-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LQsUJ2+/WT+JW0cOsG7ezFEFnoiHZN27Q/hKmp1PKzx6OBdfkzjz2z4HX2K9I2tl DIUPNBfdzLFpJzM15iSAsA== 0001047469-98-044994.txt : 19981228 0001047469-98-044994.hdr.sgml : 19981228 ACCESSION NUMBER: 0001047469-98-044994 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981223 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RADIUS INC CENTRAL INDEX KEY: 0000805574 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 680101300 STATE OF INCORPORATION: CA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-18690 FILM NUMBER: 98775011 BUSINESS ADDRESS: STREET 1: 460 E MIDDLEFIELD RD CITY: MOUNTAIN VIEW STATE: CA ZIP: 94043 BUSINESS PHONE: 6504046000 MAIL ADDRESS: STREET 1: 460 E MIDDLEFIELD RD CITY: MOUNTAIN VIEW STATE: CA ZIP: 94043 10-K 1 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) FOR TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 0-18690 RADIUS INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 68-0101300 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 460 E MIDDLEFIELD ROAD MOUNTAIN VIEW, CA 94043 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (650) 404-6000 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO --- ------- INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF THE REGISTRANTS KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. ( )
AS OF NOVEMBER 30, 1998 ----------------------- AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF THE REGISTRANT BASED ON THE CLOSING BID PRICE OF SUCH STOCK: $8,644,022 NUMBER OF SHARES OF COMMON STOCK OUTSTANDING: 5,532,174
DOCUMENTS INCORPORATED BY REFERENCE PORTIONS OF REGISTRANT'S DEFINITIVE PROXY STATEMENT FOR THE ANNUAL MEETING OF SHAREHOLDERS TO BE HELD FEBRUARY 26, 1999 ARE INCORPORATED BY REFERENCE INTO PART III (ITEMS 10, 11, 12, AND 13) HEREOF. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- RADIUS INC. 1998 ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS
PART I Page ---- ITEM 1. Business . . . . . . . . . . . . . . . . . . . . . . . . 2 ITEM 2. Properties . . . . . . . . . . . . . . . . . . . . . . . 7 ITEM 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . 7 ITEM 4. Submission of Matters to a Vote of Security Holders. . . 8 ITEM 4A. Executive Officers of Registrant . . . . . . . . . . . . 8 PART II ITEM 5. Market for Registrant's Common Equity and Related Shareholder Matters. . . . . . . . . . . . . . . . . . . 9 ITEM 6. Selected Financial Data. . . . . . . . . . . . . . . . . 10 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . . . . . . . . . 11 ITEM 7A Quantitative and Qualitative Disclosures about Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . 23 ITEM 8. Financial Statements and Supplementary Data. . . . . . . 23 ITEM 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . 23 PART III ITEM 10. Directors and Executive Officers of the Registrant . . . 24 ITEM 11. Executive Compensation . . . . . . . . . . . . . . . . . 24 ITEM 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . . . . . . . . 24 ITEM 13. Certain Relationships and Related Transactions . . . . . 24 PART IV ITEM 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . 25 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Radius, the Radius logo, PressView and PrecisionView, among others are registered trademarks and/or registered service marks of Radius Inc. Radius Edit, EditDV, MotoDV, PhotoDV and Roto, among others, are trademarks and/or service marks of Radius Inc. or one of it subsidiaries. Other brands or products contained in this document are trademarks, service marks, registered trademarks or registered service marks of their respective holders and should be treated as such. -1- PART I ITEM 1. BUSINESS 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 -2- 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. 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. -3- PRODUCTS AND APPLICATIONS A summary of some of the Company's principal products and their typical applications is set forth below:
Product Suggested Retail Price ------- ---------------------- PhotoDV (with FireWire) $299 MotoDV (with FireWire) $499 MotoDV Studio (with FireWire) $899 EditDV (with FireWire) $999 EditDV Unplugged $ 99 Software upgrades to: PhotoDV $199 MotoDV $399 EditDV $799
The prices listed above are suggested retail prices. Actual prices could vary based on purchase volumes, competition, seasonality and promotions or other sales incentives, among others. DIGITAL VIDEO SYSTEMS AND SOFTWARE Radius offers a number of products for both the multimedia authoring and the non-linear digital video editing and production market. Non-linear digital editing enables video editors to manipulate pictures and sound in a faster, easier and more cost effective manner than traditional analog tape-based systems. Editors can randomly access and digitally "cut and paste" images, videos and sound clips, avoiding the tedious process of winding and rewinding linear tape and the subsequent physical cutting and splicing of film segments. PhotoDV is a software tool, used as an Adobe Photoshop import plug-in. It is available with or without the Radius FireWire card and a digital interface cable. PhotoDV enables a Digital Video ("DV") camcorder to perform as a still image camera, in addition to being used to record video. Pictures are acquired digitally over FireWire (IEEE 1394) and can be used for Web sites, picture databases, printed pages, and QuickTime VR scenes. PhotoDV is available for both the Macintosh and Windows operating systems. MotoDV is an input/output utility that provides a digital method for moving DV camcorder footage from the camcorder to a personal computer for the purpose of editing. MotoDV is targeted at video designers and other creative professionals who produce video and multimedia content for tape, CD-ROM, and Web delivery. The MotoDV application remotely controls the DV camcorder or DV video tape recorder over FireWire and captures DV clips, in real-time or time-lapse mode. As clips are being captured, MotoDV converts the integrated DV data stream into QuickTime movies with separate video and audio tracks. These clips can then be imported into any QuickTime-compliant editing or special effects application, including Radius EditDV, Adobe Premiere, and Adobe After Effects. MotoDV is available for both the Macintosh and Windows operating systems. MotoDV Studio builds on MotoDV by including Adobe Premiere for Windows and a set of custom Radius developed plug-ins and is targeted towards the large installed base that Adobe has for Premiere. EditDV is a digital non-linear editing system which operates on the MacOS in conjunction with digital camcorders, Apple's QuickTime (an industry standard architecture of digital media) and FireWire connections. Users can create digital video with multiple video and effects tracks, rubber-band audio, and traditional wipes and fades for fast interactive editing, color modification and keying. EditDV also provides QuickTime-compliant digital video non-linear editing, compositing and animation capability that facilitates the creation and editing of digital video content. EditDV is a non-linear professional digital video editing solution that features an intuitive user interface, FX templates, built-in titling, multiple key frames, batch digitizing and picture-in-picture capabilities. It also offers a variety of high-quality special effects for digital video editing including pan-zoom-rotating, chroma -4- keying and compositing. EditDV Unplugged is an entry level version of EditDV targeted to the beginning non-linear editor, and is available for both the Macintosh and Windows operating systems. The Company expects to continue to invest significant resources in its software digital video products during fiscal 1999, including developing cross platform functionality for the Windows environment, and intends to introduce various enhancements to these products. MONITOR AND COLOR PUBLISHING PRODUCTS During fiscal 1998, the Company offered two large color reference displays designed for desktop color publishers and graphic artists. The PressView SR series was designed to offer the color accuracy, resolution and clarity needed for high quality color prepress, media authoring, photography, medical imaging and scientific image processing. These color reference displays offer consistent and accurate color preproofing at resolutions of up to 1600 by 1200 pixels. The PrecisionView 21 also offers resolutions of up to 1600 by 1200 pixels but at a lower price point. During fiscal 1998, the Company also offered the Prosense display calibrator. Color peripherals tend to vary over time from their original specifications, thus causing significant color variances. Display calibrators control the way peripherals produce color, making the color more consistent and predictable. The Company's Prosense Display Calibrator works with sensing technology and Macintosh software to measure the actual color performance of a display and then adjusts information in the Macintosh graphics card so that the colors will be accurate. As a result of the KDS transactions, the Company does not expect to invest significant resources in the development or distribution of such products in the future. TECHNOLOGY AND PRODUCT DEVELOPMENT The Company's current development focus is on developing digital video acquisition products and editing tools for the Macintosh and Windows operating systems. The Company's research and development efforts are focused on creating new products and technologies for customers who create, review, approve and utilize moving video. Current research and development efforts include: (i) performance improvements and cost reductions of current products; (ii) development of application software to facilitate the creation and manipulation of video and high resolution still and full motion images; (iii) development of technology to enable new methods of displaying and creating digital video information with greater flexibility, speed, and quality; (iv) development of technology to permit use of all of the Company's main digital video software products in the Windows operating environment, including EditDV. The Company believes that the competitive nature of the computer industry, along with the rapid pace of technological evolution, requires that it continue to introduce innovative products on a timely basis to compete effectively. During fiscal 1998, 1997 and 1996, the Company's expenditures for research and development totaled $2.8 million, $5.0 million and $7.5 million, respectively. Of these expenditures 68.98%, 28.95% and 11.79%, respectively, were allocated to the digital video software product line. To date, all of the Company's research and development expenditures have been charged to operations as incurred. Because of its smaller size and narrowing of product focus, the Company does not anticipate having research and development expenditures equal to earlier levels and there can be no assurance that the Company will be able to successfully develop new or enhanced products, commercially successful products, or products that will not be rendered obsolete by changing technology or new products introduced by others. Additionally, should the Company fail to introduce new products on a timely basis, the Company's operating results could be adversely affected. The Company does plan to devote increasing percentages of its research and development expenditures to products for the Windows or cross platform markets. Although these markets are potentially much larger than the Macintosh market, the Company has less experience in such markets and they are known to become more competitive over time. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Certain Factors That May Affect the Company's Future Results of Operations -- Technological Change; Continuing Need to Develop New Products." MARKETING, SALES AND DISTRIBUTION Domestically the Company employs a two-tiered distribution model through which it sells its products primarily through a limited number of distributors that in turn distribute the Company's products to a variety of resellers including superstores, independent dealers, educational resellers, systems integrators, value added resellers and mail order resellers. The Company's domestic distributors purchase products at discounts from suggested retail prices based on purchase volumes. The Company also sells directly in the United States using its site on the World Wide Web and its toll-free call center. The Company major distributors are: Ingram Micro, Inc., Pinacor, Canon, Broadfield, and Wynit. The Company's business and financial results are highly dependent on the success of these distributors. To assist these domestic distributors and to provide -5- marketing, training and technical support, the Company provides sales representatives in a number of locations in the United States. Radius also provides market development funds to give distributors incentives to increase sales, improve reporting and achieve a product mix favoring higher margin products. Internationally, sales are made through foreign distributors, which market, sell and service the Company's products. During fiscal 1996, the Company entered into exclusive distributor arrangements with respect to Japan and Europe which resulted in revenues in the form of sales commissions, rather than gross sales proceeds. These commission-based and exclusive arrangements have been terminated and all international sales are currently reported in terms of gross sales. For fiscal years ended September 30, 1998, 1997 and 1996, the Company's export sales accounted for approximately 23.4%, 15.7%, and 50.7% respectively, of the Company's net sales. See Note 7 of Notes to Consolidated Financial Statements. The Company's export sales are subject to certain risks common to international operations, such as currency fluctuations and governmental regulation. During the third quarter of fiscal 1997, exclusivity with the Japanese distributor was terminated, however, no other distribution relationship for Japan has been entered into by the Company. During the fourth quarter of fiscal 1998, the Company terminated its exclusive distribution contract for Europe. The Company is in the process of establishing new distributors in Europe. During the fourth quarter of fiscal 1998, the Company appointed a marketing representative for Europe to assist the Company in building a network of distributors. There is no assurance that these efforts will increase sales and profits from these markets. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Certain Factors That May Affect the Company's Future Results of Operations -- International Sales." For the fiscal years ended September 30, 1998, 1997 and 1996 one customer accounted for approximately 53.5%, 66.1%, and 34.3% of the Company's net sales, respectively. Many of the Company's distributors have the right to return products purchased from the Company. While the Company provides for estimated product returns, if in the future the Company were to experience returns from customers significantly in excess of this estimate, such returns could have a material adverse effect on the Company's results of operations. The Company's marketing programs support worldwide sales and distribution of its products. The Company's principal marketing activities include active use of its own web site and others on the world wide web, frequent participation in industry trade shows and seminars, advertising in major trade publications worldwide, public relations activities with the trade and business press, publication of technical articles, distribution of sales literature and product specifications and communications with its installed base of end users. The Company's marketing programs are designed to generate sales leads for its distributors and master resellers as well as to enhance the Company's brand name recognition. MANUFACTURING AND SUPPLIERS As a result of the Company's outsourcing of manufacturing, substantially all of the Company's assembly, quality control testing, packaging and other manufacturing operations are performed by the Company's suppliers, contract manufacturers, and other subcontractors. The Company has developed a quality assurance program with these third parties. The Company attempts to utilize standard parts and components available from multiple vendors. However, certain components used in the Company's products are available only from sole or limited suppliers. Although the Company has been able to obtain an adequate supply of such components in the past, there can be no assurance that it will be able to obtain an adequate supply in the future. COMPETITION All markets in which the Company competes are expected to remain highly competitive. The Company's principal competitors in the digital video market include Adobe, Avid Technology, Inc. and Ulead. The market for the Company's products is evolving, and it is difficult to predict all future sources of competition. For example, Apple is expected to introduce a non linear digital video editing product during fiscal 1999. Therefore, the Company could face significant competition in the future from newly established companies or newly introduced or improved products of others. Although Apple and Microsoft are principally suppliers of general purpose computing platforms and other applications upon which third parties are encouraged to build more complete solutions, the Company may face competition from Apple and Microsoft. Apple currently markets a number of products that compete directly or indirectly with the Company. Apple and Microsoft also could introduce additional products, add functionality to their computer systems that is similar to that provided by certain of the Company's products, or alter their systems' architecture in a manner that could adversely affect the Company's ability to compete. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Certain Factors That May Affect the Company's Future Results of Operations -- Dependence on and Competition with Apple and Microsoft. -6- The Company believes that the principal competitive factors for its product line are product performance, breadth of distribution, brand name recognition, price and customer support. There can be no assurance that the Company will be able to compete successfully with respect to these factors. In addition, many of the Company's current and prospective competitors have significantly greater financial, technical and marketing resources than the Company. As a result, there can be no assurance that the Company will compete effectively with current or future competitors or that competitive pressures faced by the Company will not have a material adverse affect on the Company's business, financial condition or results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Certain Factors That May Affect the Company's Future Results of Operations -- Competition." EMPLOYEES As of October 30, 1998, the Company had approximately 42 full time employees, 17 of which are in sales and marketing functions, 13 of which are in research and development, and the balance are in administration (finance, operations, and senior management). The Company's success will depend, in large measure, on its ability to attract, motivate and retain highly qualified technical, marketing, engineering and management personnel, who are in great demand. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Certain Factors That May Affect the Company's Future Results of Operations -- Dependence on Key Personnel." The Company's employees are not represented by any collective bargaining agreements, and the Company has never experienced a work stoppage. The Company believes that its employee relations are good. ITEM 2. PROPERTIES The Company's primary facility is located in Mountain View, California and consists of leased space of approximately 19,000 square feet. The Company believes that its current facilities are sufficient for its current needs. The lease on the primary facility will expire in April 1999. The Company expects to be able to renew its current lease for a three year period for an annual cost that is similar to its current annual costs. The Company has subleased, to another company, a facility of approximately 86,000 square feet which the Company is currently not using. This master and sublease arrangement expires in December 1998. The Company has no other facilities. ITEM 3. LEGAL PROCEEDINGS (a) On November 16, 1995, Electronics for Imaging, Inc. ("EFI") filed a suit in the United States District Court in the Northern District of California alleging that the Company infringes a patent allegedly owned by EFI. Although the complaint does not specify which of the Company's products allegedly infringe the patent, subsequent pleading indicates that EFI alleges that the Company's Color Server products 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 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. ("IE") 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 -7- 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 reserves 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. ITEM 4A. EXECUTIVE OFFICERS OF REGISTRANT The executive officers of the Company are as follows:
NAME AGE POSITION ---- --- -------- Mark Housley 42 Chairman of the Board of Directors, Chief Executive Officer and President
MARK 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. HENRY V. MORGAN was the Chief Financial Officer and Senior Vice President, Finance and Administration since February 1997. 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. STEVE PETRACCA was the Senior Vice President of Engineering and Operations since April 1997. He resigned from this position in March 1998. -8- PART II ITEM 5. 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."
Year Ended September 30, 1997 Low High ----------------------------- --- ---- 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
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. -9- ITEM 6. SELECTED FINANCIAL DATA
SEPTEMBER 30, (1) -------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (IN THOUSANDS, EXCEPT PER SHARE DATA) 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 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- SEPTEMBER 30, (1) ---------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (IN THOUSANDS) 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
* Reflects the one-for-ten reverse stock split effective March 9, 1998. -10- (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. ITEM 7. 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).
YEAR ENDED SEPTEMBER 30, -------------------------------------------- 1998 1997 1996 ---- ---- ---- 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)% ----- ----- ----- ----- ----- -----
-11- 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. -12- 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 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 -13- 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. 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, -14- 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. 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. -15- 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 believes 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 -- 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 -16- 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 uncollectable amounts, returns, credits and similar costs, including product warranties and price protection. Due to the inherent uncertainty of such estimates, there can be no assurance that the Company's forecasts regarding bookings, collections, rates of return, credits and related matters will be accurate. A significant portion of the operating expenses of the Company are relatively fixed in nature, and planned expenditures are based primarily on sales forecasts which, as indicated above, are uncertain. Any inability on the part of the Company to adjust spending quickly enough to compensate for any failure to meet sales forecasts or to receive anticipated collections, or any unexpected increase in product returns or other costs, could also have an adverse impact on the Company's operating results. As a strategic response to a changing competitive environment, the Company has elected, and, in the future, may elect from time to time, to make certain pricing, service or marketing decisions or acquisitions that could have a 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 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." -17- 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 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. -18- 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. -19- 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 -20- to Japanese and European customers. Additionally, fluctuations in exchange rates could affect demand for the Company's products. If for any reason exchange or price controls or other restrictions on foreign currencies are imposed, the Company's business, operating results and financial condition could be materially adversely affected. DEPENDENCE ON KEY PERSONNEL The Company's success depends to a significant degree upon the continued contributions of its key management, marketing, product development and operational personnel and the Company's ability to retain and continue to attract highly skilled personnel. The Company 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. -21- 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 millenium approaches. -22- ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The index to the Company's Financial Statements, Financial Schedules, and the Report of the Independent Auditors appears in Part IV of this Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. -23- PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT The information concerning the Company's directors required by Item 10 is incorporated by reference herein to section entitled "Proposal No. 1 - Election of Directors" of the Proxy Statement for its 1999 Annual Meeting of Shareholders (the "Proxy Statement"). The information concerning the Company's executive officers required by Item 10 is incorporated by reference to Item 4A in Part 1 hereof entitled "Executive Officers of Registrant." With the exception of the information specifically stated as being incorporated by reference from the Company's Proxy Statement in Part III of this Annual Report on Form 10-K, the Company's Proxy Statement is not to be deemed as filed as part of this report. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the Company's fiscal year end. ITEM 11. EXECUTIVE COMPENSATION The information required by Item 11 is incorporated herein by reference to the sections entitled "Executive Compensation" and "Proposal No. 1 - Election of Directors--Compensation of Directors" of the Proxy Statement. With the exception of the information specifically stated as being incorporated by reference from the Company's Proxy Statement in Part III of this Annual Report on Form 10-K, the Company's Proxy Statement is not to be deemed as filed as part of this report. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the Company's fiscal year end. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Item 12 is incorporated herein by reference to the section entitled "Security Ownership of Certain Beneficial Owners and Management" of the Proxy Statement. With the exception of the information specifically stated as being incorporated by reference from the Company's Proxy Statement in Part III of this Annual Report on Form 10-K, the Company's Proxy Statement is not to be deemed as filed as part of this report. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the Company's fiscal year end. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Item 13 is incorporated herein by reference to the section entitled "Certain Transactions" of the Proxy Statement. With the exception of the information specifically stated as being incorporated by reference from the Company's Proxy Statement in Part III of this Annual Report on Form 10-K, the Company's Proxy Statement is not to be deemed as filed as part of this report. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the Company's fiscal year end. -24- PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) (1) FINANCIAL STATEMENTS. The Company's financial statements filed herewith are as follows:
Page ---- Report of Ernst & Young LLP, Independent Auditors 31 Consolidated Balance Sheets at September 30, 1998 and 1997 32 Consolidated Statements of Operations for the Years Ended September 30, 1998, 1997 and 1996 33 Consolidated Statements of Convertible Preferred Stock and Shareholders' Equity for the Years Ended September 30, 1998, 1997, and 1996 34 Consolidated Statements of Cash Flows for the Years Ended September 30, 1998, 1997, and 1996 35 Notes to Consolidated Financial Statements 36 (a) (2) FINANCIAL STATEMENT SCHEDULES. The Company's financial statement schedule filed herewith is as follows: Page ---- Schedule II: Valuation and Qualifying Accounts 52
All other financial statement schedules are omitted because the information called for is not present in amounts sufficient to require submission of the schedules or because the information required is shown either in the financial statements or the notes thereto. (a) (3) The following exhibits are filed herewith or incorporated by reference herein:
EXHIBIT NUMBER EXHIBIT TITLE - ------ ------------- 2.01 -- Agreement and Plan of Reorganization dated May 20, 1994 between Radius Inc. and SuperMac Technology, Inc. (1) 2.02 -- Modification Agreement dated July 21, 1994 to Agreement and Plan of Reorganization between Radius Inc. and SuperMac Technology, Inc. (1) 2.07 -- Merger Agreement (the "Merger Agreement") dated as of December 21, 1995 among Radius Inc., Splash Technology, Inc., Summit Subordinated Debt Fund, L.P., Summit Ventures IV, L.P., Summit Investors II, L.P., Splash Technology Holdings, Inc. and Splash Merger Company, Inc. (4) 2.08 -- Amendment No. 1 to Merger Agreement dated as of January 30, 1996. (4)
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EXHIBIT NUMBER EXHIBIT TITLE - ------ ------------- 3.01 A Registrant's Sixth Amended and Restated Articles of Incorporation. (5) B Certificate of Amendment of Registrant's Sixth Amended and Restated Articles of Incorporation. (3) C Certificate of Amendment of Registrant's Sixth Amended and Restated Articles of Incorporation. (17) D Certificate of Determination of Preferences of Series A Convertible Preferred Stock of Radius Inc. (17) 3.02 -- Registrant's Bylaws. (6) 4.01 -- Specimen Certificate for shares of Common Stock of the Registrant. (7) 4.03 A Warrant dated September 13, 1995 between IBM Credit Corporation and the Registrant. (17) B Warrant dated October 13, 1996, between Mitsubishi Electronics America, Inc. and the Registrant. (18) 4.04 -- Form of Registration Rights Agreement between the Registrant and certain shareholders. (17) A The Registrant's Sixth Amended and Restated Articles of Incorporation. (5) B Certificate of Amendment of Registrant's Sixth Amended and Restated Articles of Incorporation. (3) C Certificate of Amendment of Registrant's Sixth Amended and Restated Articles of Incorporation. (See exhibit 3.01) D Certificate of Determination of Preferences of Series A Convertible Preferred Stock of Radius Inc. (See exhibit 3.01). 4.05 -- The Registrant's Bylaws. (6) 4.06 -- *Non-Plan Stock Option Grant to Charles W. Berger. (8) 10.01 A *Registrant's 401(k) Savings and Investment Plan. (9) B *Amendment to Registrant's 401(k) Savings and Investment Plan. (3) C *Registrant's 401(k) Savings and Investment Plan Loan Policy. (3) 10.02 -- *Registrant's 1995 Stock Option Plan. (3) 10.03 -- *Form of Stock Option Agreement and Exercise Request as currently in effect under 1995 Stock Option Plan. (3) 10.04 -- *Registrant's 1990 Employee Stock Purchase Plan and related documents. (10) 10.05 -- *Registrant's 1994 Directors' Stock Option Plan. (3) 10.06 -- Form of Indemnity Agreement with Directors. (7)
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EXHIBIT NUMBER EXHIBIT TITLE - ------ ------------- 10.08 A Credit Agreement by and among Radius Inc., the certain financial institutions, and International Business Machines Credit Corporation, dated February 17, 1995. (11) B Acknowledgment, Waiver and Amendment to Radius Inc. Inventory and Working Capital Financing Agreement by and between Radius Inc. and International Business Machines Credit Corporation dated December 14, 1995. (3) C Amended and Restated Working Capital and Term Loan Agreement dated as of August 30, 1996 between IBM Credit Corporation and the Registrant. (18) D Amended and Restated Working Capital and Term Loan Agreement dated as of May 12, 1997 between IBM Credit Corporation and the Registrant. (19) E Amended and Restated Working Capital and Term Loan Agreement dated as of November 10, 1997 between IBM Credit Corporation and the Registrant. (24) F Amended and Restated Working Capital and Term Loan Agreement dated as of January 8, 1998 between IBM Credit Corporation and the Registrant. (21) G Amended and Restated Working Capital and Term Loan Agreement dated as of April 16, 1998 between IBM Credit Corporation and the Registrant. (22) 10.09 A Lease Agreement by and between Registrant and the Equitable Life Assurance Society of the United States dated June 22, 1988, as amended by the Commencement of Term Agreement dated February 13, 1989 and Amendment No. One dated July 20, 1989, and related documents (1710 Fortune Drive, San Jose, California offices). (7) B Second Amendment to Lease dated January 27, 1993 amending Lease Agreement by and between Registrant and the Fortune Drive Partners (successor in interest to the Equitable Life Assurance Society of the United States) dated June 22, 1988 (1710 Fortune Drive, San Jose, California offices). (12) 10.13 -- *SuperMac Technology, Inc.'s 1988 Stock Option Plan ("Option Plan"). (15) 10.14 -- *SuperMac Technology, Inc.'s Form of Incentive Stock Option Agreement under the Option Plan. (15) 10.15 -- *SuperMac Technology, Inc.'s Form of Supplemental Stock Option Agreement under the Option Plan. (15) 10.16 -- *SuperMac Technology, Inc.'s Form of Early Exercise Stock Purchase Agreement under the Option Plan. (15) 10.17 -- Distribution Agreement between Radius Inc. and Ingram Micro, Inc. dated June 5, 1991 as amended on April 1, 1992, May 31, 1995 and July 14, 1995. (16) 10.18 -- *Employment Agreement by and between Registrant and Mark Housley dated December 20, 1996. (20) 10.19 Asset Purchase Agreement dated as of August 7, 1998 between Korea Data Systems America, Inc. and the Registrant. (23) 10.20 -- Amended and Restated License Agreement dated as of August 7, 1998 between Korea Data Systems America, Inc. and the Registrant. (23)
-27-
EXHIBIT NUMBER EXHIBIT TITLE - ------ ------------- 10.21 -- Credit Agreement by and among Radius Inc., the certain financial institutions, and Silicon Valley Bank, dated August 28, 1998. 10.22 -- Asset Purchase Agreement dated as of November 23, 1998 between Post Digital Software, Inc. and the Registrant. 10.23 -- Asset Sale Agreement dated as of December 4, 1998 between Splash Technology Holdings, Inc. and the Registrant. 10.24 -- Supplement to the License and Asset Purchase Agreement dated December 4, 1998 between Korea Data Systems America, Inc. and the Registrant. 21.01 -- List of Registrant's subsidiaries. 23.01 -- Consent of Ernst & Young LLP, Independent Auditors. 27.01 -- Financial Data Schedule (EDGAR version only)
- --------------- (1) Incorporated by reference to exhibits to the Company's Amendment No. 2 (File No. 33-79732) to Form S-4 filed on July 25, 1994. (4) Incorporated by reference to exhibits to the Company's Report on Form 10-Q filed on February 13, 1996 (5) Incorporated by reference to exhibits to the Company's Report on Form 10-K filed on December 24, 1990. (6) Incorporated by reference to exhibits to the Company's Registration Statement on Form S-8 filed on April 29, 1992 (File No. 33-47525). (7) Incorporated by reference to exhibits to the Company's Registration Statement on Form S-1 (File No. 33-35769) which became effective on August 16, 1990. (8) Incorporated by reference to exhibits to the Company's Registration Statement on Form S-8 filed on November 15, 1993 (File No. 33-71636). (9) Incorporated by reference to exhibits to the Company's Report on Form 10-K filed on December 28, 1992. (10) Incorporated by reference to exhibits to the Company's Report on Form 10-K filed on December 30, 1991. (11) Incorporated by reference to exhibits to the Company's Report on Form 10-Q filed on May 10, 1995. (12) Incorporated by reference to exhibits to the Company's Report on Form 10-Q filed on August 18, 1993. (13) Incorporated by reference to exhibits to the Company's Report on Form 10-Q filed on August 12, 1992. (15) Incorporated by reference to exhibits to SuperMac Technology, Inc.'s Registration Statement on Form S-1, as amended (File No. 33-46800), which became effective on May 15, 1992. (16) Incorporated by reference to exhibits to the Company's Report on Form 10-Q filed on August 15, 1995. -28- (17) Incorporated by reference to the Company's Registration Statement on Form S-1 (File No. 333-12417) filed on September 20, 1996. (18) Incorporated by reference to Amendment No. 1 to the Company's Registration Statement on Form S-1 (File No. 333-12417) filed on November 12, 1996. (19) Incorporated by reference to exhibits to the Company's Report on Form 10-Q filed on August 12, 1997. (20) Incorporated by reference to exhibits to the Company's Report on Form 10-Q filed on February 11, 1997. (21) Incorporated by reference to exhibits to the Company's Report on Form 10-Q filed on February 10, 1998. (22) Incorporated by reference to exhibits to the Company's Report on Form 10-Q filed on May 12, 1998. (23) Incorporated by reference to exhibits to the Company's Report on Form 10-Q filed on August 11, 1998. (24) Incorporated by reference to exhibits to the Company's Report on Form 10-K filed on January 9, 1998. * management contracts or compensatory plans required to be filed as an exhibit to Form 10-K. - ---------------- (b) REPORTS ON FORM 8-K. No report on Form 8-K was filed during the last quarter of fiscal 1998. (c) EXHIBITS - See (a) (3) above. FINANCIAL STATEMENT SCHEDULES - See (a) (2) above. -29- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. RADIUS INC. By: /s/ Mark Housley ------------------------------- Mark Housley Chairman of the Board of Directors, Chief Executive Officer and President POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints Mark Housley and Henry V. Morgan, jointly and severally, his true and attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign amendments to this Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorneys-in-fact, or his or her substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
NAME TITLE DATES - ---- ----- ----- PRINCIPAL EXECUTIVE OFFICER: /s/ Mark Housley Chairman of the Board of Directors, December 23, 1998 - ------------------------------------------ Chief Executive Officer and President Mark Housley PRINCIPAL FINANCIAL OFFICER AND CHIEF ACCOUNTING OFFICER: /s/ Edwin Silliman Interim Chief Financial Officer December 23, 1998 - ------------------------------------------ Edwin Silliman DIRECTORS: /s/ Michael D. Boich Director December 23, 1998 - ------------------------------------------ Michael D. Boich /s/ Charles W. Berger Director December 23, 1998 - ------------------------------------------ Charles W. Berger /s/ Henry V. Morgan Director, Secretary December 23, 1998 - ------------------------------------------ Henry V. Morgan /s/ John C. Kirby Director December 23, 1998 - ------------------------------------------ John C, Kirby
-30- 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. /s/ ERNST & YOUNG LLP San Jose, California October 30, 1998 -31- CONSOLIDATED BALANCE SHEETS
September 30 (in thousands) 1998 1997 ---- ---- 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 -------- --------- -------- --------- See accompanying notes.
-32- CONSOLIDATED STATEMENTS OF OPERATIONS
For years ended September 30 (in thousands, except per share data) 1998 1997 1996 ---- ---- ---- 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 --------- -------- --------- --------- -------- ---------
See accompanying notes. -33- 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 ---------- ------------------------------------------------------ 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) --------- ---------------------------------------------------- --------- ----------------------------------------------------
See accompanying notes. -34- CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS For years ended September 30 (in thousands) 1998 1997 1996 ---- ---- ---- 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 --------- ----------- --------- --------- ----------- ---------
See accompanying notes. -35- 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 believes 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 -36- 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):
September 30, ------------------------------ 1998 1997 ---- ---- Raw materials $ 20 $ - Work in process 238 176 Finished goods 545 629 -------- --------- $ 803 $ 805 -------- --------- -------- ---------
PROPERTY AND EQUIPMENT Property and equipment is stated at cost and consists of the following (in thousands):
September 30, ---------------------------- 1998 1997 ---- ---- 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 -------- --------- -------- ---------
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. -37- 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. -38- 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 $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. -39- 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):
Gross Net Operating Sublease Operating Leases Income Leases ------ ------ ------ 1999 $352 $155 $197 ----- ----- ------- Total minimum lease payments $352 $197 ----- -------- ----- -------- Total sublease income $155 ----- -----
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 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. -40- (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. 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 -41- 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. -42- The following table summarizes the consolidated activity under all of the Company's plans:
Weighted Shares Under Average Option Exercise Price Exercise Price ------------ -------------- -------------- 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 $ 23.70 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 ------------- -------------
The following table summarizes information concerning outstanding and exercisable options at September 30, 1998:
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 ---------------- ------------- ------------ ------------- ----------- ---------- $ 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 ------------- ----------- ------------- -----------
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 -43- date of grant using a Black-Scholes option pricing model with the following 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):
Year ended September 30, 1998 ------------------ 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 ----- -----
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. -44- NOTE FIVE. FEDERAL AND STATE INCOME TAXES The provision (benefit) for income taxes consists of the following:
Year ended September 30, ----------------------------------- 1998 1997 1996 ---- ---- ---- (in thousands) Federal: Current $ - $ 50 $ - Foreign: Current (1,000) 251 765 State: Current - 15 50 -------- --------- -------- $ (1,000) $ 316 $ 815 --------- --------- -------- --------- --------- --------
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:
September 30, --------------------------- 1998 1997 ---- ---- (in thousands) 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 $ - $ - --------- --------- --------- ---------
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. -45- 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:
Year ended September 30, ----------------------------------------- 1998 1997 1996 ---- ---- ---- (in thousands) 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 ---------- --------- ---------- ---------- --------- ----------
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
Year ended September 30, ----------------------------------------- 1998 1997 1996 ---- ---- ---- (in thousands) 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 --------- --------- ---------- --------- --------- ----------
-46- 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. -47- 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. 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 -48- 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. -49- 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:
1998 1997 1996 -------- -------- --------- (in thousands, except per-share amounts) 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) -------- -------- --------- -------- -------- ---------
(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. -50- NOTE FOURTEEN. SUBSEQUENT EVENTS (UNAUDITED) TECHOLOGY 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. -51- SCHEDULE II --- VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
Balance at Charged to Charged Balance beginning costs and to other at end of Description of period expenses accounts Deductions(1) period ----------- --------- -------- -------- ------------- ---------- ALLOWANCE FOR DOUBTFUL ACCOUNTS: Year ended September 30, 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
- ----------------------------- (1) Uncollectible accounts written off. -52- EX-10.21 2 EX-10.21 EXHIBIT 10.21 SILICON VALLEY BANK 3003 Tasman Drive Santa Clara, CA 95054 (408) 654-1000 - Fax (408) 980-6410 This NOTE PURCHASE AGREEMENT (the "Agreement"), dated as of August 28, 1998, is between SILICON VALLEY BANK ("Buyer") and RADIUS INC., a California Corporation ("Seller"), with its chief executive office at: Street Address: 460 Middlefield Road City: Mountain View County: Santa Clara State: California Zip Code: 94303 Phone: 650/404-6000
1. DEFINITIONS. In this Agreement: 1.1 "Adjustments" is the meaning set forth in Section 7 hereof. 1.2 "Administrative Fee" is the meaning set forth in Section 2.4 hereof. 1.3 "Interest" is the meaning set forth in Section 2.3 hereof. 1.4 "Purchased Note" is that Promissory Note between Radius Inc., a California Corporation, and Korean Data Services, Inc., a California Corporation, dated August 7, 1998 in the amount of $5,200,000.00 in United States Currency. "Purchased Note" also includes books and records about the Purchased Note and proceeds from voluntary or involuntary dispositions, including insurance proceeds. 1.5 "Reconciliation Period" is each calendar month of every year. 1.6 "Reserve" is the meaning set forth in Section 2.6 hereof. 1.7 "Related Property" is all returned or rejected goods connected with the Purchased Note or books and records about the returned or rejected goods; or proceeds from voluntary or involuntary dispositions of the returned or rejected goods, including insurance proceeds. 1.8 "Schedule" is the attached schedule showing the: Purchase Date, Schedule of Due Dates, Face Amount of Note, Total Purchased Note and Advance Amount. 2. PURCHASE AND SALE OF NOTE. 2.1 Sale and Purchase. On the Purchase Date, Seller sells and Buyer buys Seller's right, title, and interest (but none of Sellers obligations) to payment on the Purchased Note, (the "Note Debtor"). 2.2 Payment of Advance Amount. Buyer will pay Seller, on the Purchase Date, $1,100,000 (the "Advance Amount"). 2.3 Payment of Interest. On each Reconciliation Date Seller will pay Buyer interest at the rate of 1.25(%) percent per month of 125% the average daily outstanding balance of the Advance Amount during the applicable Reconciliation Period (the "Interest"). Buyer will deduct the accrued Interest from the Reserve as set forth in Section 2.6 below. 2.4 Payment of Administrative Fee. On the Reconciliation Date Seller shall pay to Buyer an Administrative Fee equal to .50(%) percent of 125% the original amount of the Advance Amount (the "Administrative Fee"). 2.5 In the event that the Advance Amount is less than One Million Dollars and No/100**** ($1,000,000.00) by September 30, 1998, the interest rate defined in Section 2.3 above will be 1.75(%) per month. 2.6 Establishment of a Reserve. Upon the purchase by Buyer of the Purchased Note, Buyer shall establish a reserve. The reserve shall be the amount by which the face amount of the Purchased Note exceeds the Advance Amount on that Total Purchased Note (the "Reserve"); provided, the Reserve with respect to that Total Purchased Note outstanding at any one time shall be an amount not less than 20(%) percent of the Total Purchased Note at the time and may be set at a higher percentage at Buyer's discretion. The reserve shall be the book balance maintained on the records of Buyer and shall not be a segregated fund. 3. COLLECTION, PAYMENTS AND REMITTANCES. 3.1 Application of Payments. All Payments for the Purchased Note, not exceeding the Total Purchased Note plus any unpaid fees and interest (if any), received by Seller or Buyer, are Buyers property. 3.2 No Obligation to Take Action. Buyer has a right, but no obligation, to perform Seller's obligations. 3.3 Application of Payments. All payments in respect of the Purchased Note, whether received from the Note Debtor or any other source and whether received by Seller or Buyer, shall first be applied for the account of Buyer until Buyer has received full and final payment in an amount equal to the Advance Amount plus interest, administrative fees, expenses and indemnity amounts payable to Buyer hereunder, with the remaining balance, if any, payable to Seller. 4. REPURCHASE OBLIGATIONS. 4.1 Seller's Agreement to Repurchase. Seller will, at Buyer's option, repurchase from Buyer the Purchased Note for a purchase price equal to the unpaid principal of the Purchase Note if: (a) There has been any breach of warranty, representation or covenant in this Agreement; or (b) The Note Debtor asserts any discount, allowance, return, dispute, defense, right of recoupement, right of return, warranty claim, or short payment; or (c) The Purchased Note remains unpaid after October 1, 1999. 5. POWER OF ATTORNEY. Seller does hereby irrevocably appoint Buyer and its successors and assigns as Seller's true and lawful attorney in fact, and hereby authorizes Buyer, regardless of whether there has been an Event of Default, (a) to sell, assign, transfer, pledge, compromise, or discharge the whole or any part of the Purchased Note; (b) to demand, collect, receive, sue, and give releases to the Note Debtor for those monies due or which may become due upon or with respect to the Purchased Note and to compromise, prosecute, or defend an action, claim, case or proceeding relating to the Purchased Note, including filing a claim or voting of such claims in any bankruptcy case, all in Buyer's name or Seller's name, as Buyer may choose; (c) to prepare, file and sign Seller's name on any notice, claim, assignment, demand, draft, or notice of or satisfaction of lien or mechanics' lien or similar document with respect to Purchased Note; (d) to notify the Note Debtor with respect to the Purchased Note to pay Buyer directly; (e) to receive, open, and dispose of all mail addressed to Seller for the purpose of collecting the Purchased Note; (g) to execute on behalf of Seller any and all instruments, documents, financing statements and the like to perfect Buyer's interest in the Purchased Note and Collateral; and (h) to do all acts and things necessary or expedient, in furtherance of any such purposes. If Buyer receives a check or item which is payment for both the Purchased Note and another receivable, the funds shall first be applied to the Purchased Note and, so long as there does not exist an Event of Default or an event that notice, lapse of time or otherwise would constitute an Event of Default, the excess shall be remitted to Seller. Upon the occurrence and continuation of an Event of Default, all of the power of attorney rights granted by Seller to Buyer hereunder shall be applicable with respect to the Purchased Note and all Collateral. 6. REPRESENTATIONS, WARRANTIES AND COVENANTS. 6.1 Purchased Note--Warranties, Representations and Covenants. Seller represents, warrants and covenants for the Purchased Receivable: (a) It is the owner with legal right to sell, transfer and assign it; (b) The correct amount is shown in Section 1.4 and is not disputed; (c) Payment is not contingent on any obligations or contact, and it has fulfilled all its obligations as of the Purchase Date; (d) There are no defenses, offsets, counterclaims or agreements in which the Note Debtor may claim any deduction or discount; (e) It reasonably believes the Note Debtor is not insolvent as defined in the United States Bankruptcy Code ("US Code") or the California Uniform Commercial Code ("UCC") and the Note Debtor has not filed or had filed against it a voluntary or involuntary petition for relief under the US Code; and (f) The Note Debtor has not objected to payment for or the quality or quantity of the subject of the Purchased Note. 6.2 Additional Warranties, Representation and Covenants. Seller represents, warrants and covenants: (a) Its name, form of organization, chief executive office and the place where the records about the Purchased Note are kept is shown at the beginning of this Agreement and it will give Buyer at least 10 days prior written notice of changes to its name, organization, chief executive office or location of records. (b) It has not filed a voluntary petition or had filed against it an involuntary petition under the US Code and does not anticipate any filing. 7. ADJUSTMENTS. If the Note Debtor asserts a discount, allowance, return, offset, defense, warranty claim, or the like (an "Adjustment"), Seller will promptly advise Buyer and, with Buyer's approval, resolve the dispute. 8. INDEMNIFICATION. (a) If the Note Debtor is released from the payment obligation for the Purchased Note because of: (i) Seller's act or omission; or (ii) any of the documentation about the Purchased Note which results in termination of any of the Note Debtor's obligation for the Purchased Note, then Seller will pay Buyer the lesser of the Purchased Note not payable or the unpaid portion of the Purchased Note. (b) Seller indemnifies and holds Buyer harmless from any taxes from this transaction (except Buyer's income taxes) and costs, expenses and reasonable attorney fees if Buyer promptly notifies it if any taxes of which Buyer has notice. 9. REPURCHASE EVENTS. Any of the following is an Event of Repurchase: (a) Seller fails to pay Buyer any amount when due; (b) An involuntary lien, garnishment, attachment or the like is issued against or attaches to the Purchased Note or Related Property; and (c) Seller breaches a covenant, agreement, warranty, or representation in this Agreement and the breach is not cured to Buyer's satisfaction within 10 days after Buyer gives Seller oral or written notice. A breach that cannot be cured is an immediate default; and (d) The Note Debtor fails to pay any amount under the Purchased Note when due. 10. REPURCHASE OPTION. When an Event of Repurchase occurs Buyer shall have a right to require Seller to repurchase all of the affected Purchased Note for a purchase price equal to the amount specified in Section 4.1. Buyer shall also have all rights and remedies under this Agreement and the law, including those of a secured party under the UCC, and the right to collect, dispose of, sell, lease or use all Purchased Note and Related Property. 11. FEES, COSTS AND EXPENSES. Immediately on demand Seller will pay all reasonable fees, costs and expenses (including attorney and professional fees) that Buyer incurs from (a) preparing, negotiating, administering and enforcing this Agreement or any other agreement, including amendments, waiver or consents, (b) litigation or disputes relating to the Purchased Note, the Related Property, this Agreement or any other agreement, (c) enforcing rights against Seller, (d) protecting or enforcing its title to the Purchased Note or its security interest in the Related Property, (e) collecting any amounts due from Seller or for a Purchased Note under a breach of Seller's representation, warranty or covenant and (f) any bankruptcy case or insolvency proceeding involving Seller. 12. CHOICE OF LAW, VENUE AND JURY WAIVER. California law governs this Agreement. Seller and Buyer each submit to the exclusive jurisdiction of the State and Federal courts in Santa Clara County, California. SELLER AND BUYER EACH WAIVE ITS RIGHT TO A JURY TRIAL FROM ANY CAUSE OF ACTION RELATED TO AGREEMENT, INCLUDING CONTRACT, TORT, BREACH OF DUTY OR OTHER CLAIM. THIS WAIVER IS A MATERIAL INDUCEMENT FOR BOTH PARTIES TO ENTER THIS AGREEMENT. EACH PARTY HAS REVIEWED THIS WAIVER WITH ITS COUNSEL. 13. NOTICES. Notices or demands by either party about this Agreement must be in writing and personally delivered or sent by an overnight delivery service, by certified mail postage prepaid return receipt requested, or by FAX to the address below: Seller: Radius, Inc. 460 Middlefield Road Mountain View, CA 94303 Attn: Chief Financial Officer FAX: (650) 404-6205 Buyer: Silicon Valley Financial Services/Silicon Valley Bank 3003 Tasman Drive/NC481 Santa Clara, CA 95054 Attn: Credit Manager FAX: (408) 980-6410 A party may change notice address by written notice to the other party. 14. GENERAL PROVISIONS. 14.1 Successors and Assigns. This Agreement binds and is for the benefit of successors and permitted assigns of each party. Seller may not assign this Agreement or any rights under it without Buyer's prior written consent which may be granted or withheld in Buyers discretion. Buyer may, without the consent of or notice to Seller, sell, transfer, or grant participation in any part of Buyer's obligations, rights, or benefits under this Agreement. 14.2 Indemnification. Seller will indemnify, defend and hold harmless Buyer and its officers, employees, and agents against: (a) obligations, demands, claims, and liabilities asserted by any other party in connection with the transaction contemplated by this Agreement; and (b) losses or expenses incurred, or paid by Borrower from or consequential to transactions between Buyer and Seller (including reasonable attorneys fees and expenses), except for losses caused by Buyer's gross negligence or willful misconduct. 14.3 Time of Essence. Time is of the essence for performance of all obligations in this Agreement. 14.4 Severability of Provision. Each provision of this Agreement is severable from every other provision in determining the enforceability of any provision. 14.5 Amendments in Writing, Integration. All amendments to this Agreement must be in writing. This Agreement is the entire agreement about this subject matter and supersedes prior negotiations or agreements. 14.6 Counter Parts. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts and when executed and delivered are one Agreement. 14.7 Survival. All covenants, representations and warranties made in this Agreement continue in full force while any Purchased Note amount remains outstanding. Seller's indemnification obligations survive until all statutes of limitations for actions that may be brought against Buyer have run. 14.8 Confidential Information. Buyer will use the same degree of care in handling Seller's confidential information that is used for its own proprietary information, but may disclose information; (i) to its subsidiaries or affiliates in connection with their business with Seller, (ii) to prospective transferees or purchasers of any interest in the Agreement, (iii) as required by law, regulation, subpoena, or other order, (iv) as required in connection with an examination or audit and (v) as it considers appropriate exercising the remedies under this Agreement. Confidential information does not include information that is either: (a) in the public domain or in Buyer's possession when disclosed, or becomes part of the public domain after disclosure to Buyer; or (b) disclosed to Buyer by a third party, if Buyer does not know that the third party, is prohibited from disclosing the information. SELLER: RADIUS INC. A CALIFORNIA CORPORATION By /s/ [illegible] --------------------------------------- Title CFO --------------------------------------- BUYER: SILICON VALLEY BANK By /s/ [illegible] --------------------------------------- Title VICE PRESIDENT --------------------------------------- SCHEDULE DATED AUGUST 28, 1998 TO NOTE PURCHASE AGREEMENT DATED AS OF AUGUST 28, 1998 SELLER: Radius Inc. BUYER: Silicon Valley Bank PURCHASE DATE: August 28, 1998 SCHEDULE OF DUE DATES: See attached Schedule of Due Dates FACE AMOUNT OF NOTE: $5,200,000.00 ***USD TOTAL PURCHASED NOTE: $5,200,000.00 ***USD ADVANCE AMOUNT: $1,100,000 ***USD Seller warrants and represents that (a) its warranties and representation in the Agreement are true and correct as of the date of this Schedule and (b) no Event of Default has occurred under the Agreement. SELLER: RADIUS INC. A CALIFORNIA CORPORATION By /s/ [illegible] --------------------------------------- Title CFO --------------------------------------- BUYER: SILICON VALLEY BANK By /s/ [illegible] --------------------------------------- Title VICE PRESIDENT --------------------------------------- CORPORATE RESOLUTION TO SELL I, the Secretary or Assistant Secretary of Radius, Inc. (the "Seller"), certify that: The Seller is a California corporation, and Attachments 1 and 2 are copies of Seller's Articles of Incorporation and Bylaws which are currently effective, and At a duly held meeting of Seller's directors at which a quorum was present (or by other authorized corporate action) the following resolutions were adopted: "RESOLVED THAT any ( ) of the following officers of Seller, whose signatures are below:
Name Title Signature Mark Housley CEO ----------------------- ------------------ ----------------------- Henry V. Morgan CFO /s/ Henry V. Morgan ----------------------- ------------------ ----------------------- ----------------------- ------------------ ----------------------- ----------------------- ------------------ -----------------------
acting for Seller are authorized to: EXECUTE PURCHASE AGREEMENT. To enter a Note Purchase Agreement with Silicon Valley Bank ("Buyer") on terms agreed by them and Buyer for the sale of certain Seller's notes and to execute renewals, extensions, modifications, refinancings, consolidations or substitutions of any notes and to do other acts and things and execute and deliver other documents that they consider necessary to carry out the effect of these Resolutions. FURTHER RESOLVED THAT: any acts authorized by these Resolutions but performed before their passage are ratified, and these Resolutions remain effective and Buyer may rely on them until it receives written notice of their revocation, but that notice will not affect any of Seller's agreements or commitments then effective." I ALSO CERTIFY that the officers or agents above are duly elected or appointed by Seller and hold the positions opposite their names and that their signatures are true and that the Resolutions are effective and have not been modified or revoked. /s/ Henry V. Morgan August 28, 1998 - -------------------------------------------- -------------------- (signature) Assistant Secretary or Secretary Date SCHEDULE OF DUE DATES TO NOTE PURCHASE AGREEMENT DATED AS OF AUGUST 20, 1998
DUE DATE AMOUNT DUE August 7, 1998 $350,000.00 September 1, 1998 $350,000.00 October 1, 1999 $350,000.00 November 1, 1999 $350,000.00 December 1, 1999 $350,000.00 January 1, 1999 $350,000.00 February 1, 1999 $350,000.00 March 1, 1999 $350,000.00 April 1, 1999 $350,000.00 May 1, 1999 $350,000.00 June 1, 1999 $350,000.00 July 1, 1999 $350,000.00 August 1, 1999 $350,000.00 September 1, 1999 $350,000.00 October 1, 1999 $300,000.00 TOTAL PURCHASED NOTE $5,200,000.00
NOTE PURCHASE MODIFICATION AGREEMENT This Note Purchase Modification Agreement is entered into as of September 23, 1998, by and between Radius, Inc., (the "Seller") whose address 460 Middlefield Road, Mountain View, California 94303 and Silicon Valley Financial Services, a division of Silicon Valley Bank ("Buyer"), whose address is 3003 Tasman Drive, Santa Clara, CA 95054. 1. DESCRIPTION OF EXISTING INDEBTEDNESS: Among other indebtedness which may be owing by Seller to Buyer, Seller is indebted to Buyer pursuant to, among other documents, a Note Purchase Agreement, dated August 28, 1998 by and between Seller and Buyer (the "Note Purchase Agreement"). Capitalized terms used without definition herein shall have the meanings assigned to them in the Note Purchase Agreement. Hereinafter, all indebtedness owing by Seller to Buyer shall be referred to as the "indebtedness" and the Note Purchase Agreement and any and all other documents executed by Seller in favor of Buyer shall be referred to as the "Existing Documents." 2. DESCRIPTION OF CHANGE IN TERMS. A. MODIFICATION(S) TO NOTE PURCHASE AGREEMENT, EFFECTIVE AS OF THE DATE FIRST WRITTEN ABOVE: Section 2.2 of the Note Purchase Agreement is amended and restated to read in full as follows: "2.2 Payment of Advance Amount. Buyer will pay Seller, on the Purchase Date, the amount of One Million One Hundred Thousand and No/100*****$1,100,000.00 (the "Initial Advance"). Upon payment by Buyer to Seller of the Initial Advance, Buyer and Seller shall execute a Schedule to this Agreement evidencing the receipt by Seller of the Initial Advance. At one or more times after the Purchase Date, Buyer shall, upon the request of Seller, advance additional sums to Seller aggregating not more than Three Million Sixty Thousand and No/100*****($3,060,000.00), (the "Additional Advances"; the Additional Advances and the Initial Advance are collectively called the "Advance Amount"). Upon payment by Buyer to Seller of each Additional Advance, Buyer and Seller shall execute a Schedule to this Agreement evidencing the receipt by Seller of such Additional Advance." 3. CONSISTENT CHANGES. The Existing Documents are each hereby amended wherever necessary to reflect the changes described above. 4. NO DEFENSES OF SELLER. Seller agrees that, as of this date, it has no defenses against the obligations to pay any amounts under the Indebtedness. 5. CONTINUING VALIDITY. Seller understands and agrees that in modifying the existing Indebtedness, Buyer is relying upon Seller's representations, warranties, and agreements, as set forth in the Existing Documents. Except as expressly modified pursuant to this Note Purchase Modification Agreement, the terms of the Existing Documents remain unchanged and in full force and effect. Buyer's agreement to modifications to the existing Indebtedness pursuant to this Note Purchase Modification Agreement in no way shall obligate Buyer to make any future modifications to the Indebtedness. Nothing in this Note Purchase Modification Agreement shall constitute a satisfaction of the Indebtedness. It is the intention of Buyer and Seller to retain as liable parties all makers and endorsers of Existing Documents, unless the party is expressly released by Buyer in writing. No maker, endorser, or guarantor will be released by virtue of this 1 Note Purchase Modification Agreement. The terms of this paragraph apply not only to this Note Purchase Modification Agreement, but also to any subsequent Note Purchase modification agreements. This Note Purchase Modification Agreement is executed as of the date first written above. SELLER: BUYER: Radius, Inc. Silicon Valley Financial Services, a division of Silicon Valley Bank By: /s/ Henry V. Morgan By: /s/ [illegible] --------------------------- ------------------------------ Name: Henry V. Morgan Name: [illegible] --------------------------- ------------------------------ Title: Secretary Title: Vice President --------------------------- ------------------------------ 2 EX-10.22 3 EX-10.22 EXHIBIT 10.22 INTANGIBLE ASSET PURCHASE AGREEMENT This Intangible Asset Purchase Agreement (this "AGREEMENT") dated November 23, 1998 (the "EFFECTIVE DATE") is made between Post Digital Software, Inc. ("SELLER"), a California corporation doing business at 1119 Pacific Ave., Suite 300, Santa Cruz, CA 95060, and Radius Inc., a California corporation doing business at 460 East Middlefield Road, Mountain View, CA 94043, and Radius (Cayman Islands) Ltd., Radius Inc.'s wholly owned subsidiary, (collectively "BUYER"). Seller is engaged in the business of designing, developing, assembling, marketing and selling the "SOFTWARE" identified on EXHIBIT A. Buyer owns other software and products which are complementary to the Software and wants to acquire the Software and all related intellectual property from Seller. The parties, therefore, agree as follows: 1. DEFINITIONS. For purposes of this Agreement, the following terms have the following meanings: 1.1 "CLOSING" means the day upon which the conditions to concluding this Agreement are met and the parties exchange the deliveries specified in Section 2 below. 1.2 "CONTRACTS" means those agreements between Seller and third parties assumed by Buyer as of the Closing and which are listed on EXHIBIT C, if any. 1.3 "DISCLOSURE SCHEDULE" means EXHIBIT B to this Agreement. 1.4 "INTANGIBLE ASSETS" means all right, title and interest in and to the Software, the other intangible assets identified on EXHIBIT C to this Agreement and all Intellectual Property Rights therein. The Intangible Assets do not include the Third Party Intangibles (defined below). 1.5 "INTELLECTUAL PROPERTY RIGHTS" means any and all patents, patents pending and other patent rights, copyright rights (including but not limited to rights in audiovisual works), Moral Rights, trade secret rights, trade and service marks, the right to bring any claim related thereto and the right to receive income or payments therefrom and any other intellectual property rights recognized by the law of any jurisdiction. 1.6 "MORAL RIGHTS" means any right to claim authorship of a work, any right to object to any distortion or other modification of a work, and any similar right, existing under the law of any country in the world, or under any treaty. 1.7 "PURCHASE PRICE" means the purchase price payable to Seller for the Purchased Assets as specified in Section 3.1 below. 1 1.8 "PURCHASED ASSETS" means the Intangible Assets and Seller's rights in the Contracts. 1.9 "SITE" means the street address of Radius Inc. set forth in the introductory paragraph of this Agreement. 1.10 "SOFTWARE" means the computer program in object and source code described on EXHIBIT A, including all predecessor versions, and all related user and developer documentation. 1.11 "THIRD-PARTY INTANGIBLES" means the Intellectual Property Rights of third parties specifically identified on EXHIBIT B to this Agreement. 1.12 "WARRANT" means the security defined by the provisions of EXHIBIT D. 2. PURCHASE AND SALE. 2.1 PURCHASE AND SALE. On the Closing, Seller shall grant, sell, convey, assign, transfer and deliver to Buyer, and Buyer shall purchase and accept from Seller the Purchased Assets, free and clear of all liens, claims, encumbrances, security interests, restrictions and rights of any third parties other than the Third-Party Intangibles. 2.2 TRANSFER OF PURCHASED ASSETS. On or before the Closing, Seller shall, at its expense, tender possession of the Purchased Assets to Buyer at the Site or such other locations and times and by such means as have been agreed by the parties. 2.3 FURTHER ACTION. On and after the Closing, Seller will execute and deliver to Buyer such documents and instruments of transfer and take such further action as may be reasonably requested by Buyer to transfer to Buyer the Purchased Assets and vest or perfect in Buyer good and marketable title in and to the Purchased Assets subject to the terms of this Agreement. Seller hereby waives any Moral Rights with respect to the Software and Intangible Assets. 2.4 NO ASSUMPTION OF LIABILITY. Except to the extent Buyer assumes prospective liability under the Contracts, Buyer has not and will not, by the execution, delivery or performance for this Agreement, or otherwise, assume or otherwise become responsible for any liability or obligation of any nature of Seller, including without limitation: (i) any liability or obligation under contracts of Seller arising prior to the Closing; (ii) any tax liabilities related to the Purchased Assets arising prior to the Closing; (iii) any taxes, wage claims or liabilities for employment-related contributions or liabilities; (iv) any liabilities arising from a failure to properly withhold from employees or a failure to file required tax returns or reports with respect to employees or consultants: and (v) any compensation or benefits to which the Seller's employees are entitled from Seller (collectively referred to as "PRE-CLOSING RISKS"). Seller hereby agrees to indemnify, defend and hold Buyer harmless from and against all 2 loss, liability, claims and expenses (including reasonable attorneys' fees) related to such Pre-Closing Risks; provided that Buyer gives Seller reasonable notice of such claim and reasonably cooperates in the defense and settlement of such claim 3. PURCHASE PRICE AND MANNER OF PAYMENT. 3.1 PURCHASE PRICE. As consideration for the sale of the Purchased Assets, Buyer will pay Seller payments pursuant to EXHIBIT E and deliver the Warrant. 3.2 EXPENSES AND TAXES. Each party will bear its own costs in preparing this Agreement and for taxes in connection with this Agreement and the transactions contemplated hereby, except as set forth below. Seller agrees that it shall be responsible for the timely payment of any applicable sales and use taxes on the transfer of the Purchased Assets and will indemnify Seller from all loss, liability, claim, risk and expense (including reasonable attorneys' fees) occasioned by Buyer's failure to pay such taxes. 4. DUE AUTHORIZATION. As of the Effective Date and as of the Closing: 4.1 BUYER. Buyer hereby represents and warrants to Seller that Buyer has the full right, power, legal capacity and authority to execute and delivery this Agreement and to perform its obligations hereunder, and that no approval and consent of any other person, entity or governmental authority is necessary to such performance hereof, except as shall be validly and timely obtained before such performance is required. 4.2 SELLER. Seller hereby represents and warrants to Buyer that Seller has the full right, power, legal capacity and authority to execute and deliver this Agreement and to perform its obligations hereunder, and no approval or consent of any other person, entity or governmental authority is necessary to such performance thereof, except as shall be validly and timely obtained prior to Closing. 5. REPRESENTATIONS AND WARRANTIES OF SELLER. Seller hereby represents and warrants to Buyer that, except as set forth the Disclosure Schedule attached hereto as EXHIBIT B, the matters set forth in the following subsections of this Section 5 are true and correct as of the Effective Date and the Closing. 5.1 CORPORATE ORGANIZATION AND GOOD STANDING. Seller is a corporation duly organized, validly existing and in good standing under the laws of California. The nature of the business conducted or properties owned by Seller do not require Seller to be qualified in any other jurisdiction. Seller has all corporate power and authority to own, lease and operate its properties and to conduct its business as such is presently conducted. 5.2 AUTHORIZATION FOR AGREEMENT. The execution, delivery and performance of this Agreement by Seller has been duly authorized by all necessary actions of its Board of Directors and its shareholders, and this Agreement, when executed and delivered by Seller, will constitute the valid and binding obligation of Seller, 3 enforceable according to its terms. 5.3 NO BREACH OF STATUTE OR CONTRACT. Neither the execution nor delivery by Seller of this Agreement nor compliance by Seller with the terms and provisions hereof will conflict with, or result in a breach of the terms, conditions or provisions of, or constitute a default under, or result in any violation of, the Articles of Incorporation or Bylaws of Seller, any judgment or award of any court or arbitrator or any other material agreement (including any material agreement with shareholders) or to Seller's knowledge any applicable law to which Seller or any of the Purchased Assets is subject, nor will such execution or delivery result in the creation of any lien or charge upon the Purchased Assets. Seller is not a party to, or otherwise subject to any provision contained in, any instrument evidencing indebtedness, any agreement relating thereto or any other contract or agreement (including its Articles of Incorporation) which restricts or otherwise limits Seller's power or authority to transfer the Purchased Assets. Seller is not a party to any joint venture or similar affiliation involving the Purchased Assets. 5.4 TITLE AND CONDITION OF PROPERTY. Seller owns all right, title and interest in and to the Purchased Assets free and clear of all claims, mortgages, liens, security interests or encumbrances of any nature other than the Third Party Intangibles; and (i) to Seller's knowledge, the transfer of the Purchased Assets to Buyer and Buyer's use thereof does and will not infringe upon any Intellectual Property Rights of any third party and (ii) to Seller's knowledge, no third party is using any element of the Purchased Assets nor infringing on the Intellectual Property Rights therein. 5.5 LITIGATION. There are no actions, suits, investigations or proceedings pending, or, to the knowledge of Seller, threatened (i) against Seller, the Purchased Assets or any properties or rights of Seller which arose out of or are based upon the ownership or use of the Purchased Assets before any court, arbitrator or administrator or governmental body, and there is no judgment, order, writ or decree of any governmental authority applicable to Seller which might result in any material adverse change in the value of the Purchased Assets or Buyer's ability to design, develop, assemble, market and incorporate such Assets into Buyer's other products, (ii) challenging the ownership or use, in any respect, of the Purchased Assets, or (iii) asserting the invalidity of this Agreement or seeking to prevent any of the transactions contemplated hereby. To the knowledge of Seller, no valid basis for any successful action, suit, investigation or proceeding of the nature referred to above exists, which if so asserted would have a material adverse effect on the value of the Purchased Assets or Buyer's ability to design, develop, assemble, market and incorporate such Assets into Buyer's other Products. 5.6 FINANCIAL RECORDS. On or before the Effective Date and the Closing, Seller has made available to Buyer access to all records of Seller pertaining to the Purchased Assets (the "FINANCIAL RECORDS"). 5.7 UNDISCLOSED LIABILITIES. To Seller's knowledge, Seller has no obligations or liabilities related to the Purchased Assets of any material nature, including but not limited to employees or consultants, whether absolute, accrued, contingent or 4 otherwise, except and to the extent disclosed in the Disclosure Schedule or this Agreement. (Buyer is not assuming any Seller obligations under this Agreement except as set forth in Section 2.4.) 5.8 PROPRIETARY INFORMATION AGREEMENTS. All persons who have had access to the confidential and proprietary information related to the Purchased Assets have executed a non-disclosure agreement and assignment with Seller. Concurrently with the execution of this Agreement, the rights to enforce these agreements with respect to the Purchased Assets and the confidential and proprietary information contained therein is being assigned to Buyer to the extent necessary to preserve Buyer's Intellectual Property Rights in the Purchased Assets. Josh Jeffe was at all times an employee of Seller when authorized to work on the Software. 5.9 SOFTWARE SPECIFICATIONS. The Software conforms to the specifications included in EXHIBIT A. To Seller's knowledge, the current "bug list" for the Software provided to Buyer is complete and Seller knows of no other significant errors in the Software. The Software is year 2000 compliant and does not contain any computer virus or keying mechanism. 5.10 LIQUIDATION. Seller intends to cease operations, satisfy all creditor obligations and liquidate its remaining assets after the Closing. Seller warrants that all creditor obligations will be satisfied in full or assumed by responsible third parties prior to making any distributions to its shareholders. To Seller's knowledge, the consideration to be received from Buyer for the Purchased Assets is reasonable and fair in light of all circumstances. 5.11 NO OTHER WARRANTIES. Seller makes no other warranties in connection with the Purchased Assets, express or implied, INCLUDING THE WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. 6. REPRESENTATIONS AND WARRANTIES OF BUYER. Buyer hereby represents and warrants to Seller that the matters set forth in the following subsections of this Section 6 are true and correct as of the Effective Date and the Closing. 6.1 CORPORATE ORGANIZATION AND GOOD STANDING. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of California or the Cayman Islands, as applicable. Buyer has all corporate power and authority to own, lease and operate its properties and to conduct its business as such is presently conducted. 6.2 AUTHORIZATION FOR AGREEMENT. The execution and performance of this Agreement by Buyer has been duly authorized by all necessary actions of its Board of Directors, and this Agreement, when executed and delivered by Buyer, will constitute the valid and binding obligation of Buyer, enforceable against Buyer according to its terms. 7. CONDITIONS PRECEDENT TO BUYER'S OBLIGATIONS. As of the Closing, the 5 following conditions have been satisfied, unless waived by Buyer in accordance with Section 9: 7.1 REPRESENTATIONS AND WARRANTIES TRUE AT CLOSING. The representations and warranties made by Seller in Sections 4 and 5 above shall be true and correct in all material respects on the Closing Date. 7.2 CORPORATE APPROVALS. On or prior to the Closing, this Agreement and all transactions contemplated hereby shall have been duly and validly authorized and adopted by the Board of Directors and shareholders of Seller. 7.3 CONSENTS. Seller will have obtained all consents, permits and waivers and made all filings necessary or appropriate for the consummation of the transactions contemplated hereby, including but not limited to the approvals of parties to the Contracts. 7.4 CLOSING CERTIFICATE. On the Closing Date, Seller shall have delivered to Buyer a certificate signed by the chief financial officer of Seller, dated the Closing Date and certifying to the fulfillment of the conditions set forth in Sections 7.1, 7.2, and 7.3 above. 7.5 DELIVERIES OBTAINED. All deliveries to Buyer required to be made by Seller under Section 2 hereof shall have been made. 7.6 DILIGENCE. Buyer is satisfied with the results of its investigation of the Purchased Assets prior to the Closing and the terms under which any Contracts are to be assigned. 8. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF SELLER. As of the Closing, all of the following conditions shall have been satisfied, unless waived by Seller in accordance with Section 9: 8.1 REPRESENTATIONS AND WARRANTIES TRUE AT CLOSING. The representations and warranties made by Buyer in Sections 4 and 6 above shall be true and correct in all material respects on the Closing. 8.2 CORPORATE APPROVAL. On or prior to the Closing Date, this Agreement and all transactions contemplated hereby shall have been duly and validly authorized and adopted by the Board of Directors of Buyer, and Buyer shall have delivered to Seller certified copies of the resolutions of its Board of Directors authorizing the execution, delivery and performance of this Agreement and the transactions contemplated hereby. 8.3 CLOSING CERTIFICATE. On the Closing Date, Buyer shall have delivered to Seller a certificate signed by the chief financial officer of Buyer, dated the Closing Date and certifying to the fulfillment of the conditions set forth in Sections 8.1 and 8.2 and that there have been no material adverse changes to Buyer's financial conditions or business. 6 8.4 DELIVERIES. Buyer shall deliver the Warrant and the initial payment specified in EXHIBIT E. 9. WAIVERS OF CONDITIONS; TERMINATION; CERTAIN COVENANTS. 9.1 WAIVERS OF CONDITIONS. Either party can elect to waive any condition for its benefit on prior written notice to the other party and upon such waiver will not thereafter be able to seek any legal recourse against the other party for the failure to satisfy such condition. In any event, Seller shall have no liability to Buyer if the conditions identified in Section 7.3 are not satisfied, provided that commercially reasonable efforts are made to satisfy them during the term of this Agreement. 9.2 TERMINATION OF THIS AGREEMENT. This Agreement may be terminated upon the mutual written consent of Seller and Buyer, and will be terminated in any event if the Closing has not occurred by January 31, 1999 (unless extended by agreement of the parties), in which case only the obligations of Sections 10 and 12 shall survive. 9.3 CERTAIN SELLER COVENANTS. Until the termination of this Agreement or the Closing: (a) Seller shall conduct its business with respect to the Purchased Assets only in the ordinary course. (b) Seller shall reasonably cooperate with Buyer in the orderly transition of the business related to the Purchased Assets to Buyer's control by the Closing. (c) Seller shall use reasonable best efforts to preserve for Buyer the good will of Seller's customers and others having business relations with the Seller related to the Purchased Assets. (d) Seller shall refrain from negotiating the license or other form of transfer of any portion of the Purchased Assets with any third party. Until the first anniversary of the Closing, Seller shall use reasonable commercial efforts to ensure that the operator of the Aptos Post, Inc. web site provides reasonable links to Buyer's web site for site users interested in the Software, all without charge to Buyer. 10. SURVIVAL, INDEMNIFICATION AND EXCULPATION. 10.1 INDEMNIFICATION OF SELLER. Buyer will defend, indemnify and hold Seller (including Seller's officers, directors, shareholders, employees, distributors and agents) harmless from all loss, liability, claims and expenses (including reasonable 7 attorneys' and experts' charges) (collectively, the "LOSSES") occasioned by Buyer's breach of any of its representations and warranties herein, except to the extent such Losses are caused by Seller's intentional misconduct or gross negligence. 10.2 INDEMNIFICATION OF BUYER. Seller will defend, indemnify and hold Buyer (including Buyer's officers, directors, shareholders, employees, distributors and agents) harmless from all Losses occasioned by Seller's breach of any of its representations and warranties herein, except to the extent such Losses are caused by Buyer's intentional misconduct or gross negligence. 10.3 SURVIVAL. The representations and warranties of Seller and Buyer pursuant to Articles 4, 5 and 6 respectively will survive as long as any payments may be payable by Buyer to Seller pursuant to EXHIBIT E or until the Warrant expires or is completely exercised, whichever is longer. Any action for breach must therefore accrue prior to such expiration. The provisions of Sections 1, 10 and 12 shall survive any termination or expiration of this Agreement. The provisions of Section 12.4 (Confidentiality) shall survive any termination or expiration of this Agreement for a period of three years. 11. NONCOMPETITION AND NONSOLICITATION. As an inducement to enter into this Agreement and consummate the transactions contemplated hereby, the parties agree as follows: (a) During the period from the Closing until the first anniversary of the Closing (the "NONCOMPETE PERIOD"), Seller shall not (i) develop or assist any other person, entity or venture in developing or maintaining any software with substantially similar functionality to the Software, nor (ii) knowingly induce any employee of Buyer to leave the employ of Buyer without Buyer's written approval; PROVIDED, HOWEVER, that in the event this Agreement is assigned or the Seller's assets and funds are distributed to any individual persons in connection with any liquidation, dissolution or winding up of Seller, the provisions of this Section 11 shall not be binding upon such persons, unless Seller shall have previously breached this Section 11 or unless such person is Stephen Manousos. (b) During the Noncompete Period, Buyer and its affiliates shall not knowingly induce any employee of Seller to leave the employment of Seller in order to provide services to Buyer without Seller's written approval. (c) The parties acknowledge and agree that money damages may not be an adequate remedy for any breach or threatened breach of the provisions of subparagraph (a) or (b) of this Section 11 and that, in such event, the aggrieved party or its successors or assigns may, in addition to any other rights and remedies existing in its favor, apply to any court of competent jurisdiction for specific performance, injunctive and other relief in order to enforce or prevent any violations of the provisions of this Section 11 (including the extension of the Noncompete Period by a period equal to the length of court proceedings necessary to stop such violation). Any injunction shall be available without the posting of any bond or other security. In the event of an alleged breach or violation of any of the provisions of this Section 11, the Noncompete Period 8 will be tolled until such alleged breach or violation is resolved; PROVIDED, HOWEVER, that if it is found that the provisions of this Section 11 have not been violated, then the Noncompete Period will not be deemed to have been tolled. The parties agree that the restrictions contained in this Section 11 are reasonable in all respects in light of all circumstances. 12. MISCELLANEOUS 12.1 NO ASSIGNMENT; SUCCESSORS AND ASSIGNS. This Agreement may not be assigned by Seller or Buyer and any attempt to do so will be void; except that, subject to the provisions of Section 11, (i) Buyer may assign this Agreement in connection with a merger or sale of substantially all of its assets or similar reorganization, and (ii) Seller may assign this Agreement in connection with the liquidation, dissolution and winding up of Seller provided that Buyer is timely compensated for any increased administrative expenses associated with such assignment as such expenses are incurred. This Agreement and the terms and conditions contained herein are binding upon, and will inure to the benefit of, the parties hereto and their respective representatives, executors, administrators, heirs, successors and assigns. 12.2 SEVERABILITY. If any provision of this Agreement is found to be invalid, illegal or unenforceable, then it will be enforced to the maximum extent possible and the remaining provisions of this Agreement will continue unaffected to the extent equitable. Moreover, if for any reason, other than the knowing fault of Buyer, the transfer of any significant portion of the Purchased Assets is found by a court to be invalid, illegal or unenforceable and any court requires in a final judgment that Buyer either return same or relinquish its ownership rights in a manner that materially and adversely affects Buyer's interest in the Purchased Assets, then all payments made by Buyer and the Warrant shall first be returned to Buyer, Buyer shall be relieved of all payment obligations and Buyer shall continue to have the perpetual, nonexclusive, irrevocable, transferable and sublicensable right to copy, use, modify, make derivative works of, market, offer, sell and license all software elements of the Purchased Assets (including documentation) and all trademarks and tradenames associated therewith in consideration of the significant resources devoted by Buyer to the further development of the Purchased Assets. 12.3 WAIVERS. No waiver by any party hereto of any term or condition of this Agreement will be effective unless set forth in a writing signed by such party. No waiver of any provision of this Agreement will be deemed a waiver of any other provision, or constitute a continuing waiver unless otherwise expressly provided in writing by the waiving party. No failure or delay on the part of any party in exercising any right, power or privilege under this Agreement will operate as a waiver thereof, nor will a single or partial exercise thereof preclude any other or further exercise of any other rights, powers or privileges. 12.4 CONFIDENTIALITY. Each party acknowledges that it will receive information which is confidential and proprietary to the other party (the "CONFIDENTIAL INFORMATION"). Each party agrees not to use the Confidential Information except in performance of this Agreement and not to disclose the Confidential Information to third 9 parties. Each party shall take all reasonable steps to protect the Confidential Information from unauthorized or inadvertent disclosure or use, including without limitation, all steps that it takes to protect its own proprietary information. Neither party will issue a press release in connection with the entry into or Closing of this Agreement without the prior approval of the other party, except as may be required by law 12.5 NOTICES. All notices which are required to be given hereunder shall be in writing and shall be addressed (i) if to Seller, at Seller's address set forth in the introductory paragraph of this Agreement, or (ii) if to Buyer, at the address as set forth in the introductory paragraph of this Agreement (each to the attention of the chief executive officer or chief financial officer), or at such other address as the relevant party furnishes to the other party hereto in writing pursuant to this Section. Any such notice may be delivered personally, by commercial overnight courier or facsimile transmission which shall be followed by a hard copy (U.S. mail prepaid, first class or better) and shall be deemed to have been served if by hand when delivered, if by commercial overnight courier 48 hours after deposit with such courier, and if by facsimile transmission when transmission has been confirmed. 12.6 COUNTERPARTS. This Agreement may be executed in any number of counterparts (original or facsimile), each of which shall be deemed an original and all of which together shall constitute but one instrument. 12.7 BROKER'S FEES/EXPENSES. Each party represents that it has not engaged the services of any broker or finder in connection with the transactions contemplated by this Agreement and jointly and severally agree to indemnify the other and hold it harmless from and against any claims for broker's or finder's fees or other compensation in connection with such transactions. Otherwise, each party will bear its own expenses in connection with this Agreement. 12.8 DISPUTES. If any dispute arising out of or in connection with this Agreement cannot be resolved by the parties consensually or through mutually agreeable forms of mediation or arbitration, then such dispute shall be adjudicated in any court of competent jurisdiction applying California law. The parties agree that the state or federal courts of Santa Clara County California are competent to hear any such dispute and consent to service there. 12.9 NO ADDITIONAL REPRESENTATIONS. Buyer and Seller each acknowledge that the other has not made any representations or warranties, of any kind, either express or implied. 12.10 ATTORNEYS' FEES. If any action at law or in equity or arbitration or mediation proceeding is necessary to enforce or interpret the provisions of this Agreement, then the prevailing party shall be entitled to reasonable attorneys' and experts' charges in addition to any other relief to which such prevailing party may be entitled. 12.11 INTEREST. Except as otherwise provided in EXHIBIT E, any 10 obligation under the Agreement which can be reduced to a monetary sum and which is not satisfied when due under this Agreement will bear interest at the rate of one percent per month or any lower legal maximum until satisfied. 12.12 ENTIRE AGREEMENT; MODIFICATIONS. This Agreement, together with the exhibits attached hereto, each of which is incorporated herein by this reference, constitutes the entire agreement among the parties hereto pertaining to the subject matter hereof and supersedes in its entirety all prior agreements, understandings, negotiations and discussions between the parties, whether oral or written, with respect to the subject matter hereof. No supplement, modification or amendment to this Agreement will be binding unless executed in writing by all parties hereto. There are no intended third party beneficiaries of this Agreement. An ambiguity or inconsistency in this Agreement shall not be construed against its drafter. "Including" and "for example" are used inclusively, without limitation. The adequacy and fairness of consideration is acknowledged by each party. [Balance of page left blank; signature block follows.] 11 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written: POST DIGITAL SOFTWARE, INC. RADIUS INC. By: By: --------------------------- --------------------------- Name: Stephen Manousos Name: Mark Housley Title: Chief Executive Officer Title: Chief Executive Officer Radius (Cayman Islands) Ltd. By: --------------------------- Name: Mark Housley Title: Chief Executive Officer EXHIBITS Exhibit A The Software and its Specifications Exhibit B Disclosure Schedule and Third Party Intangibles Exhibit C Other Intellectual Property and the Contracts Exhibit D The Warrant Exhibit E Payment Provisions 12 EXHIBIT A The Software and its Specifications For the purpose of this Agreement, the term "Software" means: The computer software programs developed by or for Post Digital, Inc. or its shareholders that comprise the products known as "Roto" and "Media Paint" in source and object code for all platforms, including Macintosh and Windows, including but not limited to: (i) the HoloPaint Specification from June 23, 1998 including screen shots, (ii) related databases, (iii) the lite and full versions; (iv) all other computer code and documentation created, designed, published, conceptualized, developed, manufactured, assembled, produced, acquired, licensed, distributed or otherwise disposed of by or for Post Digital Inc. related to the foregoing, (v) all related or supplementary products and/or programs related thereto, (vi) all derivative works, modifications, alterations, amendments, corrections, updates, enhancements, changes, upgrades, and additions to the foregoing, (vii) all know how, inventions, work in progress, algorithms, diagnostic routines, processes related to or associated with the foregoing, (viii) all business files and records relating to or used in connection with the foregoing, (ix) any and all related manuals, logic diagrams, flow charts, programmers' notes, and other documentation relating to the foregoing and (x) bug data bases and tech support files. 13 EXHIBIT B THIRD PARTY INTANGIBLES Strata Incorporated, a Utah corporation, jointly owns rights to the version of the source code for Media Paint in existence when the Disengagement Agreement among Strata Incorporated, Neil Media, Inc. and others was entered into as of January 17, 1997, a copy of which has been provided to Buyer. Under the Disengagement Agreement, Neil Media is restricted to using only the code that was written as a part of the main application, and is free to develop and derive any products for sale which are based on the shared source code for Media Paint. Post Digital Software acquired all of Neil Media's right, title and interest to Media Paint pursuant to the Software Acquisition Agreement among Neil Media, Post Digital Software and others dated January 7, 1997, a copy of which has been provided to Buyer. DISCLOSURE SCHEDULE The following are exceptions to the representations and warranties of Post Digital Software, Inc. (the "SELLER") contained in the Intangible Asset Purchase Agreement dated November 23, 1998 (the "AGREEMENT"), and should be considered an integral part of the Agreement. The section numbers in this Disclosure Schedule correspond to the section numbers in the Agreement. Any terms defined in the Agreement shall have the same meaning when used in this Disclosure Schedule as when used in the Agreement, unless the context otherwise requires. Copies of agreements and documents described herein have been made available to the Buyer. 5.4 TITLE AND CONDITION OF PROPERTY See Exhibit B, "Third Party Intangibles" above; and Section 5.8, "Proprietary Information Agreements" below. 5.5 LITIGATION Letter from Puffin Designs, Inc. to Seller dated July 9, 1998, informing Seller that Puffin Designs has filed a number of patent applications for features of Commotion, its real time visual effects tool. 5.6 FINANCIAL RECORDS Seller has not provided Buyer with any financial records. 5.7 UNDISCLOSED LIABILITIES Seller has issued promissory notes to each of Lee Lorenzen and Stephen Manousos, each in the amount of $522,000. 14 5.8 PROPRIETARY INFORMATION AGREEMENTS Neither Josh Jeffe nor Scott Meyer signed employment agreements with invention assignment provisions. However, each of Josh Jeffe and Scott Meyer were full-time employees, and each signed Seller's standard nondisclosure agreement. The nondisclosure agreement between Josh Jeffe and Seller is dated May 6, 1997, and the nondisclosure agreement between Scott Meyer and Seller is dated May 13, 1997. 5.10 LIQUIDATION Seller has issued promissory notes to each of Lee Lorenzen and Stephen Manousos, each in the amount of $522,000. 15 EXHIBIT C Other Intellectual Property and Contracts The trademarks and applications therefor of: "Roto" and variations thereof and all goodwill associated therewith. All trade dress, labels, logos and box designs, including specifications in all forms, for all product packaging and promotional materials related to the Software. All marketing and promotional literature in all forms. All prospective customer lists, the lead database from NAB, email addresses of users registered via the web and the list of VARs who expressed an interest in handling the Software. The Roto web site pages and all related source HTML files and documentation associated with the operation of such site. Contracts There are no Contracts assumed by Buyer. 16 EXHIBIT D WARRANT THE SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE. NO SALE OR OTHER DISPOSITION OR PLEDGE OF THESE SECURITIES MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATING THERETO OR AN EXEMPTION THEREFROM OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT A PROPOSED DISPOSITION OR PLEDGE IS PERMITTED UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS OR A NO ACTION LETTER OR INTERPRETIVE OPINION OF THE STAFF OF THE SECURITIES AND EXCHANGE COMMISSION THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE ACT. RADIUS INC. WARRANT VOID AFTER NOVEMBER 23, 2002 1. THE WARRANT. (a) THE GRANTING OF A WARRANT. This Warrant is executed and delivered by Radius Inc., a California corporation (the "COMPANY"), to Post Digital Software, Inc. (the "Holder") in connection with the closing of the Intangible Asset Purchase Agreement dated November 23, 1998 (the "Purchase Agreement"). (b) NUMBER AND PRICE OF SHARES SUBJECT TO WARRANT. Subject to the terms and conditions herein set forth, Holder is entitled to purchase from the Company, at any time commencing on the date hereof (the "EXERCISE COMMENCEMENT DATE") until this Warrant has expired in accordance with subparagraph (e) below, 50,000 shares of fully paid and non-assessable shares of Common Stock of the Company (the "SHARES") at a purchase price of $1.50 (one and one half dollars) per share (the "WARRANT PRICE"). The number and purchase price of such shares are subject to adjustment pursuant to paragraph 2 hereof. This Warrant will be exercisable by the holder at any time after the earlier to occur of twelve months from the date of the issuance hereof by its giving to the Company written notice of its intent to exercise ("EXERCISE NOTICE") on or before the expiration of this Warrant, in the form attached hereto as ATTACHMENT 1. Upon giving such notice, the Holder will surrender this Warrant at the principal office of the Company and pay the full purchase price for the Shares to be acquired upon payment in cash or by check. Notwithstanding the foregoing, the Warrant will not be exercisable until May 1, 1999, and then for only up to 12,000 shares. Thereafter, the Warrant can be exercised for up to 12,000 shares plus an additional 2,000 shares for each full month which has transpired since April 30, 1999. The Warrant will therefore not be exercisable for the entire 50,000 shares until December 1, 2000. 17 (c) NET EXERCISE. In lieu of exercising this Warrant pursuant to Section 1(b) above, the Holder may elect to receive a number of Shares to be calculated as follows: X = Y(A-B) ------ A where X = the number of shares of Common Stock to be issued to the holder. Y = the number of shares of Common Stock requested to be exercised under this Warrant. A = the fair market value of one (1) share of Common Stock. B = the Warrant Price. For purposes of the above calculation, current fair market value of Common Stock shall mean with respect to each share of Common Stock: (i) if traded on a national securities exchange or the Nasdaq National Market (or similar national quotation system), the fair market value shall be deemed to be the closing price (last reported sale) on the day the current fair market value of the securities is being determined; (ii) if traded over-the-counter, the fair market value shall be deemed to be the average of the closing bid or sales price (as applicable) over the thirty calendar day period ending three days before the date of calculation; or (iii) if at any time the Common Stock is not traded as described in (i) or (ii) above, the current fair market value shall be the highest price per share which the Company could obtain from a willing buyer (not a current employee or director) for shares of Common Stock sold by the Company, from authorized but unissued shares, as determined in good faith by its Board of Directors, unless the Company shall become subject to a merger, acquisition or other consolidation pursuant to which the Company is not the surviving party, in which case the fair market value shall be deemed to be the value received by the holders of the Company's Common Stock on a common equivalent basis pursuant to such merger or acquisition. (d) EFFECT OF EXERCISE. This Warrant shall be deemed to have been exercised immediately prior to the close of business on the date of its surrender for exercise as provided above, and the person entitled to receive the Shares issuable upon such exercise shall be treated for all purposes as the holder of record of such shares as of the close of business on such date. As soon as practicable on or after such date, the Company shall issue and deliver to the person or persons entitled to receive the same a certificate or certificates for the number of Shares issuable upon such exercise. (e) TERM. Unless earlier exercised in whole, this Warrant shall terminate and expire as of 5:00 p.m. local California time on November 23, 2002. (f) PARTIAL EXERCISE. This Warrant may be exercised by the holder from time to time as to all or a portion of the Shares subject hereto. In the event that this Warrant is exercised as to only a portion of the Shares subject hereto, the Company will, upon issuance of the Shares so acquired, deliver to the holder a new Warrant representing the remaining Shares subject hereto. 18 (g) VALIDITY. The Warrant and Warrant Shares, when issued, delivered and paid for in accordance with this Agreement, will be duly and validly authorized and issued, fully paid and non-assessable and will not subject the holder thereof to personal liability by reason of being such holder. There are no preemptive rights of any shareholder of the Company, as such, to acquire the Warrant or Warrant Shares. 2. (a) ADJUSTMENT FOR STOCK DIVIDENDS. In case at any time or from time to time on or after the effective date hereof all holders of the Common Stock of the Company (or any shares of stock or other securities at the time receivable upon the exercise of this Warrant) shall have received, or, on or after the record date fixed for the determination of eligible shareholders, shall have become entitled to receive, without payment therefor, other or additional stock of the Company by way of dividend, then and in each case, the Holder of this Warrant shall, upon the exercise hereof, be entitled to receive, in addition to the number of shares of Common Stock receivable thereupon, and without payment of any additional consideration therefor, the amount of such other or additional stock of the Company which such holder would hold on the date of such exercise had it been the holder of record of such Common Stock on the date hereof and had thereafter, during the period from the date hereof to and including the date of such exercise, retained such shares and/or all other additional stock receivable by it as aforesaid during such period, giving effect to all adjustments called for during such period by paragraphs (b) and (c) of this paragraph 2. (b) ADJUSTMENT FOR RECLASSIFICATION, REORGANIZATION OR MERGER. In case of any reclassification or change of the outstanding securities of the Company or of any reorganization of the Company (or any other corporation the stock or securities of which are at the time receivable upon the exercise of this Warrant) on or after the date hereof, or in case, after such date, the Company (or any such other corporation) shall merge with or into another corporation or convey all or substantially all of its assets to another corporation, then and in each such case the holder or this Warrant, upon the exercise hereof at any time after the consummation of such reclassification, change, reorganization, merger or conveyance, shall be entitled to receive, in lieu of the stock or other securities and property receivable upon the exercise hereof prior to such consummation, the stock or other securities or property to which such holder would have been entitled upon such consummation if such holder had exercised this Warrant immediately prior thereto, all subject to further adjustment as provided in paragraphs (a) and (c); in each such case, the terms of this paragraph 2 shall be applicable to the shares of stock or other securities properly receivable upon the exercise of this Warrant after such consummation. (c) STOCK SPLITS AND REVERSE STOCK SPLITS. If at any time on or after the date hereof the Company shall subdivide its outstanding shares of Common Stock into a greater number of shares, the Warrant Price in effect immediately prior to such subdivision shall be proportionately reduced and the number of shares receivable upon exercise of the Warrant shall be proportionately increased; and, conversely, if at any time on or after the date hereof the outstanding number of shares of Common Stock shall be combined into a smaller number of shares, the Warrant Price in effect immediately prior to such combination shall be proportionately increased and the number of shares receivable upon exercise of the Warrant shall be proportionately 19 decreased. 3. (a) CERTAIN INFORMATION RIGHTS. Subject to the provisions of Section 2 above, while a public market exists for the Warrant Shares, the Company agrees to make and keep public information available, as those terms are construed in Rule 144 under the Securities Act of 1933, to file with the commission in a timely manner all periodic reports and to use its best efforts to file other documents required of the Company under the such Act and the Securities Exchange Act of 1934 for applicable time periods under Rule 144. Upon the request of any Holder, the Company will furnish such Holder a copy of such filings. Holder can elect to purchase Shares separately from this Agreement in order to become eligible to receive information provided to all shareholders and can elect to be on Company's non obligatory "courtesy copy" fax list in order to receive corporate (as opposed to commercial or product) press releases along with other interested parties by providing Company with current contact information from time to time. (b) SEC FILINGS. The Company represents and warrants that it has filed all forms, reports and documents required to be filed by it with the Securities and Exchange Commission (the "SEC") (the "COMPANY SEC REPORTS"). The Company SEC Reports, as well as all forms, reports and documents to be filed by the Company with the SEC after the date of the Purchase Agreement, (i) were or will be prepared in accordance with the requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, as the case may be, and the rules and regulations thereunder, (ii) did not at the time they were filed, or will not at the time they are filed, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading, and (iii) did not at the time they were filed, or will not at the time they are filed, omit any documents required to be filed as exhibits thereto. No subsidiary of the Company is required to file any form, report or other document with the SEC. 4. Holder represents and warrants to, and agrees with, the Company, that: (a) PURCHASE FOR OWN ACCOUNT. This Warrant and the Warrant Shares are being acquired for investment for Holder's own account, not as a nominee or agent, and not with a view to the public resale or distribution thereof within the meaning of the Act, and such Holder has no present intention of selling, granting any participation in, or otherwise distributing the same. (b) DISCLOSURE OF INFORMATION. Holder has received or has had full access to all the information it considers necessary or appropriate to make an informed investment decision with respect to the Warrant. Holder has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the Warrant and the Warrant Shares and to obtain additional information necessary to verify any information furnished to Holder or to which Holder had access. Holder acknowledges receipt of Company's most recent periodic reports on forms 10-K and 10-Q as well as all current reports on form 8-K. 20 (c) INVESTMENT EXPERIENCE. Holder understands that the receipt of the Warrants and the purchase of the Warrant Shares involves substantial risk. Holder: (i) has experience as an investor in securities of companies in the development stage and acknowledges that it is able to fend for itself, can bear the economic risk of such investment in the Warrants and Warrant Shares and has such knowledge and experience in financial or business matters that Holder is capable of evaluating the merits and risks of this investment in the Warrants and Warrant Shares and protecting its own interests in connection with this investment and/or (ii) has a preexisting personal or business relationship with the Company and certain of its officers, directors or controlling persons of a nature and duration that enables Holder to be aware of the character, business acumen and financial circumstances of such persons. (d) RESTRICTED SECURITIES. Holder understands that the Warrants and the Warrant Shares are characterized as "restricted securities" under the Securities Act inasmuch as they are being acquired from the Company in a transaction not involving a public offering and that under the Securities Act and applicable regulations thereunder such securities may be resold without registration under the Securities Act only in certain limited circumstances. In this connection, Holder represents that Holder is familiar with Rule 144 of the U.S. Securities and Exchange Commission, as presently in effect, and understands the resale limitations imposed thereby and by the Securities Act. Holder understands that the Company is under no obligation to register any of the securities sold hereunder except as set forth in Section 11. Holder understands that no public market now exists for the Warrant and that it is uncertain whether a public market will continue to exist for the Warrant Shares. (e) FURTHER LIMITATIONS ON DISPOSITION. Without in any way limiting the representations set forth above, Holder further agrees not to make any disposition of the Warrant in whole or part or all or any portion of the Warrant Shares unless and until: (i) there is then in effect a registration statement under the Securities Act covering such proposed disposition and such disposition is made in accordance with such registration statement; or (ii) (A) Holder shall have notified the Company of the proposed disposition and shall have furnished the Company with a statement of the circumstances surrounding the proposed disposition, and (B) Holder shall have furnished the Company, at the expense of Holder or its transferee, with an opinion of counsel, reasonably satisfactory to the Company, that such disposition will not require registration of such securities under the Securities Act. Notwithstanding the provisions of paragraphs (i) and (ii) above, no such registration statement or opinion of counsel shall be required: (1) for any transfer of all or any portion of the Warrant or any Warrant Shares in compliance with SEC Rule 144 or (2) for the transfer by gift, will or intestate succession by Holder to his or her spouse or lineal descendants or ancestors or any trust for any of the foregoing or (3) in connection with a final liquidating distribution to creditors and shareholders of Holder which has been approved by a court with jurisdiction and which is exempt from 21 federal securities laws; PROVIDED that in each of the foregoing cases the transferee agrees in writing to be subject to the terms of this Warrant to the same extent as if the transferee were the original Holder hereunder. (f) LEGENDS. It is understood that the certificates evidencing the Warrant Shares will bear the legends set forth below: (i) THE SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE. NO SALE OR OTHER DISPOSITION OR PLEDGE OF THESE SECURITIES MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATING THERETO OR AN EXEMPTION THEREFROM OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT A PROPOSED DISPOSITION OR PLEDGE IS PERMITTED UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS OR A NO ACTION LETTER OR INTERPRETIVE OPINION OF THE STAFF OF THE SECURITIES AND EXCHANGE COMMISSION THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE ACT. (ii) Any legend required by the laws of the State of California, including any legend required by the California Department of Corporations and Sections 417 and 418 if the California Corporations Code or any other state securities laws. The legend set forth in (i) above shall be removed by the Company from any certificate evidencing Warrant Shares upon delivery to the Company of an opinion by counsel, reasonably satisfactory to the Company, that a registration statement under the Securities Act is at that time in effect with respect to the legended security or that such security can be freely transferred in a public sale without such a registration statement being in effect and that such transfer will not jeopardize the exemption or exemptions from registration pursuant to which the Company issued the Warrant Shares. (g) PURCHASE AGREEMENT OFFSET. Holder or its predecessor has received the Warrant in consideration in part for various undertakings in the Purchase Agreement. The Company can elect to refuse to authorize the transfer of any Warrant or the issuance of the Warrant Shares until all indemnification and payment obligations to it under the Purchase Agreement (including Exhibit E) are satisfied pursuant to the terms of the Purchase Agreement (other than by discharge in bankruptcy); provided however, that such authorization of transfer or issuance shall not be unreasonably withheld or delayed. This Section 4(g) shall not apply to the proposed transfer of the Warrant or Warrant Shares to any shareholder of the Holder in connection with the liquidation, dissolution and winding up of Holder. 5. OTHER ADJUSTMENTS. Except as provided in paragraph 2, no adjustment on account of dividends or interest on Common Stock will be made upon the exercise hereof. 22 6. NO FRACTIONAL SHARES. No fractional shares of Common Stock will be issued in connection with any subscription hereunder. In lieu of any fractional shares which would otherwise be issuable, the Company shall pay cash equal to the product of such fraction multiplied by the fair market value of one share of Common Stock on the date of exercise, as determined in good faith by the Company's Board of Directors. 7. NO SHAREHOLDER RIGHTS. Until effectively exercised, this Warrant shall not entitle its Holder to any of the rights of a shareholder of the Company. The Company will not, by amendment of its charter or through reorganization, consolidation, merger, dissolution, sale of assets or any other voluntary corporate action, seek to avoid the observance or performance of any of the terms of this Warrant and will at all times reasonably assist in the carrying out of all such terms of the Warrant and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Holder of this Warrant in accordance with its terms. 8. EXERCISE OF WARRANT. The Holder's ability to exercise this Warrant is subject to the Company having obtained any necessary regulatory approvals prior to such exercise. The Company shall use its best efforts to obtain any such consents after the date hereof. Subject to such approvals, this Warrant (or portion thereof pursuant to Section 10) may be exercised by each registered holder or each of its registered assigns on only four occasions and in minimum increments of 10,000 shares of Common Stock (or any remaining shares of Common Stock subject to this Warrant if the number of shares of Common Stock subject to this Warrant is less than 10,000) by the surrender of this Warrant at the principal office of the Company, accompanied by payment in full of the Warrant Price as described above. A Warrant shall be deemed to have been exercised immediately prior to the close of business on the date of its surrender for exercise as provided above, and the person entitled to receive the shares of Common Stock issuable upon such exercise shall be treated for all purposes as the holder of such Shares of record as of the close of business on such date. As promptly as practicable on or after such date, the Company shall issue and deliver to the person or persons entitled to receive the same, a certificate or certificates for the number of full shares of Common Stock issuable upon such exercise, together with cash in lieu of any fraction of a share as provided above. The Company will at all times reserve and keep available, solely for the issuance and delivery upon the exercise of this Warrant, such shares of Warrant Shares and other stock, securities and property, as from time to time shall be issuable upon the exercise of this Warrant. 9. CERTIFICATE OF ADJUSTMENT. Whenever the Warrant Price is adjusted, as herein provided, upon written request by the holder, the Company shall deliver to the record holder of this Warrant a certificate of an officer of the Company setting forth the (i) Warrant Price after such adjustment, (ii) setting forth a brief statement of the facts requiring such adjustment, and (iii) the kind and amount of stock or other securities or property into which this Warrant shall be exercisable after such adjustment. 10. RESTRICTIONS ON TRANSFER OF WARRANT. This Warrant and all rights hereunder are transferable, in whole or in part, subject to the provisions of Sections 4(d), (e), (f) and (g) above; provided that Holder first offer the Company the opportunity to acquire the Warrant on the same terms as are offered to or by any bona fide third party (each 23 such opportunity expiring if the Company has not accepted the offer in writing within seven business days after notice of the terms). The foregoing right of first refusal shall not apply to the initial Holder's liquidating distribution to its shareholders, nor to any transfer of the Warrant Shares. The terms of this Warrant shall be binding upon the successors and assigns of the holder. 11. PIGGYBACK REGISTRATION AND MARKET STANDOFF AGREEMENT. If: (i) Holder is unable to dispose of its Warrant Shares pursuant to Rule 144 of the SEC (or any successor regulation) within the three months after the notice referred to below; (ii) Holder desires to sell all 50,000 Warrant Shares as soon as practicable (or as many as the Company's investment banker deems prudent); (iii) the Company has conferred registration rights to third parties and such rights have been effectively exercised; and (iv) in the Company's reasonable opinion the inclusion of such Warrant Shares in a registration statement at such time will not prejudice the rights and opportunity of such third parties or result in a breach of the Company's obligations to such third parties; then the Company will notify Holder of the opportunity to participate in such registered offering. Unless Holder confirms its irrevocable election to participate in the registered offering within ten days after receipt of such notice, then Holder will be deemed to have waived its election to participate. If Holder timely elects to participate, then Holder will enter into the same undertakings regarding the registered offering as are applicable to the other selling shareholders (e.g., indemnification). Holder's failure to timely do so will be deemed to waive Holder's right to participate in the registered offering. If Holder does not participate in the registered offering after being offered to participate, the Company is not required to offer further opportunities to participate in such registered offering and such nonparticipation by Holder shall not affect Holder's right to participate in a subsequent registered offering by the Company. In any event, Holder hereby agrees that it shall not, to the extent requested by an underwriter of securities or the Company, sell or otherwise transfer or dispose of any Shares (other than to donees or partners of the holder who agree to be similarly bound) for up to one hundred eighty (180) days following the effective date of a registration statement of the Company filed under the Act; PROVIDED, HOWEVER, that all officers and directors of the Company then holding Common Stock of the Company enter into similar agreements. In order to enforce the foregoing covenant, the Company shall have the right to place restrictive legends on the certificates representing the Shares and to impose stop transfer instructions with respect to the Shares (and the shares or securities of every other person subject to the foregoing restriction) until the end of such period. 12. MISCELLANEOUS. This Warrant shall be governed by the laws of the State of California without giving effect to conflicts of law principles. The headings in this Warrant are for purposes of convenience and reference only, and shall not be deemed to constitute a part hereof. Neither this Warrant nor any term hereof may be changed, waived, discharged or terminated except by an instrument in writing signed by the Company and the registered holder hereof. All notices and other communications from the Company to the holder of this Warrant shall be mailed by first-class registered or certified mail, postage prepaid, to the address furnished to the Company in writing by the last holder of this Warrant who shall have furnished an address to the Company in writing. 24 ISSUED this 23rd day of November, 1998 (the "Effective Date" of this agreement). HOLDER - POST DIGITAL SOFTWARE, INC. RADIUS INC. By: By: ------------------------ ------------------------ 25 ATTACHMENT 1 EXERCISE NOTICE 1. The undersigned hereby elects to purchase _______ shares of the Common Stock of Radius Inc. pursuant to the terms of the attached Warrant and to utilize the net exercise provisions of Section 1(c) of the Warrant (unless payment of the purchase price of such shares in full is made herewith.) 2. Please issue a certificate representing said shares in the name of the undersigned or in such other name as specified below: (Name) (taxpayer ID#) (Address) 3. The undersigned represents it is acquiring the shares solely for its own account and not as a nominee for any other party and not with a view toward the resale or distribution thereof except in compliance with applicable securities laws. (Date) (Signature) 26 Exhibit E Payment Provisions Pursuant to Section 3.1 of the Intangible Asset Purchase Agreement dated November 23, 1998, Buyer will pay Seller payments equal to: (a) $50,000 upon the Closing (the "Initial Payment"); (b) $50,000 upon the earlier of (i) the first anniversary of the Effective Date or (ii) the "Commercialization" of the Software by Buyer; Commercialization means the first commercial shipment of any product of Buyer containing twenty percent or more of the Software object code; (c) "Unit Payments" equal to ten percent of Buyer's "Net Selling Price" (as defined below) for the Software when sold on or licensed for the Apple Macintosh platform; equal to four percent of Buyer's Net Selling Price for the Software when sold on or licensed for the Windows platform; and equal to seven percent of Buyer's Net Selling Price for the Software when sold or licensed as a package for both the Apple Macintosh and Windows platform ; and (d) "Prorated Unit Payments" equal to a percentage of Buyer's Net Selling Price when the Software or certain portions thereof are sold along with other software or technology of Buyer. Prorated Unit Payments will be calculated as follows: (i) the included Software must contain one or more of the "app framework", "paint", "compositor", "particle", "object", and "realtime playback" functionalities of the Software; (ii) for each functionality included, the "Factor" will equal twenty percent (not exceeding one hundred percent), i.e., the presence of two functionalities would yield a Factor of forty percent; (iii) the list price of the standalone Software product and the other Buyer product will be established as "Roto ASP" and "Other Product ASP", respectively; (iv) the applicable Unit Payment percentage will be established as ten, four or seven percent depending on whether the combined product is for use on the Apple Macintosh, Windows platform or both, as applicable; (v) the "ASP Ratio" will then be determined as the Roto ASP divided by the sum of the Roto ASP and the Other Product ASP; (vi) the Prorated Unit Payment for a product sold will then equal the Unit Payment times the Factor times the ASP Ratio. For example, assuming a Roto ASP and a Other Product ASP of $1000 each for the Apple Macintosh platform with a Factor of forty percent, the Prorated Unit Payment will then equal: 10% times $1000 (assuming no netting factors) or $100 [i.e., the non prorated Unit Payment] times the Factor of 40% times the ASP Ratio of fifty percent, or $20. Notwithstanding the foregoing, the total payments, that is the sum of the Initial Payment, the payment upon the first anniversary of the Effective Date or Commericalization, the aggregate Unit Payments and the aggregate Prorated Unit Payments, will not exceed $750,000. Payments are due within 45 days after the end of each quarter for transactions closed during such quarter. NET SELLING PRICE shall mean gross sales revenue and licensing proceeds from all applicable transactions during the applicable quarter excluding, if applicable, sales, use, value added and similar taxes, shipping, insurance and actual discounts, less returns and net deferrals arising from stock balancing, coop advertising, market development and price protection 27 undertakings. Subject to the foregoing, Buyer will calculate and account for gross sales revenue and Net Selling Prices from applicable products (i.e., those containing one or more of the six functionalities of the Software referred to above) in the same manner as such quantities are established for Buyer's other products (i.e., those not containing any one of the six functionalities of the Software referred to above). In the event Buyer assigns (voluntarily or by operation of law) all of its rights in the Software to a third party or any affiliate, then the assignee will be subject to the provisions of this Exhibit E as if the assignee were the Buyer, unless either Buyer or the assignee elects to and does pay the balance of all payment obligations potentially due in the future hereunder (i.e., $750,000 less the sum of all payments previously made). Revenue from the assignment of less than all of Buyer's rights in the Software shall be treated like revenue from the sale of products including the Software or the license of the Software pursuant to paragraph (c) above. All payments under this Agreement will be made in United States currency by bank-to-bank wire transfer to an account designated by Seller, unless otherwise specified by Seller in writing. In the event there are no list prices established for the Software or any other products sold together with the product containing the Software or one or more of the six functionalities, then Buyer will establish deemed list prices in good faith in light of market value and demand. If Seller disputes such deemed prices by notice to Buyer within thirty days after receipt of Buyer's quarterly report, then the parties will cooperate to establish mutually acceptable prices. However, if the parties do not arrive at such mutually acceptable deemed prices within thirty days after notice of the dispute is given, then the parties will submit the matter to an appraiser having extensive experience in setting prices or establishing values for similar products or technology for binding determination. If the parties cannot agree on the selection of an appraiser within such time period, then either party can submit such selection for determination to the American Arbitration Association or any court with jurisdiction. After appointed, the appraiser will request relevant information from each party, make such other inquiries as deemed appropriate and notify each party of the determination and the bases therefore within thirty days. Seller will bear the cost of the appraiser unless the appraiser determines that Buyer's deemed list prices understated Seller's applicable payment obligation for the applicable time period by more than ten percent, in which case Buyer will bear the expense of the appraiser and promptly pay such deficiency to Seller. Buyer reserves the right to reduce payments by any sums due it from Seller (its predecessors and successors) which have not been paid on a net thirty day basis and payment obligations pursuant to the Agreement. Moreover, Buyer can elect to reduce payments by any Losses (as defined in Section 10.1 of the Purchase Agreement) incurred by Buyer (i) in connection with claims by any third party that the Software or its use infringes its rights whether or not Seller had any knowledge of such risk of claim, (ii) in enforcing the Intellectual Property Rights conferred by the Purchase Agreement against third parties who had access to the Software prior to the Effective Date by or through Seller, (iii) as a result of the illegality of Seller's entry into or performance of the Agreement or (iv) as a result of the Stephen Manousos engaging in any conduct prior to the first anniversary of the Effective Date which would have violated the provisions of Section 11 of the Agreement had Seller engaged directly in 28 such conduct. All amounts payable under this Agreement are inclusive of all sales, use, value-added, withholding, and other taxes and duties. Buyer has no obligation to pay such taxes. Seller will pay all taxes and duties assessed in connection with these payments by any authority within or outside of the U.S to Seller under this Agreement. Seller will promptly reimburse Buyer for any and all taxes or duties that Buyer may be required to pay on Seller's behalf in connection with each payment. If any withholding or similar tax must be paid under the laws of any country outside of the U.S. based on the payments due to Seller under this Agreement, then Buyer may elect to pay all such taxes and the amounts payable to Seller under this Agreement will be decreased by the amounts actually so paid. Buyer will provide Seller with written documentation, including but not limited to copies of receipts, of any and all such taxes paid on Seller's behalf in connection with this Agreement. Buyer will maintain complete records regarding the distribution of relevant products during and for two years after the termination Buyer's obligation to make payments under this Agreement and for the duration of any dispute which arises during such time period. Within 45 days after the close of each quarter ending March 31, June 30, September 30 and December 31, Buyer will deliver to Seller a report which will provide all information reasonably necessary for computation and/or confirmation of the payments, if any, due or credited to Seller for such quarterly period. Such reports will identify the relevant products sold, the quantities sold, the list prices of such products, the gross sales revenue therefrom, permissible deductions to arrive at net revenue, any prorations or allocations of net revenue and the payment(s) due less any permissible offsets or credits. An independent certified public accountant selected by Seller (but responsible to both Seller and Buyer as clients) may, upon reasonable notice and during normal business hours, inspect the records of Buyer on which such reports are based. If, upon performing such audit, it is determined that Buyer has underpaid Seller by an amount greater than five percent of the payments due Seller in the period being audited, Buyer will bear all reasonable expenses and costs of such audit in addition to its obligation to make full payment. Such sum will be paid within thirty days after invoicing by Seller. No transaction may be audited more than once, nor more than three years after accrued. An audit may be performed no more frequently than once during any twelve month period. 29 EX-10.23 4 EX-10.23 Exhibit 10.23 SPLASH TECHNOLOGY HOLDINGS, INC. AND RADIUS, INC. SOFTWARE PURCHASE AGREEMENT This Software Purchase Agreement ("Agreement") is entered into by and between Splash Technology Holdings, Inc., a Delaware corporation, with principal offices at 555 Del Rey Avenue, Sunnyvale, California 94086 ("Splash"), and Radius, Inc., a California corporation, with principal offices at 460 East Middlefield Road, Mountain View, California 94043-4032 ("Radius"). This Agreement is effective as of November __, 1998 (the "Effective Date"). WHEREAS, Radius has developed certain Software products entitled "Separation Lab" and "Profile Lab"; and WHEREAS, Radius desires to transfer, assign and sell to Splash certain rights to "Separation Lab" and "Profile Lab," and Splash desires to obtain such rights, pursuant to the terms and conditions of this Agreement. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants contained herein, the parties agree to the following terms and conditions. 1. DEFINITIONS. For purposes of this Agreement, the following terms shall have the following meanings: 1.1 "BLUE PURPLE FUNCTIONALITY AND THE GCR" means the specific method under U.S. Patent Application 08/788,934 for correcting errors in perceived hue when using the LAB color space for gamut mapping and the specific proprietary method to add black (k) instead of cyan (c), magenta (m) and yellow (y) (as opposed to the standard industry definition of GCR). 1.2 "CODE" means computer programming code. "Object Code" means the binary machine-executable form of Code, including object files, libraries, executable program, scripts and HTML pages. "SOURCE CODE" means the human-readable form of Code. 1.3 "DERIVATIVE WORK(S)" has the meaning set forth in the United States Copyright Act of 1976 as amended, as interpreted in relevant case law. 1.4 "INTELLECTUAL PROPERTY" means: (i) all patents and applications therefor and all reissues, divisions, continuations, renewals, extensions and continuations-in-part thereof; (ii) all inventions (whether patentable or not in any country), invention disclosures, improvements, trade secrets, proprietary information, know how, technology, technical data, and all documentation relating to any of the foregoing; (iii) all copyrights, copyright registrations and applications therefor in any country, and all other rights corresponding thereto throughout the world (iv) all designs and any registrations and applications therefor; (v) all software and any proprietary rights in such software; (vi) all rights to income, royalties (with the exception of income and/or royalties due and/or payable from Korea Data Services (America), Inc. and its guarantors or their successors in interest, collectively "KDS"), damages (excluding damages related to the foregoing parenthetical expression) and any other payments now and hereafter due and/or payable with respect to any of the foregoing (except as noted and except for payments received in the ordinary course from Radius distributors and customers in connection with the purchase, sale and license of Radius products incorporating elements of the Software, including, without limitation, damages and payments for past or future infringement or misappropriation thereof; and (vii) all rights to sue for past, present and future infringements or misappropriation of any of the foregoing. 1.5 "LITE VERSION" means the Software product entitled Separation Lab which has been modified by Radius pursuant to this Agreement to eliminate the Blue to Purple Functionality and GCR. 1.6 "PROFILE DATA SETS" means any and all of the profile data sets, including core measurements of multi-dimensional colour patches from printed output, in file format as listed in EXHIBIT A. 1.7 "PROFILE LAB" means the Software entitled Profile Lab including any or all of that portion of the Code listed in EXHIBIT A. 1.8 "SOFTWARE" means Separation Lab, Profile Lab, Profile Data Sets and Scripts collectively and all documentation relating to such Software and all versions and components of such Software and all other Software from which such Software was derived. 1.9 "SCRIPTS" means any coded instructions to automate a process, namely the reading of patch data using greytag SpectraLino as listed in EXHIBIT A. 1.10 "SEPARATION LAB" means the Software product entitled Separation Lab including any or all of the Code listed in EXHIBIT A, INCLUDING THE "LITE VERSION". 2. ASSIGNMENT. 2.1 ASSIGNMENT. Radius hereby sells, transfers, grants and assigns to Splash, and Splash hereby accepts, all of the Software and all of Radius' Intellectual Property rights and licenses therein throughout the world in and to the Software. At any time or from time to time on and after the Effective Date, at the request of Splash, Radius shall execute and deliver or cause to be executed and delivered, all such assignments, documents or further instruments of transfer as Splash may reasonably deem necessary in order for Splash to obtain the full benefits of the assignment, sale, grant and transfer set forth in this Section 2.1 including, but not limited to, registration and assignment of the U.S. copyright as soon as permitted by law. Nothing in this Agreement restricts Splash from re-registering the U.S. copyright for the Software. 2.2 Radius irrevocably constitutes and appoints Splash with full power of substitution, to be its true and lawful attorney, and in its name, place or stead, to execute, acknowledge, swear to and file, all instruments, conveyances, certificates, agreements and other documents, and to take any action which shall be necessary, appropriate or desirable to effectuate the transfer of the Software and Intellectual Property to Splash in accordance with the terms of this Agreement; PROVIDED, HOWEVER, that such power shall be exercised by Splash only in the event that Radius fails to take the necessary actions required to affect or record the transfer of the Software at -2- Splash's request. This power of attorney shall be deemed to be coupled with an interest and shall be irrevocable for the term of this Agreement 3. TECHNOLOGY TRANSFER. 3.1 DELIVERABLES. On or before the Effective Date, Radius shall provide Splash with all copies of the Software (other than the Lite Version) and Intellectual Property, including Source Code and Object Code and data files, notebooks, flowcharts, prototypes, all such deliverables will be made electronically in a manner mutually acceptable to Splash and Radius. Within ten(10) days of the Effective Date, Radius shall deliver the Lite Version to Splash. In addition, within ten (10) days from the Effective Date, Radius shall deliver all units or copies of Separation Lab in Radius's inventory or at distributors, which shall be no less than one hundred (100) units, as referred to in Section 8.1.6., to Splash's facilities. Within ten days after the Effective Date, Radius may elect to deliver the Lite Version. 3.2 ACCEPTANCE. Within ten (10) days of the receipt of the Lite Version, Splash shall test the Lite Version to ascertain if the Blue to Purple Functionality and GCR have been removed from the Software. If Splash determines the Blue to Purple Functionality and GCR have not been removed, Splash shall promptly notify Radius and at Splash's sole option, Radius shall, within ten (10) days of the such notification, make any further changes to the Lite Version will be made as necessary to eliminate the Blue to Purple Functionality and GCR. 4. PERSONNEL. 4.1 EMPLOYMENT. As a condition to Splash's obligations to close under this Agreement, Radius shall cause Andrew Bryant, currently an employee of Radius, to accept employment with Splash simultaneously with the execution of this Agreement. 4.2 NON-SOLICITATION. For a period of twelve (12) months after the Effective Date, Radius shall not solicit the employment of or offer employment to Splash's employee, Andrew Bryant. 5. FEES AND TAXES. 5.1 FEES. In consideration of the sale, transfer and assignments granted to Splash herein with respect to the Software and Intellectual Property, Splash shall: (a) pay two hundred and seventy-five thousand dollars ($275,000) in cash on the Effective Date; and (b) direct the Escrow Agent to pay one million dollars ($1,000,000) on the Effective Date to Radius which shall be paid from the escrow account in existence pursuant to an Escrow Agreement between the parties dated January 30, 1996 (the "Escrow Agreement"). 5.2 TAXES. All payments are in U.S. Dollars and are exclusive of any applicable taxes. Radius shall be responsible for and shall pay sales or use taxes whenever and however levied with respect to this Agreement or shall provide Splash with an appropriate exemption certificate. Radius shall be responsible for and shall pay all other taxes, assessments, permits and fees, however designated, which are levied upon this Agreement whenever and however levied except taxes based -3- upon Splash's net income. Each party shall cooperate with the other in minimizing any applicable tax to the extent permitted by law. 6. PROPRIETARY RIGHTS. 6.1 SPLASH PROPRIETARY RIGHTS. Title to and ownership of all copies of Software, whether in machine-readable or printed form, and all Intellectual Property Rights therein, and all Derivative Works thereof created by or on behalf of Splash and all Intellectual Property Rights therein, are and shall remain the exclusive property of Splash. Radius shall not take any action to jeopardize, limit or interfere in any manner with Splash's ownership of and rights with respect to the Software. 6.2 DERIVATIVE WORKS. Title to and ownership of all Derivative Works created by Radius, and all Intellectual Property Rights therein, shall be the exclusive property of Splash and Radius shall execute and deliver or cause to be executed and delivered, all such assignments, documents or further instruments of transfer as Splash may reasonably deem necessary in order for Splash to obtain the full benefits of the ownership of the Derivative works as set forth in this Section 6.2. 6.3 PRE-EXISTING RIGHTS. Notwithstanding the foregoing, (i) the rights of third parties to continue to use Radius products that were purchased prior to the Effective Date and that incorporate the elements of the technology embodied by the Software and Intellectual Property shall not be impaired, and (ii) the rights of KDS in such technology, Software and Intellectual Property pursuant to the Amended and Restated License Agreement and Asset Purchase Agreement, each with Radius and dated August 7, 1998, shall not be impaired. Splash shall have no liability to Radius or any of Radius' customers or any of the third parties listed above, including KDS, for such use of the technology embodied by the software and Intellectual Property. 7. CONFIDENTIALITY. 7.1 DEFINITION. For purposes of this Agreement "Confidential Information" shall mean confidential and proprietary information disclosed by one party to the other party hereunder including, without limitation, the Software, Intellectual Property, computer programs, Code, flow charts, algorithms, names and expertise of employees and consultants, know-how, formulas, processes, ideas, inventions (whether patentable or not), schematics and other technical, business, financial and product development plans, forecasts and strategies, and other information which is marked "Confidential," or if disclosed verbally, identified as confidential at the time of disclosure. The parties acknowledge and agree that all Source Code received by a party hereunder, and any portions thereof, is and are deemed Confidential Information regardless of whether it is identified as confidential and that all information described in the foregoing sentence that is observed by Radius or their employees or independent contractors while at Splash facilities is deemed Confidential Information regardless of whether it is identified as confidential. 7.2 OBLIGATIONS. Each party agrees to maintain all Confidential Information of the other party in confidence to the same extent that it protects its own similar Confidential Information and to use and disclose such Confidential Information only as permitted under this Agreement. Each -4- party agrees to take all reasonable precautions to prevent any unauthorized disclosure or use of Confidential Information including, without limitation disclosing Confidential Information only to its employees and permitted independent contractors (a) with a need to know to further permitted uses of such information and (b) who are parties to appropriate agreements sufficient to comply with this Section 7, and (c) who are informed of the non-disclosure/non-use obligations imposed by this Section 7, and both parties shall take appropriate steps to implement and enforce such non-disclosure/non-use obligations. Neither party shall be subject to any restrictions with respect to its own Confidential Information. 7.3 EXCEPTIONS. The foregoing restrictions on disclosure and use shall survive for three (3) years following termination of this Agreement (or, with respect to Source Code, ten (10) years) but shall not apply with respect to any Confidential Information which: (i) was or becomes publicly known by action of the disclosing party or otherwise through no fault of the receiving party; (ii) was rightfully known or becomes rightfully known to the receiving party without confidential or proprietary restriction from a source other than the disclosing party; (iii) is independently developed by the receiving party without the participation of individuals who have had access to the Confidential Information; (iv) is approved by the disclosing party for disclosure without restriction in a written document which is signed by a duly authorized officer of such disclosing party; (v) the receiving party is requested to disclose by the U.S. government in connection with security and export matters or (vi) the receiving party is legally compelled to disclose; provided, however, that prior to any such compelled disclosure, the receiving party will (a) assert the privileged and confidential nature of the Confidential Information against the third party seeking disclosure and (b) cooperate fully with the disclosing party in protecting against any such disclosure and/or obtaining a protective order narrowing the scope of such disclosure and/or use of the Confidential Information. In the event that such protection against disclosure is not obtained, the receiving party will be entitled to disclose the Confidential Information, but only as and to the extent necessary to legally comply with such compelled disclosure. 7.4 LIMITATION. Although certain information may be generally known in the relevant industry, the fact that the receiving party uses same may not be so known and in such instance would comprise Confidential Information if so characterized. Furthermore, the fact that various fragments of information or data may be generally known in the relevant industry does not mean that the manner in which the disclosing party combines them, and the results obtained thereby, are so known and in such instance would also comprise Confidential Information if so characterized. 7.5 CONFIDENTIALITY OF AGREEMENT. Unless required by law, and except to assert its rights hereunder or for disclosures to its own employees on a "need to know" basis, or as required by law or regulations, each party agrees not to disclose the terms of this Agreement or matters relating thereto without the prior written consent of the other, which consent shall not be unreasonably withheld. 8. REPRESENTATIONS, WARRANTIES AND INDEMNITIES. 8.1 RADIUS REPRESENTATIONS AND WARRANTIES. Radius represents and warrants to Splash that, as of the Effective Date: -5- 8.1.1 Radius is a corporation duly organized, validly existing and in good standing under, and by virtue of the laws of the State of California; 8.1.2 All of the Software constitutes an original work of Radius authored by employees of Radius within the scope of their employment for Radius or by contractors of Radius who have transferred any rights in such Software to Radius; 8.1.3 It has all requisite ate right, power and authority to enter into this Agreement and grant all of the rights, powers and authorities herein granted; 8.1.4 The execution, delivery and performance of this Agreement does not contravene any contractual restriction or other restrictions binding on or affecting it; 8.1.5 Subject to Section 6.3 and Section 8.1.6, Radius has not previously assigned, transferred, conveyed or otherwise encumbered the right, title or interest in the Software or Intellectual Property rights therein; 8.1.6 Radius has produced a maximum of two hundred fifty (250) units of Separation Lab for distribution, Radius has sold no more than ONE HUNDRED fifty (150) licenses to use Separation Lab and Radius will deliver the remaining units of Separation Lab to Splash as set forth in Section 3.1. 8.1.7 Radius is the sole and exclusive owner of the Software, and all Intellectual Property rights therein, free and clear of any liens, charges and encumbrances, and no other person or entity has or shall have any claim of ownership with respect to the Software, and all Intellectual Property rights therein whatsoever; 8.1.8 Radius has not included any third party software in the Software and no royalties are payable to any third parties for use of the Software. 8.1.9 Radius has not provided a warranty or support and maintenance rights to Separation Lab to any other person or entity other than KDS or in the ordinary course of the sale of products incorporating the Software technology; 8.1.10 To Radius' knowledge, the Software does not infringe any rights owned or possessed by any third party, including without limitation any rights with respect to copyrights, trademarks, patents or trade secrets; and 8.1.11 To Radius's knowledge, no person is infringing any of Radius's Intellectual Property rights in the Software. 8.1.12 The foregoing representations and warranties are exclusive. SUBJECT TO THE FOREGOING, RADIUS MAKES NO OTHER REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, INCLUDING THE IMPLIED WARRANTIES OF FITNESS FOR A PARTICULAR PURPOSE, MERCHANTABILITY AND NONINFRINGEMENT WITH THE EXCEPTION OF SECTION 8.1.9. The Software is not error -6- free and may not satisfy Splash's requirements. Radius has no duty to correct, modify or update the Software. The Software is provided "as is". 8.2 RADIUS INDEMNIFICATION. 8.2.1 Radius, at no expense to Splash, shall, at all times, defend, indemnify, save and hold harmless Splash and its affiliates and each of their respective directors, officers, partners, employees, representatives and agents, from and against any and all liabilities, claims, causes of action, suits, damages and expenses, including reasonable attorneys' fees and expenses, interest, fines and penalties which any such entity or person may suffer, be liable for, may incur or be compelled to pay, or is otherwise threatened against such person or entity by reason of any breach by Radius of its representations and warranties set forth in Section 8.1. The indemnification provisions contained in this Section 8.2 shall be Splash's exclusive remedy and exclusive means for obtaining relief in the event of such breach by Radius or their representations and warranties hereunder, except claims relating to the fraud or willful misconduct of Radius. 8.3 SPLASH REPRESENTATIONS AND WARRANTIES. Splash represents and warrants to Radius that, as of the Effective Date: 8.3.1 Splash is a corporation duly organized, validly existing and in good standing under, and by virtue of, the laws of the State of Delaware. 8.3.2 Splash has all requisite legal and corporate power and authority to execute and deliver this Agreement. 8.3.3 All corporate action on the part of Splash necessary for the authorization, execution and delivery of this Agreement and the performance of all obligations of Splash hereunder has been taken. 9. LIMITATION OF LIABILITY. 9.1 CONSEQUENTIAL DAMAGES. Under no circumstances shall Splash or Radius be liable to each other for any consequential, special, indirect or incidental damages (including, without limitation, loss of use, data, business or profits) arising out of or under this Agreement or any use or exploitation the Software or Intellectual Property, even if such party has been advised of the possibility of such loss or damage. 9.2 DAMAGES CAP. Splash's cumulative liability to Radius from all causes of action and all theories of liability under or arising out of this Agreement, whether arising in contract, tort (including but not limited to negligence) or otherwise, will not exceed fifty thousand dollars ($50,000), except for a willful or reckless uncured breach of Section 7; provided that Radius has received the payments required pursuant to Section 5.1. Radius' liability to Splash hereunder shall not exceed two hundred and seventy-five thousand ($275,000) dollars, except for a willful or grossly negligent breach of Section 7 or 8. 10. GENERAL PROVISIONS. -7- 10.1 NOTICES. Any notice, request, demand, or other communication required or permitted hereunder shall be in writing and shall be deemed to be properly given upon the earlier of (i) actual receipt by the addressee, (ii) five (5) business days after deposit in the mail, postage prepaid, or (iii) three (3) days after deposit in an overnight industry courier, to the respective parties at the addresses first set forth above or to such other person or address as the parties may from time to time designate in a writing delivered pursuant to this Section 10.1. 10.2 PUBLICITY. Neither party shall use the name or describe the products or business of the other party in any publicity, product announcement, brochure, advertising, product labeling, promotion or otherwise for any purpose without the prior written consent of such other party. 10.3 GOVERNING LAW; JURISDICTION. This Agreement shall be governed by and construed in accordance with the laws of the State of California, U.S.A., without reference to its conflicts of law provisions. The parties agree that any suit or proceeding brought in connection with, arising out of or relating to, this Agreement shall be instituted only in a court of law located in the County of Santa Clara, State of California, U.S.A. and the parties hereby irrevocably agree and submit to the jurisdiction and venue of any such proceeding and agree that service of process may be effected in the same manner notice is given hereunder. 10.4 DISPUTE RESOLUTION. Any dispute hereunder will be negotiated between the parties commencing upon written notice from one party to the other. Settlement discussions and materials will be confidential and inadmissible in any subsequent proceeding without both parties' consent. If the dispute is not resolved by negotiation within sixty (60) days following such notice, the parties have the right to proceed under Section 10.3. 10.5 FORCE MAJEURE. Neither party shall be deemed to be in default of any provision hereof or be liable for any delay, failure in performance (excepting the obligation to pay) or interruption of service resulting directly or indirectly from act of war, act of God, act of civil or military authority, civil disturbance or any other cause beyond its reasonable control. 10.6 INDEPENDENT CONTRACTORS. The relationship between Splash and Radius is that of independent contractors. Neither party, nor its agents or its employees shall be deemed to be the agent, partner or franchisor/franchisee of the other party. Neither party shall have the right to bind the other party, transact any business in the other party's name or in its behalf or incur any liability for or on behalf of the other party. 10.7 ATTORNEYS' FEES. If any dispute arises under this Agreement, the prevailing party shall be reimbursed by the other party for any and all reasonable legal fees and costs associated therewith. 10.8 ASSIGNMENT. Radius may assign this Agreement in its entirety upon receipt of prior written consent from Splash, however, Radius may assign this Agreement without consent to an entity, with the exception of Electronics For Imaging, Inc. ("EFI") or any corporation formed from a merger or consolidation with EFI that succeeds to all or substantially all of the business or assets of Radius to which this Agreement relates and all such rights and licenses are assigned to such -8- successor entity. Splash may assign this Agreement in its entirety; however, any such assignee under this Section 10.8 shall agree in writing to be bound by the terms of this Agreement. This Agreement shall be binding upon and shall inure to the benefit of the parties, their successors and permitted assigns. Any attempted assignment of rights, duties or obligations hereunder, except in accordance with this Agreement, shall be null and void. 10.9 AMENDMENT. No provisions of this Agreement may be altered or amended unless such alteration or amendment is in writing and executed by a duly authorized officer of Splash and Radius, except where otherwise specifically provided for in this Agreement. 10.10 HEADINGS. The headings to the sections of this Agreement are included merely for convenience of reference and shall not affect the meaning of the language included therein. 10.11 TERMINATION OF SOFTWARE LICENSE AGREEMENT. The Software License Agreement dated January 30, 1996 between Splash and Radius (the "Software License Agreement") is hereby terminated by mutual agreement of the parties. Notwithstanding the foregoing, the provisions of Section 7 of the Software License Agreement shall govern such termination. Subject to Section 3 of this Agreement, Radius shall comply with Section 7(c)(iii) of the Software License Agreement. 10.12 ENTIRE AGREEMENT. This Agreement, together with its exhibits, constitutes the entire agreement and understanding between the parties relating to the subject matter hereof, supersedes all other agreements, oral or written, heretofore made between the parties with respect to such subject. Neither party is relying on any representation, warranty or agreement not expressly set forth in this Agreement. 10.13 SEVERABILITY. If any provision in this Agreement should be held illegal or unenforceable by a court having jurisdiction, such illegal or unenforceable provision shall be modified to the extent necessary to render it enforceable without losing its intent, or severed from this Agreement if no such modification is possible, and other provisions of this Agreement shall remain in full force and effect. 10.14 WAIVER. A waiver by either party of any term or condition of this Agreement or any breach thereof, in any one instance, shall not be deemed or construed to be a waiver of such term or condition or any subsequent breach thereof. 10.15 COUNTERPARTS. This Agreement may be executed in counterparts or by facsimile, each of which shall be an original, but all of which together shall constitute one agreement. 10.16 ATTORNEYS CONSULTED. Both parties have had the opportunity to review and negotiate this Agreement with the advice and assistance of legal counsel and no provision of this Agreement shall be construed against either party because such party or such party's legal counsel drafted such provision. -9- 10.16 ATTORNEYS CONSULTED. Both parties have had the opportunity to review and negotiate this Agreement with the advice and assistance of legal counsel and no provision of this Agreement shall be construed against either party because such party or such party's legal counsel drafted such provision. 10.17 INJUNCTIVE RELIEF. Notwithstanding the provisions of Section 10.4 or any other provision of this Agreement, the parties may apply to any court of competent jurisdiction at any time for temporary or permanent injunctive relief under this Agreement. IN WITNESS WHEREOF, the parties have caused this Technology Agreement to be executed by their duly authorized representatives as of the Effective Date. SPLASH TECHNOLOGY HOLDINGS, INC. RADIUS, INC. By: /s/ Kevin Macgillvray By: /s/ Mark Housley -------------------------- ----------------------------- Signature Signature Name: /s/ Kevin Macgillvray Name: Mark Housley ------------------------- --------------------------- Print or Type Print or Type Title: CEO Title: CEO ------------------------ -------------------------- Date: 12/4/98 Date: 12/4/98 ------------------------- -------------------------- -10- EXHIBIT A SEPARATION LAB, PROFILE LAB, PROFILE DATA SETS AND SCRIPTS See attached. -11- EX-10.24 5 EX-10.24 EXHIBIT 10.24 December 4, 1998 Mr. John Hui Korea Data Systems America, Inc. 12300 Edison Way Garden Grove, CA 92841 Re: supplement to August 7, 1998 transactions Dear John: Since we concluded the Amended and Restated License Agreement and the Asset Purchase Agreement, we have agreed to supplement the License and Agreement with the following changes: 1) KDS agrees to purchase certain tangible personal property pursuant to the attached Bill of Sale for $50,000 due on mutual execution of this letter. 2) Radius agrees to transfer its rights in the "EMACHINES" and "COLORMATCH" trademarks pursuant to the attached Assignment Agreement for $50,000 due on the mutual execution of this letter. 3) The assignment of trademarks and sale of tangible property is "as is", without any warranty by Radius, INCLUDING THE IMPLIED WARRANTIES OF MERCHANTIBILITY AND FITNESS FOR A PARTICULAR PURPOSE, except as specifically otherwise provided in the attached Assignment and Bill of Sale. KDS agrees to pay or reimburse Radius for all federal, state and local sales, use, personal property and other taxes, fees or duties arising out of the transactions contemplated by this supplement (other than taxes on the net income of Radius). Radius will timely cooperate with KDS in signing and filing such other documents as may be reasonably necessary to effectuate the foregoing. 4) KDS waives the "shareholder approval or opinion of counsel" condition set forth in Section 7.05 of the Asset Purchase Agreement. 5) KDS and Radius agree to extend the date by which the Asset Purchase Agreement must close to the close of business on May 17, 1999 (amending Section 9.02 of the Asset Purchase Agreement). 6) Radius agrees to consent to the assignment of the Amended and Restated License and the Asset Purchase Agreement (as amended by this letter) to miro Displays, Inc.; provided that KDS remains liable for all obligations under such License and Agreement if such assignee fails to timely perform and provided that the Guarantors' obligations under such License and Agreement are unimpaired. Such assignment will occur prior to July 4, 1999, if at all, and 1 KDS will promptly notify Radius of the effective date of such assignment. The License and Agreement are in all other respects affirmed. Please indicate your acceptance of the foregoing by signing below. Sincerely, /s/ Mark Housley Mark Housley, Chairman and CEO Accepted: /s/ John Hui 12/11/98 ------------------------------- -------------------- John Hui, Chairman Date 2 BILL OF SALE For good and valuable consideration, the undersigned "Seller" transfers all of its right, title and interest in the personal property identified ON THE ATTACHED LIST free of all liens and encumbrances to the undersigned "Buyer". Buyer accepts the personal property "as is" and "where is". Seller also transfers to Buyer any of its assignable warranties from third parties on the personal property. THERE ARE NO OTHER WARRANTIES, EXPRESS OR IMPLIED, ASSOCIATED WITH THE PERSONAL PROPERTY AND SELLER EXPRESSLY DISCLAIMS ANY OTHER WARRANTIES, INCLUDING THE WARRANTIES OF MERCHANTIBILITY AND FITNESS FOR A PARTICULAR PURPOSE. Buyer accepts the transfer of personal property on these terms and acknowledges that the consideration paid to Seller reflects a reasonable allocation of such risks. Buyer shall pay all sales and use taxes associated with this transfer and will indemnify Seller from all loss, liability, claims and expense, including reasonable attorneys' charges, associated with Buyer's failure to timely discharge such obligation. BUYER: Korea Data Systems America, Inc. SELLER: Radius Inc. By: By: /s/ Mark Housley ------------------------------ ------------------------------ Name: Name: Mark Housley ------------------------------ ------------------------------ Address: Address: 460 E Middlefield ------------------------------ ------------------------------ Mtn View, CA ------------------------------ ------------------------------ (Attach list of personal property) 3 LIST OF ASSETS TO BE TRANSFERRED TO KDS/MIRO
I.D. ASSET # QTY DESCRIPTION SERIAL # ASSET 10371 1 MONITOR--PRESSVIEW 17" MNB5290A0032 10372 1 PC--MAC POWER 8500/180 XB63907C8FB 10421 1 MONITOR--PRESSVIEW 17"SR MNB5290A0135 10422 1 MONITOR--MULTI SYNC--3D EQA940002322 10423 1 PC--IBM, 286 EQA940002323 10424 1 PC--MAC POWER 9500/1150 XB62400M767 10427 1 MONITOR--PRESSVIEW 21"SR MNAG290A0029 10429 1 MONITOR--RADIUS PV.21"SR MNA5200A0448 10432 1 PC--MAC QUADRA 950 F522652F672 11247 1 PC--IBM PENTIUM 11445 1 MONITOR 850 APPLE WR7301FN947 R-1096 1 OSCILLOSCOPE 400MHZ B014488 R-4440 1 SPECTRAL SCANNER--PHOTO RESEARCH 1020 R-5503 1 STD LUMINANCE INDICATOR (METER) (2 PIECES) R-6215 1 PRINTER--COMPAQ PAGEMERQ 20 R-6287 1 COLOR ANALYZER--MINOLTA CTR 75011029 R-6329 1 POWER SUPPLY 3870120 R-6502 1 PC PWR MAC 9600/233 XB7251PL9XJ R-6503 1 DTP 92 XRITE 522 R-6504 1 SWATCHBOOK DIGITAL XRITE 1674 R-6505 1 MONITOR PV 21" R-6508 1 Radius System 100 BATA00001264 R-6508 1 Radius System 100 BATA00001274 R-6510 1 SPECTRA SCAN 10247 R-6511 1 SIGNAL GEN R-6512 1 MONITOR PV21SR MNA7160A0473 R-6513 1 MONITOR PV21SR MNA6400A0002 1 Radius System 100 R-6234 1 COLOR ANALYZER--MINOLTA CTR R-6207 1 SIGNAL GEN 1 OSCILLOSCOPE 400MHZ 1 Prototype X-chassis .28mm AG 1 Prototype X-chassis .28mm AG 1 Synoptics Hub 2803 2318953 1 Synoptics Hub 2803 1112182
Asset List for Miro Final Page 1 12/4/98 LIST OF ASSETS TO BE TRANSFERRED TO KDS/MIRO
I.D. ASSET # QTY DESCRIPTION SERIAL # ASSET 1 Synoptics Hub 2803 2291961 1 Synoptics Hub 2803 2318882 R-6470 1 Cisco 2501 Router 1 NAT LANB/290 Router 1 Shiva Lanrover 4E 103940 1 Shiva Lanrover 4E 103398 1 Verilink 56K DSU B440A2768 1 Verilink 56K DSU B446B1896 R-5292 1 Verilink T1 DSU 163739 R-5293 1 Verilink T1 DSU 163715 R-5470 1 Cisco WS-C1201 10T Switch 62010376 R-6520 1 Synoptics Hub 2813 2567673 R-6521 1 Synoptics Hub 2813 1926969 R-6524 1 Synoptics Hub 2813 1112062 R-6526 1 Synoptics Hub 2813 1122462 1 Small Radius Light Box 1 MONITOR--RADIUS PV.21"SR MNA5470A0152 8 Pedestals for Trade Show Booth (assuming inventory available) 4 Counter tops for Trade Show Booth (assuming inventory available) 1 Metal Trade Show Bin 1 Hanging Radius for Trade Show Booth 1 Internet Class "C" address 198.148.212.X (subject to ARIN approval)
Asset List for Miro Final Page 2 12/4/98 ASSIGNMENT For good and valuable consideration, Radius Inc. transfers all of its right, title and interest in the U.S. trademarks #_________, #_________ and #_________ ("EMACHINES", the stylized "E" and "COLORMATCH"), as well as all related goodwill and the right to sue for any infringement, the "Trademarks") to Korea Data Systems America, Inc. ("Assignee"), subject only to the right of Radius and its designees to continue to use the Trademarks as necessary to service, repair or replace goods sold by or through Radius and its predecessors under such Trademarks prior to the date of this assignment. Assignee will indemnify Radius from all loss, liability, claims and expense (including attorneys' and experts' charges), collectively "Losses", occasioned by Assignee's use of the Trademarks after the date of this assignment. Radius will indemnify Assignee from all Losses occasioned by Radius' continued use of such Trademarks after the date of this assignment. Radius will execute such other documents as may be reasonably requested by Assignee to effect the recordation of such assignment. The date of this assignment is November 26, 1998. Assignee: Korea Data Systems America, Inc. By: John Hui, chairman /s/ John Hui -------------------------------------------- Date: 12/11/98 -------------------------------------------------------------- Radius Inc. By: Mark Housley, chairman and CEO /s/ Mark Housley -------------------------------- Date: 12/4/98 -------------------------------------------------------------- 5 EX-21.01 6 EX-21.01 EXHIBIT 21.01 -- LIST OF SUBSIDIARIES SUBSIDIARY FRANCE Radius France S.A. Radius S.A.R.L. ASIA Nihon SuperMac K.K. SuperMac Asia Pacific UNITED KINGDOM SuperMac Technology Europe GERMANY Radius GmbH OTHERS Radius FSC Inc. Radius (Cayman Island) Ltd. Radius Canada All subsidiaries are either inactive or in dissolution or preparation therefor, except Radius (Cayman Island) Ltd. -53- EX-23.01 7 EX-23.01 EXHIBIT 23.01 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-8 Nos. 33-37376, 33-43116, 33-47525, 33-71636, 33-77238, 33-83824, 33-59571, 333-17881 and 333-04765) pertaining to the 1986 Stock Option Plan, the 1988 SuperMac Technology, Inc. Stock Option Plan, the Directors' Stock Option Plan, the 1990 Employee Stock Purchase Plan, Non-Plan Stock Options and the 1995 Stock Option Plan, as amended, of Radius Inc. of our report dated October 30, 1998 with respect to the consolidated financial statements and schedule of Radius Inc. included in this Annual Report (Form 10-K) for the year ended September 30, 1998. /s/ ERNST & YOUNG LLP San Jose, California December 18, 1998 -54- EX-27.1 8 EX-27.1
5 12-MOS SEP-30-1998 SEP-30-1998 600 0 4258 (3894) 803 6423 7336 (7203) 6556 11639 0 0 0 169102 (174185) 6556 15668 15668 9921 9921 9908 0 459 7733 (1000) 0 0 0 0 8733 1.58 1.57
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