17.9 30.6 15.1 ----- ----- ----- ----- Operating expenses: Research and development 9.8 5.0 8.5 8.1 Selling, general and administrative 51.5 22.7 41.9 26.7 ----- ----- ----- ----- Total operating expenses 61.3 27.7 50.4 34.9 ----- ----- ----- ----- Income (loss) from operations (44.2) (9.8) (19.8) (19.8) Other income (expense), net (0.1) 59.3 (0.1) 30.5 Interest Expense (7.5) (3.2) (6.7) (3.4) ----- ----- ----- ----- Income (loss) before income taxes (51.7) 46.3 (26.6) 7.2 Provision for income taxes 1.9 0.8 1.4 0.7 ----- ----- ----- ----- Net income (loss) (53.6)% 45.5% (28.0)% 6.5% ----- ----- ----- ----- ----- ----- ----- -----
NET SALES The Company's net sales decreased 66.8% to $10.1 million in the second quarter of fiscal 1997 from $30.6 million for the same quarter in fiscal 1996. Net sales for the first six months of fiscal 1997 decreased 64.8% to $22.2 million from $63.2 million in the same period of fiscal 1996. The decline is due to three primary factors: first is the result of the Company's efforts to refocus its business on higher margin products; the second is the divestiture of certain of its former business units; and the third is a result of entering into exclusive distributor arrangements for Japan and Europe effective April 1, 1996 and July 1, 1996, respectively, which relationships provide for the Company to recognize as net sales, a percentage of the sales price of each product sold by those distributors as compared to the entire sales price of the product which was formerly recognized by the Company as net sales prior to the appointment of these distributors. As a result of these factors, product sales decreased 73.8% and 69.9% for the second quarter and the first six months of fiscal 1997 from the corresponding periods of fiscal 1996. They also account for the decrease of the Company's export sales to 20.4% of net sales in the second quarter of fiscal 1997 from 53.1% of net sales in the same quarter of fiscal 1996. Export sales declined to 15.2% of net sales for the six month period in fiscal 1997, compared to a 58.4% of net sales for the corresponding period in fiscal 1996. These factors also lead to the commission and royalties of $1.9 million and $3.2 million for the second quarter and the first six months of fiscal 1997, respectively. One customer, Ingram Micro, accounted for 55.0% and 69.4% of the Company's net sales for the three and six months ended March 31,1997, respectively. For the corresponding periods of fiscal 1996, the same customer accounted for 29.8% and 34.4% of the Company's net sales. GROSS PROFIT The Company's gross profit margin was 17.1% and 30.6% for the three and six month periods ended March 31, 1997, as compared with 17.9% and 15.1% for the corresponding periods in fiscal 1996. The decrease in gross profit margin for the three month period was primarily due to a net charge of $3.6 million relating to inventory write downs. Excluding the charge for inventory write down reserves, gross profit margin would have been 53% and 47% for the three and six month periods ended March 31, 1997, respectively, which increase was primarily attributed to the Company's focus on higher margin products and continuing efforts to reduce product costs and controlling expenses. 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. -10- There can be no assurance that the Company's gross margins will remain at current levels for subsequent quarters or for the entire fiscal year. RESEARCH AND DEVELOPMENT EXPENSES Research and development expenses decreased to $0.9 million or 9.8% of net sales in the second quarter of fiscal 1997 from $1.5 million or 5.0% of net sales in the same quarter of fiscal 1996. Research and development expenses decreased from $5.1 million or 8.1% of net sales for the fist six months of fiscal 1996 to $1.9 million or 8.5% of net sales for the corresponding period of fiscal 1997. The Company decreased its research and development expenses primarily by reducing expenses related to headcount resulting from the Company's efforts to refocus its business and business divestitures. The increase in research and development expenses expressed as a percentage of net sales was primarily attributed to the decrease in net sales and the Company's refocusing on higher-end products, rather than high-volume lower-margin products. Although the Company expects research and development expenses to increase gradually over time, the Company does not expect research and development expenses to approach historical levels in absolute amount. The Company's ability to introduce new products or to compete successfully could be adversely affected if it is unable to increase its research and development efforts. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses decreased to $5.2 million or 51.5% of net sales in the second quarter of fiscal 1997 from $7.0 million or 22.7% of net sales in the same quarter of fiscal 1996. Included in the second quarter of fiscal 1997 expenses is a charge of $1.2 million for increasing the allowance for doubtful accounts due to one account which the Company determined was unlikely to be collected in full. Selling, general and administrative expenses decreased from $16.9 million or 26.7% of net sales for the first six months of fiscal 1996 to $9.3 million or 41.9% of net sales for the corresponding period in fiscal 1997. The Company decreased its selling, general and administrative expenses primarily by reducing expenses related to headcount resulting from the Company's efforts to refocus its business and business divestitures. The increase in selling, general and administrative expenses expressed as a percentage of net sales was primarily attributed to the decrease in net sales and the Company's refocusing on higher-end products, rather than high-volume lower-margin products. Although the Company expects selling, general and administrative expenses to increase gradually over time, the Company does not expect them to approach historical levels in absolute amount. OTHER INCOME (EXPENSE), NET There was no other income recorded in the second quarter of fiscal 1997. The Company had other income of $18.1 million in the second quarter of fiscal 1996 resulting from income of approximately $17.2 million, primarily related to product group divestitures. INTEREST EXPENSE Interest expense was $0.8 million in the second quarter of fiscal 1997 as compared to $1.0 million in the same period of fiscal 1996. This decrease was due to lower average interest rates on lower average borrowings. NET LOSS As a result of the above factors, the Company had a net loss of $5.4 million and $6.2 million for the three and six months ended March 31, 1997, respectively, as compared to a net income of $13.9 million and $4.1 million for the three and six months ended March 31, 1996. LITIGATION SETTLEMENT In September 1992, the Company and certain of its officers and directors were named as defendants in a securities class action litigation brought in the United States District Court for the Northern District of California that sought unspecified damages, prejudgment and post judgment interest, attorneys' fees, expert witness fees and costs, and equitable relief. In July 1994, SuperMac and certain of its officers and directors, several venture capital firms and several of the underwriters of SuperMac's May 1992 initial public offering and its February 1993 secondary offering were named as defendants in a class action litigation brought in the same court that sought unspecified damages, prejudgment and post judgment interest, attorneys' fees, experts' fees and costs, and equitable relief (including the imposition of a constructive trust on the proceeds of defendants' trading activities). -11- In June 1995, the Court approved the settlement of both litigations and entered a Final Judgment and Order of Dismissal. Under the settlement of the litigation brought in 1992 against the Company, the Company's insurance carrier paid $3.7 million in cash and the Company issued a total of 128,695 shares of its Common Stock to a class action settlement fund. In the settlement of the litigation brought in 1994 against SuperMac, the Company paid $250,000 in cash and is to issue into a class action settlement fund a total of 707,609 shares of its Common Stock. The number of shares to be issued by the Company increased by 100,000 because the price of the Company's Common Stock was below $12 per share during the 60-day period following the initial issuance of shares. In connection with these settlements, the financial statements for the first quarter of fiscal 1995 included a charge to other income of $12.4 million, reflecting settlement costs not covered by insurance as well as related legal fees, resulting in a reduction in net income from $1.4 million to a net loss of $11.0 million or $0.78 per share for the quarter. As of March 31, 1997, the Company had issued 836,304 shares of its Common Stock due to the settlements and 100,000 shares remained to be issued. The Company was named as one of approximately 42 defendants in Shapiro et al. v. ADI Systems, Inc. et al., Superior Court of California, Santa Clara County, case no. CV751685, filed August 14, 1995. Radius was named as one of approximately 32 defendants in Maizes & Maizes et al. v. Apple Computer et al., Superior Court of New Jersey, Essex County, case no. L-13780-95, filed December 15, 1995. Plaintiffs in each case purport to represent alleged classes of similarly situated persons and/or the general public, and allege that the defendants falsely advertised that the viewing areas of their computer monitors are larger than in fact they are. Although the Company believes it has meritorious defenses to the plaintiffs' claims, due to the costs of defense regardless of outcome, on March 11, 1997, the Company along with all but two of the other named defendants agreed to settle the suits, subject to final court approval. The settlement provides that class members are eligible for a $13 rebate per monitor purchased during the class period on applicable new purchases over a three year period, subject to specific limitations. Class members who are consumers and do not elect to use the rebate fully can thereafter elect to receive a $6 refund per monitor (up to a maximum of $30 per consumer class member) during the following six months. The Company is responsible only to class members who purchased Radius branded monitors during the class period of May 1, 1991 to May 1, 1995. Additionally, the Company will pay its share of publication and administration costs associated with the implementation of the settlement, pay its share of plaintiffs' stipulated attorneys' fees (estimated to be approximately $75,000 and currently payable) and will agree to abide by certain limitations in the description of its monitors. Final court approval is expected after a court hearing currently set for June 30, 1997. See Note 3 to Consolidated Financial Statements - Commitments and Contingencies. FINANCIAL CONDITION The Company's cash decreased approximately $1.6 million in the first half of fiscal 1997 to $1.4 million at March 31, 1997 as compared to the ending balance at September 30, 1996. This decrease is primarily a result of the loss from operations in the first half of fiscal 1997, less the non-cash charges and changes in working capital items during this period, and the interest payments associated with the Company's indebtedness with IBM Credit. Approximately $0.5 million of the $1.4 million of cash and cash equivalents available at March 31, 1997 was restricted under various letters of credit. The Company's financial condition is extremely constrained under the terms of its current loan agreement with IBM Credit, which includes an approximately $21.9 million term loan and a $5 million working capital line of credit. Under this agreement the Company has granted to IBM Credit a security interest in substantially all of its assets including its securities in Splash, Portrait Displays, Inc. ("PDI"), and UMAX Computer Corporation ("UMAX"). The securities in Splash are valued at $39.2 million on March 31, 1997, net of taxes which are estimated to be zero, and based on a closing price of $25 per share as of such date. As the Company is an affiliate of Splash, it can only sell its shares subject to the SEC Rule 144 volume limitations, and is eligible to do so at this time. The agreement with IBM Credit was amended in the second quarter of fiscal 1997 to reduce the interest rates on outstanding borrowings effective April 1, 1997 to prime rate plus 1.75% for the working capital line of credit and to the prime rate plus 2.50% for the term loan. Additionally, the borrowing base calculation under the working capital line of credit was modified to include in the amounts available for borrowing, an amount equal to 25% of the "excess value" of Splash Stock, as defined in the amendment to the agreement. In the event the closing price of the Splash Common Stock is below $25 per share, the "excess value" of the Splash Common Stock is excluded from the calculation of the amounts available for borrowing under the working line of credit. -12- The Company is currently negotiating with IBM Credit so that the "excess value" of the Splash Common Stock is only excluded when it is below $22 per share and expects to complete this negotiation within the third quarter. There can be no assurance that this negotiation will be concluded favorably to the Company. Because of the exclusion of Splash Common Stock from the borrowing base calculation when it is below $25 per share, and because of the Company's pattern of product shipments with shipments higher at the end of the quarter than at the beginning of the quarter, the Company may not have a sufficient borrowing base to fully utilize the $5 million working capital line of credit at all times. This could result in the delay in payments to vendors and may delay product shipments when the Company is on credit hold. As of March 31, 1997 the Company was in compliance with all of the financial covenants under the amended loan agreement dated February 14, 1997. There can be no assurance that IBM Credit will grant a waiver in the event the Company fails to comply with these financial covenants in the future. See Note 2 to Consolidated Financial Statements - Borrowings- contained in the Company's Annual Report on Form 10K for the year ended September 30, 1996. As a result of IBM's control over the Company's cash flow and restrictions on the use of the Company's excess cash flow, the Company anticipates that it will not have significant cash available for expenditures other than for its ordinary course of business operating expenses, which will be significantly lower than historical amounts. In the event the Company were unable to generate sufficient net sales or if the Company incurs unforeseen operating expenses, it may not be able to meet its operating expenses without additional financing or a restructuring of its loan agreements with IBM Credit. In the event that the Company desired to acquire any strategic technologies or businesses, it would probably be unable to do so without obtaining additional financing or the consent of IBM Credit. This consent was granted prior to the Company's entering into the agreement with Reply Corporation. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Certain Factors That May Affect the Company's Future Results of Operations -- Need for Additional Financing; Loan Restrictions." The Company believes it has sufficient funds to finance its operations for the remainder of the fiscal year. However, the level of operations which it believes will be able to sustain for the next 6 months will be significantly lower than historical periods, particularly in the research and development, sales and marketing and general administrative areas. Additional funds will be needed to finance the Company's operations, product development plans and for other purposes if the Company's operating expenses are higher than anticipated. Additional financing will be required if the Company desires to acquire or invest in additional complementary businesses or products or to obtain the right to use complementary technologies. While the Company plans to generate cash by divesting certain liquid assets and is investigating possible financing opportunities, there can be no assurance that additional financing will be available when needed or, if available, that the terms of such financing will not adversely affect the Company's results of operations. CERTAIN FACTORS THAT MAY AFFECT THE COMPANY'S FUTURE RESULTS OF OPERATIONS A number of uncertainties exist that could affect the Company's future operating results, including, without limitation, the following: CONTINUING OPERATING LOSSES The Company experienced a net operating loss in the second quarter and for the six months ended March 31, 1997. The Company also experienced net operating losses in each of the fiscal years ended September 30, 1993, 1994, 1995 and 1996. In the future, the Company's ability to achieve and subsequently sustain profitable operations will depend upon a number of factors, including the Company's ability to control 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. -13- 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. Amounts available under this line of credit are affected by the amount eligible of accounts receivable as well as the market price of Splash Common Stock, which if below $25 per share, significantly reduces amounts available under this line of credit. Because the Company has experienced operating losses in each of its prior four fiscal years, the Company must significantly reduce operating expenses and/or significantly increase net sales in order to finance its working capital needs with cash generated by operations. Furthermore, pursuant to the restructured loan with IBM Credit, the Company is required to deposit its revenues in accounts subject to control by IBM Credit. See "Financial Condition." VOLATILITY OF STOCK PRICE The price of the Company's Common Stock has fluctuated widely in the past. Management believes that such fluctuations may have been caused by announcements of new products, quarterly fluctuations in the results of operations and other factors, including changes in conditions of the personal computer industry in general and of Apple Computer in particular, changes in the Company's results of operations and financial condition and sales of large numbers of shares of Common Stock by former creditors of the Company. Stock markets, and stocks of technology companies in particular, have experienced extreme price volatility in recent years. This volatility has had a substantial effect on the market prices of securities issued by the Company and other high technology companies, often for reasons unrelated to the operating performance of the specific companies. Due to the factors referred to herein, the dynamic nature of the Company's industry, general economic conditions, the substantially larger number of freely tradable shares of Common Stock held by former creditors of the Company and other factors, the Company's future operating results and stock prices may be subject to significant volatility in the future. Such stock price volatility for the Common Stock has in the past provoked securities litigation, and future volatility could provoke litigation in the future that could divert substantial management resources and have an adverse effect on the Company's results of operations. -14- 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. A number of the Company's products compete with products marketed by Apple. As a competitor of the Company, Apple could in the future take steps to hinder the Company's development of compatible products and slow sales of the Company's products. The Company's business is based in part on supplying products that meet the needs of high-end customers that are not fully met by Apple's products. As Apple improves its products or bundles additional hardware or software into its computers, the potential market for Radius products that provide those capabilities will be reduced. New products anticipated from and introduced by Apple could cause customers to defer or alter buying decisions due to uncertainty in the marketplace, as well as presenting additional direct competition for the Company. For example, the Company believes that Apple's transition during 1994 to Power PC products caused delays and uncertainties in the marketplace and had the effect of reducing demand for the Company's products. In addition, sales of the Company's products have been adversely affected by Apple's restructuring of its entire product line from Nubus-based to PCI Bus-based computers. In the past, transitions in Apple's products have been accompanied by shortages in those products and in key components for them, leading to a slowdown in sales of those products and in the development and sale by the Company of compatible products. In addition, it is possible that the introduction of new Apple products with improved performance capabilities may create uncertainties in the market concerning the need for the performance enhancements provided by the Company's products and could reduce demand for such products. COMPETITION The markets for the Company's products are highly competitive, and the Company expects competition to intensify. Many of the Company's current and prospective competitors have significantly greater financial, technical, manufacturing and marketing resources than the Company. The Company believes that its ability to compete will depend on a number of factors, including the amount of financial resources available to the Company, its ability to repay its indebtedness to IBM Credit, success and timing of new product developments by the Company and its competitors, product performance, price and quality, breadth of distribution, customer support and its ability to attract and retain key personnel, particularly in light of the Company's financial condition. There can be no assurance that the Company will be able to compete successfully with respect to these factors. In addition, the introduction of lower priced competitive products could result in price reductions that would adversely affect the Company's results of operations. DEPENDENCE ON LIMITED NUMBER OF MANUFACTURERS AND SUPPLIERS The Company outsources the manufacturing and assembly of its products to third party manufacturers. Although the Company uses a number of manufacturer/assemblers, each of its products is manufactured and assembled by a single manufacturer. The failure of a manufacturer to ship the quantities of a product ordered by the Company could cause a material disruption in the Company's sales of that product. The Company is also dependent on sole or limited source suppliers for certain key components used in its products, including certain digital to analog converters, digital video chips, color-calibrated monitors and other products. Certain other semiconductor components and molded plastic parts are also purchased from sole or limited source suppliers. The Company purchases these sole or limited source components primarily pursuant to purchase orders placed from time to time in the ordinary course of business and has no guaranteed supply arrangements with sole or limited source suppliers. Certain suppliers, due to the Company's shortages in available cash, have put the Company on a cash or prepay basis and/or required the Company to provide security for their risk in procuring components or reserving manufacturing time, and there is a risk that suppliers will discontinue their relationship with the Company. -15- TECHNOLOGICAL CHANGE; CONTINUING NEED TO DEVELOP NEW PRODUCTS The personal computer industry in general, and color publishing and video applications within the industry, are characterized by rapidly changing technology, often resulting in short product life cycles and rapid price declines. The Company believes that its success will be highly dependent on its ability to develop innovative and cost-competitive new products and to bring them to the marketplace in a timely manner. Should the Company fail to introduce new products on a timely basis, the Company's operating results could be adversely affected. As a result of the Company's financial condition, it has had to significantly reduce its research and development expenditures. For the second quarter of fiscal 1997, the Company spent approximately $997,000 on research and development as compared with approximately $1.9 million for the second quarter of fiscal 1996. Continued reduction in the available cash resources of the Company could result in the interruption or cancellation of research and product development efforts which would have a material adverse effect on the business, operating results and financial condition of the Company. See "Need for Additional Financing; Loan Restrictions". The introduction of new products is inherently subject to risks of delay. Should the Company fail to introduce new products on a timely basis, the operating results of the Company could be adversely affected. The introduction of new products and the phasing out of older products will require the Company to carefully manage its inventory to avoid inventory obsolescence and may require increases in inventory write-down reserves. The long lead times -- as much as three to five months -- associated with the procurement of certain components (principally displays and ASICs) exposes the Company to greater risk in forecasting the demand for new products. There can be no assurance that the Company's forecasts regarding new product demand and its estimates of appropriate inventory levels will be accurate. Moreover, no assurance can be given that the Company will be able to cause all of its new products to be manufactured at acceptable manufacturing yields, that the Company will obtain market acceptance for these products or that potential manufacturers will not be hesitant to manufacture such new products as a result of the Company's financial condition. DEPENDENCE ON INDIRECT DISTRIBUTION CHANNELS The Company's primary means of distribution is through a limited number of third-party distributors and master resellers that are not under the direct control of the Company. Furthermore, the Company relies on one exclusive distributor for its sales in each of Japan and Europe. The Company does not maintain a direct sales force. As a result, the Company's business and financial results are highly dependent on the amount of the Company's products that is ordered by these distributors and resellers. Third parties carry many lines and have no minimum order requirements. INTERNATIONAL SALES Prior to the second fiscal quarter of 1996, the Company's international sales were primarily made through distributors and the Company's subsidiary in Japan. Effective April 1, and July 1, 1996 the Company appointed an exclusive distributor for Japan and Europe, respectively. The Company expects that international sales, particularly sales to Japan, will represent a significant portion of its business activity and that it will be subject to the normal risks of international sales such as currency fluctuations, longer payment cycles, export controls and other governmental regulations and, in some countries, a lesser degree of intellectual property protection as compared to that provided under the laws of the United States. See "Results of Operations - Net Sales". SHARES ELIGIBLE FOR FUTURE SALE Sales of substantial amounts of Common Stock in the public market could adversely affect the prevailing market price of the Company's Common Stock. As of November 12, 1996, the effective date of the Registration Statement on Form S-1 with respect to the securities issued pursuant to the Plan (the "Effective Date"), there were approximately 54,451,586 shares of Common Stock outstanding, substantially all of which are available for sale without restriction under the Securities Act of 1933, as amended (the "Act") (as compared with approximately 18,147,099 shares of Common Stock outstanding as of August 31, 1996) except for those shares which are held by affiliates of the Company. If the Series A Convertible Preferred Stock is converted and if outstanding warrants to purchase 800,000 shares of Common Stock are exercised, up to an additional 17,921,393 shares (including 11,046,060 shares issuable pursuant to the Rights) will be available for sale in the public market. The tradability of such shares of Common Stock could materially and adversely affect the market price of the Common Stock. See "-- Volatility of Stock Price." In addition, the Company is required to pay (on a quarterly basis) an annual dividend of $300,000 (or $0.40 per share) on the Series A Convertible Preferred Stock. 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 -16- having a market value of up to $75,000, the amount of such quarterly dividend, will be issued each quarter. Based on the closing price of $0.5313 per share on December 27, 1996 and $0.3438 per share on March 28, 1997, an additional 359,358 shares will be issued as dividend on the Series A Convertible Preferred Stock. The Company has registered under the Act, Common Stock having a market value of $600,000 (representing the first eight quarterly dividend payments) in the event that such dividend is paid in Common Stock. Such shares will be freely tradable. Subsequent dividends in the form of shares of Common Stock will be subject to the provisions of Rule 144, including the holding period requirements. As of March 31, 1997, there were 6,571,700 shares of Common Stock reserved for issuance upon exercise by employees and consultants of outstanding options. As of such date there were 900,111 shares of Common Stock available for issuance under options to be granted to employees and consultants and 158,998 shares reserved for issuances for purchases under the Company's Employee Stock Purchase Plan. Additionally, 200,000 shares of Common Stock were reserved for issuance under the Company's stock option plans for non-employee directors, 45,000 of which were subject to outstanding options. The Company amended its 1995 Stock Option Plan (the "1995 Plan") to increase the number of shares available for issuance thereunder by 2,716,620 shares at its Annual Meeting of Shareholders in February 1997. In accordance with the terms of the debt-to-equity exchange consummated in September 1996, the 1995 Plan will be further amended or a new plan adopted in the event that the Series A Convertible Preferred Stock is converted into Common Stock so that an aggregate of 7,890,043 shares of Common Stock are covered by the 1995 Plan as amended and/or any additional plan. The Company may also seek to obtain Board and/or shareholder approval for grants of options in excess of the amounts described above. All of the shares of Common Stock to be issued upon exercise of options granted or to be granted or upon stock purchases will be available for sale in the public market, subject to the Rule 144 volume limitations applicable to affiliates. Such availability will further increase the number of freely tradable shares of Common Stock outstanding which could exert downward pressure on the trading price of the Common Stock. 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 since November 1996) which makes it less likely that the Company will meet the minimum bid price requirement for the Nasdaq SmallCap Market and, as a result, the Company would need to maintain capital and surplus of $2.0 million. Furthermore under the proposed new continued listing requirements of the Nasdaq National Market and the Nasdaq SmallCap Market, any securities with a trading price of less than $1.00 per share would become subject to delisting, regardless of capital and surplus. If the Company's Common Stock is delisted, there can be no assurance that the Company will meet the requirements for initial inclusion on such markets in the future, particularly the current $3.00 minimum per share bid requirement. Trading, if any, in the listed securities after delisting would be conducted in the over-the-counter market in what are commonly referred to as the "pink sheets." As a result, investors may find it more difficult to dispose of, or to obtain accurate quotations as to the value of, the Company's securities. -17- PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS See Note 3 to Consolidated Financial Statements - Commitments and Contingencies. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Annual Meeting of Shareholders held on February 25, 1997, the following proposals were adopted by the margins indicated: 1. To elect a Board of Directors to hold office until the next annual meeting of shareholders and until their respective successors have been elected and qualified or until their earlier resignation or removal. Number of Shares For Withheld Charles W. Berger 37,197,248 1,883,530 Michael D. Boich 37,424,096 1,656,682 Carl A. Carlson 37,429,342 1,651,436 Dee Cravens 37,414,496 1,666,282 Mark M Housley 37,392,101 1,688,677 John C. Kirby 37,405,353 1,675,425 2. To approve an amendment to the Company's 1995 Stock Option Plan to reserve an additional 2,716,620 shares of Common Stock for issuance thereunder. For 35,859,129 Against 2,857,759 Abstain 261,304 Broker Non-Vote 15,494,897 3. To ratify the appointment of Ernst & Young LLP as independent auditors of the Company for it's fiscal year ending September 30, 1997. For 38,654,662 Against 286,263 Abstain 139,853 Broker Non-Vote 15,392,311 ITEM 5. OTHER INFORMATION Henry V. Morgan joined the Company on February 24, 1997 as Chief Financial Officer and Senior Vice President, Finance and Administration. During 1995 and 1996, Mr. Morgan was Chief Financial Officer of Connect, Inc., Mountain View, California, an Internet-based interactive commerce applications software company. From 1989 through 1994, Mr. Morgan was Chief Financial Officer of Logitech International, S.A., a computer mouse manufacturer. On February 25, 1997, the shareholders approved the addition of Mark Housley, Dee Cravens and John C. Kirby to the Board of Directors. See Item 4. Mr. Cravens has been Vice President of Worldwide Corporate Marketing and Communications at Adaptec, Inc. since February 1996. Mr. Cravens was Vice President of Marketing of the Company from 1992 until 1996. Before joining the Company, Mr. Cravens was a principal of the Cravens Group, a marketing company for technology related businesses. Mr. Cravens is a board member of the USL Entertainment Council and the IMagic Technology Group. Mr. Kirby has been a principal and Executive Vice President of KH Consulting Group since 1986. Mr. Kirby is responsible for this firm's reorganization and financial restructuring practice. In this capacity, Mr. Kirby has represented various debtors, secured parties, trade creditors and corporate buyers and frequently assumes a management role in the client. -18- Since early 1991, Mr. Kirby has been President and CEO of Cabrillo Crane & Rigging, Inc., a wholly-owned subsidiary of Wells Fargo Bank. From 1992 until 1994, Mr. Kirby was Vice President and CFO of Everex Systems, Inc. Mr. Housley has been President and Chief Operating Officer of the Company since January 1997. From March 1995 until October 1996, Mr. Housley was founder and Vice President of marketing of Spectrum Wireless, inc., a manufacturer of wireless infrastructure products. From May 1992 until March 1995, Mr. Housley held various positions of responsibility for the Company and its predecessor SuperMac Technologies, Inc., including Vice President and General Manager of the Company's Color Publishing Division. From October 1990 until May 1992, Mr. Housley was a Vice President for Siemens in Santa Clara, a multinational manufacturer of electronic equipment, directing product marketing and planning. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS The following exhibits are filed with this Quarterly Report: 11.01 Computation of per share earnings. 27.01 Financial Data Schedule (EDGAR version only). (b) REPORTS ON FORM 8-K No report on Form 8-K was filed during the three months ended March 31, 1997. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: May 12, 1997 RADIUS INC. By: /s/ -------------------------------- Henry V. Morgan Chief Financial Officer -19- EX-11.1 2 EXHIBIT 11.1 EXHIBIT 11.01 COMPUTATION OF NET INCOME (LOSS) PER SHARE (in thousands, except per share data)
THREE MONTHS ENDED SIX MONTHS ENDED MARCH 31, MARCH 31, 1997 1996 1997 1996 ---- ---- ---- ---- Primary: Average common shares outstanding 54,879 18,079 54,770 18,002 Net effect of dilutive stock options - based on the modified treasury stock method using average market price - 3 - 56 -------- ------- -------- ------- Totals 54,879 18,082 54,770 18,058 -------- ------- -------- ------- -------- ------- -------- ------- Net income (loss) $(5,516) $13,919 $(6,385) $ 4,136 -------- ------- -------- ------- -------- ------- -------- ------- Per share amount $ (0.10) $ 0.77 $ (0.12) $ 0.23 -------- ------- -------- ------- -------- ------- -------- ------- Fully diluted: Average common shares outstanding 54,879 18,079 54,770 18,002 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 - 3 - 56 -------- ------- -------- ------- Totals 54,879 18,082 54,770 18,058 -------- ------- -------- ------- -------- ------- -------- ------- Net income (loss) $(5,516) $13,919 $(6,385) $ 4,136 -------- ------- -------- ------- -------- ------- -------- ------- Per share amount* $ (0.10) $ 0.77 $ (0.12) $ 0.23 -------- ------- -------- ------- -------- ------- -------- -------
* 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. -20- EX-27 3 FINANCIAL DATA SCHEDULE
5 6-MOS SEP-30-1996 MAR-31-1997 1,408 0 15,407 (3,795) 4,526 35,181 35,368 (34,399) 58,140 15,358 60 0 3,000 168,928 (151,146) 58,140 10,147 10,147 8,409 8,409 6,220 0 757 (5,246) 195 0 0 0 0 (5,441) (0.10) (0.10)
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