<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
Filed by Registrant [X]
Filed by a party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only
(as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
RADIUS INC.
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(Name of Registrant as Specified in Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14a6(i)(4) and 0-11
1) Title of each class of securities to which transaction applies:
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2) Aggregate number of securities to which transaction applies:
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3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
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4) Proposed maximum aggregate value of transaction:
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5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
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2) Form, Schedule or Registration Statement No.:
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3) Filing Party:
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4) Date Filed:
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[LOGO]
January 15, 1999
To Our Shareholders:
You are cordially invited to attend the 1999 Annual Meeting of Shareholders
of Radius Inc. to be held at Radius Inc.'s offices at 460 East Middlefield Road,
Mountain View, California 94043 on Friday, February 26, 1999 at 11:00 a.m.
The matters expected to be acted upon at the meeting are described in
detail in the Notice of Annual Meeting of Shareholders and the Proxy Statement
following this letter. Audited financial statements and certain other useful
information are included in Appendix A to the Proxy Statement entitled
"Additional Information for Shareholders."
It is important that you use this opportunity to take part in the affairs
of your company by voting on the business to come before the meeting. WHETHER
OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE COMPLETE, SIGN AND DATE THE
ACCOMPANYING PROXY AND RETURN IT PRIOR TO THE MEETING IN THE ENCLOSED
POSTAGE-PAID ENVELOPE. Returning the proxy does NOT prevent you from attending
the meeting and voting your shares in person. Note that if your shares are not
held in your name, however, you must bring a letter of authorization from the
record holder confirming your beneficial ownership of the shares, if you intend
to vote the shares at the meeting.
We look forward to seeing you at the meeting.
Sincerely,
/s/ Mark Housley
Mark Housley
Chairman & CEO
<PAGE>
RADIUS INC.
460 EAST MIDDLEFIELD ROAD
MOUNTAIN VIEW, CALIFORNIA 94043-4037
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Our Shareholders:
NOTICE IS HEREBY GIVEN that the 1999 Annual Meeting of Shareholders of
Radius Inc. (the "Company") will be held at the offices of the Company at 460
East Middlefield Road, Mountain View, California 94043 on Friday, February 26,
1999 at 11:00 a.m. for the following purposes:
1. To elect seven directors of the Company 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. The Board of Directors intends to nominate the following
individuals for election: Charles W. Berger; Michael D. Boich; Mark
Housley; John C. Kirby, Henry V. Morgan, all currently serving as
directors, as well as John Cirigliano and Stephen Manousos.
2. To authorize an additional 137,500 shares of Common Stock for issuance
under the Company's Stock Option Plan.
3. To adopt the Company's 1999 Employee Stock Purchase Plan and authorize
137,500 shares of Common Stock for issuance under such Plan.
4. To amend the Company's articles of incorporation to effectuate a name
change.
5. To ratify the appointment of Ernst & Young LLP as independent auditors
for the Company for the current fiscal year.
6. To transact such other business as may properly come before the
meeting.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
Only shareholders of record at the close of business on December 28, 1998
are entitled to notice of and to vote at the meeting and any adjournment
thereof.
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE COMPLETE, SIGN AND
DATE THE ACCOMPANYING PROXY AND RETURN IT PRIOR TO THE MEETING IN THE ENCLOSED
POSTAGE-PAID ENVELOPE.
By Order of the Board of Directors
/s/ Henry V. Morgan
Mountain View, California Henry V. ("Hank") Morgan
January 15, 1999 Secretary
<PAGE>
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RADIUS INC.
PROXY STATEMENT
JANUARY 15, 1999
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GENERAL
The accompanying proxy is solicited on behalf of the Board of Directors of
Radius Inc., a California corporation (the "Company"), for use at the 1999
Annual Meeting of Shareholders of the Company to be held at the principal
executive offices of the Company at 460 East Middlefield Road, Mountain View,
California 94043 on Friday, February 26, 1999 at 11:00 a.m. Pacific Time (the
"Meeting"). Only holders of record of the Company's Common Stock on December
28, 1998 (the "Record Date") will be entitled to vote at the Meeting. On the
Record Date, the Company had 5,532,174 shares of Common Stock outstanding and
entitled to vote at the Meeting. A majority, or 2,766,088 of these shares
represented in person or by proxy will constitute a quorum for the transaction
of business at the Meeting. This Proxy Statement and the accompanying proxy
were first mailed to shareholders on or about January 22, 1999.
Holders of the Company's Common Stock are entitled to one vote for each
share held as of the Record Date. Any person signing a proxy in the form
accompanying this Proxy Statement has the power to revoke it prior to the
Meeting or at the Meeting prior to the vote pursuant to the proxy. A proxy may
be revoked by (i) a writing delivered to the Company stating that the proxy is
revoked, (ii) a subsequent proxy executed by the person executing the prior
proxy and presented at the Meeting, or (iii) attendance at the Meeting and
voting in person. PLEASE NOTE, HOWEVER, THAT IF A SHAREHOLDER'S SHARES ARE HELD
OF RECORD BY A BROKER, BANK OR OTHER NOMINEE AND THAT SHAREHOLDER WISHES TO VOTE
AT THE MEETING, THE SHAREHOLDER MUST BRING TO THE MEETING A LETTER FROM THE
BROKER, BANK OR OTHER NOMINEE CONFIRMING THAT SHAREHOLDER'S BENEFICIAL OWNERSHIP
OF THE SHARES.
In the event that sufficient votes in favor of the proposals are not
received by the date of the Meeting, the proxyholder may propose one or more
adjournments of the Meeting to permit further solicitations of proxies. Any
such adjournment would require the affirmative vote of the majority of the
shares present in person or represented by proxy at the Meeting.
The expenses of soliciting proxies in the form accompanying this Proxy
Statement will be paid by the Company. Following the original mailing of the
proxies and other soliciting materials, the Company and/or its agents may also
solicit proxies by mail, telephone, facsimile or in person. The Company has
retained Skinner & Co., a proxy solicitation firm, and will pay Skinner & Co. a
fee of approximately $3,500, plus expenses estimated at $3,500. In addition,
the Company will request brokers, custodians, nominees and other record holders
of the Company's Common Stock to forward copies of the proxy and other
soliciting materials to persons for whom they hold shares of Common Stock and to
request authority for the exercise of proxies. In such cases, the Company, upon
the request of the record holders, will reimburse such holders for their
reasonable expenses.
<PAGE>
PROPOSAL NO. 1
ELECTION OF DIRECTORS
At the Meeting, shareholders will elect a board of seven 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. Shares represented by a proxy returned to the Company will be voted
for the election of the nominees set forth below unless the proxy is marked in
such a manner as to withhold authority to so vote. If any nominee for any
reason is unable to serve or for good cause will not serve, the proxies may be
voted for such substitute nominee as the proxy holder may determine. The
Company is not aware of any nominee who will be unable to, or for good cause
will not, serve as a director. Directors are elected by the affirmative vote of
a plurality of the shares of Common Stock represented in person or by proxy and
voting at the Meeting. Abstentions will have no effect. Broker non-votes will
be disregarded. All nominees, except Mr. Cirigliano and Mr. Manousos, currently
serve on the Company's Board of Directors (the "Board").
DIRECTORS/NOMINEES
The names of the nominees, and certain information about them (including their
respective terms of service), are set forth below:
<TABLE>
<CAPTION>
Director
Name of Nominee Age Principal Occupation Since
--------------- --- -------------------- --------
<S> <C> <C> <C>
Charles W. Berger (1) (2) 45 Chairman of the Board and Chief 1993
Executive Officer of Imgis, Inc.
Michael D. Boich (2) 45 Investor 1986
John Cirigliano 56 President of CLB Associates n/a
Mark Housley 42 Chairman, President and Chief Executive 1997
Officer of the Company
John C. ("Jack") Kirby (1) 54 Executive Vice President of KH Consulting Group 1997
Henry V. ("Hank") Morgan 59 Chief Financial Officer and Senior Vice 1998
President of Redcreek Communications, Inc.
Stephen Manousos 48 Chief Executive Officer and Director of n/a
Post Digital Software, Inc.
</TABLE>
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(1) Member of the Audit Committee
(2) Member of the Compensation Committee
MR. BERGER was appointed President, Chief Executive Officer and a director
of the Company in March 1993 and Chairman of the Board of Directors in March
1994. He resigned as CEO in July 1997 and as Chairman in December 1997. He is
currently Chairman and CEO of Imgis, Inc., an Internet advertising company. He
is also on the board of directors of Splash Technology Holdings, Inc., a
publicly traded company that was organized around the Company's color server
group in January 1996. From April 1992 until he joined the Company, Mr. Berger
was Senior Vice President, Worldwide Sales, Operations and Support for Claris
Corporation, a subsidiary of Apple Computer, Inc. ("Apple") that develops and
markets application software. From February 1991 to April 1992, he was
President of Sun Microsystems Federal, Inc., a subsidiary of Sun Microsystems,
Inc. ("Sun"), a manufacturer of computer work stations. From July 1989 to
February 1991, he served as Vice President of Business Development for Sun, and
from March 1989 to July 1989, he was Sun's Vice President of Product Marketing.
From April 1982 to March 1989, Mr. Berger held numerous executive positions
involving sales, marketing, business development and finance for Apple.
MR. BOICH has been a director of the Company since its inception in May
1986 and was the Chairman of the Board of Directors from April 1991 until March
1994. Mr. Boich was President and Chief Executive Officer of Rendition, Inc., a
developer of graphics chips, from March 1994 until its sale in 1998. Mr. Boich
served as the
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<PAGE>
Company's President and Chief Executive Officer from its inception until April
1991 and again assumed these positions from September 1992 through February
1993. From July 1985 to April 1986, Mr. Boich worked as an independent data
communications consultant. From March 1982 to July 1985, Mr. Boich was employed
by Apple, where he was part of the original Macintosh development team and was
responsible for applications software acquisitions and promoting third-party
software development for the Macintosh.
MR. CIRIGLIANO, as president and founder of the privately held consulting
firm of CLB Associates, has advised or invested in dozens of emerging companies
in a range of industries including manufacturing, marketing, communications,
software and hardware since 1986. Such work has focused on operating or
strategic initiatives and implementations designed to significantly improve
client company operations and enhance equity values. In such capacity, Mr.
Cirigliano advised the Company from 1995 until 1998. Prior to his association
with CLB Associates, Mr. Cirigliano was a managing director with Merrill Lynch
Capital Markets for ten years, where he headed the team that developed a highly
successful zero coupon convertible product. Mr. Cirigliano also co-founded
Copaquen Associates, a privately-held computer software development and advisory
firm, and Corporate Property Investors, a large, privately held real estate
investment trust now part of Simon DeBartolo. From 1991 to 1997, he was a
Director of Ajax Electric Corp., a leading domestic distributor of electric
motors and served as a Senior Advisor to "The Red Herring" magazine as well as
on the Advisory Board of Outward Bound U.S.A. and The Endowment Trust. Mr.
Cirigliano received his BA from Columbia University and his JD from New York Law
School.
MR. HOUSLEY has been President and Chief Operating Officer of the Company
since January 1997, CEO since August 1997 and Chairman since December 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 AG in Santa Clara, a multinational manufacturer of electronic
equipment, directing product marketing and planning.
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. From
early 1995, Mr. Kirby was President and CEO of Cabrillo Crane & Rigging, Inc., a
wholly owned subsidiary of Wells Fargo Bank, until its sale in late 1997. From
1992 until 1994, Mr. Kirby was Vice President and CFO of Everex Systems, Inc.
MR. MORGAN joined the Company in February 1997 as Chief Financial Officer
and Senior Vice President, Finance and Administration. He resigned from these
positions in September 1998 in order to assume his current duties at Redcreek
Communications, Inc., an Internet start up company. He remained Secretary to
the Company and was appointed to the Board of Directors in October 1998. During
1995 and 1996, Mr. Morgan was Executive Vice President and Chief Financial
Officer of Connect, Inc. of Mountain View, California, an Internet-based
interactive commerce applications software company. From 1989 through 1994, Mr.
Morgan was Executive Vice President and Chief Financial Officer of Logitech
International, S.A., a computer mouse manufacturer.
MR. MANOUSOS co-founded and has served as Chief Executive Officer and
Director of Post Digital Software, Inc. since June 1996. Post Digital is an
electronic prepress and digital printing company dedicated to creating and
marketing powerful, professional video applications. Currently, Post Digital
operations are being wound down. From April 1991 until June 1996, Mr.
Manousos co-founded and served as Vice President of Sales and Marketing, and
later Vice President of Sales at Fractal Design Corporation, and was a member
of its Board of Directors until the company was acquired by MetaTools in May
1997. While at Fractal, Mr. Manousos managed the sales and marketing teams
and was responsible for the company's product packaging. Prior to Fractal,
Mr. Manousos spent 17 years in newspaper editing and writing, including a
stint as an editor on the national desk of the Los Angeles Times.
THE BOARD RECOMMENDS A VOTE FOR THE ELECTION OF EACH OF THE NOMINEES.
BOARD OF DIRECTORS' MEETINGS AND COMMITTEES
Standing committees of the Board include an Audit Committee and a
Compensation Committee. The Board does not have a nominating committee or a
committee performing a similar function.
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<PAGE>
Messrs. Kirby and Berger are currently the members of the Audit Committee.
The Audit Committee meets with the Company's independent auditors concerning the
scope of their annual audit, the findings of the auditors with respect to the
Company's accounting systems and controls, and other matters relating to the
preparation of the Company's audited financial statements. If elected, it is
expected that Mr. Morgan will join the Audit Committee.
Messrs. Boich and Berger are currently the members of the Company's
Compensation Committee. The Compensation Committee considers all matters of
executive compensation and makes recommendations to the Board regarding the
compensation of the Company's executive officers and the establishment of
employee benefit plans generally. The Compensation Committee also administers
the Company's stock option plans and makes stock option awards to executive
officers. If elected, it is expected that Mr. Manousos will join the
Compensation Committee.
During the year ended September 30, 1998, the Board met six times, the
Audit Committee met four times, and the Compensation Committee met once. None
of the nominees for director attended fewer than 75% of the aggregate total
number of meetings of the Board of Directors (held during the period for which
he was a director) and the total number of meetings held by all committees of
the Board of Directors on which he served (held during the period that he
served).
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee is comprised of former officers of the Company.
Mr. Berger was President and Chief Executive Officer of the Company from March
1993 until July 1997. Mr. Boich was President and Chief Executive Officer of
the Company from May 1986 until April 1991 and from September 1992 through
February 1993.
COMPENSATION OF DIRECTORS
Board members are reimbursed for expenses incurred in attending board or
committee meetings. Except as described below, they are not otherwise
compensated for attending board or committee meetings.
The 1994 Directors Stock Option Plan (the "1994 Directors Plan") was
adopted by the Company's Board on December 14, 1994 and approved by the
Company's shareholders on February 15, 1995. A total of 19,000 shares of the
Company's Common Stock have been reserved for issuance under the 1994 Directors
Plan (consisting of 10,000 shares allocated to the 1994 Directors Plan at the
time of its adoption by the Board plus 9,000 shares that were authorized for
issuance, but not issued or subject to outstanding options, under the Company's
1990 Directors' Stock Option Plan (the "Prior Directors Plan") as of September
30, 1998). In addition, shares of the Company's Common Stock issuable upon
exercise of outstanding stock options granted under the Prior Directors Plan
that expire or become unexercisable for any reason after September 30, 1998 will
be available for issuance under the 1994 Directors Plan. A total of 1,000
options are outstanding under the Prior Directors Plan. Although options granted
prior to termination of the Prior Directors Plan remain outstanding in
accordance with their terms, no further options may be granted under the Prior
Directors Plan.
The 1994 Directors Plan provides for the automatic grant of 1,000
nonqualified stock options ("NQSOs") to non-employee members of the Board upon
appointment to the Board and annual grants of 250 NQSOs on each anniversary of a
director's initial grant under either the Prior Directors Plan or the 1994
Directors Plan, provided the Director continues to serve on the Board at such
time. In addition, each director who received a grant to purchase 125 shares
under the Prior Directors Plan after August 30, 1994 and before February 15,
1995 was eligible to receive a one time grant under the 1994 Directors Plan to
purchase 125 shares of the Company's Common Stock. Options granted under the
1994 Directors Plan vest on the anniversary date of the grant at the rate of 25%
per year. During fiscal 1998, Messrs. Boich and Kirby each received an option
to purchase 250 shares of Common Stock at an exercise price of $2.375 and $2.968
per share.
All director stock options were granted with an exercise price equal to the
market price of the Company's Common Stock on the date of grant. All options
granted have a term of ten years.
INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF LIABILITY
The provisions of Section 317 of the California Corporations Code, Article
V of the Company's Articles of Incorporation and Article VI of the Company's
Bylaws provide for indemnification to the fullest extent permitted by law for
expenses, judgments, fines, settlements and other amounts actually and
reasonably incurred in connection
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<PAGE>
with any proceeding arising by reason of the fact that any person is or was a
director, officer or employee of the Company. In addition, Article IV of the
Company's Articles of Incorporation provides that the liability of the Company's
directors shall be eliminated to the fullest extent permissible under the
California Law.
The Company has entered into Indemnity Agreements with each of its current
directors to give such directors additional contractual assurances regarding the
scope of the indemnification and liability limitations set forth in the
Company's Articles of Incorporation and Bylaws.
The Company currently carries a director and officer liability insurance
policy with a per claim and annual aggregate coverage limit of $7.5 million.
-5-
<PAGE>
PROPOSAL NO. 2
AUTHORIZATION TO INCREASE THE NUMBER OF SHARES ISSUABLE
UNDER THE COMPANY'S STOCK OPTION PLAN
The Board of Directors has approved and recommends to the shareholders that
they approve an amendment to the Company's 1995 Stock Option Plan (the "Option
Plan") to increase the aggregate number of shares of Common Stock that may be
issued under the Option Plan by 137,500 shares. The Board of Directors believes
that the Option Plan has played, and will continue to play, a major role in
enabling the Company to attract and/or retain certain officers, directors and
other key employees. Options granted to such individuals through the Option
Plan provide personnel with long-term incentives that are consistent with the
Company's compensation policy of providing compensation that is closely related
to the performance of the Company. As of December 31, 1998, 68,233 shares had
been issued on exercise of stock options granted under the Option Plan, 686,845
shares were subject to outstanding option grants and 21,317 options were
available for future grant under the Option Plan. To allow the Company to
continue to obtain the benefit of incentives available under the Option Plan,
the Company's Board of Directors has adopted and recommended for submission to
the shareholders for their adoption a proposal to increase the number of shares
that may be issued upon the exercise of options granted under the Option Plan.
The Board of Directors considers the Option Plan typical of comparable plans
commonly utilized by technology companies in the Silicon Valley area, and the
Option Plan is described in greater detail below.
This authorization requires the affirmative vote of the holders of a
majority of the shares of Common Stock represented in person or by proxy at the
Meeting. Abstentions will be counted toward the number of shares represented
and voted at the Meeting. Broker non-votes will be disregarded.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE AUTHORIZATION
TO INCREASE THE NUMBER OF SHARES ISSUABLE UNDER THE COMPANY'S STOCK OPTION PLAN.
DESCRIPTION OF THE 1995 STOCK OPTION PLAN
HISTORY. The Stock Option Plan was adopted by the Company's Board on
December 20, 1995; amended on December 18, 1996 and December 8, 1997 by the
Board; and in each case was ratified by the Company's shareholders at the
following annual meeting.
PURPOSE. The purpose of the Option Plan is to provide incentives to
attract, retain and motivate eligible persons whose present and potential
contributions are important to the success of the Company by offering them an
opportunity to participate in the Company's future performance.
PLAN ADMINISTRATION. The Option Plan is administered by the Compensation
Committee of the Board of Directors References herein to the "Board" mean the
Compensation Committee appointed by the Board unless clearly indicated to the
contrary.
Except as otherwise limited by the Option Plan, the Board determines the
optionees, the number of shares subject to each option, the exercise prices, the
exercise periods, the vesting schedules and the dates of grants. The Board has
delegated to the Company's Chief Executive Officer the authority to grant
options to all eligible persons other than executive officers. Each option
granted pursuant to the Option Plan is evidenced by a Stock Option Grant (the
"Grant") issued by the Company and a Stock Option Exercise Notice (the "Exercise
Notice") completed at the time of option exercise.
The Board has the authority to construe and interpret any provision of the
Option Plan, and such interpretations are binding on the Company and the
employees. The Board does not receive any compensation for administering the
Option Plan.
ELIGIBILITY. All officers, directors, employees, independent contractors,
advisors and consultants of the Company or any parent, subsidiary or affiliate
of the Company are eligible to receive option grants under the Option Plan
(provided that, in the case of independent contractors, advisors and
consultants, such persons render bona fide services to the Company). As of
December 31, 1998, there were approximately 60 persons eligible to receive
awards of stock options under the Option Plan and 51 persons held outstanding
grants.
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<PAGE>
TYPE OF OPTION. Both incentive stock options ("ISOs"), as defined in
Section 422 of the Internal Revenue Code (the "Code"), and non-qualified stock
options ("NQSOs") may be granted under the Option Plan. The Option Plan limits
the aggregate fair market value (determined as of the time the option is
granted) of the shares with respect to which ISOs are exercisable for the first
time by the optionee during any calendar year to not more than $100,000. There
is no similar limit on NQSOs granted under the Option Plan.
TERMS OF THE OPTIONS.
- VESTING. Options under the Option Plan generally become exercisable
or vest on a monthly basis over a fifty-month period.
- EXPIRATION DATE. Options granted under the Option Plan may be
exercisable, subject to vesting, for up to ten years after the option
grant date, except that an ISO granted to a person owning ten percent
or more of the total combined voting power of all classes of stock of
the Company or of any parent or subsidiary of the Company (a "Ten
Percent Shareholder") must be exercised within five years of the
option grant date.
- EXERCISE PRICE. Each Grant states the exercise price of the option.
The exercise price of an option granted under the Option Plan must be
equal to the fair market value per share of the Company's Common Stock
on the date of grant, except that NQSOs may be granted with an
exercise price equal to or greater than 85% of the fair market value
of the Company's Common Stock on the date of grant. The exercise
price of an option granted to a Ten Percent Shareholder must be at
least equal to 110% of the fair market value per share on the date of
the grant. The Board determines such fair market value on the date of
grant based upon the closing price of the Company's Common Stock on
the Nasdaq National Market on the date of grant.
- OPTION EXERCISE AND PAYMENT ALTERNATIVES. To exercise an option, the
optionee must deliver to the Company an executed Exercise Notice and
full payment for the shares being purchased. Payment may be made:
(i) in cash; (ii) by surrender of fully paid shares of the Company's
Common Stock; (iii) where permitted by applicable law and approved by
the Board, by tender of a full recourse promissory note having such
terms as determined by the Board; (iv) by waiver of compensation due
or accrued to an optionee for services rendered; (v) by cancellation
of indebtedness of the Company to the optionee; (vi) through a "same
day sale"; (vii) through a "margin commitment"; or (viii) through any
combination of the foregoing where approved by the Board.
- NONTRANSFERABILITY OF OPTIONS. Options granted under the Option Plan
may not be transferred by the optionee other than by will or by the
laws of descent and distribution. During the lifetime of an optionee,
options may be exercised only by the optionee or his or her legal
representative.
- TERMINATION OF EMPLOYMENT. If an optionee's employment or other
association with the Company is terminated for any reason other than
death or disability, any outstanding option, to the extent that it was
exercisable on the date of such termination, may be exercised by the
optionee within thirty days after such termination, but in no event
later than the expiration of the option. If an optionee's association
with the Company is terminated because of the optionee's death or
disability within the meaning of Section 22(e)(3) of the Code, any
outstanding option, to the extent that it was exercisable on the date
of such termination, may be exercised by the optionee, (or optionee's
legal representative or authorized assignee) within twelve months
after such termination, but in no event later than the expiration of
the option. Neither the Option Plan nor any Grant impose any
obligation on the Company to continue an optionee's employment or
other association with the Company.
- MODIFICATION AND ADJUSTMENT OF OPTIONS. If the number of outstanding
shares of Common Stock of the Company is changed by a stock dividend,
stock split, reverse stock split, combination, reclassification or
similar change in the capital structure of the Company without
consideration, the number of shares of Common Stock available for
option grants under the Option Plan and the number of shares and the
exercise price per share for each outstanding option will be
proportionately adjusted, subject to any required action by the Board
or shareholders of the Company.
- CHANGE IN CONTROL. In the event of a transaction in which the Company
is not the surviving corporation (or a merger in which the Company is
the surviving corporation but after which the shareholders of the
Company immediately prior to the merger cease to own their shares in
the Company) and the successor corporation does not assume the options
or substitute equivalent options, the outstanding options under the
Option Plan will expire upon the consummation of such event at such
times and on such conditions as the Board determines.
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<PAGE>
- AMENDMENTS AND TERMINATION. The Board may amend or terminate the
Option Plan at any time and in any respect, including modifying the
form of the Grant or the Exercise Notice, except that no amendment of
the Option Plan may adversely affect any outstanding option or
unexercised portion thereof without the optionee's written consent.
The Option Plan will continue in effect until December 2005, subject
to earlier termination by the Board of Directors.
FEDERAL INCOME TAX INFORMATION
THE FOLLOWING IS A GENERAL SUMMARY AS OF THE DATE OF THIS PROXY STATEMENT OF THE
FEDERAL INCOME TAX CONSEQUENCES TO THE COMPANY AND PARTICIPANTS UNDER THE OPTION
PLAN. THE FEDERAL TAX LAWS MAY CHANGE AND THE FEDERAL, STATE AND LOCAL TAX
CONSEQUENCES FOR ANY PARTICIPANT WILL DEPEND UPON HIS OR HER INDIVIDUAL
CIRCUMSTANCES. EACH PARTICIPANT HAS BEEN AND IS ENCOURAGED TO SEEK THE ADVICE
OF A QUALIFIED TAX ADVISOR REGARDING THE TAX CONSEQUENCES OF PARTICIPATION IN
THE OPTION PLAN.
- INCENTIVE STOCK OPTIONS. A participant will recognize no income upon
grant of an ISO and incur no tax on its exercise (unless the
participant is subject to the alternative minimum tax ("AMT")). If
the participant holds the stock acquired upon exercise of an ISO (the
"ISO Shares") for more than one year after the date the option was
exercised and for more than two years after the date the option was
granted, the participant generally will realize long-term capital gain
or loss (rather than ordinary income or loss) upon disposition of the
ISO Shares. This gain or loss will be equal to the difference between
the amount realized upon such disposition and the amount paid for the
ISO Shares.
- DISQUALIFYING DISPOSITIONS. If the participant disposes of ISO
Shares prior to the expiration of either required holding period (a
"disqualifying disposition"), the gain realized upon such
disposition, up to the difference between the fair market value of
the ISO Shares on the date of exercise (or, if less, the amount
realized on a sale of such shares) and the option exercise price,
will be treated as ordinary income. Any additional gain will be
long-term or short-term capital gain, depending on the amount of
time the ISO Shares were held by the participant.
- ALTERNATIVE MINIMUM TAX. The difference between the fair market value
of the ISO Shares on the date of exercise and the exercise price is an
adjustment to income for purposes of the AMT. The AMT (imposed to the
extent it exceeds the taxpayer's regular tax) is 26% of an individual
taxpayer's alternative minimum taxable income (28% in the case of
alternative minimum taxable income in excess of $175,000).
Alternative minimum taxable income is determined by adjusting regular
taxable income for certain items, increasing the income by certain tax
preference items (including the difference between the fair market
value of the ISO Shares on the date of exercise and the exercise
price) and reducing this amount by the applicable exemption amount
($45,000 in case of a joint return, subject to reduction under certain
circumstances). If a disqualifying disposition of the ISO Shares
occurs in the same calendar year as exercise of the ISO, there is no
AMT adjustment with respect to those ISO Shares. Also, upon a sale of
ISO Shares that is not a disqualifying disposition, alternative
minimum taxable income is reduced in the year of sale by the excess of
the fair market value of the ISO Shares at exercise over the amount
paid for the ISO Shares.
- NONSTATUTORY STOCK OPTIONS. A participant will not recognize any
taxable income at the time a NQSO is granted. However, upon exercise
of a NQSO, the participant must include in income as compensation an
amount equal to the difference between the fair market value of the
shares on the date of exercise (or, in the case of exercise for stock
subject to a substantial risk of forfeiture, at the time such
forfeiture restriction lapses) and the participant's exercise price.
In the case of stock subject to a substantial risk of forfeiture, if
the optionee makes an 83(b) election, the included amount must be
based on the difference between the fair market value on the date of
exercise and the option exercise price. The included amount must be
treated as ordinary income by the participant and may be subject to
withholding by the Company (either by payment in cash or withholding
out of the participant's salary). Upon resale of the shares by the
participant, any subsequent appreciation or depreciation in the value
of shares will be treated as capital gain or loss.
- MAXIMUM TAX RATES. The maximum tax rate applicable to ordinary income
is 39.6%. Long-term capital gain will be taxed at a maximum of 20%.
For this purpose, in order to receive long-term capital gain
treatment, the stock must be held for more than one year. Capital
gains may be offset by capital losses and up to $3,000 of capital
losses may be offset annually against ordinary income.
-8-
<PAGE>
- TAX TREATMENT OF THE COMPANY. The Company generally will be entitled
to a deduction in connection with the exercise of a NQSO by a
participant to the extent that the participant recognizes ordinary
income. The Company will be entitled to a deduction in connection
with the disposition of ISO Shares only to the extent that the
participant recognizes ordinary income on a disqualifying disposition
of the ISO Shares.
- ERISA. The Option Plan is not subject to any of the provisions of the
Employee Retirement Income Security Act of 1974 ("ERISA").
-9-
<PAGE>
PROPOSAL NO. 3
TO ADOPT THE COMPANY'S 1999 EMPLOYEE STOCK PURCHASE PLAN AND AUTHORIZE THE
ISSUANCE OF 137,500 SHARES OF COMMON STOCK UNDER SUCH PLAN
The Board of Directors has approved and recommends to the shareholders
that they approve the adoption of the Company's 1999 Employee Stock Purchase
Plan (the "1999 Purchase Plan") and the reservation for issuance of 137,500
shares of Common Stock under the Purchase Plan. The existing 1990 Employee
Stock Purchase Plan (the "Prior Plan") is scheduled to expire in June 2000
and will terminate early upon shareholder approval of this Proposal No. 3 and
implementation of the 1999 Purchase Plan. Any shares authorized for issuance
under the Prior Plan and not issued upon its termination will be reserved for
issuance under the 1999 Purchase Plan in addition to the 137,500 shares
initially reserved. The Board of Directors believes that the Prior Plan has
played and that the 1999 Purchase Plan will continue to play, a major role in
enabling the Company to attract and/or retain certain officers, directors and
other key employees. Shares purchased through the 1999 Purchase Plan will
provide personnel with long-term incentives that are consistent with the
Company's compensation policy of providing compensation that is closely
related to the performance of the Company. As of the date of December 31,
1998, 49,100 shares had been issued under the Prior Plan and 15,900 shares
were available for future issuance under the Prior Plan. To allow the
Company to continue to obtain the benefit of incentives available under the
Prior Plan, the Company's Board of Directors has adopted the 1999 Purchase
Plan and recommends its adoption by the shareholders along with the
reservation of 137,500 shares of common stock for issuance under the 1999
Purchase Plan. The Board of Directors considers the 1999 Purchase Plan
typical of comparable plans commonly utilized by technology companies in the
Silicon Valley area, and the 1999 Purchase Plan is described in greater
detail below.
This authorization requires the affirmative vote of the holders of a
majority of the shares of Common Stock represented in person or by proxy at the
Meeting. Abstentions will be counted toward the number of shares represented
and voted at the Meeting. Broker non-votes will be disregarded.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE IN FAVOR OF
PROPOSAL NO. 3.
DESCRIPTION OF THE 1999 EMPLOYEE STOCK PURCHASE PLAN
HISTORY. The 1999 Purchase Plan was adopted by the Board of Directors
(the "Board") as of December 16, 1998 and 137,500 shares of common stock were
reserved for issuance under it, subject to shareholder approval. The 1999
Purchase Plan has a term of ten years. The Prior Plan was adopted by the
Board on June 19, 1990 and would automatically expire on June 18, 2000. The
1999 Purchase Plan will replace the Prior Plan at the beginning of the first
offering period under the 1999 Purchase Plan. Shares previously reserved for
issuance under the Prior Plan and not issued upon such termination of the
Prior Plan will be reserved for issuance under the 1999 Purchase Plan. The
number of shares of Common Stock reserved for issuance under the Prior Plan
was initially 30,000 and increased to 65,000 in 1995.
PURPOSE. The purpose of the 1999 Purchase Plan is to provide employees of
the Company, or any parent or subsidiary thereof, with a convenient means to
acquire equity in the Company at a reduced price through payroll deductions, and
to provide an incentive for continued employment. The 1999 Purchase Plan is
intended to qualify as an "employee stock purchase plan" under Section 423 of
the Internal Revenue Code of 1986 (the "Code").
ADMINISTRATION. The 1999 Purchase Plan may be administered by the Board
or by a committee appointed by the Board (the "Committee"). References to
the "Committee" in this description of the 1999 Purchase Plan means either
such committee or the Board, unless clearly indicated otherwise.
The Committee has the authority to construe and interpret any provision
of the 1999 Purchase Plan and such interpretations are binding on the Company
and its employees. Members of the Board do not receive any compensation for
administering the 1999 Purchase Plan.
ELIGIBILITY. All employees of the Company, or any designated parent or
subsidiary thereof, are eligible to participate in the 1999 Purchase Plan except
the following: (i) employees who are not employed by the Company on the day
before the beginning of an offering period (as described below); (ii) employees
who are customarily employed for less than 20 hours per week; (iii) employees
who are customarily employed for less than 5 months in a calendar year; (iv)
employees who own or hold options to purchase or who, as a result of
participation in the 1999 Purchase Plan, would own stock or hold options to
purchase stock possessing 5% or more of the total combined voting power
-10-
<PAGE>
or value of all classes of stock in the Company pursuant to Section 425(d) of
the Code; and (v) independent contractors unless federal tax withholding is
required in connection with payments to such contractors
TERMS OF THE 1999 PURCHASE PLAN
- OFFERING AND PURCHASE PERIODS Offering periods, except for the
initial offering period which will begin on a date determined by
the Committee, will be twelve months in duration beginning April 1
and October 1 of each year and ending on March 31 and September 30
of each following year. Each offering period will be comprised of
two six month purchase periods (except for the first offering
period). Stock is purchased on the last day of each purchase
period. The Board may change the timing and duration of an offering
or purchase without shareholder approval.
- PAYROLL DEDUCTIONS. Employees will participate in the 1999 Purchase
Plan during each offering period through payroll deductions. An
employee sets the rate of such payroll deductions, which may not be
less than 2% nor more than 10% of the employee's base salary or wages,
bonuses, overtime and commissions, unreduced by the amount by which
the employee's salary is reduced pursuant to Sections 125 or 401(k) of
the Code. These payroll deductions are made during the entire
purchase period and on the last day of the purchase period are applied
to purchase stock at a reduced price. Once enrolled, a participating
employee will automatically participate in each succeeding offering
period unless such employee withdraws from the 1999 Purchase Plan. The
employee may increase or lower the rate of payroll deductions for
the current offering period and prior to any upcoming offering
period, but not more than one decrease and one increase may be made
effective during any offering period.
- PURCHASE PRICE. The purchase price of shares that may be acquired in
any purchase period under the 1999 Purchase Plan is 85% of the lesser
of (i) the closing price of the shares on the Nasdaq SmallCap Market
on the day prior to the first day of the offering period or (ii) the
closing price of the shares on the last day of the purchase period.
- PURCHASE OF STOCK. The number of whole shares an employee may
purchase in any purchase period will be determined by dividing the
total amount of payroll deductions withheld from the employee's
salary during the purchase period by the price for each share
determined as described above. The purchase will take place
automatically on the last day of the purchase period. No employee
will be able to purchase more than (i) 200% of the number of shares
determined by using 85% of the fair market value of a share of the
Company's Common Stock on the first day of the offering period as
the denominator in the formula described above or (ii) the maximum
number of shares set by the Committee. Any cash balance remaining
in an employee's account following the purchase will be refunded to
the employee as soon as practicable; however, any cash balance
representing a fractional share may be applied to the purchase of
additional shares in the next period.
- WITHDRAWAL. An employee may withdraw from any offering period. No
further payroll deductions for the purchase of shares will be made for
succeeding offering periods unless the employee enrolls in a new
offering period.
- TERMINATION OF EMPLOYMENT. Termination of an employee's employment
for any reason, including retirement or death, cancels his or her
participation in the 1999 Purchase Plan immediately. In such event,
the payroll deductions credited to the employee's account will be
returned to such employee or, in case of death, to the employee's
legal representative.
- ADJUSTMENT UPON CHANGES IN CAPITALIZATION. In the event of certain
corporate transactions, such as a merger, the successor or
surviving corporation may assume the 1999 Purchase Plan with
respect to any open offering period or the Committee may determine
in its sole discretion to terminate the 1999 Purchase Plan or
authorize a shortened purchase period. In the event of changes in
the Company's capitalization, such as a stock split, the number of
shares that are reserved for issuance under the 1999 Purchase Plan
will be appropriately adjusted.
-11-
<PAGE>
FEDERAL INCOME TAX INFORMATION. The 1999 Purchase Plan is intended to qualify
as an "employee stock purchase plan" within the meaning of Section 423 of the
Code.
THE FOLLOWING IS A GENERAL SUMMARY AS OF THE DATE OF THIS PROXY STATEMENT OF THE
FEDERAL INCOME TAX CONSEQUENCES TO THE COMPANY AND EMPLOYEES OF PARTICPATION IN
THE 1999 PURCHASE PLAN. THE FEDERAL TAX LAWS MAY CHANGE AND THE FEDERAL, STATE
AND LOCAL TAX CONSEQUENCES FOR ANY PARTICIPATING EMPLOYEE WILL DEPEND UPON HIS
OR HER INDIVIDUAL CIRCUMSTANCES. EACH PARTICIPATING EMPLOYEE IS ENCOURAGED TO
SEEK THE ADVICE OF A QUALIFIED TAX ADVISOR REGARDING THE TAX CONSEQUENCES OF
PARTICIPATION IN THE 1999 PURCHASE PLAN.
- TAX TREATMENT OF THE PARTICIPATING EMPLOYEE. Participating employees
will not recognize income for federal income tax purposes either upon
enrollment in the 1999 Purchase Plan or upon the purchase of shares.
All tax consequences are deferred until the employee sells the shares,
disposes of shares by gift or dies.
- If shares are held for more than one year after the date of purchase
and more than two years from the beginning of the applicable offering
period, or if the employee dies while owning the shares, the employee
realizes ordinary income on a sale (or a disposition by way of gift or
upon death) to the extent of the lesser of (i) 15% of the fair market
value of the shares at the beginning of the offering period or (ii)
the actual gain (the amount by which the market value of the shares on
the date of sale, gift or death exceeds the purchase price). All
additional gain upon the sale of shares is treated as long-term
capital gain. If the shares are sold and the sale price is less than
the purchase price, there is no ordinary income and the employee has a
long-term capital loss for the difference between the sale price and
the purchase price.
- If the shares are sold or are otherwise disposed of including by way
of gift (but not death, bequest or inheritance) within either the
one-year or the two-year holding periods described above (a
"disqualifying disposition"), the employee realizes ordinary income at
the time of sale or other disposition taxable to the extent that the
fair market value of the shares at the date of purchase is greater
than the purchase price. This excess will constitute ordinary income
in the year of the sale or other disposition even if no gain is
realized on the sale or if a gratuitous transfer is made. The
difference, if any, between the proceeds of sale and the fair market
value of the shares at the date of purchase is a capital gain or loss.
Capital gains may be offset by capital losses and up to $3,000 of
capital losses may be used annually against ordinary income.
- TAX TREATMENT OF THE COMPANY. The Company will be entitled to a
deduction in connection with the disposition of shares acquired under
the 1999 Purchase Plan only to the extent that the employee recognizes
ordinary income on a disqualifying disposition. In order to enable
the Company to learn of disqualifying dispositions and ascertain the
amount of the deductions to which it is entitled, participating
employees are required to notify the Company in writing of the date
and terms of any disposition of shares purchased under the 1999
Purchase Plan.
- ERISA. The 1999 Purchase Plan is not subject to any of the provision
of the Employee Retirement Income Security Act of 1974.
-12-
<PAGE>
PROPOSAL NO. 4
APPROVAL OF AMENDMENT TO COMPANY'S ARTICLES OF
INCORPORATION TO EFFECTUATE A NAME CHANGE
In June 1998, the Company licensed certain technology and assets necessary
to conduct its monitor business to Korea Data Systems America, Inc. ("KDS"),
leaving the Company free to focus on its digital video software business. The
brand name and trademark RADIUS was one of the assets so licensed because of its
close association with monitors. Although the Company's corporate name was not
transferred in this transaction and the Company retains the right to continue to
refer to itself as "Radius Inc.", the Company has determined that it will be in
the best interest of the Company to change its own name to reflect its new focus
on digital video software and to avoid confusion with its historical business
activities. After significant study with the assistance of professional
advisors, management has recommended that the name be changed to "Digital
Origin, Inc." By approving this proposal, the shareholders will authorize the
Board to amend the Company's articles of incorporation accordingly. The
amendment to the Company's articles of incorporation will take the following
form: "Article I is replaced with a new Article I - The name of this
corporation is Digital Origin, Inc."
In August 1998, the Company amended the license under which the use of the
RADIUS brand name by KDS was authorized and agreed to sell the assets subject to
the license to KDS. The sale of such assets is subject to certain contingencies
in the discretion of KDS. If KDS elects to deem such contingencies satisfied
and the purchase transaction closes, then the Company will be obligated to seek
shareholder approval to change its corporate name to a name that does not
include "Radius." The Board of Directors believes it to be in the best interest
of the Company to change its name, in any event, to more closely reflect the
Company's current business objectives.
Management expects the formal implementation of the name change with the
California Secretary of State to be completed by the end of March 1999 after
shareholder approval; however, transitional uses of the "Radius" name by the
Company may continue for several months in order to minimize the risk of
customer confusion. There will be no adverse tax consequences associated with
this name change. Implementation costs during fiscal year 1999 are not expected
to be material. Even if this proposal is not approved by the shareholders or
the transaction referred to above does not close, the Company expects to utilize
this new name and variations of it as a brand name, to seek trademark protection
for such names and to do business under such names in various jurisdictions for
the reasons referred to above. Therefore, the Company is seeking approval of
this name change.
This authorization requires the affirmative vote of the holders of a
majority of the outstanding shares of Common Stock. Abstentions and Broker
non-votes will have the effect of a vote against this proposal.
THE BOARD RECOMMENDS A VOTE IN FAVOR OF PROPOSAL NO. 4.
-13-
<PAGE>
PROPOSAL NO. 5
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The Company has appointed Ernst & Young LLP as its independent auditors to
perform the audit of the Company's financial statements for the 1999 fiscal year
and the shareholders are being asked to ratify such appointment. Ernst & Young
LLP has audited the Company's financial statements since the Company's
inception. Representatives of Ernst & Young LLP will be present at the Meeting,
will be given an opportunity to make a statement at the Meeting if they desire
to do so and will be available to respond to questions.
This ratification requires the affirmative vote of the holders of a
majority of the shares of Common Stock represented in person or by proxy at the
Meeting. Abstentions will be counted toward the number of shares represented
and voted at the Meeting. Broker non-votes will be disregarded.
THE BOARD RECOMMENDS A VOTE IN FAVOR OF PROPOSAL NO. 5.
-14-
<PAGE>
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information known to the Company
with respect to beneficial ownership of the Company's Common Stock as of
September 30, 1998 (except as noted), for (i) each shareholder who is known by
the Company to be the beneficial owner of more than 5% of the Company's Common
Stock; (ii) the Named Executive Officers (defined below), (iii) each of the
Company's directors, and (iv) all current directors and executive officers of
the Company as a group. Shares of Common Stock beneficially owned include
securities that can be acquired by such person within 60 days of September 30,
1998 upon the exercise of stock options or warrants or upon conversion of
convertible securities.
<TABLE>
<CAPTION>
Amount and Nature of Percent
Name of Beneficial Owner Beneficial Ownership (1) of Class
------------------------ ------------------------ --------
<S> <C> <C>
Ellenburg Group (2) 404,990 7.33%
Charles W. Berger (3) 89,833 1.63%
Michael D. Boich (4) 16,557 *
Mark Housley (5) 132,000 2.39%
Jack Kirby (6) 2,173 *
Hank Morgan (7) 42,000 *
John Cirigliano (8) 68,515 1.24%
Stephen Manousos (9) 50,000 *
All current executive officers and 351,078 6.36%
directors as a group (six persons) (10)
</TABLE>
* Less than one percent.
(1) Percentage ownership is based on 5,522,816 shares outstanding as of
September 30, 1998. Unless otherwise indicated below, the persons and
entities named in the table have sole voting and sole investment power with
respect to all shares beneficially owned, subject to community property
laws where applicable.
(2) Includes 5,000 shares of Common Stock issuable upon exercise of warrants at
an exercise price of $10.00 per share until October 13, 2000. Messrs.
Ellenburg, Karno, Epple and Edwards are the beneficial owners of 182,500,
182,500, 23,994 and 15,996 respectively of the Company's Common Stock, each
filing a separate Schedule 13D on December 11, 1997 with the Securities and
Exchange Commission. All such persons may be deemed to constitute a
"group" within the meaning of Section 13 (d) (3) of the Securities Exchange
Act of 1934 because all of their acquisitions of shares of the Company's
Common Stock were made pursuant to an option to purchase granted by
Mitsubishi Electronics America, Inc. Mr. Epple is also the beneficial
owner of 4,000 shares of the Company's Common Stock not purchased pursuant
to such option and is not included in the amount of the Ellenburg Group.
Mr. Ellenburg's address is 217 N. Missouri Avenue, Clearwater, FL 33755;
Mr. Karno's address is 16255 Ventura Blvd. Suite 1200, Encino, CA 91436;
Mr. Epple's address is 423 Cleveland Street, Clearwater, FL 33757; and Mr.
Edwards' address is 217 North Missouri Avenue, Clearwater, FL 33755. Mr.
Ellenburg shares voting and investment power with Ms. Tomczak. Information
with respect to these holders is based on Schedules 13D filed December 11,
1997.
(3) Represents 15 shares held by Mr. Berger as beneficial owner for his
children, and 89,818 shares subject to options exercisable within 60 days
of September 30, 1998.
(4) Represents 15,180 shares held by Mr. Boich, and 1,377 shares subject to an
option exercisable within 60 days of September 30, 1998.
(5) Represents shares subject to options exercisable within 60 days of
September 30, 1998.
(6) Represents shares subject to options exercisable within 60 days of
September 30, 1998.
(7) Represents shares subject to options exercisable within 60 days of
September 30, 1998.
(8) Includes 68,515 shares owned by CLB Associates and its affiliates. Mr.
Cirigliano is a principal in CLB Associates.
-15-
<PAGE>
(9) Includes a warrant for 50,000 shares of common stock issued to Post Digital
Software, Inc. on November 23, 1998. Mr. Manousos is a principal in Post
Digital Software, Inc.
(10) Includes the shares described in 3 - 8 footnotes above.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information concerning the compensation
awarded to, earned by or paid for services rendered in all capacities to the
Company during each of the fiscal years ended September 30, 1996, 1997 and 1998
by the Company's Chief Executive Officer, Chief Financial Officer and Senior
Vice President of Operations (collectively, the "Named Executive Officers"). No
other executive officer of the Company who held office at September 30, 1998,
met the definition of "most highly compensated executive officer" within the
meaning of the SEC's executive compensation disclosure rules.
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
------------------------------------------------------ ------------
Securities
Name and Annual Fiscal Annual Other Annual Underlying All Other ($)
Principal Position Year Salary($) Bonus($) Compensation($) Options(#) Compensation
- ------------------ ------ --------- --------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Mark Housley (1) 1998 180,000 70,625 - 100,000 1,000
President, CEO and 1997 179,886 50,000 - 100,000 1,000
Chairman 1996
Henry V. Morgan (2) 1998 130,786 22,813 - 30,000 1,000
Senior Vice President 1997 86,548 - 50,000 1,000
and CFO 1996 -
Steve Petracca (3) 1998 94,802 24,813 - 1.000
Senior Vice President 1997 90,615 - 50,000 1,000
1996 -
</TABLE>
- ---------------------
(1) Mr. Housley became President and CEO in August 1997
(2) Mr. Morgan became CFO in February 1997 and resigned from this position in
September 1998.
(3) Mr. Petracca became SVP in March 1997 and resigned from this position in
March 1998.
STOCK OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth further information regarding individual
grants of stock options pursuant to the Company's Option Plan during fiscal 1998
to each of the Named Executive Officers. In accordance with the rules of the
Securities and Exchange Commission, the table sets forth the hypothetical gains
or "option spreads" that would exist for the options at the end of their
respective ten-year terms based on assumed annualized rates of compound stock
appreciation of 5% and 10% from the dates the options were granted to the end of
the respective option terms. Actual gains, if any, on option exercises are
dependent on the future performance of the Company's Common Stock and overall
market conditions. There can be no assurance that the potential realizable
values shown in this table will be achieved.
<TABLE>
<CAPTION>
Individual Grants
----------------------------------------------------------------
Potential Realizable Value
Number of at Assumed Annual Rates
Securities of Stock Price
Underlying % of Total Appreciation for Option
Options Options Granted Terms ($)(1)
Granted to Employees in Exercise Expiration --------------------------
Name (#) Fiscal Year Price ($/share) Date 5% 10%
- ----------------------- ---------- ----------- --------------- ---------- --- ---
<S> <C> <C> <C> <C> <C> <C>
Mark Housley 100,000 (2) 22.27% $2.87 3/31/08 $180,807 $458,201
Henry V. Morgan 30,000 (2) 6.68% $2.87 3/31/08 $54,242 $137,460
</TABLE>
-16-
<PAGE>
(1) The potential realizable value is calculated based on the term of the
option at its time of grant, compounded annually. It is calculated by
assuming that the stock price on the date of grant appreciates at the
indicated annual rate, compounded annually for the entire term of the
option and that the option is exercised and sold on the last day of its
term for the appreciated stock price. These amounts are net of exercise
prices. The assumed rates of appreciation are mandated by the rules of the
Securities and Exchange Commission and do not represent the Company's
estimate or projection of future Common Stock prices. Actual gains, if
any, on option exercises are dependent on future performance of the
Company's Common Stock and overall market conditions. There can be no
assurance that the potential realizable values shown in this table will be
achieved.
(2) These stock options were granted with an exercise price equal to the
closing fair market value of the Company's Common Stock on the date of
grant. These options became exercisable at the rate of 4% per month of the
total shares beginning in March 1998. These options lapse within 30 days
after the termination of the applicable employment, director or consulting
relationships with the Company.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table shows the number of shares of Common Stock
represented by outstanding stock options held by each Named Executive Officer as
of September 30, 1998 and the value of such options based on the last sales
price of the Company's Common Stock on October 3, 1998 (the last trading day
prior to the end of fiscal 1998), which was $0.969.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at Fiscal Year-end (#) at Fiscal Year-end ($)
------------------------------ ----------------------
Shares Acquired Value Exercisable/ Exercisable/
Name On Exercise (#) Realized ($) Unexercisable Unexercisable
- ---- --------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Mark Housley - - 116,000/84,000 0/0
Henry V. Morgan - - 42,000/0 0/0
</TABLE>
EMPLOYMENT AGREEMENTS
The Company and Mark Housley, the Company's Chairman, CEO and President,
entered into an employment relationship by letter dated December 20, 1996 that
provides for at will employment until either party terminates the relationship
with or without cause. Initial base compensation is $200,000 per year with a
target bonus of up to $100,000, unless increased by the Compensation Committee
of the Board. Mr. Housley was also granted an option to purchase 100,000 shares
of the Company's Common Stock at an exercise price of $5.31 per share, the fair
market value on the date of grant.
BOARD OF DIRECTORS AND COMPENSATION COMMITTEE REPORT
ON EXECUTIVE COMPENSATION
THIS SECTION IS NOT "SOLICITING MATERIAL," IS NOT DEEMED FILED WITH THE SEC
AND IS NOT TO BE INCORPORATED BY REFERENCE IN ANY FILING OF THE COMPANY UNDER
THE SECURITIES ACT OR THE EXCHANGE ACT WHETHER MADE BEFORE OR AFTER THE DATE
HEREOF AND IRRESPECTIVE OF ANY GENERAL INCORPORATION LANGUAGE CONTAINED IN ANY
SUCH FILING.
During the 1998 fiscal year, final decisions regarding executive
compensation were made by the Compensation Committee (the "Committee"). The
Committee currently consists of Messrs. Boich and Berger. The Board is currently
composed of four independent non-employee directors and one employee director.
Although Mr. Housley is a member of the Board, he does not participate in
deliberations that relate to his own compensation.
GENERAL COMPENSATION POLICY
The Committee establishes the general compensation policies for the
Company's executive officers and typically reviews base salary levels, option
levels and target bonuses for the executive officers of the Company. The Board
has delegated to the Committee the authority to grant stock options to the
Company's executive officers and has delegated to the Company's Chief Executive
Officer ("CEO") the authority to grant stock options to employees other than
executive officers.
-17-
<PAGE>
When establishing salaries, bonus levels and stock option awards for
executive officers, the Committee considers: (1) the Company's financial
performance during the past year and recent quarters, (2) the individual's
performance during the past year and recent quarters, and (3) the salaries of
executive officers in similar positions in companies of comparable size within
the computer industry. With respect to executive officers other than the CEO,
the Committee places considerable weight upon the recommendation of the CEO.
The method for determining compensation varies from case to case based on a
discretionary and subjective determination of what is appropriate at the time.
Also, for fiscal 1998, debt and expense reduction as well as the maximum
utilization of assets was given significant consideration in determining
compensation in addition to the other factors referred to above.
The Committee reviews available executive compensation sample data for
similar companies within the computer industry. The companies included in the
sample data included companies present in the NASDAQ (US) Index and the
Hambrecht & Quist Technology Index (used for purposes of the returns data
presented in the "Performance Graph" below), but the sample was not intended to
correlate with either of these indices. The Committee assessed this data in
reviewing executive officer salaries. For the 1998 fiscal year, base salaries
have been set somewhat below market, while targeted bonuses have been set at
market in order to emphasize Company performance. Moreover, during fiscal 1998
the Named Executive Officers and four vice presidents elected to reduce their
base salaries by ten percent from the fiscal 1997's rates.
The Committee believes that the compensation of the Company's executive
officers also should be significantly influenced by the Company's performance.
Accordingly the Company's practice has been to make additional compensation in
the form of bonuses and options available for each executive contingent upon
corporate performance. Specifically, corporate performance determines bonus
payments made to executive officers as bonuses are based on achieving corporate
financial objectives. Additional bonuses may also be granted in recognition of
outstanding individual performance. In each case, targeted bonuses are
established by the Committee in its discretion.
Significant stock options are granted to the Company's executives in order
to provide appropriate long term financial incentives and to align the interests
of the executives with the shareholders. The Committee does not set specific
target levels for options granted to Named Executive Officers or for the CEO.
Initial option grants are awarded to executives when they first join the
Company. Initial option grants are normally larger than subsequent option
grants in order to incent the executive to join the Company by participating in
the Company's long term success. Subsequent option grants are awarded from time
to time depending on the executive's particular circumstances such as a
significant change in responsibilities, superior performance, or the number of
unvested options then held by the executive. The number of stock option awards
is based on a discretionary and subjective determination by the Committee based
on the foregoing factors and does not necessarily take into account options
granted by comparably sized peer companies. The relative importance of these
factors varies from case to case based on a discretionary and subjective
determination by the Committee of what is appropriate at the time. In fiscal
1998, the primary factor considered in granting options to executive officers
was contribution to debt and expense reduction as well as contribution to
maximizing the utilization of all assets.
FISCAL YEAR 1998 EXECUTIVE COMPENSATION
For the 1998 fiscal year, the Committee and the CEO reviewed data collected
by Radford Associates in evaluating base salaries for executive officers. Base
salaries for the Company's executives for the 1998 fiscal year were determined
based upon these surveys, the compensation policies described above and the
CEO's recommendations.
The Company's executive officer bonus plan for the 1998 fiscal year (the
"1998 Executive Plan") provided for a target bonus of fifty percent of base
salary for vice presidents with payments to be made semi-annually based on the
Company's attainment of operating income goals. Bonus payments were contingent
on achieving at least eighty percent of these financial goals. In the event the
Company exceeded its financial goals, payments would exceed target amounts.
The Company establishes its financial goals in conjunction with its normal
fiscal year planning process. The specific financial goals established by the
Company are confidential commercial and business information. Based on the
Company's financial goals, a bonus pool was established on a semi-annual basis.
The size of the semi-annual bonus pool was dependent on whether or not the
Company achieved at least eighty percent of its financial goals.
-18-
<PAGE>
During the first half of fiscal year 1998, the operating income goals were
exceeded and commensurate bonuses were paid. No plan bonuses were paid for the
second half of fiscal year 1998, as operating income goals were not met.
However, two vice presidents received discretionary bonuses of $15,000 each in
recognition of extraordinary efforts on specific tasks.
In March 1998, the Company granted incremental stock options to its Chief
Financial Officer and four vice presidents. See "Stock Option Grants in the
Last Fiscal Year" above.
CEO COMPENSATION
Mr. Housley was hired by the Company pursuant to an Employment Agreement in
December 1996 that provides for a base salary of $200,000. Pursuant to his
Employment Agreement, Mr. Housley's target bonus for the 1998 fiscal year
remained $100,000, to be paid in semi-annual installments. First half bonus
payments of $40,625 were paid to Mr. Housley based on achieving operating income
goals. No second half plan bonus was paid in light of the Company's inability
to achieve its targeted operating income goals, however, Mr. Housley received a
discretionary bonus of $30,000 in recognition of extraordinary efforts on
specific tasks. In March 1998, the Company granted incremental stock options to
Mr. Housley. See "Stock Option Grants in the Last Fiscal Year" above.
COMPLIANCE WITH SECTION 162 OF THE INTERNAL REVENUE CODE OF 1986
The Omnibus Budget Reconciliation Act of 1993 added Section 162(m) to the
Internal Revenue Code. Section 162(m) limits deductions for certain executive
compensation in excess of $1 million. Certain types of compensation are
deductible only if performance criteria are specified in detail, and payments
are contingent on shareholder approval of the compensation arrangement. The
Company believes that it is in the best interests of its shareholders to
structure its compensation plans to achieve maximum deductibility under Section
162(m) with minimal sacrifices in flexibility and corporate objectives.
The Company does not expect that the cash compensation it pays in fiscal
1999 will be great enough to be affected by the requirements of Section 162(m)
of the Code. Because members of the Compensation Committee are former officers
of the Company, they are not "outside directors" within the meaning of Section
162(m) and the stock options do not meet the requirements of Section 162(m).
The Committee will continue to monitor this situation and will take appropriate
action if and when it is warranted. Since corporate objectives may not always
be consistent with the requirements for full deductibility, it is conceivable
that the Company may enter into compensation arrangements in the future under
which payments are not deductible under Section 162(m); deductibility will not
be the sole factor used by the Committee in ascertaining appropriate levels or
modes of compensation.
BOARD OF DIRECTORS COMPENSATION COMMITTEE
Charles W. Berger Michael D. Boich
Michael D. Boich Charles W. Berger
John C. Kirby
Henry V. Morgan
Mark Housley
-19-
<PAGE>
PERFORMANCE GRAPH
The Securities and Exchange Commission requires a comparison on an
indexed basis of cumulative total shareholder return for the Company, a
relevant broad equity market index and a published industry or
line-of-business index. Cumulative total shareholder return represents share
value appreciation assuming the investment of $100 in the Common Stock of the
Company and each of the other indexes in September 1993, and reinvestment of
all dividends. The Common Stock of the Company is traded on the Nasdaq
SmallCap Market. Set forth below is a graph comparing cumulative total
shareholder return on the Company's Common Stock, the NASDAQ(US) Index and
the Hambrecht & Quist Technology Index.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
AMONG RADIUS INC., THE NASDAQ STOCK MARKET (U.S.) INDEX
AND THE HAMBRECHT & QUIST TECHNOLOGY INDEX
[GRAPH]
<TABLE>
<CAPTION>
Radius; NASDAQ; (H&Q)
------- ------- ------
<S> <C> <C> <C>
9/93 100.00 100.00 100.00
9/94 106.15 100.83 114.13
9/95 139.28 87.69 200.10
9/96 165.24 21.54 219.66
9/97 226.81 8.08 327.51
9/98 231.84 1.31 304.30
</TABLE>
* $100 INVESTED ON 9/30/93 IN STOCK OR INDEX - INCUDING REINVESTMENT OF
DIVIDENDS. FISCAL YEAR ENDING SEPTEMBER 30.
THIS SECTION IS NOT "SOLICITING MATERIAL," IS NOT DEEMED FILED WITH THE SEC
AND IS NOT TO BE INCORPORATED BY REFERENCE IN ANY FILING OF THE COMPANY UNDER
THE SECURITIES ACT OR THE EXCHANGE ACT WHETHER MADE BEFORE OR AFTER THE DATE
HEREOF AND IRRESPECTIVE OF ANY GENERAL INCORPORATION LANGUAGE CONTAINED IN ANY
SUCH FILING.
-20-
<PAGE>
CERTAIN TRANSACTIONS
The Company has entered into indemnity agreements with certain officers and
directors which provide, among other things, that the Company will indemnify
such officer or director, under the circumstances and to the extent provided for
therein, for expenses, damages, judgments, fines and settlements the officer or
director may be required to pay in actions or proceedings which the officer or
director is or may be made a party by reason of the officer's or director's
position with the Company, and otherwise to the full extent permitted under
California law and the Company's By-laws.
On November 23, 1998, the Company acquired certain software and other
intangible property from Post Digital Software, Inc. for (i) an initial
payment of $50,000, (ii) earnout payments equal to at least $50,000 but not
exceeding $700,000 based on subsequent sales of the Company's digital video
products incorporating such software and (iii) a warrant to purchase up to
50,000 shares of the Company's Common Stock at an exercise price of $1.50 per
share. The warrant is exercisable over a four year period beginning on May
1, 1999. Thereafter, the warrant can be exercised for up to 12,000 shares
plus an additional 2,000 shares for each full month that transpires, up to a
total of 50,000 shares. Stephen Manousos, a candidate for election to the
Company's Board of Directors, is a principal shareholder, officer and
director of Post Digital Software, Inc. Post Digital Software, Inc. is in
the process of winding up its business.
The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. All future transactions between the Company and its
officers, directors and principal shareholders and their affiliates will be
approved by a majority of the Board of Directors, including a majority of the
independent and disinterested directors of the Board of Directors, and will be
on terms no less favorable to the Company than could be obtained from
unaffiliated third parties.
-21-
<PAGE>
SHAREHOLDER PROPOSALS FOR 2000 ANNUAL MEETING
Proposals of shareholders intended to be included in the Company's Proxy
Statement and form of proxy relating to the Company's 2000 Annual Meeting of
Shareholders must be received at the Company's principal executive office by
September 12, 1999.
SECTION 16(a) BENEFICAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 (as amended) requires
that the Company's officers, directors and ten percent or greater shareholders
file reports of changes in ownership of the Company's securities with the SEC
with copies to the Company. To the Company's knowledge, all such required
reports were timely filed for fiscal year 1998.
OTHER BUSINESS
The Board does not presently intend to present matters other than the
foregoing for action by the shareholders at the Meeting, and, so far as is known
to the Board, no matters are to be brought before the Meeting except as
specified in the notice of the Meeting. As to any business that may properly
come before the Meeting, however, it is intended that proxies, in the form
accompanying this Proxy Statement, will be voted in the respect thereof in
accordance with the judgment of the persons voting such proxies.
By Order of the Board of Directors
/s/ Mark Housley
Mark Housley
Chairman and Chief Executive Officer
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE COMPLETE, SIGN AND DATE
THE ACCOMPANYING PROXY AND RETURN IT PRIOR TO THE MEETING IN THE ENCLOSED
POSTAGE-PAID ENVELOPE.
-22-
<PAGE>
APPENDIX A
RADIUS INC.
ADDITIONAL INFORMATION FOR SHAREHOLDERS
<TABLE>
<CAPTION>
CONTENTS PAGE
- --------- -----
<S> <C>
Business of the Company A-2
Selected Financial Data A-4
Management's Discussion and Analysis of A-6
Financial Condition and Results of Operations
Consolidated Financial Statements A-18
Market for Radius Inc.'s Common Equity and A-39
Related Shareholder Matters
Executive Officers and Directors A-40
Form 10K A-40
</TABLE>
A-1
<PAGE>
BUSINESS OF THE COMPANY
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS: THE FOLLOWING DISCUSSION
CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934 THAT ARE SUBJECT TO RISKS AND UNCERTAINTIES.
STATEMENTS INDICATING THAT THE COMPANY OR MANAGEMENT "INTENDS", "PLANS",
"EXPECTS," "ESTIMATES" OR "BELIEVES" ARE FORWARD-LOOKING, AS ARE ALL OTHER
STATEMENTS CONCERNING FUTURE FINANCIAL RESULTS, PRODUCT OFFERINGS OR OTHER
EVENTS THAT HAVE NOT YET OCCURRED. THERE ARE SEVERAL IMPORTANT FACTORS THAT
COULD CAUSE ACTUAL RESULTS OR EVENTS TO DIFFER MATERIALLY FROM THOSE ANTICIPATED
BY THE FORWARD-LOOKING STATEMENTS CONTAINED IN THIS DISCUSSION AND OTHER
SECTIONS OF THIS FORM 10-K.
OVERVIEW
The Company designs, develops, assembles, markets and supports digital
video computer products for creative professionals and consumers who use digital
camcorders. The Company's current product line includes: multimedia authoring
and editing video systems and software that can acquire and manipulate video and
audio information.
The primary target markets for the Company's products are video editors,
video producers, and creators of multimedia. These markets encompass creative
professionals involved in such areas as multimedia authoring, video editing,
video and multimedia production and corporate training.
Historically, 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. This past year, the Company
added cross platform (Windows and Macintosh) capabilities to many of the
Company's products in order to market these products to users of the Windows
operating system. In the last quarter of fiscal 1998, 27% of unit sales were
made to Macintosh only users, 43% were made to Windows only users, and 30% were
made to cross-platform buyers.
As shown in the accompanying consolidated financial statements, the Company
has incurred substantial operating losses. During fiscal 1997 and 1998,
management implemented a number of actions to address its cash flow and
operating issues including; refocusing its efforts on providing solutions for
digital video customers; discontinuing sales of mass market and other low value
added products; divesting a number of businesses and product lines, including
most recently the agreement for the sale and related license of significant
assets of its monitor business to Korea Data Systems America, Inc. ("KDS");
significantly reducing expenses and headcount; and reducing its lease
obligations given its reduced occupancy requirements. There can be no assurance
that these measures will be sufficient to allow the Company to achieve
profitability. As of September 30, 1998, the Company had a working capital
deficit of $5.2 million. The Company intends to finance its working capital
needs through cash generated by operations and borrowings under a working
capital line of credit with Silicon Valley Bank. The Company may need to
further reduce its operating expenses or seek additional sources of working
capital if software product sales do not increase at the rate assumed in the
Company's current operating plans.
The Company's executive offices are located at 460 E. Middlefield Road,
Mountain View, CA 94043, and its telephone number is (650) 404-6000.
RECENT DEVELOPMENTS
LICENSING OF AND AGREEMENT TO SELL MONITOR BUSINESS ASSETS TO KOREA DATA SYSTEMS
AMERICA, INC. ("KDS")
In June 1998, the Company licensed certain technology and assets
necessary to conduct its monitor and color publishing business to KDS,
leaving the Company free to focus on its digital video software business.
The brand name and trademark RADIUS was one of the assets so licensed because
of its primary association with monitors. In August 1998, the Company
amended and restated this license and agreed to sell the licensed assets to
KDS pursuant to an asset transfer agreement, subject to certain
contingencies, at the discretion of KDS. The monitor business has accounted
for substantially all of the revenues of the color publishing product line
and 55.3% of the Company's revenues during fiscal 1998. Under the license
and asset transfer agreement, Radius has transferred (by licensing or by
assignment if KDS elects to close the asset transfer agreement) its Radius,
Supermac, PressView and certain other trademarks to KDS and has licensed
certain intellectual property pertaining to PressView and PrecisionView
monitors.
A-2
<PAGE>
KDS has not agreed to purchase any inventory or other tangible assets of Radius
under the license and asset transfer agreements. The expected value of the
transaction is $6.2 million paid or to be paid in installments, including $0.85
million paid in August 1998 and $0.35 million in September 1998 under the
amended license and $0.5 million under the original license in June 1998. The
remaining amount is payable in installments through October 1999. KDS'
performance is guaranteed by a Korean corporation and its US affiliate. The
asset transfer agreement is expected to close by June 1999, if contingencies are
satisfied. If KDS elects to deem such contingencies satisfied and the purchase
transaction closes, then the Company will be obligated to seek shareholder
approval to change its corporate name to a name that does not include "Radius".
Management believes that the corporate name change will facilitate the sale and
intends to seek shareholder approval of a corporate name change at the February
1999 annual meeting, whether or not the sale is concluded, in view of the
Company's focus on the digital video software business. The new name is
expected to more closely reflect the Company's current business objectives.
After significant study with the assistance of professional advisors, management
has recommended that the name be changed to "Digital Origin, Inc." There can
be no assurance that the closing or name change will occur. In the interim,
Radius expects to wind down its monitor business activities as current supplies
of monitors are sold, whether or not the asset purchase agreement is closed.
Radius will continue to use the transferred trademarks and technology until this
transition is completed over the next several months.
POTENTIAL NASDAQ SMALLCAP MARKET DELISTING; REVERSE STOCK SPLIT
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. For example, companies traded on the Nasdaq SmallCap Market have
been required since March 1998 to maintain a minimum bid price of $1.00 per
share. For this reason, the Company implemented a one for ten reverse stock
split in March 1998. There have been periods in 1998 when the Company's Common
Stock has had a minimum bid price below $1.00. This condition has not been
sustained for a period of time sufficient to cause action by Nasdaq. However,
there can be no assurance that the Company will continue to meet this or other
listing requirements of Nasdaq. If the Company's Common Stock is delisted,
there can be no assurance that the Company will meet the requirements for
initial inclusion on the Nasdaq SmallCap Market in the future, particularly in
light of the fact that Nasdaq currently requires traded securities to have a
$4.00 minimum per share bid requirement. Moreover, the NASD is considering the
elimination of the SmallCap Market altogether. Trading, if any, in the listed
securities after delisting or the elimination of the SmallCap Market would be
conducted in the over-the-counter market in what are commonly referred to as the
"pink sheets." As a result, investors would find it more difficult to dispose
of, or to obtain accurate quotations as to the value of, the Company's
securities.
TECHNOLOGY PURCHASE FROM POST DIGITAL SOFTWARE, INC.
On November 23, 1998, the Company acquired certain software and other
intangible property from Post Digital Software, Inc. for (i) an initial payment
of $50,000, (ii) earnout payments equal to at least $50,000 but not exceeding
$700,000 based on subsequent sales of the Company's digital video products
incorporating such software and (iii) a warrant to purchase up to 50,000 shares
of the Company's Common Stock at an exercise price of $1.50 per share. The
warrant is exercisable over a four year period through November 23, 2002. The
warrant can be exercised for up to 12,000 shares beginning May 1, 1999, plus an
additional 2,000 shares for each full month that transpires thereafter, up to a
total of 50,000 shares. Stephen Manousos, a candidate for election to the
Company's Board of Directors at the Company's annual shareholders meeting on
February 26, 1999, is a principal shareholder, officer and director of Post
Digital Software, Inc. Post Digital Software, Inc. is in the process of winding
up its business.
SALE OF CERTAIN COLOR PUBLISHING TECHNOLOGY
On December 4, 1998, the Company agreed to sell certain software and
other intangible property associated with its monitor and color publishing
business to Splash Technology Holdings, Inc. ("Splash") in consideration of
$275,000 and the early release of $1.0 million from an escrow established for
the benefit of Splash when the Company's Color Server Group was sold to
Splash in January 1996. See Management's Discussion and Analysis of Financial
Condition - Divestitures". These funds were received on December 16, 1998.
In the transaction, Splash licensed some of the transferred technology back
to the Company for a term of two years on a fully paid up basis.
A-3
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
SEPTEMBER 30, (1)
----------------------------------------------------------
1998 1997 1996 1995 1994
------ ------ ----- ----- -----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Total net sales $ 15,668 $ 31,150 $ 90,290 $ 308,133 $ 324,805
Cost of sales 9,921 31,032 77,382 302,937 276,948
--------- ---------- ---------- ---------- ---------
Gross profit 5,747 118 12,908 5,196 47,857
Operating expenses:
Research and development 2,801 5,002 7,478 19,310 33,956
Selling, general and administrative 7,107 21,355 25,886 90,068 94,731
--------- ---------- ---------- ---------- ---------
Total operating expenses 9,908 26,357 33,364 109,378 128,687
--------- ---------- ---------- ---------- ---------
Loss from operations (4,161) (26,239) (20,456) (104,182) (80,830)
Other income (expense), net 12,353 30,600 24,032 (3,045) (376)
Interest expense (459) (2,777) (3,736) (3,023) (869)
Litigation settlement - - - (12,422) -
--------- ---------- ---------- ----------- ---------
Income (loss) before income taxes 7,733 1,584 (160) (122,672) (82,075)
Provision (benefit) for income taxes (1,000) 316 815 9,070 (4,600)
---------- ---------- ---------- ---------- ----------
Net income (loss) $ 8,733 $ 1,268 $ (975) $ (131,742) $ (77,475)
========== ========== =========== =========== ==========
Preferred stock dividend - 272 - - -
--------- ---------- ------------ ---------- ---------
Net income (loss) applicable to
common shareholders $ 8,733 $ 996 $ (975) $ (131,742) $ (77,475)
========== ========== =========== =========== ==========
Net income (loss) per common share:
Basic net income (loss) per share applicable
to common shareholders * $ 1.58 $ 0.18 $ (0.46) $ (87.54) $ (56.97)
========== ========== =========== =========== ==========
Diluted net income (loss) per share applicable
to common shareholders * $ 1.57 $ 0.18 $ (0.46) $ (87.54) $ (56.97)
========== ========== =========== =========== ==========
Shares used in per share computation:
Shares used in computing basic net income
(loss) per share * 5,522 5,389 2,125 1,505 1,360
========== ========== =========== =========== ==========
Shares used in computing diluted net income
(loss) per share * 5,557 5,522 2,125 1,505 1,360
========== ========== =========== =========== ==========
</TABLE>
A-4
<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 30, (1)
-----------------------------------------------------------
1998 1997 1996 1995 1994
-------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA
Working capital (Working capital deficiency) $(5,216) $ 7,909 $ 8,476 $(59,334) $ 29,856
Total assets 6,556 26,272 45,526 87,878 126,859
Long-term debt---noncurrent portion - - 22,213 1,331 2,857
Convertible preferred stock - - 3,000 - -
Shareholders' equity (Net capital deficiency) $(5,083) $ 8,158 $ 3,960 $(57,117) $ 35,691
</TABLE>
* Reflects the one-for-ten reverse stock split effective March 9, 1998.
(1) The Company's fiscal year ends on the Saturday closest to September 30
and includes 53 weeks in fiscal years 1993 and 1998. All other fiscal years
presented are 52 weeks. During fiscal 1995, the Company changed its fiscal
year end from the Sunday closest to September 30 to the Saturday closest to
September 30 for operational efficiency purposes. For consistency of
presentation, all fiscal periods in this Form 10-K are reported as ending on
a calendar month end.
A-5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS: THE FOLLOWING DISCUSSION
CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934 THAT ARE SUBJECT TO RISKS AND UNCERTAINTIES.
STATEMENTS INDICATING THAT THE COMPANY OR MANAGEMENT "INTENDS", "PLANS",
"EXPECTS," "ESTIMATES" OR "BELIEVES" ARE FORWARD-LOOKING, AS ARE ALL OTHER
STATEMENTS CONCERNING FUTURE FINANCIAL RESULTS, PRODUCT OFFERINGS OR OTHER
EVENTS THAT HAVE NOT YET OCCURRED. THERE ARE SEVERAL IMPORTANT FACTORS THAT
COULD CAUSE ACTUAL RESULTS OR EVENTS TO DIFFER MATERIALLY FROM THOSE ANTICIPATED
BY THE FORWARD-LOOKING STATEMENTS CONTAINED IN THIS DISCUSSION AND OTHER
SECTIONS OF THIS FORM 10-K. SUCH FACTORS INCLUDE, BUT ARE NOT LIMITED TO: THE
COMPANY'S ABILITY TO ACHIEVE PROFITABILITY; RECEIPT OF TIMELY INSTALLMENT
PAYMENTS FROM KDS; THE COMPANY'S ABILITY TO REPAY ITS INDEBTEDNESS TO SILICON
VALLEY BANK; THE COMPANY'S ABILITY TO SUCCESSFULLY RENEW ITS LEASE OF SPACE FOR
ITS MAIN OFFICES IN MOUNTAIN VIEW; THE COMPANY'S ABILITY TO SUCCESSFULLY
CONCLUDE ITS LITIGATION WITH IE; THE SUCCESS OF THE COMPANY'S DIGITAL VIDEO
SOFTWARE PRODUCTS ON WHICH THE COMPANY EXPECTS TO BE SUBSTANTIALLY DEPENDENT;
THE SUCCESS OF THE APPLE MACINTOSH COMPUTER LINE AND OPERATING SYSTEM, THE
SUCCESS OF APPLE, AS WELL AS THE COMPANY'S ABILITY TO COMPETE SUCCESSFULLY WITH
APPLE IN ITS MARKETS, INCLUDING THE NON LINEAR DIGITAL VIDEO EDITING SOFTWARE
MARKET; THE SUCCESS OF APPLE'S QUICKTIME TECHNOLOGY FOR WINDOWS; FAVORABLE
LICENSING TERMS FOR QUICKTIME FROM APPLE; THE COMPANY'S ABILITY TO SUCCESSFULLY
DEVELOP, INTRODUCE AND MARKET NEW SOFTWARE PRODUCTS, INCLUDING PRODUCTS FOR THE
WINDOWS OPERATING SYSTEM, TO KEEP PACE WITH TECHNOLOGICAL INNOVATION,
PARTICULARLY IN LIGHT OF ITS LIMITED FINANCIAL RESOURCES; THE COMPANY'S ABILITY
TO COMPETE IN THE DIGITAL VIDEO SOFTWARE MARKET, INCLUDING WITH APPLE; THE
ABILITY OF THE COMPANY'S MANUFACTURERS AND SUPPLIERS TO DELIVER COMPONENTS AND
MANUFACTURE THE COMPANY'S PRODUCTS; THE COMPANY'S RELIANCE ON INTERNATIONAL
SALES AND ITS NEW DISTRIBUTOR ARRANGEMENTS WITH RESPECT TO EUROPE AND JAPAN; AND
THE COMPANY'S ABILITY TO ATTRACT AND RETAIN ITS KEY PERSONNEL.
RESULTS OF OPERATIONS
The following table sets forth for the years indicated certain operational
data as a percentage of net sales (may not add due to rounding).
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------------
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
Total net sales 100.0% 100.0% 100.0%
Cost of sales 63.3 99.6 85.7
------- ------- -------
Gross profit 36.7 0.4 14.3
Operating Expenses:
Research and development 17.9 16.1 8.3
Selling, general, and administrative 45.3 68.5 28.7
------- ------- -------
Total operating expenses 63.2 84.6 37.0
------- ------- -------
Loss from operations (26.5) (84.2) (22.7)
Other income (expense), net 78.8 98.2 26.6
Interest expense (2.9) (8.9) (4.1)
------- ------- -------
Income (loss) before income taxes 49.4 5.1 (0.2)
Provision (benefit) for income taxes (6.3) 1.0 0.9
------- ------- -------
Net income (loss) 55.7% 4.1% (1.1)%
------- ------- -------
------- ------- -------
</TABLE>
A-6
<PAGE>
FISCAL 1998 TO FISCAL 1997
NET SALES. The Company's net sales for fiscal 1998 decreased 50% to $15.7
million from $31.2 million for fiscal 1997. The decline is due primarily to the
following factors: the Company's efforts to refocus its efforts on its digital
video software product lines while discontinuing the development of its color
publishing, accelerated color graphics products and its DOS on Mac products; and
a decline in fourth quarter sales of its color publishing products due to the
agreement for the license of significant assets of its monitor business to Korea
Data Systems America, Inc. ("KDS"). The color display products had $8.7 million
in sales for fiscal 1998 as compared to $16.6 million for fiscal 1997. As a
result of these factors, product sales decreased 45.9% in fiscal 1998 from
fiscal 1997. Commissions and royalties decreased in fiscal 1998 by 77.3% to $1.1
million from $4.9 million in fiscal 1997 due to the termination of the exclusive
distributor relationships in Europe and Japan and due to the expiration of the
royalty agreement with Umax Computer Corporation in March 1998. Also as a
result of the distributor relationships in Japan and Europe, the Company's
export sales for fiscal 1998 declined to $3.7 million as compared to $4.9
million for fiscal 1997. The Company anticipates that sales in Asia will remain
weak for the near future. Sales growth in the Asia market has been impacted by
certain factors including weaker economic conditions and stronger dollar versus
the local currencies.
Revenue is recognized when products are shipped. Sales to certain
distributors are subject to agreements allowing certain rights of return and
price protection on unsold merchandise held by these distributors. The Company
provides for estimated returns at the time of shipment and for price protection
following price declines. Revenue earned under royalty or commission agreements
is recognized in the period in which it is earned.
As a result of the KDS transaction, the Company anticipates significantly
lower overall net sales in the immediate future. Future sales will be
predominately attributable to sales of software products since the Company's
digital video product line is primarily software. Revenue recognition related
to software product sales is as follows: Revenue from the sale of software, net
of estimated returns, is recognized upon either shipment of the physical product
or delivery of electronic product, at which time, collectibility is probable and
the Company has no remaining obligations.
In May 1997, the Financial Accounting Standards Board approved the American
Institute of Certified Public Accountants Statement of Position, "Software
Revenue Recognition" (SOP 97-2). SOP 97-2 provides revised and expanded
guidance on software revenue recognition and applies to all entities that earn
revenue from licensing, selling or otherwise marketing computer software. SOP
97-2 is effective for transactions entered into in fiscal years beginning after
December 15, 1997. The application of SOP 97-2 is not expected to have a
material impact on the Company's results of operations.
The sale of the software products for digital video camcorders (PhotoDV
introduced in April 1997 and MotoDV introduced in September 1997 and EditDV
introduced in November 1997) have increased during 1998. There can be no
assurance that sales of these software products will continue to increase or
that they will increase to a sufficient extent to offset the elimination of
hardware sales.
Effective January 1, 1998, the Company modified its relationships with its
distributors in Japan and Europe for its digital video software products. Rather
than paying commissions to Radius for products sold, they purchase products from
the Company at a discount from the price list. Commissions will still be paid
on the sales of the Company's other products sold through these distributors,
although the Company believes that these sales will not be material.
One customer accounted for 53.5% of the Company's net sales for fiscal
1998. For fiscal 1997 the same distributor accounted for 66.1% of the Company's
net sales.
GROSS PROFIT. The Company's gross profit margin was 36.7% for fiscal 1998,
as compared with 0.4% for fiscal 1997. This increase was a result of the
Company's decision to refocus its business on higher margin digital video
software products. Included in fiscal 1997 cost of sales are one-time charges
of $9.7 million consisting principally of inventory write downs of $7.7 million
and reserves for excess purchase order commitments of $2.0 million for inventory
in excess of anticipated demand. These charges reflect decreases in demand and
the Company's decision to refocus its business. Excluding these one-time
charges, gross profit margin in fiscal 1997 was 31.5%.
The Company expects the gross profit margins will be higher in the future
due to the impact of the decreased sales of monitor products and focus on sales
of higher gross margin software products. Additionally, the Company is taking
further steps to reduce product costs and control expenses. However, there can
be no assurance that the Company's gross margins will improve or remain at
current levels.
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RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
decreased from $5.0 million or 16.1% of net sales for fiscal 1997 to $2.8
million or 17.9% of net sales for fiscal 1998. 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. The
increase in research and development expenses expressed as a percentage of net
sales for fiscal 1998 was primarily attributable to the decrease in net sales
and the Company's refocusing on higher margin products, rather than high volume,
lower margin products. The Company expects that decreases in its research and
development expenses due to the de-emphasis in its monitor business will be
offset by increases in the expenses for the digital video product line and
therefore, expects to devote approximately $3.0 million to research and
development during the entire fiscal 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased from $21.4 million or 68.6% of net sales for
fiscal 1997 to $7.1 million or 45.4% of net sales for fiscal 1998. Included in
these expenses for fiscal 1997 is a $2.6 million charge to increase the
allowance for doubtful accounts due to accounts which the Company determined
were unlikely to be collected in full. Adjusting for these charges and
reductions, selling, general and administrative expenses would have been $18.8
million or 60.3% of net sales in fiscal 1997. The Company decreased its fiscal
1998 selling, general and administrative expenses in absolute and percentage
terms primarily by reducing expenses related to headcount resulting from the
Company's efforts to refocus its business. 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. Other income was $12.4 million for fiscal
1998 compared to $30.6 million for fiscal 1997. The other income for fiscal
1998 was due to the sale of 570,139 shares of Splash Common Stock compared to
996,875 shares of Splash Common Stock in fiscal 1997. Fiscal 1998 also includes
$1.6 million related to the KDS license.
INTEREST EXPENSE. Interest expense was $0.5 million for fiscal 1998 as
compared to $2.8 million for fiscal 1997. This decrease was due to lower
average borrowings primarily as a result of the repayment of the working capital
line of credit to IBM Credit.
PROVISION FOR INCOME TAXES. The Company recorded a reversal of accrual for
income taxes of $1.0 million for fiscal 1998 compared to a provision of $0.3
million for fiscal 1997. The reversal reflects the fact that exposure in
certain foreign jurisdictions, as a result of the passage of time, has become
remote. The provision for fiscal 1997 differs from the provision computed
utilizing the combined statutory rate in effect during the period primarily as a
result of the impact of foreign taxes offset by the impact of previously unused
net operating losses and the reversal of existing deferred tax assets.
FASB Statement 109, Accounting for Income Taxes, 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
assets on a quarterly basis.
As a result of the issuance of Common Stock and Series A Convertible
Preferred Stock in exchange for certain 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
substantial net operating losses and tax credit carryforwards will be subject to
an approximate $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 without full utilization. See Note 5 of
Notes to Consolidated Financial Statements.
NET INCOME (LOSS). As a result of the above factors, the Company had net
income of $ 8,733,000 in fiscal 1998 compared to a net income of $996,000 for
fiscal 1997.
FISCAL 1997 TO FISCAL 1996
NET SALES. The Company's net sales for fiscal 1997 decreased 65.5% to
$31.2 million from $90.3 million for fiscal 1996. The decline is due to the
following factors: the Company's efforts to refocus its business on higher
margin products; the divestiture of certain business units, such as its Color
Server Copy Group which had $7.0 million in sales for fiscal 1996; entering into
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
recognized by the Company as net sales prior to the appointment of these
distributors; uncertainty regarding the
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viability of the Apple Macintosh product line; and the slow development of the
3D graphics market due to limited applications software availability. As a
result of these factors, product sales decreased 70.2% in fiscal 1997 from
fiscal 1996. Commissions and royalties increased in fiscal 1997 by 125.5% to
$4.9 million from $2.2 million in fiscal 1996 due to the distributor
relationships in Europe and Japan and due to royalties paid by Umax Computer
Corporation under its license agreement for the MacOS compatible systems signed
in February 1996. Also as a result of the distributor relationships in Japan and
Europe, the Company's export sales for fiscal 1997 declined to 15.7% of net
sales as compared to 50.7% of net sales for fiscal 1996.
One customer accounted for 66.1% of the Company's net sales for fiscal
1997. For fiscal 1996 the same distributor accounted for 34.3% of the Company's
net sales.
GROSS PROFIT. The Company's gross profit margin was 0.4% for fiscal 1997,
as compared with 14.3% for fiscal 1996. Included in fiscal 1997 cost of sales
are one-time charges of $9.7 million consisting principally of inventory write
downs of $7.7 million reflecting current market conditions for the Company's
products and reserves for excess purchase order commitments of $2.0 million for
inventory in excess of anticipated demand. These charges reflect decreases in
demand and the Company's decision to refocus its business. Included in fiscal
1996 cost of sales was a one-time charge of $3.5 million resulting from the
Company's financial restructuring completed in September 1996. Excluding these
one time charges, gross profit margin in fiscal 1997 was 31.5% compared to 18.3%
in fiscal 1996. This increase was a result of the Company's decision to refocus
its business on higher margin products.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
decreased from $7.5 million or 8.3% of net sales for fiscal 1996 to $5.0 million
or 16.1% of net sales for 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 for fiscal 1997 was primarily attributed to the decrease
in net sales and the Company's refocusing on higher margin products, rather than
high volume, lower margin products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased from $25.9 million or 28.7% of net sales for
fiscal 1996 to $21.4 million or 68.6% of net sales for fiscal 1997. Included in
these expenses for fiscal 1997 is a $2.6 million charge to increase the
allowance for doubtful accounts due to accounts which the Company determined
were unlikely to be collected in full. Included in these expenses for fiscal
1996 was a reduction of $0.9 million in restructuring reserves to reflect the
then current requirements. Adjusting for these charges and reductions, selling,
general and administrative expenses would have been $18.8 million or 60.3% of
net sales in fiscal 1997, compared to $26.8 million or 29.7% of net sales in
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 margin products, rather than high volume,
lower margin products.
OTHER INCOME (EXPENSE), NET. Other income was $30.6 million for fiscal
1997 compared to $24.0 million for fiscal 1996. The other income for fiscal
1997 was due to the sale of 996,875 shares of Splash Common Stock in August
1997. The other income in fiscal 1996 was primarily due to approximately $23.8
million resulting from the Company's divestitures of three business lines,
including the Color Server Group.
INTEREST EXPENSE. Interest expense was $2.8 million for fiscal 1997 as
compared to $3.7 million for fiscal 1996. This decrease was due to lower
average borrowings.
PROVISION FOR INCOME TAXES. The Company recorded a provision for income
taxes of $316,000 for fiscal 1997 as compared to $815,000 for fiscal 1996. The
provision for fiscal 1997 differs from the provision computed utilizing the
combined statutory rate in effect during the period primarily as a result of the
impact of foreign taxes offset by the impact of previously unbenefited net
operating losses and the reversal of existing deferred tax assets. The
provision for fiscal 1996 differs from the provision computed utilizing the
combined statutory rate in effect during the period primarily as a result of the
impact of foreign taxes.
NET INCOME (LOSS). As a result of the above factors, the Company had net
income of $996,000 in fiscal 1997 compared to a net loss of $975,000 for fiscal
1996. The Color Server Group had net income of approximately $0.9 million for
fiscal 1996. Had this business not been included in the calculation of the
Company's net loss for fiscal 1996, the Company would have had a net loss of
approximately $1.9 million.
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RESTRUCTURING, MERGER AND OTHER CHARGES
During fiscal 1994 and 1995, three restructuring and other charges were
recorded. SuperMac recorded a $16.6 million restructuring charge during December
1993 in connection with a program to realign its inventory and facility and
personnel resources. Subsequently, the two companies merged and incurred a
restructuring charge of $43.4 million. In September 1995, Radius recorded $57.9
million restructuring charge in connection with the Company's efforts to refocus
and streamline its business. A discussion of each of these events follows.
SUPERMAC DECEMBER 1993 RESTRUCTURING AND OTHER CHARGES: In December 1993,
SuperMac recorded charges of $16.6 million in connection with a program to
adjust inventory levels, eliminate excess facilities, terminate certain projects
and contract arrangements and reduce the number of employees. The charges (in
thousands) are included in: cost of sales ($13,352); research and development
($2,000); and selling, general and administrative expenses ($1,238). There have
been no material changes in the restructuring plan or in the estimates of the
restructuring costs. The remaining balance of $236,000 at September 30, 1995 in
its restructuring reserve, which related to facility costs, was eliminated in
fiscal 1996.
RADIUS FISCAL 1994 MERGER RELATED RESTRUCTURING AND OTHER CHARGES. In the
fourth quarter of fiscal 1994, the Company recorded charges of $43.4 million in
connection with the Merger of Radius and SuperMac Technology Inc. These charges
include the discontinuance of duplicative product lines and related assets;
elimination of duplicative facilities, property and equipment and other assets;
and personnel severance costs as well as transaction fees and costs incidental
to the merger. The charges (in thousands) are included in: net sales ($3,095);
cost of sales ($25,270); research and development ($4,331); and selling, general
and administrative expenses ($10,711). The remaining balance of $44,000 in its
restructuring reserve, which related to facility costs, was eliminated in fiscal
1997.
RADIUS FISCAL 1995 RESTRUCTURING AND OTHER CHARGES. In September 1995,
Radius recorded charges of $57.9 million in connection with the Company's
efforts to restructure its operations by refocusing its business on the color
publishing and multimedia markets. The charges primarily included a writedown
of inventory and other assets. Additionally, the charges included expenses
related to the cancellation of open purchase orders, excess facilities and
employee severance. The charges (in thousands) are included in cost of sales
($47,004), and selling, general and administrative expense ($10,861). The
remaining balance of $20,000 in its restructuring reserve, which related to
employee severance costs, was eliminated in fiscal 1998.
DIVESTITURES
COLOR SERVER GROUP DIVESTITURE. In January 1996, the Company completed the
sale of its Color Server Group ("CSG") to Splash Merger Company, Inc. (the
"Buyer"), a wholly owned subsidiary of Splash Technology Holdings, Inc.
("Splash"), a corporation formed by various investment entities associated with
Summit Partners. The Company received approximately $17.2 million in cash and
4,282 shares of Splash's 6% Series B Redeemable and Convertible Preferred Stock
(the "Series B Preferred Stock"). An additional $4.7 million was placed in
escrow to secure certain post-closing and indemnification obligations. In April
1996, approximately $2.3 million was released from this escrow to the Company
and the Company also received approximately $1.5 million as a result of
post-closing adjustments. As of September 30, 1998, $2.0 million remained in
this escrow. See Note 14 to Consolidated Financial Statements. The shares of
Series B Preferred Stock were converted into shares of Splash Common Stock in
connection with the initial public offering of Splash. Such stock was pledged to
IBM Credit in order to secure the Company's obligations to IBM Credit under the
restructured loan agreement with IBM Credit. In connection with the
restructuring of the terms of its loan agreement with IBM Credit, the Company
granted IBM Credit an option to purchase 428 shares of Series B Preferred Stock
at a nominal amount (174,113 shares of Splash Common Stock after conversion).
The Company has certain indemnification obligations in connection with the
patent lawsuit brought by Electronics for Imaging, Inc. (See Note 3 to
Consolidated Financial Statements). The net proceeds of the CSG transaction
were paid to Silicon Valley Bank ("SVB"), in order to repay the Company's
indebtedness to SVB, and to IBM Credit, in order to reduce the Company's
outstanding indebtedness to IBM Credit. As of July 1998, IBM Credit had
exercised all its option to purchase Splash Common Stock and the working capital
line of credit with IBM Credit was fully repaid in fiscal 1998.
PORTRAIT DISPLAY LABS. In January 1996, the Company entered into a series
of agreements with Portrait Display Labs, Inc. ("PDL"). The agreements assigned
the Company's pivoting technology to PDL and canceled PDL's on-going royalty
obligation to the Company under an existing license agreement in exchange for a
one-time cash payment. The Company did not receive any material amount of
payments under such license agreement. PDL also granted the Company a limited
license back to the pivoting technology. Under these agreements, PDL also
settled its outstanding receivable to the Company by paying the Company $500,000
in cash and issuing to the Company 214,286 shares of PDL's Common Stock. The
cash proceeds were paid to IBM Credit. The Company does not expect to realize
any material value from PDL's Common Stock.
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UMAX DATA SYSTEMS, INC. In February 1996, the Company sold its MacOS
compatible systems business to UMAX Computer Corporation ("UCC"), a company
formed by UMAX Data Systems, Inc. ("UMAX"). The Company received approximately
$2.3 million in cash and debt relief and 1,492,500 shares of UCC's Common Stock,
representing approximately 19.9% of UCC's then outstanding shares of UCC Common
Stock. The cash proceeds were paid to IBM Credit and the shares of UCC Common
Stock were pledged to IBM Credit. In March 1998, due to Apple Computer's
reversal in MacOS licensing policy, the Company sold the Common Stock of Umax
Computer Corporation held by it to Umax Data Systems, Inc. for $550,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents decreased approximately $0.2
million during fiscal 1998 to approximately $0.6 million at September 30, 1998,
as compared with the fiscal 1997 ending balance of cash and cash equivalents of
$0.8 million. Approximately $0.1 million of the $0.6 million of cash and cash
equivalents available at September 30, 1998 was restricted under a letter of
credit. The decrease in the Company's cash and cash equivalents during fiscal
1998 was primarily attributable to funding of operating losses of the Company.
As of September 30, 1998, the Company's total assets had decreased to $6.6
million from $26.3 million on September 30, 1997. The Company's liabilities
exceeded its assets. This was due primarily to the substantial decline in the
trading price of Splash Common Stock from $38.75 as of the end of fiscal 1997 to
an average of $19.52 which was realized on the sale of the Splash Common Stock
during fiscal 1998. The proceeds of the sale of the Splash Common Stock were
used to repay in full the working line of credit with IBM Credit, and to fund
the operating losses of the Company.
Under the license and asset transfer agreement with KDS, Radius has
transferred (by licensing or by assignment if KDS elects to close the asset
transfer agreement) its Radius, Supermac, PressView and certain other trademarks
to KDS and has licensed certain intellectual property pertaining to PressView
and PrecisionView monitors. KDS has not agreed to purchase any inventory or
other tangible assets of Radius under these agreements. The expected value of
the transaction is $6.2 million which is payable in installments, including
$0.85 million paid in August 1998 and $0.35 million in September 1998 and $0.5
million in June 1998. The remaining amount is payable in installments through
October 1999. KDS' performance is guaranteed by a Korean corporation and its US
affiliate. The asset transfer agreement is expected to close by June 1999, if
contingencies are satisfied. These installment payment obligations have been
pledged to secure a $4.2 million line of credit from Silicon Valley Bank. There
can be no assurance that the closing will occur or that installment payments
under the license will be timely made.
The Company had agreed with KDS to continue to support the sale of monitors
through the Company's sales force during August and September 1998 in return for
$55,000 a month and a sharing of the gross margin from the sale of the monitor
products during this period. The Company will provide a diminishing level of
support until KDS has fully assumed all relevant activities. KDS will reimburse
the Company for this support.
The Company believes that the cash flows from KDS, results of operations
and other sources of financing will be sufficient to fund operations for at
least the next 12 months. However, there can be no assurances that the sale of
software products will continue to increase to a sufficient extent to offset the
loss of revenues and gross margin from the monitor business or that the
installment payments will be timely made. The Company may need to further
reduce its operating expenses or seek additional sources of working capital if
software product sales do not increase at the rate assumed in the Company's
current operating plans. The Company and its management believe that it can
further reduce such operating expenses, if necessary, and that other sources of
financing will be available.
The Company's principal sources of liquidity currently are cash generated
by operations, if any, and up to $4.2 million working capital line of credit
provided by Silicon Valley Bank which is secured by the installment payment
obligations of the KDS transaction. Under the terms of the $4.2 million working
capital line of credit, the amount available to borrow will be decreased by
eighty percent of the payments made by KDS, since the borrowing base under the
working capital line of credit is eighty percent of the unpaid balance of KDS'
installment obligations. As the borrowing base is dependent on the continued
payment of monthly installments, there can be no assurance that it will be
sufficient to allow the Company to borrow up to the full amount of the working
capital line of credit.
The Company anticipates that it will not have significant cash available
for expenditures other than for its ordinary course of business operating
expenses. In the event the Company were unable to generate sufficient net sales
or if the Company incurs unforeseen operating expenses, it may not be able to
meet its operating expenses without additional financing. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations
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- -- Certain Factors That May Affect the Company's Future Results of Operations --
Need for Additional Financing; Loan Restrictions."
Capital expenditures were approximately $0.1 million during fiscal 1998,
$0.1 million in fiscal 1997 and $0.2 million in fiscal 1996 and were primarily
for leasehold improvements and upgrading the Company's management information
systems. The Company expects this level of expenditures to continue in fiscal
1999 barring unexpected developments. See Management's Discussion and Analysis
of Financial Condition and Results of Operation -- Certain Factors That May
Affect the Company's Future Results of Operations -- Impact Year 2000.
At September 30, 1998, the Company's principal commitments consisted of
obligations under a loan agreement with Silicon Valley Bank and its obligations
under building leases. See Notes 2 and 3 to Consolidated Financial Statements.
The Company is also a party to various litigation proceedings, the costs of
defending or the outcome of which could adversely affect the Company's
liquidity. See "Business -- Legal Proceedings."
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 operating losses in each of its prior five 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 Silicon Valley Bank; timely receipt of the KDS
transaction installment payments; the Company's ability to generate sufficient
cash from operations or obtain additional funds to fund its operating expenses;
the Company's ability to successfully market its software products; 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; the Company's ability to successfully develop and market
products for the Microsoft Windows and NT operating systems in a timely manner;
competitive factors such as new product introductions, product enhancements and
aggressive marketing and pricing practices; general economic conditions; the
Company's ability to successfully negotiate a lease renewal for its main office
facility, and negotiate a settlement or other favorable conclusion of the EFI
and IE litigation; and other factors. 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 uncollectible 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 mateial adverse effect on
the Company's business, results of operations and financial condition. The
Company also completed a variety of business divestitures during fiscal 1996,
1997 and 1998, 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 and has licensed (and agreed to sell) its
monitor business in August 1998. In addition, the Company is focusing its
efforts on developing and marketing software products, an area in which it has
limited experience. As a result, the Company believes that period-to-period
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comparisons of its results of operations will not necessarily be meaningful and
should not be relied upon as any indication of future performance. Due to all
of the foregoing factors, it is likely that in some future quarter the Company's
operating results will be below the expectations of public market analysts and
investors. In such event, the price of the Company's Common Stock would be
likely to be materially adversely affected. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
NEED FOR ADDITIONAL FINANCING; LOAN RESTRICTIONS
As of September 30, 1998, the Company had a working capital deficit of $5.2
million. The Company intends to finance its working capital needs through cash
generated by operations and borrowings under a working capital line of credit
with Silicon Valley Bank. Because the Company has experienced operating losses
in each of its prior five fiscal years and has liabilities in excess of assets,
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. There can be no assurance that the Company will be
able to successfully fund its working capital needs internally.
Although the Silicon Valley Bank loan provides for a working capital line
of credit of up to $4.2 million, the Company will only be able to borrow amounts
up to the "borrowing base" which is defined as eighty percent of the unpaid
portion of the KDS transaction installment payments. Once the line of credit
has been reduced to zero, the Company does not expect that it will be a source
of working capital in the future.
In the event that cash from operations and the working capital line of
credit are insufficient to fund the Company's working capital needs, the Company
may need to raise additional capital through public or private financing,
strategic relationships or other arrangements. There can be no assurance that
the Company will be able to raise additional capital on commercially reasonable
terms or at all. The failure of the Company to raise capital when needed would
have a material adverse effect on the Company's business, operating results and
financial condition. If the additional funds are raised through the issuance of
equity securities, the percentage ownership of the Company of its then-current
shareholders would be reduced. Furthermore, such equity securities might have
rights, preferences or privileges senior to those of the Company's Common Stock.
DEPENDENCE ON AND COMPETITION WITH APPLE
Although the Company has begun to market certain products for the Windows
environment, it is expected that sales of products for Apple computers will
continue to represent a significant portion of the Company's sales for fiscal
1999. Apple has lost significant market share over recent years. The Company's
operating results would be adversely affected if these trends should continue or
if other developments were to adversely affect Apple's business. Furthermore,
any continued 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 further reduced demand for Apple computers, which
in turn could materially and adversely affect sales of the Company's 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 Windows operating environment support high performance
graphics and video applications similar to those offered on the Macintosh.
There is a risk that this trend will reduce the support given to Macintosh
products by third party developers and could substantially reduce demand for
Macintosh products and peripherals over the long term.
A number of the Company's products compete with products marketed by
Apple. As a competitor of the Company, Apple could in the future take steps
to hinder the Company's development of compatible products and slow sales of
the Company's products. The Company's business is based in part on supplying
products that meet the needs of high-end customers that are not fully met by
Apple's products. As Apple improves its products or bundles additional
hardware or software into its computers, it reduces the market for Radius
products that provide those capabilities. In the past, the Company has
developed new products as Apple's progress has rendered existing Company
products obsolete. However, in light of the Company's current financial
condition there can be no assurance that the Company will continue to develop
new products on a timely basis or that any such products will be successful.
In order to develop products for the Macintosh on a timely basis, the Company
depends upon access to advance information concerning new Macintosh products.
A decision by Apple to cease sharing advance product information with the
Company would adversely affect the Company's business.
New products anticipated from and introduced by Apple could cause customers
to defer or alter buying decisions due to uncertainty in the marketplace, as
well as presenting additional direct competition for the Company. In addition,
Apple may introduce a non linear digital video software editing program during
fiscal 1999 which could
A-13
<PAGE>
adversely affect and reduce sales of EditDV. 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.
DEPENDENCE ON AND COMPETITION WITH MICROSOFT
New products introduced by Microsoft could cause customers to defer or
alter buying decisions due to uncertainty in the marketplace, as well as present
additional competition for the Company. In addition, it is possible that the
introduction of new Microsoft 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, success and timing of new product developments by the Company and
its competitors, product performance, price and quality, breadth of distribution
and customer support. There can be no assurance that the Company will be able
to compete successfully with respect to these factors. In addition, the
introduction of lower priced competitive products could result in price
reductions that would adversely affect the Company's results of operations.
See "Business -- Competition."
DEPENDENCE ON LIMITED NUMBER OF MANUFACTURERS AND SUPPLIERS
The Company outsources the manufacturing and assembly of its products to
third party manufacturers. Although the Company uses a number of
manufacturer/assemblers, each of its products is manufactured and assembled by a
single manufacturer. The failure of a manufacturer to ship the quantities of a
product ordered by the Company could cause a material disruption in the
Company's sales of that product. In the past the Company has experienced
substantial delays in its ability to fill customer orders due to the inability
of certain manufacturers to meet their volume and schedule requirements. There
can be no assurance that 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. Certain other components are
purchased from sole or limited source suppliers. The Company purchases these
sole or limited source components primarily pursuant to purchase orders placed
from time to time in the ordinary course of business and has no guaranteed
supply arrangements with sole or limited source suppliers. Therefore, these
suppliers are not obligated to supply products to the Company for any specific
period, in any specific quantity or at any specific price, except as may be
provided in a particular purchase order.
Although the Company expects that these suppliers will continue to meet its
requirements for the components, there can be no assurance that they will do so,
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.
A-14
<PAGE>
TECHNOLOGICAL CHANGE; CONTINUING NEED TO DEVELOP NEW PRODUCTS
The video applications industry is 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
1998 fiscal year, the Company spent approximately $2.8 million, for the 1997
fiscal year, the Company spent approximately $5.0 million on research and
development as compared with approximately $7.5 million for the 1996 fiscal
year. 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,
in particular digital video editing products for use with digital video
camcorders. 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 digital 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 digital video editing
products developed by the Company will achieve consumer acceptance or broad
commercial success. 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, particularly in light of the fact that the Company has licensed or
sold its remaining hardware product lines over the last three years.
DEPENDENCE ON INDIRECT DISTRIBUTION CHANNELS
The Company's primary means of distribution is through a limited number of
third-party distributors that are not under the direct control of the Company.
Furthermore, the Company relies on one primary distributor for its sales in
Japan and is creating a new distribution network in Europe. The Company
maintains only a small 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. Such orders are in turn
dependent upon the continued viability and financial condition of these
distributors as well as on their ability to resell such products and maintain
appropriate inventory levels. Furthermore, many of these distributors 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. In addition, due in part to the historical volatility of
the personal computer industry, certain of the Company's distributors 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. If
its 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 distributors
for Japan and Europe, respectively. Effective January 1, 1998, the Company
modified its relationships with these distributors for its digital video
software products. Rather than paying commissions to Radius for products sold,
they purchase products from the Company at a discount from the price list.
Commissions will still be paid on the sales of the Company's other products sold
through these distributors, although the Company believes that these sales will
not be material. Although such distribution arrangements are no longer
exclusive, no other distributor has yet been retained in either area.
The Company expects that international sales, primarily in Europe, 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.
Sales in Japan could be affected by the economic conditions in that region,
which are currently unfavorable. Sales in Asian markets, which are also
unfavorable, have not been, and the Company does not expect them to be, material
in the future outside of Japan. Furthermore, a reduction in sales efforts or
financial viability of the distributors could adversely affect the Company's net
sales and its ability to provide service and support to Japanese and European
customers.
A-15
<PAGE>
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 currently has one Executive
Officer. 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 senior management
team have departed since 1997, including its former President and Chief
Executive Officer, two Chief Financial Officers and four other Vice Presidents,
and the Company has also had substantial layoffs and other employee departures.
Because of the Company's financial difficulties and the very tight labor market
for technical personnel, it has become increasingly difficult for it to hire new
employees and retain key management and current employees. The failure of the
Company to attract and retain key personnel would have a material adverse effect
on the Company's business, operating results and financial condition.
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. See "Business --
Litigation."
IMPACT OF YEAR 2000
The year 2000 Issue ("Y2K Issue") is the result of computer programs being
written using two digits rather than four to define the applicable year. Any of
the Company's computer programs or hardware that have time-sensitive software
may recognize a date using "00" as the year 1900 rather than the year 2000.
This could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
The Company's plan to resolve the Y2K Issue involves the following four phases:
assessment, remediation, testing, and implementation. To date, the Company has
fully completed its assessment of all internal systems and products that could
be significantly affected. The assessment of risks associated with suppliers
and distributors is not yet complete.
Based on recent assessments of its information management and accounting
systems, the Company has determined that it will be required to modify or
replace significant portions of its software and certain hardware so that those
systems will properly utilize dates beyond December 31, 1999. The Company
presently believes that with such modifications, the Y2K Issue can be mitigated
without a material adverse impact on the Company. However, if such
modifications and replacements are not timely made, the Y2K Issue could have a
material impact on the operations of the Company. None of these systems
interoperate directly with the systems of suppliers or distributors.
A-16
<PAGE>
Based on a review of its product line, the Company has determined that
primarily all of the products it has sold and will continue to sell do not
require remediation to be Year 2000 compliant, as primarily all operate in
conjunction with the MacOS. Accordingly, the Company does not believe that the
Y2K Issue presents a material risk with respect to the Company's products.
The Company is approximately 50% through the remediation phase with respect
to its information management and accounting systems and expects to complete
software and hardware replacement no later than September 30, 1999. Once the
software and hardware is replaced for a system, the Company begins testing and
implementation. These phases run concurrently for different systems. The
Company has completed 50% of its testing. Completion of the testing phase for
all significant software systems is expected by January 31, 1999, with all
remediated systems fully tested and implemented by December 31, 1999.
None of the Company systems interface directly with significant third party
suppliers. The Company is starting the process of working with third party
suppliers and distributors to ensure that any Company systems that could
interface directly with third parties are Year 2000 compliant by December 31,
1999. Remediation and testing of all significant systems is expected no later
than December 31, 1999. The Company believes that its key suppliers, two of
whom are sole sources, are in the process of making their billing systems Year
2000 compliant. The Company is not aware of any supplier or distributor with a
Y2K Issue that would materially impact the Company's results of operations,
liquidity, or capital resources. However, the Company has no means of ensuring
that such suppliers and distributors will be Year 2000 ready. The inability of
suppliers and distributors to complete their Year 2000 resolution process in a
timely fashion could materially impact the Company. There are no vendors that
could not be replaced in a reasonable period of time, except for transport
vendors. The failure of Fedex, UPS, Airborne and the U.S. Mail would impact
direct sales. The effect of this occurrence is not determinable.
The Company will utilize both internal and external resources to reprogram,
or replace, test, and implement the software and operating equipment for Year
2000 compliance. The total future cost of the Year 2000 compliance is estimated
at $200,000 to $600,000 and is being funded through net cash flows or capital
leases. Some of these expenditures were likely to have been made in the
ordinary course of upgrading and replacing obsolete systems without regard to
the Y2K Issue. Through fiscal 1998, the Company has incurred less than $100,000
related to all phases of the Year 2000 project and $100,000 has been budgeted
for fiscal 1999, under the assumption that most of the new system cost will be
funded via leasing.
Management of the Company believes it has an effective program in place to
resolve those aspects of the Y2K Issue within its control in a timely manner.
As noted above, the Company has not completed all necessary phases of the Year
2000 program. In the event that the Company does not complete these phases, the
Company would be unable in some degree to take customer orders, manufacture and
ship products, invoice customers and collect payments. In addition, disruptions
in the economy generally resulting from Year 2000 issues could also materially
adversely affect the Company. The Company could be subject to litigation for
computer systems product failure, for example, equipment shutdown or failure to
properly date business records. Furthermore, although Management is not aware
of any Y2K Issue with products sold, there can be no assurance that the use of
such products alone or in conjunction with other products will not malfunction
and expose the Company to liability. The amount of potential liability and lost
revenue associated with these risks cannot be reasonably estimated at this time.
The Company has contingency plans for certain critical applications and is
working on such plans for others. These contingency plans involve, among other
actions, manual workarounds, increasing inventories, and adjusting staffing
strategies. All of the Company's production, shipping, purchasing, billing and
inventory functions could be accomplished via outsource vendors that are
currently readily available, although there can be no assurance that such
vendors will be available on reasonable terms as the millennium approaches.
A-17
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND SHAREHOLDERS
RADIUS INC.
We have audited the accompanying consolidated balance sheets of Radius Inc. as
of September 30, 1998 and 1997, and the related consolidated statements of
operations, convertible preferred stock and shareholders' equity, and cash flows
for each of the three years in the period ended September 30, 1998. Our audits
also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Radius Inc. at September 30, 1998 and 1997, and the consolidated results
of its operations and its cash flows for each of the three years in the
period ended September 30, 1998, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the information set
forth therein.
San Jose, California
October 30, 1998
A-18
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
September 30 (in thousands)
1998 1997
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 600 $ 773
Accounts receivable, net of allowance for doubtful accounts
of $3,894 in 1998 and $4,758 in 1997 364 2,168
Note receivable from Korea Data Systems America, Inc. 4,500 -
Inventories 803 805
Investment in Splash Technology Holdings, Inc. - 22,093
Prepaid expenses and other current assets 156 184
-------- ---------
Total current assets 6,423 26,023
Property and equipment, net 133 249
-------- ---------
$ 6,556 $ 26,272
-------- ---------
-------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,971 $4,511
Accrued payroll and related expenses 324 1,320
Other accrued liabilities 2,069 3,228
Deferred income 4,833 -
Accrued income taxes 1,102 2,111
Accrued restructuring and other charges - 2,033
Short-term borrowings 1,340 4,638
Obligations under capital leases - 273
-------- ---------
Total current liabilities 11,639 18,114
Shareholders' Equity (Net Capital Deficiency):
Preferred stock, no par value, 2,000 authorized; none
issued and outstanding in 1998 and 1997 - -
Common stock, no par value; 100,000 shares authorized;
issued and outstanding--5,524 shares in 1998 and
5,502 shares in 1997 169,102 168,994
Accumulated deficit (174,239) (182,972)
Unrealized gain on available-for-sale securities - 22,093
Accumulated translation adjustment 54 43
-------- ---------
Total shareholders' equity (Net capital deficiency) (5,083) 8,158
--------- ---------
$ 6,556 $ 26,272
-------- ---------
-------- ---------
</TABLE>
See accompanying notes.
A-19
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
For years ended September 30
(in thousands, except per share data)
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net sales $ 14,564 $ 26,276 $ 88,129
Commissions and royalties 1,104 4,874 2,161
--------- --------- ---------
Total net sales 15,668 31,150 90,290
Cost of sales 9,921 31,032 77,382
--------- --------- ---------
Gross profit 5,747 118 12,908
--------- --------- ---------
Operating expenses:
Research and development 2,801 5,002 7,478
Selling, general and administrative 7,107 21,355 25,886
--------- --------- ---------
Total operating expenses 9,908 26,357 33,364
--------- --------- ---------
Loss from operations (4,161) (26,239) (20,456)
Other income, net 12,353 30,600 24,032
Interest expense (459) (2,777) (3,736)
---------- ---------- ----------
Income (loss) before income taxes 7,733 1,584 (160)
Provision (benefit) for income taxes (1,000) 316 815
---------- --------- ---------
Net income (loss) $ 8,733 $ 1,268 $ (975)
--------- --------- ----------
--------- --------- ----------
Preferred stock dividend - 272 -
--------- --------- ---------
Net income (loss) applicable to
common shareholders $ 8,733 $ 996 $ (975)
--------- --------- ----------
--------- --------- ----------
Net income (loss) per common share:
Basic net income (loss) per share applicable
to common shareholders $ 1.58 $ 0.18 $ (0.46)
--------- --------- ----------
--------- --------- ----------
Diluted net income (loss) per share applicable
to common shareholders $ 1.57 $ 0.18 $ (0.46)
--------- --------- ----------
--------- --------- ----------
Shares used in computing net income (loss) per common share:
Shares used in computing basic net income
(loss) per common share 5,522 5,389 2,125
--------- --------- ---------
--------- --------- ---------
Shares used in computing diluted net income
(loss) per common share 5,557 5,522 2,125
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes.
A-20
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY
For the years ended September 30, 1998, 1997 and 1996
(in thousands)
Shareholder's Equity
--------------------------------------------------
Accumulated Unrealized
Deficit Gain on
Convertible and Available- Total
Preferred Common Translation for-Sale Shareholders'
Stock Stock Adjustment Securities Equity
----------- ----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1995 $ - $ 125,813 $(182,930) $ - $(57,117)
Issuance of 12 shares of common stock
under Stock Option Plans - 406 - - 406
Issuance of 2 shares of common stock
under Employee Stock Purchase Plan - 24 - - 24
Issuance of 3,629 shares of common
stock to Creditors - 42,503 - - 42,503
Issuance of 75 shares of preferred stock to IBM 3,000 - - - -
Issuance of 84 shares of common stock
in partial settlement of litigation - - - - -
Unrealized gain on available-for-sale securities - - - 19,152 19,152
Currency translation adjustment - - (33) - (33)
Net loss - - (975) - (975)
--------- -----------------------------------------------
Balance at September 30, 1996 3,000 168,746 (183,938) 19,152 3,960
Issuance of 53 shares of common stock
under Stock Option Plans - 200 - - 200
Issuance of 8 shares of common stock under
Employee Stock Purchase Plan - 48 - - 48
Redemption of 75 shares of preferred stock
held by IBM (3,000) - - - -
Unrealized gain on available-for-sale securities - - - 2,941 2,941
Currency translation adjustment - - 13 - 13
Dividends paid on convertible preferred stock - - (272) - (272)
Net income - - 1,268 - 1,268
--------- ----------------------------------------------
Balance at September 30, 1997 - 168,994 (182,929) 22,093 8,158
Issuance of 22 shares of common stock
under Stock Option Plans - 108 - - 108
Unrealized gain on available-for-sale securities - - - (22,093) (22,093)
Currency translation adjustment - - 11 - 11
Net income - - 8,733 - 8,733
--------- ----------------------------------------------
Balance at September 30, 1998 $ - $169,102 $(174,185) $ - $ (5,083)
--------- -----------------------------------------------
--------- -----------------------------------------------
</TABLE>
See accompanying notes.
A-21
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
For years ended September 30
(in thousands) 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 8,733 $ 1,268 $ (975)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 149 801 1,453
Gain on the sale of Splash Common Stock in 1997
and 1998 and the Color Server Group in 1996 (10,011) (30,779) (20,638)
Gain on the monitor license to KDS (1,615) - -
Gain on the sale of Umax Common Stock (534) - -
Non-cash restructuring and other charges - 2,162 -
Loss on disposal of fixed assets 22 500 258
(Increase) decrease in assets:
Accounts receivable 2,679 3,342 56,698
Allowance for doubtful accounts (864) 2,626 (6,269)
Note receivable (4,500) - -
Inventories 2 12,047 811
Prepaid expenses and other current assets 28 182 1,970
Income tax receivable - 514 5
Increase (decrease) in liabilities:
Accounts payable (2,540) (493) (19,874)
Accrued payroll and related expenses (996) (1,492) (3,007)
Other accrued liabilities (1,159) 205 (10,817)
Deferred income 4,833 - -
Accrued income taxes (1,009) (116) 562
Accrued restructuring and other charges (2,033) (420) (16,588)
---------- ------------ ----------
Total adjustments (17,548) (10,921) (15,436)
---------- ------------ ----------
Net cash used in operating activities (8,815) (9,653) (16,411)
---------- ------------ ----------
Cash flows from investing activities:
Capital expenditures (55) (55) (175)
Deposits and other assets - 50 467
Net proceeds from the sale of Splash Common Stock in
1998 and 1997 and the Color Server Group in 1996 10,011 30,779 20,163
Proceeds from the monitor license to KDS 1,615 - -
Net proceeds from the sale of Umax Common Stock 534 - -
--------- ----------- ---------
Net cash provided by investing activities 12,105 30,774 20,455
--------- ----------- ---------
Cash flows from financing activities:
Principal payment of short-term borrowings, net (3,298) 2,716 (4,782)
Principal payment of long-term borrowings, net - (21,940) -
Redemption of preferred stock and related dividend - (3,272) -
Issuance of common stock 108 248 430
Principal payments under capital leases (273) (1,074) (1,478)
---------- ------------ ----------
Net cash used in financing activities (3,463) (23,322) (5,830)
---------- ------------ ----------
Net decrease in cash and cash equivalents (173) (2,201) (1,786)
Cash and cash equivalents, beginning of year 773 2,974 4,760
--------- ----------- ---------
Cash and cash equivalents, end of year $ 600 $ 773 $ 2,974
--------- ----------- ---------
--------- ----------- ---------
</TABLE>
See accompanying notes.
A-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE ONE. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Radius
Inc. ("Radius" or the "Company") and its wholly-owned subsidiaries after
elimination of significant intercompany transactions and balances.
FINANCIAL STATEMENT ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses. Such estimates include the level of allowance for
potentially uncollectible receivables and sales returns; inventory reserves
for obsolete, slow-moving, or non-salable inventory; and estimated cost for
installation, warranty and other customer support obligations. Actual
results could differ from these estimates.
MANAGEMENT'S BUSINESS RECOVERY PLANS
As shown in the accompanying consolidated financial statements, the
Company has incurred recurring operating losses. During fiscal 1996, 1997
and 1998, management implemented a number of actions to address its cash
flow and operating issues, including: restructuring its outstanding
indebtedness to trade creditors and its secured creditor; refocusing its
efforts on providing solutions for digital video customers; discontinuing
sales of mass market and other low value added products; divesting a number
of businesses and product lines, including most recently the agreement for
the sale and related license of significant assets of its monitor business
to Korea Data Systems America, Inc. significantly reducing expenses and
personnel headcount; and subleasing unoccupied portions of its facility
leases commensurate with its reductions in operations. All revenue in the
years ended September 30, 1996 and 1997 and approximately $13.0 million in
the year ended September 30, 1998, relates to businesses and product lines
that have been disposed of over the last three years. Approximately $2.6
million of revenue in the year ended September 30, 1998 relates to digital
video-related software. See Notes 3 and 10.
The Company's relatively 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.
During fiscal 1999, additional funds may be needed to finance ongoing
operations and to implement the Company's development plans and for other
purposes. The Company plans to generate cash from operations and
borrowings under a working capital line of credit of $4.2 million with
Silicon Valley Bank secured by the $5.2 million note issued by Korea Data
Systems America, Inc. (KDS), and is investigating possible financing and
strategic partnering opportunities. The Company and its management believe
that it can further reduce such operating expenses, if necessary, and that
other sources of financing will be available. The note issued to KDS
relates to a license agreement under which income is being recognized as
cash is received.
FISCAL YEAR
The Company's fiscal year ends on the Saturday closest to September 30
and includes 53 weeks in fiscal 1998. All other fiscal years presented
include 52 weeks. For consistency of presentation, all fiscal periods in
this Form 10-K are reported as ending on a calendar month end.
A-23
<PAGE>
FOREIGN CURRENCY TRANSLATION
The Company translates the assets and liabilities of its foreign
subsidiaries into dollars at the rates of exchange in effect at the end of
the period and translates revenues and expenses using rates in effect
during the period. Gains and losses from these balance sheet translations
are accumulated as a separate component in the Consolidated Balance Sheets.
Foreign currency transaction gains or losses, which are included in the
results of operations, are not material.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is
determined using standard costs that approximate cost on a first-in,
first-out basis. The Company reviews the levels of its inventory in light
of current and forecasted demand to identify and provide reserves for
obsolete, slow-moving, or non-salable inventory. Inventories consist of
the following (in thousands):
<TABLE>
<CAPTION>
September 30,
-----------------------------
1998 1997
---- ----
<S> <C> <C>
Raw materials $ 20 $ -
Work in process 238 176
Finished goods 545 629
-------- ---------
$ 803 $ 805
-------- ---------
-------- ---------
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and consists of the following
(in thousands):
<TABLE>
<CAPTION>
September 30,
-----------------------------
1998 1997
---- ----
<S> <C> <C>
Computer equipment $ 6,423 $ 18,170
Machinery and equipment 120 553
Furniture and fixtures 354 626
Leasehold improvements 439 439
-------- ---------
7,336 19,788
Less accumulated depreciation
and amortization (7,203) (19,539)
--------- ---------
$ 133 $ 249
-------- ---------
-------- ---------
</TABLE>
Depreciation has been provided for using the straight-line method over
estimated useful lives of three to five years. Leasehold improvements have
been fully amortized.
CARRYING VALUE OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
In accordance with FASB Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of, the Company records impairment losses on long-lived assets when events
and circumstances indicate that the assets might be impaired and the
undiscounted cash flows estimated to be generated by those assets are less
than the carrying amounts of those assets. Based on the Company's estimate
of future undiscounted cash flows, the Company expects to recover the
carrying amounts of its long-lived assets. Nonetheless, it is reasonably
possible that the estimate of undiscounted cash flows may change in the
near term resulting in the need to write-down those assets to fair value.
REVENUE RECOGNITION
Revenue is recognized when products are shipped. Sales to certain
resellers are subject to agreements allowing certain rights of return and
price protection on unsold merchandise held by these resellers. The
Company provides for estimated returns at the time of shipment and for
price protection following price declines. Revenue earned under royalty or
commission agreements is recognized in the period in which it is earned.
A-24
<PAGE>
Revenue from the sale of software, net of estimated returns, is
recognized upon either shipment of the physical product or delivery of
electronic product, at which time, collectibility is probable and the
Company has no remaining obligations.
In May 1997, the Financial Accounting Standards Board approved the
American Institute of Certified Public Accountants Statement of Position,
"Software Revenue Recognition" (SOP 97-2). SOP 97-2 provides revised and
expanded guidance on software revenue recognition and applies to all
entities that earn revenue from licensing, selling or otherwise marketing
computer software. SOP 97-2 is effective for transactions entered into in
fiscal years beginning after December 15, 1997. The application of SOP
97-2 is not expected to have a material impact on the Company's results of
operations.
WARRANTY EXPENSE
The Company provides at the time of sale for the estimated cost to
repair or replace products under warranty. The warranty period commences
on the end user date of purchase and is normally one year for displays and
digital video products and for the life of the product for graphics cards.
ADVERTISING EXPENSES
The Company expenses advertising expenses as incurred.
NET INCOME (LOSS) PER SHARE
The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 128 in fiscal 1998. This statement requires the presentation of basic
and diluted net income per share. Basic net income per share is computed
using the weighted average number of common shares outstanding during the
period. Diluted net income per share is computed using the weighted
average number of common and dilutive common shares outstanding during the
period. Dilutive common equivalent shares consist of employee stock
options using the treasury stock method. The Company has restated all
prior period per share data presented as required by SFAS No. 128.
Restated numbers as computed using the diluted method under SFAS No. 128
approximate those computed using the primary method as defined in
Accounting Principals Board Opinion No. 15.
Assuming the conversion of accounts payable and other creditor debt
into common stock in the fourth quarter of fiscal 1996 had occurred at the
beginning of fiscal 1996, the supplemental basic and diluted loss per share
for fiscal 1996 would have been $0.02 per share.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity
from date of purchase of three months or less to be cash equivalents;
investments with maturities between three and twelve months are considered
to be short-term investments. Cash equivalents are carried at cost, which
approximates market. There were no short-term investments as of September
30, 1998 or 1997. Approximately $0.1 million of the $0.6 million of cash
at September 30, 1998 was restricted under various letters of credit.
OFF BALANCE-SHEET RISK AND CONCENTRATION OF CREDIT RISK
The Company sells its products to distributors in the United States
and in various foreign countries. The Company performs on-going credit
evaluations of its customers and generally does not require collateral.
The Company maintains reserves for potential credit losses.
FAIR VALUE DISCLOSURES
The carrying values of cash and cash equivalents and short-term
borrowings approximate their fair values as of September 30, 1998. The
fair value of short-term borrowings are estimated to approximate their
carrying value as the borrowings are subject to variable interest rates.
A-25
<PAGE>
Estimated fair value amounts have been determined by the Company using
available market information and appropriate valuation methodologies.
However, considerable judgment is required in interpreting market data to
develop the estimates of fair value. Accordingly, the estimates presented
herein are not necessarily indicative of the amounts that the Company could
realize in a current market exchange.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130 ("SFAS 130"),
"Reporting Comprehensive Income". SFAS 130 establishes standards for
reporting comprehensive income in a financial statement. Comprehensive
income items include changes in equity (net assets) not included in net
income. Examples are foreign currency translation adjustments and
unrealized gains/losses on available for sale securities. This disclosure
prescribed by SFAS 130 is required beginning with the quarter ending
December 31, 1998. Adoption of SFAS No. 130 is not anticipated to have a
material impact on the Company's financial statements.
In June 1997, FASB issued SFAS 131, "Disclosures about Segments of an
Enterprise and related Information." This statement establishes standards
for the way companies report information about operating segments in
financial statements. It also establishes standards for related
disclosures about products and services, geographic areas and major
customers. The Company has not yet determined the impact, if any, of
adopting this standard. The disclosures prescribed by SFAS 131 are
required in fiscal year 1999.
RECLASSIFICATIONS
Certain amounts in the September 30, 1996 financial statements have
been reclassified to conform to the current year presentation.
NOTE TWO. BORROWINGS
LINE OF CREDIT ARRANGEMENT
In August 1998, the Company entered into a $4.2 million working
capital line of credit agreement with Silicon Valley Bank secured by the
$5.2 million note issued by Korea Data Systems America, Inc. (KDS). The
borrowing base under the working capital line of credit is eighty percent
of the balance on the KDS note held by the Company. Under the terms of the
working capital line of credit, the amount available to borrow will be
decreased to an amount equal to eighty percent of the unpaid balance of
KDS' installment obligations. As the borrowing base is dependent on the
continued payment of monthly installments required by the note, there can
be no assurance that it will be sufficient to allow the Company to borrow
up to the full amount of the working capital line of credit. Interest is
paid at the rate of 1.25% per month of 125% of the average daily
outstanding balance of the loan. In addition, a one time administrative
fee of .50% of 125% of each advance amount is also paid to Silicon Valley
Bank. As of September 30, 1998, the outstanding loan balance was $1.3
million and is included as short-term borrowings in the accompanying
Consolidated Balance Sheet.
In February 1995, the Company and IBM Credit Corp. ("IBM Credit")
entered into a $30.0 million Inventory and Working Capital Financing
Agreement (the "Loan Agreement"). The Loan Agreement permitted advances for
inventory and working capital up to the lesser of $30.0 million or 85% of
eligible receivables ("Inventory and Working Capital Advances"). In
September 1995, IBM Credit advanced an additional $20.0 million under the
Loan Agreement to finance the manufacturing of the Company's MacOS
compatible products (the "MacOS Advances").
Immediately prior to the consummation of the restructuring of its
unsecured and secured debt in September 1996 (the "Plan"), amounts
outstanding to IBM Credit were approximately $26.4 million (See Note 11).
In connection with the Plan, IBM Credit received 750,000 shares of the
Company's Series A Convertible Preferred Stock and warrants to purchase
60,000 shares of Common Stock in consideration of the cancellation of $3.0
million of indebtedness to IBM Credit and for an additional advance of
approximately $470,000. In addition, IBM Credit restructured the terms of
the remaining approximately
A-26
<PAGE>
$23.4 million indebtedness into a working line of credit and a term loan.
The term loan was repaid and the Convertible Preferred Stock was redeemed
in August 1997 with the proceeds from the sale of 996,875 shares of the
1,741,127 shares of Splash Common Stock owned by the Company. During
fiscal 1998, IBM exercised the option to purchase 174,113 shares of Splash
Common Stock and a portion of the proceeds of the sale of the remaining
570,139 shares owned by the Company were used to repay in full the working
line of credit with IBM Credit.
NOTE THREE. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases facilities in Mountain View, California, where it
has established its headquarters operations, and in San Jose, California,
under operating leases.
Future annual minimum lease payments under all noncancelable operating
leases at September 30, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
Gross Net
Operating Sublease Operating
Leases Income Leases
------ ------ ------
<S> <C> <C> <C>
1999 $352 $155 $197
------ ------ ------
Total minimum lease payments $352 $197
------ ------
------ ------
Total sublease income $155
------
------
</TABLE>
Rent expense charged to operations amounted to approximately $0.5
million, $0.6 million and $1.5 million for the fiscal years ended September
30, 1998, 1997 and 1996, respectively. The rent expense amounts for fiscal
1998, 1997 and 1996 exclude a provision for remaining lease obligations on
excess facilities.
Sublease income for fiscal 1998, 1997 and 1996 was approximately $0.8
million, $1.3 million and $1.2 million, respectively.
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 infringe. In January
1996, the Company completed the divestiture of the Color Server Group to
Splash Technology Holdings, Inc.
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 or
additional immunity with respect to elements of EFI's claims. A motion for
summary judgment based on these indemnification rights disposing of EFI's
claims was filed, and the court granted this motion finding the Company
immune from suit under the patent after February 22, 1995. In March 1998,
EFI and the Company agreed to dismiss their remaining claims against each
other pending the outcome of EFI's appeal of this summary judgment finding.
Pursuant to this agreement, if the Company prevails on appeal, the
remaining claims will be dismissed. On the other hand, if EFI were to
prevail on appeal, then EFI could refile its claims and the Company would
intend to continue to vigorously defend against such claims and prosecute
its own claims against EFI. In such event, neither the Company nor Splash
Technology Holdings, Inc. would be able to advance the immunity defense
ruled on in the summary judgment motion, which would require the Company to
defend EFI's claims based upon their merits. EFI filed its notice of
appeal on April 7, 1998, each party submitted opening briefs, oral
A-27
<PAGE>
argument was heard in December 1998 and the District Court summary
judgement was affirmed by the Federal Circuit Court after the oral
argument. No further appeal is expected and the case should be concluded.
(b) On July 18, 1997, Intelligent Electronics, Inc. and its
affiliates filed a suit in the United States District Court for the
District of Colorado alleging a breach of contract and related claims in
the approximate amount of $800,000, maintaining that the Company failed to
comply with various return, price protection, inventory balancing and
marketing development funding undertakings. In 1997, the Company filed an
answer to the complaint and cross-claimed against the plaintiffs and in
October 1997 additionally cross claimed against Deutsche Financial, Inc., a
factor in the account relationship between the Company and the plaintiffs,
seeking the recovery of approximately $2 million. The Company continues to
investigate these claims as well as cross claims and expects to vigorously
defend and prosecute them as applicable. The Company has provided for the
full amount of accounts receivable due from Intelligent Electronics, Inc.
and Deutsche Financial, Inc.
(c) 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 FOUR. SHAREHOLDERS' EQUITY
STOCK SPLITS
A one-for-ten reverse split of the Company's Common Stock became
effective March 9, 1998. All references to share and per share data for
all periods presented have been adjusted to give effect to this split.
SHARES SUBJECT TO ISSUANCE
As of September 30, 1998, the Company was subject to issuing
approximately 10,000 shares of Common Stock associated with the settlement
of a securities class action lawsuit in fiscal 1995.
STOCK OPTIONS
The Company's 1986 Stock Option Plan, as amended (the "1986 Plan"),
authorized the issuance of up to 297,500 shares of common stock upon the
exercise of incentive stock options or nonqualified stock options that may
be granted to officers, employees, directors, consultants and independent
contractors. Under the 1986 Plan, options are exercisable, subject to
vesting, for a term of up to ten years after the date of grant. The 1986
Plan expired in October 1996 and provided for options to be granted at
prices ranging from 50% to 100% of the fair market value of the common
stock on the date of grant, as determined by the Board of Directors.
Vesting of shares is also determined by the Board of Directors at the date
of grant. Outstanding grants of options to purchase 21,446 shares of
Common Stock continue to be exercisable according to the terms of the
grants, and all unused shares under the 1986 Plan are reserved for issuance
under the 1995 Stock Option Plan.
A-28
<PAGE>
The Company's 1995 Stock Option Plan (the "1995 Plan") authorizes the
issuance of up to 769,892 shares of common stock upon the exercise of
incentive stock options or nonqualified stock options that may be granted
to officers, employees, directors, consultants and independent contractors.
Shares available for grant under the 1995 Plan include 143,231 shares which
were not issued under the 1986 Plan. Under the 1995 Plan, options are
exercisable, subject to vesting, for a term of up to ten years after the
grant date. Options may be granted at prices ranging from 85% to 100% of
the fair market value of the common stock on the date of grant, as
determined by the Board of Directors. Vesting of shares is also determined
by the Board of Directors at the date of grant. As of September 30, 1998,
571,416 options were outstanding under the 1995 Plan. The 1995 Plan will
expire in December 2005.
Pursuant to the 1994 merger with SuperMac Technologies, Inc., Radius
assumed 97,524 outstanding options originally issued under the SuperMac
1988 Stock Option Plan (the "SuperMac Plan"). These options will be
administered in accordance with the SuperMac Plan until all options are
exercised or expired. As of September 30, 1998, 762 options remain
outstanding under the SuperMac Plan and are exercisable, subject to
vesting, for a term of up to ten years after the date of grant.
The Company has also reserved 19,000 shares of common stock for
issuance to non-employee directors pursuant to options granted under the
1994 Directors' Stock Option Plan (the "1994 Plan"), including 9,000 shares
which were not issued under the Company's 1990 Directors' Stock Option
Plan. Such options may only be nonqualified stock options, must be
exercised within ten years from the date of grant, and must be granted in
accordance with a non-discretionary formula. Under this formula, each new
director receives an option to purchase 1,000 shares when that director is
first appointed to the Board and an option to purchase 250 shares on each
anniversary of such director's appointment. As of September 30, 1998,
1,750 options were outstanding under this plan at exercise prices ranging
from $3.438 to $108.75 per share. Of the options granted under the 1994
Plan, 627 are exercisable at September 30, 1998.
Prior to the approval of the 1994 Plan, the 1990 Directors' Stock
Option Plan (the "Prior Plan") was in effect. As of September 30, 1998,
the Prior Plan had 1,000 options outstanding at $97.50. Such options are
nonqualified stock options, must be exercised within five years from the
date of grant, and were granted in accordance with a non-discretionary
formula. Options unissued under the Prior Plan become available for grant
under the 1994 Plan.
In March 1993, the Company granted a nonqualified stock option to one
former officer to purchase a total of 25,000 shares of common stock outside
the Company's 1986 Stock Option Plan at an exercise price of $77.50 per
share. This stock option was subsequently repriced to $4.688. This option
is exercisable for a term of ten years and vests over a fifty month period
commencing on the date of grant. During fiscal 1994, 15 of these shares
were exercised by the officer, and as of September 30, 1998, the remaining
24,985 shares were exercisable.
During fiscal 1998, the Company granted, outside of the Company's
Stock Option Plans, 50,000 nonqualified stock options to an employee for an
exercise price of $2.625, the fair market value of the Company's Common
Stock on the relevant date. These options are exercisable for a term of
ten years and vest over a two year period commencing on the date of grant.
A-29
<PAGE>
The following table summarizes the consolidated activity under all of
the Company's plans:
<TABLE>
<CAPTION>
Weighted
Shares Under Average
Option Exercise Price Exercise Price
------------- -------------- --------------
<S> <C> <C> <C>
Outstanding at September 30, 1995 200,739 $13.60 - $289.60 $102.60
Granted 120,546 $12.80 - $ 44.40 $ 23.60
Exercised (11,152) $13.60 - $ 23.70 $ 3.70
Canceled (193,317) $13.60 - $255.80 $ 70.70
-------------
Outstanding at September 30, 1996 116,816 $12.80 - $172.50 $ 43.40
Granted 712,211 $ 2.80 - $ 5.90 $ 4.00
Exercised (52,579) $ 3.40 - $ 4.70 $ 4.70
Canceled (92,851) $ 2.80 - $172.50 $ 28.00
-------------
Outstanding at September 30, 1997 683,597 $ 2.80 - $108.75 $ 4.20
Granted 458,957 $ 1.56 - $ 6.25 $ 2.87
Exercised (21,935) $ 3.44 - $ 4.69 $ 4.14
Canceled (275,759) $ 2.81 - $ 6.25 $ 3.77
-------------
Outstanding at September 30, 1998 844,860 $ 1.56 - $108.75 $ 3.62
------------
------------
</TABLE>
The following table summarizes information concerning outstanding
and exercisable options at September 30, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------- ----------------------------
Weighted
Average Weighted Weighted
Range of Options Remaining Average Options Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices Life Price Price
---------------- ------------- ------------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C>
$ 1.56 - $ 3.88 455,408 9.39 Years $ 2.87 118,607 $ 2.88
$ 4.06 - $ 5.31 387,952 8.40 Years $ 4.18 347,536 $ 4.17
$19.38 - $108.75 1,500 6.30 Years $86.35 1,314 $91.62
---------------- ------------ ------------
$ 1.56 - $108.75 844,860 8.93 Years $ 3.62 467,457 $ 4.09
------------ ------------
------------ ------------
</TABLE>
The Company accounts for stock options in accordance with FASB
Statement No. 123, Accounting for Stock-Based Compensation ("FAS 123").
Under FAS 123, the Company may continue following existing accounting rules
or adopt a new fair value method of valuing stock-based awards. The
Company has elected to continue to follow APB Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB 25") and related interpretations in
accounting for its stock options plans and the Employee Stock Purchase Plan
and has not adopted the alternative fair value method of accounting
provided under FAS 123. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by FAS 123, which also requires that the information be determined
as if the Company has accounted for its employee stock options granted
subsequent to September 30, 1995 under the fair value method of that
Statement. The weighted-average grant-date fair value of options granted
in fiscal 1998 was $2.18. The fair value of options was estimated at the
date of grant using a Black-Scholes option pricing model with the following
A-30
<PAGE>
weighted-average assumptions for fiscal years 1998, 1997 and 1996,
respectively: risk free interest rate of approximately 5.5%, 6% and 6%;
dividend yield of 0% for all years; volatility factors of the expected
market price of the Company's Common Stock of 1.148, 1.077 and 1.077 and a
weighted-average expected life of the option of four years.
For purposes of pro forma disclosures, the estimated fair values of
the options are amortized to expense over the related vesting periods. The
Company's pro forma net income (loss) for 1997 and 1996 was not materially
different from reported amounts.
The Company's pro forma information for 1998 follows (in thousands
except for income per share information):
<TABLE>
<CAPTION>
Year ended
September 30, 1998
------------------
<S> <C>
Net income applicable to common
shareholders as reported $8,733
------
------
Pro forma net income applicable
to common shareholders for FAS 123 $8,089
------
------
Pro forma net income per common share:
Pro forma basic net income per share applicable
to common shareholders $1.46
-----
-----
Pro forma diluted net income per share
applicable to common shareholders $1.46
-----
-----
Shares used in computing pro forma net income per common
share:
Shares used in computing pro forma basic net
income per common share 5,522
-----
-----
Shares used in computing pro forma diluted
net income per common share 5,557
-----
-----
</TABLE>
Since FAS 123 is applicable only to options granted subsequent to
September 30, 1995, its pro forma effect will not be fully reflected until
fiscal year 2002.
EMPLOYEE STOCK PURCHASE PLAN
The Company has an employee stock purchase plan under which
substantially all employees may purchase common stock through payroll
deductions at a price equal to 85% of its fair market value as of certain
specified dates. Stock purchases under this plan are limited to 10% of an
employee's compensation, and in no event may exceed $21,250 per year. The
Company suspended the operation of its employee stock purchase plan in
fiscal 1997 and expects to be able to resume operation of the plan during
fiscal 1999. At September 30, 1998, 15,900 shares remain available for
issuance under the plan.
A-31
<PAGE>
NOTE FIVE. FEDERAL AND STATE INCOME TAXES
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
Year ended September 30,
----------------------------------------
1998 1997 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Federal:
Current $ - $ 50 $ -
Foreign:
Current (1,000) 251 765
State:
Current - 15 50
-------- --------- --------
$ (1,000) $ 316 $ 815
--------- --------- --------
--------- --------- --------
</TABLE>
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
September 30,
----------------------------
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 25,017 $ 19,687
Reserves and accruals not currently tax deductible 3,232 8,542
Capitalized research & development expenditures 2,769 4,399
Inventory write-downs 1,275 4,835
Other 1,082 3,122
--------- ---------
Total deferred tax assets 33,375 40,585
Valuation allowance for deferred tax assets (33,375) (40,585)
---------- --------
Deferred tax assets $ - $ -
--------- ---------
--------- ---------
</TABLE>
FASB Statement 109, Accounting for Income Taxes, 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.
A-32
<PAGE>
The provision for income taxes differs from the amount computed by
applying the statutory federal income tax rate to income before taxes. The
sources and tax effects of the differences are as follows:
<TABLE>
<CAPTION>
Year ended September 30,
-----------------------------------------
1998 1997 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Expected tax at statutory rate $ 2,707 $ 554 $ (56)
Change in valuation allowance (2,707) (504) 241
Reversal of previously accrued foreign taxes (1,000) - -
State income tax, net of federal tax benefit - 15 50
Other - 251 580
--------- --------- ----------
$ (1,000) $ 316 $ 815
---------- --------- ----------
---------- --------- ----------
</TABLE>
During the fourth quarter of fiscal 1998, the Company reversed
approximately $1.0 million of previously accrued foreign taxes as a result
of reduced tax exposures in certain foreign jurisdictions.
As of September 30, 1998, the Company had net operating loss
carryforwards for federal and state income tax purposes of approximately
$62.0 million and $65.0 million, respectively. The federal loss
carryforwards will expire beginning in 2011, if not utilized and the state
loss carryforwards will expire beginning in 1999, if not utilized.
As a result of the issuance of Common Stock and Series A Convertible
Preferred Stock in exchange for certain 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 generated prior to
September 1996 will be subject to an annual limitation of approximately
$2.0 million due to the ownership change limitations provided by the
Internal Revenue Code of 1986 and similar state provisions, except under
limited circumstances.
NOTE SIX. STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended September 30,
------------------------------------------
1998 1997 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Supplemental disclosure of cash
flow information:
Cash paid during the year for:
Interest $ 495 $ 2,988 $ 3,792
--------- --------- ---------
--------- --------- ---------
Income taxes $ 9 $ 8 $ 253
--------- --------- ---------
--------- --------- ---------
Supplemental schedule of noncash
investing and financing activities:
Common and preferred stock issued
to creditors $ - $ - $ 45,503
--------- --------- ---------
--------- --------- ---------
Conversion of short-term borrowings
to long-term borrowings $ - $ - $ 21,940
--------- --------- ---------
--------- --------- ---------
</TABLE>
A-33
<PAGE>
NOTE SEVEN. EXPORT SALES AND MAJOR CUSTOMERS
The Company's export sales were approximately $3.7 million, $4.9
million and $45.8 million in the fiscal years ended September 30, 1998,
1997 and 1996, respectively, and included export sales to Europe of
approximately $1.3 million, $1.8 million and $21.2 million, respectively.
The Pacific, Asia, and Latin America region sales were approximately $2.4
million, $3.1 million and $24.6 million for fiscal years ended September
30, 1998, 1997 and 1996, respectively. During fiscal 1996, the Company
entered into exclusive distributor arrangements with respect to Japan and
Europe and earns royalties and commissions under such arrangements. In
fiscal 1998, the Company modified its relationships with its distributors
in Japan and Europe for its digital video software products and terminated
the exclusivity provisions. These products are purchased from the Company
at a discount from the price list and no commissions are paid. For the
fiscal year ended September 30, 1998, the Company earned approximately $0.5
million and $0.2 million in royalties and commissions from Europe and
Japan, respectively, which are included in the above amounts.
One customer accounted for approximately 53.5%, 66.1% and 34.3% of the
Company's net sales during the years ended September 30, 1998, 1997 and
1996, respectively.
NOTE EIGHT. RESTRUCTURING AND OTHER CHARGES
RADIUS FISCAL 1995 RESTRUCTURING AND OTHER CHARGES
In September 1995, Radius recorded charges of $57.9 million in
connection with the Company's efforts to refocus its business on the color
publishing and multimedia markets. The charges primarily included a
writedown of inventory and other assets. Additionally, it included
expenses related to the cancellation of open purchase orders, excess
facilities and severance. The charges are included in cost of sales ($47.0
million), and selling, general and administrative expense ($10.9 million).
The remaining balance of $20,000 in its restructuring reserve, which
related to employee severance costs, was eliminated in fiscal 1998.
NOTE NINE. TECHNOLOGY LICENSING FROM REPLY CORPORATION
On March 31, 1997, the Company licensed certain technology from Reply
Corporation ("Reply") that allowed the Company to develop and market PCI
bus adapter cards featuring Windows compatibility to users of Macintosh
products. First customer shipments of these products were made during the
third fiscal quarter of 1997. Effective in the third fiscal quarter, the
Company purchased such technology along with certain assets and inventory.
The purchase price of such assets and inventory was approximately $401,000,
although the Company is required to pay a royalty fee based upon the number
of products sold which incorporate such technology. The Company pays a
royalty for Radius products containing the acquired technology in the
amount of 5% of net revenue until cumulative royalties exceed $1.5 million,
when the rate is reduced to 3%, until cumulative royalties of $2.5 million
are paid, after which no royalty is due. In September 1997, the Company
discontinued the development of its DOS on Mac products and shipments of
related products were terminated in the first quarter of fiscal 1998. As
of September 30, 1998, the Company has paid an aggregate of approximately
$86,000 in royalties. Additionally, the Company issued a warrant to Reply
to purchase 50,000 shares of the Company's Common Stock at a price of
$12.50 per share exercisable over a forty-two month period. The Company
has agreed with representatives of the current holders of the warrant to
repurchase the warrant for $10,000, subject to final documentation.
A-34
<PAGE>
NOTE TEN. BUSINESS DIVESTITURES
COLOR SERVER GROUP. 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"). In fiscal 1996, the Company received approximately $21.0
million in cash and, as of September 30, 1998, an additional $2.0 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 which were converted into
shares of Splash's Common Stock outstanding in connection with the initial
public offering of Splash. In June 1996, the Company granted IBM Credit,
its secured lender, an option to purchase 174,113 shares of Splash Common
Stock in connection with the restructuring of the terms of its loan
agreement with IBM Credit (also, see Note 11). The remaining shares of
Splash Common Stock were also pledged to IBM Credit. As of July 1998, IBM
Credit had exercised its option of Splash Common Stock in full and the
working capital line of credit with IBM Credit was fully repaid in fiscal
1998.
PORTRAIT DISPLAY LABS. In January 1996, the Company entered into a
series of agreements with Portrait Display Labs, Inc. ("PDL"). Under these
agreements, PDL settled its outstanding receivable to the Company by paying
the Company $500,000 in cash and issuing to the Company 214,286 shares of
PDL's Common Stock. The cash proceeds were paid to IBM Credit. Due to an
expected recapitalization of PDL, the Company's interests became deeply
subordinated to new investors in PDL. Therefore, the Company does not
anticipate that it will realize any future material benefit from its
investment in PDL. These shares are not valued for financial statement
purposes.
UMAX DATA SYSTEMS, INC. In February 1996, the Company sold its MacOS
compatible systems business to UMAX Computer Corporation ("UCC"), a company
formed by UMAX Data Systems, Inc. ("UMAX"). The Company received
approximately $2.3 million in cash and debt relief and 1,492,500 shares of
UCC's Common Stock, representing approximately 19.9% of UCC's then
outstanding shares of UCC Common Stock. The cash proceeds were paid to IBM
Credit. In March 1998, due to Apple's recent reversal in MacOS licensing
policy, the Company sold the Common Stock of Umax Computer Corporation held
by it to Umax Data Systems, Inc. for $550,000.
NOTE ELEVEN. STOCK ISSUED TO CREDITORS
In September 1996, the Company, IBM Credit and its unsecured creditors
consummated a restructuring of the Company's outstanding indebtedness
pursuant to which the Company's creditors received equity in satisfaction
of their claims (the "Plan"). The Company issued 3,629,420 shares of
Common Stock in satisfaction of approximately $45.9 million in unsecured
claims (including a $1.0 million reserve for unknown or unresolved claims)
and repaid approximately $1.9 million of unsecured claims, most of which
were less than $50,000, at an average discount of approximately 75% of the
amount of the claim. Of these shares of Common Stock issued pursuant to
the Plan, 79,128 were issued to the Radius Creditors Trust for the purpose
of satisfying unresolved or unknown claims. As of September 30, 1997, all
shares of Common Stock held by the Radius Creditors Trust had been
disbursed to various claimants. The Company also issued 750,000 shares of
its Series A Convertible Preferred Stock (convertible into an aggregate of
552,303 shares of Common Stock) and warrants to purchase 60,000 shares of
Common Stock to IBM Credit in satisfaction of $3.0 million indebtedness and
in consideration of restructuring its remaining approximately $23.4 million
indebtedness to IBM Credit. The Company also issued warrants to purchase
5,000 shares of Common Stock to Mitsubishi in consideration of the
extension of open credit terms to the Company. The warrants expire October
13, 2000. The Company also issued to its unsecured creditors, who received
Common Stock, Rights ("Rights") to receive up to an additional 1,104,606
shares of Common Stock in the event that the Series A Convertible Preferred
Stock is converted into Common Stock (including 24,082 Rights issued to the
Radius Creditors Trust). All outstanding shares of the Convertible
Preferred Stock were redeemed in September 1997. Because such Series A
Convertible Preferred Stock was redeemed prior to conversion of any shares
of such Preferred Stock into Common Stock, no shares of CommonStock will be
issuable pursuant to the Rights. All such Rights have expired.
A-35
<PAGE>
Considering the value of the Common and Preferred Stock issued or
issuable to the creditors, the percentage of the Company's ownership issued
to the creditors, the large blocks of stock issued to a certain few
creditors, Common Stock warrants issued and other costs, such as cash
settlements, legal and accounting expenses and the option to IBM Credit to
purchase 10% of the Company's investment in Splash, and considering
appropriate discounts on the stock issued, the Company concluded that the
value of consideration given up was equal to the indebtedness forgiven.
As a result, the accompanying financial statements do not include any
extraordinary gain or loss resulting from the execution of the Plan.
NOTE TWELVE. LICENSING OF ASSETS TO KOREA DATA SYSTEMS AMERICA, INC.
In June 1998, the Company licensed certain technology and assets
necessary to conduct its monitor and color publishing business to KDS,
leaving the Company free to focus on its digital video software business.
The brand name and trademark RADIUS was one of the assets so licensed
because of its primary association with monitors. In August 1998, the
Company amended and restated this license and agreed to sell the licensed
assets to KDS pursuant to an asset transfer agreement, subject to certain
contingencies at the discretion of KDS. The monitor business has accounted
for substantially all of the revenues of the color publishing product line
and 55.3% of the Company's revenues during fiscal 1998. Under the license
and asset transfer agreement, Radius has transferred (by licensing or by
assignment if KDS elects to close the asset transfer agreement) its Radius,
Supermac, PressView and certain other trademarks to KDS and has licensed
certain intellectual property pertaining to PressView and PrecisionView
monitors. KDS has not agreed to purchase any inventory or other tangible
assets of Radius under the license and asset transfer agreement. The
expected value of the transaction is $6.2 million paid or to be paid in
installments, including $0.85 million paid in August 1998 and $0.35 million
in September 1998 under the amended license and $0.5 million under the
original license in June 1998. The remaining amount is payable in
installments through October 1999. These installment payment obligations
have been pledged to secure a $4.2 million line of credit from Silicon
Valley Bank. KDS' performance is guaranteed by a Korean corporation and
its US affiliate. The agreement is expected to close by June 1999 if
contingencies are satisfied. In the interim, Radius has licensed KDS the
use of its monitor trademarks and specific technology and expects to wind
down its monitor business activities as current supplies of monitors are
sold, whether or not the asset purchase agreement is completed. In the
event that the asset purchase agreement is not completed, the license
agreement will continue as a perpetual license. Radius will continue to
use the transferred trademarks and technology until the transition is
completed over the next several months and expects to focus on its digital
video line of business during this transition period. Additionally, the
Company had agreed with KDS to continue to support the sale of the monitors
through the Company's sales force during August and September in return for
$55,000 a month and a sharing of the gross margin from the sale of the
monitor products during this period. The Company will provide a
diminishing level of support until KDS has fully assumed all relevant
activities. KDS will reimburse the Company for this support.
As of September 30, 1998, the remaining balance receivable under the
agreement was $4.5 million which is included as note receivable and
deferred revenue in the accompanying Consolidated Balance Sheet. The
Company will recognize other income under the license agreement as cash is
received on the note.
A-36
<PAGE>
NOTE THIRTEEN. COMPUTATION OF PER SHARE COMMON INCOME (LOSS)
The following table presents the calculation of basic and diluted earnings per
share as required under SFAS 128:
<TABLE>
<CAPTION>
1998 1997 1996
-------- --------- ----------
(in thousands, except per-share amounts)
<S> <C> <C> <C>
NUMERATOR:
Numerator for basic and diluted earnings per share -
income (loss) available to common stockholders $ 8,733 $ 996 $ (975)
-------- --------- ----------
-------- --------- ----------
DENOMINATOR:
Denominator for basic earnings per share - weighted-average
shares outstanding 5,522 5,389 2,125
Effect of dilutive securities:
Employee stock options 35 133 -
-------- --------- ---------
Dilutive potential common shares 35 133 -
Denominator for diluted earnings per share - adjusted
weighted-average shares outstanding 5,557 5,522 2,125
-------- --------- ---------
-------- --------- ---------
Basic earnings (loss) per share $ 1.58 $ 0.18 $ (0.46)
-------- --------- ----------
-------- --------- ----------
Diluted earnings (loss) per share $ 1.57 $ 0.18 $ (0.46) (1)
-------- --------- ----------
-------- --------- ----------
</TABLE>
(1) Diluted earnings per share does not reflect any potential shares relating
to employee stock options or the convertible preferred stock due to a loss
reported for the period, in accordance with FAS 128. The assumed issuance
of any additional shares would be antidilutive.
Diluted earnings per share in 1998 and 1997 also does not include certain stock
options as those options are at exercise prices in excess of fair market value,
750,446 and 341,252, respectively.
For additional disclosure regarding the employee stock options, see Note 4.
A-37
<PAGE>
NOTE FOURTEEN. SUBSEQUENT EVENTS (UNAUDITED)
TECHNOLOGY PURCHASE FROM POST DIGITAL SOFTWARE, INC.
On November 23, 1998, the Company acquired certain software and other
intangible property from Post Digital Software, Inc. for (i) an initial
payment of $50,000, (ii) earnout payments equal to at least $50,000 but not
exceeding $700,000 based on subsequent sales of the Company's digital video
products incorporating such software and (iii) a warrant to purchase up to
50,000 shares of the Company's Common Stock at an exercise price of $1.50
per share. The warrant is exercisable over a four year period through
November 23, 2002. The warrant can be exercised for up to 12,000 shares on
May 1, 1999, plus an additional 2,000 shares for each full month that
transpires thereafter, up to a total of 50,000 shares.
SALE OF CERTAIN COLOR PUBLISHING TECHNOLOGY
On December 4, 1998, the Company agreed to sell certain software and
other intangible property associated with its monitor and color publishing
business to Splash Technology Holdings, Inc. ("Splash") in consideration of
$275,000 and the early release of $1.0 million from an escrow established
for the benefit of Splash when the Company's Color Server Group was sold to
Splash in January 1996. These funds were received on December 16, 1998.
In the transaction, Splash licensed some of the transferred technology back
to the Company for a term of two years on a fully paid up basis. See Note
10.
CONCLUSION OF LITIGATION WITH ELECTRONICS FOR IMAGING, INC.
On December 8, 1998, the appeal by EFI was briefed and was argued to
the court. On December 9, 1998, in a per curium order, the Federal Circuit
Court affirmed the summary judgment by the district court in favor of the
Company. No further appeal is expected and the case should be concluded.
See Note 3. As a result, the Company has requested the release of all
remaining funds from the escrow established in connection with the
disposition of the Color Server Group to Splash. See Note 10.
SCHEDULE II --- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Balance at Charged to Charged Balance
beginning costs and to other at end of
Description of period expenses accounts Deductions(1) period
----------- --------- -------- -------- ------------- --------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Year ended September 30, 1996 $8,502 $ 91 $0 $ 6,461 $2,132
Year ended September 30, 1997 $2,132 $4,706 $0 $ 2,080 $4,758
Year ended September 30, 1998 $4,758 $ 30 $0 $ 894 $3,894
</TABLE>
- -----------------------------
(1) Uncollectible accounts written off.
A-38
<PAGE>
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
The Company's Common Stock was quoted on the Nasdaq National Market from
August 21, 1991 until July 1, 1996. The Company's Common Stock is now quoted on
the Nasdaq SmallCap Market under the symbol "RDUS." The high and low sales
prices for the Common Stock are indicated below, adjusted to reflect the
one-for-ten reverse split effective March 9, 1998. See "Recent Developments -
Potential Nasdaq SmallCap Market Delisting."
<TABLE>
<CAPTION>
Year Ended September 30, 1997 Low High
- ----------------------------- --- ----
<S> <C> <C>
First Quarter $4.69 $18.12
Second Quarter 3.12 5.31
Third Quarter 1.87 4.06
Fourth Quarter 2.50 7.19
Year Ending September 30, 1998
- ------------------------------
First Quarter 2.81 7.19
Second Quarter 2.25 4.37
Third Quarter 2.37 5.87
Fourth Quarter 0.94 2.94
</TABLE>
On September 30, 1998, there were approximately 2,207 holders of record of
the Company's Common Stock.
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, 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.
The Company has never declared or paid any cash dividends on its Common
Stock. The Company anticipates that it will retain any future earnings for use
in its business or the retirement of debt and does not anticipate paying any
cash dividends on its Common Stock in the foreseeable future.
A-39
<PAGE>
EXECUTIVE OFFICERS AND DIRECTORS
<TABLE>
<CAPTION>
NAME POSITION
---- --------
<S> <C>
Mark Housley Chairman of the Board of Directors and Chief
Executive Officer
Henry V. Morgan Director, Secretary
Steven Petracca Senior Vice President (resigned)
Charles W. Berger Director (Chairman and CEO of Imgis, Inc.)
Michael D. Boich Director
John C. Kirby Director
</TABLE>
FORM 10K
The Company will provide without charge to any shareholder upon request a
copy of the Company's Annual Report of Form 10K. Such written request should be
made to:
Radius Inc.
Investor Relations
460 East Middlefield Road, Mountain View, California 94043
A-40
<PAGE>
RADIUS INC.
PROXY FOR ANNUAL MEETING OF SHAREHOLDERS
FEBRUARY 26, 1999
THIS PROXY IS SOLICITED ON BEHALF OF THE COMPANY'S BOARD OF DIRECTORS
The undersigned hereby appoints Mark Housley and Henry V. Morgan, or
either of them, each with power of substitution, to represent the undersigned
at the Annual Meeting of Shareholders of Radius Inc. (the "Company") to be
held at 460 East Middlefield Road, Mountain View, California 94043 on
February 26, 1999, at 11:00 a.m., P.D.T., and any adjournment or postponement
thereof, and to vote the number of shares the undersigned would be entitled
to vote if personally present at the meeting on the following matters:
----------------
See Reverse Side
----------------
<PAGE>
Please mark
your votes as / X /
indicated in
this example
ACCOUNT NUMBER ______________ COMMON _______________ PREFERRED ______________
The Board of Directors recommends a vote FOR all of the nominees and FOR
each of the Proposals.
for all nominees,
for all except the withhold authority
nominees following nominees: for all nominees
1. Election of Directors / / / / / /
Nominees: Charles W. Berger,
Michael D. Boich, John Cirigliano,
Mark Housley, Hank Morgan,
Jack Kirby, Stephen Manousos
FOR AGAINST ABSTAIN
2. AMENDMENT TO STOCK PURCHASE PLAN / / / / / /
FOR AGAINST ABSTAIN
3. ADOPTION OF 1999 EMPLOYEE STOCK / / / / / /
PURCHASE PLAN AND SHARE
RESERVATION
FOR AGAINST ABSTAIN
4. AMENDMENT OF ARTICLES OF / / / / / /
INCORPORATION TO EFFECTUATE A
NAME CHANGE
FOR AGAINST ABSTAIN
5. RATIFICATION OF THE APPOINTMENT OF / / / / / /
ERNST & YOUNG LLP AS THE COMPANY'S
INDEPENDENT AUDITORS
THIS PROXY WILL BE VOTED AS DIRECTED. IN
THE ABSENCE OF DIRECTION, THIS PROXY WILL
BE VOTED FOR the nominees listed and FOR
each of THE PROPOSALS.
In their discretion, the proxies are
authorized to vote upon such other
business as may properly come before the
meeting or any adjournment or postponement
thereof to the extent authorized by Rule
14a-4(c) promulgated by the Securities and
Exchange Commission.
THIS PROXY IS SOLICITED ON BEHALF OF THE
BOARD OF DIRECTORS OF THE COMPANY.
WHETHER OR NOT YOU EXPECT TO ATTEND THE
MEETING, PLEASE COMPLETE, DATE, SIGN AND
PROMPTLY RETURN THIS PROXY IN THE
ENCLOSED, POSTAGE-PAID ENVELOPE SO THAT
YOUR SHARES MAY BE REPRESENTED AT THE
MEETING.
Signature(s) Dated: , 1999
---------------------------------------- ---------
Please sign exactly as your name(s) appear(s) on your stock certificate. If
shares are held of record in the names of two or more persons or in the name
of husband and wife, whether as joint tenants or otherwise, both or all of
such persons should sign the proxy. If shares of stock are held of record by
a corporation, the proxy should be executed by the president or vice
president and the secretary or assistant secretary. Executors,
administrators or other fiduciaries who execute the above proxy for a
deceased shareholder should give their full title. Please date the proxy.
