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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the fiscal year ended SEPTEMBER 30, 1996
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OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM _____ TO ______
COMMISSION FILE NUMBER 000-21171
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SPLASH TECHNOLOGY HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-2910085
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
555 DEL REY AVENUE, SUNNYVALE, CA 94086
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 328-6300
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.001 PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the proceeding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [_] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of November 30, 1996 was approximately $61.0 million based upon
the closing price of the Common Stock on the Nasdaq Stock Market for such date.
Shares of Common Stock held by each executive officer and director and by each
person who owns 5% or more of the outstanding Common Stock have been excluded in
that such person may, under certain circumstances, be deemed to be an affiliate.
This determination of executive officer or affiliate status is not necessarily a
conclusive determination for other purposes. The number of outstanding shares
of Registrant's Common Stock as of November 30, 1996 was 12,044,752.
Documents incorporated by reference: Items 10,11,12 and 13 of Part III are
incorporated by reference from the Registrant's Proxy Statement for the Annual
Meeting of Stockholders to be held on February 26, 1997. This Report contains
46 sequentially numbered pages of which this is Number 1. The Index to the
Exhibits begins on page 44.
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PART I
This Report on Form 10-K contains forward-looking statements that
involve risks and uncertainties. The Company's actual results may differ
material 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 "Factors Affecting Future Results" Unless the contexts otherwise
specifies, references in this Report on Form 10-K 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.
ITEM 1. BUSINESS
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 Computer, Inc. ("Apple") personal computers and UNIX-based
computers.
Splash sells its 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.
The Company was incorporated in Delaware in December 1995. The
Company 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, Splash was acquired by an
investor group in a leveraged transaction (the "Acquisition").
PRODUCTS AND TECHNOLOGY
Product Lines
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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 main product lines are the Splash Professional Color Imaging
(''PCI'') Series, first introduced in the second calendar quarter of 1996, and
the Splash Docucolor ("DC") Series products, first introduced in September,
1996. These products use the newest Apple Power Macintosh computers and are
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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's products vary by geography and, for example, range
from $17,000 to $55,000 in the United States, depending on model and
configuration.
Product Features and Technology
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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.
Technical 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 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
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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
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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
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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 designed to assure
reproducible, consistent color. All
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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
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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
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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
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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
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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
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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.
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 customer support at
the local level as well as providing Splash with a valuable source of input for
product enhancement.
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.
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Revenue from Xerox constituted 40%, 41% and 43% of Splash net revenue
in fiscal 1994, 1995, and 1996, respectively. Revenue from Fuji Xerox
constituted 60%, 59% and 57% of Splash net revenue in fiscal 1994, 1995 and
1996, respectively.
As of September 30, 1996, the Company employed 11 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, 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.
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.
Commercial and Short-Run Printing. The commercial printing market
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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
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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
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professional color publishing market consists of in-house creative staffs and
advertising agencies and design firms. These creative 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,
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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
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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
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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.
MANUFACTURING
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
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 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.
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. 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
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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 has increased 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.
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.
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
Systems Incorporated ("Adobe"), Apple, Fuji Xerox and Xerox.
The Company has historically devoted a significant amount of its
resources to research and development. As of September 30, 1996, the Company had
27 employees engaged in research and development. Research and development
expenses in fiscal 1994, 1995 and 1996 were $2.0 million, $3.3 million and $4.1
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, 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
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not achieve timely and widespread market acceptance, it would have a material
adverse effect on the Company's business, operating results and financial
condition.
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
Electronics For Imaging, Inc. ("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 computers increase, 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.
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.
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
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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.
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. Although Radius has recently prevailed on its summary judgment
motion, 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 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 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.
9
<PAGE>
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.
EMPLOYEES
As of September 30, 1996, the Company employed 50 people, including 27
in research and development, 5 in operations, 11 in sales and marketing, and 7
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.
EXECUTIVE OFFICERS AND KEY PERSONNEL
The following table sets forth certain information regarding the
executive officers and other key personnel of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------- --- -------------------------------------------
<S> <C> <C>
Kevin K. Macgillivray 37 President, Chief Executive Officer and
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
Richard A. Falk 37 Chief Scientist
</TABLE>
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 division. 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
10
<PAGE>
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 division 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.
Richard A. Falk has served as Splash's Chief Scientist since the
---------------
Acquisition. 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.
FACTORS AFFECTING FUTURE RESULTS
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 fiscal 1996 (pro forma and before purchase accounting
adjustments) and the first eight months of independent operations through
September 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.
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
11
<PAGE>
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 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 expects to be required to reduce prices in response to competitive
pressure and 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, 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.
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
12
<PAGE>
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.
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, 1995 and 1996 accounted for approximately 40%,
41% and 43%, respectively, of the Company's net revenue, and sales to Fuji Xerox
in such periods accounted for approximately 60%, 59% and 57%, 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
13
<PAGE>
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 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.
Dependence on Adobe Systems Incorporated. The Company's products
----------------------------------------
depend on the PostScript page description language software developed by 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.
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
14
<PAGE>
NuBus architecture in the second half of calendar 1995 in favor of Power
Macintosh 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.
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.
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.
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
15
<PAGE>
management controls, systems and procedures, could have a material adverse
effect on the Company's business, operating results and financial condition.
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 its initial public offering, cash flow
from operations and existing cash balances. Upon completion of its initial
public offering and the application of $23.4 million of the net proceeds
therefrom for repayment of the subordinated notes and redemption of the Series A
Preferred Stock, the Company had as of October 31, 1996 approximately $13.6
million in working capital, including approximately $16.0 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 its initial public offering, cash flow from operations and the
Company's bank line of credit. However, 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.
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.
International Sales. All sales to Fuji Xerox are international
-------------------
sales. As a result, international sales accounted for approximately 60%, 59% and
57% of net revenue in fiscal 1994, 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. The Company's business, operating results and
financial condition would be materially adversely affected if foreign markets do
not continue to develop.
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.
16
<PAGE>
Risks Associated with Acquisitions. The Company frequently evaluates
----------------------------------
potential acquisitions of complementary businesses, products and technologies.
As part of the Company's expansion plans, the Company may acquire companies that
have an installed base of products not yet offered by the Company, have
strategic distribution channels or customers relationships, or otherwise present
opportunities which management believes enhance the Company's competitive
positions. Such acquisitions would subject the Company to numerous risks,
including risks associated with integration into the Company of new employees
and technology. Moreover, such transactions involve the diversion of
substantial management resources and evaluation of such opportunities requires
substantial diversion of engineering and technological resources. In addition,
such transactions could result in large one-time write-offs or the creation of
goodwill or other intangible assets that would result in amortization expenses.
To date, the Company has not consummated an acquisition transaction. The
failure to successfully evaluate, negotiate and effect acquisition transactions
could have a material adverse effect on the Company's business, operating
results and financial condition.
ITEM 2. PROPERTIES
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.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Pursuant to an Action by Written Consent dated August 1, 1996, the
Company's stockholders approved the following matters:
(a) the amendment and restatement of the Company's Certificate of
Incorporation in connection with the Company's initial public
offering;
(b) the amendment and restatement of the Company's Bylaws in connection
with the Company's initial public offering;
(c) the amendment and restatement of the Company's 1996 Stock Plan and the
reservation of an aggregate of 3,150,000 shares of the Company's
Common Stock thereunder; and
(d) the adoption of the Company's Employee Stock Purchase Plan and the
reservation of 175,000 shares of the Company's Common Stock
thereunder.
Each of the above matters was approved by the following vote:
NUMBER OF COMMON SHARES VOTED
<TABLE>
<CAPTION>
For Against No Vote
- ------------ ------- -------
<S> <C> <C>
9,039,028 0 310,472
</TABLE>
17
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Since the Company's initial public offering on October 9, 1996, the
Company's Common Stock has traded on the Nasdaq Stock Market under the symbol
"SPLH". 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 line of credit prohibits
the payment of cash dividends without the lender's prior written consent.
As of November 30, 1996, there were approximately 69 stockholders of
record.
18
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following information has been summarized from the Company's
consolidated financial statements included elsewhere in this Annual Report on
Form 10-K and should be read in connection with such consolidated financial
statements and the related notes thereto.
<TABLE>
<CAPTION>
SPLASH
TECHNOLOGY
PREDECESSOR BUSINESS HOLDINGS, INC.
-------------------- --------------
FISCAL YEAR FOUR MONTHS EIGHT MONTHS
ENDED ENDED ENDED
SEPTEMBER 30, JANUARY 31, SEPTEMBER 30,
----------------------- ----------- --------------
1994 1995 1996 1996
---- ---- ---- ----
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net revenue...................................................... $16,354 $30,472 $13,008 $ 34,713
Cost of net revenue.............................................. 12,068 20,723 8,427 19,381
------- ------- ------- --------
Gross profit..................................................... 4,286 9,749 4,581 15,332
------- ------- ------- --------
Operating expenses:
Research and development.................................... 1,999 3,295 1,498 2,627
Sales and marketing......................................... 562 2,076 688 1,756
General and administrative.................................. 377 891 287 1,276
Amortization of purchased technology
and write-off of in-process technology.................... -- -- -- 22,803
------- ------- ------- --------
Total operating expenses................................ 2,938 6,262 2,473 28,462
------- ------- ------- --------
Income (loss) from operations.................................... 1,348 3,487 2,108 (13,130)
Interest expense, net............................................ -- -- 18 575
------- ------- ------- --------
Income (loss) before provision for income taxes.................. 1,348 3,487 2,090 (13,705)
Provision for (benefit from) income taxes........................ 99 1,395 836 (5,509)
------- ------- ------- --------
Net income (loss)................................................ $ 1,249 $ 2,092 $ 1,254 $ (8,196)
======= ======= ======= ========
Net income (loss) per share(1)................................... ( .93)
========
Shares used in computing per share amounts(1).................... 9,583
========
</TABLE>
<TABLE>
<CAPTION>
SPLASH
PREDECESSOR TECHNOLOGY
BUSINESS HOLDINGS, INC.
------------- --------------
SEPTEMBER 30, SEPTEMBER 30,
1995 1996
------------- --------------
(IN THOUSANDS)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital.................................... $ 2,318 $ 8,771
Total assets....................................... 9,688 30,417
Long term debt..................................... -- 8,600
Total liabilities.................................. 6,985 19,507
Equity............................................. 2,703 10,910
</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.
19
<PAGE>
ITEM 7. 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 Report on Form 10-K 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 "Factors Affecting Future Results."
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. References below to
the results of operations for the year ended September 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 eight months ended September 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 40%, 41% and
43% of net revenue in fiscal 1994, 1995 and 1996, respectively. Sales to Fuji
Xerox accounted for approximately 60%, 59% and 57% of net revenue in fiscal
1994, 1995 and 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.
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. 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's revenue 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 continues
to build 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 in fiscal 1996 (pro forma and before purchase accounting
adjustments) and the first eight months of independent operations through
September 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.
20
<PAGE>
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
PREDECESSOR TECHNOLOGY
BUSINESS HOLDINGS, INC.
------------- --------------
YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- --------------
1994 1995 1996
----- ---- ----
(PRO FORMA)
<S> <C> <C> <C>
Net revenue......................................... 100% 100% 100%
Cost of net revenue................................. 74 68 58
---- ---- ----
Gross margin........................................ 26 32 42
---- ---- ----
Operating expenses:
Research and development......................... 12 11 9
Sales and marketing.............................. 3 7 5
General and administrative....................... 3 3 3
Amortization of purchased technology
and write-off of in-process technology......... -- -- 48
---- ---- ----
Total operating expenses.................... 18 21 65
---- ---- ----
Income (loss) from operations....................... 8 11 (23)
Interest expense, net............................... -- -- 1
---- ---- ----
Income (loss) before provision for income taxes..... 8 11 (24)
Provision for (benefit from) income taxes........... -- 4 (10)
---- ---- ----
Net income (loss)................................... 8% 7% (14)%
==== ==== ====
</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 56% to
$47.7 million in fiscal 1996 from fiscal 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 adversely 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.
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
21
<PAGE>
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.
All sales to Fuji Xerox are international sales. As a result,
international sales accounted for 60%, 59% and 57% of net revenues in fiscal
1994, 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.
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 42% in 1996. The increases in gross margin
were primarily due to economies of scale derived from higher sales volumes,
increases in pricing due to product improvements from additional software
features, and reductions in component costs achieved through new product designs
and favorable component pricing, partially offset by a sales shift toward
certain lower margin pre-configured server models. 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 expects to 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.
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 24% to $4.1 million
fiscal 1996 from fiscal 1995. As a percentage of net revenue, however, research
and development decreased to 11% in fiscal 1995 from 12% in fiscal 1994, and 9%
of net revenue in fiscal 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 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.
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 increased 14% to $2.4 million in fiscal
1996 from fiscal 1995. Such expenses represented 7%, 3% and 5% of net revenue
for such respective periods. The increase in the absolute dollar amount of these
expenditures was 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 an effort to enhance sales support
capabilities and to pursue promotional programs designed to improve name and
product recognition in the end user community.
22
<PAGE>
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 80% to
$1.6 million in fiscal 1996 from fiscal 1995, representing 3% of net revenue.
The increase from 1994 to 1995 was primarily due to increased salary and related
costs due to increased headcount. The increase in fiscal 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 fiscal 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
September 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 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.
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 September 30, 1996, the Company had $6.2 million of cash and
cash equivalents and had repaid all borrowings under its bank line of credit.
Borrowings are available under the line of credit based on a percentage of
eligible accounts receivable and inventory, and at September 30, 1996,
borrowings of $2.9 million were available. Borrowings under the line of credit
bear interest at prime rate. The line of credit expires on January 1, 1998. 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 had an interest rate of 12% per annum, payable
quarterly. The notes were valued at $8.6 million by an independent third party
valuation. On October 16, 1996, the Company repaid the notes
23
<PAGE>
in full out of the proceeds of its initial public offering. 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 fiscal 1996, the Company generated $6.7 million in
cash from operations, primarily due to increases in accounts payable, other
accrued liabilities, deferred revenue and income taxes payable, and decreases in
accounts receivable, partially offset by a decrease 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 increased to $5.8 million at September 30,
1996 as the Company increased net revenues from fiscal 1995, partially offset by
improved cash collection procedures which were implemented after the
Acquisition. Inventories increased to $4.0 million at September 30, 1995 from
$1.3 million at September 30, 1994 and decreased to $3.7 million at September
30, 1996, 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, then decreased to $5.0 million at September 30, 1996, primarily due to
a slowdown in vendor payments imposed by Radius, of which the Company was a
division in fiscal 1994 and 1995, and the Company's subsequent payment of vendor
obligation after the Acquisition.
Investing activities used $444,000 in cash in fiscal 1995 and $24.0
million in cash in fiscal 1996. These amounts represented purchases of property
and equipment and, in fiscal 1996, $23.4 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
fiscal 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.
In October 1996, the Company used $23.4 million of the net proceeds of
its initial public 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 will be used for working capital and general corporate purposes. 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 its initial
public offering, cash flow from operations and the Company's bank line of
credit. However, 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and supplementary data of the Company
required by this item are set forth at the pages indicated at Item 14(a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
24
<PAGE>
PART III
Certain information required by Part III is omitted from this Report
on Form 10-K in that the Registrant will file its definitive Proxy Statement for
its Annual Meeting of Stockholders to be held on February 26, 1997, pursuant to
Regulation 14A of the Securities Exchange Act of 1934, as amended (the "Proxy
Statement"), not later than 120 days after the end of the fiscal year covered by
this Report, and certain information included in the Proxy Statement is
incorporated herein by reference.
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
The information required hereunder is incorporated by reference from
the Company's Proxy Statement filed in connection with the Company's annual
meeting of Stockholders to be held on February 26, 1997.
ITEM 11. EXECUTIVE COMPENSATION
The information required hereunder is incorporated by reference from
the Company's Proxy Statement filed in connection with the Company's annual
meeting of Stockholders to be held on February 26, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required hereunder is incorporated by reference from
the Company's Proxy Statement filed in connection with the Company's annual
meeting of Stockholders to be held on February 26, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required hereunder is incorporated by reference from
the Company's Proxy Statement filed in connection with the Company's annual
meeting of Stockholders to be held on February 26, 1997.
25
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a)(1) Consolidated Financial Statements: Page Number
-----------
<S> <C> <C>
Report of Independent Accountants 27
Consolidated Balance Sheets: 28
September 30, 1995 and 1996
Consolidated Statements of Operations: 29
Years ended September 30, 1994 and 1995, the four months ended
January 1996, and the eight months ended September 30, 1996
Consolidated Statement of Stockholder's Equity: 30
Eight months ended September 30, 1996
Predecessor Business Statement of Parent Company Investment: 30
Years ended September 30, 1994, 1995 and four months ended
January 31, 1996
Consolidated Statement of Cash Flows: 31
Years ended September 30, 1994 and 1995, the four months ended
January 1996, and the eight months ended September 30, 1996
Notes to Consolidated Financial Statements 32
(a)(2) Financial Statement Schedules:
Report of Independent Accountants
Schedule II
Other Schedules are omitted because the conditions required for filing do
not exist or the required information is included in the financial statements
or notes thereto.
(a)(3) Exhibits: See Index to Exhibits Page. The Exhibits listed in the accompanying
Index of Exhibits are filed as part of this Report.
(b) Reports on Form 8-K: None.
(c) Exhibits: See Index to Exhibits Page. The Exhibits listed in the accompanying
Index of Exhibits are filed as part of this Report.
(d) Financial Statement Schedules: See (a)(1) above
</TABLE>
26
<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 September 30, 1996 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the eight months ended September 30, 1996. We have also audited the balance
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 September 30, 1996, and the
consolidated results of their operations and their cash flows for the eight
months ended September 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
October 14, 1996, except for Notes 5 and 12,
for which the date is October 16, 1996, and for
Notes 7 and 12, for which the date is October 18, 1996
27
<PAGE>
SPLASH TECHNOLOGY HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
September 30, 1995 and 1996
(in thousands, except share data)
<TABLE>
<CAPTION>
Predecessor Splash Technology
Business Holdings, Inc.
------------ --------------------------------
Pro forma
(Note 2)
September 30, September 30, September 30,
ASSETS 1995 1996 1996
------------- ------------- ------------
Current Assets: (unaudited)
<S> <C> <C> <C>
Cash and cash equivalents $ - $ 6,179
Accounts receivable, net of allowance for doubtful
accounts of $84 and $299 in 1995 and 1996, respectively 4,716 5,767
Inventories 3,965 3,651
Prepaid expenses and other current assets - 119
Deferred income taxes 622 3,962
------- -------
Total current assets 9,303 19,678
Property and equipment, net 385 913
Deferred income taxes - 8,315
Other assets - 1,511
------- -------
Total assets $ 9,688 $30,417
======= =======
LIABILITIES
Current Liabilities:
Trade accounts payable $ 2,538 $ 1,239
Other accrued liabilities 1,074 2,533
Royalties payable 1,978 1,260
Deferred revenue - 4,150
Income taxes payable 1,395 1,725
------- -------
Total current liabilities 6,985 10,907
Subordinated promissory notes payable to stockholders - 8,600
------- -------
Total liabilities 6,985 19,507
------- -------
Commitments (Note 6)
STOCKHOLDER'S EQUITY
Preferred stock:
Authorized: 5,000,000 shares;
Series A preferred stock, par value $.001 per share:
Authorized, issued and outstanding: 15,426 shares - 1 $ 1
(Liquidation value: $15,735)
Series B preferred stock, par value $.001 per share:
Authorized, issued and outstanding: 4,282
shares in 1996 and no shares pro forma - 1 -
(Liquidation value: $4,338)
Parent company investment 2,703
Common stock, par value $.001 per share:
Authorized: 10,000,000 shares in 1996 and 50,000,000
shares pro forma; issued and outstanding: 7,603,123
shares in 1996 and 9,344,252 shares pro forma - 8 9
Additional paid-in capital 19,826 19,826
Retained earnings (accumulated deficit) - (8,926) (8,926)
------- ------- --------
Total stockholders' equity 2,703 10,910 $ 10,910
------- ------- ========
Total liabilities and stockholders' equity $ 9,688 $30,417
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
28
<PAGE>
SPLASH TECHNOLOGY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Splash
Technology
Holdings,
Predecessor Business Inc.
------------------------------------------------- -------------
Four Eight
Year Ended Months Months
September 30, Ended Ended
------------------------- January 31, September 30,
1994 1995 1996 1996
--------- --------- ----------- ------------
<S> <C> <C> <C> <C>
Net revenue $16,354 $30,472 $13,008 $ 34,713
Cost of revenue 12,068 20,723 8,427 19,381
------- ------- ------- --------
Gross profit 4,286 9,749 4,581 15,332
------- ------- ------- --------
Operating expenses:
Research and development 1,999 3,295 1,498 2,627
Sales and marketing 562 2,076 688 1,756
General and administrative 377 891 287 1,276
Amortization of purchased technology
and goodwill and write-off of
in-process technology - - - 22,803
------- ------- ------- --------
Total operating expenses 2,938 6,262 2,473 28,462
------- ------- ------- --------
Income (loss) from operations 1,348 3,487 2,108 (13,130)
Interest expense, net - - 18 575
------- ------- ------- --------
Income (loss) before provision
for income taxes 1,348 3,487 2,090 (13,705)
Provision for (benefit from) income taxes 99 1,395 836 (5,509)
------- ------- ------- --------
Net income (loss) $ 1,249 $ 2,092 $ 1,254 $ (8,196)
======= ======= ======= ========
Net loss per share $(.93)
========
Shares used in per share calculation 9,583
========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
29
<PAGE>
SPLASH TECHNOLOGY HOLDINGS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
<TABLE>
<CAPTION>
Retained
Preferred Stock Common Stock Additional Earnings
--------------- ------------- Paid-In (Accumulated
Shares Amount Shares Amount Capital Deficit) Total
------ ------ ------ ------ ---------- --------- --------
<S> <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 599,627 101 101
Accretion for dividends on Series A
and B preferred stock 730 (730)
Repurchase of common stock (5,250) (1) (1)
Net loss (8,196) (8,196)
------ --- --------- --- ------- ------- -------
Balances, September 30, 1996 19,708 $ 2 7,603,123 $ 8 $19,826 $(8,926) $10,910
====== === ========= === ======= ======= =======
</TABLE>
PREDECESSOR BUSINESS STATEMENT
OF PARENT COMPANY INVESTMENT
(In thousands)
<TABLE>
<CAPTION>
<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.
30
<PAGE>
SPLASH TECHNOLOGY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Splash
Technology
Predecessor Business Holdings, Inc.
------------------------------------------------- --------------
Four Eight
Months Months
Year Ended Ended Ended
September 30, January 31, September 30,
------------------------ ---------- ------------
1994 1995 1996 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,249 $ 2,092 $ 1,254 $ (8,196)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization 80 259 102 195
Provision for doubtful accounts 16 68 17 198
Purchased and in-process technology - - - 22,729
Deferred income taxes (622) - 622 (11,409)
Changes in assets and liabilities:
Accounts receivable (3,947) 490 (4,597) 3,330
Inventories (513) (2,678) 2,231 (1,917)
Prepaid expenses and other
current assets - - - (119)
Other assets - - - (464)
Trade accounts payable (914) 1,766 (2,391) 1,093
Other accrued liabilities 317 743 1,986 (464)
Royalties payable 796 745 1,434 (2,112)
Deferred revenue - - 905 1,080
Income taxes payable 721 674 (559) 1,725
------- ------- ------- --------
Net cash provided by (used
in) operating activities (2,817) 4,159 1,004 5,669
------- ------- ------- --------
Cash flows from investing activities:
Purchase of property and equipment (280) (444) (63) (604)
Acquisition of Color Server Group
from Radius - - - (23,421)
------- ------- ------- --------
Net cash used in investing
activities (280) (444) (63) (24,025)
------- ------- ------- --------
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 - - - 100
Net change in Parent Company
Investment 3,097 (3,715) (12) -
------- ------- ------- --------
Net cash provided by (used
in) financing activities 3,097 (3,715) (12) 23,606
------- ------- ------- --------
Net increase in cash - - 929 5,250
Cash and cash equivalents at beginning
of period - - - 929
------- ------- ------- --------
Cash and cash equivalents at end of
period $ - $ - $ 929 $ 6,179
======= ========= ======= ========
Supplemental disclosure of cash flow
information:
Taxes paid $ - $ - $ - $ 4,175
Interest paid $ - $ - $ - $ 704
Non-cash financing activities:
Accretion of preferred stock $ - $ - $ - $ 730
Issuance of Series B preferred stock $ - $ - $ - $ 4,100
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
31
<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., Splash Foreign Sales Corporation and
Splash Technology S.a.r.l., develops, produces and markets color servers that
provide an integrated link between desktop computers and digital color copiers
and enable such copiers to provide high quality, high speed 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 copier systems which are sold to end users in North and
South America, Europe, Asia, Australia, Japan, New Zealand, Africa and the
Middle East. The Company operates in one business segment.
The business of the Company was previously operated as the
unincorporated Color Server Group of SuperMac Technologies, Corp. ("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 consisting of
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
existing purchased technology related to the Company's Power Series products for
which the Company was developing a replacement product at the time of the
acquisition due to the discontinuance of the Apple Nubus architecture on which
the Power Series products 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>
32
<PAGE>
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 year ended September
30, 1994 and 1995 and for the four months ended January 31, 1996, and the
balance sheet as of September 30, 1995, as if the Color Server Group existed as
a corporation separate from Radius and Super Mac during such periods on a
historical basis. The Company's financial statements presented herein include
the results of operations and cash flows for the eight months ended September
30, 1996 and the balance sheet as of that date.
Radius and SuperMac each performed certain corporate headquarter
functions on behalf of the Color Server Group and provided certain marketing,
technology, human resource, financial and accounting services. Costs associated
with these services have been allocated to the Color Server Group based on
relative headcount, which management believes is 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., Splash Foreign Sales Corporation, 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
September 30, 1996, the Company had deferred revenue of approximately $4.2
million from sales of the 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
33
<PAGE>
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
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 money market funds held
in U.S. banks and other financial institutions.
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.
Therefore, 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 AND OTHER RISKS:
Cash and cash equivalents are primarily deposited with major banks and
other financial institutions in the United States. Deposits in these
institutions 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 color copiers on a worldwide basis. The Company
performs ongoing credit evaluations of its customers. The Company does not
require collateral for its receivables and maintains an allowance for potential
credit
34
<PAGE>
losses. At September 30, 1996, the accounts receivable balance is comprised
primarily of one customer, which represents 93% 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.
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 and, in
certain situations, to recognize an impairment loss. SFAS 121 will become
effective for the Company's year ending September 30, 1997. The Company believes
the impact will not be significant.
During October 1995, the Financial Accounting Standards Board issued
Statement No. 123 ("SFAS 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 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.
The Company believes the impact will not be significant.
COMPUTATION OF NET LOSS PER SHARE:
Net loss per share is computed using the weighted average number of
common shares outstanding during the period.
The Company has determined the number of shares used in calculating
earnings per share 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 PRO FORMA INFORMATION:
In conjunction with the initial public offering, all of the Company's
outstanding Series B Convertible Preferred Stock converted into shares of Common
Stock as described in Note 7. The pro forma effect of this conversion has been
reflected in the accompanying pro forma balance sheet assuming the conversion
had occurred September 30, 1996.
35
<PAGE>
3. Balance Sheet Detail (in thousands):
--------------------
INVENTORIES:
<TABLE>
<CAPTION>
Splash
Technology
Predecessor Holdings,
Business Inc.
------------ ------------
September 30, September 30,
1995 1996
------------ ------------
<S> <C> <C>
Raw materials $ 591 $1,580
Work in process 166 -
Finished goods 3,208 2,071
------ ------
$3,965 $3,651
====== ======
</TABLE>
PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
Splash
Technology
Predecessor Holdings,
Business Inc.
------------ ------------
September 30, September 30,
1995 1996
------------ ------------
<S> <C> <C>
Furniture and fixtures $ 201 $ 392
Computer equipment 523 415
Leasehold improvements - 81
Trade show booth - 146
------ ------
724 1,034
Less accumulated depreciation
and amortization (339) (121)
------ ------
$ 385 $ 913
====== ======
</TABLE>
4. Revolving Credit Facility:
-------------------------
In September 1996, the Company entered into an agreement with a bank
to borrow up to a maximum of $5,000,000 under a revolving line of credit subject
to a borrowing base of 80% and 75% of eligible domestic and foreign accounts
receivable, respectively. The line bears interest at prime rate, is
collateralized in accounts receivable, owned property and equipment and
inventory of the Company, and matures on January 1, 1998. The agreement
contains dividend restrictions and certain financial covenants concerning
liquidity, net worth and indebtedness ratios, as well as profitability. The
Company has no borrowings outstanding under the line of credit as of September
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. On October 16, 1996, the Company repaid the subordinated
promissory notes payable to shareholders with proceeds of its initial public
offering (see Note 12).
36
<PAGE>
6. Commitments:
-----------
The Company leases certain office facilities under noncancelable
operating leases which expire through 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>
September 30, 1997 $ 413
September 30, 1998 416
September 30, 1999 417
September 30, 2000 431
September 30, 2001 294
</TABLE>
Rent expense for the eight months ended September 30, 1996 was $226.
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 noncash transaction as part of the consideration for the
acquisition (see Note 1). The valuation of the Series A and Series B preferred
stock by an independent third party resulted in assigning values of $14,700,000
and $4,100,000, respectively, for those instruments. The carrying amounts of
both Series A and Series B have been increased by amounts representing dividends
not currently declared or paid but which may be payable under the stocks'
dividend rights. The increases have been effected by a charge against retained
earnings.
On October 9, 1996, the Company initiated trading of its common stock
under an initial public offering. On October 18, 1996, the Company redeemed the
Series A preferred stock, and the Series B preferred stock converted to common
stock.
8. Common Stock:
------------
On January 31, 1996, the Company sold 7,008,746 shares of common stock
for $80,100. These shares have been valued at $206,000 based on an independent
third party appraisal. The Company has granted certain registration rights to
certain holders of common shares, options, warrants and convertible securities.
In connection with a line of credit, the Company issued a 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. The warrant
expires on January 31, 2001.
STOCK OPTIONS AND REPURCHASE AGREEMENTS:
The Company has reserved 3,150,000 shares of common stock for issuance
under its stock option plan. 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 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 36
months.
37
<PAGE>
Activity for the Company's stock option is summarized as follows:
<TABLE>
<CAPTION>
Average
Available Outstanding Price Amount
--------- ----------- ------------ -------------
(in thousands)
<S> <C> <C> <C> <C>
Options authorized 3,150,000
Options granted (894,880) 894,880 $0.14-$11.00 $ 758
Options canceled 27,128 (27,128) $ 0.14 4
Options repurchased 5,250 - $ 0.14 (1)
Options exercised - (599,627) $ 0.14-$0.29 101
--------- ------- ------
Balances, September 30, 1996 2,287,498 268,125 $0.14-$11.00 $ 862
========= ======= ======
</TABLE>
The terms of each option are no more than 10 years from the date of
the grant. At September 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 to OEM customers in the United States
and Japan. Net revenue from export sales accounted for 60%, 59%, 61% and 55% of
total revenues for the years ended September 30, 1994 and 1995, the four months
ended January 31, 1996 and the eight months ended September 30, 1996,
respectively. All of export sales were made to Japan.
In the years ended September 30, 1994 and 1995, the four months ended
January 31, 1996 and the eight months ended September 30, 1996, two customers
accounted for 60% and 40%, 59% and 41%; 62% and 38%; and 55% and 45% of total
revenues, respectively. In addition, although all sales made to the Company's
U.S. based customer 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.
10. Income Taxes:
------------
The provision for (benefit from) income taxes consists of the
following (in thousands):
<TABLE>
<CAPTION>
Splash
Technology
Predecessor Business Holdings, Inc.
--------------------------------------- -------------
Four Eight
Year Ended Months Months
September 30, Ended Ended
--------------------- January 31, September 30,
1994 1995 1996 1996
------ ------ ---------- ------------
<S> <C> <C> <C> <C>
Current: $ 522 $1,095 $ 192 $ 4,690
Federal 199 300 22 1,210
----- ------ ----- --------
State 721 1,395 214 5,900
----- ------ ----- --------
Deferred:
Federal (537) - 537 (9,794)
State (85) - 85 (1,615)
----- ------ ----- --------
(622) - 622 (11,409)
----- ------ ----- --------
$ 99 $1,395 $ 836 $ (5,509)
===== ====== ===== ========
</TABLE>
38
<PAGE>
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.
--------------------------------------- -------------
Four Eight
Year Ended Months Months
September 30, Ended Ended
--------------------- January 31, September 30,
1994 1995 1996 1996
------ ------ ---------- ------------
<S> <C> <C> <C> <C>
Tax provision at federal statutory rate 34.0% 34.0% 34.0% (35.0)%
State taxes, net of federal tax benefit 6.1 6.1 6.1 (6.0)
Net operating losses (33.3) - - -
Other 0.6 (0.1) (0.1) 1.0
---- ----- ----- -------
7.4% 40.0% 40.0% (40.0)%
==== ===== ===== =======
</TABLE>
The components of the deferred tax asset are as follows (in
thousands):
<TABLE>
<CAPTION>
September 30,
----------------------
1995 1996
------- -------
<S> <C> <C>
Deferred tax assets:
In-process and purchased technology $ - $ 8,903
Receivables allowances 34 511
Inventory valuation allowance 221 422
Warranty accruals 128 191
State taxes 102 424
Deferred revenue - 1704
All other 137 122
----- -------
Total deferred tax assets 622 12,277
Long-term portion of in-process and purchased technology - (8,315)
------ -------
Current portion of deferred tax asset $ 622 $ 3,962
====== =======
</TABLE>
At September 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 entire deferred
tax asset would be recovered.
11. Employee Benefit Plans:
----------------------
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 their compensation, subject to certain
limitations. The Company, at its discretion, may make additional contributions.
All employer contributions are 100% vested after four years. During the eight
months ended September 30, 1996, the Company recorded approximately $119,000 in
contributions to the Plan.
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.
39
<PAGE>
12. Subsequent Events:
-----------------
On October 3, 1996, the following corporate matters were completed:
. The Company's Amended and Restated Certificate of Incorporation was
amended 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.
. The Company's common stock was split 3.5 shares to one share. The
accompanying financial statements reflect the stock split.
On October 9, 1996, the Company initiated trading of 2,600,000 shares of
its common stock under an initial public offering. On October 16, 1996, the
proceeds from the initial public offering were used to retire the subordinated
debt (see Note 5). On October 18, 1996, the Company redeemed its Series A
preferred stock, and the Series B preferred stock was converted into the
Company's common stock (see Note 7).
40
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, this
report has been signed and thereunto duly authorized, in the City of Sunnyvale,
State of California, on December 24, 1996.
SPLASH TECHNOLOGY HOLDINGS, INC.
By: /s/ Kevin K. Macgillivray
-------------------------------
Kevin K. Macgillivray
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Kevin Macgillivray and Joan Platt
and each of them acting individually, as his or her attorney-in-fact, each with
full power of substitution, for him or her in any and all capacities, to sign
any and all amendments to this report and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming our signatures as they may
be signed by our said attorney to any and all amendments to said report.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
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 December 24, 1996
- ----------------------------- Chief Officer (Principal
Kevin K. Macgillivray Executive Officer)
/s/ Joan P. Platt Chief Financial Officer and December 24, 1996
- ----------------------------- Vice President, Finance and
Joan P. Platt Administration (Principal
Financial and Accounting
Officer)
/s/ Gregory M. Avis Director December 24, 1996
- -----------------------------
Gregory M. Avis
/s/ Charles W. Berger Director December 24, 1996
- -----------------------------
Charles W. Berger
/s/ Peter Y. Chung Director December 24, 1996
- -----------------------------
Peter Y. Chung
/s/ Lawrence G. Finch Director December 24, 1996
- -----------------------------
Lawrence G. Finch
</TABLE>
41
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
In connection with our audit of the consolidated financial statements
of Splash Technology Holdings, Inc., and its subsidiaries as of September 30,
1996 and for the eight months ended September 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 Company's Annual Report on Form 10-K,
we have also audited the financial statement schedule listed in Item 14(a)(2)
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
October 14, 1996
42
<PAGE>
SPLASH TECHNOLOGY HOLDINGS, INC.
FINANCIAL STATEMENT SCHEDULE
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
VALUATION FOR DOUBTFUL 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
Eight months ended September 30, 1996............... $101 $ 198 $ - $ 299
BALANCE AT BALANCE AT
VALUATION FOR INVENTORY RESERVES BEGINNING OF PERIOD ADDITIONS DEDUCTIONS END OF PERIOD
- ---------------------------------------- ------------------- --------- ---------- -------------
Years ended:
September 30, 1994(1).............................. $ - $ 575 $ - $ 575
September 30, 1995(1).............................. $575 $ - $ (25) $ 550
Four months ended January 31, 1996(1).............. $550 $ - $(550) $ -
Eight months ended September 30, 1996(1)........... $ - $1,028 $ - $1,028
BALANCE AT BALANCE AT
VALUATION FOR WARRANTY RESERVES BEGINNING OF PERIOD ADDITIONS DEDUCTIONS END OF PERIOD
- ---------------------------------------- ------------------- --------- ---------- -------------
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
Eight months ended September 30, 1996............. $141 $ 353 $ (27) $ 467
</TABLE>
(1) Predecessor Business.
43
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ -----------------------
11.1 Computation of Earnings Per Share
23.1 Consent of Coopers & Lybrand L.L.P.
27.1 Financial Data Schedule
<PAGE>
EXHIBIT 11.1
SPLASH TECHNOLOGY HOLDINGS, INC.
COMPUTATION OF EARNINGS PER SHARE (1)
(in thousands, except per share amounts)
<TABLE>
EIGHT MONTHS
ENDED
SEPTEMBER 30, 1996
------------------
<CAPTION>
<S> <C> <C>
Weighted average common shares
outstanding for the period............................... 7,008,750
Common equivalent shares pursuant
to Staff Accounting Bulletin No. 83 (2)..................
Common equivalent shares deemed
outstanding from options and warrants to acquire
common stock deemed converted
using Modified Treasury Stock Method................ 833,114
Common equivalent shares outstanding
from conversion of preferred stock.................. 1,741,127 2,574,241
--------- ------------
Shares used in per share calculation 9,582,991
============
Net loss $ (8,196)
Cumulative dividends on preferred stock (730)
------------
Adjusted net loss $ (8,926)
============
Net loss per share $ (0.93)
============
</TABLE>
(1) This exhibit presents the primary and fully diluted computations of net
loss per share. There is no significant difference in the per-share amounts
when applying either method.
(2) The number of common equivalent shares which were issued during the twelve
months immediately preceeding the Company's initial public offering date
pursuant to the grant of stock options (using the treasury stock method and
proposed offering price) and the issuance of warrants and other common
stock equivalents have been included in the calculation of common
equivalent shares pursuant to Securities and Exchange Commission Staff
Accounting Bulletin No. 83.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration
statement of Splash Technology Holdings, Inc. on Form S-3 (File No. 333-13815)
of our report dated October 14, 1996, except for Notes 5 and 12, for which the
date is October 16, 1996, and for Notes 7 and 12, for which the date is October
18, 1996 on our audits of the consolidated financial statements and financial
statement schedule of Splash Technology Holdings, Inc. as of September 30, 1996
and for the eight months ended September 30, 1996 and of the Predecessor
Business as of September 30, 1995 and for the years ended September 30, 1994 and
1995 and the four months ended January 31, 1996, which report is included in
this Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P
San Jose, California
December 20, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 8-MOS 4-MOS
<FISCAL-YEAR-END> SEP-30-1996 SEP-30-1996
<PERIOD-START> FEB-01-1996 OCT-01-1995
<PERIOD-END> SEP-30-1996 JAN-31-1996
<CASH> 6,179 0
<SECURITIES> 0 0
<RECEIVABLES> 5,767 0
<ALLOWANCES> 299 0
<INVENTORY> 3,651 0
<CURRENT-ASSETS> 19,678 0
<PP&E> 913 0
<DEPRECIATION> 121 0
<TOTAL-ASSETS> 30,417 0
<CURRENT-LIABILITIES> 10,907 0
<BONDS> 8,600 0
0 0
2 0
<COMMON> 8 0
<OTHER-SE> 10,900 0
<TOTAL-LIABILITY-AND-EQUITY> 30,417 0
<SALES> 34,713 13,008
<TOTAL-REVENUES> 34,713 13,008
<CGS> 19,381 8,427
<TOTAL-COSTS> 19,381 8,427
<OTHER-EXPENSES> 28,462 2,473
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 575 18
<INCOME-PRETAX> (13,705) 2,090
<INCOME-TAX> (5,509) 836
<INCOME-CONTINUING> (8,196) 1,254
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (8,196) 1,254
<EPS-PRIMARY> .93 0
<EPS-DILUTED> .93 0
</TABLE>
