<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 10, 1996
REGISTRATION NO. 333-09591
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
SPLASH TECHNOLOGY HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 3577 77-0418472
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
555 DEL REY AVENUE
SUNNYVALE, CALIFORNIA 94086
(408) 328-6300
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
KEVIN K. MACGILLIVRAY
PRESIDENT
AND CHIEF EXECUTIVE OFFICER
SPLASH TECHNOLOGY HOLDINGS, INC.
555 DEL REY AVENUE
SUNNYVALE, CALIFORNIA 94086
(408) 328-6300
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPIES TO:
Jeffrey D. Saper, Esq. Carla S. Newell, Esq.
Howard S. Zeprun, Esq. Anthony M. Allen, Esq.
Brett D. Byers, Esq. GUNDERSON DETTMER STOUGH
WILSON SONSINI GOODRICH & ROSATI, VILLENEUVE FRANKLIN & HACHIGIAN, LLP
Professional Corporation 600 Hansen Way, Second Floor
650 Page Mill Road Palo Alto, California 94304
(415) 843-0500
Palo Alto, California 94304
(415) 493-9300
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
----------------
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE TO BE OFFERING PRICE OFFERING REGISTRATION
REGISTERED REGISTERED(1) PER SHARE(2) PRICE(1)(2) FEE(3)
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<S> <C> <C> <C> <C>
Common Stock, $0.001 par
value................. 2,990,000 shares $13.00 $38,870,000 $13,403.45
</TABLE>
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(1) Includes up to 390,000 shares of Common Stock ($5,070,000 aggregate
offering price) which may be purchased by the Underwriters to cover over-
allotments, if any.
(2) Estimated pursuant to Rule 457(a) solely for the purpose of calculating
the registration fee.
(3) Includes $11,896.64 which was previously paid.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS +
+OF ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
SEPTEMBER 10, 1996
2,600,000 Shares
[SPLASH LOGO]
Common Stock
--------
All of the 2,600,000 shares of Common Stock offered hereby are being sold by
Splash Technology Holdings, Inc. ("Splash" or the "Company"). Prior to the
Offering, there has been no public market for the Common Stock of the Company.
It is currently estimated that the initial public offering price will be
between $11.00 and $13.00 per share. See "Underwriting" for a discussion of
factors to be considered in determining the initial public offering price. The
Company has applied to have its Common Stock approved for quotation on the
Nasdaq National Market under the symbol "SPLH."
--------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 5.
--------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS
TO DISCOUNTS AND TO
PUBLIC COMMISSIONS(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share..................................... $ $ $
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Total(3)...................................... $ $ $
</TABLE>
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(1) See "Underwriting" for information relating to indemnification of the
Underwriters and other matters.
(2) Before deducting expenses payable by the Company estimated at $1,200,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
390,000 additional shares of Common Stock solely to cover over-allotments,
if any. To the extent that the option is exercised, the Underwriters will
offer the additional shares at the Price to Public shown above. If the
option is exercised in full, the total Price to Public, total Underwriting
Discounts and Commissions and total Proceeds to Company will be $ , $
and $ , respectively. See "Underwriting."
--------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject
to the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made at the
offices of Alex. Brown & Sons Incorporated, Baltimore, Maryland, on or about
, 1996.
Alex. Brown & Sons Montgomery Securities
INCORPORATED
THE DATE OF THIS PROSPECTUS IS , 1996.
<PAGE>
This page contains a large copy of the Splash logo above the text "When You're
Serious About Color(TM)." This page also includes the following text:
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE>
Inside front cover fold out
- ---------------------------
This page contains a picture of a Splash color server (including an Apple
Macintosh computer) and Xerox photocopier. In addition, this page contains
twelve other pictures of documents produced, at least in part, with Splash. The
page also includes the following text:
Desktop Publishing -- With Splash, high quality color brochures, flyers, and
newsletters can be printed quickly and cost effectively from the desktop.
Office Graphics -- Multiple users across a corporate network can use Splash for
color charts, graphs, and high-impact presentations.
The front, inside and back covers of this prospectus were created, revised and
proofed in-house using Splash.
Graphic Arts -- Splash's specialized color and workflow capabilities can be
used in a variety of graphic arts applications.
Professional Color Publishing -- Splash technology enables magazine publishers
to produce high quality pre-proofs before going to press.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and consolidated financial statements and
notes thereto, appearing elsewhere in this Prospectus. This Prospectus contains
forward-looking statements that involve risks and uncertainties. The Company's
actual results may differ materially from the results discussed in such
forward-looking statements. Factors that may cause such a difference include,
but are not limited to, those discussed in "Risk Factors." Unless the contexts
otherwise specifies, references in this Prospectus to "Splash" and the
"Company" refer to Splash Technology Holdings, Inc. and its subsidiaries,
including its principal operating subsidiary, Splash Technology, Inc., as well
as predecessor entities.
THE COMPANY
Splash develops, produces and markets color servers that provide an
integrated link between desktop computers and digital color laser copiers and
enable such copiers to provide high quality, high speed, networked color
printing. These hybrid systems, consisting of color servers and digital color
laser copiers (referred to as connected or multifunction copiers), support
multiple uses including image scanning, image manipulation, printing and
photocopying. The Company's products feature advanced color correction, color
calibration and separations support, ease of use, time-saving workflow
functionality, simulation of many color monitors and printing presses, and
automatic correction for certain printing workflow problems.
Commercial color printing customarily involves multiple iterations of
complex, labor-intensive and costly steps, including design and composition,
color retouching and other manipulation, color separation, image setting and
proofing, and, finally, preparation of printing plates and printing on a large,
expensive commercial press. The process involves high fixed costs and
considerable time, and historically has been justified only for printing in
large volumes. The broader use of desktop color displays, desktop publishing
software, and desktop-based color scanners, as well as the increased
availability of digital color copiers and networked and desktop color printers,
has enabled a greater amount of color design and print preparation to be
performed more rapidly and at lower costs than previously possible. Although
the quality of both color copiers and desktop color displays has improved in
recent years, users hoping to take advantage of such improvements have faced
considerable difficulties due to the complexities inherent in color technology,
thus creating a need for advanced, integrated, high quality, easy-to-use, and
cost-effective color printing solutions.
Splash servers transform color copiers into effective network-based system
solutions for a variety of color printer applications from commercial and short
run printing to desktop publishing and office color printing. The Company's
products utilize open systems that can be readily integrated with corporate
networks, enabling easy access by a broad range of end users. The use of open
systems enables the Company to concentrate its development resources on value-
added solutions for end users, and provides greater flexibility by allowing use
of standard peripheral products and software. The Company believes it was the
first among its direct competitors to commercially offer a number of
significant features for multifunction copiers, including features in the areas
of color calibration, color corrections, color separations and scanning.
Splash sells its Professional Color Imaging ("PCI") Series color server
products to two of the leading providers of color copiers, Xerox Corporation
(including its affiliate in Europe, Rank Xerox) ("Xerox") and Fuji Xerox
Company Ltd. ("Fuji Xerox"). These original equipment manufacturers ("OEMs")
integrate the Company's color servers with their digital color copiers and sell
the connected systems to end users through a worldwide direct distribution
network. Users of the Company's color servers include magazine publishers,
advertising firms, graphic arts firms, publishing services providers, prepress
and printing firms, and Fortune 500 companies with in-house graphics, marketing
and advertising and publishing needs.
Splash Technology Holdings, Inc. was incorporated in Delaware in December
1995. The Company's business operated as the Color Server Group ("CSG")
division of SuperMac Technology, Inc. ("SuperMac") from late 1992 to August
1994, and after the merger of SuperMac into Radius, Inc. ("Radius") as the CSG
division of Radius from August 1994 until January 1996. In January 1996, the
Company was acquired by an investor group led by certain entities affiliated
with Summit Partners, L.P. and Sigma Partners, L.P. (the "Acquisition"). The
Company's executive offices are located at 555 Del Rey Avenue, Sunnyvale, CA
94086, and its telephone number is (408) 328-6300. See "Acquisition" and
"Certain Transactions."
3
<PAGE>
THE OFFERING
<TABLE>
<C> <S>
Common Stock offered by the Company.......... 2,600,000 shares
Common Stock to be outstanding after the
offering made hereby (the "Offering")....... 11,920,633 shares(1)
Use of proceeds.............................. For repayment of subordinated
promissory notes, redemption of
Series A Preferred Stock, and
general corporate purposes
including working capital. See
"Use of Proceeds."
Proposed Nasdaq National Market symbol....... SPLH
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS)
<TABLE>
<CAPTION>
SPLASH
TECHNOLOGY
PREDECESSOR BUSINESS HOLDINGS, INC.
----------------------- --------------
YEAR ENDED NINE MONTHS ENDED
SEPTEMBER 30, JUNE 30,
--------------- ----------------------
1994 1995 1995 1996(2)
------- ------- ------- --------------
(PRO FORMA)
(UNAUDITED)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Net revenue............................. $16,354 $30,472 $20,343 $ 31,334
Cost of net revenue..................... 12,068 20,723 13,737 19,882
------- ------- ------- --------
Gross profit............................ 4,286 9,749 6,606 11,452
------- ------- ------- --------
Research and development................ 1,999 3,295 2,034 3,122
Sales and marketing..................... 562 2,076 1,505 1,494
General and administrative.............. 377 891 667 955
Amortization and write-off of
technology............................. -- -- -- 22,729
------- ------- ------- --------
Income (loss) from operations........... 1,348 3,487 2,400 (16,848)
Interest expense, net................... -- -- -- 406
------- ------- ------- --------
Income (loss) before provision for
income taxes........................... 1,348 3,487 2,400 (17,254)
Provision for (benefit from) income
taxes.................................. 99 1,395 960 (6,929)
------- ------- ------- --------
Net income (loss)....................... $ 1,249 $ 2,092 $ 1,440 $(10,325)
======= ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
----------------------
ACTUAL AS ADJUSTED(3)
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<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital.......................................... $ 5,955 $10,345
Total assets............................................. 28,502 32,892
Long term debt........................................... 8,600 --
Stockholders' equity..................................... 7,522 20,273
</TABLE>
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(1) Based on the number of shares outstanding as of June 30, 1996. Excludes an
aggregate of approximately 250,000 shares of Common Stock issuable on the
exercise of options and warrants outstanding as of June 30, 1996 at a
weighted average exercise price of $0.47 per share; approximately 14,000
shares of Common Stock issuable on the exercise of options granted after
June 30, 1996; approximately 2,350,000 shares of Common Stock reserved for
future grants under the Company's 1996 Stock Option Plan; and 175,000
shares of Common Stock reserved for issuance under the Company's 1996
Employee Stock Purchase Plan. Also excludes 15,426 shares of Series A
Preferred Stock to be redeemed upon the closing of the Offering. See "Use
of Proceeds," "Management--Compensation Plans" and Notes 8 and 12 of Notes
to Consolidated Financial Statements.
(2) Represents the results of operations of CSG for the four months ended
January 31, 1996 plus the results of operations of the Company for the five
months ended June 30, 1996. There were no significant pro forma
adjustments.
(3) Adjusted to reflect the sale of 2,600,000 shares of Common Stock offered by
the Company hereby at an assumed public offering price of $12.00 per share,
after deducting estimated underwriting discounts and commissions and
estimated offering expenses and application of the net proceeds therefrom.
See "Use of Proceeds" and "Capitalization."
--------------
This Prospectus includes trademarks and trade names of the Company and other
corporations.
--------------
Except for the Consolidated Financial Statements and as otherwise noted, all
information in this Prospectus has been adjusted to give effect to (i) the
conversion of each outstanding share of Series B Preferred Stock into Common
Stock upon the closing of the Offering and (ii) the filing of an Amended and
Restated Certificate of Incorporation on or prior to the closing of the
Offering to effect a 3.5-for-1 split of the Common Stock and to increase the
authorized number of shares of Common Stock and Preferred Stock. See
"Capitalization," "Description of Capital Stock" and "Underwriting."
4
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the
shares of Common Stock offered hereby. This Prospectus contains forward-
looking statements that involve risks and uncertainties. The Company's actual
results may differ materially from the results discussed in such forward-
looking statements. Factors that may cause such a difference include, but are
not limited to, those discussed below.
Short Period of Independent Operations; No Assurance of Future
Profitability. Prior to the Acquisition in January 1996, the business of the
Company had been operated as a division of Radius and, prior to the merger of
SuperMac into Radius, as a division of SuperMac. Moreover, Splash was
dependent on Radius through May 1996 for certain financial and administrative
services and related support functions. Accordingly, the Company has had
limited experience operating as an independent entity, and there can be no
assurance that the Company will be able to operate effectively as an
independent company. Moreover, the Company only began implementing independent
accounting systems, financial, operational and management controls, and
reporting systems and procedures in February 1996. The Company believes that
further improvements in financial, management and operational controls will
continue to be needed to manage any expansion of the Company's operations. The
failure to implement such improvements could have a material adverse effect
upon the Company's business, operating results and financial condition.
Although the Company's net revenue has increased each year since fiscal
1994, the Company's limited history of operations as an independent entity
make reliable predictions of future operating results difficult or impossible.
In particular, the Company's recent revenue growth should not be considered
indicative of future results. There can be no assurance that any of the
Company's business strategies will be successful or that the Company will be
able to sustain growth on a quarterly or annual basis. Although the Company
was profitable for the first nine months of fiscal 1996 (pro forma and before
purchase accounting adjustments) and the first five months of independent
operations through June 30, 1996 (before purchase accounting adjustments),
there can be no assurance that the Company will continue to be profitable on
an annual or quarterly basis in the future. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Fluctuations in Operating Results; Seasonal Purchasing Patterns. The
Company's operating results have fluctuated and will likely continue to
fluctuate in the future on a quarterly and annual basis as a result of a
number of factors, many of which are outside the Company's control. These
fluctuations are in part due to the purchasing patterns of the Company's two
customers, Xerox and Fuji Xerox. These customers have historically made, and
are expected to continue to make, a significant portion of their purchases of
the Company's products in the second half of the Company's fiscal year. As a
result, the Company's sales have historically been significantly lower, and
are expected to continue to be lower, in the first quarter of the Company's
fiscal year than in the immediately preceding fourth quarter. In addition, any
increases in inventories by the Company's customers could also result in
variations in the timing of purchases by such customers. For example, in May
1996, as the Company transitioned from its Power Series line of products to
its PCI Series line of products, Xerox informed Splash that it held in its
inventory a substantial quantity of Power Series products accumulated since
January 1996. As a result of the Company's product transition and Xerox's
accumulation of inventory of these products, sales of Power Series products
shipped to Xerox between January 1996 and April 1996 are recorded as net
revenue when Xerox sells these products to end users. All other Power Series
and PCI Series product sales are recorded as net revenue upon shipment to the
OEM customer. There can be no assurance that the Company will receive
sufficient inventory information from its OEM customers over time or that the
Company will be able to prevent a recurrence of a similar problem in the
future. In addition, announcements by the Company or its competitors of new
products and technologies could cause customers to defer purchases of the
Company's existing products. In the event that anticipated orders
5
<PAGE>
from end users fail to materialize, or delivery schedules are deferred or
canceled as a result of the above factors or other unanticipated factors, it
would materially and adversely affect the Company's business, operating
results and financial condition.
Results in any period could also be affected by changes in market demand,
competitive market conditions, sales promotion activities by the Company, its
OEM customers or its competitors, market acceptance of new or existing
products, sales of color copiers with which the Company's products are
compatible, the cost and availability of components, the mix of the Company's
customer base and sales channels, the amount of any third party funding of
development expenses, the mix of products sold, the Company's ability to
effectively expand its sales and marketing organization, the Company's ability
to attract and retain key technical and managerial employees, and general
economic conditions. As a result, the Company believes that period-to-period
comparisons of its results of operations are not necessarily meaningful and
should not be relied upon as indicative of future performance. Due to all of
the foregoing factors, the Company's operating results in one or more future
periods may be subject to significant fluctuations. In the event this results
in the Company's financial performance being below the expectations of public
market analysts and investors, the price of the Company's Common Stock would
be materially and adversely affected.
The Company's gross margin is affected by a number of factors, including
product mix, product pricing, and manufacturing and component costs. The
Company may be required to reduce prices in response to competitive pressure
or increase spending to pursue new market opportunities. In this regard, in
the event of significant price competition in the market for color copier
servers or competitive systems, the Company could be at a significant
disadvantage compared to its competitors, many of which have substantially
greater resources (and, in the case of the Company's principal competitor,
Electronics for Imaging, Inc. ("EFI"), lower product costs) than the Company
and therefore could more readily withstand an extended period of downward
pricing pressure. Any decline in average selling prices of a particular
product which is not offset by a reduction in production costs or by sales of
other products with higher gross margins would decrease the Company's overall
gross margin and adversely affect the Company's operating results. The Company
establishes its expenditure levels for product development and other operating
expenses based on projected sales levels and margins, and expenses are
relatively fixed in the short term. Moreover, the Company's overall expense
level is expected to increase as the Company builds corporate infrastructure
to replace services previously provided by Radius and to support expansion of
operations. Accordingly, if sales are below expectations in any given period,
the adverse impact of the shortfall on the Company's operating results may be
increased by the Company's inability to adjust spending in the short term to
compensate for the shortfall. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Emerging Color Server Market. The market for the Company's color server
products has only recently begun to develop. Because the markets for digital
color copiers and connected color servers are relatively new, and because
current and future competitors are likely to continue to introduce competing
solutions, it is difficult to predict the rate at which these markets will
grow, if at all. If the color server market fails to grow, or grows more
slowly than anticipated, the Company's business, operating results and
financial condition will be adversely affected. The Company intends to
continue to spend resources educating potential customers about color servers.
However, there can be no assurance that such expenditures will enable the
Company's products to achieve any additional degree of market acceptance.
Moreover, the Company has historically focused on certain segments of the
market (the prepress and graphic arts segments) and has had only limited
penetration to date into the broader office segment or other market segments.
There can be no assurance the Company will be able to maintain or increase its
presence in its existing market segments or to successfully penetrate such
additional market segments. See "Business--Industry Background," "--Markets
and Customers" and "--Competition."
6
<PAGE>
Dependence on Xerox and Fuji Xerox. The Company's products operate only with
certain color laser copiers offered by Xerox and Fuji Xerox, and the Company
currently sells its products solely to Xerox and Fuji Xerox, which resell the
Company's products on an OEM basis to their color copier end users. Sales to
Xerox in fiscal 1994 and 1995 and the nine months ended June 30, 1996 accounted
for approximately 60%, 41% and 49%, respectively, of the Company's net revenue,
and sales to Fuji Xerox in such periods accounted for approximately 40%, 59%
and 51%, respectively, of net revenue. As a result, sales of the Company's
products have been and will continue to be heavily influenced by the market
acceptance of the Xerox and Fuji Xerox color copiers with which the Company's
products operate and the sales efforts of Xerox and Fuji Xerox with respect to
Splash products. Xerox and Fuji Xerox face substantial competition from other
manufacturers of color copiers, including Canon Inc. ("Canon"), which the
Company believes has the largest share of the worldwide market for color
copiers. If sales of the color copiers of Xerox and Fuji Xerox with which
Splash's products are compatible decrease, the Company's business, operating
results and financial condition would be materially and adversely affected.
Similarly, if Xerox or Fuji Xerox were to introduce color copiers that are not
compatible with the Company's products, or if Xerox or Fuji Xerox were to
introduce color copiers that already contain a significant portion of the
functionality of the Company's products so as to render the Company's products
unnecessary, the Company's business, operating results and financial condition
would be materially and adversely affected. In addition, Fuji Xerox color
copiers are produced in a single location in Japan, and any disruption of
production at such facility could materially and adversely affect the Company's
business, operating results and financial condition.
As a result of its reliance on Xerox and Fuji Xerox, the Company currently
has a very small sales and marketing organization and has limited experience
with direct sales efforts. Any change in the sales and marketing efforts of
Xerox or Fuji Xerox with respect to Splash's products, including any reduction
in the size or effectiveness of the Xerox or Fuji Xerox sales and marketing
forces, or changes in incentives for Xerox or Fuji Xerox salespersons to sell
Splash products or color servers produced by competitors of Splash, could have
a material adverse effect on the Company's business, operating results and
financial condition.
Xerox currently sells a substantial number of color servers made by companies
other than Splash, including those of the Company's principal competitor, EFI,
and Fuji Xerox has recently commenced sales of EFI color servers. Either Xerox
or Fuji Xerox may choose to promote the use of color servers manufactured by
competitors of the Company to the detriment of sales of the Company's products,
may choose to manufacture color servers themselves, may choose to manufacture
only color copiers that are not compatible with Splash products, or may
otherwise reduce or cease purchases and sales of Splash color servers. The
Company does not have contracts with Xerox and Fuji Xerox with respect to its
PCI Series products and is currently operating on a purchase order basis with
these customers. Although the Company is currently negotiating an agreement
with Xerox and Fuji Xerox for its PCI Series products, there can be no
assurance that any such agreement will be completed or that the Company will
continue to receive orders from Xerox or Fuji Xerox. Any decrease in the level
of sales to Xerox or Fuji Xerox would have a material adverse effect on the
Company's business, operating results and financial condition.
Inventory Risks. Xerox and Fuji Xerox may from time to time carry excess
inventory of Splash color servers, inaccurately project future demand for
Splash products or fail to optimally manage their ordering of Splash products,
any of which could result in a significant decrease in orders from such
customers in subsequent periods. For example, in May 1996, as the Company
transitioned from its Power Series line of products to its PCI Series line of
products, Xerox informed Splash that it held in its inventory a substantial
quantity of Power Series products accumulated since January 1996. Xerox has
indicated to Splash that, to eliminate this inventory and to permit Xerox to
introduce the new PCI Series products, Xerox substantially reduced the selling
prices of the Power Series products beginning in June 1996. Sales by Xerox of
the Power Series products at a discount may have resulted or could result in
reduced sales of the Company's PCI Series products and Xerox may not be able to
continue to sell
7
<PAGE>
Splash products at historical levels once it returns to a policy of not
discounting Splash products. Further, the reduced margin that Xerox will
experience as a result of its efforts to sell off its inventory of the Power
Series products may impair Splash's relationship with Xerox and thus could
result in reduced future sales of Splash products by Xerox. Xerox may have
difficulty selling color server kits for the Power Series products, which do
not include a computer platform, because these units require the use of an
Apple Power Macintosh based upon the NuBus architecture no longer used in
Apple Power Macintosh computers. Thus, a purchaser of the earlier generation
color server kit must either already possess a NuBus based Apple Power
Macintosh or purchase one used. Moreover, although Xerox has no commercial
right of return with respect to the Company's products, there can be no
assurance that the Company will not elect to make accommodations to Xerox in
light of its status as a significant customer. Reduced sales of Splash
products by Xerox or any financial or other accommodation made to Xerox could
have a material adverse effect on the business, operating results and
financial condition of Splash. There can be no assurance that the Company will
receive sufficient inventory information from Xerox or other customers over
time or that the Company will in any event be able to prevent recurrence of a
similar problem in the future, which could have a material adverse effect on
the Company's business, operating results and financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Dependence on Adobe Systems Incorporated. The Company's products depend on
the PostScript page description language software developed by Adobe Systems
Incorporated ("Adobe") and licensed by the Company from Adobe on a non-
exclusive basis. Any delay in the release of future versions of PostScript by
Adobe or in the upgrade of the Company's products to be compatible with future
versions of PostScript, or any material defects in any future versions of
PostScript software, could have a material adverse effect on the Company's
business, operating results and financial condition. The Company is required
to pay a royalty for each copy of PostScript that is incorporated in Splash
products, which royalty constitutes a substantial portion of the total
manufactured cost of the Company's products. In addition, the Company is
required to permit testing by Adobe of the beta release version of the
Company's products, and the Company cannot begin shipping any version until
such version meets Adobe's quality standards. The license agreement between
the Company and Adobe expires in September 1997, subject to renewal upon
mutual consent. There can be no assurance that Adobe will continue to enjoy
its leadership position in the market, renew the current license at the end of
its term or license future versions of PostScript to Splash on terms favorable
to Splash or at all. If the license agreement between Adobe and the Company is
terminated for any reason or the Company's relationship with Adobe is
impaired, the Company could be required to change to an alternative page
description language which would require the expenditure of significant
resources and time and could significantly limit the marketability of the
Company's products. Any increase in royalties payable to Adobe also could have
a material adverse effect on the Company's operating results. In addition, the
Adobe PostScript software is incorporated in the products of certain of the
Company's competitors. The Company's business could be materially and
adversely affected if Adobe were to make available to the Company's
competitors future versions of Adobe PostScript software that include
enhancements to the Adobe PostScript software that were originally developed
or implemented by Splash. See "Business--Competition" and "--Intellectual
Property."
Dependence on Apple Computer, Inc. All of the Company's current products
require the use of an Apple Power Macintosh computer as a computer platform.
Apple has recently experienced significant financial difficulties and losses
in market acceptance, and its products have particularly low levels of market
acceptance in the office color printing market into which the Company is
seeking to expand. If Apple were to discontinue production of the Power
Macintosh models with which Splash products operate or were unable to provide
or otherwise cease to provide an acceptable level of end user customer
support, the Company's business, operating results and financial condition
would be materially and adversely affected. For example, Apple phased out the
manufacture of Power Macintosh products based on the NuBus architecture in the
second half of calendar 1995 in favor of Power Macintosh
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products based on the PCI bus architecture. As a result, the Company had to
expend significant resources and faced substantial risk of technological
failure or lack of market acceptance in developing and introducing its PCI-
based products. Any efforts of the Company to migrate its products to a
different computer platform would require a substantial expenditure of
resources and time, and there can be no assurance that any such products can
be successfully developed or introduced in a timely fashion and at competitive
cost or otherwise achieve widespread market acceptance. See "Business--
Manufacturing."
Dependence on Single Product Line. Substantially all of Splash's current
shipments consist, and are expected to continue to consist, of the Company's
PCI Series of color server products. Because of this product concentration, a
decline in demand for or pricing of these products would have a material
adverse effect on the Company's business, operating results and financial
condition, whether as a result of a decline in sales of complementary Xerox
and Fuji Xerox copiers; a further decline in the market for Apple Power
Macintosh computers; increased sales by Xerox or Fuji Xerox of color servers
offered by competitors of the Company or developed internally by Xerox or Fuji
Xerox; new product introductions by competitors; price competition; or
technological change. Any decline in the market for this product line or any
failure to timely produce new and enhanced products would have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business--Products and Technology."
Rapid Technological Change; Dependence on New Product Introductions. The
graphics and color reproduction, color processing and personal computing
markets are characterized by rapid changes in customer requirements, frequent
introductions of new and enhanced products, and continuing and rapid
technological advancement. To compete successfully, the Company must continue
to design, develop, manufacture and sell new products that provide
increasingly higher levels of performance and reliability, take advantage of
technological advancements and changes and respond to new customer
requirements. The Company's success in designing, developing, manufacturing
and selling new products will depend on a variety of factors, including the
identification of market demand for new products, product selection, timely
implementation of product design and development, product performance, cost-
effectiveness of current products and products under development, effective
manufacturing processes and the success of promotional efforts.
The Company has recently transitioned its product offerings from its Power
Series products to its PCI Series products, and there can be no assurance that
the PCI Series or any future products will achieve widespread market
acceptance. In addition, the Company has in the past experienced delays in the
development of new products and the enhancement of existing products, and such
delays may occur in the future. If the Company is unable, due to resource
constraints or technological or other reasons, to develop and introduce new
products or versions in a timely manner, or if such new products or releases
do not achieve timely and widespread market acceptance, it would have a
material adverse effect on the Company's business, operating results and
financial condition. See "Business--Products and Technology" and "--Research
and Development."
Competition. The markets for the Company's products are characterized by
intense competition and rapid change. The Company competes directly with other
independent manufacturers of color servers and with copier manufacturers, and
indirectly with printer manufacturers and others. The Company has a number of
direct competitors for color server products, the most significant of which is
EFI. Splash also faces competition from copier manufacturers that offer
internally developed color server products, such as a non-PostScript color
server offered by Fuji Xerox, or that incorporate color server features into
their copiers. In addition, the Company faces competition from desktop color
laser printers that offer increasing speed and color server capability. As
component prices decrease and the processing power and other functionality of
copiers, printers and computers increases, it becomes more likely that copier,
printer and computer manufacturers will continue to add color server
functionality to their systems, which could reduce the market for the
Company's existing line of products.
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The Company also competes indirectly with manufacturers of electronic color
prepress systems, which offer similar functionality for the short-run and
commercial printing market as is provided by the Company's products. The
Company also competes indirectly with providers of color separation, color
editing and page layout software. While such software typically is
complementary to the Company's systems, such software can also be competitive
with the Company's systems and may become increasingly competitive to the
extent that the providers of such software extend the functionality of their
products in future releases.
Many of the Company's current and potential direct and indirect competitors
have longer operating histories, are substantially larger, and have
substantially greater financial, technical, manufacturing, marketing and other
resources than Splash. A number of these current and potential competitors also
have substantially greater name recognition and a significantly larger
installed base of products than the Company, which could provide leverage to
such companies in their competition with Splash. The Company expects
competition to increase to the extent the color server market grows, and such
increased competition may result in price reductions, reduced gross margins and
loss of market share, any of which could materially adversely affect the
Company's business, operating results and financial condition. As a result of
their greater resources, many of such competitors are in a better position than
Splash to withstand significant price competition or downturns in the economy.
There can be no assurance that Splash will be able to continue to compete
effectively, and any failure to do so would have a material adverse effect upon
the Company's business, operating results and financial condition. See
"Management Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Competition."
Management of Expanding Operations. The growth in the Company's business has
placed, and any further expansion would continue to place, a significant strain
on the Company's limited personnel, management and other resources. The
Company's ability to manage any future expansion effectively will require it to
attract, train, motivate and manage new employees successfully, to integrate
new management and employees into its overall operations and to continue to
improve its operational, financial and management systems. In this regard, the
Company's Chief Financial Officer and Vice President, Finance and
Administration joined the Company on March 29, 1996, and the Company currently
does not have and has been searching for a Vice President, Sales and Marketing.
Moreover, the Company expects to increase significantly the size of its
domestic and international sales support staff and the scope of its sales and
marketing activities, and to hire additional research and development
personnel. The Company's failure to manage any expansion effectively, including
any failure to integrate new management and employees or failure to continue to
implement and improve financial, operational and management controls, systems
and procedures, could have a material adverse effect on the Company's business,
operating results and financial condition.
Dependence on Third Party Manufacturers. The Company outsources the
manufacture of its products to third party subcontract manufacturers including
Manufacturing Services, Ltd. ("MSL"), located in Sunnyvale, California and
Logistix Incorporated ("Logistix") located in Fremont, California. MSL
purchases the components used in Splash boards from its component suppliers and
performs double-sided active surface mount assembly, in-circuit test,
functional test and system test of the printed circuit boards used in the
Splash PCI Series products, on a turnkey basis. MSL also performs in-warranty
and out-of-warranty repair of failed boards for the Splash PCI Series products.
The Company directly purchases Apple Power Macintosh computers, monitors and
memory, and furnishes these components, as well as the MSL-assembled boards, to
Logistix for final assembly. Logistix directly purchases a small portion of the
components used in Splash color servers and does all final assembly and system
configuration. Other subcontract manufacturers perform similar services with
respect to the Splash Power Series product line.
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While the Company's subcontract manufacturers conduct quality control and
testing procedures specified by the Company, the Company has from time to time
experienced manufacturing quality problems. Although the Company does not
believe any such problem had a material adverse effect on the Company's
business, there can be no assurance that quality problems will not occur again
in the future or that any such problem would not have a material adverse
effect on the Company's business, operating results and financial condition.
If the Logistix, MSL or other third party manufacturing facilities utilized
by the Company become unavailable to the Company, or if the manufacturing
operations at these facilities are slowed, interrupted or terminated, the
Company's business, operating results and financial condition could be
adversely affected. Although the Company believes that there are a variety of
companies available with the capability to provide the Company with such
services, there can be no assurance that the Company would be able to enter
into alternative third party manufacturing arrangements on terms satisfactory
to the Company, in a timely fashion, or at all. See "Business--Manufacturing."
Dependence on Component Availability and Cost. The Company purchases
components comprising a significant portion of the total cost of its color
servers. The balance of the inventory required to manufacture the Company's
products is purchased by Logistix. The Company currently sources most of its
Power Macintosh computers that serve as the platforms for its color servers
exclusively from Apple. The Company is currently operating on a purchase order
basis with Apple.
Certain components necessary for the manufacture of the Company's products
are obtained from a sole supplier or a limited group of suppliers. These
include Apple Power Macintosh computers, certain ASICs and other semiconductor
components. The Company does not maintain any long-term agreements with any of
its suppliers of components. Because the purchase of certain key components
involves long lead times, in the event of unanticipated increases in demand
for the Company's products, the Company could be unable to manufacture certain
products in a quantity sufficient to meet end user demand. The Company also
purchases memory modules from a single supplier. Although other sources are
available, a change in memory supplier could require time to effect and could
impact production. This risk would be exacerbated in times of memory supply
shortages. Any inability to obtain adequate deliveries of any of the
components or any other circumstance that would require the Company to seek
alternative sources of supply could affect the Company's ability to ship its
products on a timely basis, which could damage relationships with current and
prospective customers and could therefore have a material adverse effect on
the Company's business, financial condition and operating results. Moreover,
there can be no assurance that alternative sources of supply would be
available on reasonably acceptable terms, on a timely basis, or at all. The
Company has from time to time experienced shortages in deliveries of ASICs
from Toshiba Corporation, which shortages have impacted production volume
capabilities. In order to attempt to mitigate the risk of such shortages in
the future, the Company intends to increase its inventory of components for
which the Company is dependent upon sole or limited source suppliers. As a
result, the Company may be subject to an increasing risk of inventory
obsolescence in the future, which could materially and adversely affect its
operating results and financial condition.
The market prices and availability of certain components, particularly
memory and other semiconductor components and, to a lesser extent, Apple Power
Macintosh computers, which collectively represent a substantial portion of the
total manufactured cost of the Company's products, have fluctuated
significantly in the past. Significant fluctuations in the future could have a
material adverse effect on the Company's operating results and financial
condition. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business--Manufacturing."
Dependence on Proprietary Technology; Reliance on Third Party Licenses. The
Company relies in part on trademark, copyright and trade secret law to protect
its intellectual property in the United States and abroad. The Company seeks
to protect its software, documentation and other written materials
11
<PAGE>
under trade secret and copyright laws, which afford only limited protection and
there can be no assurances that the steps taken by the Company will prevent
misappropriation of its technology. The Splash software included as a part of
the Company's products is sold pursuant to "shrink wrap" licenses that are not
signed by the end user and, therefore, may be unenforceable under the laws of
certain jurisdictions. The Company does not own any issued patent. There can be
no assurance that any trademark or copyright owned by the Company, or any
patent, trademark or copyright obtained by the Company in the future, will not
be invalidated, circumvented or challenged, that the rights granted thereunder
will provide competitive advantages to the Company or that any of the Company's
pending or future patent applications will be issued with the scope of the
claims sought by the Company, if at all. In addition, the laws of some foreign
countries do not protect the Company's proprietary rights as fully as do the
laws of the United States. Thus, effective intellectual property protection may
be unavailable or limited in certain foreign countries. There can be no
assurance that the Company's means of protecting its proprietary rights in the
United States or abroad will be adequate or that competition will not
independently develop technologies that are similar or superior to the
Company's technology, duplicate the Company's technology or design around any
patent of the Company. Moreover, litigation may be necessary in the future to
enforce the Company's intellectual property rights, to determine the validity
and scope of the proprietary rights of others or to defend against claims of
infringement or invalidity. Such litigation could result in substantial costs
and diversion of management time and resources and could have a material
adverse effect on the Company's business, operating results and financial
condition.
There have been substantial amounts of litigation in the computer and related
industries regarding intellectual property rights, and there can be no
assurance that third parties will not claim infringement by the Company of
their intellectual property rights. In particular, EFI filed suit against
Radius in November 1995, alleging infringement of an EFI patent by Splash's
predecessor, CSG, and requesting unspecified monetary damages and injunction
relief. The technology which is the subject of the patent claim was acquired by
Splash in the Acquisition, and EFI could add Splash as a defendant to this suit
at any time. Although a portion of the purchase price in the Acquisition was
placed in escrow pending resolution of the EFI litigation, there can be no
assurance that any such litigation against Splash would not have a material
adverse effect on the Company's business, operating results and financial
condition. The addition of Splash as a defendant in the EFI suit or any other
claims that the Company is infringing on proprietary rights of others, with or
without merit, could be time consuming to defend, result in costly litigation,
divert management's attention and resources, and cause product shipment delays.
If the Company were found to be infringing on the intellectual property rights
of any third party, the Company could be subject to liabilities for such
infringement, which liabilities could be material, and could be required to
seek licenses from other companies or to refrain from using, manufacturing or
selling certain products or using certain processes. Although holders of
patents and other intellectual property rights often offer licenses to their
patent or other intellectual property rights, no assurance can be given that
licenses would be offered or that the terms of any offered license would be
acceptable to the Company. Any need to redesign the products or enter into any
royalty or licensing agreement could have a material adverse effect on the
Company's business, operating results and financial condition.
The Company relies upon certain software licensed from third parties. There
can be no assurance that the software licensed by the Company will continue to
provide competitive features and functionality or that licenses for software
currently utilized by the Company or other software which the Company may seek
to license in the future will be available to the Company on commercially
reasonable terms. The loss of, or inability to maintain, existing licenses
could result in shipment delays or reductions until equivalent software or
suitable alternative products could be developed, identified, licensed and
integrated, and the inability to license key new software that may be
developed, on commercially reasonable terms, would have a material adverse
effect on the Company's competitive position. Any such event would materially
adversely affect the Company's business, operating results and financial
condition. See "Acquisition," "Business--Intellectual Property" and "Certain
Transactions."
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Need for Additional Capital. The Company believes that in order to remain
competitive it may require additional financial resources over the next
several years for working capital, research and development, expansion of
sales and marketing resources, and capital expenditures. The Company believes
that it will be able to fund planned expenditures for at least the next twelve
months from a combination of the proceeds of the Offering, cash flow from
operations and existing cash balances. Assuming completion of the Offering and
the application of $27.8 million of the net proceeds therefrom for repayment
of the subordinated notes and redemption of the Series A Preferred Stock, the
Company would have had as of June 30, 1996 approximately $10.3 million in
working capital, including approximately $11.0 million in cash and cash
equivalents. The Company's operations generated cash flow of $6.8 million
during the nine months ended June 30, 1996. The Company believes that it will
be able to satisfy its cash requirements for at least the next twelve months
from a combination of the proceeds of the Offering, cash flow from operations
and the Company's bank line of credit. However, upon completion of the
Offering, the Company will continue to have limited capital resources and may
require additional capital sooner. There can be no assurance that the Company
will be able to obtain additional financing as needed on acceptable terms or
at all. See "Use of Proceeds," "Capitalization," "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources" and "Certain Transactions."
Risk of Product Defects. The Company's products consist of hardware and
software developed by Splash and others. Products such as those of the Company
may contain undetected errors when first introduced or when new versions are
released, and the Company has in the past discovered software and hardware
errors in certain of its new products after their introduction. Although the
Company has not experienced material adverse effects resulting from any errors
to date, there can be no assurance that errors would not be found in new
versions of Splash products after commencement of commercial shipments, or
that any such errors would not result in a loss of or delay in market
acceptance and have a material adverse effect upon the Company's business,
operating results and financial condition. In addition, errors in the
Company's products (including errors in licensed third party software)
detected prior to new product release could result in delay in the
introduction of new products and incurring of additional expense, which also
could have a material adverse effect upon the Company's business, operating
results and financial condition. See "Business--Products and Technology."
International Sales. All sales to Fuji Xerox are international sales. As a
result, international sales accounted for approximately 40%, 59% and 51% of
net revenue in fiscal 1994 and 1995 and in the nine months ended June 30,
1996, respectively. In addition, although all sales to Xerox are U.S. sales,
Xerox has a significant international customer base, and the Company believes
that a significant portion of Splash products purchased by Xerox are resold
outside the United States. The Company expects that direct and indirect
international sales will continue to represent a substantial portion of its
net revenue for the foreseeable future. While the Company's international
sales are presently denominated in U.S. dollars, fluctuations in currency
exchange rates could cause the Company's products to become relatively more
expensive to end users in a particular country, leading to pressure to reduce
the U.S. dollar denominated price to the Company's OEM customers, which could
in turn result in a reduction in net revenue and profitability. The Company's
business, operating results and financial condition would be materially
adversely affected if foreign markets do not continue to develop. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Sales and Marketing."
Financial Difficulties of a Major Shareholder; Potential Sales of Common
Stock. Radius, which will beneficially own approximately 14.6% of the
outstanding shares of the Common Stock immediately following the Offering, has
faced significant financial difficulties in recent periods, including the
period before the Acquisition, and continues to face such difficulties. Radius
has certain rights to demand that the Company register Radius' shares of
Common Stock under the Securities Act of 1933, as amended (the "Securities
Act"), which registration would permit the sale by Radius of the shares
registered in the public market. If Radius were to enter bankruptcy, Radius
might have the ability to sell a substantial portion of its holdings of Common
Stock in the public market without regard to requirements for registration of
such shares under the Securities Act or the requirements of Rule 144
promulgated under
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<PAGE>
the Securities Act and may have the ability to avoid its obligations under the
lock-up agreement with respect to Common Stock held by it. Sales of
substantial amounts of the shares of Common Stock held by Radius in the public
market or the prospect of such a sale could adversely affect the market price
of the Company's Common Stock. See "Principal Stockholders."
Dependence on Key Personnel. Because of the nature of the Company's
business, the Company is highly dependent on the continued service of, and on
its ability to attract and retain, qualified technical, marketing, sales and
managerial personnel, including senior members of management. The competition
for such personnel is intense, and the loss of any of such persons, as well as
the failure to recruit additional key technical and sales personnel in a
timely manner, would have a material adverse effect on the Company's business
and operating results. There can be no assurance that the Company will be able
to continue to attract and retain the qualified personnel necessary for the
development of its business. The Company currently does not have employment
contracts with any of its employees and does not maintain key person life
insurance policies on any of its employees. See "Business--Employees" and
"Management."
Control By Principal Stockholders, Officers and Directors; Antitakeover
Effects of Certificate of Incorporation and Delaware Law. Immediately
following the Offering, the Company's principal stockholders, officers,
directors and their affiliates will beneficially own approximately 74.6% of
the outstanding shares of the Common Stock. As a result, such persons, acting
together, would have the ability to control all matters requiring stockholder
approval, including the election of directors and approval of significant
corporate transactions. In addition, effective upon the closing of the
Offering, the Board of Directors will have the authority to issue up to
5,000,000 shares of undesignated Preferred Stock, to determine the powers,
preferences and rights and the qualifications, limitations or restrictions
granted to or imposed upon any unissued series of undesignated Preferred
Stock, and to fix the number of shares constituting any series and the
designation of such series, without any further vote or action by the
Company's stockholders. The Preferred Stock could be issued with voting,
liquidation, dividend and other rights superior to the rights of the Common
Stock. The concentration of ownership and the issuance of Preferred Stock
under certain circumstances could have the effect of delaying or preventing a
change in control of the Company. The Company's Certificate of Incorporation
also provides for a classified board of directors such that only approximately
one-third of the board is selected at each annual meeting of stockholders. A
classified board may have the effect of deferring or discouraging a charge in
control of the Company. The Company's Certificate of Incorporation also
eliminates cumulative voting in the election of directors. See "Principal
Stockholders" and "Description of Capital Stock."
Benefit of Transaction to Existing Stockholders. The Offering will provide
substantial benefits to existing stockholders of the Company, particularly
Radius and certain entities affiliated with Summit Partners, L.P. and Sigma
Partners, L.P. The existing stockholders of the Company will benefit from the
creation of a public market for the Common Stock held by them after the
closing of the Offering. In addition, the Company will use approximately $15.4
million of the proceeds of the Offering to redeem all outstanding shares of
the Company's Series A Preferred Stock and approximately $8.0 million of the
proceeds to repay all outstanding subordinated promissory notes. Upon the
closing of the Offering, the shares of Common Stock then held by Radius will
have an aggregate market value of approximately $20.9 million, based upon an
assumed public offering price of $12.00 per share. Certain entities affiliated
with Summit Partners, L.P. which previously acquired shares of Common Stock
and Series A Preferred Stock for an aggregate of $14.0 million in cash and
subordinated promissory notes for an aggregate of $8.0 million in cash (i)
will receive approximately $13.9 million of the proceeds of the Offering upon
the redemption of all outstanding shares of the Company's Series A Preferred
Stock coincident with the closing of the Offering, (ii) will receive
approximately $8.0 million of the proceeds of the Offering upon repayment of
outstanding subordinated promissory notes, and (iii) will hold, upon the
closing of the Offering, shares of Common Stock having an aggregate value
equal to approximately $70.7 million, based on an assumed public offering
price of $12.00 per share. Certain entities affiliated with
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<PAGE>
Sigma Partners, L.P. which acquired shares of Common Stock and Series A
Preferred Stock for an aggregate of approximately $1.5 million in cash (i)
will receive approximately $1.5 million of the proceeds of the Offering upon
the redemption of all outstanding shares of the Company's Series A Preferred
Stock coincident with the closing of the Offering and (ii) will hold, upon the
closing of the Offering, shares of Common Stock having an aggregate value
equal to approximately $7.0 million based on an assumed public offering price
of $12.00 per share. See "Use of Proceeds" and "Principal Stockholders."
Shares Eligible for Future Sale. Sale of substantial amounts of shares in
the public market or the prospect of such sales could adversely affect the
market price of the Company's Common Stock. Upon completion of the Offering,
the Company will have outstanding 11,920,633 shares of Common Stock. Of these
shares, with the exception of the 2,600,000 shares offered hereby, all shares
of Common Stock held by current stockholders are subject to lock-up agreements
under which the holders of such shares have agreed not to sell or otherwise
dispose of any of their shares for a period of 180 days after the date of this
Prospectus without the prior written consent of the Representatives of the
Underwriters. After the 180-day period, approximately 1,120,000 shares will be
eligible for sale under Rules 144 and 701 promulgated pursuant to the
Securities Act. The remaining approximately 8,225,000 shares held by existing
stockholders will become eligible for sale from time to time in the future
under Rule 144. In addition, the Company intends to file a registration
statement under the Securities Act, upon the effectiveness of the Offering or
shortly thereafter, covering the sale of shares of Common Stock reserved for
issuance under the Company's 1996 Stock Option Plan and 1996 Employee Stock
Purchase Plan. As of June 30, 1996, there were options outstanding to purchase
a total of approximately 240,000 shares of the Company's Common Stock, all of
which are subject to 180-day lock-up agreements, and approximately 2,350,000
additional shares reserved for future option grants. Approximately 240,000
shares issuable upon exercise of such options will be eligible for purchase
and resale into the public market 180 days after the date of this Prospectus
in reliance upon Rule 701. Upon completion of the offering, the 4,282 shares
of Series B Preferred Stock owned by Radius will convert into 1,741,129 shares
of the Company's Common Stock, which are subject to a 180-day lockup
agreement. If Radius were to enter bankruptcy and were allowed to sell its
shares of the Company's Common Stock without regard to the lock-up agreement
with respect to its shares of Common Stock or the restrictions of Rule 144
under the Securities Act, such additional shares of Common Stock would become
eligible for resale into the public market at an indeterminate date after the
date of this Prospectus. Certain existing stockholders, including Radius and
funds affiliated with Summit Partners, L.P. and Sigma Partners, L.P., holding
an aggregate of approximately 8,750,000 shares of Common Stock and the holder
of a warrant to purchase 8,750 shares of Common Stock also will be entitled to
registration rights with respect to their shares of Common Stock after the
Offering. See "Management--Compensation Plans," "Shares Eligible for Future
Sale," "Underwriting" and "Description of Capital Stock--Registration Rights."
No Prior Trading Market for Common Stock; Potential Volatility of Stock
Price. Prior to the Offering, there has been no public market for the Common
Stock, and there can be no assurance that an active trading market will
develop or be sustained after the Offering. The initial public offering price
will be determined through negotiations between the Company and the
representatives of the Underwriters based on several factors and may not be
indicative of the market price of the Common Stock after the Offering. The
market price of the shares of Common Stock may be highly volatile and may be
significantly affected by factors such as actual or anticipated fluctuations
in the Company's operating results, change in estimates or recommendations by
securities analysts, litigation by or against the Company, announcements of
technical innovations, new products or new contracts by the Company, its
competitors or their end users, developments with respect to patents or
proprietary rights, general market conditions and other factors, certain of
which could be unrelated to, or outside the control of, the Company. The stock
market has from time to time experienced significant price and volume
fluctuations that have particularly affected the market prices for securities
of technology companies and that have often been unrelated to the operating
performance of particular companies. These broad market fluctuations may
adversely affect the market price of the Common Stock. In the past, following
periods of volatility in the market price of a company's securities,
securities class action
15
<PAGE>
litigation has been initiated against the issuing company. There can be no
assurance that such litigation will not occur in the future with respect to
the Company. Such litigation could result in substantial costs and a diversion
of management's attention and resources, which could have a material adverse
effect on the Company's business and operating results. Any settlement or
adverse determination in such litigation could also subject the Company to
significant liability, which could have a material adverse effect on the
Company's financial condition. See "Underwriting."
Dilution. The initial public offering price is substantially higher than the
net tangible book value per share of the Common Stock. Investors purchasing
shares of Common Stock in the Offering will therefore incur immediate and
substantial dilution in net tangible book value per share. To the extent that
outstanding options and warrants to purchase the Company's Common Stock are
exercised, there will be further dilution. See "Dilution."
Dividend Policy; Restrictions on Payment of Dividends. The Company has never
declared or paid cash on its Common Stock. The Company currently intends to
retain any earnings for use in its business and does not anticipate paying any
cash dividends on its Common Stock in the foreseeable future. In addition, the
Company's borrowing arrangements, including the Company's line of credit and
outstanding subordinated promissory notes (which notes will be repaid out of
the proceeds of the Offering) prohibit the payment of cash dividends without
the lender's prior written consent. See "Dividend Policy."
16
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,600,000 shares of
Common Stock offered by the Company hereby at an assumed initial public
offering price of $12.00 per share, after deducting underwriting discounts and
commissions and estimated offering expenses, are estimated to be $27.8 million
($32.2 million if the Underwriters' over-allotment option is exercised in
full). The Company will use approximately $15.4 million of the proceeds of the
Offering to redeem all outstanding shares of the Company's Series A Preferred
Stock, which are held by entities affiliated with Summit Partners, L.P. and
Sigma Partners, L.P., and approximately $8.0 million to repay all outstanding
subordinated promissory notes, which are held by entities affiliated with
Summit Partners. The subordinated notes bear interest at a rate of 12% and
require principal repayments beginning January 30, 2001. The Series A Preferred
Stock and the subordinated notes were issued in connection with the
Acquisition. The remaining net proceeds will be used for working capital and
general corporate purposes. A portion of the net proceeds may also be used for
investments in or acquisitions of complementary businesses, products or
technologies, although no such transactions are currently under negotiation.
Pending such uses, the Company expects to invest the net proceeds in short-
term, interest-bearing securities. See "Certain Transactions."
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its Common Stock.
The Company currently intends to retain any earnings for use in its business
and does not anticipate paying any cash dividends on its Common Stock in the
foreseeable future. In addition, the Company's borrowing arrangements,
including the Company's line of credit and outstanding subordinated promissory
notes (which notes will be repaid out of the proceeds of the Offering) prohibit
the payment of cash dividends without the lender's prior written consent. See
"Risk Factors -- Dividend Policy; Restrictions on Payment of Dividends."
ACQUISITION
On January 30, 1996, the Company was acquired by an investor group (the
"Acquisition Group") led by certain entities affiliated with Summit Partners,
L.P. and certain entities affiliated with Sigma Partners, L.P. The Acquisition
was effected through the following series of transactions: (i) the Acquisition
Group formed and capitalized a new corporation, the Company, called Splash
Technology Holdings, Inc., a Delaware corporation; (ii) the Company formed and
capitalized a new wholly-owned subsidiary, Splash Merger Company, Inc., a
Delaware corporation; (iii) Radius created a new corporation, Splash
Technology, Inc., a Delaware corporation, into which Radius placed
substantially all of the assets and liabilities of its Color Server Group in
exchange for all of the capital stock of Splash Technology, Inc.; and (iv)
Splash Merger Company, Inc. was merged with and into Splash Technology, Inc.,
thereby effecting the Acquisition. As a result of these transactions, the
surviving corporation in the merger was Splash Technology, Inc., a wholly-owned
subsidiary of the Company, which in turn was owned principally by the
Acquisition Group. As a result of these transactions, Radius received (i) a
payment of approximately $21.9 million in cash on January 30, 1996
(approximately $2.35 million of which remains in escrow for the benefit of the
Company and its stockholders, as described below), (ii) an aggregate of 4,282
shares of Series B Preferred Stock of the Company, which are convertible into a
total of 1,741,129 shares of Common Stock of the Company (representing
approximately 19% of the outstanding Common Stock of the Company on an as-
converted basis prior to the Offering), and (iii) a payment of approximately
$1.5 million in cash on June 9, 1996. None of the entities within the
Acquisition Group which are affiliated with Summit Partners, L.P. or Sigma
Partners, L.P. were affiliated with Radius immediately prior to the
Acquisition. Entities affiliated with Sigma Partners, L.P. collectively held
more than 5% of the outstanding capital stock of SuperMac until January 1993
and Lawrence G. Finch was a director of Radius until October 1995.
17
<PAGE>
The Acquisition was funded by the purchase of approximately $15.5 million of
Series A Preferred Stock and Common Stock by entities associated with Summit
Partners, L.P. and entities associated with Sigma Partners, L.P. and the
purchase of $8.0 million of subordinated promissory notes by entities
associated with Summit Partners, L.P. As a result of an independent third party
valuation, the Series A Preferred Stock was valued at $14.7 million and the
subordinated promissory notes were valued at $8.6 million.
In connection with the Acquisition, the parties entered into an escrow
agreement providing for an escrow of $4.7 million for satisfaction of possible
claims for indemnification by Splash Technology, Inc., Splash Technology
Holdings, Inc. and its stockholders against Radius. An amount equal to
approximately $2.35 million remains in escrow pending (i) a final, non-
appealable order dismissing with prejudice the EFI litigation, (ii) the
attainment by Radius of certain financial tests or (iii) the discretionary
decision by Splash Technology Holdings, Inc. and its stockholders to release
the amount in escrow. See "Risk Factors--Dependence on Proprietary Technology;
Reliance on Third Party Licenses" and "Business--Intellectual Property."
In connection with the Acquisition and related transactions, entities
affiliated with Summit Partners, L.P. and Sigma Partners, L.P. acquired an
aggregate of 5,888,749 shares of Common Stock and 586,249 shares of Common
Stock, respectively, representing 63.2% and 6.3% of the Company's outstanding
Common Stock immediately prior to the Offering. In addition, entities
affiliated with Summit Partners, L.P. and Sigma Partners, L.P. acquired an
aggregate of 13,933 shares and 1,493 shares, respectively, of Series A
Preferred Stock of the Company and entities affiliated with Summit Partners,
L.P. acquired subordinated promissory notes of the Company in the aggregate
principal amount of $8.0 million. The subordinated promissory notes are
required to be repaid at face value plus accrued and unpaid interest, and the
Series A Preferred Stock is required to be redeemed at a price of $1,000 per
share plus accrued and unpaid dividends, upon certain events including an
initial public offering at a price of at least $3.43 per share and aggregate
gross proceeds to the Company of at least $35.0 million. It is anticipated that
the subordinated promissory notes will be repaid and the Series A Preferred
Stock will be redeemed out of the proceeds of the Offering even at a lesser
amount of aggregate gross proceeds to the Company. See "Use of Proceeds,"
"Certain Transactions," "Principal Stockholders" and "Description of Capital
Stock."
The Acquisition constituted a leveraged transaction and was accounted for as
a purchase. As of January 30, 1996, the Company had approximately $12.6 million
in assets and approximately $9.6 million of liabilities. Immediately following
the Acquisition, the Company had $18.2 million in assets and $19.7 million of
liabilities. The proceeds from the Offering will be used primarily to repay the
$8.0 million in subordinated promissory notes and redeem the $15.4 million of
outstanding Series A Preferred Stock issued in connection with the Acquisition.
See "Use of Proceeds," "Capitalization," "Management's Discussion and Analysis
of Financial Condition and Results of Operations," "Certain Transactions" and
"Principal Stockholders."
18
<PAGE>
CAPITALIZATION
The following table sets forth as of June 30, 1996: (i) the actual
capitalization of the Company, (ii) the capitalization of the Company on a pro
forma basis to give effect to the conversion into Common Stock of all
outstanding shares of Series B Preferred Stock upon the closing of the
Offering, and (iii) the pro forma capitalization of the Company as adjusted to
give effect to the receipt of the estimated net proceeds from the initial
public offering of $27.8 million at an assumed public offering price of $12.00
per share, the application of the net proceeds therefrom and the filing of the
Company's Amended and Restated Certificate of Incorporation upon the closing of
the Offering. See "Use of Proceeds."
<TABLE>
<CAPTION>
JUNE 30, 1996
----------------------------
PRO AS
ACTUAL FORMA ADJUSTED
-------- -------- --------
(IN THOUSANDS, EXCEPT FOR
SHARE DATA)
<S> <C> <C> <C>
Long-term debt(1)............................... $ 8,600 $ 8,600 $ --
-------- -------- --------
Stockholders' equity
Preferred Stock:
Authorized: 19,708 shares, actual and pro
forma; 5,000,000 shares as adjusted
Series A Preferred Stock, par value $.001 per
share: Authorized: 15,426 shares, actual and
pro forma; issued and outstanding: 15,426
shares, actual and pro forma and no shares as
adjusted..................................... $ 1 $ 1 $ --
Series B Preferred Stock, par value $.001 per
share: Authorized, issued and outstanding:
4,282 shares actual; no shares pro forma or
as adjusted.................................. 1 -- --
Common Stock, par value $.001 per share:
Authorized: 50,000,000 shares; issued and
outstanding: 7,579,504 shares actual, 9,320,633
shares pro forma and 11,920,633 shares as
adjusted(2).................................... 8 9 12
Additional paid-in capital...................... 19,456 19,456 32,206
Accumulated deficit(3).......................... (11,944) (11,944) (11,945)
-------- -------- --------
Total stockholders' equity.................... 7,522 7,522 20,273
-------- -------- --------
Total capitalization........................ $ 16,122 $ 16,122 $ 20,273
======== ======== ========
</TABLE>
- --------
(1) Represents subordinated promissory notes having a face amount of $8.0
million, which have been valued at $8.6 million pursuant to an independent
valuation. See Note 5 of Notes to Consolidated Financial Statements.
(2) Excludes an aggregate of approximately 250,000 shares of Common Stock
issuable on exercise of options and warrants outstanding as of June 30,
1996; approximately 14,000 shares of Common Stock issuable on exercise of
options granted after June 30, 1996; approximately 2,350,000 shares of
Common Stock reserved for future grants under the Company's 1996 Stock
Option Plan; and 175,000 shares of Common Stock reserved for issuance under
the Company's 1996 Employee Stock Purchase Plan. See "Use of Proceeds,"
"Management--Compensation Plans" and Note 8 of Notes to Consolidated
Financial Statements.
(3) Accumulated deficit has been adjusted for the effects of a gain of $600,000
(less associated taxes of $240,000) relating to the early extinguishment of
subordinated debt, offset in part by a loss of $361,000 on retirement of
the Series A Preferred Stock and net of conversion of the Series B
Preferred Stock.
19
<PAGE>
DILUTION
The pro forma net tangible book value of the Company at June 30, 1996, giving
effect to the conversion of all outstanding shares of Series B Preferred Stock
into Common Stock upon or prior to the closing of the Offering, was
approximately $6.4 million, or $0.69 per share of Common Stock. "Pro forma net
tangible book value" per share represents the amount of total tangible assets
of the Company less total liabilities, divided by the number of shares of
Common Stock outstanding. After giving effect to the sale by the Company of
2,600,000 shares of Common Stock offered hereby at an assumed initial public
offering price of $12.00 per share (after deducting the underwriting discounts
and commissions and estimated Offering expenses), the pro forma net tangible
book value of the Company at June 30, 1996 would have been approximately $34.2
million, or $2.87 per share. This represents an immediate increase in net
tangible book value of $2.18 per share to existing stockholders and an
immediate dilution of $9.13 per share to new investors. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price.............................. $12.00
Pro forma net tangible book value before the Offering............ $ .69
Increase attributable to new investors........................... 2.18
-----
Pro forma net tangible book value after the Offering............... 2.87
------
Pro forma net tangible book value dilution to new investors........ $ 9.13
======
</TABLE>
The following table summarizes, on a pro forma basis as of June 30, 1996, the
differences in the total consideration paid and the average price per share
paid by the Company's existing stockholders and the new investors with respect
to the 2,600,000 shares of Common Stock to be sold by the Company. The
calculations in this table with respect to shares of Common Stock to be
purchased by new investors in the Offering reflect an assumed initial public
offering price of $12.00 per share:
<TABLE>
<CAPTION>
SHARES AVERAGE
PURCHASED TOTAL CONSIDERATION PRICE
-------------- --------------------- PER
NUMBER PERCENT AMOUNT PERCENT SHARE
------ ------- ---------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Existing stockholders.............. 9,321 78.2% $ 301 1.0% $ 0.03
New investors...................... 2,600 21.8 31,200 99.0 12.00
------ ----- ---------- --------
Total............................ 11,921 100.0% $ 31,501 100.0%
====== ===== ========== ========
</TABLE>
The foregoing computations exclude, as of June 30, 1996, an aggregate of
approximately 250,000 shares of Common Stock issuable on exercise of
outstanding options and warrants at a weighted average exercise of $0.47 per
share. To the extent outstanding options and warrants are exercised, there will
be further dilution to new investors. See "Risk Factors--Dilution,"
"Management--Compensation Plans" and "Description of Capital Stock."
20
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated statement of operations data presented below for
the years ended September 30, 1994 and 1995, the four months ended January 31,
1996 and the five months ended June 30, 1996, and the selected consolidated
balance sheet data as of September 30, 1994 and 1995 and June 30, 1996 are
derived from, and are qualified by reference to, the audited consolidated
financial statements and notes thereto included elsewhere in this Prospectus.
The selected consolidated statement of operations data for the nine months
ended June 30, 1995 are derived from unaudited consolidated financial
statements included elsewhere in this Prospectus, have been prepared on the
same basis as the annual consolidated financial statements and, in the opinion
of management, contain all adjustments, consisting only of normal recurring
adjustments necessary for a fair presentation of the operating results and
financial position for such periods and as of such dates. The consolidated
operating results for the four months ended January 31, 1996 and five months
ended June 30, 1996 are not necessarily indicative of the results to be
expected for the full year or any other future period.
The financial statements for the periods prior to January 31, 1996 reflect
the operations of the CSG division of Radius and SuperMac, adjusted to reflect
operations as a separate corporation. The financial statements after January
31, 1996 reflect the consolidated operations of the Company after accounting
for the Acquisition using the purchase method of accounting. Operating results
subsequent to January 31, 1996 reflect (i) interest on the debt incurred in
connection with the Acquisition, (ii) non-recurring, non-cash charges relating
to the write-off of in-process research and development projects and the
amortization of purchased technology, and (iii) an income tax benefit from the
net operating loss associated with the Acquisition.
The data set forth on the following page are qualified in their entirety by,
and should be read in conjunction with, "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the consolidated
financial statements, notes thereto and other financial and statistical
information appearing elsewhere in this Prospectus.
21
<PAGE>
<TABLE>
<CAPTION>
SPLASH
TECHNOLOGY
PREDECESSOR BUSINESS HOLDINGS, INC.
--------------------------------------- --------------
FISCAL YEAR
ENDED NINE MONTHS FOUR MONTHS FIVE MONTHS
SEPTEMBER 30, ENDED ENDED ENDED
--------------- JUNE 30, JANUARY 31, JUNE 30,
1994 1995 1995 1996 1996
------- ------- ----------- ----------- --------------
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Net revenue............. $16,354 $30,472 $20,343 $13,008 $ 18,326
Cost of net revenue..... 12,068 20,723 13,737 8,427 11,455
------- ------- ------- ------- --------
Gross profit............ 4,286 9,749 6,606 4,581 6,871
------- ------- ------- ------- --------
Operating expenses:
Research and
development.......... 1,999 3,295 2,034 1,498 1,624
Sales and marketing... 562 2,076 1,505 688 806
General and
administrative....... 377 891 667 287 668
Amortization of
purchased technology
and write-off of in-
process technology... -- -- -- -- 22,729
------- ------- ------- ------- --------
Total operating
expenses........... 2,938 6,262 4,206 2,473 25,827
------- ------- ------- ------- --------
Income (loss) from
operations............. 1,348 3,487 2,400 2,108 (18,956)
Interest expense, net... -- -- -- 18 388
------- ------- ------- ------- --------
Income (loss) before
provision for income
taxes.................. 1,348 3,487 2,400 2,090 (19,344)
Provision for (benefit
from) income taxes..... 99 1,395 960 836 (7,765)
------- ------- ------- ------- --------
Net income (loss)....... $ 1,249 $ 2,092 $ 1,440 $ 1,254 $(11,579)
======= ======= ======= ======= ========
Net income (loss) per
share(1)............... $ (1.25)
========
Shares used in computing
per share amounts(1)... 9,580
========
</TABLE>
<TABLE>
<CAPTION>
SPLASH
PREDECESSOR TECHNOLOGY
BUSINESS HOLDINGS, INC.
------------- --------------
SEPTEMBER 30,
------------- JUNE 30,
1994 1995 1996
------ ------ --------------
(IN THOUSANDS)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital.................................... $4,126 $2,318 $ 5,955
Total assets....................................... 7,383 9,688 28,502
Long term debt..................................... -- -- 8,600
Total liabilities.................................. 3,057 6,985 20,980
Equity............................................. 4,326 2,703 7,522
</TABLE>
- --------
(1) See Note 2 of Notes to Consolidated Financial Statements for an explanation
of the method used to determine the number of shares used to compute per
share amounts.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results
of Operations and other parts of this Prospectus contain forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ materially from the results discussed in such forward-looking
statements. Factors that may cause such a difference include, but are not
limited to, those discussed in "Risk Factors."
OVERVIEW
The Company operated as the CSG division of SuperMac from late 1992 to
August 1994 and, after the merger of SuperMac into Radius, as the CSG division
of Radius from August 1994 until January 1996. In January 1996, Splash was
acquired by an investor group in a leveraged transaction. See "Acquisition"
and "Certain Transactions." References below to the results of operations for
the nine months ended June 30, 1996 refer to the results of operations of CSG
for the four months ended January 31, 1996 plus the results of operations of
the Company for the five months ended June 30, 1996.
The Company sells pre-configured color server systems and board-level server
kits to two OEM customers, Xerox and Fuji Xerox, which integrate the Company's
color servers with their color copiers and sell such connected systems on a
worldwide basis. Sales to Xerox accounted for approximately 60%, 41% and 49%
of net revenue in fiscal 1994, fiscal 1995 and the nine months ended June 30,
1996, respectively. Sales to Fuji Xerox accounted for approximately 40%, 59%
and 51% of net revenue in fiscal 1994, fiscal 1995 and the nine months ended
June 30, 1996, respectively. The Company expects that sales to Xerox and Fuji
Xerox will continue to account for all or a substantial portion of its net
revenue for the foreseeable future. As a result, sales of the Company's
products have been and will continue to be heavily influenced by the market
acceptance of the Xerox and Fuji Xerox color copiers with which the Company's
products operate and the sales efforts of Xerox and Fuji Xerox with respect to
Splash products. See "Risk Factors--Dependence on Xerox and Fuji Xerox."
Substantially all net revenue has been derived from the sale of systems and
color server kits. The Company's policy is to recognize revenue at the time of
shipment of its products to its OEM customers, which have no right to return
products. From inception to September 30, 1993, the Company was engaged
principally in research and development, and recorded approximately $1.3
million of net revenue from product shipments and $1.6 million of research and
development costs. The Company began shipping board-level color server kits in
fiscal 1993 and pre-configured color server systems in fiscal 1995. In May
1996, the Company made the transition from its Power Series products to its
new PCI Series products, and continues to offer Power Series products only as
server kits in limited quantities and as warranty and replacement parts. In
May 1996, Xerox informed Splash that it held in its inventory a substantial
quantity of Power Series products accumulated since January 1996. As a result
of the Company's product transition and Xerox's accumulation of inventory of
these products, sales of Power Series products shipped to Xerox between
January and April 1996 are recorded as net revenue when Xerox sells these
products to end users. All other Power Series and PCI Series product sales are
recorded upon shipment to the OEM customer.
The Company has achieved significant growth in net revenue and operating
income each year since fiscal 1994, before purchase accounting adjustments.
However, there can be no assurance that the Company will continue to grow at
similar rates in the future, if at all. In addition, the Company's overall
expense level is expected to increase as the Company builds corporate
infrastructure and expands its operations. Accordingly, the Company believes
that period-to-period comparisons of its financial results should not be
relied upon as an indication of future performance. Although the Company was
profitable for the first nine months of fiscal 1996 (pro forma and before
purchase accounting adjustments) and the first five months of independent
operations through June 30, 1996 (before purchase accounting
23
<PAGE>
adjustments), there can be no assurance that the Company will continue to be
profitable on an annual or quarterly basis in the future.
The Company establishes its expenditure levels for operating expenses based
on projected sales levels and margins, and expenses are relatively fixed in
the short term. Moreover, the Company expects to expand its sales and
marketing, technical and customer support, research and product development
and administrative activities. Accordingly, if sales are below expectations in
any given quarter, the adverse impact of the shortfall in revenues on
operating results may be increased by the Company's inability to adjust
spending in the short term to compensate for the shortfall.
RESULTS OF OPERATIONS
The following table sets forth consolidated statement of operations data as
a percentage of revenue for the periods indicated.
<TABLE>
<CAPTION>
SPLASH
TECHNOLOGY
PREDECESSOR BUSINESS HOLDINGS, INC.
----------------------------- --------------
YEAR ENDED
SEPTEMBER 30, NINE MONTHS ENDED JUNE 30,
--------------- --------------------------
1994 1995 1995 1996
------ ------ ----------- --------------
(UNAUDITED) (PRO FORMA)
<S> <C> <C> <C> <C>
Net revenue......................... 100% 100% 100% 100%
Cost of net revenue................. 74 68 68 63
------ ------ --- ---
Gross margin........................ 26 32 32 37
------ ------ --- ---
Operating expenses:
Research and development.......... 12 11 10 10
Sales and marketing............... 3 7 7 5
General and administrative........ 3 3 3 3
Amortization of purchased
technology and write-off of in-
process technology............... -- -- -- 73
------ ------ --- ---
Total operating expenses........ 18 21 20 91
------ ------ --- ---
Income (loss) from operations....... 8 11 12 (54)
Interest expense, net............... -- -- -- 1
------ ------ --- ---
Income (loss) before provision for
income taxes....................... 8 11 12 (55)
Provision for (benefit from) income
taxes.............................. -- 4 5 (22)
------ ------ --- ---
Net income (loss)................... 8% 7% 7% (33)%
====== ====== === ===
</TABLE>
Net Revenue. The Company's net revenue increased 86% to $30.5 million in
fiscal 1995 from $16.4 million in fiscal 1994, and increased 54% to $31.3
million in the nine months ended June 30, 1996 from $20.3 million in the nine
months ended June 30, 1995. These increases were primarily attributable to
higher unit sales of systems and color server kits. In addition, the Company
has experienced a shift toward higher priced, pre-configured color server
systems from lower priced color server kits, particularly in the third quarter
of fiscal 1995 with the introduction of the Company's Power Series product
line and in the third quarter of fiscal 1996 with the introduction of the
Company's PCI Series product line. For example, since the Company's
introduction of the PCI Series product line, Fuji Xerox has shifted its
product purchases from substantially all kits to substantially all pre-
configured systems. There can be no assurance that Fuji Xerox or Xerox will
not change its mix of product purchases again in the future. Any sales mix
shift toward kits would result in lower average selling prices and impact net
revenue. Net revenue has also been and may continue to be impacted by the
Company's sales mix of systems and kits in greater or lesser memory
configurations.
24
<PAGE>
Through April 1996, the Company derived substantially all of its revenue
from color server products designed for NuBus-based Apple Macintosh computers,
including the Power Series product line originally introduced in fiscal 1995
and the Company's original Splash color server kit products introduced in
fiscal 1993. Beginning in mid-calendar 1995, Apple began to transition from a
NuBus architecture in its high end Power Macintosh products to a PCI bus
architecture. Accordingly, Splash developed its initial PCI bus-based product
line, the PCI Series, and commenced shipment of such product line in May 1996.
The Company does not expect that sales of Power Series products will represent
any material portion of net revenue in the future other than any net revenue
recognized from the sale to end users of the remaining Power Series products
held by Xerox. See "--Overview" and "Risk Factors--Dependence on Xerox and
Fuji Xerox."
All sales to Fuji Xerox are international sales. As a result, international
sales accounted for 40% and 59% of net revenues in fiscal 1994 and 1995,
respectively, and accounted for approximately 59% and 51% of net revenue in
the nine months ended June 30, 1995 and 1996, respectively. In addition,
although all sales to Xerox are U.S. sales, Xerox has a significant
international customer base and the Company believes that a significant
portion of Splash products purchased by Xerox are resold outside the United
States. The Company expects that direct and indirect international sales will
continue to represent a substantial portion of its net revenue for the
foreseeable future. While the Company's international sales are presently
denominated in U.S. dollars, fluctuations in currency exchange rates could
cause the Company's products to become relatively more expensive to end users
in a particular country, leading to pressure to reduce the U.S. dollar
denominated price to the Company's OEM customers, which could in turn result
in a reduction in net revenue and profitability. See "Risk Factors--
International Sales."
Gross Margin. Cost of net revenue consists primarily of the costs of Apple
Power Macintosh computers (in the case of pre-configured systems), memory, and
royalties for Adobe PostScript software, plus, to a lesser extent, the cost of
other components, additional third party software license fees and royalties,
and manufacturing services. Gross margins increased to 32% in fiscal 1995 from
26% in fiscal 1994, and increased to 37% in the nine months ended June 30,
1996 from 32% in the nine months ended June 30, 1995. The increases in gross
margin were primarily due to economies of scale derived from higher sales
volumes and increases in pricing due to product improvements from additional
software features, partially offset by a sales shift toward certain lower
margin pre-configured server models. The gross margin for the nine months
ended June 30, 1996 as compared to the nine months ended June 30, 1995 also
increased due to reductions in component costs achieved through new product
designs and favorable component pricing. The Company expects that gross
margins will fluctuate from period to period and may decrease in future
periods. Gross margin is affected by a number of factors, including product
mix, product pricing and manufacturing and component costs. The Company may
also be required to reduce prices in response to competitive pressure. Any
decline in average selling prices of a particular product which is not offset
by a reduction in production costs or by sales of other products with higher
gross margins would decrease the Company's overall gross margin and adversely
affect the Company's operating results. See "Risk Factors--Fluctuations in
Operating Results; Seasonal Purchasing Patterns."
Research and Development. Research and development expenses consist
primarily of compensation and related costs, consulting fees and depreciation
of equipment. Research and development expenses increased 65% to $3.3 million
in fiscal 1995 from $2.0 million in fiscal 1994, and increased 53% to $3.1
million in the nine months ended June 30, 1996 from $2.0 million in the nine
months ended June 30, 1995. As a percentage of net revenue, however, research
and development decreased to 11% in fiscal 1995 from 12% in fiscal 1994, and
was 10% of net revenue in each of the nine month periods ended June 30, 1995
and 1996. These increases in the absolute dollar amount of these expenses were
primarily attributable to increased staffing and associated support required
to enhance the Company's product line and, in fiscal 1995 and 1996, to
introduce the Company's Power Series and
25
<PAGE>
PCI Series product lines, respectively. Except for charges related to the
Acquisition, all research and development costs to date have been expensed as
incurred. In view of current projects under development and contemplated,
research and development expenses are expected to increase in absolute dollars
in future periods, although they may vary as a percentage of net revenue. See
"Business--Research and Development."
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries and related costs, consulting fees, trade show costs and marketing
materials. Sales and marketing expenses increased 269% to $2.1 million in
fiscal 1995 from $562,000 in fiscal 1994 and remained relatively constant at
$1.5 million in the nine months ended June 30, 1996 and the nine months ended
June 30, 1995. Such expenses represented 7%, 3%, 5% and 7% of net revenue for
such respective periods. The increase in the absolute dollar amount of these
expenditures were primarily related to expansion of the Company's sales
support and marketing staff and associated costs, primarily to increase the
Company's level of support for Xerox's sales organization. The Company intends
to continue to increase sales and marketing expenses in order to enhance sales
support capabilities and to pursue promotional programs designed to improve
name and product recognition in the end user community. Accordingly, sales and
marketing expenses are expected to increase in absolute dollars in future
periods, although they may vary as a percentage of net revenue.
General and Administrative. General and administrative expenses prior to
January 31, 1996 consisted primarily of an allocation of overhead expenses by
Radius and SuperMac based on headcount. Since February 1, 1996, general and
administrative expenses have consisted primarily of compensation and related
costs, and consulting and professional fees. General and administrative
expenses increased 136% to $891,000 in fiscal 1995 from $377,000 in fiscal
1994, representing 3% of net revenue for each respective period, and increased
43% to $955,000 in the nine months ended June 30, 1996 from $667,000 in the
nine months ended June 30, 1995, representing 3% of net revenue in each such
period. The increase from 1994 to 1995 was primarily due to increased salary
and related costs due to increased headcount. The increase in the first nine
months of 1996 was primarily related to the Company's efforts to enhance its
corporate infrastructure to replace services provided by Radius prior to the
Acquisition, and to support expansion of the Company's operations. The Company
believes that its general and administrative expenses will increase in
absolute dollars in the foreseeable future as it continues to implement
additional management and operational systems, expands its administrative
staff and incurs additional costs relating to being a public company.
Acquisition-Related and Non-Operating Expenses. In the nine months ended
June 30, 1996, the Company recorded certain costs related to the Acquisition,
including a write-off of $19.3 million of in-process research and development,
and the amortization in full through May 1996 of $3.4 million of purchased
technology. These in-process research and development projects related to the
development of the Company's PCI Series product line. Substantially all the
research and development costs incurred from the Acquisition through May 1996
(the time of the PCI Series product launch) were for the development of the
PCI Series products. Through June 30, 1996, the Company had incurred interest
costs pursuant to the subordinated notes and line of credit established in
connection with the Acquisition, offset in part by interest earned on short-
term investments.
Provision for Income Taxes. The Company accounts for income taxes in
accordance with the Financial Accounting Standards Board's Statement of
Financial Accounting Standard No. 109 "Accounting for Income Taxes." For
fiscal 1994, 1995 and the nine month periods ended June 30, 1995 and 1996, the
Company estimated a provision for income taxes as if CSG had been operating as
a separate company. In addition, as a result of the Acquisition, the Company
recorded a deferred tax asset of approximately $9.1 million and realized a
corresponding credit to the provision for income taxes, arising from the
difference in treatment of acquired intangible assets for tax and financial
reporting purposes. The Company has not reduced the deferred tax asset by a
valuation allowance as it is more likely than not that all of the deferred tax
asset will be realized through future taxable income.
26
<PAGE>
QUARTERLY RESULTS
The following tables set forth consolidated statements of operations data for
the seven quarters in the period ended June 30, 1996, both in dollar amounts
and as percentages of net revenue. This information has been derived from
unaudited financial statements that, in the Company's opinion, reflect all
normal recurring adjustments that the Company considers necessary to present a
fair statement of the results of operations in the quarterly periods. The data
set forth should be read in conjunction with the financial statements and notes
thereto appearing elsewhere in this Prospectus. The operating results for any
quarter are not necessarily indicative of results for future quarters. The
following tables set forth consolidated statements of operations data.
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------
DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1994 1995 1995 1995 1995 1996 1996
-------- -------- -------- --------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenue............. $4,559 $6,346 $9,438 $10,129 $7,206 $ 10,791 $13,337
Cost of net revenue..... 3,042 4,171 6,524 6,986 4,847 6,871 8,164
------ ------ ------ ------- ------ -------- -------
Gross profit........... 1,517 2,175 2,914 3,143 2,359 3,920 5,173
------ ------ ------ ------- ------ -------- -------
Operating expenses
Research and
development........... 372 825 837 1,261 1,256 884 982
Sales and marketing.... 281 504 720 571 568 438 488
General and
administrative........ 222 223 222 224 236 188 531
Amortization of
purchased technology
and write-off of in-
process technology.... -- -- -- -- -- 21,027 1,702
------ ------ ------ ------- ------ -------- -------
Total operating
expenses............ 875 1,552 1,779 2,056 2,060 22,537 3,703
------ ------ ------ ------- ------ -------- -------
Income (loss) from
operations.......... 642 623 1,135 1,087 299 (18,617) 1,470
Interest expense, net... 197 209
------ ------ ------ ------- ------ -------- -------
Income (loss) before
income taxes.......... 642 623 1,135 1,087 299 (18,814) 1,261
Provision for (benefit
from) income taxes..... 257 249 454 435 120 (7,550) 501
------ ------ ------ ------- ------ -------- -------
Net income (loss)...... $ 385 $ 374 $ 681 $ 652 $ 179 $(11,264) $ 760
====== ====== ====== ======= ====== ======== =======
<CAPTION>
AS A PERCENTAGE OF NET REVENUE
-----------------------------------------------------------------
DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1994 1995 1995 1995 1995 1996 1996
-------- -------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenue............. 100% 100% 100% 100% 100% 100% 100%
Cost of net revenue..... 67 66 69 69 67 64 61
------ ------ ------ ------- ------ -------- -------
Gross profit........... 33 34 31 31 33 36 39
------ ------ ------ ------- ------ -------- -------
Operating expenses
Research and
development........... 8 13 9 12 18 8 7
Sales and marketing.... 6 8 8 6 8 4 4
General and
administrative........ 5 3 2 2 3 2 4
Amortization of
purchased technology
and write-off of in-
process technology.... -- -- -- -- -- 195 13
------ ------ ------ ------- ------ -------- -------
Total operating
expenses............ 19 24 19 20 29 209 28
------ ------ ------ ------- ------ -------- -------
Income (loss) from
operations.......... 14 10 12 11 4 (173) 11
Interest expense, net... 2 1
------ ------ ------ ------- ------ -------- -------
Income (loss) before
income taxes.......... 14 10 12 11 4 (175) 10
Provision for (benefit
from) income taxes..... 6 4 5 5 2 (71) 4
------ ------ ------ ------- ------ -------- -------
Net income (loss)...... 8% 6% 7% 6% 2% (104)% 6%
====== ====== ====== ======= ====== ======== =======
</TABLE>
27
<PAGE>
The Company's net revenue increased on a sequential quarterly basis from the
first quarter of fiscal 1995 to the fourth quarter of fiscal 1995, and the
same pattern was followed for the first three quarters of fiscal 1996.
Increases within each year reflected higher unit sales quarter to quarter due
to increasing market acceptance of the Company's products. In addition, the
Company has experienced shifts in sales to its higher-priced color server
systems from its lower-priced color server kits, particularly beginning in the
third quarters of fiscal 1995 and 1996 with the introductions of the Power
Series and PCI Series product lines, respectively. The gross margins decreased
in the second half of fiscal 1995 primarily due to a sales shift toward
certain lower margin pre-configured server systems. The subsequent increases
in gross margins for each of the first three quarters in fiscal 1996 were
primarily due to the reductions in component costs achieved through redesigns
of the Power Series boards, new product line designs, continued economies of
scales from higher sales volumes and favorable component pricing, particularly
computers and memory. Memory prices have experienced significant fluctuations
in the past and there can be no assurances that current pricing trends will
continue. The Company expects that gross margins will fluctuate quarter to
quarter and may decrease in the future. See "Risk Factors--Fluctuations in
Operating Results; Seasonal Purchasing Patterns."
Research and development expenses have fluctuated from quarter to quarter
due in part to periodic third party funding of development efforts, which
totaled approximately $337,000, $543,000 and $453,000 in fiscal 1994, fiscal
1995 and the nine months ended June 30, 1996 respectively, ranging from $0 to
approximately $300,000 per quarter in the periods presented. Third party
funding of development is included in net revenue and costs of net revenue for
such products. In addition, research and development spending generally
increased quarter to quarter in fiscal 1995 as the Company expanded its
development efforts, and decreased in the second and third quarters of fiscal
1996 due to elimination of overhead charges by Radius following the
Acquisition. There can be no assurance that the Company will continue to
receive third party funding of any of its future development projects. Sales
and marketing expenses increased in the third quarter of fiscal 1995 and third
quarter of fiscal 1996 due to marketing efforts in connection with the
introduction of Splash's Power Series and PCI Series products, respectively.
General and administrative expenses decreased in the second quarter of fiscal
1996 as the Company discontinued use of Radius' administrative services and
increased in the third quarter of fiscal 1996 as the Company began adding its
own administrative infrastructure.
The Company's operating results have fluctuated and will likely continue to
fluctuate in the future on a quarterly and annual basis as a result of a
number of factors, many of which are outside the Company's control. These
fluctuations are in part due to the purchasing patterns of the Company's two
customers, Xerox and Fuji Xerox. These customers have historically made, and
are expected to continue to make, a significant portion of their purchases of
the Company's products in the second half of the Company's fiscal year. As a
result, the Company's sales have historically been significantly lower, and
are expected to continue to be lower, in the first quarter of the Company's
fiscal year than the immediately preceding fourth quarter. In addition, any
increases in inventories by the Company's customers could also result in
variations in the timing of purchases by such customers. In addition,
announcements by the Company or its competitors of new products and
technologies could cause customers to defer purchases of the Company's
existing products. In the event that anticipated orders from end users fail to
materialize, or delivery schedules are deferred or canceled as a result of the
above factors or other unanticipated factors, it would materially and
adversely affect the Company's business, operating results and financial
condition.
Results in any period could also be affected by changes in market demand,
competitive market conditions, sales promotion activities by the Company, its
OEM customers or its competitors, market acceptance of new or existing
products, sales of color copiers with which the Company's products are
compatible, the cost and availability of components, the mix of the Company's
customer base and sales channels, the amount of any third party funding of
development expenses, the mix of products sold, the Company's ability to
effectively expand its sales and marketing organization, the Company's ability
to attract and retain key technical and managerial employees, and general
economic conditions. As a result,
28
<PAGE>
the Company believes that period-to-period comparisons of its results of
operations are not necessarily meaningful and should not be relied upon as
indicative of future performance. Due to all of the foregoing factors, the
Company's operating results in one or more future periods may be subject to
significant fluctuations. In the event this results in the Company's financial
performance being below the expectations of public market analysts and
investors, the price of the Company's stock would be materially and adversely
affected.
LIQUIDITY AND CAPITAL RESOURCES
From fiscal 1994 until the Acquisition in January 1996, the Company satisfied
its liquidity requirements through cash flow generated from operations. The
Company had limited cash balances following the Acquisition and satisfied its
cash needs through a $4.0 million revolving line of credit and cash flow from
operations.
As of June 30, 1996, the Company had $6.6 million of cash and cash
equivalents and had repaid all borrowings under the bank line of credit.
Borrowings are available under the line of credit based on a percentage of
eligible accounts receivable, and at June 30, 1996, borrowings of $3.4 million
were available. Borrowings under the line of credit bear interest at a rate of
prime plus three-quarters of one percent. The line of credit expires on January
31, 1997. The Company also had outstanding an aggregate of $8.0 million of
subordinated promissory notes issued to stockholders in connection with the
Acquisition. The subordinated promissory notes bear interest at a rate of 12%
per annum, payable quarterly. Such notes are payable in 2001 and 2002, or
earlier if certain events occur, including the Offering, and will be paid in
full out of the proceeds of the Offering. (The notes were valued at
$8.6 million by an independent third party valuation.) See Notes 4 and 5 of
Notes to Consolidated Financial Statements.
The Company's operating activities provided $4.2 million in cash in fiscal
1995, primarily due to increases in accounts payable, other accrued
liabilities, royalties payable and income taxes payable, offset in part by an
increase in inventories. For the nine months ended June 30, 1996, the Company
generated $6.8 million in cash from operations, primarily due to decreases in
accounts receivable and increases in other accrued liabilities, deferred
revenue and income taxes payable, partially offset by decreases in royalties
payable.
Notwithstanding an increase in net revenue over the respective periods,
accounts receivable decreased to $4.7 million at September 30, 1995 from $5.3
million at September 30, 1994. This was due to the introduction and significant
shipments of a new product series in late fiscal 1994 causing the resulting
accounts receivable balance to be unusually high at September 30, 1994. The
accounts receivable balance further decreased to $4.0 million at June 30, 1996
as the Company implemented its own cash collection procedures after becoming
independent from Radius, significantly reducing days sales outstanding.
Inventories increased to $4.0 million at September 30, 1995 from $1.3 million
at September 30, 1994 primarily due to a delay in product shipments at the end
of fiscal 1995. Trade accounts payable, other accrued liabilities and royalties
payable increased to $5.6 million at September 30, 1995 from $2.3 million at
September 30, 1994, primarily due to a slowdown in vendor payments imposed by
Radius, of which the Company was a division at such dates.
Investing activities used $444,000 in cash in fiscal 1995 and $22.9 million
in cash in the nine months ended June 30, 1996. These amounts represented
purchases of property and equipment and, in the nine months ended June 30,
1996, $22.5 million in cash used in connection with the Acquisition. Financing
activities used $3.7 million in cash in fiscal 1995, consisting of cash
transfers to Radius and provided $23.6 million in cash in the nine months ended
June 30, 1996, consisting primarily of financing related to the Acquisition.
The Company has no material commitments other than obligations under
operating leases. See Note 6 of Notes to Consolidated Financial Statements.
29
<PAGE>
The Company expects to use $23.4 million of the net proceeds of the Offering
for repayment of the subordinated promissory notes payable to stockholders and
redemption of its Series A Preferred Stock. See Notes 5 and 7 of Notes to
Consolidated Financial Statements. The remaining net proceeds, if any, will be
used for working capital and general corporate purposes. Assuming completion
of the Offering and the application of the net proceeds therefrom, the Company
would have had, as of June 30, 1996, approximately $10.3 million in working
capital, including approximately $11.0 million in cash and cash equivalents.
The Company believes that it will be able to satisfy its cash requirements for
at least the next twelve months from a combination of the proceeds of the
Offering, cash flow from operations and the Company's bank line of credit.
However, upon completion of the Offering, the Company will continue to have
limited capital resources and may require additional capital sooner. There can
be no assurance that the Company will be able to obtain additional financing
as needed on acceptable terms or at all. See "Use of Proceeds,"
"Capitalization," "Risk Factors--Need for Additional Capital" and "Certain
Transactions."
30
<PAGE>
BUSINESS
This Business section and other parts of this Prospectus contain forward-
looking statements that involve risks and uncertainties. The Company's actual
results may differ materially from the results discussed in such forward-
looking statements. Factors that may cause such a difference include, but are
not limited to, those discussed in "Risk Factors."
Splash develops, produces and markets color servers that provide an
integrated link between desktop computers and digital color laser copiers and
enable such copiers to provide high quality, high speed, networked color
printing and scanning. These hybrid systems, consisting of color servers and
digital color laser copiers (referred to as connected or multifunction
copiers), support multiple uses including image scanning, image manipulation,
printing and photocopying. The Company's products feature advanced color
correction, color calibration and separations support, ease of use, time-
saving workflow functionality, simulation of many color monitors and printing
presses, and automatic correction for certain printing workflow problems.
Splash's color servers are commonly accessed by users across networks of
Windows-based personal computers, Apple personal computers and UNIX-based
computers.
INDUSTRY BACKGROUND
The use of color in communications media is becoming ubiquitous. Just as
photography, television, computer monitors and newspapers have migrated from
black and white to color, a similar transition is occurring in electronic
printing. Advances in computer-based color graphics, printing and imaging
technology are fueling increased demand for the ability to produce color
printed materials more easily, more frequently, in smaller batches, and at
lower cost.
Commercial color printing customarily involves a number of complex, labor
intensive and costly steps. Accordingly, color largely has been reserved for
high end and high volume applications, and printing of commercial quality
materials such as magazines, catalogs, brochures and sales material has been
performed primarily by professional independent printing companies. The images
to be printed are typically designed and composed by an end user's in-house
staff or a design house or advertising agency. The images are passed to a
service bureau for prepress preparation, which involves input by a high-
quality scanner (or, more recently, acceptance in electronic file format from
the designer) and other preparation for printing. Preparation for printing
includes color retouching and other manipulation and then separation into the
four colors--cyan, magenta, yellow and black ("CMYK")--utilized by large,
four-color commercial presses. The separated CMYK files are transferred
electronically to an imagesetter which generates a separate CMYK film for each
color. These films are then used to print a pre-proof via a film proofer.
Color separation and proofing are typically performed by service bureaus or,
at times, by commercial printers. These steps are often repeated several times
to ensure that the proof matches the end user's expectations. Once the proof
is approved by the end user, the commercial printer utilizes the CMYK films to
prepare printing plates and then print the job on a large, expensive
commercial press. Each step in the proofing and prepress process is
technically complex, time consuming, labor intensive and costly, and multiple
cycles are often required. Accordingly, the process involves high fixed costs
and considerable time, and historically has been justified only for printing
in large volumes.
31
<PAGE>
The following diagram depicts the steps involved in a typical commercial
printing process, showing the repetition of certain of the key steps prior to
the final print run.
[A graphic diagram appears here and depicts certain steps within the typical
commercial printing process.]
The broad use of high quality desktop color displays, desktop publishing
software such as Adobe Photoshop and QuarkXPress, and desktop-based color
scanners, as well as the increased availability of digital color copiers and
networked and desktop color printers, has enabled a greater amount of the color
design and production workflow to be performed more rapidly and at lower costs
than was previously possible. As a result, the different organizations in the
traditional printing workflow have begun to broaden their service offerings,
with resultant overlap of roles. For example, end users and designers are
seeking to perform a greater degree of color preparation and to review a
greater number of design proofs earlier in the process, and service bureaus are
seeking to expand their service offerings with faster and lower cost color
alternatives. End users, service bureaus and traditional commercial printers
are all seeking to expand their internal capabilities for inexpensive, low
volume, high quality color printing of final output. In the emerging end user
office market in particular, the improvements in color copier technology make
possible inexpensive production of a broad range of color materials, including
sales brochures, product literature and internal communications.
The use of color printing has historically been limited because color
printing involves significantly greater complexities and requires substantially
more memory and processing power than black and white printing. For example,
accurate printed replication of an electronic color image displayed on a
monitor is difficult to achieve because the monitor creates color by projecting
light in the three display colors of red, green and blue ("RGB")--an additive
process of light creation--while printed output is created through the mixing
of the four CMYK ink colors on paper--a subtractive process of light
absorption. Each display, scanning and printing device has unique color
properties that must be managed and adjusted during production, and each device
must be continually recalibrated over time. The variety of papers, ink and
printing processes also results in variations, as do changes in temperature and
humidity. In addition, different applications and devices may combine multiple
color and file formats when producing an image, resulting in issues of
compatibility and consistency.
The complexities inherent in color reproduction and printing have created a
need for advanced, easy-to-use and cost-effective color printing solutions. As
a result, digital laser color copiers and associated color servers are becoming
increasingly prevalent across a broader printing market. However, the different
segments of the broader market demand a variety of different capabilities. In
the commercial printer segment, printing companies are seeking means to broaden
their market through high quality solutions that can be offered at lower cost;
in design houses and service bureaus, color professionals require both superior
color quality and tools that enhance productivity in color production workflow;
and in the office market, ease of use is as critical as high quality results,
to make technology accessible to a broad range of end users with limited
special expertise in color. Accordingly, as color servers become more prevalent
and broadly used, there is a demand for solutions that offer more powerful
features and more accurate color capabilities with greater ease of use.
32
<PAGE>
THE SPLASH SOLUTION
Splash color servers provide an integrated link between computers and color
copiers and address the demand for high performance, cost effective digital
color printing. The Company's color servers turn a color copier into an
effective network-based solution for a variety of color printing applications
from commercial and short-run printing to desktop publishing and office color
printing. The Company's products feature advanced color correction, color
calibration and separations support, ease of use, time-saving workflow
functionality, simulation of many color monitors and printing presses, and
automatic correction for certain workflow problems.
The diagram below is an example of how Splash color servers and connected
digital color copiers can eliminate certain costly and time consuming steps in
the printing workflow.
[A graphic diagram appears here and depicts an example of certain steps in the
printing process using a Splash color server and a connected color copier.]
Splash servers utilize open systems that can be readily integrated with
corporate networks enabling easy access by a broad range of end users. The
Company's products use Adobe PostScript and are based on the Apple Power
Macintosh computer, both of which are widely used by color graphics
professionals. The Company's servers support popular network protocols,
including AppleTalk for Apple Macintosh networks, Novell IPX for Windows-based
personal computer networks and TCP/IP for UNIX-based networks. Open systems
enable the Company to concentrate its development resources on value-added
solutions for end users, including improved color quality, workflow and overall
productivity, while being able to leverage ongoing enhancements in hardware,
software and computer performance from IBM, Motorola, Apple and Adobe. Open
systems also provide users with greater flexibility by allowing the use of
standard peripheral products and software. The Company believes that its open
systems approach and color expertise have enabled it to provide innovative,
high performance products.
33
<PAGE>
The diagram below reflects the connection between a Splash color server and
a color copier and a network containing Windows PCs, Mac OS computers and UNIX
workstations via the use of Novell, AppleTalk and TCP/IP network protocols.
[A graphic diagram appears here and depicts the integration of a Splash color
server and a connected color server within a computer network.]
STRATEGY
Splash's objective is to extend its position as a leading provider of
innovative, high quality color server solutions. To achieve this objective,
the Company's business strategy includes the following key elements:
Leverage Technology Expertise. Splash seeks to leverage its expertise in
color technology, application workflow, software and hardware design and
computer systems integration to continue to offer innovative, easy-to-use,
color server products. The Company believes that its technological leadership
has permitted it to offer a number of significant features for multifunction
copiers prior to its direct competitors. For example, Splash was first to
market with a number of key features in the areas of color calibration, color
correction, CMYK separation and mixed RGB/CMYK printing.
Support Open Systems. Splash intends to continue to utilize standards-based
open systems to enable it to bring new products to market more quickly and to
permit operation with a wide variety of computer networks, devices and
complementary software. Splash provides color servers based on open systems
and popular networking protocols in order to focus the Company's development
efforts on advanced software and hardware designs that optimize color quality
and consistency, workflow efficiency and ease of use.
Broaden Markets and Product Lines. Splash intends to continue to pursue the
markets for connected copiers in pre-proof and prepress applications and to
migrate its products to additional computer platforms in order to address both
the high end of the color server market and the broader, office color printing
market. The Company also intends to develop color servers for a wider range of
34
<PAGE>
Xerox and Fuji Xerox color copiers in order to provide systems with different
feature sets across a range of price points and may consider offering color
servers for the systems of additional copier manufacturers.
Expand Sales and Marketing Organizations. Splash intends to expand its sales
and marketing organizations on a worldwide basis in order to support its Xerox
and Fuji Xerox OEM relationships. The Company believes that such expansion will
allow it to better leverage the resources offered by Xerox, Fuji Xerox and
their affiliates, which are among the leading providers of digital color
copiers and have extensive worldwide sales organizations. Splash is seeking to
further develop sales through these channels in Europe and other geographic
regions in which the Company has had lower market penetration.
PRODUCTS AND TECHNOLOGY
Product Lines
Splash offers both pre-configured color server systems and board-level server
kits. The pre-configured color server systems include a Splash copier interface
board and frame buffer installed in an Apple Power Macintosh computer and
feature Splash software, a color display, a keyboard and an interface cable.
The server kits do not include the computer, display and keyboard, thereby
allowing the customer or reseller to install the Splash color server on a
locally procured or existing compatible system. Splash products are sold under
the Splash brand worldwide except in Japan, where they are sold under the SM
ICS brand name of Fuji Xerox. The fundamental architectures of the SM ICS and
Splash products are substantially identical other than localization differences
for user interface and documentation.
Splash's primary product line is the Splash Professional Color Imaging
("PCI") Series, which was first introduced in the second calendar quarter of
1996. These products use the newest Apple Power Macintosh computers and are
compatible with the PCI bus architecture. The Splash Power Series product line,
based on a design originally launched in 1993 and updated over the years with
successive software releases, uses the NuBus architecture found in earlier
Apple Power Macintosh computers. The Company continues to offer, in limited
quantities, Power Series products, primarily board level kits and spare parts.
The retail prices of Splash PCI Series servers range from $22,000 to $35,000 in
the United States and (Yen)2,560,000 to (Yen)3,760,000 in Japan, and the retail
prices of Splash PCI Series kits range from $17,000 to $29,000 in the United
States in each case depending on model and configuration. The Splash PCI kits
are currently not sold in the Japanese market. See "Risk Factors--Dependence on
Xerox and Fuji Xerox" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
35
<PAGE>
The Company's products vary primarily by available frame buffer memory.
Memory configuration impacts print quality, scan resolution and the ability to
scan images of larger sizes. The Company's principal products are as follows:
<TABLE>
<CAPTION>
FRAME
PRODUCT COMPUTER HARDWARE DISPLAY BUFFER
------- ----------------- ------- ------
<S> <C> <C> <C>
PCI Series Servers
Splash PCI 1280 Server Power PC 604/120 MHz 149 color 128 MB RAM
Splash PCI 640 Server Power PC 604/120 MHz 149 color 64 MB RAM
Splash PCI 320 Server Power PC 604/120 MHz 149 color 32 MB RAM
PCI Series Kits(1)
Splash PCI 1280 Kit * * 128 MB RAM
Splash PCI 640 Kit * * 64 MB RAM
Splash PCI 320 Kit * * 32 MB RAM
Power Series Servers
Splash P105 Pro PowerPC 601/100 MHz NuBus 179 color 128 MB RAM
Splash P85 PowerPC 601/80 MHz NuBus 179 color 72 MB RAM
Splash P70 PowerPC 601/66 MHz NuBus 149 color 72 MB RAM
Power Series Kits(2)
Splash Power Kit Pro * * 128 MB RAM
Splash Power Kit * * 72 MB RAM
</TABLE>
- --------
* Customer supplied.
(1) Compatible hosts for PCI Series Kits are: Apple Power Macintosh 7200, 7500,
7600, 8500, 9500.
(2) Compatible hosts for Power Series Kits are: Apple Power Macintosh 7100, 8100
(non-AV configurations).
Product Features and Technology
Splash servers are based on open systems, enabling the Company to leverage
the development efforts of computer and operating system suppliers, and thereby
concentrate its development resources in those areas specific to the concerns
of color users. This open systems approach has provided an advantage in
bringing innovative color and workflow solutions to the market rapidly. It has
also enabled the Company to provide its customers with performance increases by
taking advantage of improvements in industry standard computers.
The Company's products include a Splash-designed copier interface board
integrated with a standard computer system and Splash software written for the
server and its networked clients. The Splash PCI Series copier interface board
uses double-sided surface mount technology and includes a number of advanced
design features such as a proprietary application specific integrated circuit
(ASIC), certain other custom ASICs and a large frame buffer--all in a single-
slot PCI form factor.
Splash software includes: driver software written for several different types
of client workstations; server software including network interface, spooling,
and imaging engine modules that reside on the standard computer system; and
server software including print interface and device control modules that
reside on the Splash board itself. These software modules are layered on a
standard computer operating system to provide compatibility with a variety of
off-the-shelf peripherals and third-party software applications.
The combination of Splash-engineered technology and an open systems approach
has enabled the Company to introduce a number of technical innovations to
market prior to any of its direct competitors. Innovations first introduced to
market by Splash include techniques that enhance color quality, such as
accurate printing of RGB monitor blues (avoiding the common blue to purple
shift upon printing); techniques that enhance print quality, such as traps and
overprints (as described below); and features
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that enhance productivity workflow, such as advanced color calibration
capabilities and the ability to interpret and print multiple RGB formats or
mixed RGB and CMYK formats from the same electronic file.
The following describes these and other key features offered by Splash.
CMYK Separation Support. Splash's CMYK separation capability enables users
to employ page layout and publishing software to print pre-proofs from color
copiers that incorporate overprinting (overlapping mixing of colors) and
Desktop Color Separations (high-resolution separation files). This feature
allows the printing of high quality pre-proofs and thereby saves professional
color publishing end users time and money by reducing the number of cycles of
film proofs required for the design and production process.
Splash Match. Splash Match is a unique color management solution that
permits rapid, automatic and accurate color correction of image files. The
user can select among a variety of color profiles--including RGB monitor
matching and CMYK press matching--through "check box" selections within a
printing window in the graphical user interface from a networked client.
Splash ColorCal. Splash ColorCal is a fast, easy-to-use calibration utility
that utilizes a unique randomized calibration target and a copier's built-in
digital scanning capability for calibration. By making calibration fast and
simple and eliminating the need for separate, expensive densitometers, Splash
provides a mechanism for frequent calibration that assures reproducible,
consistent color. All Splash Match color profiles (RGB and CMYK) are updated
simultaneously upon completion of calibration. Splash Match also provides an
"expert mode" of operation that allows the user to customize a copier's output
to the unique print characteristics of a given press intended for final
printing.
Splash AccuColor. Splash AccuColor, implemented as part of Splash Match,
allows for more accurate translation and printing of monitor blues without the
significant purple shift that occurs with almost all other printing
alternatives. This is a performance advantage in printing applications where
the desired goal is producing output that comes as close as possible to
matching the RGB colors on a user's display. Splash AccuColor allows for
screen-to-press matching through the use of one of several Splash press
profiles selectable in Adobe Photoshop.
Splash IntelliColor. Splash IntelliColor compensates for mistakes commonly
made during the design process such as mixing different RGB file formats or
combining RGB and CMYK formats in the same document. Images combined in the
same file are separately and accurately color corrected. This capability is
independent of the end user's application or computer workstation.
Splash Scan and Splash Print. Both Splash Scan and Splash Print are Adobe
Photoshop Plug-in modules that provide 400-dpi, 24-bit color scanning from the
copier and ultra high-speed bit map printing to a copier, respectively. In
this way, scans can be made, retouched and printed locally without tying up
the network.
Splash Colortone. Splash Colortone enhances the print quality of color
servers that have limited frame buffer memory. Splash Colortone delivers true,
continuous tone (contone) or near-contone quality output optimized to the
available frame buffer memory. Splash Colortone is automatically engaged
whenever the Splash server has too little memory to print a given page size
with full color quality. The Splash Colortone feature can print with either a
2:1 memory savings, yielding near-contone quality, or a 4:1 memory savings,
yielding prints with some but often minimal degradation. Splash automatically
switches back to true contone printing when sufficient memory is available.
Splash Edit. Splash Edit is a utility that enables the user to change
certain print settings at the Splash server after the print job has been sent
by the user across the network. Changeable print settings include number of
copies, tray selection, color correction choice, page range and sorter.
Because these settings can be changed at the Splash server next to the copier,
the user saves time by not having to return to the client computer to resend
the file.
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SALES AND MARKETING
Splash sells its PCI Series color server products to two of the leading
providers of color copiers, Xerox and Fuji Xerox. These OEMs integrate the
Company's color servers with their digital color copiers and sell the connected
systems to end users through a worldwide direct distribution network. Xerox
sells primarily in North America, South America and (through its affiliate,
Rank Xerox) Europe, while Fuji Xerox sells primarily in Japan and the Asia
Pacific region. Xerox and Fuji Xerox each provide primary customer service
through their worldwide networks, while Splash provides backup support to Xerox
and Fuji Xerox. These relationships allow Splash to provide strong customer
support at the local level as well as providing Splash with a valuable source
of input for product enhancement. Splash believes that the strength of Xerox
and Fuji Xerox in the office equipment market provides the Company with a
significant opportunity to expand its presence in the end user office printing
market.
Xerox and Fuji Xerox sell Splash products as well as competing color servers
with their products. The Company does not have contracts with Xerox and Fuji
Xerox with respect to its PCI Series products and is currently operating on a
purchase order basis with these customers. Although the Company is currently
negotiating an agreement with Xerox and Fuji Xerox for its PCI Series products,
there can be no assurance that any such agreement will be completed or that the
Company will continue to receive orders from Xerox or Fuji Xerox. Any change in
the level of sales to Xerox or Fuji Xerox would have a material adverse effect
on the Company's business, operating results and financial condition. See "Risk
Factors--Dependence on Xerox and Fuji Xerox."
Revenue from Xerox constituted 60%, 41% and 49% of Splash net revenue in
fiscal 1994, 1995 and the first nine months of fiscal 1996, respectively.
Revenue from Fuji Xerox constituted 40%, 59% and 51% of Splash net revenue in
fiscal 1994, 1995 and the first nine months of fiscal 1996, respectively. See
"Risk Factors--Dependence on Xerox and Fuji Xerox."
As of June 30, 1996, the Company employed six people in sales and marketing.
These people support Xerox's sales force while Fuji Xerox is supported by its
own personnel. Splash's sales and marketing personnel typically provide support
to Xerox and Fuji Xerox through sales literature, periodic training, customer
symposia, pre-sales support and joint sales calls. The Company also
participates in industry trade shows and conferences, publishes articles in
trade and technical journals, distributes sales and product literature and has
a public relations plan intended to generate coverage of the Company's products
and technology by editors of trade journals.
Splash believes that in order to increase its market penetration and enhance
brand awareness, it must expand its sales and marketing efforts. The Company
plans to recruit and hire additional field personnel in Europe, the United
States and the Asia Pacific region, as well as to expand its marketing
programs. There can be no assurance that the Company will be able to hire
additional personnel, expand its marketing programs or that the Company will be
able to increase its market penetration.
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MARKETS AND CUSTOMERS
Splash products are employed by users in five principal markets: commercial
and short-run printing, prepress and photo labs, graphic arts and professional
color publishing, print-for-pay and office color printing. The Company to date
has focused principally on the prepress and graphic arts markets, where end
users who are discerning about color and print quality require high quality
innovative color server solutions. The Company believes that the emerging use
of color in a variety of printing applications is creating an opportunity for
the Company's products in the other market segments. Below is a diagram
showing the five markets in which Splash products are sold.
[A graphic diagram appears here and lists the five principal markets in which
Splash products sell. (These five markets are listed as: "Commercial/Short-Run"
"Prepress and Photo Labs," "Graphic Arts and Professional Color
Publishing," "Print-for-Pay" and "Office Color Printing.")]
Commercial and Short-Run Printing. The commercial printing market represents
the highest quality and highest volume color printing production. Firms in
this market typically have their roots in traditional offset press printing,
in which output is developed in-house at businesses and other organizations,
prepared for printing by service bureaus and trade shops (which often perform
prepress services as described below) and then delivered to the commercial
printer for printing on large, expensive printing presses. In recent years,
many firms in the commercial printing market have begun to expand into
prepress and short-run printing services. These firms use color server-based
printing devices to more rapidly and less expensively produce pre-proofs of
color output. In addition, many of these firms have begun to use color server-
based printing devices as a less expensive alternative for printing in smaller
quantities. End users of Splash products in this segment include Applied
Computer Services, Inc. and R.R. Donnelley & Sons Company.
Prepress and Photo Labs. The prepress market consists of service bureaus and
trade shops which handle complex color production for end users that intend to
send print jobs to short-run and commercial printing firms for high quality or
high volume printing, as well as photo labs which provide high-end
photographic services. Prepress firms work closely with end users and the
local commercial printers that perform the print jobs. Prepress firms provide
high end scanning, image retouching, imagesetter output of color separation
films for proofing and, in some cases, the production of contract proofs which
serve as the standard for the commercial print run. Firms in this market are
utilizing color server-based printing devices as a means to reduce the cost
and turnaround time for image design, modification and pre-proofing. End users
of Splash products in this segment include the Digital Cafe, a wholly-owned
subsidiary of Boston Photo Imaging and smaller, local operators.
Graphic Arts and Professional Color Publishing. The graphic arts and
professional color publishing market consists of in-house creative staffs and
advertising agencies and design firms. These creative
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professionals perform extensive color design and layout, but historically have
not performed print production. Users typically utilize networked personal
computers and workstations for color design and use color server-based
printing devices for conceptual and comprehensive designs as well as pre-
proofs. Users typically compose the color image to be printed utilizing
applications such as Adobe Photoshop, Adobe Illustrator, QuarkXPress and Adobe
PageMaker. End users of Splash products in this segment include DRC
Advertising, Hearst Magazines and Gibson Greetings, Inc.
Print-for-Pay. Print-for-pay firms provide a broad range of walk-in services
including faxing, copying and desktop publishing. Recently these firms have
begun to use connected color copiers to offer expanded color printing and
copier services. Users in this market segment range from franchised and local
storefronts traditionally focused on black and white copying services to
specialized firms. End users of Splash products in this segment include PIP
Printing.
Office Color Printing. The office color printing market consists of
networked office printing and central reproduction departments in businesses
and other organizations. These organizations, which have typically used black
and white laser printers and desktop color ink jet printers for production of
word processed documents, spreadsheets and presentations, are increasingly
using connected copiers to produce materials such as product brochures and
internal communications. This market segment is still emerging, but the
Company believes the ability of color servers to operate across corporate
networks will help expand this market.
MANUFACTURING
The Company outsources the manufacture of its products to third party
subcontract manufacturers including MSL, located in Sunnyvale, California, and
Logistix, located in Fremont, California. MSL purchases the components used in
Splash boards from its suppliers and performs double-sided active surface
mount assembly, in-circuit test, functional test and system test of the
printed circuit boards used in the Splash PCI Series products, on a turnkey
basis. MSL also performs in-warranty and out-of-warranty repair of failed
boards for the Splash PCI Series products. The Company purchases Apple Power
Macintosh computers, monitors and memory, and furnishes these components as
well as the MSL-assembled boards to Logistix for final assembly. Logistix
directly purchases a small portion of the components used in Splash color
servers and does all final assembly and system configuration. Other
subcontract manufacturers perform similar services with respect to the Splash
Power Series product line.
While the Company's subcontract manufacturers conduct quality control and
testing procedures specified by the Company, the Company has from time to time
experienced manufacturing quality problems. Although the Company does not
believe any such problem had a material adverse effect on the its business,
there can be no assurance that quality problems will not occur again in the
future or that any such problem will not have a material adverse effect on its
business, operating results and financial condition.
If the Logistix, MSL or other third party manufacturing facilities utilized
by the Company become unavailable to the Company, or if the manufacturing
operations at these facilities are slowed, interrupted or terminated, the
Company's business, operating results and financial condition could be
materially and adversely affected. Although the Company believes that there
are other companies available with the capability to provide the Company with
such services, there can be no assurance that the Company would be able to
enter into alternative third party arrangements on terms satisfactory to the
Company, on a timely basis, or at all. See "Risk Factors--Dependence on Third
Party Manufacturers."
Certain components necessary for the manufacture of the Company's products
are obtained from a sole supplier or a limited group of suppliers. These
include Apple Power Macintosh computers, certain ASICs and other semiconductor
components. The Company does not maintain any long-term agreements with any of
its suppliers of components. Because the purchase of certain key components
involves long
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lead times, in the event of unanticipated increases in demand for the Company's
products, the Company could be unable to manufacture certain products in a
quantity sufficient to meet end user demand. In addition, Apple has recently
experienced significant financial difficulties and losses in market acceptance,
and its products have particularly low levels of market acceptance in the
office color printing market into which the Company is seeking to expand. If
Apple were to discontinue production of the Power Macintosh models with which
Splash products operate or were unable to provide or otherwise cease to provide
an acceptable level of end user customer support, the Company's business,
operating results and financial condition would be materially and adversely
affected. The Company also purchases memory modules from a single supplier.
Although other sources are available, a change in memory supplier could require
time to effect and could impact production. This risk would be exacerbated in
times of short memory supply. Any inability to obtain adequate deliveries of
any of the components or any other circumstance that would require the Company
to seek alternative sources of supply could affect the Company's ability to
ship its products on a timely basis, which could damage relationships with
current and prospective customers and could therefore have a material adverse
effect on the Company's business, financial condition and operating results.
Moreover, there can be no assurance that alternative sources of supply would be
available on reasonably acceptable terms, on a timely basis, or at all. The
Company has from time to time experienced shortages in deliveries of ASICs from
Toshiba Corporation, which shortages have impacted production volume
capabilities. In order to attempt to mitigate the risk of such shortages in the
future, the Company intends to increase its inventory of components for which
the Company is dependent upon sole or limited source suppliers. As a result,
the Company may be subject to an increasing risk of inventory obsolescence in
the future, which could materially and adversely affect the operating results
and financial condition. See "Risk Factors--Dependence on Component
Availability and Cost" and "--Dependence on Apple Computer, Inc."
The market prices and availability of certain components, particularly memory
and other semiconductor components and, to a lesser extent, Apple Power
Macintosh computers, which collectively represent a substantial portion of the
total manufactured cost of the Company's products, have fluctuated
significantly in the past. Significant fluctuations in the future could have a
material adverse effect on the Company's business, operating results and
financial condition. See "Risk Factors--Fluctuations in Operating Results;
Seasonal Purchasing Patterns," "--Dependence on Component Availability and
Cost" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
RESEARCH AND DEVELOPMENT
Splash's research and development efforts are focused on color science,
application workflow, ASIC and board design, software and computer systems
integration and the continued development of new and enhanced products. The
Company also works closely with key technology partners including Adobe, Apple,
Fuji Xerox and Xerox.
The Company has historically devoted a significant amount of its resources to
research and development. As of June 30, 1996, the Company had 23 employees
engaged in research and development. Research and development expenses in
fiscal 1994 and 1995 and the first nine months of fiscal 1996 were $2.0
million, $3.3 million and $3.1 million, respectively.
The graphics and color reproduction, color processing and personal computing
markets are characterized by rapid changes in customer requirements, frequent
introductions of new and enhanced products, and continuing and rapid
technological advancement. To compete successfully, the Company must continue
to design, develop, manufacture and sell new products that provide increasingly
higher levels of performance and reliability, take advantage of technological
advancements and changes and respond to new customer requirements. The
Company's success in designing, developing, manufacturing and selling new
products will depend on a variety of factors, including the identification of
market demand for new products, product selection, timely implementation of
product design and development,
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product performance, cost-effectiveness of products under development,
effective manufacturing processes and the success of promotional efforts.
The Company has recently transitioned its product offerings from its Power
Series products to its PCI Series products, and there can be no assurance that
the PCI Series or any future products will achieve widespread market
acceptance. In addition, the Company has in the past experienced delays in the
development of new products and the enhancement of existing products, and such
delays may occur in the future. If the Company is unable, due to resource
constraints or technological or other reasons, to develop and introduce new
products or versions in a timely manner, or if such new products or releases do
not achieve timely and widespread market acceptance, it would have a material
adverse effect on the Company's business, operating results and financial
condition. See "Risk Factors--Rapid Technological Changes; Dependence on New
Product Introductions."
COMPETITION
The markets for the Company's products are characterized by intense
competition and rapid change. The Company competes directly with other
independent manufacturers of color servers and with copier manufacturers, and
indirectly with printer manufacturers and others. Splash has a number of direct
competitors for color server products, the most significant of which is EFI.
Splash also faces competition from copier manufacturers that offer internally
developed color server products, such as a non-PostScript color server offered
by Fuji Xerox, or that incorporate color server features into their copiers. In
addition, the Company faces competition from desktop color laser printers that
offer increasing speed and color capability. As component prices decrease and
the processing power and other functionality of copiers, printers and add color
server functionality to their systems, it becomes more likely that copier,
printer and computer manufacturers will continue to add color server
functionality to their systems, which could reduce the market for the Company's
existing line of products.
The Company also competes indirectly with manufacturers of electronic color
prepress systems, which offer similar functionality for the short-run and
commercial printing market as is provided by the Company's products. The
Company also competes indirectly with providers of color separation, color
editing and page layout software. While this software typically is
complementary to the Company's systems, it may also be competitive and may
become increasingly competitive to the extent that the providers of such
software extend the functionality of their products in future releases. See
"Risk Factors--Dependence on Adobe Systems Incorporated."
The Company believes that the principal competitive factors in its markets
are product features, functionality and performance; strength of distribution
channels, including sales capability and after-market support; brand name
recognition and market share; and price. The Company believes that it competes
favorably with respect to product features, functionality and performance,
including color and print quality and the open architecture of the Company's
systems. Splash was the first to introduce a number of significant features to
the multifunction color copier market, and its products currently provide
certain features and functionality not offered by competitors. However,
Splash's competitors also offer certain unique features and functionality that
are not offered by the Company. EFI also has substantially greater name
recognition and a significantly larger installed base than the Company, its
products operate with a broader range of color photocopier systems and its
products are generally priced less than those of Splash. EFI has historically
had higher operating margins than Splash which could allow EFI to increase
pricing pressure on Splash or to respond more effectively to any third party
pricing pressures. The Company also believes that it competes favorably in many
distribution channels addressed by Xerox and Fuji Xerox, but the Company's
products do not support the range of products from different manufacturers
supported by EFI and other competitors, and the Company's relationship with the
Xerox distribution channel is currently not as strong in certain geographical
areas, such as Europe, where the Company historically has had a smaller market
presence and lesser support capabilities.
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Many of the Company's current and potential direct and indirect competitors
have longer operating histories, are substantially larger, and have
substantially greater financial, technical, manufacturing, marketing and other
resources than Splash. A number of these current and potential competitors also
have substantially greater name recognition and a significantly larger
installed base of products than the Company, which could provide leverage to
such companies in their competition with Splash. The Company expects
competition to increase to the extent the color server market grows, and such
increased competition may result in price reductions, reduced gross margins and
loss of market share, any of which could materially adversely affect the
Company's business, operating results and financial condition. As a result of
their greater resources, many of such competitors are in a better position than
Splash to withstand significant price competition or downturns in the economy.
There can be no assurance that Splash will be able to continue to compete
effectively, and any failure to do so would have a material adverse effect upon
the Company's business, operating results and financial condition. See "Risk
Factors--Competition."
INTELLECTUAL PROPERTY
The Company relies in part on trademark, copyright and trade secret law to
protect its intellectual property in the United States and abroad. The Company
seeks to protect its software, documentation and other written materials under
trade secret and copyright laws, which afford only limited protection and there
can be no assurance that the steps taken by the Company will prevent
misappropriation of its technology. The Splash software included as a part of
the Company's products is sold pursuant to "shrink wrap" licenses that are not
signed by the end user and, therefore, may be unenforceable under the laws of
certain jurisdictions. The Company does not own any issued patent. There can be
no assurance that any trademark or copyright owned by the Company, or any
patent, trademark or copyright obtained by the Company in the future, will not
be invalidated, circumvented or challenged, that the rights granted thereunder
will provide competitive advantages to the Company or that any of the Company's
pending or future patent applications will be issued with the scope of the
claims sought by the Company, if at all. In addition, the laws of some foreign
countries do not protect the Company's proprietary rights as fully as do the
laws of the United States. Thus, effective intellectual property protection may
be unavailable or limited in certain foreign countries. There can be no
assurance that the Company's means of protecting its proprietary rights in the
United States or abroad will be adequate or that competition will not
independently develop technologies that are similar or superior to the
Company's technology, duplicate the Company's technology or design around any
patent of the Company. Moreover, litigation may be necessary in the future to
enforce the Company's intellectual property rights, to determine the validity
and scope of the proprietary rights of others, or to defend against claims of
infringement or invalidity. Such litigation could result in substantial costs
and diversion of management time and resources and could have a material
adverse effect on the Company's business, operating results and financial
condition.
There have been substantial amounts of litigation in the computer and related
industries regarding intellectual property rights, and there can be no
assurance that third parties will not claim infringement by the Company of
their intellectual property rights. In particular, EFI filed suit against
Radius in November 1995, alleging infringement of an EFI patent by Splash's
predecessor, CSG and requesting unspecified monetary damages and injunctive
relief. The technology which is the subject of the patent claim was acquired by
Splash in the Acquisition, and EFI could add Splash as a defendant to the suit
at any time. Although a portion of the purchase price in the Acquisition was
placed in escrow pending resolution of the EFI litigation, there can be no
assurance that any such litigation against Splash would not have a material
adverse effect on the Company's business, operating results and financial
condition. The addition of Splash as a defendant in this suit or any other
third party claims that the Company is infringing on proprietary rights of
others, with or without merit, could be time consuming to defend, result in
costly litigation, divert management's attention and resources, and cause
product shipment delays. If the Company were found to be infringing on the
intellectual property rights of any third party, the Company could be subject
to liabilities for such infringement, which liabilities could be material, and
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could be required to seek licenses from other companies or to refrain from
using, manufacturing or selling certain products or using certain processes.
Although holders of patents and other intellectual property rights often offer
licenses to their patent or other intellectual property rights, no assurance
can be given that licenses would be offered or that the terms of any offered
license would be acceptable to the Company. Any need to redesign the products
or enter into any royalty or licensing agreement could have a material adverse
effect on the Company's business, operating results and financial condition.
See "Certain Transactions."
The Company has been required to place the source code for certain of its
software in escrow for the benefit of Xerox, and such software will be released
to Xerox in the event that the Company either files bankruptcy and as a result
is unable to deliver products for the thirty (30) days of the previously
committed date, or ceases operations.
The Company relies upon certain software licensed from third parties. There
can be no assurance that the software licensed by the Company will continue to
provide competitive features and functionality or that licenses for software
currently utilized by the Company or other software which the Company may seek
to license in the future will be available to the Company on commercially
reasonable terms. The loss of, or inability to maintain, existing licenses
could result in shipment delays or reductions until equivalent software or
suitable alternative products could be developed, identified, licensed and
integrated, and the inability to license key new software that may be
developed, on commercially reasonable terms, would have a material adverse
effect on the Company's competitive position. Any such event would materially
adversely affect the Company's business, operating results and financial
condition. See "Risk Factors--Dependence on Proprietary Technology; Reliance on
Third Party Licenses" and "--Dependence on Adobe Systems Incorporated."
EMPLOYEES
As of June 30, 1996, the Company employed 40 people, including 23 in research
and development, 5 in operations, 6 in sales and marketing, and 6 in a general
and administrative capacity. The Company also employs a number of temporary
employees and consultants on a contract basis. None of the Company's employees
is represented by a labor union with respect to his or her employment by the
Company. The Company has not experienced any work stoppages and considers its
relations with its employees to be good.
The Company's future success will depend, in part, upon its ability to
attract and retain qualified personnel. Competition for qualified personnel in
the Company's industry is intense, and there can be no assurance that the
Company will be successful in retaining its key employees or that it will be
able to attract skilled personnel necessary for the development of its
business. See "Risk Factors--Dependence on Key Personnel."
FACILITIES
The Company's principal operations are located in a leased facility of
approximately 24,000 square feet in Sunnyvale, California. The lease on this
building expires in 2001, and the Company has an option to extend the lease for
a period of up to five additional years. The Company also leases three office
suites in Paris, France, primarily for sales and marketing efforts in Europe.
The initial lease term on these offices expires in April 1998, and the lease is
automatically renewed every three months after April 1998 unless one of the
parties to the lease gives prior notice of termination. The Company believes
that its existing facilities are adequate to meet its needs for the foreseeable
future.
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MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY PERSONNEL
The following table sets forth certain information regarding the executive
officers, directors and other key personnel of the Company as of June 30,
1996:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
President, Chief Executive Officer and
Kevin K. Macgillivray*** 37 Director
Joan P. Platt 42 Chief Financial Officer and
Vice President, Finance and Administration
Timothy D. Kleffman 38 Vice President, Engineering Operations
Christine A. Beheshti 34 Vice President, Software Engineering
Gregory M. Avis(1)*** 37 Director
Charles W. Berger(1)* 42 Director
Peter Y. Chung(2)** 28 Director
Lawrence G. Finch(2)** 62 Director
Richard A. Falk 37 Chief Scientist
</TABLE>
- --------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
* Class I Director
** Class II Director
*** Class III Director
Kevin K. Macgillivray has served as President and Chief Executive Officer of
the Company since the Acquisition in January 1996. From April 1995 until the
Acquisition, Mr. Macgillivray was Vice President and General Manager of the
Publishing Division of Radius, a manufacturer of computer video cards and
display products, which included the CSG. From May 1993 to April 1995, Mr.
Macgillivray held other managerial positions within Radius and SuperMac, which
merged into Radius in 1994. From May 1991 to May 1993, Mr. Macgillivray was
Vice President and General Manager of Oce Graphics USA, a computer peripherals
manufacturer. Mr. Macgillivray received a B.S. in Mechanical Engineering from
Stanford University.
Joan P. Platt joined the Company in March 1996 as Vice President, Finance
and Administration and Chief Financial Officer. From October 1986 to March
1996, Ms. Platt was a general practice partner at Coopers & Lybrand L.L.P., a
public accounting firm. Prior to 1986, Ms. Platt was a staff accountant and
manager in the business advisory, accounting and audit practice of Coopers &
Lybrand L.L.P. Ms. Platt received a B.S. in Business Administration from The
Pennsylvania State University.
Timothy D. Kleffman has served as Vice President, Engineering Operations of
the Company since the Acquisition. Mr. Kleffman was Director of Printer
Systems within the CSG at Radius and SuperMac from October 1992 until the
Acquisition. From August 1985 to October 1992, Mr. Kleffman held various
management positions at ROLM Corporation. Mr. Kleffman received a B.S. in
Electrical and Computer Engineering from the University of California, Davis.
Christine A. Beheshti has served as Vice President, Software Engineering of
the Company since the Acquisition. From March 1993 until the Acquisition, Ms.
Beheshti held various engineering management positions with Radius and
SuperMac. From December 1990 to March 1993, Ms. Beheshti worked for ROLM
Corporation, where she held various software development, management and
engineering positions. Ms. Beheshti received a B.S. in Computer Science from
the University of Wisconsin.
45
<PAGE>
Gregory M. Avis has been a director of the Company since its formation in
December 1995. Mr. Avis has served as a General Partner of Summit Partners,
L.P., a venture capital partnership, since 1987 and has served as a Managing
Partner of Summit Partners, L.P. since 1990. Mr. Avis is also a director of
CMG Information Services, Inc. and Digital Link Corporation. Mr. Avis received
a B.A. in Political Economy from Williams College and an M.B.A. from Harvard
Business School.
Charles W. Berger has been a director of the Company since the Acquisition
in January 1996. Mr. Berger has served as Chief Executive Officer, President
and a director of Radius, a computer peripherals manufacturer, since March
1993 and has been the Chairman of the Board of Directors of Radius since March
1994. From April 1992 until he joined Radius, Mr. Berger was Senior Vice
President, Worldwide Sales, Operations and Support for Claris Corporation, a
software subsidiary of Apple, a personal computer manufacturer, that develops
and markets application software. From March 1989 to April 1992, Mr. Berger
held various executive positions at Sun Microsystems, Inc. and its
subsidiaries. Mr. Berger received a B.S. in Business Administration from
Bucknell and an M.B.A. from Santa Clara University.
Peter Y. Chung has been a director of the Company since its formation in
December 1995. Mr. Chung has served as a Senior Associate at Summit Partners,
L.P., a venture capital partnership, since August 1994. From August 1989 to
July 1992, Mr. Chung was employed by Goldman, Sachs & Co., an investment
banking firm. Mr. Chung received an A.B. in Economics from Harvard College and
an M.B.A. from Stanford University.
Lawrence G. Finch has been a director of Splash since the Acquisition in
January 1996. Mr. Finch has served as a General Partner of Sigma Partners,
L.P., a venture capital firm, since January 1989. Mr. Finch is also a director
of Phoenix Technologies Ltd., a developer of computer firmware and software.
Richard A. Falk has served as Splash's Chief Scientist since the Acquisition
in January 1996. From October 1992 until the Acquisition, Mr. Falk served in
various engineering positions with SuperMac and Radius. From August 1983 to
October 1992, Mr. Falk worked for ROLM Corporation in a variety of
development, engineering and management positions. Mr. Falk received a B.A. in
Physical Sciences and an M.B.A. from the University of California, Berkeley.
The Company's Board of Directors shall be divided into three classes upon
the closing of the Offering. The initial term of the Class I directors expires
at the Company's annual meeting of stockholders in 1997, the initial term of
the Class II directors expires at the Company's annual meeting of stockholders
in 1998, and the initial term of the Class III directors expires at the
Company's annual meeting of stockholders in 1999. Thereafter, the term of each
class of directors shall be three years. All directors hold office until the
annual meeting of stockholders at which their respective class is subject to
reelection and until their successors are duly elected and qualified, or until
their earlier resignation or removal. Officers serve at the discretion of the
Board and are elected annually. There are no family relationships among the
directors or officers of the Company.
BOARD COMMITTEES
The Board of Directors has had a Compensation Committee and an Audit
Committee since July 1996. The Compensation Committee makes recommendations to
the Board concerning salaries and incentive compensation for the Company's
officers and employees and administers the Company's 1996 Stock Option Plan
and 1996 Employee Stock Purchase Plan. The Audit Committee aids management in
the establishment and supervision of the Company's financial controls,
evaluates the scope of the annual audit, reviews audit results, consults with
management and the Company's independent auditors prior to the presentation of
financial statements to stockholders and, as appropriate, initiates inquiries
into aspects of the Company's financial affairs.
46
<PAGE>
DIRECTOR COMPENSATION
Directors receive no cash remuneration for serving on the Board of Directors,
although directors are reimbursed for all reasonable expenses incurred by them
in attending Board and Committee meetings. Non-employee directors are eligible
to receive stock options under the 1996 Stock Option Plan. See "--Compensation
Plans."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors currently consists of
Messrs. Avis and Berger. Neither of these individuals were at any time since
the formation of the Company, an officer or employee of the Company. No
executive officer of the Company serves as a member of the board of directors
or compensation committee of any entity that has one or more executive officers
serving as a member of the Company's Board of Directors or Compensation
Committee.
EMPLOYMENT CONTRACTS AND CHANGE OF CONTROL ARRANGEMENTS
The Company does not currently have any employment contract in effect with
its Chief Executive Officer or any other Named Executive Officer (as defined
below).
EXECUTIVE COMPENSATION
The following table set forth a summary of the compensation paid by Radius
during the fiscal year ended September 30, 1995 to the Company's Chief
Executive Officer and the Company's other most highly compensated executive
officers (collectively, the "Named Executive Officers") for services rendered
in all capacities to Radius.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
PREDECESSOR BUSINESS
-----------------------------------------------------
1995 ANNUAL LONG TERM
COMPENSATION COMPENSATION
------------------ ------------------
NAME AND PRINCIPAL SECURITIES ALL OTHER
POSITION(1) SALARY($) BONUS($) UNDERLYING OPTIONS COMPENSATION($)
------------------ --------- -------- ------------------ ---------------
<S> <C> <C> <C> <C>
Kevin K. Macgillivray.... $137,711 $35,500 -- --
President, Chief
Executive Officer and
Director
Timothy D. Kleffman...... $127,284 $36,000 -- --
Vice President,
Engineering Operations
Christine A. Beheshti.... $125,000 $24,000 -- --
Vice President, Software
Engineering
</TABLE>
- --------
(1) In March 1996, the Company hired Joan P. Platt as Vice President, Finance
and Administration and Chief Financial Officer. Ms. Platt's annualized
compensation and target bonus are $135,000 and $25,000, respectively.
OPTION GRANTS IN LAST FISCAL YEAR
The Company was formed in December 1995 and effected the Acquisition in
January 1996. Accordingly, the Company did not grant any stock options to the
Named Executive Officers during the fiscal year ended September 30, 1995. In
February 1996, the Company granted options to purchase shares of the Company's
Common Stock at an exercise price of $0.14 per share to the following executive
officers: (i) Kevin K. Macgillivray received options to purchase an aggregate
of 48,125 shares,
47
<PAGE>
(ii) Timothy D. Kleffman received options to purchase an aggregate of 48,125
shares and (iii) Christine A. Beheshti received options to purchase an
aggregate of 48,125 shares. In March 1996, the Company granted options to
purchase an aggregate of 96,659 shares of the Company's Common Stock at an
exercise price of $.29 per share to Joan P. Platt.
COMPENSATION PLANS
1996 STOCK OPTION PLAN
The Company's 1996 Stock Option Plan (the "1996 Plan") was adopted in January
1996 and amended in July 1996. The 1996 Plan provides for the grant to
employees of the Company (including officers and employee directors) of
incentive stock options within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), and for the grant of
nonstatutory stock options to employees and consultants of the Company. The
1996 Plan is administered by the Board of Directors or a Committee of the Board
of Directors (the "Administrator"), which selects the optionees, determines the
number of shares to be subject to each option and determines the exercise price
of each option. The 1996 Plan authorizes the issuance of an aggregate of up to
3,150,000 shares of Common Stock. As of June 30, 1996, approximately 575,000
shares had been issued under the 1996 Plan, options for approximately 240,000
shares were outstanding, and approximately 2,350,000 shares remained available
for future grants. The exercise price of all incentive stock options granted
under the 1996 Plan must be at least equal to the fair market value of the
Common Stock on the date of grant. The exercise price of all nonstatutory stock
options granted under the 1996 Plan shall be determined by the Administrator.
With respect to any participant who owns stock possessing more than 10% of the
voting power of all classes of stock of the Company, the exercise price of any
incentive stock option granted must equal at least 110% of the fair market
value on the grant date and the maximum term of the option must not exceed five
years. The term of all other options granted under the 1996 Plan may not exceed
ten years.
In the event of a merger of the Company with or into another corporation or a
sale of substantially all the Company's assets, the 1996 Plan requires that
each outstanding option be assumed or an equivalent option substituted by the
successor corporation; provided, however, that in the event the successor
corporation refuses to assume or substitute for the outstanding options, such
options will become fully vested and exercisable for a period of fifteen days
after notice from the Administrators. Unless terminated sooner, the 1996 Plan
will terminate ten years from its effective date. The Board has authority to
amend or terminate the 1996 Plan, provided that no such action may impair the
rights of the holder of any outstanding options without the written consent of
such holder.
1996 EMPLOYEE STOCK PURCHASE PLAN
The Company's 1996 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted in July 1996 and will become effective upon the closing of the
Offering. A total of 175,000 shares of Common Stock has been reserved for
issuance under the Purchase Plan. The Purchase Plan is intended to qualify
under Section 423 of the Code. Offering periods may be up to 24 months in
duration and may include several purchase periods as determined by the Board.
The initial offering period will commence on the date of the Offering and end
on the last business day on or prior to April 30, 1997, and subsequent offering
periods are initially expected to be May 1 to October 31 and November 1 to
April 30 of each year. Employees are eligible to participate if they are
regularly employed by the Company for at least twenty hours per week and more
than five months in any calendar year.
The Purchase Plan permits eligible employees to purchase Common Stock through
payroll deductions, which may not exceed 10% of an employee's base compensation
(20% in the first offering period), including commissions, bonuses and
overtime, at a price equal to 85% of the fair market value of the Common Stock
at the beginning of each offering period or the purchase date, whichever is
lower. In the event of certain changes in control of the Company, the Purchase
Plan provides that the Board
48
<PAGE>
of Directors will shorten the offering period by setting a new purchase date to
occur before the change in control event. Unless terminated sooner, the
Purchase Plan will terminate ten years after its effective date. The Board of
Directors has authority to amend or terminate the Purchase Plan provided no
such action may adversely affect the rights of any participant.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Amended and Restated Certificate of Incorporation limits the
liability of directors to the fullest extent permitted by the Delaware General
Corporation Law (the "Delaware Law"). Under the Delaware Law, a director's
liability to a company or its stockholders may not be limited with respect to
(i) any breach of his duty of loyalty to the company or its stockholders, (ii)
acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law, (iii) unlawful payments or dividends or unlawful
stock repurchases or redemptions, or (iv) transactions from which the director
derived an improper personal benefit.
The Company's Bylaws provide that the Company shall indemnify its officers
and directors and may indemnify its employees and other agents to the fullest
extent permitted under the Delaware Law. The Company has also entered into
agreements to indemnify its directors and executive officers, in addition to
the indemnification provided for in the Company's Bylaws. The Company believes
that these provisions and agreements are necessary to attract and retain
qualified directors and executive officers. The Company's Bylaws also permit it
to secure insurance on behalf of any officer, director, employee or other agent
for any liability arising out of his or her actions, regardless of whether the
Delaware Law would permit indemnification.
There is no pending litigation or proceeding involving any director, officer,
employee or agent of the Company where indemnification will be required or
permitted. The Company is not aware of any pending or threatened litigation or
proceeding that might result in a claim for such indemnification.
49
<PAGE>
CERTAIN TRANSACTIONS
On January 30, 1996, the Company was acquired by an investor group (the
"Acquisition Group") led by certain entities affiliated with Summit Partners,
L.P. and certain entities affiliated with Sigma Partners, L.P. The Acquisition
was effected through the following series of transactions: (i) the Acquisition
Group formed and capitalized a new corporation, the Company, called Splash
Technology Holdings, Inc., a Delaware corporation; (ii) the Company formed and
capitalized a new wholly-owned subsidiary, Splash Merger Company, Inc., a
Delaware corporation; (iii) Radius created a new corporation, Splash
Technology, Inc., a Delaware corporation, into which Radius placed
substantially all of the assets and liabilities of its Color Server Group in
exchange for all of the capital stock of Splash Technology, Inc.; and (iv)
Splash Merger Company, Inc. was merged with and into Splash Technology, Inc.,
thereby effecting the Acquisition. As a result of these transactions, the
surviving corporation in the merger was Splash Technology, Inc., a wholly-owned
subsidiary of the Company, which in turn was owned principally by the
Acquisition Group. As a result of these transactions, Radius received (i) a
payment of approximately $21.9 million in cash on January 30, 1996
(approximately $2.35 million of which remains in escrow for the benefit for the
Company and its stockholders, as described below), (ii) an aggregate of 4,282
shares of Series B Preferred Stock of the Company, which are convertible into a
total of 1,741,129 shares of Common Stock of the Company (representing
approximately 19% of the outstanding Common Stock of the Company on an as-
converted basis prior to the Offering), and (iii) a payment of approximately
$1.5 million in cash on June 9, 1996. None of the entities within the
Acquisition Group which are affiliated with Summit Partners, L.P. or Sigma
Partners, L.P. were affiliated with Radius immediately prior to the
Acquisition. Entities affiliated with Sigma Partners, L.P. collectively held
more than 5% of the outstanding capital stock of SuperMac until January 1993
and Lawrence G. Finch was a director of Radius until October 1995.
The Acquisition was funded by the purchase of approximately $15.5 million of
Series A Preferred Stock and Common Stock by entities associated with Summit
Partners, L.P. and entities associated with Sigma Partners, L.P. and the
purchase of $8.0 million of subordinated promissory notes by entities
associated with Summit Partners, L.P. The following table shows the aggregate
amount of Common Stock, Series A Preferred Stock and subordinated promissory
notes acquired by each of the principal parties in connection with the initial
capitalization of Splash Technology Holdings, Inc. and the amount and type of
consideration contributed therefor.
<TABLE>
<CAPTION>
PRINCIPAL
PURCHASE PURCHASE AMOUNT OF
PRICE SHARES OF PRICE FOR SUBORDINATED
SHARES OF FOR SERIES A SERIES A PROMISSORY
COMMON COMMON PREFERRED PREFERRED NOTES
STOCK STOCK STOCK STOCK PURCHASED TOTAL
--------- -------- --------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Entities associated with
Summit Partners, L.P. . 5,888,749 $67,300 13,933 $13,933,000 $8,000,000 $22,000,300
Entities associated with
Sigma Partners, L.P. .. 586,249 6,700 1,493 1,493,000 -- 1,499,700
Management.............. 533,748 6,100 -- -- -- 6,100
--------- ------- ------ ----------- ---------- -----------
Total................. 7,008,746 $80,100 15,426 $15,426,000 $8,000,000 $23,506,100
========= ======= ====== =========== ========== ===========
</TABLE>
In connection with the Acquisition, the parties entered into an escrow
agreement providing for an escrow of $4.7 million for satisfaction of possible
claims for indemnification by Splash Technology, Inc., Splash Technology
Holdings, Inc. and its stockholders against Radius. An amount equal to
approximately $2.35 million remains in escrow pending (i) a final, non-
appealable order dismissing with prejudice the EFI litigation, (ii) the
attainment by Radius of certain financial tests, or (iii) or the discretionary
decision by Splash Technology Holdings, Inc. and its stockholders to release
the amount in escrow. See "Risk Factors--Dependence on Proprietary Technology;
Reliance on Third Party Licenses" and "Business--Intellectual Property."
50
<PAGE>
In connection with the Acquisition, and related transactions, entities
affiliated with Summit Partners, L.P. and Sigma Partners, L.P. acquired an
aggregate of 5,888,749 shares of Common Stock and 586,249 shares of Common
Stock, respectively, representing 63.2% and 6.3% of the Company's outstanding
Common Stock immediately prior to the Offering. In addition, entities
affiliated with Summit Partners, L.P. and Sigma Partners, L.P. acquired an
aggregate of 13,933 shares and 1,493 shares, respectively, of Series A
Preferred Stock of the Company and entities affiliated with Summit Partners,
L.P. acquired subordinated promissory notes of the Company in the aggregate
principal amount of $8.0 million. The subordinated promissory notes are
required to be repaid at face value plus accrued and unpaid interest, and the
Series A Preferred Stock is required to be redeemed at a price of $1,000 per
share plus accrued and unpaid dividends, upon certain events including an
initial public offering at a price of at least $3.43 per share and aggregate
gross proceeds to the Company of at least $35.0 million. It is anticipated that
the subordinated promissory notes will be repaid and the Series A Preferred
Stock will be redeemed out of the proceeds of the Offering even at a lesser
amount of aggregate gross proceeds to the Company. See "Use of Proceeds,"
"Principal Stockholders" and "Description of Capital Stock."
The Acquisition constituted a leveraged transaction. As of January 30, 1996,
the Company had approximately $12.6 million in assets and approximately $9.6
million of liabilities. Immediately following the Acquisition, the Company had
$18.2 million in assets and $19.7 million of liabilities. The proceeds from the
Offering will be used primarily to repay the face value of $8.0 million in
subordinated promissory notes and redeem the face value of the $15.4 million of
outstanding Series A Preferred Stock issued in connection with the Acquisition.
See "Acquisition," "Use of Proceeds," "Capitalization," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Principal Stockholders."
51
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock of the Company as of June 30, 1996 and as
adjusted to reflect the sale of the shares of Common Stock offered hereby with
respect to (i) each person (or group of affiliated persons) known by the
Company to own beneficially more than 5% of the outstanding shares of Common
Stock, (ii) each of the Company's directors, (iii) each of the Named Executive
Officers, and (iv) all directors and executive officers as a group.
<TABLE>
<CAPTION>
PERCENT OF
TOTAL (1)(2)
NUMBER OF --------------------
SHARES BENEFICIALLY BEFORE THE AFTER THE
NAME OF BENEFICIAL OWNER OWNED(1) OFFERING OFFERING
------------------------ ------------------- ---------- ---------
<S> <C> <C> <C>
Summit Partners, L.P.(3)(4)........... 5,888,749 63.2% 49.4%
499 Hamilton Avenue, Suite 200
Palo Alto, CA 94301
Gregory M. Avis(3)(4)................. 5,888,749 63.2 49.4
Peter Y. Chung(3)(4).................. -- -- --
Sigma Partners, L.P.(5)(6)............ 586,249 6.3 4.9
2884 Sand Hill Road, Suite 121
Menlo Park, CA 94025
Lawrence G. Finch(5)(6)............... 586,249 6.3 4.9
Radius Inc.(7)........................ 1,741,129 18.7 14.6
215 Moffett Park Drive
Sunnyvale, CA 94089
Charles W. Berger(7).................. 1,741,129 18.7 14.6
Kevin K. Macgillivray(8).............. 242,217 2.6 2.0
Joan P. Platt(9)...................... 96,659 1.0 *
Timothy A. Kleffman(10)............... 193,707 2.1 1.6
Christine D. Beheshti(11)............. 145,162 1.6 1.2
All directors and executive officers
as a group
(8 persons)(3)(5)(7)(12)............. 8,893,872 95.4 74.6
</TABLE>
- --------
*Less than 1%
(1) Beneficial ownership is determined in accordance with the rules of
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that
person, shares of Common Stock subject to options or warrants held by that
person that are currently exercisable or exercisable within 60 days of
June 30, 1996 are deemed outstanding. Such shares, however, are not deemed
outstanding for the purposes of computing the percentage ownership of any
other person. Except as indicated in the footnotes to this table and
pursuant to applicable community property laws, each stockholder named in
the table has sole voting and investment power with respect to the shares
set forth opposite such stockholder's name.
(2) Percentage of ownership is based on 9,320,633 shares of Common Stock
outstanding on June 30, 1996 and shares of Common Stock outstanding after
completion of the Offering. Shares owned do not include 15,426 shares of
Series A Preferred Stock, all shares of which are held by affiliates of
Summit Partners, L.P. and Sigma Partners, L.P. and all of which are to be
redeemed upon the closing of the Offering. See "Description of Capital
Stock." Assumes no exercise of the Underwriters' over-allotment option.
52
<PAGE>
(3) Includes 5,254,812, 224,175 and 409,762 shares of Common Stock held of
record by Summit Ventures IV, L.P., Summit Investors III, L.P. and Summit
Subordinated Debt Fund, L.P., respectively. Summit Partners IV, L.P. is a
General Partner of Summit Ventures IV, L.P. and Summit Partners SD, L.P.
is a General Partner of Summit Subordinated Debt Fund, L.P. Stamps,
Woodsum & Co., IV is a General Partner of Summit Ventures IV, L.P. and
Stamps, Woodsum & Co., III is a General Partner of Summit Subordinated
Debt Fund, L.P. Gregory M. Avis, a director of the Company, is a General
Partner of Stamps, Woodsum & Co., III, Stamps, Woodsum & Co., IV and
Summit Investors III, L.P. See Note (4).
(4) Includes shares described in Note (3) above. Mr. Avis, a director of the
Company, is a general partner of affiliates of Summit Partners, L.P. Mr.
Avis exercises shared investment and voting power with respect to such
shares, but disclaims beneficial ownership of such shares.
(5) Includes 489,520, 89,106, and 7,623 shares of Common Stock held by Sigma
Partners III, L.P., Sigma Associates III, L.P., and Sigma Investors III,
L.P., respectively. Sigma Management III is a General Partner of Sigma
Partners III, L.P., Sigma Associates III, L.P. and Sigma Investors III,
L.P. Mr. Finch, a director of the Company, is General Partner of Sigma
Partners, L.P. See Note (6).
(6) Includes shares described in Note (5) above. Mr. Finch, a director of the
Company, is a General Partner of Sigma Partners, L.P. Mr. Finch exercises
shared investment and voting power with such shares, but disclaims
beneficial ownership of such shares.
(7) Includes 1,741,129 shares beneficially owned by Radius Inc. Mr. Berger, a
director of the Company, is Chairman of the Board of Directors and Chief
Executive Officer of Radius Inc.
(8) Includes 242,217 shares that are subject to a right of repurchase in favor
of the Company which expires ratably through February 2000.
(9) Includes 96,659 shares that are subject to a right of repurchase in favor
of the Company which expires ratably through March 2000.
(10) Includes 193,707 shares that are subject to a right of repurchase in favor
of the Company which expires ratably through February 2000.
(11) Includes 145,162 shares that are subject to a right of repurchase in favor
of the Company which expires ratably through February 2000.
(12) Includes 677,745 shares that are subject to a right of repurchase in favor
of the Company which expires ratably through March 2000.
53
<PAGE>
DESCRIPTION OF CAPITAL STOCK
After giving effect to the filing of an Amended and Restated Certificate of
Incorporation on or prior to the closing of the Offering, the authorized
capital stock of the Company will consist of 50,000,000 shares of Common Stock,
par value $0.001 per share, and 5,000,000 shares of Preferred Stock, par value
$0.001 per share.
The following summary of certain provisions of the Common Stock and Preferred
Stock does not purport to be complete and is subject to, and qualified in its
entirety by, the provisions of the Company's Amended and Restated Certificate
of Incorporation, which is included as an exhibit to the Registration Statement
of which this Prospectus is a part, and by the provisions of applicable law.
COMMON STOCK
As of June 30, 1996, there were 9,320,633 shares of Common Stock outstanding
held of record by approximately 33 stockholders, as well as options and
warrants to purchase an aggregate of approximately 250,000 shares of Common
Stock. The holders of Common Stock are entitled to one vote per share on all
matters to be voted on by the stockholders. Subject to preferences that may be
applicable to outstanding shares of Preferred Stock, if any, the holders of
Common Stock are entitled to receive ratably such dividends as may be declared
from time to time by the Board of Directors out of funds legally available
therefor. In the event of the liquidation, dissolution or winding up of the
Company, the holders of Common Stock are entitled to share ratably in all
assets remaining after payment of liabilities, subject to prior liquidation
rights of Preferred Stock, if any, then outstanding. The Common Stock has no
preemptive conversion rights or other subscription rights. There are no
redemption or sinking funds provisions applicable to the Common Stock. All
outstanding shares of Common Stock are fully paid and non-assessable, and the
shares of Common Stock to be outstanding upon completion of the Offering will
be fully paid and non-assessable.
PREFERRED STOCK
Effective upon the closing of the Offering, redemption of outstanding Series
A Preferred Stock and automatic conversion of outstanding Series B Preferred
Stock, the Company will be authorized to issue 5,000,000 shares of undesignated
Preferred Stock. The Board of Directors will have the authority to issue the
undesignated Preferred Stock in one or more series and to fix the rights,
preferences, privileges and restrictions granted to or imposed upon any wholly
unissued shares of undesignated Preferred Stock and to fix the number of shares
constituting any series in the designations of such series, without any further
vote or action by the stockholders. The Board of Directors, without stockholder
approval, can issue Preferred Stock with voting and conversion rights which
could adversely affect the voting power of the holders of Common Stock. The
issuance of Preferred Stock may have the effect of delaying, deferring or
preventing a change in control of the Company. The Company has no present plan
to issue Preferred Stock.
WARRANT
In connection with the Acquisition, the Company issued to Imperial Bank (the
"Warrantholder") a warrant to purchase an aggregate of 8,750 shares of Common
Stock at a price of $0.01 per share. The warrant terminates on January 31,
2001. The Warrantholder has certain rights to registration of its shares of
Common Stock issuable upon exercise of such warrant.
REGISTRATION RIGHTS
Under the terms of the Registration Rights Agreement dated as of January 30,
1996 among the Company and certain holders of its securities (the "Rights
Agreement"), following the closing of the Offering, the holders of
approximately 8,750,000 shares of Common Stock and the holder of a warrant to
purchase 8,750 shares of Common Stock (the "Registrable Securities") will be
entitled to certain rights with respect to the registration of such shares of
Common Stock under the Securities Act. Under the
54
<PAGE>
Rights Agreement, if the Company proposes to register any of its Common Stock
under the Securities Act, certain holders of Registrable Securities are
entitled to notice of such registration and to include their Registrable
Securities therein; provided, among other conditions, that the underwriters
have the right to limit the number of shares included in any such registration.
Beginning six months after the closing of the Offering, the holders of at least
fifty percent (50%) of the Registrable Securities have the right to require the
Company, on not more than two occasions, to file a registration statement under
the Securities Act in order to register all or any part of their Registrable
Securities. The Company may, in certain circumstances, defer such registration
and the underwriters have the right, subject to certain limitations, to limit
the number of shares included in such registrations. Further, the holders of
Registrable Securities may require the Company to register all or any portion
of their Registrable Securities on Form S-3, when such form becomes available
to the Company, subject to certain conditions and limitations.
ANTITAKEOVER EFFECTS OF PROVISIONS OF CERTIFICATE OF INCORPORATION, BYLAWS AND
DELAWARE LAW
The Company's Certificate of Incorporation and Bylaws, as amended and
restated on or prior to the closing of the Offering, among other things, (i)
permit vacancies on the Board of Directors that may occur between annual
meetings and any newly created seats to be filled only by the Board of
Directors and not by the stockholders, subject to any rights of holders of the
Preferred Stock that may be granted by the Board of directors in the future,
(ii) limit the rights of stockholders to call special meetings of stockholders,
(iii) provide for classification of the Board of Directors into three classes
having terms of three years each, and (iv) provide that the Board of Directors,
without action by the stockholders, may issue and fix the rights and
preferences of shares of Preferred Stock. These provisions may have the effect
of delaying, deferring or preventing a change of control of the Company without
further action by the stockholders, may discourage bids for the Common Stock at
a premium over the market price of the Common Stock, may adversely affect the
market price of, and the voting and other rights of, the holders of the Common
Stock and could have the effect of discouraging certain attempts to acquire the
Company or remove incumbent management, including incumbent members of the
Company's Board of Directors, even if some or a majority of the Company's
stockholders deemed such an attempt to be in their best interests. See "Risk
Factors--Control by Principal Stockholders, Officers and Directors;
Antitakeover Effects of Certificate of Incorporation and Delaware Law" and
"Management--Executive Officers, Directors and Key Personnel."
The Company is subject to Section 203 of the Delaware General Corporation Law
("Section 203"). Section 203 prohibits a publicly held Delaware corporation
from engaging in a "business combination" with an "interested stockholder" for
a period of three years after the date of the transaction in which the person
became an interested stockholder, unless (i) prior to such date, the board of
directors of the corporation approves either the business combination of the
transaction that resulted in the stockholder becoming an interested
stockholder, (ii) upon consummation of the transaction that resulted in the
stockholder becoming an interested stockholder, the interested stockholder owns
at least 85% of the outstanding voting stock, excluding certain shares held by
employee directors and employee stock plans, or (iii) on or after the
consummation date the business combination is approved by the board of
directors and by the affirmative vote of at least 66 2/3% of the outstanding
voting stock that is not owned by the interested stockholder. For purposes of
Section 203, a "business combination" includes, among other things, a merger,
asset sale or other transaction resulting in a financial benefit to the
interested stockholder, and an "interested stockholder" is generally a person
who, together with affiliates and associates, owns (or within three years, did
own) 15% or more of the corporation's voting stock.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is The First National
Bank of Boston. Its telephone number is (617) 575-2000.
LISTING
The Company has applied to list its Common Stock on the Nasdaq National
Market under the trading symbol "SPLH."
55
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has been no public market for securities of the
Company. No prediction can be made as to the effect, if any, that market sales
of shares or the availability of shares for sale will have on the market price
prevailing from time to time. Nevertheless, sales of substantial amounts of
Common Stock of the Company in the public market after the lapse of the
restrictions described below could adversely affect the prevailing market price
and the ability of the Company to raise equity capital in the future at a time
and place which it deems appropriate.
Upon completion of the Offering, the Company will have 11,920,633 shares of
Common Stock outstanding, assuming no exercise of the Underwriters' over-
allotment option, no exercise of outstanding options and no exercise of
warrants after June 30, 1996. Of this amount, the 2,600,000 shares offered
hereby and no additional shares will be available for immediate sale in the
public market as of the date of this Prospectus. Approximately 1,120,000
additional shares will be available for sale in the public market following the
expiration of the 180-day lockup agreements with the Representatives of the
Underwriters or the Company, subject in some cases to compliance with the
volume and other limitations of Rule 144.
<TABLE>
<CAPTION>
DAYS AFTER DATE SHARES ELIGIBLE FOR
OF THIS PROSPECTUS SALE COMMENT
------------------ ------------------- -------
<C> <C> <S>
Upon Effectiveness...... 0 Freely tradeable shares sold
in Offering and shares
saleable under Rule 144(k)
that are not subject to 180-
day lockup
180 days................ approximately 1,120,000 Lockup released; shares
saleable under Rules 144 and
701
Thereafter.............. approximately 8,225,000 Restricted securities held
for two years or less
</TABLE>
In general, under Rule 144 a person (or persons whose shares are aggregated)
who has beneficially owned shares for at least two years is entitled to sell
within any three-month period commencing 90 days after the date of this
Prospectus a number of shares that does not exceed the greater of (i) 1% of the
then outstanding shares of Common Stock (approximately 120,000 shares
immediately after the Offering) or (ii) the average weekly trading volume
during the four calendar weeks preceding such sale, subject to the filing of a
Form 144 with respect to such sale. A person (or persons whose shares are
aggregated) who is not deemed to have been an affiliate of the Company at any
time during the 90 days immediately preceding the sale who has beneficially
owned his or her shares for at least three years is entitled to sell such
shares pursuant to Rule 144(k) without regard to the limitations described
above. Persons deemed to be affiliates must always sell pursuant to Rule 144,
even after the applicable holding periods have been satisfied.
The Company is unable to estimate the number of shares that will be sold
under Rule 144, as this will depend on the market price for the Common Stock of
the Company, the personal circumstances of the sellers and other factors. Prior
to the Offering, there has been no public market for the Common Stock, and
there can be no assurance that a significant public market for the Common Stock
will develop or be sustained after the Offering. Any future sale of substantial
amounts of the Common Stock in the open market may adversely affect the market
price of the Common Stock offered hereby.
The Company, its directors, executive officers, stockholders with
registration rights and certain other stockholders have agreed pursuant to the
Underwriting Agreement and other agreements that they will not sell any Common
Stock without the prior consent of Alex. Brown & Sons Incorporated for a period
of 180 days from the date of this Prospectus (the "180-day Lockup Period"),
except that the Company may, without such consent, grant options and sell
shares pursuant to the 1996 Plan and the Purchase Plan.
56
<PAGE>
The Company intends to file a registration statement on Form S-8 under the
Securities Act to register the 3,150,000 shares of Common Stock issued or
issuable upon the exercise of options or reserved for issuance under the 1996
Plan and the 175,000 shares of Common Stock subject to or reserved for issuance
under the Purchase Plan within 180 days after the date of this Prospectus, thus
permitting the resale of such shares by nonaffiliates in the public market
without restriction under the Securities Act.
Any employee or consultant to the Company who purchased his or her shares
pursuant to a written compensatory plan or contract is entitled to rely on the
resale provisions of Rule 701, which permits nonaffiliates to sell their Rule
701 shares without having to comply with the public information, holding
period, volume limitation or notice provisions of Rule 144 and permits
affiliates to sell their Rule 701 shares without having to comply with the Rule
144 holding period restrictions, in each case commencing 90 days after the date
of this Prospectus. As of June 30, 1996, the holders of options exercisable
into approximately 240,000 shares of Common Stock will be eligible to sell
their shares in reliance upon Rule 701 or pursuant to the Form S-8 upon the
expiration of the 180-day Lockup Period. Upon completion of the offering, the
4,282 shares of Series B Preferred Stock owned by Radius will automatically
convert to 1,741,129 shares of the Company's Common Stock. If Radius were to
enter bankruptcy and were allowed to sell its shares of the Company's Common
Stock without regard to the restrictions of Rule 144 under the Securities Act,
such additional shares of Common Stock would become eligible for resale into
the public market at an indeterminate date after the date of this Prospectus.
In addition, after the Offering, the holders of approximately 8,750,000
shares of Common Stock and the holder of a warrant to purchase 8,750 shares of
Common Stock will be entitled to certain rights with respect to registration of
such shares under the Securities Act. Registration of such shares under the
Securities Act would result in such shares becoming freely tradeable without
restriction under the Securities Act (except for shares purchased by affiliates
of the Company) immediately upon the effectiveness of such registration. See
"Description of Capital Stock--Registration Rights."
57
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their Representatives,
Alex. Brown & Sons Incorporated and Montgomery Securities, have severally
agreed to purchase from the Company the following respective numbers of shares
of Common Stock at the initial public offering price less the underwriting
discounts and commissions set forth on the cover page of this Prospectus.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ----------- ---------
<S> <C>
Alex. Brown & Sons Incorporated.......................................
Montgomery Securities.................................................
---------
Total............................................................. 2,600,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase all shares of the Common Stock offered hereby if any of such shares
are purchased.
The Company has been advised by the Representatives of the Underwriters that
the Underwriters propose to offer the shares of Common Stock to the public at
the initial public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not in excess
of $ per share. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of $ per share to certain other dealers. After the
initial public offering, the offering price and other selling terms may be
changed by the Representatives of the Underwriters.
The Company has granted to the Underwriters an option, exercisable not later
than 30 days after the date of this Prospectus, to purchase up to 390,000
additional shares of Common Stock at the public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to purchase approximately the same
percentage thereof that the number of shares of Common Stock to be purchased by
it shown in the above table bears to 390,000 and the Company will be obligated,
pursuant to the option, to sell such shares to the Underwriters. The
Underwriters may exercise such option only to cover over-allotments made in
connection with the sale of Common Stock offered hereby. If purchased, the
Underwriters will offer such additional shares on the same terms as those on
which the 2,600,000 shares are being offered.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
The Company and all stockholders of the Company have agreed not to offer,
sell or otherwise dispose of any shares of Common Stock for a period of 180
days after the effective date of the Offering without the prior written consent
of Alex. Brown & Sons Incorporated, except that the Company may issue, and
grant options to purchase, shares of Common Stock under its current stock
option and purchase plans and other currently outstanding options and warrants.
In addition, the Company may issue shares of Common Stock in connection with
corporate acquisitions.
58
<PAGE>
The Representatives of the Underwriters have advised the Company that the
Underwriters do not intend to confirm sales to any account over which they
exercise discretionary authority.
Prior to the Offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price for the Common
Stock will be determined by negotiations between the Company and the
Representatives of the Underwriters. Among the factors to be considered in such
negotiations will be prevailing market conditions, the results of operations of
the Company in recent periods, the market capitalizations, the price-earnings
ratios, the price-sales ratios, the market prices generally of securities and
stages of development of other companies that the Company and the
Representatives of the Underwriters believe to be comparable to the Company,
estimates of the business potential of the Company and its industry in general
and the present state of the Company's development.
LEGAL MATTERS
The validity of the issuance of shares of Common Stock offered hereby will be
passed upon for the Company by Wilson Sonsini Goodrich & Rosati, Professional
Corporation, Palo Alto, California. Certain legal matters in connection with
the Offering will be passed upon for the Underwriters by Gunderson Dettmer
Stough Villeneuve Franklin & Hachigian, LLP, Palo Alto, California. Jeffrey D.
Saper, a member of Wilson Sonsini Goodrich & Rosati, Professional Corporation,
is the Secretary of the Company.
EXPERTS
The consolidated balance sheets of the Company as of September 30, 1994 and
1995 and June 30, 1996 and the consolidated statements of income cash flows for
each of the two years in the period ended September 30, 1995, the four months
ended January 1996, and the five months ended June 30, 1996; and statement of
parent company investment for each of the two years in the period ended
September 30, 1995 and the four months ended January 31, 1996 and the
consolidated statement of stockholders' equity for the five months ended June
30, 1996, included in this Prospectus have been so included in reliance on the
report of Coopers & Lybrand L.L.P., independent accountants, given on the
authority of such firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 with respect to the shares
of Common Stock offered hereby, of which this Prospectus forms a part. In
accordance with the rules of the Commission, this Prospectus omits certain
information contained in the Registration Statement. For further information
with respect to the Company and the securities offered hereby, reference is
made to the Registration Statement and the exhibits and schedules filed
therewith. Statements contained in this Prospectus concerning the provisions of
such documents are necessarily summaries of such documents and each such
statement is qualified in its entirety by reference to the copy of the
applicable document filed with the Commission as an exhibit to the Registration
Statement. Copies of the Registration Statement and the exhibits and schedules
thereto may be inspected, without charge, at the offices of the Commission, or
obtained at prescribed rates from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission
maintains a Web site that contains reports, proxy and information statements
and other information regarding registrants that file electronically with the
Commission at http://www.sec.gov.
The Company intends to furnish to its stockholders annual reports containing
audited consolidated financial statements and quarterly reports for the first
three quarters of each fiscal year containing unaudited summary financial
information.
59
<PAGE>
SPLASH TECHNOLOGY HOLDINGS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants......................................... F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of September 30, 1994, 1995 and June 30,
1996................................................................... F-3
Consolidated Statements of Operations for the years ended September 30,
1994 and 1995; the four months ended January 31, 1996 and the five
months ended June 30, 1996............................................. F-4
Consolidated Statements of Stockholders' Equity for the five months
ended June 30, 1996.................................................... F-5
Predecessor Business Statement of Parent Company Investment for the
years ended September 30, 1994 and 1995 and the four months ended
January 31, 1996....................................................... F-6
Consolidated Statements of Cash Flows for the years ended September 30,
1994 and 1995; the four months ended January 31, 1996 and the five
months ended June 30, 1996............................................. F-7
Notes to Consolidated Financial Statements................................ F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Splash Technology Holdings, Inc.
We have audited the accompanying consolidated balance sheet of Splash
Technology Holdings, Inc. and its subsidiaries as of June 30, 1996 and the
related consolidated statements of operations, stockholders' equity and cash
flows for the five months ended June 30, 1996. We have also audited the
balances sheets at September 30, 1994 and 1995, and the statements of
operations, cash flows and parent company investment of the Predecessor
Business for the years ended September 30, 1994 and 1995, and the four months
ended January 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements 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 Splash Technology Holdings, Inc. and its subsidiaries as of June 30, 1996,
and the consolidated results of their operations and their cash flows for the
five months ended June 30, 1996, in conformity with generally accepted
accounting principles. Also in our opinion, the financial statements of the
Predecessor Business referred to above present fairly, in all material
respects, the financial position of the Predecessor Business as of September
30, 1994 and 1995 and the results of its operations and its cash flows for the
years ended September 30, 1994 and 1995 and for the four months ended January
31, 1996, in conformity with generally accepted accounting principles.
Coopers & Lybrand l.l.p.
San Jose, California
July 23, 1996, except for Note 12, the dates for which are July 31, 1996 and
September 6, 1996.
F-2
<PAGE>
SPLASH TECHNOLOGY HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1994 AND 1995 AND JUNE 30, 1996
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
PREDECESSOR SPLASH TECHNOLOGY
BUSINESS HOLDINGS, INC.
------------- ---------------------
PRO FORMA
SEPTEMBER 30, (NOTE 2)
------------- JUNE 30, JUNE 30,
1994 1995 1996 1996
------ ------ -------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................. $ -- $ -- $ 6,601
Accounts receivable, net of allowance for
doubtful accounts of $16, $84 and $300
as of September 30, 1994 and 1995 and
June 30, 1996, respectively.............. 5,274 4,716 4,037
Inventories............................... 1,287 3,965 3,945
Prepaid expenses and other current
assets................................... -- -- 119
Deferred income taxes..................... 622 622 3,633
------ ------ --------
Total current assets.................... 7,183 9,303 18,335
Property and equipment, net................ 200 385 679
Deferred income taxes...................... -- -- 8,249
Other long term assets..................... -- -- 1,239
------ ------ --------
Total assets............................ $7,383 $9,688 $ 28,502
====== ====== ========
LIABILITIES
Current liabilities:
Trade accounts payable.................... $ 772 $2,538 $ 2,154
Other accrued liabilities................. 331 1,074 1,955
Royalties payable......................... 1,233 1,978 1,070
Deferred revenue.......................... -- -- 5,227
Income taxes payable...................... 721 1,395 1,974
------ ------ --------
Total current liabilities............... 3,057 6,985 12,380
Subordinated promissory notes payable to
stockholders.............................. -- -- 8,600
------ ------ --------
Total liabilities....................... 3,057 6,985 20,980
------ ------ --------
Commitments (Note 6)
STOCKHOLDERS' EQUITY
Preferred stock:
Authorized: 5,000,000 shares
Series A preferred stock, par value $.001
per share:
Authorized: 15,426 shares; issued and
outstanding: 15,426 shares; liquidation
value: $15,735,000..................... -- -- 1 $ 1
Series B preferred stock, par value $.001
per share:
Authorized, issued and outstanding:
4,282 shares as of June 30, 1996 and no
shares pro forma; liquidation value:
$4,338,000............................. -- -- 1 --
Parent company investment.................. 4,326 2,703 -- --
Common stock, par value $.001:
Authorized: 10,000,000 shares as of June
30, 1996, 50,000,000 shares pro forma;
issued and outstanding: 7,579,504 shares
as of June 30, 1996 and 9,320,633 shares
pro forma................................ -- -- 8 9
Additional paid-in capital................. -- -- 19,456 19,456
Retained earnings (accumulated deficit).... -- -- (11,944) (11,944)
------ ------ -------- --------
Total stockholders' equity................. 4,326 2,703 7,522 $ 7,522
------ ------ -------- --------
Total liabilities and stockholders'
equity................................. $7,383 $9,688 $ 28,502
====== ====== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
SPLASH TECHNOLOGY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SPLASH
TECHNOLOGY
PREDECESSOR BUSINESS HOLDINGS, INC.
--------------------------------------- --------------
YEAR ENDED NINE MONTHS FOUR MONTHS
SEPTEMBER 30, ENDED ENDED FIVE MONTHS
--------------- JUNE 30, JANUARY 31, ENDED JUNE 30,
1994 1995 1995 1996 1996
------- ------- ----------- ----------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenue............. $16,354 $30,472 $20,343 $13,008 $ 18,326
Cost of net revenue..... 12,068 20,723 13,737 8,427 11,455
------- ------- ------- ------- --------
Gross profit.......... 4,286 9,749 6,606 4,581 6,871
------- ------- ------- ------- --------
Operating expenses:
Research and
development.......... 1,999 3,295 2,034 1,498 1,624
Sales and marketing... 562 2,076 1,505 688 806
General and
administrative....... 377 891 667 287 668
Amortization of
purchased technology
and write-off of in-
process technology... -- -- -- -- 22,729
------- ------- ------- ------- --------
Total operating
expenses........... 2,938 6,262 4,206 2,473 25,827
------- ------- ------- ------- --------
Income (loss) from
operations............. 1,348 3,487 2,400 2,108 (18,956)
Interest expense, net... -- -- -- 18 388
------- ------- ------- ------- --------
Income (loss) before
provision for income
taxes.................. 1,348 3,487 2,400 2,090 (19,344)
Provision for (benefit
from) income taxes..... 99 1,395 960 836 (7,765)
------- ------- ------- ------- --------
Net income (loss)....... $ 1,249 $ 2,092 $ 1,440 $ 1,254 $(11,579)
======= ======= ======= ======= ========
Net loss per share...... $ (1.25)
========
Shares used in computing
per share amounts...... 9,580
========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
SPLASH TECHNOLOGY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
PREFERRED STOCK
--------------------------- RETAINED
SERIES A SERIES B COMMON STOCK ADDITIONAL EARNINGS
------------- ------------- ---------------- PAID-IN (ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT) TOTAL
------ ------ ------ ------ --------- ------ ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, February 1,
1996
Issuance of preferred
stock:
Series A............... 15,426 $ 1 -- $-- -- $-- $14,699 $ -- $ 14,700
Series B............... -- -- 4,282 1 -- -- 4,099 -- 4,100
Issuance of common
stock................. -- -- -- -- 7,008,746 8 198 -- 206
Exercise of employee
stock options for
cash.................. -- -- -- -- 570,758 -- 95 -- 95
Accretion for dividends
on Series A and B
preferred stock....... -- -- -- -- -- -- 365 (365) --
Net loss............... -- -- -- -- -- -- -- (11,579) (11,579)
------ --- ----- --- --------- --- ------- -------- ---------
Balances, June 30, 1996. 15,426 $ 1 4,282 $1 7,579,504 $ 8 $19,456 $(11,944) $ 7,522
====== === ===== === ========= === ======= ======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
SPLASH TECHNOLOGY HOLDINGS, INC.
PREDECESSOR BUSINESS STATEMENT
OF PARENT COMPANY INVESTMENT
(IN THOUSANDS)
<TABLE>
<S> <C>
Balance, October 1, 1993............................................... $ (20)
Net change in parent company investment................................ 3,097
Net income............................................................. 1,249
------
Balance, September 30, 1994............................................ 4,326
Net change in parent company investment................................ (3,715)
Net income............................................................. 2,092
------
Balance, September 30, 1995............................................ 2,703
Net change in parent company investment................................ (12)
Net income............................................................. 1,254
------
Balance, January 31, 1996.............................................. $3,945
======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
SPLASH TECHNOLOGY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SPLASH
TECHNOLOGY
PREDECESSOR BUSINESS HOLDING, INC.
----------------------------------------- -------------
YEAR ENDED NINE MONTHS FOUR MONTHS
SEPTEMBER 30, ENDED ENDED FIVE MONTHS
---------------- JUNE 30, JANUARY 31, ENDED
1994 1995 1995 1996 JUNE 30, 1996
------- ------- ----------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income (loss)..... $ 1,249 $ 2,092 $ 1,440 $ 1,254 $(11,579)
Adjustments to
reconcile net income
to net cash provided
by operating
activities:
Depreciation and
amortization......... 80 259 82 102 57
Provision for
doubtful accounts.... 16 68 -- 17 199
Purchased and in-
process technology... -- -- -- -- 22,729
Deferred income
taxes................ (622) -- -- 622 (11,014)
Changes in assets and
liabilities:
Accounts receivable. (3,947) 490 419 (4,597) 5,059
Inventories......... (513) (2,678) (2,678) 2,231 (2,211)
Prepaid expenses and
other current
assets............. -- -- -- -- (119)
Other long term
assets............. -- -- -- -- (118)
Trade accounts
payable............ (914) 1,766 1,049 (2,391) 2,008
Other accrued
liabilities........ 317 743 108 1,986 (1,042)
Royalties payable... 796 745 (47) 1,434 (2,302)
Deferred revenue.... -- -- -- 905 2,157
Income taxes
payable............ 721 674 239 (559) 1,974
------- ------- ------- ------- --------
Net cash provided
by (used in)
operating
activities....... (2,817) 4,159 612 1,004 5,798
------- ------- ------- ------- --------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Purchase of property
and equipment........ (280) (444) (333) (63) (306)
Acquisition of Color
Server Group from
Radius (net of cash
acquired)............ -- -- -- -- (22,492)
------- ------- ------- ------- --------
Net cash used in
investing
activities....... (280) (444) (333) (63) (22,798)
------- ------- ------- ------- --------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Proceeds from Series
A preferred stock.... -- -- -- -- 14,700
Proceeds from common
stock................ -- -- -- -- 206
Proceeds from
subordinated debt.... -- -- -- -- 8,600
Exercise of stock
options for cash..... -- -- -- -- 95
Net change in Parent
Company Investment... 3,097 (3,715) (279) (12) --
------- ------- ------- ------- --------
Net cash provided by
(used in) financing
activities............ 3,097 (3,715) (279) (12) 23,601
------- ------- ------- ------- --------
Net increase in cash... -- -- -- 929 6,601
Cash and cash
equivalents at
beginning of period... -- -- -- -- --
------- ------- ------- ------- --------
Cash and cash
equivalents at end of
period................ $ -- $ -- $ -- $ 929 $ 6,601
======= ======= ======= ======= ========
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW
INFORMATION:
Taxes paid............ $ -- $ -- $ -- $ -- $ 1,275
Interest paid......... $ -- $ -- $ -- $ -- $ 198
NON-CASH FINANCING
ACTIVITIES:
Accretion of
preferred stock...... $ -- $ -- $ -- $ -- $ 365
Issuance of Series B
preferred stock...... $ -- $ -- $ -- $ -- $ 4,100
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
SPLASH TECHNOLOGY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. RECENT REORGANIZATION AND BASIS OF PRESENTATION
Splash Technology Holdings, Inc. (the "Company"), through its wholly-owned
subsidiaries Splash Technology, Inc. and Splash Technology S.a.r.l., develops,
produces and markets color servers, which consist of computer hardware and
software systems that provide an integrated link between desktop computers and
digital color copiers and enable such copiers to provide high speed and quality
networked color printing and scanning. The Company sells its color servers
through two original equipment manufacturers ("OEMs") who integrate the
Company's color servers into connected digital color photocopier systems which
are sold to end users in North and South America, Europe, Asia and Australia.
The Company operates in one business segment.
The business of the Company was previously operated as the unincorporated
Color Server Group of SuperMac Technology Inc. ("SuperMac") until August 1994
when SuperMac merged with Radius Inc. ("Radius"). In January 1996, the assets
and liabilities of the Color Server Group of Radius were transferred by Radius
into its newly created wholly-owned subsidiary, Splash Technology, Inc. In
December 1995, Splash Technology Holdings, Inc. was incorporated in Delaware
and was capitalized by the sale of Series A preferred stock and common stock
and subordinated debt to an investor group led by certain affiliates of Summit
Partners, L.P., and Sigma Partners, L.P. On January 31, 1996, Splash
Technology, Inc. merged with a wholly-owned subsidiary of Splash Technology
Holdings, Inc. and as part of the consideration for the merger, Splash
Technology Holdings, Inc. issued Series B preferred stock to Radius. The
surviving corporation in the merger was Splash Technology, Inc., a wholly-owned
subsidiary of the Company.
The acquisition of Splash Technology, Inc. was regarded as a purchase of net
assets accounted for under the purchase method of accounting as of January 31,
1996. The total purchase price of $27,843,000 (including the costs of the
acquisition of $321,000), consisting of cash and the fair value of Series B
preferred stock of $4,100,000, has been allocated to the net assets acquired
based on their estimated fair values as of January 31, 1996. The two principal
components of the initial excess purchase price allocation included in-process
research and development projects ($19,324,000) and existing purchased
technology ($3,405,000). The Company allocated a portion of the purchase price
to various in-process research and development projects that had identifiable
economic value and expensed this value as of the date of the acquisition. The
purchased technology is related to the Company's Power Series product for which
the Company was developing a replacement product at the time of the acquisition
due to the discontinuance of the Apple CPU architecture on which the Power
Series product relied. The Company transitioned to the new product in May 1996
and accordingly, the fair value of the purchased technology was fully amortized
over the four months to May 31, 1996.
The fair value of the assets acquired (net of cash acquired of $929,000) and
liabilities assumed were as follows:
<TABLE>
<S> <C>
In-process technology............................................ $19,324
Purchased technology............................................. 3,405
Receivables...................................................... 9,296
Inventories...................................................... 1,734
Property and equipment........................................... 430
Other long term assets........................................... 1,121
Payables......................................................... (147)
Other accrued liabilities........................................ (6,049)
Deferred revenue................................................. (2,200)
-------
$26,914
=======
</TABLE>
F-8
<PAGE>
SPLASH TECHNOLOGY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Of the purchase consideration, $2,350,000 remains in escrow pending
resolution of certain events including unasserted claims.
The Predecessor Business's financial statements presented herein include the
results of operations and cash flows for the years ended September 30, 1994 and
1995, and for the four months ended January 31, 1996 and the balance sheets as
of September 30, 1994 and 1995, as if the Color Server Group existed as a
corporation separate from Radius and SuperMac during such periods on a
historical basis. The Company's financial statements presented herein include
the results of operations and cash flows for the five months ended June 30,
1996 and the balance sheet as of that date. Results for the four months ended
January 31, 1996 and the five months ended June 30, 1996 are not necessarily
indicative of the results for the entire year.
Radius and SuperMac each performed certain corporate headquarter functions on
behalf of the Color Server Group and provided certain marketing, technology,
human resource and financial and accounting services. Costs associated with
these services have been allocated to the Color Server Group based on relative
headcount, which management believes to be a reasonable basis for allocation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries, Splash Technology, Inc. and
Splash Technology S.a.r.l. All significant intercompany transactions between
the entities have been eliminated.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
Revenue is generally recognized upon shipment of the product to the customer.
The Company generally does not grant rights of return. In May 1996, the Company
made the transition from its Power Series products to its new PCI Series
products. In calendar year 1996, one of the Company's OEM customers accumulated
a substantial quantity of the Power Series product. Due to the transition of
products and the accumulation of Power Series product, the Company is
recognizing revenue from the sales of the Power Series product upon
notification from the OEM that the product has been sold to their end user. At
June 30, 1996, the Company had deferred revenue of $5,120,000 from sales of
Power Series products to one of its OEM customers.
Warranties
The Company's products are generally warranted for 15 months. Estimated
future costs of repair, replacement, or customer accommodations are reflected
in the accompanying consolidated financial statements.
Research and Development
Costs incurred in the research and development of new software products are
expensed as incurred until technological feasibility has been established. To
date, the establishment of technological feasibility
F-9
<PAGE>
SPLASH TECHNOLOGY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
of the Company's products and general release substantially coincide. As a
result, the Company has not capitalized any software development costs since
such costs have not been significant.
Income Taxes
The Company uses the liability method to calculate deferred income taxes. The
realization of deferred tax assets is based on historical tax positions and
expectations about future taxable income.
Income taxes have been provided in the Predecessor Business statements of
operations as if the Predecessor Business was a separate taxable entity. Since
the division was not a separate taxable entity but was included in the
consolidated income tax returns of the Radius and SuperMac companies, the
current benefit from or provision for U.S. federal and state income taxes was
ultimately assumed to be receivable from or payable to Radius or SuperMac in
the period presented. In accordance with the merger agreement with Radius, the
Company is not required to repay Radius for the utilization of their tax losses
against the Company's taxable income as a Predecessor Business. Such benefits
are reflected as capital contributions as of each fiscal year end.
Cash and Cash Equivalents
All highly liquid investments with an original, or remaining, maturity of
three months or less at the date of purchase and money market funds are
considered cash equivalents.
Cash and cash equivalents consist primarily of deposits with banks in the
United States.
Financial Instruments
The Company's financial instruments, including borrowings under the line of
credit and the subordinated promissory notes payable to stockholders, are
stated at fair value.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined on
a first-in, first-out basis.
Property and Equipment
Property and equipment are stated at cost and are depreciated using the
straight line method over their estimated useful lives ranging from three to
seven years or, in the case of leasehold improvements, the lease period, if
shorter. Upon disposal, the assets and related accumulated depreciation are
removed from the Company's accounts, and the resulting gains or losses are
reflected in the statements of income. The Predecessor Business' accounting
policy was to expense all items of property and equipment upon acquisition.
Accordingly, appropriate adjustments have been included in the financial
statements to reflect the capitalization and depreciation of property and
equipment during the periods presented.
Concentration of Credit-Risks
Cash and cash equivalents are deposited with major banks in the United States
and France. Deposits in these banks may exceed the amount of insurance provided
on such deposits. The Company has not experienced any losses on its deposits of
cash and cash equivalents.
The Company sells its products to two OEM customers who distribute the
Company's products with their own color photocopier systems on a worldwide
basis. The Company performs ongoing credit evaluations of its customers. The
Company does not require collateral for its receivables and maintains
F-10
<PAGE>
SPLASH TECHNOLOGY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
an allowance for potential credit losses. At June 30, 1996, the accounts
receivable balance is comprised primarily of these two customers, which
represent 57% and 37% of accounts receivable.
Certain components necessary for the manufacture of the Company's products
are obtained from a sole supplier or a limited group of suppliers. These
include Apple Power Macintosh computer, certain ASICs and other semiconductor
components.
Recent Pronouncements
During March 1995, the Financial Accounting Standards Board issued Statement
No. 121 (SFAS 121), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," which requires the Company to review for
impairment of long-lived assets, certain identifiable intangibles, and goodwill
related to those assets whenever events or changes in circumstances indicate
that the carrying amount of an asset might not be recoverable. In certain
situations, an impairment loss would be recognized. SFAS 121 will become
effective for the Company's year ending September 30, 1997.
During October 1995, the Financial Accounting Standards Board issued
Statement No. 123 (SFAS No. 123), "Accounting for Stock-Based Compensation,"
which established a fair value based method of accounting for stock-based
compensation plans and requires additional disclosures for those companies who
elect not to adopt the new method of accounting. The Company intends to
continue to account for stock options under APB Opinion No. 25, "Accounting for
Stock Issued to Employees." SFAS No. 123 will be effective for fiscal years
beginning after December 15, 1995, and will require the Company to provide
additional disclosures in the financial statements for the year ending
September 30, 1997.
Computation of Net Loss Per Share
Net loss per share is computed using the weighted average number of common
and dilutive common equivalent shares outstanding during the period. Dilutive
common equivalent shares consist of the incremental common shares issuable upon
conversion of convertible preferred stock (using the "if converted" method) and
stock options and warrants (using the treasury stock method) as if converted
for all periods presented.
The Company has computed common and dilutive common equivalent shares in
determining the number of shares used in calculating earnings per share for all
periods presented pursuant to the Securities and Exchange Commission Staff
Accounting Bulletin (SAB) No. 83. SAB 83 requires the Company to include all
common shares and all common share equivalents issued during the 12 month
period preceding the filing date of an initial public offering in its
calculation of the number of shares used to determine earnings per share as if
the shares had been outstanding for all periods presented. Net loss for the
purposes of the computation reflects the dividend accretion on the shares of
preferred stock.
Unaudited Interim Financial Information
The accompanying interim statements of operations and cash flows for the nine
months ended June 30, 1995 together with the related notes are unaudited but
include all adjustments, consisting of only normal recurring adjustments, which
the Company considers necessary to present fairly, in all material respects,
the results of operations and cash flows for the period ended June 30, 1995.
Results for the nine months ended June 30, 1995 are not necessarily indicative
of results for an entire year.
F-11
<PAGE>
SPLASH TECHNOLOGY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Unaudited Pro Forma Information
In conjunction with the initial public offering, all of the Company's
outstanding Series B preferred stock will be converted into shares of Common
Stock as described in Note 7. The pro forma effect of these conversions has
been reflected in the accompanying pro forma balance sheet assuming the
conversion had occurred June 30, 1996 and is unaudited.
3. BALANCE SHEET DETAIL (IN THOUSANDS)
Inventories
<TABLE>
<CAPTION>
SPLASH
PREDECESSOR TECHNOLOGY
BUSINESS HOLDINGS, INC.
------------- --------------
SEPTEMBER 30,
------------- JUNE 30,
1994 1995 1996
------ ------ --------------
<S> <C> <C> <C>
Raw materials................................... $ 714 $ 591 $1,593
Work in process................................. 81 166 --
Finished goods.................................. 492 3,208 2,352
------ ------ ------
$1,287 $3,965 $3,945
====== ====== ======
</TABLE>
Property and Equipment
<TABLE>
<CAPTION>
SPLASH
PREDECESSOR TECHNOLOGY
BUSINESS HOLDINGS, INC.
------------- --------------
SEPTEMBER
30,
------------- JUNE 30,
1994 1995 1996
----- ------ --------------
<S> <C> <C> <C>
Furniture and fixtures........................ $ 81 $ 201 $270
Computer equipment............................ 199 523 241
Leasehold improvements........................ -- -- 80
Trade show booth.............................. -- -- 145
----- ------ ----
280 724 736
Less accumulated depreciation and
amortization................................. (80) (339) (57)
----- ------ ----
$ 200 $ 385 $679
===== ====== ====
</TABLE>
4. REVOLVING CREDIT FACILITY
In January 1996, the Company entered into an agreement with a bank to borrow
up to a maximum of $4,000,000 under a revolving line of credit subject to a
borrowing base of 80% and 70% of eligible domestic and foreign accounts
receivable, respectively. The line bears interest at prime rate plus 0.75%, is
collateralized by accounts receivable, owned property and equipment and
inventory of the Company and matures on January 31, 1997. The agreement
contains dividend restrictions and certain financial covenants concerning
required liquidity, net worth and indebtedness ratios as well as required
profitability. The Company has no borrowings outstanding under the line of
credit as of June 30, 1996.
5. SUBORDINATED PROMISSORY NOTES PAYABLE TO STOCKHOLDERS
The Company issued subordinated promissory notes payable to stockholders,
with a face value totaling $8,000,000, which bear interest at 12%, payable
quarterly. The subordinated promissory notes were issued to certain
stockholders concurrent with the issuance of the Series A preferred stock and
the fair value of the notes was established at $8,600,000 by an independent
third party valuation. In the event
F-12
<PAGE>
SPLASH TECHNOLOGY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
of liquidation, merger or a firm commitment underwriting pursuant to a public
offering of common stock at a price of at least $3.43 per share with net
proceeds to the Company of at least $35,000,000, all principal and accrued
interest shall be payable immediately ("Qualified Liquidity Event"). In the
event that a public offering does not qualify as a Qualified Liquidity Event,
the interest rate increases to 15%. In the event that a Qualified Liquidity
Event is not consummated on or before January 30, 2001, then all outstanding
principal must be paid in two equal installments on January 30, 2001 and 2002.
The notes are subordinate to the Revolving Credit Facility (see Note 4).
6. COMMITMENTS
The Company leases certain office facilities under noncancelable operating
leases which expire in April 2001. The Company is responsible for taxes,
insurance and maintenance expenses related to the leased facilities. Under the
term of certain lease agreements, the leases may be extended, at the Company's
options, and certain of the leases provide for adjustments of the minimum
monthly rent.
Future minimum annual lease payments under the leases are as follows (in
thousands):
<TABLE>
<CAPTION>
PERIOD
ENDING
------
<S> <C>
June 30, 1997........................... $384
June 30, 1998........................... 398
June 30, 1999........................... 412
June 30, 2000........................... 427
June 30, 2001........................... 442
</TABLE>
Rent expense for the five months ended June 30, 1996 was $83,960.
7. PREFERRED STOCK
The Company has authorized and issued 15,426 shares of Series A preferred
stock at a face value of $1,000 per share and 4,282 shares of Series B
preferred stock in a non cash transaction as part of the consideration for the
merger. The valuation of the Series A and Series B preferred stock by an
independent third party resulted in values of $14,700,000 and $4,100,000,
respectively for those instruments. The rights, preferences and privileges of
the Series A and Series B preferred stock are as follows:
Liquidation Rights
The preferred stock has certain liquidation preferences over the common stock
in the event of a liquidating event such as a dissolution of the affairs of the
Company or a take-over by another corporation. The liquidation preferences
entitle the preferred stockholders to receive $1,000 per share in addition to
amounts due on unpaid dividends which have been accrued or declared. The Series
A preferred stockholders have preference over the Series B preferred
stockholders in determining the order of liquidation payout. The preferred
stock does not participate in the distribution of assets remaining after the
liquidation preference has been paid.
Conversion Rights
The Series A preferred stock has no conversion rights. The Series B preferred
stockholders have the right at any time to convert each share of preferred
stock into common stock at the specified conversion rate per share, which
currently is 406.616 shares of common stock for each share of preferred stock.
The conversion rate will be adjusted for stock splits and recapitalization. In
the event of a public offering of
F-13
<PAGE>
SPLASH TECHNOLOGY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the Company's common stock where the net proceeds received by the Company
equals or exceeds $35,000,000 and the offering price is at least $3.43 per
share, or in the event of a merger or sale of the Company where the
consideration or proceeds equals or exceeds $50,000,000, all shares of the
Series B preferred stock automatically convert into shares of common stock at
the specified conversion rate.
Redemption Rights
The Company may redeem all or any of the shares of the Series A preferred
stock at any time. The Company may also redeem all or any of the shares of the
Series B preferred stock at any time but only if there are no shares of the
Series A preferred stock then outstanding.
The Company is required to redeem all of the shares of the Series A preferred
stock in the event of a public offering of the Company's common stock or a
merger or sale of the Company meeting the quantitative criteria disclosed in
the paragraph concerning conversion rights above. Provided there are no shares
of the Series A preferred stock then outstanding, the Company is required to
redeem the shares of the Series B preferred stock, one half on January 1, 2002
and one half on January 1, 2003. The redemption price for each share of
preferred stock will be $1,000, plus any unpaid and accrued dividends.
Voting Rights
The Series B preferred stockholders are entitled to vote on all matters with
the holders of common stock as if on an as converted basis. The Series A
preferred stockholders have no rights to vote other than to elect one director
to the Board of Directors. The other five directors are elected by the common
stockholders in conjunction with the Series B preferred stockholders.
Dividend Rights
The preferred stockholders will be entitled to receive dividends in
preference to the common stockholders. In addition, the Series A preferred
stockholders also have preference to the Series B preferred stockholders. From
the date of issuance until January 1, 1997, there shall be no cumulative
dividends payable to the preferred stockholders. After that date, cumulative
dividends are payable when and if declared or accumulate as part of the shares'
liquidation preferences as follows:
<TABLE>
<CAPTION>
DIVIDENDS PER SHARE
-------------------
SERIES A SERIES B
-------------------
<S> <C> <C>
January 2, 1997 to January 1, 1998.................... $ 60 $ 60
January 2, 1998 to January 1, 1999.................... $ 80 $ 60
January 2, 1999, and thereafter....................... $100 $ 60
</TABLE>
The carrying amounts of both Series A and Series B have been increased by
amounts representing dividends not currently declared or paid but which will be
payable under the dividend rights of the respective series of preferred stock.
The increases have been effected by a charge against retained earnings.
8. COMMON STOCK
On January 31, 1996, the Company sold 7,008,746 shares of common stock for
$80,100. The shares have been valued at $206,000 based on a independent third
party appraisal. The Company has granted certain registration rights to certain
holders of common shares, options, warrants and convertible securities in the
event of any registration of shares by the Company under the Securities Act.
F-14
<PAGE>
SPLASH TECHNOLOGY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In connection with the line of credit, the Company issued the bank a warrant
to purchase 8,750 shares of common stock with an exercise price of $0.011 per
share. The warrant is not exercisable until the earlier of January 31, 1997, an
initial public offering, or an asset sale or merger.
Stock Options and Repurchase Agreements
The Company reserved 916,153 shares of common stock for issuance under its
stock option plan as of January 30, 1996. Under this plan, the Board of
Directors may grant incentive or nonstatutory stock options at a price not less
than 100% or 85%, respectively, of fair market value of common stock, as
determined by the Board of Directors, at grant date. Options under the plan are
immediately exercisable. Stock issued through option exercises are subject to
the Company's right of repurchase at the original exercise price. The number of
shares subject to repurchase generally decrease by 25% of the options shares
one year after the grant date, and thereafter, ratably over 48 months.
Activity for the Company's stock option is summarized as follows:
<TABLE>
<CAPTION>
AVERAGE
PRICE
AVAILABLE OUTSTANDING PER SHARE AMOUNT
--------- ----------- ----------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Options authorized.......... 916,153 -- -- --
Options granted............. (822,080) 822,080 $0.14-$1.71 $212
Options canceled............ 13,128 (13,128) $0.14 (2)
Options exercised........... -- (570,758) $0.14-$1.71 (95)
-------- -------- ----
Balances, June 30, 1996..... 107,201 238,194 $0.14-$1.71 $115
======== ======== ====
</TABLE>
At June 30, 1996, all options and shares outstanding under the Plan were
subject to repurchase.
9. BUSINESS SEGMENTS, EXPORTS AND MAJOR CUSTOMERS
The Company operates in a single industry segment encompassing the
development, manufacture, sales and support of high performance color servers.
The Company sells its products and services to customers in the United States
and Japan. Net revenue from export sales accounted for 40%, 59% and 43% of
total revenues for the years ended September 30, 1994, 1995 and the five months
ended June 30, 1996. All of export sales were made to Japan.
In the years ended September 30, 1994 and 1995 and the five months ended June
30, 1996, two customers accounted for 40% and 60%; 59% and 41%; and 43% and 57%
of total revenues, respectively. In addition, although all sales made to the
Company's U.S. based customers are considered U.S. sales, this customer has a
significant international customer base, and the Company believes that a
significant portion of the Company's products purchased by the customer are
resold outside the U.S.
F-15
<PAGE>
SPLASH TECHNOLOGY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. INCOME TAXES
The provision for (benefit from) income taxes consists of the following (in
thousands):
<TABLE>
<CAPTION>
SPLASH
TECHNOLOGY
PREDECESSOR BUSINESS HOLDINGS, INC.
--------------------------- --------------
FISCAL YEAR
ENDED FOUR MONTHS FIVE MONTHS
SEPTEMBER 30, ENDED ENDED
--------------- JANUARY 31, JUNE 30,
1994 1995 1996 1996
------ ------- ----------- --------------
<S> <C> <C> <C> <C>
Current:
Federal......................... $ 522 $ 1,095 $192 $ 2,551
State........................... 199 300 22 698
------ ------- ---- --------
721 1,395 214 3,249
------ ------- ---- --------
Deferred:
Federal......................... $ (537) $ -- $537 $ (9,365)
State........................... (85) -- 85 (1,649)
------ ------- ---- --------
(622) -- 622 (11,014)
------ ------- ---- --------
$ 99 $ 1,395 $836 $ (7,765)
====== ======= ==== ========
</TABLE>
The Company's effective tax rate differs from the statutory federal income
tax rate as shown in the following schedule:
<TABLE>
<CAPTION>
SPLASH
TECHNOLOGY
PREDECESSOR BUSINESS HOLDINGS, INC.
---------------------------- --------------
FISCAL YEAR
ENDED FOUR MONTHS FIVE MONTHS
SEPTEMBER 30, ENDED ENDED
--------------- JANUARY 31, JUNE 30,
1994 1995 1996 1996
------- ------ ----------- --------------
<S> <C> <C> <C> <C>
Tax provision (benefit from) at
federal statutory rate........ 34.0% 34.0% 34.0% (34.0)%
State taxes, net of federal tax
benefit....................... 6.1 6.1 6.1 (6.1)
Net operating losses........... (33.3) -- -- --
Other.......................... 0.6 (0.1) (0.1) --
------- ------ ---- -----
7.4% 40.0% 40.0% (40.1)%
======= ====== ==== =====
</TABLE>
The components of the deferred tax asset are as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------- JUNE 30,
1994 1995 1996
------ ------ --------
<S> <C> <C> <C>
Deferred tax assets:
In-process and purchased technology................ $ -- $ -- $ 8,865
Receivable allowances.............................. 6 34 80
Inventory valuation allowance...................... 231 221 334
Warranty accruals.................................. 55 128 92
State taxes........................................ 68 102 240
Deferred revenue................................... -- -- 2,055
All other.......................................... 262 137 216
------ ------ -------
Total deferred tax assets........................ 622 622 11,882
Long-term portion of in-process and purchased
technology........................................ -- -- 8,249
------ ------ -------
Current portion of deferred tax asset............ $ 622 $ 622 $ 3,633
====== ====== =======
</TABLE>
F-16
<PAGE>
SPLASH TECHNOLOGY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At June 30, 1996, the Company assessed the recoverability of the deferred tax
asset and based on its expectations about taxable income for future periods,
determined that it was more likely than not that the deferred tax asset would
be recovered.
11. EMPLOYEE BENEFIT PLAN
The Company adopted the Splash Technology, Inc. 401(k) Profit Sharing Plan
(the Plan) effective April 1996, which qualifies under Section 401(k) of the
Internal Revenue Code of 1986, as amended, and covers essentially all
employees. Each eligible employee may elect to contribute to the Plan, through
payroll deductions, up to 15% of compensation, subject to certain limitations.
The Company, at its discretion, may make additional contributions on behalf of
non-highly compensated employees. All employer contributions are 100% vested
after four years. During the five months ended June 30, 1996, there were no
Company contributions.
12. SUBSEQUENT EVENTS
On July 31, 1996, the Board of Directors of the Company authorized an
amendment to the Company's Amended and Restated Certificate of Incorporation to
increase the Company's authorized number of shares to an aggregate of
50,000,000 shares of common stock, par value $.001 per share and 5,000,000
shares of preferred stock, par value $.001 per share.
On July 31, 1996, the Board of Directors adopted a payroll deduction Employee
Stock Purchase Plan, effective upon the closing of the planned initial public
offering of the common stock, and reserved an aggregate of 175,000 shares of
common stock for issuance thereunder and also amended and restated the 1996
Stock Option Plan and increased the aggregate number of shares of common stock
reserved for issuance thereunder to 3,150,000 shares.
On September 6, 1996, the Board of Directors declared a common stock split of
3.5 shares to one and authorized management of the Company to file a
Registration Statement with the Securities and Exchange Commission permitting
the Company to sell 2,600,000 shares of its common stock with a price range
from $11 to $13 per share to the public. Further, the Board of Directors has
directed that the proceeds from the offering will be used to retire the
subordinated debt and Series A preferred stock at their fair value. In
addition, on September 6, 1996 Radius agreed that, pursuant to the Company's
planned public offering, it will convert its Series B preferred stock to common
stock at the applicable conversion price.
F-17
<PAGE>
Inside back cover
- -----------------
This page includes eight pictures depicting examples of the Splash software
interface and printouts that illustrate features of Splash products. The page
also includes the following text:
Splash's ColorCal is a fast, easy-to-use calibration utility that uses the
copier's built-in digital scanning capability for calibration.
ColorCal's expert tools enable users to create custom color profiles.
ColorCal utilizes a unique customized calibration target to provide
reproducible, consistent color.
Splash supports CMYK separations.
Splash offers point-and-click color correction capabilities for Windows and Mac
OS users.
Printing mixed file types in a single document without Splash results in
inaccurate color.
With Splash, mixed file types or mixed RGB and CMYK images in a single document
are accurately color corrected.
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PRO-
SPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER
TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEI-
THER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 5
Use of Proceeds........................................................... 17
Dividend Policy........................................................... 17
Acquisition............................................................... 17
Capitalization............................................................ 19
Dilution.................................................................. 20
Selected Consolidated Financial Data...................................... 21
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 23
Business.................................................................. 31
Management................................................................ 45
Certain Transactions...................................................... 50
Principal Stockholders.................................................... 52
Description of Capital Stock.............................................. 54
Shares Eligible for Future Sale........................................... 56
Underwriting.............................................................. 58
Legal Matters............................................................. 59
Experts................................................................... 59
Additional Information.................................................... 59
Index to Consolidated Financial Statements................................ F-1
</TABLE>
------------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EF-
FECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR NOT PAR-
TICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS
IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACT-
ING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
2,600,000 Shares
[SPLASH LOGO]
Common Stock
-------------
PROSPECTUS
-------------
Alex. Brown & Sons
INCORPORATED
Montgomery Securities
, 1996
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable in connection with the sale of
the Common Stock being registered hereby. All amounts are estimates except the
SEC registration fee and the NASD filing fee.
<TABLE>
<CAPTION>
AMOUNT TO
BE PAID BY
REGISTRANT
----------
<S> <C>
SEC Registration Fee............................................. $ 13,403
NASD Filing Fee.................................................. 4,387
Nasdaq National Market Application Fee........................... 50,000
Printing......................................................... 145,000
Legal Fees and Expenses.......................................... 275,000
Accounting Fees and Expenses..................................... 410,000
Blue Sky Fees and Expenses....................................... 10,000
Director and Officer Liability Insurance......................... 250,000
Custodial Fees................................................... 2,500
Transfer Agent and Registrar Fees................................ 5,000
Miscellaneous.................................................... 34,710
----------
Total.......................................................... $1,200,000
==========
</TABLE>
II-1
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
1.1 Form of Underwriting Agreement.
2.1* Merger Agreement, dated 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.
2.2* Amendment No. 1 to Merger Agreement dated January 30, 1996.
3.1* Certificate of Incorporation of Registrant.
3.2* Form of Amended and Restated Certificate of Incorporation of
Registrant.
3.3* Bylaws of Registrant.
3.4* Form of Amended and Restated Bylaws of Registrant.
3.5* Form of Amended and Restated Certificate of Incorporation of
Registrant to be filed after the closing of the Offering, the
redemption of the Series A Preferred Stock and the conversion of the
Series B Preferred Stock.
4.1* Warrant, dated January 31, 1996, issued by Registrant to Imperial
Bank.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
10.1* Form of Indemnification Agreement.
10.2* 1996 Stock Option Plan and form of Stock Option Agreement.
10.3* 1996 Employee Stock Purchase Plan and form of Subscription Agreement.
10.4* Registration Rights Agreement dated January 30, 1996 among the
Registrant and certain stockholders of the Registrant.
10.5*+ Configurable Postscript Interpreter OEM License Agreement dated
September 18, 1992 between the Registrant and Adobe Systems
Incorporated.
10.5a**+ Amendment No. 2 and Appendix No. 2 to Configurable Postscript
Interpreter OEM License Agreement dated September 18, 1992 between
the Registrant and Adobe Systems Incorporated.
10.6*+ Xerox and SMT Hardware Purchase and Software Development/License
Agreement between the Registrant and Xerox Corporation dated November
13, 1993.
10.6a*** Attachments I and II to Xerox and SMT Hardware Purchase and Software
Development/License Agreement between the Registrant and Xerox
Corporation dated November 13, 1993.
10.7* Property Lease covering Registrant's facilities in Sunnyvale,
California.
10.8* Security and Loan Agreement dated January 31, 1996, between the
Registrant and Imperial Bank.
11.1 Computation Regarding Earnings Per Share.
21.1* Subsidiaries of Registrant.
23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation
(included in Exhibit 5.1).
24.1* Power of Attorney (see page II-4).
</TABLE>
- --------
* Previously Filed.
** Additional amendment and appendix, not previously filed, to Exhibit Number
10.5, which was previously filed without this amendment and this appendix.
*** Additional attachments, not previously filed, to Exhibit Number 10.6, which
was previously filed without these attachments.
+ Confidential treatment requested.
(b) Financial Statement Schedules
Schedule II--Valuation and Qualifying Accounts
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this amendment to the Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Sunnyvale, State of California, on September 10, 1996.
SPLASH TECHNOLOGY HOLDINGS, INC.
By: /s/ Kevin K. Macgillivray
------------------------------
KEVIN K. MACGILLIVRAY,
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1933, THIS
AMENDMENT TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Kevin K. Macgillivray Director, President and September 10, 1996
- ------------------------------------------- Chief Officer (Principal
KEVIN K. MACGILLIVRAY Executive Officer)
/s/ Joan P. Platt* Chief Financial Officer September 10, 1996
- ------------------------------------------- and Vice President,
JOAN P. PLATT Finance and
Administration (Principal
Financial and Accounting
Officer)
/s/ Gregory M. Avis* Director September 10, 1996
- -------------------------------------------
GREGORY M. AVIS
/s/ Charles W. Berger* Director September 10, 1996
- -------------------------------------------
CHARLES W. BERGER
/s/ Peter Y. Chung* Director September 10, 1996
- -------------------------------------------
PETER Y. CHUNG
/s/ Lawrence G. Finch* Director September 10, 1996
- -------------------------------------------
LAWRENCE G. FINCH
</TABLE>
Kevin K. Macgillivray
*By: /s/_____________________________
KEVIN K. MACGILLIVRAY,
ATTORNEY-IN-FACT
II-3
<PAGE>
SPLASH TECHNOLOGY HOLDINGS, INC.
REPORT ON FINANCIAL STATEMENT SCHEDULE
In connection with our audit of the consolidated financial statements of
Splash Technology Holdings, Inc., and its subsidiaries as of June 30, 1996 and
for the five months ended June 30, 1996, and in connection with our audit of
the Predecessor Business as of September 30, 1994 and 1995, and for the years
then ended and for the four months ended January 31, 1996, which financial
statements are included in the Prospectus, we have also audited the financial
statement schedules listed in Item 16(b) herein.
In our opinion, this financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
Coopers & Lybrand L.L.P.
San Jose, California
July 23, 1996, except for Note 12, the dates for which are July 31, 1996
and September 6, 1996.
II-4
<PAGE>
SCHEDULE II
FINANCIAL STATEMENT SCHEDULE
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
VALUATION FOR DOUBTFUL BALANCE AT BALANCE AT
ACCOUNTS BEGINNING OF PERIOD ADDITIONS DEDUCTIONS END OF PERIOD
---------------------- ------------------- --------- ---------- -------------
<S> <C> <C> <C> <C>
Years ended:
September 30, 1994(1)... $ -- $ 16 $ -- $ 16
==== ==== ===== ====
September 30, 1995(1)... $ 16 $ 68 $ -- $ 84
==== ==== ===== ====
Four months ended
January 31, 1996(1).... $ 84 $ 17 $ -- $101
==== ==== ===== ====
Five months ended
June 30, 1996.......... $101 $199 $ -- $300
==== ==== ===== ====
<CAPTION>
VALUATION FOR INVENTORY BALANCE AT BALANCE AT
RESERVES BEGINNING OF PERIOD ADDITIONS DEDUCTIONS END OF PERIOD
----------------------- ------------------- --------- ---------- -------------
<S> <C> <C> <C> <C>
Years ended:
September 30, 1994(1)... $ -- $575 $ -- $575
==== ==== ===== ====
September 30, 1995(1)... $575 $ -- $ (25) $550
==== ==== ===== ====
Four months ended
January 31, 1996(1).... $550 $ -- $(550) $ --
==== ==== ===== ====
Five months ended
June 30, 1996.......... $ -- $832 $ -- $832
==== ==== ===== ====
<CAPTION>
VALUATION FOR WARRANTY BALANCE AT BALANCE AT
RESERVES BEGINNING OF PERIOD ADDITIONS DEDUCTIONS END OF PERIOD
---------------------- ------------------- --------- ---------- -------------
<S> <C> <C> <C> <C>
Years ended:
September 30, 1994(1)... $ -- $136 $ -- $136
==== ==== ===== ====
September 30, 1995(1)... $136 $181 $ -- $317
==== ==== ===== ====
Four months ended
January 31, 1996(1).... $317 $ -- $(176) $141
==== ==== ===== ====
Five months ended June
30, 1996............... $141 $232 $ -- $373
==== ==== ===== ====
</TABLE>
- --------
(1) Predecessor Business.
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
1.1 Form of Underwriting Agreement.
2.1* Merger Agreement, dated 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.
2.2* Amendment No. 1 to Merger Agreement dated January 30, 1996.
3.1* Certificate of Incorporation of Registrant.
3.2* Form of Amended and Restated Certificate of Incorporation of
Registrant.
3.3* Bylaws of Registrant.
3.4* Form of Amended and Restated Bylaws of Registrant.
3.5* Form of Amended and Restated Certificate of Incorporation of
Registrant to be filed after the closing of the Offering, the
redemption of the Series A Preferred Stock and the conversion of the
Series B Preferred Stock.
4.1* Warrant, dated January 31, 1996, issued by Registrant to Imperial
Bank.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
10.1* Form of Indemnification Agreement.
10.2* 1996 Stock Option Plan and form of Stock Option Agreement.
10.3* 1996 Employee Stock Purchase Plan and form of Subscription Agreement.
10.4* Registration Rights Agreement dated January 30, 1996 among the
Registrant and certain stockholders of the Registrant.
10.5*+ Configurable Postscript Interpreter OEM License Agreement dated
September 18, 1992 between the Registrant and Adobe Systems
Incorporated.
10.5a**+ Amendment No. 2 and Appendix No. 2 to Configurable Postscript
Interpreter OEM License Agreement dated September 18, 1992 between
the Registrant and Adobe Systems Incorporated.
10.6*+ Xerox and SMT Hardware Purchase and Software Development/License
Agreement between the Registrant and Xerox Corporation dated November
13, 1993.
10.6a*** Attachments I and II to Xerox and SMT Hardware Purchase and Software
Development/License Agreement between the Registrant and Xerox
Corporation dated November 13, 1993.
10.7* Property Lease covering Registrant's facilities in Sunnyvale,
California.
10.8* Security and Loan Agreement dated January 31, 1996, between the
Registrant and Imperial Bank.
11.1 Computation Regarding Earnings Per Share.
21.1* Subsidiaries of Registrant.
23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation
(included in Exhibit 5.1).
24.1* Power of Attorney (see page II-4).
</TABLE>
- --------
* Previously Filed.
** Additional amendment and appendix, not previously filed, to Exhibit Number
10.5, which was previously filed without this amendment and this appendix.
*** Additional attachments, not previously filed, to Exhibit Number 10.6, which
was previously filed without these attachments.
+ Confidential treatment requested.
<PAGE>
Exhibit 1.1
2,600,000 Shares
Splash Technology Holdings, Inc.
Common Stock
($0.001 Par Value)
UNDERWRITING AGREEMENT
----------------------
__________________, 1996
Alex. Brown & Sons Incorporated
Montgomery Securities
As Representatives of the
Several Underwriters
c/o Alex. Brown & Sons Incorporated
135 East Baltimore Street
Baltimore, Maryland 21202
Ladies and Gentlemen:
Splash Technology Holdings, Inc., a Delaware corporation (the "Company"),
proposes to sell to the several underwriters (the "Underwriters") named in
Schedule I hereto for whom you are acting as representatives (the
"Representatives") an aggregate of 2,600,000 shares of the Company's Common
Stock, $0.001 par value (the "Firm Shares"). The respective amounts of the Firm
Shares to be so purchased by the several Underwriters are set forth opposite
their names in Schedule I hereto. The Company also proposes to sell at the
Underwriters' option an aggregate of up to 390,000 additional shares of the
Company's Common Stock (the "Option Shares") as set forth below.
As the Representatives, you have advised the Company (a) that you are
authorized to enter into this Agreement on behalf of the several Underwriters,
and (b) that the several Underwriters are willing, acting severally and not
jointly, to purchase the numbers of Firm Shares set forth opposite their
respective names in Schedule I, plus their pro rata portion of the Option Shares
if you elect to exercise the over-allotment option in whole or in part for the
accounts of the several Underwriters. The Firm Shares and the Option Shares (to
the extent the aforementioned option is exercised) are herein collectively
called the "Shares."
In consideration of the mutual agreements contained herein and of the
interest of the parties in the transactions contemplated hereby, the parties
hereto agree as follows:
<PAGE>
1. Representations and Warranties of the Company.
---------------------------------------------
The Company represents and warrants to each of the Underwriters as
follows:
(i) A registration statement on Form S-1 (File No. 333-09591) with
respect to the Shares has been carefully prepared by the Company in conformity
with the requirements of the Securities Act of 1933, as amended (the "Act"), and
the Rules and Regulations (the "Rules and Regulations") of the Securities and
Exchange Commission (the "Commission") thereunder and has been filed with the
Commission. Copies of such registration statement, including any amendments
thereto, the preliminary prospectuses (meeting the requirements of the Rules and
Regulations) contained therein and the exhibits, financial statements and
schedules, as finally amended and revised, have heretofore been delivered by the
Company to you. Such registration statement, together with any registration
statement filed by the Company pursuant to Rule 462(b) of the Act, herein
referred to as the "Registration Statement," which shall be deemed to include
all information omitted therefrom in reliance upon Rule 430A and contained in
the Prospectus referred to below, has become effective under the Act and no
post-effective amendment to the Registration Statement has been filed as of the
date of this Agreement. "Prospectus" means (a) the form of prospectus first
filed with the Commission pursuant to Rule 424(b) or (b) the last preliminary
prospectus included in the Registration Statement filed prior to the time it
becomes effective or filed pursuant to Rule 424(a) under the Act that is
delivered by the Company to the Underwriters for delivery to purchasers of the
Shares, together with the term sheet or abbreviated term sheet filed with the
Commission pursuant to Rule 424(b)(7) under the Act. Each preliminary prospectus
included in the Registration Statement prior to the time it becomes effective is
herein referred to as a "Preliminary Prospectus."
(ii) The Company has been duly organized and is validly existing as
a corporation in good standing under the laws of the State of Delaware, with
corporate power and authority to own or lease its properties and conduct its
business as described in the Registration Statement. Each of Splash Technology,
Inc. and Splash Technology S.a.r.l. (collectively, the "Subsidiaries") has been
duly organized and is validly existing as a corporation in good standing under
the laws of the jurisdiction of its incorporation, with corporate power and
authority to own or lease its properties and conduct its business as described
in the Registration Statement. The Subsidiaries are the only subsidiaries,
direct or indirect, of the Company. The Company and each of the Subsidiaries are
duly qualified to transact business in all jurisdictions in which the conduct of
their business requires such qualification. The outstanding shares of capital
stock of each of the Subsidiaries have been duly authorized and validly issued,
are fully paid and non-assessable and are owned by the Company or another
Subsidiary free and clear of all liens, encumbrances and equities and claims;
and no options, warrants or other rights to purchase, agreements or other
obligations to issue or other rights to convert any obligations into shares of
capital stock or ownership interests in the Subsidiaries are outstanding.
(iii) The outstanding shares of capital stock of the Company have
been duly authorized and validly issued and are fully paid and non-assessable;
the Shares to be issued
2
<PAGE>
and sold by the Company have been duly authorized and when issued and paid for
as contemplated herein will be validly issued, fully paid and non-assessable;
and no preemptive rights of stockholders exist with respect to any of the Shares
or the issue and sale thereof. Neither the filing of the Registration Statement
nor the offering or sale of the Shares as contemplated by this Agreement gives
rise to any rights, other than those that have been waived or satisfied, for or
relating to the registration of any shares of Common Stock.
(iv) The information set forth under the caption "Capitalization" in
the Prospectus is true and correct. All of the Shares conform to the description
thereof contained in the Registration Statement. The form of certificates for
the Shares conforms to the corporate law of the jurisdiction of the Company's
incorporation.
(v) The Commission has not issued an order preventing or suspending
the use of any Prospectus relating to the proposed offering of the Shares nor
instituted proceedings for that purpose. The Registration Statement contains,
and the Prospectus and any amendments or supplements thereto will contain, all
statements which are required to be stated therein by, and will conform, to the
requirements of the Act and the Rules and Regulations. The Registration
Statement and any amendment thereto do not contain, and will not contain, any
untrue statement of a material fact and do not omit, and will not omit, to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading. The Prospectus and any amendments and
supplements thereto do not contain, and will not contain, any untrue statement
of material fact; and do not omit, and will not omit, to state any material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading;
provided, however, that the Company makes no representations or warranties as to
information contained in or omitted from the Registration Statement or the
Prospectus, or any such amendment or supplement, in reliance upon, and in
conformity with, written information furnished to the Company by or on behalf of
any Underwriter through the Representatives, specifically for use in the
preparation thereof.
(vi) The consolidated financial statements of the Company and the
Subsidiaries, together with related notes and schedules as set forth in the
Registration Statement, present fairly the financial position and the results of
operations and cash flows of the Company and the consolidated Subsidiaries, at
the indicated dates and for the indicated periods. Such financial statements and
related schedules have been prepared in accordance with generally accepted
accounting principles, consistently applied throughout the periods involved,
except as disclosed herein, and all adjustments necessary for a fair
presentation of results for such periods have been made. The summary financial
and statistical data included in the Registration Statement presents fairly the
information shown therein and such data has been compiled on a basis consistent
with the financial statements presented therein and the books and records of the
Company. The pro forma financial statements and other pro forma financial
information included in the Registration Statement and the Prospectus present
fairly the information shown therein, have been prepared in accordance with the
Commission's rules and guidelines with respect to pro forma financial
statements, have been properly compiled on the pro forma bases described
therein, and, in the opinion of the Company, the assumptions used in the
preparation
3
<PAGE>
thereof are reasonable and the adjustments used therein are appropriate to give
effect to the transactions or circumstances referred to therein.
(vii) Coopers & Lybrand, L.L.P., who have certified certain of the
financial statements filed with the Commission as part of the Registration
Statement, are independent public accountants as required by the Act and the
Rules and Regulations.
(viii) There is no action, suit, claim or proceeding pending or, to
the knowledge of the Company, threatened against the Company or any of the
Subsidiaries before any court or administrative agency or otherwise which if
determined adversely to the Company or any of its Subsidiaries might result in
any material adverse change in the earnings, business, management, properties,
assets, rights, operations, condition (financial or otherwise) or prospects of
the Company and the Subsidiaries taken as a whole or to prevent the consummation
of the transactions contemplated hereby, except as set forth in the Registration
Statement.
(ix) The Company and the Subsidiaries have good and marketable
title to all of the properties and assets reflected in the financial statements
(or as described in the Registration Statement) hereinabove described, subject
to no lien, mortgage, pledge, charge or encumbrance of any kind except those
reflected in such financial statements (or as described in the Registration
Statement) or which are not material in amount. The Company and the Subsidiaries
occupy their leased properties under valid and binding leases conforming in all
material respects to the description thereof set forth in the Registration
Statement.
(x) The Company and the Subsidiaries have filed all Federal,
State, local and foreign income tax returns that have been required to be filed
and have paid all taxes indicated by said returns and all assessments received
by them or any of them to the extent that such taxes have become due. All tax
liabilities have been adequately provided for in the financial statements of the
Company.
(xi) Since the respective dates as of which information is given in
the Registration Statement, as it may be amended or supplemented, there has not
been any material adverse change or any development involving a prospective
material adverse change in or affecting the earnings, business, management,
properties, assets, rights, operations, condition (financial or otherwise), or
prospects of the Company and its Subsidiaries taken as a whole, whether or not
occurring in the ordinary course of business, and there has not been any
material transaction entered into or any material transaction that is probable
of being entered into by the Company or the Subsidiaries, other than
transactions in the ordinary course of business and changes and transactions
described in the Registration Statement, as it may be amended or supplemented.
The Company and the Subsidiaries have no material contingent obligations that
are not disclosed in the Registration Statement.
(xii) Neither the Company nor any of the Subsidiaries is or with the
giving of notice or lapse of time or both, will be, in violation of or in
default under its Charter or By-Laws or under any agreement, lease, contract,
indenture or other instrument or obligation to which it is a party or by which
it, or any of its properties, is bound and which violation or default is of
material significance in respect of the condition, financial or otherwise of the
Company and
4
<PAGE>
its Subsidiaries taken as a whole or the business, management, properties,
assets, rights, operations, condition (financial or otherwise) or prospects of
the Company and the Subsidiaries taken as a whole. The execution and delivery
of this Agreement and the consummation of the transactions herein contemplated
and the fulfillment of the terms hereof will not conflict with or result in a
breach of any of the terms or provisions of, or constitute a default under, any
indenture, mortgage, deed of trust or other agreement or instrument to which the
Company or any Subsidiary is a party, or of the Charter or by-laws of the
Company or any order, rule or regulation applicable to the Company or any
Subsidiary of any court or of any regulatory body or administrative agency or
other governmental body having jurisdiction.
(xiii) Each approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or other
governmental body necessary in connection with the execution and delivery by the
Company of this Agreement and the consummation of the transactions herein
contemplated (except such additional steps as may be required by the Commission,
the National Association of Securities, Inc. (the "NASD") or such additional
steps as may be necessary to qualify the Shares for public offering by the
Underwriters under state securities or Blue Sky laws) has been obtained or made
and is in full force and effect.
(xiv) The Company and each of the Subsidiaries holds all material
licenses, certificates and permits from governmental authorities which are
necessary to the conduct of their businesses; except where the failure to have
such licenses, certificates and permits would not, singly or in the aggregate,
have a material adverse effect on the business or financial condition of the
Company and the Subsidiaries, taken as a whole.
(xv) The Company and each of the Subsidiaries owns or possess
licenses or other rights to use all patents, trademarks, service marks, trade
names, copyrights, mask work rights, technology know-how and other intellectual
property rights ("Intellectual Property") necessary to conduct the business now
or proposed to be conducted by the Company and each of the Subsidiaries as
described in the Prospectus, and, except as disclosed in the Prospectus, neither
the Company nor any of its Subsidiaries has received any notice of infringement
of or conflict with (or knows of such infringement of or conflict with) asserted
rights of others with respect to the Intellectual Property which, individually
or in the aggregate, could reasonably be expected to result in any material
adverse effect upon the condition, financial or otherwise, of the Company and
the Subsidiaries, taken as a whole; and, except as disclosed in the Prospectus
and to the knowledge of the Company and each of its Subsidiaries, do not in the
conduct of their business as now or proposed to be conducted as described in the
Prospectus, infringe or conflict with any Intellectual Property of any third
party, or any discovery, invention, product or process which is the subject of a
patent application filed by any thirty party, known to the Company or any of the
Subsidiaries.
(xvi) Neither the Company, nor to the Company's best knowledge, any
of its affiliates, has taken or may take, directly or indirectly, any action
designed to cause or result in, or which has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of the
price of the shares of Common Stock to facilitate the sale or
5
<PAGE>
resale of the Shares. The Company acknowledges that the Underwriters may engage
in passive market making transactions in the Shares on The Nasdaq National
Market in accordance with Rule 10b-6A under the Exchange Act.
(xvii) Neither the Company nor any Subsidiary is an "investment
company" within the meaning of such term under the Investment Company Act of
1940 and the rules and regulations of the Commission thereunder.
(xviii) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurances that (i) transactions are
executed in accordance with management's general or specific authorization; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(xix) The Company and each of its Subsidiaries carry, or are
covered by, insurance in such amounts and covering such risks as is adequate for
the conduct of their respective businesses and the value of their respective
properties and as is customary for companies engaged in similar industries.
(xx) The Company is in compliance in all material respects with
all presently applicable provisions of the Employee Retirement Income Security
Act of 1974, as amended, including the regulations and published interpretations
thereunder ("ERISA"); no "reportable event" (as defined in ERISA) has occurred
with respect to any "pension plan" (as defined in ERISA) for which the Company
would have any liability; the Company has not incurred and does not expect to
incur liability under (i) Title IV of ERISA with respect to termination of, or
withdrawal from, any "pension plan" or (i) Sections 412 or 4971 of the Internal
Revenue Code of 1986, as amended, including the regulations and published
interpretations thereunder (the "Code"); and each "pension plan" for which the
Company would have any liability that is intended to be qualified under Section
401(a) of the code is so qualified in all material respects and nothing has
occurred, whether by action or by failure to act, which would cause the loss of
such qualification.
(xxi) The Company has obtained the agreement of each of its
officers, directors and holders of the Company's outstanding capital stock, not
to sell, grant any option to sell or otherwise dispose of, directly or
indirectly, any shares of Common Stock or securities convertible into, or
exercisable or exchangeable for Common Stock or other rights to purchase Common
Stock of the Company for a period of 180 days after the effective date of the
Registration Statement without the prior written consent of Alex. Brown & Sons
Incorporated. The Company has further entered into an agreement with each of the
holders of its securities restricting the sale or other disposition of said
securities and the Company will not permit any sale or disposition of such
securities for a period of 180 days after the effective date of the
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Registration Statement, directly or indirectly, except with the prior written
consent of Alex. Brown & Sons Incorporated.
(xxii) The Company confirms as of the date hereof that it is in
compliance with all provisions of Section 1 of Laws of Florida, Chapter 92-198,
An Act Relating to Disclosure of doing Business with Cuba, and the Company
- ---------------------------------------------------------
further agrees that if it commences engaging in business with the government of
Cuba or with any person or affiliate located in Cuba after the date the
Registration Statement becomes or has become effective with the Commission or
with the Florida Department of Banking and Finance (the "Department"), whichever
date is later, or if the information reported or incorporated by reference in
the Prospectus, if any, concerning the Company's business with Cuba or with any
person or affiliate located in Cuba changes in any material way, the Company
will provide the Department notice of such business or change, as appropriate,
in a form acceptable to the Department.
2. Purchase, Sale and Delivery of the Firm Shares.
----------------------------------------------
(a) On the basis of the representations, warranties and covenants
herein contained, and subject to the conditions herein set forth, the Company
agrees to sell to the Underwriters and each Underwriter agrees, severally and
not jointly, to purchase, at a price of $_____ per share, the number of Firm
Shares set forth opposite the name of each Underwriter in Schedule I hereof,
subject to adjustments in accordance with Section 9 hereof.
(b) Payment for the Firm Shares to be sold hereunder is to be made in
New York Clearing House funds by certified or bank cashier's checks drawn to the
order of the Company against delivery of certificates therefor to the
Representatives for the several accounts of the Underwriters. Such payment and
delivery are to be made at the offices of Alex. Brown & Sons Incorporated, 135
East Baltimore Street, Baltimore, Maryland, at 10:00 a.m., Baltimore time, on
the third business day after the date of this Agreement or at such other time
and date not later than five business days thereafter as you and the Company
shall agree upon, such time and date being herein referred to as the "Closing
Date." (As used herein, "business day" means a day on which the New York Stock
Exchange is open for trading and on which banks in New York are open for
business and are not permitted by law or executive order to be closed.) The
certificates for the Firm Shares will be delivered in such denominations and in
such registrations as the Representatives request in writing not later than the
second full business day prior to the Closing Date, and will be made available
for inspection by the Representatives at least one business day prior to the
Closing Date.
(c) In addition, on the basis of the representations and warranties
herein contained and subject to the terms and conditions herein set forth, the
Company hereby grants an option to the several Underwriters to purchase the
Option Shares at the price per share as set forth in the first paragraph of this
Section 2. The option granted hereby may be exercised in whole or in part by
giving written notice (i) at any time before the Closing Date and (ii) only once
thereafter within 30 days after the date of this Agreement, by you, as
Representatives of the several Underwriters, to the Company setting forth the
number of Option Shares as to which the Several Underwriters are exercising the
option, the names and denominations in which the
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Option Shares are to be registered and the time and date at which such
certificates are to be delivered. The time and date at which certificates for
Option Shares are to be delivered shall be determined by the Representatives but
shall not be earlier than three nor later than 10 full business days after the
exercise of such option, nor in any event prior to the Closing Date (such time
and date being herein referred to as the "Option Closing Date"). If the date of
exercise of the option is three or more days before the Closing Date, the notice
of exercise shall set the Closing Date as the Option Closing Date. The number of
Option Shares to be purchased by each Underwriter shall be in the same
proportion to the total number of Option Shares being purchased as the number of
Firm Shares being purchased by such Underwriters bears to the number of Firm
Shares, adjusted by you in such manner as to avoid fractional shares. The option
with respect to the Option Shares granted hereunder may be exercised only to
cover over-allotments in the sale of the Firm Shares by the Underwriters. You,
as Representatives of the several Underwriters, may cancel such option at any
time prior to its expiration by giving written notice of such cancellation to
the Company. To the extent, if any, that the option is exercised, payment for
the Option Shares shall be made on the Option Closing Date in New York Clearing
House funds by certified or bank cashier's check drawn to the order of the
Company against delivery of certificates therefor at the offices of Alex. Brown
& Sons Incorporated, 135 East Baltimore Street, Baltimore, Maryland.
3. Offering by the Underwriters.
----------------------------
It is understood that the several Underwriters are to make a public
offering of the Firm Shares as soon as the Representatives deem it advisable to
do so. The Firm Shares are to be initially offered to the public at the initial
public offering price set forth in the Prospectus. The Representatives may from
time to time thereafter change the public offering price and other selling
terms. To the extent, if at all, that any Option Shares are purchased pursuant
to Section 2 hereof, the Underwriters will offer them to the public on the
foregoing terms.
It is further understood that you will act as the Representatives for
the Underwriters in the offering and sale of the Shares in accordance with a
Master Agreement Among Underwriters entered into by you and the several other
Underwriters.
4. Covenants of the Company.
------------------------
(a) The Company covenants and agrees with the several Underwriters
that:
(i) The Company will (A) use its best efforts to cause the
Registration Statement to become effective or, if the procedure in Rule 430A of
the Rules and Regulations is followed, to prepare and timely file with the
Commission under Rule 424(b) of the Rules and Regulations a Prospectus in a form
approved by the Representatives containing information previously omitted at the
time of effectiveness of the Registration Statement in reliance on Rule 430A of
the Rules and Regulations, and (B) not file any amendment to the Registration
Statement or supplement to the Prospectus of which the Representatives shall not
previously have been advised and furnished with a copy or to which the
Representatives shall have reasonably objected in writing or which is not in
compliance with the Rules and Regulations.
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<PAGE>
(ii) The Company will advise the Representatives promptly (A)
when the Registration Statement or any post-effective amendment thereto shall
have become effective, (B) of receipt of any comments from the Commission, (C)
of any request of the Commission for amendment of the Registration Statement or
for supplement to the Prospectus or for any additional information, and (D) of
the issuance by the Commission of any stop order suspending the effectiveness of
the Registration Statement or the use of the Prospectus or of the institution of
any proceedings for that purpose. The Company will use its best efforts to
prevent the issuance of any such stop order preventing or suspending the use of
the Prospectus and to obtain as soon as possible the lifting thereof, if issued.
(iii) The Company will cooperate with the Representatives in
endeavoring to qualify the Shares for sale under the securities laws of such
jurisdictions as the Representatives may reasonably have designated in writing
and will make such applications, file such documents, and furnish such
information as may be reasonably required for that purpose, provided the Company
shall not be required to qualify as a foreign corporation or to file a general
consent to service of process in any jurisdiction where it is not now so
qualified or required to file such a consent. The Company will, from time to
time, prepare and file such statements, reports and other documents, as are or
may be required to continue such qualifications in effect for so long a period
as the Representatives may reasonably request for distribution of the Shares.
(iv) The Company will deliver to, or upon the order of, the
Representatives, from time to time, as many copies of any Preliminary Prospectus
as the Representatives may reasonably request. The Company will deliver to, or
upon the order of, the Representatives during the period when delivery of a
Prospectus is required under the Act, as many copies of the Prospectus in final
form, or as thereafter amended or supplemented, as the Representatives may
reasonably request. The Company will deliver to the Representatives at or before
the Closing Date, four signed copies of the Registration Statement and all
amendments thereto including all exhibits filed therewith, and will deliver to
the Representatives such number of copies of the Registration Statement
(including such number of copies of the exhibits filed therewith that may
reasonably be requested), and of all amendments thereto, as the Representatives
may reasonably request.
(v) The Company will comply with the Act and the Rules and
Regulations, and the Securities Exchange Act of 1934 (the "Exchange Act"), and
the rules and regulations of the Commission thereunder, so as to permit the
completion of the distribution of the shares as contemplated in this Agreement
and the Prospectus. If during the period in which a prospectus is required by
law to be delivered by an Underwriter or dealer, any event shall occur as a
result of which, in the judgment of the Company or in the reasonable opinion of
the Underwriters, it becomes necessary to amend or supplement the Prospectus in
order to make the statements therein, in the light of the circumstances existing
at the time the Prospectus is delivered to a purchaser, not misleading, or, if
it is necessary at any time to amend or supplement the Prospectus to comply with
any law, the Company promptly will prepare and file with the Commission an
appropriate amendment to the Registration Statement or supplement to the
Prospectus so that the Prospectus as so amended or supplemented will not, in the
light of the
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<PAGE>
circumstances when it is so delivered, be misleading, or so that the Prospectus
will comply with the law.
(vi) the Company will make generally available to its security
holders, as soon as it is practicable to do so, but in any event no later than
15 months after the effective date of the Registration Statement, an earning
statement (which need not be audited) in reasonable detail, covering a period of
at least 12 consecutive months beginning after the effective date of the
Registration Statement, which earning statement shall satisfy the requirements
of Section 11(a) of the Act and Rule 158 of the Rules and Regulations and will
advise you in writing when such statement has been so made available.
(vii) The Company will, for a period of five years from the
Closing Date, deliver to the Representatives copies of annual reports and copies
of all other documents, reports and information furnished by the Company to its
stockholders or filed with any securities exchange pursuant to the requirements
of such exchange or with the Commission pursuant to the Act or the Securities
Exchange Act of 1934, as amended. The Company will deliver to the
Representatives similar reports with respect to significant subsidiaries, as
that term is defined in the Rules and Regulations, which are not consolidated in
the Company's financial statements.
(viii) No offering, sale, short sale or other disposition of any
shares of Common Stock of the Company or other securities convertible into or
exchangeable or exercisable for shares of Common Stock or derivative of Common
Stock (or agreement for such) will be made for a period of 180 days after the
date of this Agreement, directly or indirectly, by the Company otherwise than
hereunder or with the prior written consent of Alex. Brown & Sons Incorporated
except that the Company may, without such consent, issue shares upon exercise of
options issued pursuant to the 1996 Stock Option Plan or the 1996 Employee Stock
Purchase Plan provided that each person who receives such shares from the
Company agrees to similar restrictions on transfer.
(ix) The Company will use its best efforts to list, subject to
notice of issuance, the Shares on the Nasdaq National Market.
(x) The Company has caused each officer and director and
holders of the Company's outstanding capital stock to furnish to you, on or
prior to the date of this Agreement, a letter or letters, in form and substance
satisfactory to the Underwriters, pursuant to which each such person shall agree
not to offer, sell, sell short or otherwise dispose of any shares of Common
Stock of the Company or other capital stock of the Company, or any other
securities convertible, exchangeable or exercisable for Common Shares or
derivative of Common Shares owned by such person or request the registration for
the offer or sale of any of the foregoing (or as to which such person has the
right to direct the disposition of) for a period of 180 days after the date of
this Agreement, directly or indirectly, except with the prior written consent of
Alex. Brown & Sons Incorporated ("Lockup Agreements"). The Company has further
entered into an agreement with each of the holders of its securities restricting
the sale or other disposition of said securities and the Company will not permit
any sale or disposition of such securities for a period
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<PAGE>
of 180 days after the effective date of the Registration Statement, directly or
indirectly, except with the prior written consent of Alex. Brown & Sons
Incorporated.
(xi) The Company shall apply the net proceeds of its sale of
the Shares as set forth in the Prospectus and shall file such reports with the
Commission with respect to the sale of the Shares and the application of the
proceeds therefrom as may be required in accordance with Rule 463 under the Act.
(xii) The Company shall not invest, or otherwise use the
proceeds received by the Company from its sale of the Shares in such a manner as
would require the Company or any of the Subsidiaries to register as an
investment company under the Investment Company Act of 1940, as amended (the
"1940 Act").
(xiii) The Company will maintain a transfer agent and, if
necessary under the jurisdiction of incorporation of the Company, a registrar
for the Common Stock.
(xiv) The Company will not take, directly or indirectly, any
action designed to cause or result in, or that has constituted or might
reasonably be expected to constitute, the stabilization or manipulation of the
price of any securities of the Company.
5. Costs and Expenses.
------------------
The Company will pay all costs, expenses and fees incident to the
performance of the obligations of the Company under this Agreement, including,
without limiting the generality of the foregoing, the following: accounting fees
of the Company; the fees and disbursements of counsel for the Company; the cost
of printing and delivering to, or as requested by, the Underwriters copies of
the Registration Statement, Preliminary Prospectuses, the Prospectus, this
Agreement, the Underwriters' Selling Memorandum, the Underwriters' Invitation
Letter, the Listing Application, the Blue Sky Survey and any supplements or
amendments thereto; the filing fees of the Commission; the filing fees and
expenses (including legal fees and disbursements) incident to securing any
required review by the National Association of Securities Dealers, Inc. (the
"NASD") of the terms of the sale of the Shares; the Listing Fee of the Nasdaq
National Market; and the expenses, including the fees and disbursements of
counsel for the Underwriters, incurred in connection with the qualification of
the Shares under State securities or Blue Sky laws. The Company agrees to pay
all costs and expenses of the Underwriters, including the fees and disbursements
of counsel for the Underwriters, incident to the offer and sale of directed
shares of the Common Stock by the Underwriters to employees and persons having
business relationships with the Company and its Subsidiaries. The Company shall
not, however, be required to pay for any of the Underwriters expenses (other
than those related to qualification under NASD regulation and State securities
or Blue Sky laws) except that, if this Agreement shall not be consummated
because the conditions in Section 6 hereof are not satisfied, or because this
Agreement is terminated by the Representatives pursuant to Section 11 hereof, or
by reason of any failure, refusal or inability on the part of the Company to
perform any undertaking or satisfy any condition of this Agreement or to comply
with any of the terms hereof on its part to be performed, unless such failure
to satisfy said condition or to comply with said terms be due to the default or
omission of any Underwriter, then the Company shall reimburse the several
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<PAGE>
Underwriters for out-of-pocket expenses, including fees and disbursements of
counsel, reasonably incurred in connection with investigating, marketing and
proposing to market the Shares or in contemplation of performing their
obligations hereunder; but the Company shall not in any event be liable to any
of the several Underwriters for damages on account of loss of anticipated
profits from the sale by them of the Shares.
6. Conditions of Obligations of the Underwriters.
---------------------------------------------
The several obligations of the Underwriters to purchase the Firm Shares
on the Closing Date and the Option Shares, if any, on the Option Closing Date
are subject to the accuracy, as of the Closing Date or the Option Closing Date,
as the case may be, of the representations and warranties of the Company
contained herein, and to the performance by the Company of its covenants and
obligations hereunder and to the following additional conditions:
(a) The Registration Statement and all post-effective amendments
thereto shall have become effective and any and all filings required by Rule 424
and Rule 430A of the Rules and Regulations shall have been made, and any request
of the Commission for additional information (to be included in the Registration
Statement or otherwise) shall have been disclosed to the Representatives and
complied with to their reasonable satisfaction. No stop order suspending the
effectiveness of the Registration Statement, as amended from time to time, shall
have been issued and no proceedings for that purpose shall have been taken or,
to the knowledge of the Company, shall be contemplated by the Commission and no
injunction, restraining order, or order of any nature by a Federal or state
court of competent jurisdiction shall have been issued as of the Closing Date
which would prevent the issuance of the Shares.
(b) The Representatives shall have received on the Closing Date or the
Option Closing Date, as the case may be, the opinion of Wilson Sonsini Goodrich
& Rosati, P.C., counsel for the Company, dated the Closing Date or the Option
Closing Date, as the case may be, addressed to the Underwriters (and stating
that it may be relied upon by counsel to the Underwriters) to the effect that:
(i) The Company has been duly organized and is validly
existing as a corporation in good standing under the laws of the State of
Delaware, with corporate power and authority to own or lease its properties and
conduct its business as described in the Registration Statement; each of the
Subsidiaries has been duly organized and is validly existing as a corporation in
good standing under the laws of the jurisdiction of its incorporation, with
corporate power and authority to own or lease its properties and conduct its
business as described in the Registration Statement; the Company and each of the
Subsidiaries are duly qualified to transact business in all jurisdictions in
which the conduct of their business requires such qualification, or in which the
failure to qualify would have a materially adverse effect upon the business of
the Company and the Subsidiaries taken as a whole; and the outstanding shares of
capital stock of each of the Subsidiaries have been duly authorized and validly
issued and are fully paid and non-assessable and are owned by the Company or a
Subsidiary; and, to the best of such counsel's knowledge, the outstanding shares
of capital stock of each of the Subsidiaries is owned free and clear of all
liens, encumbrances and equities and claims, and no options, warrants
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<PAGE>
or other rights to purchase, agreements or other obligations to issue or other
rights to convert any obligations into any shares of capital stock or of
ownership interests in the Subsidiaries are outstanding.
(ii) The Company has authorized and outstanding capital stock as set
forth under the caption "Capitalization" in the Prospectus; the authorized
shares of the Company's Common Stock have been duly authorized; the outstanding
shares of the Company's Common Stock have been duly authorized and validly
issued and are fully paid and non-assessable; all of the Shares conform to the
description thereof contained in the Prospectus; the certificates for the
Shares, assuming they are in the form filed with the Commission, are in due and
proper form; the shares of Common Stock, including the Option Shares, if any, to
be sold by the Company pursuant to this Agreement have been duly authorized and
will be validly issued, fully paid and non-assessable when issued and paid for
as contemplated by this Agreement; and no preemptive rights of stockholders
exist with respect to any of the Shares or the issue or sale thereof.
(iii) Except as described in or contemplated by the Prospectus, to
the knowledge of such counsel, there are no outstanding securities of the
Company convertible or exchangeable into or evidencing the right to purchase or
subscribe for any shares of capital stock of the Company and there are no
outstanding or authorized options, warrants or rights of any character
obligating the Company to issue any shares of its capital stock or any
securities convertible or exchangeable into or evidencing the right to purchase
or subscribe for any shares of such stock; and except as described in the
Prospectus, to the knowledge of such counsel, no holder of any securities of the
Company or any other person has the right, contractual or otherwise, which has
not been satisfied or effectively waived, to cause the Company to sell or
otherwise issue to them, or to permit them to underwrite the sale of, any of the
Shares or the right to have any Common Shares or other securities of the Company
included in the Registration Statement or the right, as a result of the filing
of the Registration Statement, to require registration under the Act of any
shares of Common Stock or other securities of the Company.
(iv) The Registration Statement has become effective under the Act
and, to the best of the knowledge of such counsel, no stop order proceedings
with respect thereto have been instituted or are pending or threatened under the
Act.
(v) The Registration Statement, the Prospectus and each amendment
or supplement thereto comply as to form in all material respects with the
requirements of the Act and the applicable rules and regulations thereunder
(except that such counsel need express no opinion as to the financial statements
and related schedules therein).
(vi) The statements under the captions "Management--Compensation
Plans," "Certain Transactions," "Description of Capital Stock" and "Shares
Eligible for Future Sale" in the Prospectus, and in the Registration Statement
in Part II, Items 14 and 15, in each case insofar as such statements constitute
a summary of documents referred to therein or matters of law, fairly present the
information called for with respect to such documents and matters and fairly
summarize the matters referred to therein.
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(vii) Such counsel does not know of any contracts or documents
required to be filed as exhibits to the Registration Statement or described in
the Registration Statement or the Prospectus which are not so filed or described
as required, and such contracts and documents as are summarized in the
Registration Statement or the Prospectus are fairly summarized in all material
respects.
(viii) Such counsel knows of no material legal or governmental
proceedings pending or threatened against the Company or any of the Subsidiaries
except as set forth in the Prospectus.
(ix) The execution and delivery of this Agreement and the
consummation of the transactions herein contemplated do not and will not
conflict with or result in a breach of any of the terms or provisions of, or
constitute a default under, the Charter or by-laws of the Company, or any
agreement or instrument known to such counsel to which the Company or any of the
Subsidiaries is a party or by which the Company or any of the Subsidiaries may
be bound.
(x) This Agreement has been duly authorized, executed and
delivered by the Company.
(xi) No approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or other
governmental body is necessary in connection with the execution and delivery of
this Agreement and the consummation of the transactions herein contemplated
(other than as may be required by the NASD or as required by State securities
and Blue Sky laws as to which such counsel need express no opinion) except such
as have been obtained or made, specifying the same.
(xii) The Company is not, and will not become, as a result of the
consummation of the transactions contemplated by this Agreement, and application
of the net proceeds therefrom as described in the Prospectus, required to
register as an investment company under the 1940 Act.
In rendering such opinion Wilson Sonsini Goodrich & Rosati, P.C. may rely
as to matters governed by the laws of states other than California, Delaware or
Federal laws on local counsel in such jurisdictions, provided that in each case
Wilson Sonsini Goodrich & Rosati, P.C. shall state that they believe that they
and the Underwriters are justified in relying on such other counsel. In
addition to the matters set forth above, such opinion shall also include a
statement to the effect that nothing has come to the attention of such counsel
which leads them to believe that (i) the Registration Statement, at the time it
became effective under the Act (but after giving effect to any modifications
incorporated therein pursuant to Rule 430A under the Act) and as of the Closing
Date or the Option Closing Date, as the case may be, contained an untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not misleading, and
(ii) the Prospectus, or any supplement thereto, on the date it was filed
pursuant to the Rules and Regulations and as of the Closing Date or the Option
Closing Date, as the case may be, contained an untrue statement of a material
fact or omitted to state a material fact necessary in order to make the
statements, in the light of the
14
<PAGE>
circumstances under which they are made, not misleading (except that such
counsel need express no view as to financial statements, financial data,
schedules and statistical information therein). With respect to such statement,
Wilson Sonsini Goodrich & Rosati, P.C. may state that their belief is based upon
the procedures set forth therein, but is without independent check and
verification.
Fenwick & West, LLP, patent counsel for the Company, shall have furnished
to the Representatives its written opinion, addressed to the Underwriters and
dated the First Delivery Date, in form and substance reasonably satisfactory to
the Representatives, to the effect that such counsel is familiar with the
technology used by the Company in its business and the manner of its use thereof
and has read the Registration Statement and the Prospectus, including
particularly the portions of the Registration Statement and the Prospectus
referring to patents and trade secrets, and:
(i) to the best of such counsel's knowledge and except as set forth
in the Prospectus under the captions "Risk Factors-Dependence on Proprietary
Technology" and "Business--Intellectual Property," there are no legal or
governmental proceedings pending relating to patent rights trade secrets, of the
Company, and to the best of such counsel's knowledge, no such proceedings are
threatened or contemplated by governmental authorities or others;
(ii) except as set forth in the Prospectus, to the best of such
counsel's knowledge, the Company is not infringing or otherwise violating any
patents or trade secrets of others.
(d) The Representatives shall have received from Gunderson Dettmer Stough
Villeneuve Franklin & Hachigian, LLP, counsel for the Underwriters, an opinion
dated the Closing Date or the Option Closing Date, as the case may be,
substantially to the effect specified in subparagraphs (iv) and (v) of Paragraph
(b) of this Section 6, and that the Company is a duly organized and validly
existing corporation under the laws of the State of Delaware. In rendering such
opinion Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP may rely
as to all matters governed other than by the laws of the States of California
and Delaware or Federal laws on the opinion of counsel referred to in Paragraph
(b) of this Section 6. In addition to the matters set forth above, such opinion
shall also include a statement to the effect that nothing has come to the
attention of such counsel which leads them to believe that (i) the Registration
Statement, or any amendment thereto, as of the time it became effective under
the Act (but after giving effect to any modifications incorporated therein
pursuant to Rule 430A under the Act) as of the Closing Date or the Option
Closing Date, as the case may be, contained an untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, and (ii) the
Prospectus, or any supplement thereto, on the date it was filed pursuant to the
Rules and Regulations and as of the Closing Date or the Option Closing Date, as
the case may be, contained an untrue statement of a material fact or omitted to
state a material fact, necessary in order to make the statements, in the light
of the circumstances under which they are made, not misleading (except that such
counsel need express no view as to financial statements, financial data,
schedules and statistical
15
<PAGE>
information therein). With respect to such statement, Gunderson Dettmer Stough
Villeneuve Franklin & Hachigian, LLP may state that their belief is based upon
the procedures set forth therein, but is without independent check and
verification.
(e) The Representatives shall have received at or prior to the Closing
Date from Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP a
memorandum or summary, in form and substance satisfactory to the
Representatives, with respect to the qualification for offering and sale by the
Underwriters of the Shares under the State securities or Blue Sky laws of such
jurisdictions as the Representatives may reasonably have designated to the
Company.
(f) The Representatives shall have received, on each of the dates hereon,
the Closing Date and the Option Closing Date, as the case may be, a letter dated
the date hereof, the Closing Date or the Option Closing Date, as the case may
be, in form and substance satisfactory to you, of Coopers & Lybrand, L.L.P.
confirming that they are independent public accountants within the meaning of
the Act and the applicable published Rules and Regulations thereunder and
stating that in their opinion the financial statements and schedules examined by
them and included in the Registration Statement comply in form in all material
respects with the applicable accounting requirements of the Act and the related
published Rules and Regulations; and containing such other statements and
information as is ordinarily included in accountants' "comfort letters" to
Underwriters with respect to the financial statements and certain financial and
statistical information contained in the Registration Statement and Prospectus.
(g) The Representatives shall have received on the Closing Date or the
Option Closing Date, as the case may be, a certificate or certificates of the
Chief Executive Officer and the Chief Financial Officer of the Company to the
effect that, as of the Closing Date or the Option Closing Date, as the case may
be, each of them severally represents as follows:
(i) The Registration Statement has become effective under the Act
and no stop order suspending the effectiveness of the Registration Statement has
been issued, and no proceedings for such purpose have been taken or are, to his
knowledge, contemplated by the Commission;
(ii) The representations and warranties of the Company contained in
Section 1 hereof are true and correct as of the Closing Date or the Option
Closing Date, as the case may be;
(iii) All filings required to have been made pursuant to Rules 424 or
430A under the Act have been made;
(iv) He or she has carefully examined the Registration Statement and
the Prospectus and, in his or her opinion, as of the effective date of the
Registration Statement, the statements contained in the Registration Statement
were true and correct, and such Registration Statement and Prospectus did not
omit to state a material fact required to be stated therein or necessary in
order to make the statements therein not misleading, and since the effective
date of the Registration Statement, no event has occurred which should have been
set
16
<PAGE>
forth in a supplement to or an amendment of the Prospectus which has not been so
set forth in such supplement or amendment; and
(v) Since the respective dates as of which information is given in
the Registration Statement and Prospectus, there has not been any material
adverse change or any development involving a prospective material adverse
change in or affecting the condition, financial or otherwise, of the Company and
its Subsidiaries taken as a whole or the earnings, business, management,
properties, assets, rights, operations, condition (financial or otherwise) or
prospects of the Company and the Subsidiaries taken as a whole, whether or not
arising in the ordinary course of business.
(h) The Company shall have furnished to the Representatives such further
certificates and documents confirming the representations and warranties,
covenants and conditions contained herein and related matters as the
Representatives may reasonably have requested.
(i) The Firm Shares and Option Shares, if any, have been approved for
designation upon notice of issuance on the Nasdaq National Market.
(j) The Lockup Agreements described in Section 4(a)(x) are in full force
and effect.
The opinions and certificates mentioned in this Agreement shall be deemed
to be in compliance with the provisions hereof only if they are in all material
respects satisfactory to the Representatives and to Gunderson Dettmer Stough
Villeneuve Franklin & Hachigian, LLP, counsel for the Underwriters.
If any of the conditions hereinabove provided for in this Section 6 shall
not have been fulfilled when and as required by this Agreement to be fulfilled,
the obligations of the Underwriters hereunder may be terminated by the
Representatives by notifying the Company of such termination in writing or by
telegram at or prior to the Closing Date or the Option Closing Date, as the case
may be.
In such event, the Company and the Underwriters shall not be under any
obligation to each other (except to the extent provided in Sections 5 and 8
hereof).
7. Conditions of the Obligations of the Company.
--------------------------------------------
(a) The obligations of the Company to sell and deliver the portion
of the Shares required to be delivered as and when specified in this Agreement
are subject to the conditions that at the Closing Date or the Option Closing
Date, as the case may be, no stop order suspending the effectiveness of the
Registration Statement shall have been issued and in effect or proceedings
therefor initiated or threatened.
17
<PAGE>
8. Indemnification.
---------------
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within the
meaning of the Act, against any losses, claims, damages or liabilities to which
such Underwriter or any such controlling person may become subject under the Act
or otherwise, insofar as such losses, claims, damages or liabilities (or actions
or proceedings in respect thereof) arise out of or are based upon (i) any untrue
statement or alleged untrue statement of any material fact contained in the
Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto, or (ii) the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading; and will reimburse each Underwriter and
each such controlling person upon demand for any legal or other expenses
reasonably incurred by such Underwriter or such controlling person in connection
with investigating or defending any such loss, claim, damage or liability,
action or proceeding or in responding to a subpoena or governmental inquiry
related to the offering of the Shares, whether or not such Underwriter or
controlling person is a party to any action or proceeding; provided, however,
that the Company will not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement, or omission or alleged omission made in
the Registration Statement, any Preliminary Prospectus, the Prospectus, or such
amendment or supplement, in reliance upon and in conformity with written
information furnished to the Company by or through the Representatives
specifically for use in the preparation thereof. This indemnity agreement will
be in addition to any liability which the Company may otherwise have.
(b) Each Underwriter severally and not jointly will indemnify and
hold harmless the Company, each of its directors, each of its officers who have
signed the Registration Statement and each person, if any, who controls the
Company within the meaning of the Act, against any losses, claims, damages or
liabilities to which the Company or any such director, officer, or controlling
person may become subject under the Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions or proceedings in respect thereof)
arise out of or are based upon (i) any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement, any
Preliminary Prospectus, the Prospectus or any amendment or supplement thereto,
or (ii) the omission or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading in the light of the circumstances under which they were made; and
will reimburse any legal or other expenses reasonably incurred by the Company or
any such director, officer, or controlling person in connection with
investigating or defending any such loss, claim, damage, liability, action or
proceeding; provided, however, that each Underwriter will be liable in each case
to the extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission has been made in the
Registration Statement, any Preliminary Prospectus, the Prospectus or such
amendment or supplement, in reliance upon and in conformity with written
information furnished to the Company by or through the Representatives
specifically for use in the preparation thereof. This indemnity agreement will
be in addition to any liability which such Underwriter may otherwise have.
18
<PAGE>
(c) In case any proceeding (including any governmental
investigation) shall be instituted involving any person in respect of which
indemnity may be sought pursuant to this Section 8, such person (the
"indemnified party") shall promptly notify the person against whom such
indemnity may be sought (the "indemnifying party") in writing. No
indemnification provided for in Section 8(a) or (b) shall be available to any
party who shall fail to give notice as provided in this Section 8(c) if the
party to whom notice was not given was unaware of the proceeding to which such
notice would have related and was materially prejudiced by the failure to give
such notice, but the failure to give such notice shall not relieve the
indemnifying party or parties from any liability which it or they may have to
the indemnified party for contribution or otherwise than on account of the
provisions of Section 8(a) or (b). In case any such proceeding shall be brought
against any indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate
therein and, to the extent that it shall wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party and shall pay as incurred the
fees and disbursements of such counsel related to such proceeding. In any such
proceeding, any indemnified party shall have the right to retain its own counsel
at its own expense. Notwithstanding the foregoing, the indemnifying party shall
pay as incurred (or within 30 days of presentation) the fees and expenses of the
counsel retained by the indemnified party in the event (i) the indemnifying
party and the indemnified party shall have mutually agreed to the retention of
such counsel, (ii) the named parties to any such proceeding (including any
impleaded parties) include both the indemnifying party and the indemnified party
and representation of both parties by the same counsel would be inappropriate
due to actual or potential differing interests between them or (iii) the
indemnifying party shall have failed to assume the defense and employ counsel
acceptable to the indemnified party within a reasonable period of time after
notice of commencement of the action. It is understood that the indemnifying
party shall not, in connection with any proceeding or related proceedings in the
same jurisdiction, be liable for the reasonable fees and expenses of more than
one separate firm for all such indemnified parties. Such firm shall be
designated in writing by you in the case of parties indemnified pursuant to
Section 8(a) and by the Company in the case of parties indemnified pursuant to
Section 8(b). The indemnifying party shall not be liable for any settlement of
any proceeding effected without its written consent but if settled with such
consent or if there be a final judgment for the plaintiff, the indemnifying
party agrees to indemnify the indemnified party from and against any loss or
liability by reason of such settlement or judgment. In addition, the
indemnifying party will not, without the prior written consent of the
indemnified party, settle or compromise or consent to the entry of any judgment
in any pending or threatened claim, action or proceeding of which
indemnification may be sought hereunder (whether or not any indemnified party is
an actual or potential party to such claim action or proceeding) unless such
settlement, compromise or consent includes an unconditional release of each
indemnified party from all liability arising out of such claim, action or
proceeding.
(d) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
Section 8(a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) referred to therein,
then each indemnifying party shall contribute to the amount paid or payable by
such indemnified party as a result of such losses, claims, damages or
liabilities (or actions or
19
<PAGE>
proceedings in respect thereof) in such proportion as is appropriate to reflect
the relative benefits received by the Company on the one hand and the
Underwriters on the other from the offering of the Shares. If, however, the
allocation provided by the immediately preceding sentence is not permitted by
applicable law then each indemnifying party shall contribute to such amount paid
or payable by such indemnified party in such proportion as is appropriate to
reflect not only such relative benefits but also the relative fault of the
Company on the one hand and the Underwriters on the other in connection with the
statements or omissions which resulted in such losses, claims, damages or
liabilities, (or actions or proceedings in respect thereof), as well as any
other relevant equitable considerations. The relative benefits received by the
Company on the one hand and the Underwriters on the other shall be deemed to be
in the same proportion as the total net proceeds from the offering (before
deducting expenses) received by the Company bear to the total underwriting
discounts and commissions received by the Underwriters, in each case as set
forth in the table on the cover page of the Prospectus. The relative fault
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the Company on the
one hand or the Underwriters on the other and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission.
The Company and the Underwriters agree that it would not be just and
equitable if contributions pursuant to this Section 8(d) were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above in this Section 8(d). The amount
paid or payable by an indemnified party as a result of the losses, claims,
damages or liabilities (or actions or proceedings in respect thereof) referred
to above in this Section 8(d) shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this subsection (d), (i) no Underwriter shall be required to
contribute any amount in excess of the underwriting discounts and commissions
applicable to the Shares purchased by such Underwriter, and (ii) no person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Act) shall be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation. The Underwriters' obligations in this
Section 8(d) to contribute are several in proportion to their respective
underwriting obligations and not joint.
(e) In any proceeding relating to the Registration Statement, any
Preliminary Prospectus, the Prospectus or any supplement or amendment thereto,
each party against whom contribution may be sought under this Section 8 hereby
consents to the jurisdiction of any court having jurisdiction over any other
contributing party, agrees that process issuing from such court may be served
upon him or it by any other contributing party and consents to the service of
such process and agrees that any other contributing party may join him or it as
an additional defendant in any such proceeding in which such other contributing
party is a party.
(f) Any losses, claims, damages, liabilities or expenses for which
an indemnified party is entitled to indemnification or contribution under this
Section 8 shall be paid by the indemnifying party to the indemnified party as
such losses, claims, damages, liabilities or
20
<PAGE>
expenses are incurred. The indemnity and contribution agreements contained in
this Section 8 and the representations and warranties of the Company set forth
in this Agreement shall remain operative and in full force and effect,
regardless of (i) any investigation made by or on behalf of any Underwriter or
any person controlling any Underwriter, the Company, its directors or officers
or any persons controlling the Company, (ii) acceptance of any Shares and
payment therefor hereunder, and (iii) any termination of this Agreement. A
successor to any Underwriter, or to the Company, its directors or officers, or
any person controlling the Company, shall be entitled to the benefits of the
indemnity, contribution and reimbursement agreements contained in this
Section 8.
9. Default By Underwriters.
-----------------------
If on the Closing Date or the Option Closing Date, as the case may
be, any Underwriter shall fail to purchase and pay for the portion of the Shares
which such Underwriter has agreed to purchase and pay for on such date
(otherwise than by reason of any default on the part of the Company), you, as
Representatives of the Underwriters, shall use your reasonable efforts to
procure within 36 hours thereafter one or more of the other Underwriters, or any
others, to purchase from the Company such amounts as may be agreed upon and upon
the terms set forth herein, the Firm Shares or Option Shares, as the case may
be, which the defaulting Underwriter or Underwriters failed to purchase. If
during such 36 hours you, as such Representatives, shall not have procured such
other Underwriters, or any others, to purchase the Firm Shares or Option Shares,
as the case may be, agreed to be purchased by the defaulting Underwriter or
Underwriters, then (a) if the aggregate number of shares with respect to which
such default shall occur does not exceed 10% of the Firm Shares or Option
Shares, as the case may be, covered hereby, the other Underwriters shall be
obligated, severally, in proportion to the respective numbers of Firm Shares or
Option Shares, as the case may be, which they are obligated to purchase
hereunder, to purchase the Firm Shares or Option Shares, as the case may be,
which such defaulting Underwriter or Underwriters failed to purchase, or (b) if
the aggregate number of shares of Firm Shares or Option Shares, as the case may
be, with respect to which such default shall occur exceeds 10% of the Firm
Shares or Option Shares, as the case may be, covered hereby, the Company or you
as the Representatives of the Underwriters will have the right, by written
notice given within the next 36-hour period to the parties to this Agreement, to
terminate this Agreement without liability on the part of the non-defaulting
Underwriters or of the Company except to the extent provided in Section 8
hereof. In the event of a default by any Underwriter or Underwriters, as set
forth in this Section 9, the Closing Date or Option Closing date, as the case
may be, may be postponed for such period, not exceeding seven days, as you, as
Representatives, may determine in order that the required changes in the
Registration Statement or in the Prospectus or in any other documents or
arrangements may be effected. The term "Underwriter" includes any person
substituted for a defaulting Underwriter. Any action taken under this Section 9
shall not relieve any defaulting Underwriter from liability in respect of any
default of such Underwriter under this Agreement.
21
<PAGE>
10. Notices.
-------
All communications hereunder shall be in writing and, except as
otherwise provided herein, will be mailed, delivered, telecopied or telegraphed
and confirmed as follows: if to the Underwriters, to Alex. Brown & Sons
Incorporated, 135 East Baltimore Street, Baltimore, Maryland 21202, Attention:
________________, with a copy to Alex. Brown & Sons Incorporated, 135 East
Baltimore Street, Baltimore, Maryland 21202, Attention: General Counsel; if to
the Company to:
Splash Technology Holdings, Inc.
555 Del Rey Avenue
Sunnyvale, California 94086
Attention: __________________
11. Termination.
-----------
This Agreement may be terminated by you by notice to the Company as
follows:
(a) at any time prior to the earlier of (i) the time the Shares are
released by you for sale by notice to the Underwriters, or (ii) 11:30 a.m. on
the first business day following the date of this Agreement;
(b) at any time prior to the Closing Date if any of the following
has occurred: (i) since the respective dates as of which information is given in
the Registration Statement and the Prospectus, any material adverse change or
any development involving a prospective material adverse change in or affecting
the condition, financial or otherwise, of the Company and its Subsidiaries taken
as a whole or the earnings, business, management, properties, assets, rights,
operations, condition (financial or otherwise) or prospects of the Company and
its Subsidiaries taken as a whole, whether or not arising in the ordinary course
of business, (ii) any outbreak or escalation of hostilities or declaration of
war or national emergency or other national or international calamity or crisis
or change in economic or political conditions if the effect of such outbreak,
escalation, declaration, emergency, calamity, crisis or change on the financial
markets of the United States would, in your reasonable judgment, make it
impracticable to market the Shares or to enforce contracts for the sale of the
Shares, or (iii) suspension of trading in securities generally on the New York
Stock Exchange or the American Stock Exchange or limitation on prices (other
than limitations on hours or numbers of days of trading) for securities on
either such Exchange, (iv) the enactment, publication, decree or other
promulgation of any statute, regulation, rule or order of any court or other
governmental authority which in your opinion materially and adversely affects or
may materially and adversely affect the business or operations of the Company,
(v) declaration of a banking moratorium by United States or New York State
authorities, (vi) any downgrading in the rating of the Company's debt securities
by any "nationally recognized statistical rating organization" (as defined for
purposes of Rule 436(g) under the Exchange Act); (vii) the suspension of trading
of the Company's common stock by the Commission on the Nasdaq National Market or
(viii) the taking of any action by any governmental body or agency in respect of
its monetary or fiscal affairs which in your reasonable opinion has a material
adverse effect on the securities markets in the United States; or
22
<PAGE>
(c) as provided in Sections 6 and 9 of this Agreement.
12. Successors.
----------
This Agreement has been and is made solely for the benefit of the
Underwriters and the Company and their respective successors, executors,
administrators, heirs and assigns, and the officers, directors and controlling
persons referred to herein, and no other person will have any right or
obligation hereunder. No purchaser of any of the Shares from any Underwriter
shall be deemed a successor or assign merely because of such purchase.
13. Information Provided By Underwriters.
------------------------------------
The Company and the Underwriters acknowledge and agree that the only
information furnished or to be furnished by any Underwriter to the Company for
inclusion in any Prospectus or the Registration Statement consists of the
information set forth in the last paragraph on the front cover page (insofar as
such information relates to the Underwriters), legends required by Item 502(d)
of Regulation S-K under the Act and the information under the caption
"Underwriting" in the Prospectus.
14. Miscellaneous
-------------
The reimbursement, indemnification and contribution agreements
contained in this Agreement and the representations, warranties and covenants in
this Agreement shall remain in full force and effect regardless of (a) any
termination of this Agreement, (b) any investigation made by or on behalf of any
Underwriter or controlling person thereof, or by or on behalf of the Company or
its directors or officers and (c) delivery of and payment for the Shares under
this Agreement.
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
This Agreement shall be governed by, and construed in accordance
with, the laws of the State of Maryland.
If the foregoing letter is in accordance with your understanding of
our agreement, please sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement among the Company and the several
Underwriters in accordance with its terms.
23
<PAGE>
Very truly yours,
SPLASH TECHNOLOGY HOLDINGS, INC.
By
-------------------------------------
Kevin Macgillivray,
President and Chief Executive Officer
The foregoing Underwriting Agreement is hereby
confirmed and accepted as of the date first above written.
ALEX. BROWN & SONS INCORPORATED
MONTGOMERY SECURITIES
As Representatives of the several
Underwriters listed on Schedule I
By: Alex. Brown & Sons Incorporated
By:
-------------------------------
, Authorized Officer
24
<PAGE>
SCHEDULE I
SCHEDULE OF UNDERWRITERS
<TABLE>
<CAPTION>
Underwriter Number of Firm Shares to be Purchased
- ----------- --------------------------------------
<S> <C>
Alex. Brown & Sons Incorporated
Montgomery Securities
-------------
Total -------------
</TABLE>
<PAGE>
[WSGR LETTERHEAD]
EXHIBIT 5.1
Splash Technology Holdings, Inc.
555 Del Rey Avenue
Sunnyvale, CA 94086
Re: REGISTRATION STATEMENT ON FORM S-1
----------------------------------
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1 filed by you with
the Securities and Exchange Commission on August 5, 1996 (Registration No.
333-09591), as amended (the "Registration Statement"), in connection with the
registration under the Securities Act of 1933, as amended, of up to 2,600,000
shares of your Common Stock, no par value per share (the "Shares"). The Shares
include an over-allotment option granted to the underwriters of the offering to
purchase 390,000 shares. We understand that the Shares are to be sold to the
underwriters of the offering for resale to the public as described in the
Registration Statement. As your legal counsel, we have examined the proceedings
taken, and are familiar with the proceedings proposed to be taken, by you in
connection with the sale and issuance of the Shares.
It is our opinion that, upon completion of the proceedings being taken or
contemplated by us, as your counsel, to be taken prior to the issuance of the
Shares, including the proceedings being taken in order to permit such
transaction to be carried out in accordance with applicable state securities
laws, the Shares, when issued and sold in the manner described in the
Registration Statement and in accordance with the resolutions adopted by the
Board of Directors of the Company, will be legally and validly issued, fully
paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to the use of our name wherever appearing in the
Registration Statement, including the Prospectus constituting a part thereof,
and any amendments thereto.
Very truly yours,
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
/s/ Wilson Sonsini Goodrich & Rosati
<PAGE>
EXHIBIT 10.5a
AMENDMENT NO. 2
TO
CONFIGURABLE POSTSCRIPT INTERPRETER OEM LICENSE AGREEMENT
BETWEEN
SUPERMAC TECHNOLOGY, INC.
AND ADOBE SYSTEMS INCORPORATED
Effective Date: February 28, 1994
This Amendment No. 2 to the Configurable PostScript Interpreter OEM License
Agreement, effective September 18,1992 (the "Agreement") is by and between Adobe
Systems Incorporated, having its place of business at 1585 Charleston Road, P.O.
Box 7900, Mountain View, California, 94039-7900 ("Adobe") and SuperMac
Technology, Inc. having its place of business at 215 Moffett Park Drive,
Sunnyvale, CA 94089. ("OEM").
WHEREAS, it is the mutual goal of OEM and Adobe to work together in
promoting the PostScript language as an industry standard and in defining and
offering services and products to the market which promote and facilitate the
use of Adobe's CPSI Software; and
WHEREAS, Adobe and OEM agree to undertake certain activities in a
cooperative manner, as specified in this Amendment, with the intended purpose of
achieving the above stated mutual goal of the parties; and
WHEREAS, in furtherance of such agreed upon goal, Adobe has offered
specified volume discounts which may be applied to mutually agreed upon products
and types of distribution, as described in this Amendment; and
WHEREAS, OEM agrees to make certain commitments and to assume additional
responsibilities described in this Amendment as a condition to OEM being
entitled to receive such specified volume discounts.
A. Adobe and OEM hereby agree to modify the Agreement as follows:
1. Paragraph 2 ("License Grants"). Paragraph 2.1.12 [*]
----------- ----------------
[*] CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
[*]
2. Paragraph 2 ("License Grant"). The term [*] is hereby deleted from
-----------
Paragraph 2.2 ("No Right to Source Software"), as amended.
- -------------
3. Paragraph 2 ("License Grant"). The first sentence of Paragraph 2.5
----------- -------------
("Reverse Engineering"), as amended, is hereby deleted in its entirety and
replaced by the following:
"2.5 Reverse Engineering. OEM agrees that it will not reverse
-------------------
engineer, reverse compile, disassemble or otherwise attempt to create source
code which is derived from the Adobe Software, Other Adobe-Supplied Software,
Coded Font Programs or Demonstration Program(s) provided in object code form."
4. Paragraph 10.5 ("OEM's Use of Trademarks") of the Agreement is amended
--------------
in its entirety to read as follows:
"10.5 OEM's Use of Trademarks. OEM agrees that it will include the
-----------------------
Adobe Trademarks on all copies of the CPSI Application and in any advertising
concerning the CPSI Application and that it will use the applicable Trademarks
and Adobe Trademarks on all copies, advertisements, brochures, manuals and other
appropriate uses made in the promotion, distribution or use of the CPSI
Application, Bitmap Fonts and Coded Font Programs. Any use by OEM of the Adobe
Trademarks shall conform to the standards set forth by Adobe in its then
available Trademark Reference Manual. OEM shall make specific reference to
PostScript software from Adobe in any advertisement which refers to the CPSI
Application. In addition, OEM agrees to include (i) in the system software
visible to the End User and on any Designated Output Devices distributed by OEM
part of the Licensed System, and (ii) a copy of the brochure entitled
"PostScript is...", if provided free of charge by Adobe, with each Licensed
System distributed in the U.S. Further, OEM agrees to promote the Licensed
System at trade shows at which other OEM products are displayed and to allow
Adobe to review all announcements and press releases pertaining to Licensed
Systems prior to their release to the public or the press. Further, with
respect to such announcements and press releases, OEM agrees to incorporate all
changes that Adobe may reasonably request to ensure correct Adobe Trademark
usage and accuracy of content related to the Adobe Software."
[*] CONFIDENTIAL TREATMENT REQUESTED
-2-
<PAGE>
5. A new Paragraph 16 ("Clone Product Development") is added to the
------------
Agreement to read as follows:
"16. Clone Product Development.
-------------------------
If at any time during the term of the Agreement OEM commits resources to
development of or acquires rights to a product or software having page
description capabilities that are substantially compatible with the PostScript
language (hereinafter "Clone Product"), it may do so; provided however, that OEM
is obligated to inform Adobe of such decision immediately thereafter, and upon
such event, the discounts, if any, which OEM may be receiving under the
provisions in Paragraph 17 ("Qualifying for Royalty Discounts") below shall
continue, but only on a conditional basis, until such time as OEM begins
marketing a Clone Product or abandons its effort to market a Clone Product. In
the event that OEM begins marketing a Clone Product, OEM shall resume paying the
full Licensed System and Coded Font Program royalties and, further, shall
reimburse Adobe the full amount of the discounts on Licensed Systems shipped
after OEM has committed resources to such development of, or after having
acquired rights to, a Clone Product, whether or not OEM complies with its
obligations to inform Adobe as required in this Paragraph."
6. A new Paragraph 17 ("Qualifying for Royalty Discounts") is added to
------------
this Agreement to read as follows:
"17. Qualifying for Royalty Discounts.
--------------------------------
17.1 Royalty Discounts. [*]
-----------------
[*] CONFIDENTIAL TREATMENT REQUESTED
-3-
<PAGE>
17.2 General Discount Terms. [*]
----------------------
17.3 Qualifying for Royalty Discounts. [*]
--------------------------------
[*] CONFIDENTIAL TREATMENT REQUESTED
-4-
<PAGE>
[*]
7. Paragraph 16 ("General") and all subparagraphs thereto are renumbered
------------
as Paragraph 18 ("General") and all subparagraphs thereto are renumbered
------------
appropriately.
8. Exhibit I ("Authorized Printer Engine Manufacturer Distributor") has
---------
been deleted in its entirety and replaced with the updated and amended Exhibit I
---------
attached hereto.
9. A new Exhibit J ("Volume Discount Schedule") is hereby added to the
---------
Agreement and is attached hereto.
[*] CONFIDENTIAL TREATMENT REQUESTED
-5-
<PAGE>
B. All other terms and conditions of the Agreement shall remain in full force
and effect.
IN WITNESS WHEREOF, the parties have caused this Amendment No. 2 to the
Agreement to be signed by their duly authorized representatives.
Adobe: OEM:
ADOBE SYSTEMS INCORPORATED SUPERMAC TECHNOLOGY, INC.
By: /s/ S.A. MacDonald By: [illegible]
-------------------------------- --------------------------------
Name: S.A. MacDonald Name:
------------------------------- ------------------------------
Title: Sr. V.P., General Manager, SPD Title:
------------------------------ -----------------------------
Date: 2-28-94 Date:
------------------------------- ------------------------------
-6-
<PAGE>
EXHIBIT I
---------
Authorized Printer Engine Manufacturer Distributors
Authorized Printer Engine Manufacturer Distributors must be specified in
this Exhibit L Licensed Systems must be specified in this Exhibit I. AU request
for changes to this Exhibit must be submitted to Adobe in writing and such
changes shall apply only ff subsequently approved by Adobe by the issuance of an
updated Exhibit I.
Licensed Systems
Third Party CPSI Platform Designated Output Device/Model
- ----------- ------------- ------------------------------
Fuji Xerox Base SM-ICS A Color
Splash.MX Majestik
Splash.MX A Color
Fuji Xerox High-end SM-ICS A Color
Splash.MX Majestik
Splash.TX A Color
Xerox Splash.MX Majestik
Xerox Splash.TX Majestik
Rank Xerox Splash.MX Majestik
Rank Xerox Splash.TX Majestik
Hoechst-Celanese Corp. Macintosh CPSI ProofPositive
Shinko Electric Corp. Macintosh CPSI ProofPositive
<PAGE>
EXHIBIT I
---------
Volume Discount Schedule
[*]
[*] CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
APPENDIX NO. 2
EFFECTIVE AS OF JULY 28, 1993
TO THE
CONFIGURABLE POSTSCRIPT/TM/ INTERPRETER
OEM LICENSE AGREEMENT
BETWEEN
ADOBE SYSTEMS INCORPORATED
AND
SUPERMAC TECHNOLOGY INCORPORATED
Name of CPSI Application: SuperMaster Image Creation System (SM-ICS) Server
This Appendix sets forth additional and different terms and conditions
particular to the Licensed System described below and shall be incorporated by
reference into the Configurable PostScript Interpreter OEM License Agreement
("Agreement") between SuperMac Technology Incorporated ("OEM") and Adobe Systems
Incorporated ("Adobe") effective as of September 18, 1992. Such different or
additional terms are applicable only to the Licensed System described below and
in no way alter the terms and conditions applicable to other Licensed Systems
incorporated into the Agreement by addition of an appendix.
All the terms used in this Appendix shall retain the same meaning as
defined in the Agreement and such definitions are incorporated herein by
reference.
A. Description of CPSI Application:
Adobe Software integrated with the SuperMaster Image Creation System (SM-ICS)
software running on a MIPS-based accelerator card to create a PostScript Level 2
rasterization server.
B. Description of Computer System:
[*]
[*] CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
[*]
OEM may upgrade the Computer System to the latest version of both the hardware
platform and the software platform supplied by a manufacturer or a supplier that
provides a compatible computer system after completion of Milestone #(11) in
Paragraph F of this Appendix, provided that the upgraded Computer System is
- -----------
object-code compatible with the original Computer System described in this
Paragraph B. In the event that incompatibilities are introduced by hardware or
- -----------
software vendor(s), OEM may notify Adobe of such incompatibilities. Adobe will
assess these incompatibilities and, if necessary, OEM will upgrade the OEM-
Loaned Equipment to the upgraded Computer System. Adobe will communicate the
results of this assessment to the OEM. If agreed to by Adobe, upgrades to the
Adobe Software made by Adobe at OEM's request, for incompatibilities introduced
outside of the Computer System described in Paragraph B will be provided under
-----------
the terms of a Continuing Support Agreement or at Adobe's current consulting
rates and under applicable terms. [*]
C. Licensed System:
[*]
[*] CONFIDENTIAL TREATMENT REQUESTED
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<PAGE>
[*]
D. Adobe Development Environment:
The Adobe Development Environment is the specific computer environment in
which Adobe has developed and tested the Adobe Software and which is
defined below:
(1) Hardware platform: Silicon Graphics, Inc. Indigo workstation with 16
-----------------
megabytes of memory and 200 megabytes of disk;
(2) Software platform: Silicon Graphics, Inc. IRIX 4.0.5 operating system.
-----------------
E. Adobe Deliverables:
(1) Adobe Software: As described in Exhibit A ("Description of Adobe
-------------- ---------
Software") to the Agreement and in the PostScript Language Reference
Manual, Second Edition. See also Exhibit G ("Configurable PostScript
---------
Interpreter Functional Specification") of the Agreement. Adobe Software
will be delivered on 1/4 inch tape media.
(2) Demonstration Program(s): The Demonstration Program(s) will be in "C"
------------------------
language source form and will provide OEM with an example of how to use the
Adobe Software described in Exhibit A ("Description of Adobe Software") of
---------
the Agreement to interpret PostScript language programs and produce raster
output See also Exhibit G ("Configurable PostScript Interpreter Functional
---------
Specification") of the Agreement. The Demonstration Program(s) will be
delivered with the Adobe Software.
[*] CONFIDENTIAL TREATMENT REQUESTED
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<PAGE>
(3) Other Adobe-Supplied Software: The following Other Adobe-Supplied
-----------------------------
Software will be provided:
Macintosh-based Japanese font installer to be bundled with and solely for
use with a Licensed System. This Japanese font installer is licensed for
use to install aftermarket Japanese fonts that are supplied and
manufactured by Adobe or Morisawa & Co., Ltd., on the Licensed System. The
Japanese font installer shall be compatible with Apple's Mac OS 6.0.7J and
Apple's KanjiTalk/TM/7.
(4) Documentation: The Documentation as described below will be delivered
-------------
in hard copy (1 copy).
a. CPSI Read Me First!
b. Configurable PostScript Interpreter Functional Specification
c. CPSI Demonstration Software Guide
d. CPSI Product Developer's Guide
e. Supplement to the PostScript Language Reference Manual
f. PostScript Language Addendum Template
All of the above specified Documentation is to be used internally solely
for the purposes of developing a Licensed System and is to be treated as
confidential information of Adobe and subject to Paragraph 2.1.6
---------------
("Nondisclosure") of the Agreement. The PostScript Language Addendum
Template supplied by Adobe hereunder is to be used by OEM solely as a guide
for customizing and creating the PostScript Language Addendum for this
Licensed System. The only Documentation which OEM is permitted to
distribute to its End User customers is the PostScript Language Addendum
with the content written by OEM and approved by Adobe.
(5) Coded Font Programs: The Coded Font Programs described in Paragraphs J
------------------- ------------
and K below.
-
(6) [*]
F. Development Schedule and Testing Expectations:
Milestone Description Schedule*
- ---------------------- ---------
[*]
[*] CONFIDENTIAL TREATMENT REQUESTED
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Milestone Description Schedule*
- ---------------------- ---------
[*]
[*] CONFIDENTIAL TREATMENT REQUESTED
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<PAGE>
Milestone Description Schedule*
- ---------------------- ---------
[*]
G. OEM-Loaned Equipment:
[*]
[*] CONFIDENTIAL TREATMENT REQUESTED
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<PAGE>
[*]
H. Software License Fee:
[*]
I. Applicable Royalties:
(1) Royalties for Worldwide Distribution of Licensed Systems:
--------------------------------------------------------
a. Basis for Payments Hereunder. All royalties due to Adobe by OEM
----------------------------
shall be paid in U.S. Dollars regardless of the location of the transaction
or the type of currency used to consummate the transaction.
b. When Royalties Are Earned. All royalties due hereunder shall be
-------------------------
earned on the date OEM ships a complete Licensed System, or the components
listed in Paragraphs C(2) through (5) to make a complete Licensed System,
-------------- ---
to its customers.
c. Licensed Use Royalty. The Licensed Use royalty for CPSI
--------------------
Application and for the Coded Font Programs described herein shall apply to
all Licensed Systems and Coded Font Programs used internally by OEM or its
Subsidiaries and to all Licensed Systems and Coded Font Programs sold,
leased or otherwise disposed of by OEM or its Subsidiaries directly or
indirectly to End Users. Royalties are calculated on a per Licensed Use
basis and OEM shall ensure that it accounts for and pays royalties for each
Licensed Use of the CPSI Application Object and Coded Font Programs.
d. List Prices. All List Prices, as described below, shall mean OEM's
-----------
published List Price, established in good faith, for quantity one (1) of
the fully functioning Licensed System described hereunder as distributed to
End Users in both Roman and Japanese Versions. Such calculations shall be
exclusive of amounts received for taxes, interest, non-warranty maintenance
and installation charges, insurance, shipping and handling costs. OEM shall
[*] CONFIDENTIAL TREATMENT REQUESTED
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<PAGE>
distribute the components listed in Paragraphs C(2) through (5) herein
--------------- ---
solely for use with a computer supporting platform described in Paragraph
---------
C (1). Where OEM is not able to identify which specific model of computer
supporting platform, as specified in Paragraph C(1) above, is to be
--------------
included as part of the Licensed System, OEM shall determine the List Price
of the Licensed System using the List Price of any computer supporting
platform which has a Minimum Configuration equal to that specified in
Paragraph C(1).
--------------
(i) U.S. List Price. The U.S. List Price shall mean OEM's
---------------
published List Price in U.S. Dollars to End Users for quantity one (1) of a
fully functioning Licensed System as described in Paragraph C above, for
-----------
distribution in the United States. Should the U.S. List Price as described
above not be available because OEM is not shipping Licensed Systems in the
United States, the US. List Price shall mean OEM's published List Price in
Australian Dollars to End Users for quantity one (1) of a fully functioning
Licensed System as described in Paragraph C above, for distribution in
-----------
Australia. Australian Dollars shall be converted into U.S. Dollars at a
rate equal to the average of the exchange rates quoted in the Wall Street
Journal at the end of the first and last days of the relevant quarterly
accounting period defined in Paragraph 7.5 ("Payment of Royalties") of the
-------------
Agreement. The U.S. List Price of the Licensed System shall apply for the
purpose of royalty calculations hereunder for each Licensed Use of a Roman
Version (as described in Paragraph I(2)a below) of the Licensed System
---------------
distributed for use throughout the world excluding Japan where the
distribution of Licensed Systems is limited to Japanese Versions.
(ii) Japanese List Price. The Japanese List Price shall mean
-------------------
OEM's published List Price in Japanese yen to End Users for quantity one
(1) of a fully functioning Japanese Version (with five (5) or seven (7)
Japanese Typefaces as described in Paragraph I(2)b below) of a Licensed
---------------
System as described in Paragraph C above, for distribution in Japan. The
-----------
Japanese List Price shall apply for the purpose of royalty calculations
hereunder for each Licensed Use of a Japanese Version of the Licensed
System distributed for use throughout the world. The Japanese List Price
shall be converted into U.S. Dollars at a rate equal to the average of the
exchange rates quoted in the Wall Street journal at the end of the first
and last days of the relevant quarterly accounting period defined in
Paragraph 7.5 ("Payment of Royalties") of the Agreement. OEM shall use the
-------------
converted Japanese List Price to calculate the royalty for CPSI Application
hereunder.
(2) Licensed Use Royalty for CPSI Application:
-----------------------------------------
a. Roman Versions. OEM shall bundle the Roman Initial Installation
--------------
Coded Font Programs identified in Paragraph J and the Roman Additional
-----------
Coded Font Programs identified in Group I of Paragraph K(l) below with each
--------------
Licensed System distributed hereunder (a "Roman Version"). OEM may also
distribute a Roman Version bundled with an additional thirty (30) Roman
Additional Coded Font Programs, as identified in Group 2 of Paragraph K(l)
--------------
below.
-8-
<PAGE>
For each Roman Version of the Licensed System which is distributed or used
internally (beyond the number of licensed Uses provided royalty-free for
Internal Use under Paragraph I(6) below) by OEM or its Subsidiaries
--------------
hereunder, OEM shall pay Adobe a per Licensed Use royalty based on the U.S.
List Price of a Licensed System using the following method of royalty
calculation:
[*]
The same per Licensed Use royalty shall apply for each Roman Version of the
Licensed System distributed unbundled from a computer system platform in
accordance with Paragraph C above.
-----------
b. Japanese Versions. OEM agrees that with each Licensed System
-----------------
distributed for use in Japan (a "Japanese Version"), it shall bundle the
same Roman Coded Font Programs as specified in Paragraph I(2)a above for
---------------
Roman Versions. Additionally, OEM shall bundle the first five (5) Coded
Font Programs for Japanese Typefaces identified in Paragraph K(2)a. or an
---------------
seven (7) Coded Font Programs for Japanese Typefaces identified in
Paragraph K(2)(ii) with every Licensed System distributed for use in Japan.
------------------
OEM is not required to bundle the Coded Font Programs for Japanese
Typefaces with Licensed System's distributed for use outside of Japan.
However, if OEM decides to distribute Licensed Systems with Coded Font
Programs for Japanese Typefaces for use outside of Japan, it shall bundle
the Coded Font Programs for Japanese Typefaces in accordance with the above
Paragraph.
For each Japanese Version of the Licensed System which is distributed or
used internally (beyond the number of licensed Uses provided royalty-free
for Internal Use under Paragraph im below) by OEM or its Subsidiaries
hereunder, OEM shall pay Adobe a per licensed Use royalty based on the
Japanese List Price of the applicable Licensed System (Japanese Version
with five (5) or with seven (7) Japanese Typefaces) converted to U.S.
Dollars using the table in Paragraph I(2)a above.
---------------
The same per Licensed Use royalty shall apply for each Japanese Version of
the Licensed System distributed unbundled from a computer system platform
in accordance with Paragraph c above.
-----------
(3) Software Upgrade Royalties:
--------------------------
"Software Upgrades" means the installation of both the CPSI
Application Object and Coded Font Programs in a Licensed System already
distributed under license in place of CPSI Application Object and Coded
Font Programs previously installed in such Licensed System for the purpose
of updating, enhancing or extending a Licensed System. To qualify for
Software Upgrade pricing, OEM must either (i) promptly destroy the media
containing
[*] CONFIDENTIAL TREATMENT REQUESTED
-9-
<PAGE>
the prior version of the CPSI Application Object and Coded Font Programs,
or (ii) return the media containing the CPSI Application Object and Coded
Font Programs to the factory where they were manufactured, and immediately
accrue a new royalty when such CPSI Application Object and Coded Font
Programs are shipped as part of a new Licensed System. OEM is obligated to
account for any of the replaced CPSI Application Object and Coded Font
Programs which are not destroyed.
OEM shall keep accurate records of the number of Software Upgrades which it
distributes to its customers and the disposition of the corresponding CPSI
Application Object and Coded Font Programs replaced by the Software
Upgrades. OEM shall submit reports containing such Software Upgrade
information in accordance with its reporting requirements pursuant to
Paragraph 7.5 ("Payment of Royalties") of the Agreement. In addition, upon
-------------
request from Adobe, OEM shall certify to Adobe in writing, signed by its
authorized representative, that it has fully complied with the requirement
contained in this Paragraph I(3).
--------------
Following joint execution of a PostScript Software Continuing Support
Agreement, OEM shall pay Adobe a royalty on its Net Receipts from each
Software Upgrade, if any, equal to [*] of OEMs net receipts, from such
Software Upgrade, but in no event less than U.S. [*] plus the amounts due
for any Coded Font Programs not already included in the unit being
upgraded. Prior to the execution of a PostScript Software Continuing
Support Agreement, OEM shall pay Adobe a royalty on its Net Receipts from
each Software Upgrade, if any, equal to [*] of OEMs net receipts, from such
Software Upgrade, but in no event less than U.S. [*] plus the amounts due
for any Coded Font Programs not already included in the unit being
upgraded. Net Receipts means OEM's gross receipts (exclusive of amounts
received for taxes, interest, finance charges, insurance, shipping and
handling costs) from all distributions of Software Upgrades.
The per copy royalty for each Coded Font Program not previously included in
the unit being upgraded shall be determined in accordance with Paragraph
---------
I(5) below for each Roman and Japanese Typeface which is part of the
----
Software Upgrade.
(4) Hardware Upgrades for Distribution Worldwide:
--------------------------------------------
Unless agreed to in writing by Adobe and designated as a non-royalty
bearing feature, all Hardware Upgrades installed as part of the Licensed
System, which OEM may choose to offer and distribute to End Users of
Licensed Systems, shall be royalty bearing. The parties will determine
whether an optional feature improves the functional performance or improves
the throughput performance of the CPSI Application Object and/or Coded Font
Programs and thus is royalty bearing or is unrelated to the functional
performance or throughput performance in which case the feature is non-
royalty bearing.
[*] CONFIDENTIAL TREATMENT REQUESTED
-10-
<PAGE>
OEM shall pay a Hardware Upgrade royalty based on the applicable U.S. or
Japanese List Price to End Users for the Hardware Upgrade equal to [*]
of the applicable End User List Price.
(5) Licensed Use Royalty for Coded Font Programs:
--------------------------------------------
a. Licensed Use Parties for Roman Initial Installation Coded Font
--------------------------------------------------------------
Programs. The seventeen (17) Roman Initial Installation Coded Font Programs
--------
specified in Paragraph J of this Appendix No. 2 and bundled
-----------
with a Licensed System shall be royalty-free.
b. Licensed Use Royalties for Roman Additional Coded Font Programs.
---------------------------------------------------------------
OEM shall pay a per Licensed Use Royalty of $[*] per Typeface for the Roman
Additional Coded Font Program specified in Group 1 of Paragraph K(1) of
--------------
this Appendix No. 2 which is distributed or used internally by OEM or its
Subsidiaries and bundled as part of a Licensed System.
OEM shall pay a per Licensed Use Royalty of [*] for the set of thirty (30)
Typefaces for the Roman Additional Coded Font Programs specified in Group 2
of Paragraph K(1) of this Appendix No. 2 which is distributed or used
-------------
internally by OEM or its Subsidiaries and bundled as part of a Licensed
System.
c. Licensed Use Royalties for Coded Font Programs for Japanese
-----------------------------------------------------------
Typefaces. For the Coded Font Programs for Japanese Typefaces described in
---------
Paragraph K(2) which are distributed or used internally by OEM or its
--------------
Subsidiaries and bundled as part of a Licensed System, OEM shall pay Adobe
a per Typeface royalty for each Licensed Use of the Coded Font Programs for
Japanese Typefaces as follows:
[*]
* Based on 8.5 inch by 11 inch color page size.
(6) Licensed Use Parties for Internal Use:
-------------------------------------
Except for Roman Additional Coded Font Programs and Coded Font Programs for
Japanese Typefaces, OEM shall have no obligation to pay royalties to Adobe
for Licensed Uses of up to a total (cumulating all uses) of [*]
Licensed Systems if dedicated solely to the following uses:
a. Internal use by OEM (or by OEM's independent contractors) for the
exclusive benefit of OEM) for the purpose of adding proposed new
Designated Output Devices or new features to existing Designated
[*] CONFIDENTIAL TREATMENT REQUESTED
-11-
<PAGE>
Output Devices, testing Licensed Systems or performing training
with respect to Licensed Systems; or
b. Internal use by OEM's Authorized Third Parties or Authorized
Printer Engine Manufacturer Distributors for the purpose of
testing Licensed Systems or performing training with respect to
Licensed Systems.
OEM shall pay Adobe the full Licensed Use royalties for the CPSI
Application, except for such thirty (30) Licensed Systems, used internally
by OEM (or OEM's Authorized Third Parties, Authorized Printer Engine
Manufacturer Distributors or independent contractors). OEM shall pay Adobe
the full Licensed Use royalties for Roman Additional Coded Font Programs
and Coded Font Programs for Japanese Typefaces, for each Licensed Use used
internally by OEM.
J. Roman Initial Installation Coded Font Programs:
Adobe will provide the graphic characters specified in ISO 8859-1: 1987,
Latin alphabet No. 1 and symbol characters as applicable, for the following
Roman Initial Installation Coded Font Programs:
<TABLE>
<CAPTION>
Identifying Trademark Typeface Trademark Owner
--------------------- -------- ---------------
<S> <C> <C>
Helvetica Linotype-Hell AG and/or its subsidiaries
Helvetica Bold Linotype-Hell AG and/or its subsidiaries
Helvetica Oblique Linotype-Hell AG and/or its subsidiaries
Helvetica Bold Oblique Linotype-Hell AG and/or its subsidiaries
Times Roman Linotype-Hell AG and/or its subsidiaries
Times Bold Linotype-Hell AG and/or its subsidiaries
Times Italic Linotype-Hell AG and/or its subsidiaries
Times Bold Italic Linotype-Hell AG and/or its subsidiaries
Symbol (Public Domain)
Courier (Public Domain)
Courier Bold (Public Domain)
Courier Oblique (Public Domain)
Courier Bold Oblique (Public Domain)
Helvetica Narrow Linotype-Hell AG and/or its subsidiaries
Helvetica Narrow Bold Linotype-Hell AG and/or its subsidiaries
Helvetica Narrow Oblique Linotype-Hell AG and/or its subsidiaries
Helvetica Narrow Bold Oblique Linotype-Hell AG and/or its subsidiaries
</TABLE>
K. Additional Coded Font Programs:
(1) Roman Additional Coded Font Programs:
Adobe will provide the graphic characters specified in ISO 8859-1: 1987,
Latin alphabet No. 1 and symbol characters as applicable, for the Roman
Additional Coded Font Programs listed in Group 1 below. Upon written
notification by OEM, Adobe will provide the graphic characters specified
in ISO 8859-1: 1987, Latin alphabet No. 1 and symbol characters, as
applicable, for the Roman Additional Coded Font Programs listed in Group 2
below. OEM shall distribute the Roman Additional Coded Font Programs
bundled with a Roman or
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<PAGE>
Japanese Version of the Licensed System, only in one of either of the
following two (2) configurations:
(i) Group 1, as listed below, or
(ii) Group 1 and Group 2, as listed below:
<TABLE>
<CAPTION>
Group 1:
-------
Identifying Trademark Typeface Trademark Owner
------------------------- --------------- ----------------------------------------
<S> <C> <C>
ITC Avant Garde Gothic Book International Typeface Corporation
ITC Avant Garde Gothic Book Oblique International Typeface Corporation
ITC Avant Garde Gothic Demi International Typeface Corporation
ITC Avant Garde Gothic Demi Oblique International Typeface Corporation
ITC Bookman Light International Typeface Corporation
ITC Bookman Light Italic International Typeface Corporation
ITC Bookman Demi International Typeface Corporation
ITC Bookman Demi Italic International Typeface Corporation
New Century Schoolbook Roman Public Domain
New Century Schoolbook Bold Public Domain
New Century Schoolbook Italic Public Domain
New Century Schoolbook Bold Italic Public Domain
ITC Zapf Chancery Medium Italic International Typeface Corporation
ITC Zapf Dingbats International Typeface Corporation
Palatino Roman Linotype-Hell AG and/or its subsidiaries
Palatino Bold Linotype-Hell AG and/or its subsidiaries
Palatino Italic Linotype-Hell AG and/or its subsidiaries
Palatino Bold Italic Linotype-Hell AG and/or its subsidiaries
<CAPTION>
Group 2:
-------
Identifying Trademark Typeface Trademark Owner
--------------------- --------- ---------------------------------
<S> <C> <C>
Adobe Calson/TM/ Regular Adobe Systems Incorporated
Adobe Caslon Italic Adobe Systems Incorporated
Adobe Caslon Semibold Adobe Systems Incorporated
Adobe Caslon Semibold Italic Adobe Systems Incorporated
Adobe Garamond/TM/ Regular Adobe Systems Incorporated
Adobe Garamond Italic Adobe Systems Incorporated
Adobe Garamond Bold Adobe Systems Incorporated
Adobe Garamond Bold Italic Adobe Systems Incorporated
Barmeno/TM/ Regular H. Berthold AG
Barmeno Medium H. Berthold AG
Barmeno Bold H. Berthold AG
Barmeno Extra Bold H. Berthold AG
Lithos/TM/ Regular Adobe Systems Incorporated
Lithos Black Adobe Systems Incorporated
Trajan/TM/ Bold Adobe Systems Incorporated
Adobe Wood Type/TM/2 Ornaments Adobe Systems Incorporated
Blackoak/TM/ Regular Adobe Systems Incorporated
Carta/TM/ Map Symbols Adobe Systems Incorporated
Tekton/TM/ Regular Adobe Systems Incorporated
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Identifying Trademark Typeface Trademark Owner
--------------------- --------- ---------------------------------
<S> <C> <C>
Tekton Bold Adobe Systems Incorporated
Park Avenue(R) Regular Kingsley/ATF Type Corporation
Poetica 2 Supplement Ornaments Adobe Systems Incorporated
Kaufmann(R) Regular Kingsley/ATF Type Corporation
Americana(R) Regular Kingsley/ATF Type Corporation
Americana Extra Bold Kingsley/ATF Type Corporation
Parisian Regular Kingsley/ATF Type Corporation
Formata(R) Regular H. Berthold AG
Formata Medium H. Berthold AG
Formata Italic H. Berthold AG
Formata Medium Italic H. Berthold AG
</TABLE>
After receipt of written request from OEM, Adobe will provide the
Macintosh compatible Bitmap Fonts for the Roman Additional Coded Font
Programs listed in Group I and in Group 2 without additional charge.
These Bitmap Fonts can only be used in conjunction with a Licensed
System.
(2) Coded Font Programs for Japanese Typefaces:
Adobe will provide the Adobe Standard Japanese Character Set, which
includes all of the characters in Adobe's Kanji Glyph Collection and
--------------------------
Glyph Sets Technical Note #5031, dated November 12, 1990, with the
-------------------------------
exception of generic characters listed therein, for the following
Coded Font Programs for Japanese Typefaces. OEM shall distribute the
Coded Font Programs for Japanese Typefaces bundled with a Japanese
Version of the Licensed System, only in one of either of the following
two (2) configurations:
(i) The first five (5), as listed below, or
(ii) all seven (7), as listed below:
<TABLE>
<CAPTION>
Identifying Trademark Trademark Owner
--------------------- ---------------
<S> <C>
Ryumin Light KL Morisawa & Co., Ltd.
Gothic Medium BBB Morisawa & Co., Ltd.
Futo Min A101 Morisawa & Co., Ltd.
Futo Go B101 Morisawa & Co., Ltd.
Jun 101 Morisawa & Co., Ltd.
Midashi Min MA31 Morisawa & Co., Ltd.
Midashi Go MB31 Morisawa & Co., Ltd.
</TABLE>
Such Coded Font Programs for Japanese Typefaces will be distributed on
mutually agreeable distribution media and will be encrypted and copy-
protected against unauthorized duplication in a manner to be specified
by Adobe. In particular, to prevent unauthorized use of the Coded Font
Programs for Japanese Typefaces licensed with a seven font
configuration by a five font configuration, OEM must employ a different
set of code ROMs (with a different identification code) to distinguish
the five font configuration from the seven font configuration. Special
character set encodings are not provided.
OEM may not distribute additional Coded Font Programs for Japanese2
Typefaces in an unbundled form for the purpose of upgrading an existing
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<PAGE>
Licensed System from five (5) to seven (7) Coded Font Programs for
Japanese Typefaces. If OEM desires to offer to customers additional
Coded Font Programs for Japanese Typefaces, it may license the
additional two (2) aftermarket fonts in retail product version directly
from Adobe or Morisawa to provide to OEM's End Users.
After receipt of written request from OEM, Adobe will provide the
Macintosh compatible Bitmap Fonts for Futo Min A101, Futo Go B101, Jun
101, Midashi Min MA31 and Midashi Go MB31 without additional charge.
These Bitmap Fonts can only be used in conjunction with a licensed
System. Bitmap Fonts for Ryumin Light KL and Gothic Medium BBB will not
be provided, since they are available to the End User bundled with
Apple's KanjiTalk/TM/ system software.
L. Protection Mechanisms:
(1) Adobe and OEM shall mutually agree on a License Management
Mechanism which OEM shall utilize as a copy protection device in each
Licensed System distributed under this Appendix and as a way of
ensuring that use of the CPSI Application Object and Coded Font
Programs is limited to Licensed Uses.
(2) OEM shall implement the os_serial number ( ) library procedure to
guarantee that it returns a unique 32 bit identifier for the Licensed
System.
(3) Adobe and OEM shall mutually agree upon a secure production
method for the Japanese font copy-protection keys.
M. OEM Training:
With respect to the requirements set forth under Paragraph 3.10 of the
--------------
Agreement, training with respect to the development of Licensed Systems
described within this Appendix No. 2 has been completed by OEM.
N. Designated Representatives:
(1) Technically qualified OEM representative to respond to
information requested by Adobe:
David Lynch Phone (408) 541-6100
SuperMac Technology Incorporated FAX (408) 541-6150
215 Moffett Park Drive
Sunnyvale, CA 94089-1374
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<PAGE>
(2) Technically qualified Adobe representative to respond to information
requested by OEM:
Ivor Durham Phone (415) 962-2183
Adobe Systems Incorporated FAX (415) 9614022
1585 Charleston Road
Mountain View, CA 94039-7900
(3) Adobe Contract Representative:
Jeffrey Eid Phone (415) 962-3962
Adobe Systems Incorporated FAX (415) 965-7430
1585 Charleston Road
Mountain View, CA 94039-7900
(4) OEM Contract Representative:
Tim Kleffman Phone (408) 541-5109
SuperMac Technology Incorporated FAX (408) 541-5003
215 Moffett Park Drive
Sunnyvale, CA 94099-1374
IN WITNESS WHEREOF, OEM and Adobe have caused this Appendix No. 2 to be
executed by their duly authorized officers.
ADOBE: OEM:
ADOBE SYSTEMS INCORPORATED SUPERMAC TECHNOLOGY
INCORPORATED
By: /s/ John E. Warnock By: /s/ Louis J. Doctor
-------------------------- --------------------------
Print Print
Name: John E. Warnock Name: Louis J. Doctor
----------------------- ----------------------
Title: Chief Executive Officer Title: EVP
----------------------- ----------------------
Date: 7/28/93 Date: 7/16/93
----------------------- ----------------------
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<PAGE>
Schedule 1
Project Deliverables Checklist
OEM provides technical information and specifications on each _____________
output device. -
OEM provides estimated development schedule for each output _____________
device, with key milestones an deliverables. -
OEM provides business forecast for each output device (12, 24 _____________
and 36 months). -
License Management Mechanism proposal provided to Adobe. _____________
-
Color calibration mechanism proposal provided to Adobe. _____________
-
OEM certifies that the following deliverables have been _____________
received from Adobe: -
Adobe Software and Demonstration Programs ____
Aftermarket font installation utilities ____
CPSI Read Me First! ____
Configurable PostScript Interpreter Functional
Specification ____
CPSI Demonstration Software Guide ____
CPSI Product Developer's Guide ____
Supplement to the PostScript Language Reference Manual ____
PostScript Language Addendum Template ____
Coded Font Programs ____
[*] ____
[*] CONFIDENTIAL TREATMENT REQUESTED
-17-
<PAGE>
EXHIBIT 10.6a
THE DOCUMENT COMPANY
XEROX CORPORATION
DEVELOPMENT AND MANUFACTURING
MANUFACTURING OPERATIONS
SUPPLIER QUALITY REQUIREMENTS
DOC. #XW-001
original signed by
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J.M. PFUNDTNER
MANAGER, MULTINATIONAL
MATERIALS QUALITY ASSURANCE
October 1991
<PAGE>
FOREWARD
Xerox Corporation maintains high quality and reliabiilty standards for the
products and services deliver to customers. Suppliers are expected to develop
and sustain an environment where Total Quality principles are practiced to
achieve high levels of customer satisfaction.
These high standards require that purchased material delivered to Xerox
meets the Xerox Quality, Cost, Delivery and Service requirements. Quality 100
percent defect free, Cost-delivered at negotiated cost, Delivery-on time and
Service-any problems identified must be resolved immediately.
In order to achieve these requirements, the Xerox/Supplier relationship
must be based upon PARTNERING and not merely a contract. Partnering involves
team work, sharing resources and the elimination of the we/they approach to
conducting business. Partnering relationships stimulate continuous performance
improvement. Partnering and Total Quality go hand in hand. By fostering this
partnership, it is Xerox' intention to:
. Attract and maintain a world class supplier base. A base that is
committed to TOTAL QUALITY [Total Quality is a business management
methodology that align the activities of all employees in an
organization with the common focus of customer satisfaction through
continuous improvement in the quality of all activities, goods and
services.]
. Purchase material from an optimum number of suppliers who practice
Total Quality as a means to achieve world class benchmarks and who
meet Xerox requirements for Quality, Cost, Delivery and Service.
. Develop long term business relationships with suppliers who are
committed to Continuous Supplier Involvement and become more involved
with Xerox product requirements and the functional use of the products
supplied to Xerox.
. Reward those suppliers who consistently meet Xerox customer
requirements with a progressively larger share of Xerox total
commodity requirements as their performance, capability and capacity
warrants.
Xerox' primary quality objective is to prevent all defects from occurring.
This should be accomplished through the implementation of process controls,
"FMEA" studies [Failure Mode and Effects Analysis], and fail-safing techniques
at the source of manufacturing. Xerox suppliers should use this document to
gain understanding of the Xerox/Supplier mutual support program and our mutual
obligations in achieving this quality objective.
<PAGE>
INTRODUCTION
The intent of this document is to provide consistent communications on the
quality of materials, components, and assemblies procured by Xerox.
It describes responsibilities and actions required of its suppliers to
achieve the established quality standard: 100 percent defect free material
delivered to Xerox. For detailed information, contact your respective Xerox
commodity team leader through your Xerox buyer interface.
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1.0 SUPPLIER'S RESPONSIBILITY
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The supplier is responsible for the quality, reliability, packaging, and
workmanship of all components and/or assemblies procured or manufactured for
Xerox. The supplier's Quality Control Systems must be surveyed and approved by
Xerox MQA/SQA.
2.0 QUALITY CONTROL MANUAL
----------------------
All supplier must have a Plant Quality Control Manual identifying the
general quality policies, procedures, and practices of their organization. The
level of detail will vary with the size of the operation.
The minimum quality functions to be covered in the Plant Quality Control
Manual are as follows:
. Purchased Material Control
. In-Process Inspection
. Final verification
. Statistical Process Control
. Tool and Gage Control [Tool Approval and Calibration Control]
. Non-Conforming Material control
. Customer Satisfaction/Corrective Action [internal and external]
. Engineering Drawing Change Control
. Limited Life Material Control
. Training of Personnel
. In Process Material Identification and Control
. Organizational chart with quality responsibilities defined
. Internal Audits for compliance to the Quality Manual
. Electro Static Discharge [ESD] controls where applicable
3.0 INTERNATIONAL SUPPLIER QUALITY SURVEY
-------------------------------------
Supplier's quality programs and inspection systems will be surveyed
and evaluated by a Xerox Supplier Quality Assurance Engineer. The Initial
Survey will be conducted at the request of the appropriate Materials
organization (Commodity Team). A successful initial survey is required before
production orders are placed with a supplier.
The principle survey elements examined are as follows:
. Facilities
. Quality management organization/daily operations
. Purchased Material Control
. Process Control; Active utilization of statistical process control
methods.
. Final Verification; Written inspection/test instructions, adequate
inspection/test records
. Packaging; Written packaging instructions, packaging inspection records
. Non-Conforming Material Control
. Communications/Documentation
. Measuring Equipment Control
. Life and Reliability Testing
. Internal Audits
Before an initial survey is performed, the supplier will have the
opportunity to review the international Supplier Quality Survey and Rating
Guidelines.
The survey will be conducted by an SQA Engineer and will result in a rating
of:
. Approved
. Conditionally Approved
. Approval Withheld
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Materials may not be purchased prior to completion of the International
Survey or from suppliers whose survey resulted in a rating of "Approval
Withheld".
Surveys will be conducted at regular intervals and it is expected that the
supplier will demonstrate continuous improvement through the upgrade of systems,
procedures and working practices.
4.0 REQUEST FOR QUOTES [RFQ] PACKAGE CONTENT
----------------------------------------
The RFQ package contains a complete set of component, subassembly,
assembly, and reference drawings/specifications.
The buyer should be contacted if any drawings or specifications are
missing, incompatible with RFQ or illegible.
Buyer submitting a quote, the supplier must have in his possession
applicable Xerox documents as referenced in the RFQ package. These documents
include, but are not limited to the following:
. Drawing interpretation standards
. Material and finish specifications
. Packaging standards/instructions
. Specifications referenced by Xerox drawings
. Receiving inspection instructions [when applicable]
These documents should be reviewed by the supplier prior to responding to
the RFQ package. The buyer should be contacted immediately by the supplier if
any required documents have not been received.
The supplier, in his quotation, should take into consideration procedures
and equipment necessary to test and meet the quality and reliability
requirements specified in this document and the RFQ package.
5.0 CONTINUOUS SUPPLIER INVOLVEMENT [CSI]
-------------------------------------
All suppliers are expected to become a part of Team Xerox from concept
through life of production. CSI is a process in which the supplier, forward
product procurement, Xerox design engineering and SQA work together to optimize
the design and manufacturing process and reach an agreed specification so that
Quality, Cost, Delivery, and Service requirements are achieved. This process
starts with an initial CSI meeting which should be preceded by an internal PRE-
CSI meeting in order to prepare an initial Quality Plan defining the process by
which the parts/assemblies are to be produced and controlled, identify
improvement opportunities and document issues/concerns for discussion at the CSI
meeting.
6.0 PROCESS QUALIFICATION
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The supplier will qualify the manufacturing process for parts/assemblies
through an investigation of all elements influencing the method of manufacture
in order to define and document the controls required to prevent nonconforming
parts being produced. [ref. Multinational process qualification guidelines 3105-
1/2]. The desired outcome of this process is to reduce variability, center the
process, and strive for continuous improvement. Once the supplier has completed
all process qualification activities, material may be shipped to worldwide Xerox
facilities without further Xerox intervention.
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7.0 PRODUCT RELEASE
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Prior to completion of process qualification and certification of
parts/assemblies, authorization to ship material can only be through the SQA
organization. The Supplier Quality Plan must contain the criteria for release of
the product prior to certification. This can include final verification by the
supplier, certified inspector, or Xerox Source Verification. Product release by
the supplier is based on the approved quality plan, supplier in process/final
inspection and acceptable histogram. Source verification is an evaluation of the
supplier's quality data.
[feasibility study, in process inspection data and final inspection data].
The supplier must maintain lot integrity/control of all material shipped to
Xerox.
8.0 CORRECTIVE ACTION
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The supplier must operate a closed loop corrective action system for:
. System deficiencies as identified as a result of a self/Xerox audit or
survey
. Purchased part quality problems
. Supplier internal failure data
. Customer reported failures
. Internal Audit deficiency tracking
The supplier must keep the assigned SQAE informed of the status of
Corrective Actions.
9.0 CHANGE CONTROL
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Supplier must have the capability to manage changes on assemblies and
component parts.
Supplier must understand that no verbal changes will be authorized i.e. all
changes must be documented either by an issued XCN [Xerox Change Notice], BA
[Build Authorization], CA [Change Authorization], issued drawing, CRLV [Change
Request/Life Variance] or an approved specification variance.
10.0 AUDITS
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The supplier must allow Xerox to perform regular audits in order to
validate quality systems and performance.
The supplier is expected to have in place a system for self audit with
regard to
- Systems
- Performance
11.0 SUPPLIER QUALITY PERFORMANCE MEASUREMENT
----------------------------------------
Supplier Quality Assurance will gather the data necessary to develop
monthly quality performance for each production supplier. Supplier's quality
performance will be reported in parts per million (PPM). Suppliers should aim
for customer satisfaction through use of the monthly report to identify
opportunities for continuous improvement.
12.0 PRODUCT SAFETY
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Suppliers must ensure that safety requirements are met. The supplier is
expected to be a subscriber to the safety affiliated regulatory agency governing
their commodity.
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13.0 CERTIFIED SUPPLIER
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Xerox material suppliers who consistently demonstrate the capability to
plan for and control the quality, costs, delivery, and service of
parts/assemblies, unaided by Xerox, and completely satisfy their customer's
requirements will be recognized as a Certified Supplier and given authorization
to ship material direct to worldwide Xerox facilities with minimal Xerox
intervention.
14.0 SPECIFICATION VARIANCES
-----------------------
Any departure from the drawing or performance specification, or
material/part substitution must be authorized by an approved Xerox document to
deviate. Supplier requests to deviate must be directed to the assigned SQAE or
to the buyer. The deviation must be approved prior to shipment of material.
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<PAGE>
DRAFT Hardware Purchase and Software License Agreement
Attachment II - Xerox Multinational Process Qualifications Guidelines
The Xerox Multinational Process Qualification Guidelines consist of two
sections:
. The Seller's Quality Plan
. The Xerox Corporation "Supplier Quality Requirements Document # XW-
1001", dated October, 1991.
<PAGE>
SAMPLE
ATTACHMENT IIB
XYZ
QUALITY ASSURANCE
PLAN
DOCUMENT NUMBER
XXXXXXXXX
___________________________________
XXXXXXX PRESIDENT
___________________________________
XXXXXXX OPERATIONS MANAGER
___________________________________
XXXXXXX QUALITY MANAGER
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1. GENERAL REQUIREMENTS
1.1 Scope. This Quality Assurance Plan specifies the _____________
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appropriate Quality Program requirements for production of new products, spares,
and repairs. It applies to all operational areas of endeavor including
Engineering, Purchasing, Manufacturing, Quality Control, Test, Shipping and
Receiving, Repair, and Inventory. This plan is the controlling document for all
Quality Assurance (QA) activities except where a specific Product QA Plan or
contractual requirement takes precedence.
1.2 Quality Program. The ______________ Quality Program conforms to best
---------------
commercial practices and is modeled after MIL-Q-9858A. The program is
sufficiently flexible to accommodate the special quality requirements of OEM's
and other individual customer contracts, and permits an organized approach to
achieving them. Provision has been made for the early detection of actual or
potential deficiencies which could result in unsatisfactory quality, including a
timely and effective corrective action system. The Plan has been developed in
conjunction with other corporate functions to ensure compliance with
_____________ strategic goals, and the procedures which implement it are
available for on-site review by authorized customer representatives.
1.3 Reference Documents. The following documents are applicable to the
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extent specified herein:
. Military Specification MIL-Q-9858A, Quality Program Requirements.
document 00A10015-01. Workmanship Standards.
Workmanship Standards.
. Military Standard MIL-STD-1050. Sampling Procedures and Tables
For Inspection by Attributes.
. Military Standard MIL-STD-45662. Calibration Systems
Requirements.
2. DOCUMENTATION AND CHANGE CONTROL
2.1 Standard Practices Policy. The documents which implement this plan,
-------------------------
collectively referred to as the QA Manual, are organized with the framework of
the ____________ Standard Practices Policies (SPPs) and are subject to review by
the standing SPP committee. At the discretion of the committee, specific
instructions, procedures, and forms from the QA Manual may be placed under
formal document control.
2.2 Change Control. The established methods of the SPPs are used to
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control the original issue and incorporation of changes into all documents
affecting the Quality Program. These documents include the Quality Assurance
Instructions (QAIs) which form the basis of the QA Manual, engineering
documents, manufacturing and operating instructions, inspection and test
procedures, specifications, procurement documents, process and operating
instructions, and similar documents. The SPPs ensure that documents are
distributed to the proper place at the proper time in order that contract
work and Quality Program activities are accomplished in accordance with
the latest applicable documents.
2.3 Documents and Document Changes. Engineering documents are issued
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controlled by the Engineering Services Department. The SPP controls for
engineering documents provide for the systematic review and approval of
changes to ensure that the information is correct and complete, proper
affectivity is specified, and that all affected departments within
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are involved in the change process. Original documents and
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Engineering Change Orders (ECO's) for documents are signed or stamped by
the cognizant QA Engineer or his designee. Quality Assurance ensures that
documents comply with approved standards, that contractual quality require-
ments are met, and determines and control the effect of the changes on the
QA program documentation. Upon establishment of production configuration,
those changes requiring prior customer approval are submitted to them
before the changes may be incorporated into final products. Copies of
other nonproprietary changes are available for on-site review by authorized
customer representatives.
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2.4 Quality Assurance Instructions (QAIs). These documents are issued and
-------------------------------------
controlled by the Quality Assurance Department and reviewed by the SPP
committee. They specify the general inspection and test procedures and
checklists for implementing the corporate Quality Program. In addition they are
used to provide detailed instructions applicable to specific parts, processes,
vendors, customers, or internal procedures. Ordinarily QAIs are referenced on
internal procurement and manufacturing documents, but they may be placed under
the document control system at the discretion of the SPP committee or the QA
Department. As a minimum, this occurs for QAIs which affect the configuration
of production released articles, which contractually require customer approval
or control, or are referenced elsewhere in the document system.
2.5 Workmanship Standards. _______________ workmanship standards are in
---------------------
accordance with best commercial practices. They are documented as the minimum
acceptable levels specified in _________________ document number ____________.
Except where enhanced or specifically modified by _______________, _____________
standards are identical to the electrical and mechanical Workmanship Standards
published by the Quality Assurance Department, ______________ Division,
_____________, Corporation.
3. MANAGEMENT
3.1 Organization. The Director of Quality Assurance and the Director of
------------
Manufacturing head organizations separated from each other and from the product
line divisions. These segregated lines of responsibility and authority ensure
independence of action, with management emphasis equally placed on all
departments.
3.2 QA Organization. The functions of the Quality Assurance Department
---------------
are differentiated into two lines of activity: Quality Assurance Engineering
and Management (QA); and Quality Control Inspection and Test (QC).
3.2.1 Quality Assurance. QA Engineering/Management is responsible
-----------------
for product quality programs and for technical support and direction to
engineering, manufacturing, field services, customers, and vendors. The Quality
Assurance Engineer translates customer and product quality requirements into a
Product Quality Assurance Plan, Inspection Plan, and/or Quality Assurance
Instructions, as required. He is responsible for continual evaluation of the
effectiveness of the QA program by reviewing documents and document changes,
inspection data, periodic review of records, quality audits, and evaluation of
customer identified problem areas.
3.2.1.1 QA management is also included in the vendor selection
process and surveillance over subcontractors by reviewing quality records
jointly with Program engineering, manufacturing, and procurement personnel, as
appropriate. Prospective subcontractors and ________ component vendors are
surveyed as needed for adequacy of capabilities, with special emphasis given to
reliability and quality ___________ programs. The QA Engineer reviews product
documents, drawings, and ECOs to ensure the incorporation of quality
requirements, and represents the QA Department on the Material Review Board.
3.2.1.2 Finally, the QA Engineering and Management activity in
responsible for the review of inspection data, control of processes, and
investigation of general manufacturing and inspection problems. The activity
also maintains and controls the quality standards for workmanship and issues
process control procedure in conjunction with Manufacturing. When inspection
data or process analysis indicate problems with vendors or manufacturing, QA
obtains correction action and monitors future data to ensure the effectiveness
of the corrective action.
3.2.2 Quality Control Inspection. The QC inspection activity
--------------------------
includes source, incoming, mechanical assembly, electrical assembly, final
inspection, and shipping inspection. QC provides the facilities and manpower to
perform item inspection and test in each area in order to ensure compliance with
applicable documents, required regulatory agency provisions, and quality program
directives. In addition, QC inspection is responsible for the primary
mechanical standards and ________, monitoring and special processes, and
initiating inspection records which are compiled and utilized for evaluating
procurement and manufacturing controls.
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QC personnel also acts as safety and housekeeping monitors in their respective
manufacturing areas. In the event of nonconformance, QC initiates appropriate
documentation to permit identification, segregation, and disposition of the
material. At his discretion, the QA Engineer may delegate additional
responsibilities to the QC Supervisor.
3.2.3 Quality Control Test. Generally the QC Test activity performs
--------------------
or witnesses subassembly screening, burn-in, and acceptance tests as required
per test procedures and QA documents to ensure compliance with contract and
corporate requirements. In addition, QC personnel maintain the product history
files which contain functional test data sheets and the manufacturing/inspection
records of assembly in-process operations. QC also verifies current test
equipment calibration status, prepares each data package as required to be
included in shipments, and notifies resident source in inspections, if any, that
they may witness final inspection and acceptance test on production equipment.
4. DESIGN AND DEVELOPMENT CONTROL
4.1 Product Line QA Activities. The Quality Program includes the review
--------------------------
of product and contract documents for quality characteristics and to determine
the need for special tools, ________, fixtures, test equipment, and implementing
documentation. The QA Engineer prepares a product QA Plan as needed or when
required by contract.
4.2 QA Organization. The Quality Assurance Engineer assigned to a program
---------------
is an integral part of the program's management team but reports
administratively to the Director of Quality Assurance. The organizational
structure provides maximum program operating efficiency without the
subordination of quality. In the event a problem cannot be received between the
Quality Assurance Engineer and the Product Engineer, it is referred to ascending
levels of program and quality management for resolution.
5. CONTROL OF PROCURED MATERIAL
5.1 General. The Quality Program provides for the control of purchased
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parts to be used on all production released products. These controls ensure
that all applicable contract, design, reliability, and quality requirements are
transmitted to suppliers and subcontractors and are obtained in the accepted
articles. Control documents, procurement specifications, and Purchase Orders
(POs) are subject to QA approval in order to transmit the procurement
requirements to the suppliers. All vendor liaison pertinent to quality is the
responsibility of the Quality Assurance Department. Communications between
customers and ___________ vendors on the quality of procured material are
processed through the ______________ Quality Assurance Department.
5.2 Vendor Control. Procurement sources are evaluated and approved on the
--------------
basis of previous quality history or a survey of the supplier's facilities and
Quality Program. Supplier selection is performed jointly by engineering,
quality, and purchasing personnel. At the discretion of QA, surveys of
suppliers of commercial or off-the-shelf items may not be required for
qualification. The Quality Assurance Department may disqualify vendors at
any time solely for quality reasons; a Disapproved Supplier List is main-
tained by QA to control procurement sources. documents
-----------------
are also used to control procurement of all items destined for use in
released production hardware.
5.3 Source Inspection. Purchase Orders specify the requirements. If
-----------------
any, for source inspection, or request evidence that the
----------------
procured articles comply with requirements when the quality of the
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article cannot be verified at incoming inspection.
5.5 Subcontractor Quality Programs. Subcontractors having design
------------------------------
responsibility or suppliers producing complex subassemblies are required to
provide a quality program equivalent to ____________ own QA Program, unless
otherwise specified. Suppliers of commercial or off-the-shelf parts are
required to provide quality control in accordance with best commercial
practices.
5.6 Purchased Raw Materials. A certificate of compliance to the
-----------------------
applicable specification is required with each receipt of raw material. Samples
of raw material from vendors are tested periodically to verify compliance with
application.
5.7 Records of Inspections and Tests. Records of inspections and tests
--------------------------------
performed under the responsibility of the supplier are maintained on file and
made available to authorized __________ representatives. KMW may also require
that such records be shipped with the hardware for filing with ____________ own
history records.
5.8 Identification, Preservation, and Packaging. ______________
-------------------------------------------
controlled documents impose special identification, preservation, and packaging
requirements, as required to preserve the quality of procured articles.
5.9 Age Control. Materials or articles that are subject to deterioration
-----------
with age or use are marked to indicate the expiration date of the expected life
and may not be used thereafter. All such limitations are defined by the
procurement documents.
6. CONTROL OF MANUFACTURED ARTICLES
6.1 Inspection. Manufactured subassemblies are inspected in-process at
----------
such points as deemed necessary by the Quality Assurance Engineer to verify
conformance to the documentation, proper component installation, wiring, molder,
workmanship, etc. All in-house repairs to discrepant subassemblies are
reinspected and accepted by QC inspection before incorporation into higher level
units. Statistical sampling plans and process control techniques as described
below may be used in lieu of 100% inspection at the discretion of the QA
Engineer. QA implements a Zero Defects Program as a corporate goal for all
___________ manufactured articles.
6.2 Inspection and Test Procedures. Characteristics to be observed in
------------------------------
order to ensure compliance with contract and KMW requirements are detailed in
QAs and functional test procedures. These documents include operations to be
performed in sequential order, test configurations, environmental requirements,
and acceptance criteria. Inspection instructions and test procedures for
purchased parts are the joint responsibility of the QA Department and Test
Engineering for issuance, distribution, and control. ___________ manufactured
subassembly test procedures are the responsibility of Test Engineering. Test
procedures for released products are the joint responsibility of Test
Engineering and Program Engineering for preparation and issuance. All test
procedures are subject to QA review.
7. NONCONFORMING MATERIAL
7.1 Material Review. The Quality Assurance Department has implemented a
---------------
procedure for the control, review, and disposition of nonconforming material.
All nonconforming materials detected by or referred to Quality Control are
identified as such by association with an appropriate rejection document
containing a description of the nonconformance and other pertinent data, and are
placed in a controlled _________ Material Review Area (MRA) until reviewed and
dispositioned. Nonconforming material may only be used with the approval of the
Material Review Board.
7.2 Material Review Board (MRB). The MRB is composed of (a) an engineer
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appointed by the Product Manager, (b) the cognizant QA Engineer or his appointed
representative, and (c) a representative
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appointed by the Director of Manufacturing. The MRB is responsible for
determining the disposition of nonconforming material. The material and related
documentation are reviewed by the Board, and an acceptable disposition
determined. The Board is also responsible for determining the cause of the
discrepancy and for specifying correction action to prevent recurrence. The QA
member is generally responsible for representing the customers' interests on the
MRB. Records of all nonconformance and MRB decisions are maintained for
monitoring corrective actions and for history.
7.3 Disposition Without MRB Action. Under certain circumstances, the
------------------------------
disposition of nonconforming materials is permitted by a responsible authority
such as a manufacturing engineer or the buyer, without MRB approval. This is
permitted only when the disposition is Return to Vendor, Scrap, or when the
nonconformance may be entirely corrected by the completion of operations or
routine correction of workmanship errors. The required rework is specified as
part of the disposition, and the material is reinspected to ensure total
compliance with the appropriate documentation.
7.4 Deviation Requests. Special MRB directive in anticipation of future,
------------------
short term nonconformance may be recorded on Deviation Request forms. Deviation
Requests are subject to the same terms and consideration as other MRB actions
and are approved by all members of the MRB prior to implementation.
8. PROCESS CONTROL
8.1 All ______________ manufacturing processes are performed by
experienced personnel, and __________ provides formal classes as well as on the
job training. Equipment and/or personnel are certified where required by
applicable specifications. In-process controls and inspections are performed by
QC in accordance with QA's or other documentation.
9. END ITEM ACCEPTANCE
9.1 General. All final test procedures are placed under formal
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___________ document control. QC Final Inspection and Test personnel perform or
witness all acceptable tests, and notify the customer's source inspector when
required by prior agreement. No item is released for packing until it is
accepted by ____________ QC, as evidenced by an inspector's stamp on the
appropriate ____________ documents.
9.2 Spares and Repairs. Production released subassemblies, customer
------------------
repairs, and spares are subject to the same level of inspection and test as
other finished products.
10. PRESERVATION, PACKAGING, HANDLING, STORAGE, AND SHIPPING
10.1 Normal Items. Preservation, packaging, handling, and storage of
------------
articles are performed as required to ensure the quality of the articles.
Procured parts are normally stored in the vendor's shipping package. End item
parts are packaged in accordance with applicable documents and QAIs. Articles
requiring special handling are so identified on the documentation and
appropriate action taken to ensure proper handling. Product engineering define
special preservation and/or packaging as may be required for any article.
Periodic audits of stored articles are performed by QC to detect any degradation
and to preclude damage from improper housekeeping practices.
10.2 Items Subject to Electrostatic Control. The QA and Manufacturing
--------------------------------------
Departments have implemented procedures to ensure that static sensitive devices
and subassemblies are packaged and handled in accordance with _______________
static control policy. The procedures include begging and handling
requirements, maintenance of areas of the manufacturing floor subject to static
control, and policy requirements for grounding individuals who work with
sensitive devices.
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11. INSPECTION, MEASURING, AND TEST EQUIPMENT
11.1 General. All equipment used to measure or confirm the acceptability
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of products is monitored by QC to ensure accuracy and compliance with applicable
specifications. QA maintains written procedures defining the control,
frequency, and method of calibration to be used for each type of gage or
functional test equipment. Equipment not required for production may also be
monitored by QC at the request of Manufacturing or Program Engineering.
11.2 Calibration. All equipment calibrations are ultimately traceable in
-----------
standards maintained by the National Bureau of Standards. Calibration services
are required to be in accordance with a national, recognized calibration system
such as MIL-STD-48682 or equivalent. QC keeps records of all equipment under
calibration control indicating the date of the last calibration and due date for
recalibration. In addition these dates are marked on stickers affixed to the
equipment itself when size permits.
11.3 Maintenance. Maintenance inspection, measuring, and test equipment is
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periodically inspected, maintained, and recalibrated. QA determines the
intervals for each piece of equipment based upon use, accuracy, type of
equipment, required precision, and other conditions affecting measurement
control. Procedures provide for the tagging and removal from service of any
equipment that has not been maintained in accordance with established schedules,
or is suspected of or found to exceed allowable limits.
12. STATISTICAL QUALITY CONTROL
12.1 All QC inspections and tests performed at ______________ are subject
to a 100% inspection level at the discretion of the QA Engineer. In lieu of
100% inspection, QA may specify statistical sampling plans in accordance with
MIL-STD-1050 or other industry standard statistical process control procedures.
Qualify Assurance generations QAIs specifying the Acceptable Quality Levels
(AOLs), level and types of sampling plans, or other pertinent variables, as
required, for each commodity or part number of items to be inspected.
13. INSPECTION STAMPS
13.1 Control of Stamps. Quality Assurance instructions provide for the
-----------------
strict control of QC stamps, including issuance and recall. Each stamp contains
a unique identifier which provides traceability to the individual performing the
inspections. The stamps clearly identify the QC function and are distinct in
design from QC stamps of vendors or customers.
13.2 Use of Stamps. To indicate acceptance of parts, assemblies, and end
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items, the stamp is applied to the accompanying paperwork. Each assembly is
serialized to correspond with its paperwork for traceability. Marking of
assemblies themselves may be __________ at QA discretion as an additional
control device. To indicate acceptance of unserialized parts which require more
stringent inspection requirements--as opposed to those which only meet
commercial or off-the-shelf specifications--stamping, color dotting, or other
special markings may be used.
14. FAILURE ANALYSIS AND CORRECTIVE ACTION
14.1 History Records. All parts, assemblies, and units involved in
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____________ processing are accompanied by individual or lot history records in
the form of hardcopy paperwork or in electronic format. The records indicate
procedure steps, persons performing the steps, dates, specifications used,
discrepancies, and reworks of all components in the process. The records are
retained as a permanent history of the equipment and
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are used to support analysis and corrective action of equipment failures.
Additions to the history are entered during repair, update, and field service
processes, and are statistically analyzed by the QA Engineer to determine
failure trends. Analysis results are reported back to product line managers and
other departments as necessary. Copies of history records are available for on-
site review by authorized customer representatives.
14.2 Recurring Subassembly Discrepancies. Records of nonconformance
-----------------------------------
conditions are reviewed by Quality Assurance. The records contain descriptions
of defects, dispositions authorized, and corrective actions generated.
Recurring problems are given special attention to determine why initial
corrective actions were not effective, and additional corrective actions are
initiated as required.
14.3 End Item Failures. All functional and item failures occurring during
-----------------
QC Acceptance Testing are processed as nonconforming material, i.e., referenced
on the accompanying history record and fully documented on an MRB Report. The
report accumulates all information pertinent to the malfunction from the
original symptom to failure determination and corrective action.
14.4 Equipment Problems and Failures After Delivery. Problems which
----------------------------------------------
develop after delivery are documented on either the Customer Problem Report or
the Field Service Work Order, as appropriate. The originator provides the
failure symptom or problem description and ___________ completes the forms for
failure analysis and corrective action. Field Service data are statistically
analyzed by the QA Engineer to determine trends, and analysis results are
reported back to product line managers and other departments as necessary.
Again, recurring problems are given special attention and additional corrective
actions are initiated as required.
15. AUDIT OF QUALITY PROGRAM PERFORMANCE
15.1 Audits of Quality Control. Audits of QC effectiveness are performed
-------------------------
by the Director of Quality Assurance. The audits include reinspection and
retesting of parts previously accepted, verification of availability and
familiarity with applicable documents and QAIs by department personnel,
effectiveness of the calibration program, inventory audits, thoroughness of
nonconforming material aggregation, and correct filing and reporting of various
QC records.
15.2 Audits of Quality Assurance. Audits of the Quality Program and QA
---------------------------
Engineering are performed by the product line managers. The audits include
evaluation of the adequacy of program documents, effectiveness of vendor
control, review of MRB decisions, and thoroughness of failure analysis and
corrective action reporting.
15.3 Audit Reports and Corrective Action. Each audit is recorded, with
-----------------------------------
recommendations as required, and submitted to the Director of QA, product line
managers, audited area supervisors, and other management personnel as deemed
necessary to control and improve end item quality, reliability, and contract
performance. Corrective action is implemented as required.
-9-
<PAGE>
EXHIBIT 11.1
Splash Technology Holdings, Inc.
COMPUTATION OF LOSS PER SHARE(1)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Five months
ended
-------------
June 30, 1996
-------------
<S> <C> <C>
Weighted average common shares
outstanding for the period 0
Common equivalent shares pursuant
to Staff Accounting Bulletin No. 83(2)
Common equivalent shares deemed
outstanding from options to
acquire common stock deemed
converted using Modified Treasury
Stock Method 830
Common equivalent shares outstanding
from conversion of preferred stock 1,741
Common stock issued 7,009
Number of shares used in computing
-------
Net loss per share 9,580
=======
Net loss (11,579)
Cumulative dividends accreted on preferred stock (365)
-------
Adjusted net loss (11,944)
=======
Net loss per share $(1.25)
=======
</TABLE>
________________________
(1) This exhibit presents the primary and fully diluted computations of income
and loss per share. There is no difference in the per-share amounts when
applying either method.
(2) Common shares issued by the Company during the twelve months immediately
proceeding the initial public offering date plus the number of common
equivalent shares which were issued during the same period pursuant to the
grant of stock options (using the treasury stock method and proposed
offering price) have been included in the calculation of common equivalent
shares pursuant to Securities and Exchange Commission Staff Accounting
Bulletin (SAB) No. 83.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 (File No.
333-09591) of our report dated July 23, 1996, except for Note 12 for which the
dates are July 31, 1996 and September 6, 1996, on our audits of the consolidated
financial statements and consolidated financial statement schedule of Splash
Technology Holdings, Inc. We also consent to the reference to our firm under the
caption "Experts."
Coopers & Lybrand, L.L.P.
San Jose, California
September 10, 1996
