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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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, 1997
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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
SPLASH TECHNOLOGY HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0418472
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
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 [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part Ill 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 December 17, 1997 was approximately $157 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 December 17,1997 was 13,855,089.
Documents incorporated by reference: Items 10,11,12 and 13 of Part Ill are
incorporated by reference from the Registrant's Proxy Statement for the Annual
Meeting of Stockholders to be held on February 26, 1998. This Report contains 45
sequentially numbered pages of which this is Number 1.
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PART 1
This report on Form 10-K contains forward-looking statements that
involve risks and uncertainties. The Company's actual results may differ
materially from the results discussed in such forward-looking statements.
Factors that may cause such a difference include, but are not limited to,
those discussed in "Factors Affecting Future Results". Unless the context
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 work flow 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, Power-PC 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, Xerox
B.V.) ("Xerox") and Fuji Xerox Company Ltd. ("Fuji Xerox"). The original
equipment manufacturers ("OEMs") integrate the Company's color servers with
their digital color copiers and sell the connected systems to end users
through a worldwide direct distribution network. Users of the Company's color
servers include magazine publishers, advertising firms, graphic arts firms,
publishing services providers, prepress and printing firms, and Fortune 500
companies with in-house graphics, marketing and advertising and publishing
needs.
Splash Technology Holdings, Inc. was incorporated in Delaware in
December 1995. The Company's business operated as the Color Server Group (CSG)
division of SuperMac Technology, Inc. ("SuperMac") from late 1992 to August
1994, and after the merger of SuperMac into Radius Inc. ("Radius") as the CSG
division of Radius from August 1994 until January 1996. In January 1996, the
Company was acquired by an investor group led by certain entities affiliated
with Summit Partners, L.P. and Sigma Partners, L.P. (the "Splash
Acquisition"). The Company's executive offices are located at 555 Del Rey
Avenue, Sunnyvale, CA 94086, and its telephone number is (408) 328-6300.
PRODUCTS AND TECHNOLOGY
Product Lines
Splash offers both pre-configured color server systems and board-level
server kits. The preconfigured color server systems include a Splash copier
interface board and frame buffer installed in an Power PC based computer and
feature Splash software, a color display, a keyboard and an interface cable.
The server kits do not include the computer, display and keyboard, thereby
allowing the customer or reseller to install the Splash color server on a
locally procured or existing compatible system. Splash products are sold under
the Splash brand worldwide except in Japan, where they are sold under the SM
ICS brand name of Fuji Xerox. The fundamental architectures of the SM ICS and
Splash products are substantially identical other than localization
differences for user interface and documentation.
Splash's primary product lines are the Splash Professional Color
Imaging ("PCI") Series, first introduced in May 1996, and the Splash for
DocuColor ("DC Series"), first introduced in September 1996. These products
generally use Apple Power Macintosh computers and are compatible with the PCI
bus architecture. The Splash Power Series product line, based on a design
originally launched in 1993 and updated over the years with successive
software releases, uses the NuBus architecture found in earlier Apple Power
Macintosh computers. The Company continues to offer Power Series products in
limited quantities, primarily as spare parts. The retail prices to end users
of Splash products vary by geographical region, model and configuration. For
example, depending on the model and configuration, the retail prices to end
users of PCI Series products currently range from $13,000 to $28,000 in the
United States and (Yen)1.6 million to (Yen)3.19 million in Japan. The retail
price to end users of the one DC Series product marketed in the United States
is $50,000 and the retail prices to end users of the three DC Series products
marketed in Japan range from (Yen)4.15 million to (Yen)6.8 million.
To expand its product offerings targeted at the low-end and mid-range
market for color servers, Splash recently consummated two acquisitions. In May
1997, Splash acquired Quintar Holdings Corporation ("Quintar"), a company
based in Torrance, California, that designs, manufactures and markets embedded
controllers for desktop color printers, as well as proprietary servers for
high-speed, multifunction monochrome and color printers and copiers. In
October 1997, Splash acquired ColorAge Inc. ("ColorAge"), a company based in
Billerica, Massachusetts, that designs, manufactures and markets DocuPress, a
line of color document print servers targeted principally at the emerging
market for high speed color printing in the office.
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Product Features and Technology
Splash servers are based on open systems, enabling the Company to
leverage the development efforts of computer and operating system suppliers,
and thereby concentrate its development resources in those areas specific to
the concerns of color users. This open systems approach has provided an
advantage in bringing innovative color and workflow solutions to the market
rapidly. It has also enabled the Company to provide its customers with
performance increases by taking advantage of improvements in industry standard
computers.
The Company's products include a Splash-designed copier interface
board integrated with a standard computer system and Splash software written
for the server and its networked clients. The Splash 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
users to employ page layout and publishing software to print pre-proofs from
color copiers that incorporate overprinting (overlapping mixing of colors) and
Desktop Color Separations (high-resolution separation files). This feature
allows the printing of high quality pre-proofs and thereby saves professional
color publishing end users time and money by reducing the number of cycles of
film proofs required for the design and production process.
Splash Match. Splash Match is a unique color management solution that
permits rapid, automatic and accurate color correction of image files. The
user can select among a variety of color profiles including RGB monitor
matching and CMYK press matching-through "check box" selections within a
printing window in the graphical user interface from a networked client.
Splash ColorCal. Splash ColorCal is a fast, easy-to-use calibration
utility that utilizes a unique randomized calibration target and a copier's
built-in digital scanning capability for calibration. By making calibration
fast and simple and eliminating the need for separate, expensive
densitometers, Splash provides a mechanism for frequent calibration that
assures reproducible, consistent color. All Splash Match color profiles (RGB
and CMYK) are updated simultaneously upon completion of calibration. Splash
Match also provides an "expert mode" of operation that allows the user to
customize a copier's output to the unique print characteristics of a given
press intended for final printing.
Splash AccuColor. Splash AccuColor, implemented as part of Splash
Match, allows for more accurate translation and printing of monitor blues
without the significant purple shift that occurs with almost all other
printing alternatives. This is a performance advantage in printing
applications where the desired goal is producing output that comes as close as
possible to matching the RGB colors on a user's display. Splash AccuColor
allows for screen-to-press matching through the use of one of several Splash
press profiles selectable in Adobe Photoshop.
Splash IntelliColor. Splash IntelliColor compensates for mistakes
commonly made during the design process such as mixing different RGB file
formats or combining RGB and CMYK formats in the same document. Images
combined in the same file are separately and accurately color corrected. This
capability is independent of the end user's application or computer
workstation.
Splash Scan and Splash Print. Both Splash Scan and Splash Print are
Adobe Photoshop Plug-in modules that provide 400-dpi, 24-bit color scanning
from the copier and ultra high-speed bit map printing to a copier,
respectively. In this way, scans can be made, retouched and printed locally
without tying up the network.
Splash Colortone. Splash Colortone enhances the print quality of color
servers that have limited frame buffer memory. Splash Colortone delivers true,
continuous tone (contone) or near-contone quality output optimized to the
available frame buffer memory. Splash Colortone is automatically engaged
whenever the Splash server has too little memory to print a given page size
with full color quality. The Splash Colortone feature can print with either a
2:1 memory savings, yielding near-contone quality, or a 4:1 memory savings,
yielding prints with some but often minimal degradation. Splash automatically
switches back to true contone printing when sufficient memory is available.
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Splash Edit. Splash Edit is a utility that enables the user to change
certain print settings at the Splash server after the print job has been sent
by the user across the network. Changeable print settings include number of
copies, tray selection, color correction choice, page range and sorter.
Because these settings can be changed at the Splash server next to the copier,
the user saves time by not having to return to the client computer to resend
the file.
Spot Color Matching. Spot Color Matching allows the printing of spot
colors (within the color gamut of the copier) without converting them to
process color and without interrupting the user's existing work flow.
Progressives. The Progressives feature enables the printing of any of
the four CMYK plates, in any combination, and in the resulting color of that
combination. Proofing four-color work on a two-color press is one of the many
uses of Progressives.
Further Enhanced Calibration (ColorCal). The ColorCal feature enhances
the ability to store up to 10 custom color profiles. In addition, ColorCal
works with Fuji Xerox DocuColor 40 copiers and Xerox DocuColor 4040 copiers
through the use of desktop scanners.
World Wide Web/Internet/Intranet Printing. The Web Server option allows
users to print or manage a print job from any workstation on an intranet or
the Internet.
SALES AND MARKETING
Splash sells its 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 Europe, while Fuji Xerox sells
primarily in Japan and the Asia Pacific region. Xerox and Fuji Xerox each
provide primary customer service through their worldwide networks, while
Splash provides backup support to Xerox and Fuji Xerox. These relationships
allow Splash to provide strong customer support at the local level as well as
providing Splash with a valuable source of input for product enhancement.
Splash believes that the strength of Xerox and Fuji Xerox in the office
equipment market provides the Company with a significant opportunity to expand
its presence in the end user office printing market.
Xerox and Fuji Xerox sell Splash products as well as competing color
servers. Although the Company has a contract with Xerox, the Company does not
have a contract with Fuji Xerox with respect to its products and is currently
operating on a purchase order basis with Fuji Xerox. There can be no assurance
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.
As of September 30, 1997, the Company employed 32 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 continue to expand its sales and marketing
efforts. The Company plans to recruit and hire additional field personnel in
Europe, the United States, the Asia Pacific region and Latin America, 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, where end users who are discerning about color and print quality
require high quality innovative color server solutions. The Company believes
that the emerging use of color in a variety of printing applications is
creating an opportunity for the Company's products in the other market
segments.
Commercial and Short-Run Printing. The commercial printing market
represents the highest quality and highest volume color printing production.
Firms in this market typically have their roots in traditional offset press
printing, in which output is developed in-house at businesses and other
organizations, prepared for printing by service bureaus and trade shops (which
often perform prepress services as described below) and then delivered to the
commercial printer for printing on large, expensive printing presses. In
recent years, many firms in the commercial printing market have begun to
expand into prepress and short-run printing services. These firms use color
server-based printing devices to more rapidly and less expensively produce pre-
proofs of color output. In addition, many of these firms have begun to use
color server-based printing devices as a less expensive alternative for
printing in
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smaller quantities. End users of Splash products in this segment include
Applied Computer Services, Inc. and R.R. Donnelley & Sons Company.
Prepress and Photo Labs. The prepress market consists of service bureaus
and trade shops which handle complex color production for end users that
intend to send print jobs to short-run and commercial printing firms for high
quality or high volume printing, as well as photo labs which provide high-end
photographic services. Prepress firms work closely with end users and the
local commercial printers that perform the print jobs. Prepress firms provide
high end scanning, image retouching, imagesetter output of color separation
films for proofing and, in some cases, the production of contract proofs which
serve as the standard for the commercial print run. Firms in this market are
utilizing color server-based printing devices as a means to reduce the cost
and turnaround time for image design, modification and pre-proofing. End users
of Splash products in this segment include the Digital Cafe, a wholly-owned
subsidiary of Boston Photo Imaging, and smaller, local operators.
Graphic Arts and Professional Color Publishing. The graphic arts and
professional color publishing market consists of in-house creative staffs and
advertising agencies and design firms. These creative professionals perform
extensive color design and layout, but historically have not performed print
production. Users typically utilize networked personal computers and
workstations for color design and use color server-based printing devices for
conceptual and comprehensive designs as well as pre-proofs. Users typically
compose the color image to be printed utilizing applications such as Adobe
Photoshop, Adobe Illustrator, QuarkxPress, Adobe PageMaker, Corel Corp. Corel,
Corel Ventura Publisher, MetaCreations Live Picture and Macromedia Freehand.
End users of Splash products in this segment include DRC Advertising, Hearst
Magazines and Gibson Greetings, Inc.
Print for-Pay. Print-for-pay firms provide a broad range of walk-in
services including faxing, copying and desktop publishing. Recently these
firms have begun to use connected color copiers to offer expanded color
printing and copier services. Users in this market segment range from
franchised and local storefronts traditionally focused on black and white
copying services to specialized firms. End users of Splash products in this
segment include PIP Printing.
Office Color Printing. The office color printing market consists of
networked office printing and central reproduction departments in businesses
and other organizations. These organizations, which have typically used black
and white laser printers and desktop color ink jet printers for production of
word processed documents, spreadsheets and presentations, are increasingly
using connected copiers to produce materials such as product brochures and
internal communications. This market segment is still emerging, and the
Company believes the ability of color servers to operate across corporate
networks will help expand this market.
MANUFACTURING
The Company outsources the manufacture of its products to third party
subcontract manufacturers including 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 Power PC 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.
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 experienced and continues to experience 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. The Company has also experienced difficulties
related to Apple's delay in the release of new models. If Apple were to
continue to experience such delays or discontinue production of the Power
Macintosh models with which Splash products operate or were
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unable to provide or otherwise ceased 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
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 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,
Apple, Fuji Xerox and Xerox.
The Company has historically devoted a significant amount of its
resources to research and development. As of September 30, 1997, the Company
had 45 employees engaged in research and development. Research and development
expenses in fiscal 1995, 1996 and 1997 were $3.3 million, $4.1 million and
$6.1 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.
There can be no assurance that 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.
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
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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 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
in the Splash Acquisition, and EFI could add Splash as a defendant to the suit
at any time. Although a portion of the purchase price in the Splash
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 he 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
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such software will be released to Xerox in the event that the Company either
files bankruptcy and as a result is unable to deliver products for the thirty
(30) days of the previously committed date, or ceases operations.
The Company relies upon certain software licensed from third parties.
There can be no assurance that the software licensed by the Company will
continue to provide competitive features and functionality or that licenses
for software currently utilized by the Company or other software which the
Company may seek to license in the future will be available to the Company on
commercially reasonable terms. The loss of, or inability to maintain, existing
licenses could result in shipment delays or reductions until equivalent
software or suitable alternative products could be developed, identified,
licensed and integrated, and the inability to license key new software that
may be developed, on commercially reasonable terms, would have a material
adverse effect on the Company's competitive position. Any such event would
materially adversely affect the Company's business, operating results and
financial condition.
EMPLOYEES
As of September 30, 1997, the Company employed 103 people, including 45
in research and development, 9 in operations, 32 in sales and marketing, and
17 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, directors and other key personnel of the Company as of
September 30, 1997:
NAME AGE POSITION
- ---- --- --------
Kevin K. Macgillivray 38 President, Chief Executive Officer and Director
Joan P. Platt 43 Chief Financial Officer and Vice President,
Finance and Administration
Timothy D. Kleffman 39 Vice President, Business Development and
Product Planning
Christine A. Beheshti 35 Vice President, Software Engineering
Richard A. Falk 38 Chief Scientist
Kevin K. Macgillivray has served as President, Chief Executive Officer
and a director of the Company since January 1996. From April 1995 until the
Splash Acquisition, Mr. Macgillivray was Vice President and General Manager of
the Publishing Division of Radius Inc., a manufacturer of computer video cards
and display products. From May 1993 to April 1995, Mr. Macgillivray held other
managerial positions within Radius Inc. and SuperMac Technology, Inc., which
merged into Radius Inc. in 1994. From May 1991 to May 1993, Mr. Macgillivray
was Vice President and General Manager of Oce Graphics USA, a computer
peripherals manufacturer. Mr. Macgillivray received a B.S. in Mechanical
Engineering from Stanford University.
Joan P. Platt joined the Company in March 1996 as Vice President,
Finance and Administration and Chief Financial Officer. From October 1986 to
March 1996, Ms. Platt was a general practice partner at Coopers & Lybrand
L.L.P., a public accounting firm. Prior to 1986, Ms. Platt was a staff
accountant and manager in the business advisory, accounting and audit practice
of Coopers & Lybrand L.L.P. Ms. Platt received a B.S. in Business
Administration from The Pennsylvania State University.
Timothy D. Kleffman has served as Vice President, Business Development
and Product Planning since July 1997 and served as Vice President Engineering
Operations from the Splash Acquisition to June 1997. Mr. Kleffman was Director
of Printer Systems within the CSG at Radius and SuperMac from October 1992
until the Splash 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 Splash Acquisition. From March 1993 until the Splash
Acquisition, Ms. Beheshti held various engineering management positions with
Radius and
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SuperMac. From August 1987 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. Effective October 31, 1997, Ms. Beheshti resigned
as Vice President, Software Engineering to pursue personal interests.
Richard A. Falk has served as Splash's Chief Scientist since the Splash
Acquisition in January 1996. From October 1992 until the Splash Acquisition,
Mr. Falk served in various engineering positions with SuperMac and Radius.
From July 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 Splash 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. The Company 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
makes reliable predictions of future operating results difficult or
impossible. In particular, the Company's recent revenue growth should not be
considered indicative of future results. There can be no assurance that any of
the Company's business strategies will be successful or that the Company will
be able to sustain growth on a quarterly or annual basis. Although the Company
was profitable for the first eight months of independent operations through
September 30, 1996, before purchase accounting adjustments, and for the fiscal
year ended September 30, 1997, 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 a
significant portion of their purchases of the Company's products in the June
quarter and September quarter. As a result, the Company's sales have
historically been lower, and are to be lower, in the December quarter than in
the immediately preceding September quarter. However, the Company expects that
these customers will change their purchasing patterns in the future.
Consequently, this seasonality is expected to change in 1998 which would
affect the Company's quarterly operating results. 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 were generally recorded as net revenue
when Xerox sold these products to end users. All other 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
average selling price of the Company's products has decreased in the past
primarily as a result of competitive
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market pressures, the introduction of lower priced products and, in certain
cases, in response to new product introductions by the Company's customers.
The Company expects this trend to continue. For example, the Company lowered
pricing for new versions of its products which were introduced in June 1997.
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 or 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 continues to build corporate infrastructure 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
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 that 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 primarily 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 1995, 1996 and 1997 accounted for approximately 41%,
43% and 44%, respectively, of the Company's net revenue, and sales to Fuji
Xerox in such periods accounted for approximately 59%, 57% and 56%,
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 relatively 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. The Company is the principal supplier of color servers to
Fuji Xerox. However, Fuji Xerox has increased the number of color servers sold
to end users that were manufactured by companies other than Splash, including
EFI. In addition, the Company is required to permit testing by Xerox and Fuji
Xerox of the beta release of the Company's products and cannot begin shipping
any version to Xerox or Fuji Xerox until such version meets their respective
quality standards. 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, delay or cease
purchases and sales of Splash color servers. Although the Company has a
contract with Xerox, the Company does not have a contract with Fuji Xerox with
respect to its products and is currently operating on a purchase order basis
with Fuji Xerox. There can be no assurance as to the level of orders from
Xerox under its contract or that the Company will continue to receive orders
from 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
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significant decrease in orders from such customers in subsequent periods. For
example, in May 1996, as the Company transitioned from its Power Series line
of products to its PCI Series line of products, Xerox informed Splash that it
held in its inventory a substantial quantity of Power Series products
accumulated since January 1996. Xerox indicated to Splash that, to eliminate
this inventory and to permit Xerox to introduce the 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 in reduced sales of the Company's PCI Series
products. Moreover, Xerox had 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 was required to purchase
or already own a NuBus based Apple Power Macintosh. There can be no assurance
that the Company will receive sufficient information from Xerox, Fuji Xerox or
other customers over time or that the Company will in any event be able to
prevent the recurrence of a similar problem in the future. As a result,
Splash's customers, among other things, may be required to discount excess
inventory, may experience difficulty in selling excess inventory, may
experience reduced sales of new products or may become dissatisfied with their
relationship with Splash. Although customers have 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 significant customers.
Reduced sales of Splash products by Xerox or Fuji Xerox or any financial or
other accommodation made to Xerox or Fuji Xerox could have a material adverse
effect on the business, operating results and financial condition of Splash.
Dependence on Adobe Systems Incorporated. The Company's products depend
on the PostScript page description language software developed by Adobe
Systems Incorporated ("Adobe") and licensed by the Company from Adobe on a non-
exclusive basis. Any delay in the release of future versions of PostScript by
Adobe or in the upgrade of the Company's products to be compatible with
current or future versions of PostScript, or any material defects in any
versions of PostScript software (including defects identified in connection
with upgrades of the Company's products), 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 1998, 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. Substantially all of the Company's
current products require the use of an Apple Power Macintosh computer as a
computer platform. Apple has experienced, and continues to experience,
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. In addition,
Apple has experienced significant changes in management. If Apple were to
discontinue production of the Power Macintosh models with which Splash
products operate or were unable to provide or otherwise cease to provide an
acceptable level of end user customer support, the Company's business,
operating results and financial condition would be materially and adversely
affected. For example, Apple phased out the manufacture of Power Macintosh
products based on the NuBus architecture in the second half of calendar 1995
in favor of Power Macintosh 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. In addition, the Company has experienced
sourcing difficulties related to Apple's delay in the release of new models.
There can be no assurance that the Company will not experience similar
difficulties in the future. Any extended delay between the discontinuation of
an existing model and the release of an enhanced model by Apple could have a
material adverse effect on the Company's business, financial condition and
results of operations. 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
color server products. Because of this product concentration, a significant
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.
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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.
There can be no assurance that any of the Company's 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.
Competition. The markets for the Company's products are characterized by
intense competition and rapid change. The Company competes directly with other
independent manufacturers of color servers and with copier manufacturers, and
indirectly with printer manufacturers and others. The Company has a number of
direct competitors for color server products, the most significant of which is
EFI. Splash also faces competition from copier manufacturers that offer
internally developed color server products, such as a non-PostScript color
server offered by Fuji Xerox, or that incorporate color server features into
their copiers. In addition, the Company faces competition from desktop color
laser printers that offer increasing speed and color server capability. As
component prices decrease and the processing power and other functionality of
copiers, printers and computers increases, it becomes more likely that copier,
printer and computer manufacturers will continue to add color server
functionality to their systems, which could reduce the market for the
Company's existing line of products.
The Company also competes indirectly with manufacturers of electronic
color prepress systems, which offer similar functionality for the short-run
and commercial printing market as is provided by the Company's products. The
Company also competes indirectly with providers of color separation, color
editing and page layout software. While such software typically is
complementary to the Company's systems, such software can also be competitive
with the Company's systems and may become increasingly competitive to the
extent that the providers of such software extend the functionality of their
products in future releases.
Many of the Company's current and potential direct and indirect
competitors have longer operating histories, are substantially larger, and
have substantially greater financial, technical, manufacturing, marketing and
other resources than Splash. A number of these current and potential
competitors also have substantially greater name recognition and a
significantly larger installed base of products than the Company, which could
provide leverage to such companies in their competition with Splash. The
Company expects competition to increase to the extent the color server market
grows, and such increased competition may result in price reductions, reduced
gross margins and loss of market share, any of which could materially
adversely affect the Company's business, operating results and financial
condition. As a result of their greater resources, many of such competitors
are in a better position than Splash to withstand significant price
competition or downturns in the economy. There can be no assurance that Splash
will be able to continue to compete effectively, and any failure to do so
would have a material adverse effect upon the Company's business, operating
results and financial condition.
Risks Associated with Quintar and ColorAge Acquisition; General Risks
Associated with Acquisitions. On May 28, 1997, the Company acquired Quintar, a
company that designs, manufactures and markets embedded controllers for
desktop color printers, as well as proprietary servers for high-speed,
multifunction monochrome and color printers and copiers. In October 1997,
Splash acquired ColorAge, a company that designs, manufactures and markets
DocuPress, a line of color document print servers targeted principally at the
emerging market for high speed color printing in the office. In addition to
the risks generally associated with an acquisition (including those specified
in the following paragraph), there are specific risks associated with these
acquisitions, including those specified below. Both acquired companies have
technology under development. There can be no assurance that the technology
can be successfully developed on a timely basis or at all, or that products
based on this technology will receive widespread market acceptance. Moreover,
there can be no assurance that the Company can successfully integrate the
acquired technology. Quintar has experienced net losses in the past, including
the last three years. There can be no assurance that Quintar will not continue
to incur net losses, which the Company would be required to fund. The target
market for both of these companies, the low-end and mid-range market for color
servers, is characterized by intense competition and rapid change. Their
common principal competitor is EFI, the Company's most significant competitor.
The Company is currently planning to distribute Quintar's low-end color
servers, if successfully developed, through the reseller channel. Neither
Quintar nor the Company has previously sold into the reseller channel or has a
sales and marketing force capable of servicing this channel. There can be no
assurance that the Company will be able to successfully sell products into
this distribution channel or that it will be able to develop the sales and
marketing force required to service this channel. Splash plans to sell
DocuPress, the ColorAge product, as a complimentary product to its product
line in the Xerox sales channel. There can be no assurance that Xerox will
sell the DocuPress in the same manner in which it currently sells other Splash
product, or that the Xerox sales personnel will choose to sell the DocuPress
product.
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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 customer relationships, or otherwise present opportunities which management
believes may enhance the Company's competitive position. The success of any
acquisition could depend not only upon the ability of the Company to acquire
such businesses, products and technologies on a cost-effective basis, but also
upon the ability of the Company to integrate the acquired operations or
technologies effectively into its organization, to retain and motivate key
personnel of the acquired businesses, and to retain the significant customers
of the acquired businesses. Any acquisition, depending upon its size, could
result in the use of a significant portion of the Company's cash, or if such
acquisition is made utilizing the Company's securities, could result in
significant dilution to the Company's stockholders. 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. For example, in connection
with the Quintar and ColorAge acquisitions, Splash recorded, or will record in
the case of ColorAge, an expense related to purchased in-process research and
development of approximately $11.0 million and $ 26.9 million, respectively.
To date, other than the Splash Acquisition, the Company's only acquisition
transactions have been the Quintar and ColorAge acquisitions. 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.
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 currently does not have, but is seeking to identify and
recruit, a Vice President, Sales and Marketing. Moreover, the Company expects
to continue to increase the size of its domestic and international sales
support staff and the scope of its sales and marketing activities, and to hire
additional research and development personnel. The Company's failure to manage
any expansion effectively, including any failure to integrate new management
and employees or failure to continue to implement and improve financial,
operational and management controls, systems and procedures, could have a
material adverse effect on the Company's business, operating results and
financial condition.
Dependence on Third Party Manufacturers. The Company generally
outsources the manufacture of its products to third party subcontract
manufacturers including MSL and Logistix. MSL purchases the components used in
Splash boards from its component suppliers and performs double-sided active
surface mount assembly, in-circuit test, functional test and system test of
the printed circuit boards used in the Company's products, on a turnkey basis.
MSL also performs in-warranty and out-of-warranty repair of failed boards for
the Company's products. The Company directly purchases Apple Power Macintosh
computers, monitors and memory, and furnishes these components, as well as the
MSL-assembled boards, to Logistix for final assembly. Logistix directly
purchases a small portion of the components used in Splash color servers and
does all final assembly and system configuration.
While the Company's subcontract manufacturers conduct quality control
and testing procedures specified by the Company, the Company has from time to
time experienced manufacturing quality problems. Although the Company does not
believe any such problem had a material adverse effect on the Company's
business, there can be no assurance that quality problems will not occur again
in the future or that any such problem would not have a material adverse
effect on the Company's business, operating results and financial condition.
If the Logistix, MSL or other third party manufacturing facilities
utilized by the Company become unavailable to the Company, or if the
manufacturing operations at these facilities are slowed, interrupted or
terminated, the Company's business, operating results and financial condition
could be adversely affected. Although the Company believes that there are a
variety of companies available with the capability to provide the Company with
such services, there can be no assurance that the Company would be able to
enter into alternative third party manufacturing arrangements on terms
satisfactory to the Company, in a timely fashion, or at all.
Dependence on Component Availability and Cost. The Company purchases
components comprising a significant portion of the total cost of its color
servers. The balance of the inventory required to manufacture the Company's
products is purchased by Logistix. The Company currently sources most of its
Power Macintosh computers that serve as the platforms for its color servers
from Apple. The Company is currently operating on a purchase order basis with
Apple.
Certain components necessary for the manufacture of the Company's
products are obtained from a sole supplier or a limited group of suppliers.
These include Apple Power Macintosh computers, certain ASICs and other
semiconductor components. The Company does not maintain any long-term
agreements with any of its suppliers of components. Because the purchase of
certain key components involves long lead times, in the event of unanticipated
increases in demand for the Company's products, the Company could be unable to
manufacture certain products in a quantity sufficient to meet end user demand.
The Company has experienced difficulties related to Apple's delay in the
release of new systems. There can be no assurance that the Company will not
experience similar difficulties in the future. The Company also purchases
memory modules from a single supplier. Although other sources are available, a
change in memory supplier could require time to effect and could impact
production. This risk would be exacerbated in times of memory supply
shortages. Any inability to obtain adequate deliveries of any of the
components or any other circumstance
13
<PAGE>
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 is subject to an increasing
risk of inventory obsolescence, which could materially and adversely affect
its operating results and financial condition.
The market prices and availability of certain components, particularly
memory, other semiconductor components and Apple Power Macintosh computers,
which collectively represent a substantial portion of the total manufactured
cost of the Company's products, have fluctuated significantly in the past.
Significant fluctuations in the future could have a material adverse effect on
the Company's operating results and financial condition.
Dependence on Proprietary Technology Reliance on Third Party Licenses.
The Company relies in part on trademark, copyright and trade secret law to
protect its intellectual property in the United States and abroad. The Company
seeks to protect its software, documentation and other written materials under
trade secret and copyright laws, which afford only limited protection and
there can be no assurances that the steps taken by the Company will prevent
misappropriation of its technology. The Splash software included as a part of
the Company's products is sold pursuant to 'shrink wrap" licenses that are not
signed by the end user and, therefore, may be unenforceable under the laws of
certain jurisdictions. The Company does not own any issued patent. There can
be no assurance that any trademark or copyright owned by the Company, or any
patent, trademark or copyright obtained by the Company in the future, will not
be invalidated, circumvented or challenged, that the rights granted thereunder
will provide competitive advantages to the Company or that any of the
Company's pending or future patent applications will be issued with the scope
of the claims sought by the Company, if at all. In addition, the laws of some
foreign countries do not protect the Company's proprietary rights as fully as
do the laws of the United States. Thus, effective intellectual property
protection may be unavailable or limited in certain foreign countries. There
can be no assurance that the Company's means of protecting its proprietary
rights in the United States or abroad will be adequate or that others will not
independently develop technologies that are similar or superior to the
Company's technology, duplicate the Company's technology or design around any
patent of the Company. Moreover, litigation may be necessary in the future to
enforce the Company's intellectual property rights, to determine the validity
and scope of the proprietary rights of others or to defend against claims of
infringement or invalidity. Such litigation could result in substantial costs
and diversion of management time and resources and could have a material
adverse effect on the Company's business, operating results and financial
condition.
There have been substantial amounts of litigation in the computer and
related industries regarding intellectual property rights, and there can be no
assurance that third parties will not claim infringement by the Company of
their intellectual property rights. In particular, EFI filed suit against
Radius in November 1995, alleging infringement of an EFI patent by Splash's
predecessor, CSG, and requesting unspecified monetary damages and injunction
relief. The technology which is the subject of the patent claim was acquired
in the Splash Acquisition, and EFI could add Splash as a defendant to this
suit at any time. Although a portion of the purchase price in the Splash
Acquisition was placed in escrow pending resolution of the EFI litigation,
there can be no assurance that any such litigation against Splash would not
have a material adverse effect on the Company's business, operating results
and financial condition. The addition of Splash as a defendant in the EFI suit
or any other claims that the Company is infringing on proprietary rights of
others, with or without merit, could be time-consuming to defend, result in
costly litigation, divert management's attention and resources, and cause
product shipment delays. If the Company were found to be infringing on the
intellectual property rights of any third party, the Company could be subject
to liabilities for such infringement, which liabilities could be material, and
could be required to seek licenses from other companies or to refrain from
using, manufacturing or selling certain products or using certain processes.
Although holders of patents and other intellectual property rights often offer
licenses to their patent or other intellectual property rights, no assurance
can be given that licenses would be offered or that the terms of any offered
license would be acceptable to the Company. Any need to redesign the products
or enter into any royalty or licensing agreement could have a material adverse
effect on the Company's business, operating results and financial condition.
The Company relies upon certain software licensed from third parties.
There can be no assurance that the software licensed by the Company will
continue to provide competitive features and functionality or that licenses
for software currently utilized by the Company or other software which the
Company may seek to license in the future will be available to the Company on
commercially reasonable terms. The loss of, or inability to maintain, existing
licenses could result in shipment delays or reductions until equivalent
software or suitable alternative products could be developed, identified,
licensed and integrated, and the inability to license key new software that
may be developed, on commercially reasonable terms, would have a material
adverse effect on the Company's competitive position. Any such event would
materially adversely affect the Company's business, operating results and
financial condition.
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, capital expenditures and potential
acquisitions. Although the Company believes that it will be able to fund
planned expenditures for at
14
<PAGE>
least the next twelve months from a combination of the proceeds of its public
offerings, cash flow from operations, existing cash balances and the Company's
bank line of credit, there can be no assurance that the Company will be able
to obtain any additional financing which may be required in the future 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.
International sales accounted for approximately 59%, 57%, and 65% of net
revenue in fiscal 1995, 1996 and 1997, respectively. In addition, although a
majority of sales to Xerox are accounted for as 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 generally
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. In addition, to the extent
that an increased portion the Company's sales are denominated in foreign
currencies, the Company could be exposed to currency exchange risks. Other
risks inherent in international sales include unexpected changes in regulatory
requirements, tariffs and other trade barriers and uncertainties relative to
regional circumstances. These risks, and in particular risks related to the
economic circumstances in Japan, could have a material adverse affect on the
Company's business, operating results and financial condition. In addition,
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, other than one employee of Quintar, and
does not maintain key person life insurance policies on any of its employees.
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 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 also
leases office space in Torrance, California, which expires in August 1998 and
office space in Billerica, Massachusetts, which expires in May, 1999. The
Company believes that its existing facilities are adequate to meet its needs
for the near term and is evaluating its future facility needs.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
15
<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 borrowing arrangements,
including the Company's line of credit, prohibit the payment of cash dividends
without the lender's prior written consent.
As of December 17, 1997, the Company's common stock was held by
approximately 196 stockholders of record.
The following table lists the high and low closing quotations during each
quarter the stock traded in the year ended September 30, 1997.
<TABLE>
<CAPTION>
1997
------------------------
Hi Low
<S> <C> <C>
First Quarter (from October 9, 1996) $26.50 $10.38
Second Quarter 39.00 21.00
Third Quarter 36.13 21.00
Fourth Quarter 43.88 32.00
</TABLE>
16
<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>
PREDECESSOR BUSINESS SPLASH TECHNOLOGY HOLDINGS INC.
---------------------------- -------------------------------
FISCAL YEAR FOUR MONTHS EIGHT MONTHS FISCAL YEAR
ENDED ENDED ENDED ENDED
SEPTEMBER 30, JANUARY 31, SEPTEMBER 30, SEPTEMBER 30,
1995 1996 1996 1997
------------- ----------- ------------- -------------
(in thousands except per share data)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net revenue $30,472 $13,008 $34,713 $76,327
Cost of net revenue 20,723 8,427 19,381 37,229
------- ------- ------- -------
Gross profit 9,749 4,581 15,332 39,098
------- ------- ------- -------
Operating expenses:
Research and development 3,295 1,498 2,627 6,062
Sales and marketing 2,076 688 1,756 6,051
General administrative 891 287 1,276 2,690
Amortization and write-off of technology - - 22,803 11,039
------- ------- ------- -------
Total operating expenses 6,262 2,473 28,462 25,842
------- ------- ------- -------
Income (loss) from operations 3,487 2,108 (13,130) 13,256
Other income - - - 600
Interest income (expense), net - (18) (575) 655
------- ------- ------- -------
Income (loss) before income taxes 3,487 2,090 (13,705) 14,511
Provision for (benefit from) income taxes 1,395 836 (5,509) 9,420
------- ------- ------- -------
Net income (loss) $ 2,092 $ 1,254 $(8,196) $ 5,091
======= ======= ======= =======
Net income (loss) per share (1) $ (.93) $ .41
======= =======
Shares used in computing per share amounts (1) 9,583 12,423
======= =======
</TABLE>
<TABLE>
<CAPTION>
SPLASH TECHNOLOGY HOLDINGS, INC.
--------------------------------
SEPTEMBER 30,
1996 1997
--------------------------------
(in thousands except per share data)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital $8,771 $65,048
Total assets 31,232 98,215
Long term debt 8,600 -
Total liabilities 20,322 19,677
Stockholders' equity 10,910 78,538
</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.
17
<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 Form 10K contain forward-looking
statements that involve risks and uncertainties. All forward-looking statements
included in this document are based on information available to the Company on
the date hereof, and the Company assumes no obligation to update any such
forward-looking statements. The Company's actual results could differ materially
from those anticipated in these forward looking statements as a result of
certain factors, including those set forth 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 fiscal 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.
On October 13, 1997, the Company's Board of Directors approved a change in
the Company's fiscal year end from September 30 to December 31, commencing
January 1, 1998.
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 41%,43% and 44%
of net revenue in fiscal 1995, 1996 and 1997, respectively. Sales to Fuji Xerox
accounted for approximately 59%, 57% and 56% of net revenue in fiscal 1995, 1996
and 1997, respectively. The Company expects that sales to Xerox and Fuji Xerox
will continue to account for 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 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 were generally recorded as net
revenue when Xerox sold these products to end users. In addition, the Company
evaluated the carrying value of the Power Series product inventory and the
related deferred revenue on a quarterly basis and, as of September 30, 1997, net
revenue relating to the Power Series products was fully recognized. All other
product sales are recorded upon shipment to the OEM customer.
On May 28, 1997, the Company acquired Quintar, a privately-held company
located in Southern California. Pursuant to the acquisition agreement, Splash
paid to Quintar shareholders an aggregate of approximately $11.5 million in cash
at closing, assumed Quintar's outstanding stock options valued at approximately
$1.6 million and agreed to pay aggregate contingent earn-out payments of up to
$3.2 million, subject to achieving certain net revenue and operating income
targets. Splash wrote off approximately $11.0 million of the purchase price as
in-process research and development in the third quarter of fiscal 1997 in
connection with the Quintar acquisition.
On October 30, 1997, the Company acquired ColorAge, a privately-held
company located in Billerica, Massachusetts. The acquisition was accounted for
under the purchase method of accounting. Splash agreed to pay ColorAge
stockholders an aggregate of $28.4 million in a combination of approximately
$25.5 million cash and the fair value of $2.9 million in common stock. Splash
expects to write off approximately $26.9 million of the purchase price as in-
process and purchased technology in the quarter ending December 31, 1997.
The Company has achieved significant growth in net revenue and operating
income each year since fiscal 1994, before purchase accounting adjustments.
However, there can be no assurance that the Company will continue to grow at
similar rates in the future, if at all. In addition, the Company's overall
expense level is expected to increase as the Company continues to build
corporate infrastructure and expand its operations. Accordingly, the Company
believes that period-to-period comparisons of its financial results should not
be relied upon as an indication of future performance. Although the Company was
profitable for the eight months of independent operations through September 30,
1996 and the fiscal year ended September 30, 1997, 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.
The Company establishes its expenditure levels for operating expenses
based on projected sales levels and margins, and
18
<PAGE>
expenses are relatively fixed in the short term. Moreover, the Company expects
to continue 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 net revenue for the periods indicated:
<TABLE>
<CAPTION>
PREDECESSOR
BUSINESS SPLASH TECHNOLOGY HOLDINGS, INC.
----------- --------------------------------
YEAR ENDED
SEPTEMBER 30, YEAR ENDED SEPTEMBER 30,
------------- ---------------------------
1995 1996 1997
------------- ---------- ----------
(pro forma)
<S> <C> <C> <C>
Net revenue 100 % 100% 100%
Cost of net revenue 68 58 49
--- --- ---
Gross profit 32 42 51
--- --- ---
Operating expenses:
Research and development 11 9 8
Sales and marketing 7 5 8
General and administrative 3 3 4
Amortization and write-off of technology - 48 14
--- --- ---
Total operating expenses 21 65 34
--- --- ---
Income (loss) from operations 11 (23) 17
--- --- ---
Other income - - 1
Interest income (expense), net - (1) 1
--- --- ---
Income (loss) before income taxes 11 (24) 19
Provision for (benefit from) income taxes 4 (10) 12
--- --- ---
Net income (loss) 7% (14)% 7%
=== === ===
</TABLE>
Net Revenue. The Company's net revenue increased 56% to $47.7 million in
fiscal 1996 from $30.5 million in fiscal 1995, and increased 60% to $76.3
million in fiscal 1997 from fiscal 1996. These increases were primarily
attributable to higher unit sales of systems and color server kits due to
increasing market acceptance of the Company's PCI Series products and sales of
the new DC Series products (first introduced in September 1996). 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.
All sales to Fuji Xerox are international sales. In addition, a majority
of all sales to Xerox are accounted for as U.S. sales. However, Xerox has an
international customer base and the Company believes that a portion of Splash
products purchased by Xerox are resold outside the United States. International
sales accounted for 59%, 57% and 65% of net revenue in fiscal 1995, 1996 and
1997, respectively. 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 generally
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. Gross margins were 32%, 42% and 51% in fiscal 1995, 1996
and 1997, respectively. The increases in gross margin were primarily due to
economies of scale derived from higher sales volumes, 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 average selling price of the Company's
products has decreased in the past primarily as a result of competitive market
pressures, the introduction of lower priced products and, in certain cases, in
response to new product introductions by the Company's customers. The Company
expects this trend to continue in the future. For example, the Company lowered
pricing for new versions of its products which were introduced in June 1997. 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
19
<PAGE>
overall gross margin and adversely affect the Company's operating results.
Research and Development. Research and development expenses increased 24%
to $4.1 million fiscal 1996 from $3.3 million in fiscal 1995, and increased 49%
to $6.1 million in fiscal 1997 from fiscal 1996. As a percentage of net revenue,
however, research and development decreased to 9% of net revenue in fiscal 1996
from 11% in fiscal 1995, and decreased to 8% in fiscal 1997. The increases in
the absolute dollar amount of these expenses in fiscal 1995, 1996 and 1997 were
primarily attributable to increased staffing and associated support required to
enhance the Company's product line and to introduce the Company's Power Series,
PCI Series and DC Series product lines, respectively. In addition, the increase
in research and development expenses in the third quarter of fiscal 1997
reflects the addition of Quintar's engineering resources. Except for charges
related to the Splash and Quintar acquisitions, all research and development
costs to date have been expensed as incurred. In view of the ColorAge
acquisition and current projects under development and contemplated, research
and development expenses are expected to increase in absolute dollars and as a
percentage of net revenue in future periods.
Sales and Marketing. Sales and marketing expenses increased 14% to $2.4
million in fiscal 1996 from $2.1 million in fiscal 1995, and increased 154% to
$6.1 million in fiscal 1997 from fiscal 1996. Such expenses represented 7%, 5%
and 8% of net revenue for such respective periods. The increases in the absolute
dollar amount of these expenditures were primarily related to expansion of the
Company's sales support and marketing staff and associated costs (primarily to
increase the Company's level of support for Xerox's sales organization), the
implementation of promotional programs designed to improve name and product
recognition in the end user community and the Company's increased participation
in industry trade shows. 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
increased 80% to $1.6 million in fiscal 1996 from $891,000 in fiscal 1995, and
increased 69% to $2.7 million in fiscal 1997 from fiscal 1996. Such expenses
represented 3%, 3% and 4% of net revenue for such respective periods. The
increases in these expenditures were primarily due to increased salary and
related costs due to increased headcount related to the Company's efforts to
enhance its corporate infrastructure to replace services provided by Radius
prior to the Splash Acquisition, to support expansion of the Company's
operations and, in addition, in the year ended September 30, 1997, to cover
costs related to being a public company. 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 Splash 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 were related to the
development of the Company's PCI Series product line. Substantially all the
research and development costs incurred from the Splash 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 Splash Acquisition, offset in part by interest earned on
short term investments.
In the year ended September 30, 1997, the Company acquired Quintar and
wrote-off approximately $11.0 million of in-process research and development in
connection with such acquisition. These in-process research and development
activities, which were related to projects for the development of Quintar's
embedded controllers and low-end color servers, have no alternative future uses
and have not reached technological feasibility. In the quarter ending December
31, 1997, Splash expects to write-off approximately $26.9 million of in-process
and purchased technology relating to the ColorAge acquisition.
Other Income. The Splash Acquisition was recorded under the purchase method
of accounting. Concurrent with the Splash Acquisition, the Company issued
subordinated promissory notes with an aggregate face value of $8.0 million. The
valuation of the subordinated debt by an independent third party resulted in an
assigned value of $8.6 million. In October 1996, the Company utilized $8.0
million of the proceeds of its initial public offering to repay the subordinated
promissory notes payable and recorded $600,000 of other income to eliminate the
face value of the subordinated debt from the consolidated balance sheet.
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
1995 and 1996, the Company estimated a provision for income taxes at (40%), as
if CSG had been operating as a separate company. In addition, as a result of the
Splash Acquisition (a taxable event), 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. In connection with
the Quintar acquisition (a non-taxable event for the Company), the Company
recorded $3.3 million of deferred tax assets relating to Quintar's net operating
loss carryforwards. These net operating loss carryforwards are subject to
certain limitations. The Company has not reduced the deferred tax assets by a
valuation allowance as it is more likely than not that all of the deferred tax
assets will be realized through future taxable income. The Company's effective
tax rate (excluding the purchase accounting adjustments relating to the Quintar
acquisition) was 37% for fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
20
<PAGE>
From fiscal 1995 until the Splash Acquisition in January 1996, the Company
satisfied its liquidity requirements through cash flows generated from
operations. The Company had limited cash balances following the Splash
Acquisition and satisfied its cash needs through a $4.0 million revolving line
of credit and cash flows from operations. Subsequently, the Company has obtained
sufficient cash from its public offerings operations to satisfy its liquidity
requirements.
As of September 30, 1997, the Company had $67.2 million of cash, cash
equivalents and short term investments and had no borrowings under its $5.0
million bank line of credit. Borrowings under the line of credit bear interest
at the prime rate and are available under the line of credit based on a
percentage of eligible accounts receivable. The line of credit expires on
January 1, 1998.
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. The Company's
operating activities provided $20.0 million in cash in the year ended September
30, 1997, primarily from increases in accounts payable and royalties payable,
offset in part by an increase in inventories and a decrease in deferred revenue.
The accounts receivable balance increased to $6.6 million at September 30,
1996 as the Company increased net revenue from fiscal 1995, partially offset by
improved cash collection procedures which were implemented after the Splash
Acquisition. The accounts receivable balance was $7.9 million at September 30,
1997 due primarily to increased net revenue from fiscal 1996. Trade accounts
payable, other accrued liabilities and royalties payable increased from $5.8
million at September 30, 1996 to $16.1 million at September 30, 1997 due to
increased operating activities.
Investing activities used $24.1 million in cash in fiscal 1996 and $23.3
million in cash in fiscal 1997. These amounts resulted primarily from $23.4
million in cash used in connection with the Splash Acquisition in fiscal 1996
and $11.2 million in cash used in the Quintar acquisition in fiscal 1997. In
addition, investing activities used $11.4 million for the purchase of marketable
securities in fiscal 1997.
Financing activities provided $23.6 million in cash in fiscal 1996,
consisting primarily of financing related to the Splash Acquisition, and
provided $52.9 million in cash in the year ended September 30, 1997. Financing
activities in fiscal 1997 included the Company's two public offerings from which
the Company received net proceeds of $75.1 million. From these net proceeds, the
Company redeemed all of its Series A Preferred Stock for $15.4 million and
repaid outstanding promissory notes payable to stockholders of $8.0 million. The
remaining net proceeds from the Company's public offerings are being used for
working capital, acquisitions and general corporate purposes. The Company has no
material financing commitments other than its obligations under operating
leases.
The Company believes that cash flows from operations, existing cash
balances and the Company's bank line of credit will be sufficient to satisfy the
Company's cash requirements for at least the next twelve months.
RECENT ACCOUNTING PRONOUNCEMENTS
During February 1997, the Financial Accounting Standards Board issued
Statement 128 (SFAS 128) "Earnings Per Share" which specifies the computation,
presentation and disclosure requirements for earnings per share. SFAS 128 will
become effective for the Company's first quarter of 1998. The impact of adopting
SFAS 128 on the Company's financial statements has not yet been determined.
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive
Income" which establishes standards for the reporting and display of financial
statements. The impact of adopting SFAS No. 130, which is effective for the
Company in fiscal 1999, has not been determined.
In June 1997, the FASB issued SFAS No. 131 "Disclosures about Segments of
an Enterprise and Related Information" which requires publicly-held companies to
report financial and other information about key revenue-producing segments of
the entity for which such information is available and is utilized by the chief
operation decision maker. Specific information to be reported for individual
segments includes profit or loss, certain revenue and expense items and total
assets. A reconciliation of segment financial information to amounts reported in
the financial statements would be provided. SFAS No. 131 is effective for the
Company in fiscal 1999 and the impact of adoption has not been determined.
In October 1997, the Accounting Standards Executive Committee issued
Statement of Position 97-2 (SOP 97-2) "Software Revenue Recognition" which
delineates the accounting for software product and maintenance revenues. SOP 97-
2 supersedes the Accounting Standards Executive Committee Statement of Position
91-1 "Software Revenue Recognition" and is effective for transactions entered
into in fiscal years beginning after December 15,1997. The Company is evaluating
the requirements of SOP 97-2 and the effects, if any, on the Company's current
revenue recognition policies.
21
<PAGE>
PART III
Certain information required by Part III is omitted from this Report on
Form 10-K in that registrant will file its definitive Proxy Statement for its
Annual Meeting of Stockholders to be held on February 26, 1998, 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 Company's Annual Meeting of
Stockholders to be held on February 26, 1998.
ITEM 11. EXECUTIVE COMPENSATION
The information required hereunder is incorporated by reference from the
Company's Proxy Statement filed in connection with Company's Annual Meeting of
Stockholders to be held on February 26, 1998.
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 Company's Annual Meeting of
Stockholders to be held on February 26, 1998.
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 Company's Annual Meeting of
Stockholders to be held on February 26, 1998.
22
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a)(1) Consolidated Financial Statements: Page Number
-----------
<S> <C>
Report of Independent Accountants 24
Consolidated Balance Sheets: 25
September 30,1996 and 1997
Consolidated Statements of Operations: 26
Year ended September 30, 1995, the four months ended January 31, 1996 and
the eight months ended September 30,1996, and the year ended September 30, 1997
Consolidated Statements of Stockholders' Equity: 27
Eight months ended September 30, 1996 and the year ended September 30, 1997
Predecessor Business Statement of Parent Company Investment: 27
Year ended September 30, 1994, 1995 and four months ended January 31, 1996
Consolidated Statements of Cash Flows: 28
Year ended September 30, 1995, the four months ended January 31, 1996 and
the eight months ended September 30, 1996, and the year ended September 30, 1997
Notes to Consolidated Financial Statements 29
(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.
(a) Exhibits:
11.1 Computation of Earnings Per Share
23.1 Consent of Coopers & Lybrand L.L.P.
27.0 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Form 8-K on May 30, 1997 for matters related to
the acquisition of Quintar Corporation.
The Company filed a Form 8-K/A on August 11, 1997 to amend the Form 8K
filed on May 30, 1997. The Form 8-K/A included the following:
Report of Independent Auditors
Balance Sheets as of December 31, 1995 and 1996
Consolidated Statements of Operations for the years ended December 31,
1995 and 1996
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1995 and 1996
Consolidated Statements of Cash Flows for the years ended December 31,
1995 and 1996
Notes to Consolidated Financial Statements
Condensed Consolidated Balance Sheet as of March 31, 1997 (unaudited)
Condensed Consolidated Statements of Operations for the three months
ended March 31, 1996 and 1997 (unaudited)
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 1996 and 1997 (unaudited)
Notes to Condensed Consolidated Financial Statements
Introductory paragraph to Pro Forma Combined Condensed Statements of
Operations (unaudited)
Pro Forma Combined Condensed Statement of Operations for the year
ended September 30, 1996 (unaudited)
Pro Form Combined Statement of Operations for the nine months ended
June 30, 1997 (unauditied)
Notes to Unaudited Pro Forma Information
(c) Exhibits: See Index to Exhibits Page.
The Exhibits listed in the accompanying Index of Exhibits are filed as
part of this Report.
(d) Consolidated Financial Statement Schedules: See (a)(1) above.
</TABLE>
23
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Splash Technology Holdings, Inc.
We have audited the accompanying consolidated balance sheets of Splash
Technology Holdings, Inc. and its subsidiaries as of September 30, 1996 and 1997
and the related consolidated statements of operations, cash flows and
stockholders' equity for the eight months ended September 30, 1996 and the year
ended September 30, 1997. We have also audited the statements of operations,
cash flows and parent company investment of the Predecessor Business for the
year ended September 30, 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 1997, and the consolidated results of their operations and their cash flows
for the eight months ended September 30, 1996 and the year ended September 30,
1997, 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 results of its operations for the
predecessor business and its cash flows for the years ended September 30, 1995
and the four months ended January 31, 1996, in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
San Jose, California
October 13, 1997, except for Note 12 as to which the date is October 30, 1997
24
<PAGE>
<TABLE>
<CAPTION>
SPLASH TECHNOLOGY HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
September 30, 1996 and 1997
(in thousands, except share data)
Splash Technology
Holdings, Inc.
-----------------------------------
September 30,
1996 1997
------- -------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 6,179 $55,831
Marketable securities - 11,350
Accounts receivable, net of allowance for doubtful accounts
of $299 in 1996 and $173 in 1997 6,582 7,933
Inventories 3,651 4,917
Prepaid expenses and other current assets 119 379
Deferred income taxes 3,962 3,915
------- -------
Total current assets 20,493 84,325
Property and equipment, net 913 1,287
Deferred income taxes 8,315 11,198
Other assets 1,511 1,405
------- -------
Total assets $31,232 $98,215
======= =======
LIABILITIES
Current Liabilities:
Trade accounts payable $ 1,239 $ 5,918
Accrued and other liabilities 6,333 11,900
Deferred revenue 4,150 1,459
------- -------
Total current liabilities 11,722 19,277
Subordinated promissory notes payable to stockholders 8,600 -
Other long term liabilities - 400
------- -------
Total liabilities 20,322 19,677
------- -------
Commitments (Note 6)
STOCKHOLDERS' EQUITY
Preferred stock:
Authorized: 5,000,000 shares;
Series A preferred stock, par value $.001 per share:
Authorized, issued and outstanding: 15,426 shares
in 1996 and none in 1997 1 -
Series B preferred stock, par value $.001 per share:
Authorized, issued and outstanding: 4,282 shares
in 1996 and none in 1997 1 -
Common stock, par value $.001 per share:
Authorized: 50,000,000 shares.
Issued and outstanding: 7,603,123 shares in 1996 and
13,735,730 in 1997 8 14
Additional paid-in capital 19,826 82,355
Retained earnings (accumulated deficit) (8,926) (3,831)
------- -------
Total stockholders' equity 10,910 78,538
------- -------
Total liabilities and stockholders' equity $31,232 $98,215
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
25
<PAGE>
SPLASH TECHNOLOGY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Predecessor Business Splash Technology Holdings Inc.
------------------------- -------------------------------
Four Eight
Months Months
Year Ended Ended Ended Year Ended
September 30, January 31, September 30, September 30,
1995 1996 1996 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net revenue $30,472 $13,008 $34,713 $76,327
Cost of net revenue 20,723 8,427 19,381 37,229
------- ------- ------- -------
Gross profit 9,749 4,581 15,332 39,098
------- ------- ------- -------
Operating expenses:
Research and development 3,295 1,498 2,627 6,062
Sales and marketing 2,076 688 1,756 6,051
General and administrative 891 287 1,276 2,690
Amortization and write-off of technology - - 22,803 11,039
------- ------- ------- -------
Total operating expenses 6,262 2,473 28,462 25,842
------- ------- ------- -------
Income (loss) from operations 3,487 2,108 (13,130) 13,256
Other income - - - 600
Interest income (expense), net - (18) (575) 655
------- ------- ------- -------
Income (loss) before income
taxes 3,487 2,090 (13,705) 14,511
Provision for (benefit from) income taxes 1,395 836 (5,509) 9,420
------- ------- ------- -------
Net income (loss) $ 2,092 $ 1,254 $(8,196) $ 5,091
======= ======= ======= =======
Net income (loss) per share $ (.93) $ .41
======= =======
Shares used in per share calculation 9,583 12,423
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
26
<PAGE>
SPLASH TECHNOLOGY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
<TABLE>
<CAPTION>
Retained
Preferred 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
Redemption of preferred stock:
Series A (15,426) (1) (14,699) (726) (15,426)
Series B (4,282) (1) 1,741,127 2 1
Reversal of accretion for
dividends on preferred stock (730) 730
Issuance of common stock 4,284,750 3 75,095 75,098
Issuance of common stock under
stock plans and warrants 112,201 1 472 473
Disqualifying dispositions of
common stock 804 804
Repurchase of common stock (5,471) (1) (1)
Acquisition related compensation 1,588 1,588
Net income 5,091 5,091
------ ------ ---------- --- ------- -------- -------
Balances, September 30, 1997 $ 13,735,730 $14 $82,355 $ (3,831) $78,538
====== ====== ========== === ======= ======== =======
</TABLE>
PREDECESSOR BUSINESS STATEMENT
OF PARENT COMPANY INVESTMENT
(In thousands)
<TABLE>
<CAPTION>
<S> <C>
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.
27
<PAGE>
<TABLE>
<CAPTION>
SPLASH TECHNOLOGY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Predecessor Business Splash Technology Holdings Inc.
--------------------------- ---------------------------------
Four Eight Months
Year Ended Months Ended Ended Year Ended
September 30, January 31, September 30, September 30,
------------ ------------ ------------- -------------
1995 1996 1996 1997
------- ------- -------- -------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 2,092 $ 1,254 $ (8,196) $ 5,091
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 259 102 195 528
Provision for doubtful accounts 68 17 198 -
Gain on repayment of subordinated debt - - - (600)
Purchased and in-process technology - - 22,729 11,039
Deferred income taxes 622 (11,409) 463
Changes in assets and liabilities:
Accounts receivable 490 (4,597) 3,330 (635)
Inventories (2,678) 2,231 (1,917) (1,065)
Prepaid expenses and other current assets - - (119) (215)
Other assets - - (464) 172
Trade accounts payable 1,766 (2,391) 1,093 6,136
Accrued and other liabilities 2,162 2,861 (851) 2,065
Deferred revenue - 905 1,080 (2,932)
------- ------- -------- -------
Net cash provided by operating activities 4,159 1,004 5,669 20,047
------- ------- -------- -------
Cash flows from investing activities:
Purchase of marketable securities - - - (11,350)
Purchase of property and equipment (444) (63) (604) (797)
Acquisition of businesses (net of cash acquired) - - (23,421) (11,196)
------- ------- -------- -------
Net cash used in investing activities (444) (63) (24,025) (23,343)
------- ------- -------- -------
Cash flows from financing activities:
Proceeds from public offerings - - - 75,098
Proceeds from Series A preferred stock - - 14,700 -
Redemption of Series A preferred stock - - - (14,700)
Premium paid on Series A preferred stock - - - (726)
Proceeds from common stock - - 206 -
Proceeds from subordinated debt - - 8,600 -
Repayment of subordinated debt - - - (8,000)
Issuance and repurchase of common stock under
stock plans - - 100 472
Benefit from disqualifying dispositions of common stock - - - 804
Net change in Parent Company Investment (3,715) (12) - -
------- ------- -------- -------
Net cash provided by (used in) financing activities (3,715) (12) 23,606 52,948
------- ------- -------- -------
Net increase in cash - 929 5,250 49,652
Cash and cash equivalents, beginning of period - - 929 6,179
------- ------- -------- -------
Cash and cash equivalents, end of period $ - $ 929 $ 6,179 $55,831
======= ======= ======== =======
Supplemental disclosure of cash flow information:
Taxes paid $ - $ - $ 4,175 $ 8,019
Interest paid $ - $ - $ 704 $ 42
Non-cash financing activities:
Accretion of preferred stock $ - $ - $ 730 $ (730)
Issuance of Series B preferred stock $ - $ - $ 4,100 $(4,100)
Issuance of stock options in connection with
acquisition $ - $ - $ - $ 1,588
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
28
<PAGE>
SPLASH TECHNOLOGY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. REORGANIZATION AND BASIS OF PRESENTATION
Splash Technology Holdings, Inc. (the "Company") through its wholly-owned
subsidiaries develops, produces and markets color servers, which consist of
computer hardware and software systems that provide an integrated link between
desktop computers and digital color copiers and enable such copiers to provide
high speed and quality networked color printing and scanning. The Company sells
its color servers through two original equipment manufacturers ("OEMs") who
integrate the Company's color servers into connected digital color photocopier
systems, which are sold to end users in North and South America, Europe, Asia,
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 Technology Inc. ("SuperMac") until August 1994
when SuperMac merged with Radius Inc. ("Radius"). In January 1996, the assets
and liabilities of the Color Server Group of Radius were transferred by Radius
into its newly created wholly-owned subsidiary, Splash Technology, Inc. In
December 1995, Splash Technology Holdings, Inc. was incorporated in Delaware and
was capitalized by the sale of Series A preferred stock and common stock and
subordinated debt to an investor group led by certain affiliates of Summit
Partners, L.P., and Sigma Partners, L.P. On January 31, 1996, Splash Technology,
Inc. merged with a wholly-owned subsidiary of Splash Technology Holdings, Inc.
and as part of the consideration for the merger, Splash Technology Holdings,
Inc. issued Series B preferred stock to Radius. The surviving corporation in the
merger was Splash Technology, Inc., a wholly-owned subsidiary of the Company.
The acquisition of Splash Technology, Inc. (the "Splash Acquisition") 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
an identifiable economic value and expensed this value as of the date of the
acquisition. The purchased technology is related to the Company's Power Series
product for which the Company was developing a replacement product at the time
of the Splash Acquisition due to the discontinuance of the Apple NuBus
architecture on which the Power Series product relied. The Company transitioned
to the new product in May 1996, and accordingly, the fair value of the purchased
technology was fully amortized over the four months to May 31,1996.
The fair value of the assets acquired (net of cash acquired of $929,000) and
liabilities assumed were as follows:
<TABLE>
<CAPTION>
<S> <C>
In-process and purchased technology $22,729
Receivables 9,296
Inventories 1,734
Long-term assets 1,551
Payables and other accrued liabilities (6,196)
Deferred revenue (2,200)
-------
$26,914
=======
</TABLE>
Of the purchase consideration, approximately $2.2 million remains in
escrow pending resolution of certain events including unasserted claims.
The Predecessor Business' financial statements presented herein include
the results of operations and cash flows for the year ended September 30, 1995
and for the four months ended January 31, 1996, as if the Color Server Group
existed as a corporation separate from Radius and SuperMac during such periods
on a historical basis. The Company's financial statements presented herein
include the results of operations and cash flows for the eight months ended
September 30, 1996 and the year ended September 30,1997 and the balance sheets
as of September 30, 1996 and 1997.
Radius and SuperMac each performed certain corporate headquarter functions
on behalf of the Color Server Group and provided certain marketing, technology,
human resource and financial and accounting services. Costs associated with
these services have been allocated to the Color Server Group based on relative
headcount, which management believes to be a reasonable basis for allocation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries,
29
<PAGE>
Splash Technology, Inc., Splash Foreign Sales Corporation, Splash Technology
S.a.r.l., and, for the period ended September 30, 1997, Quintar Holdings
Corporation and its wholly owned subsidiary, Quintar Company. 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 when the product is shipped to the
customer, remaining obligations are insignificant and collection of the
resulting receivable is probable. The Company generally does not grant rights of
return. Provisions for product-related obligations are recorded when revenue is
recognized.
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. During the year ended September 30, 1996, due to the transition of
products and the accumulation of Power Series product, the Company had
recognized revenue from the sales of the Power Series product upon notification
from the OEM that the product had been sold to their end user, and accordingly,
at September 30, 1996, the Company had deferred revenue of $4.2 million from
sales of Power Series products to one of its OEM customers.
For the year ended September 30, 1997, the Company continued to evaluate
the carrying value of the Power Series product inventory and the related
deferred revenue on a quarterly basis and determined that the amount of future
return of the Power Series product could be reasonably estimated based on
historical experience. Accordingly, the net revenue relating to the Power Series
products was fully recognized and, in accordance with the Company's policy, an
allowance for expected returns of the Power Series products was recorded in the
year ended September 30, 1997.
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 of the Company's
products and general release substantially coincide. As a result, the Company
has not capitalized any software development costs since such costs have not
been significant.
Income Taxes
The Company uses the liability method to calculate deferred income taxes.
The realization of deferred tax assets is based on historical tax positions and
expectations about future taxable income.
Income taxes have been provided in the Predecessor Business statements of
operations as if the Predecessor Business was a separate taxable entity. Since
the division was not a separate taxable entity but was included in the
consolidated income tax returns of the Radius and SuperMac companies, the
current benefit from or provision for U.S. federal and state income taxes was
ultimately assumed to be receivable from or payable to Radius or SuperMac in the
period presented. In accordance with the merger agreement with Radius, the
Company is not required to repay Radius for the utilization of their tax losses
against the Company's taxable income as a Predecessor Business. Such benefits
are reflected as capital contributions as of each fiscal year end.
Cash, Cash Equivalents and Marketable Securities
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. All investments with an original or remaining
maturity of greater than three months at the date of purchase are considered
marketable securities.
Cash, cash equivalents and marketable securities consist primarily of cash
deposits, money market funds and municipal and U.S. government securities held
in banks and other financial institutions located primarily in the United
States.
30
<PAGE>
The Company classifies all of its marketable securities as "available-for-
sale" in accordance with the provisions of Financial Accounting Standards Board
Statement No.115 "Accounting for Certain Investments in Debt and Equity
Securities". Accordingly, the Company states its investments at estimated fair
value, with material unrealized gains and losses reported in stockholders'
equity. The cost of securities sold is based on the specific identification
method. Such securities are anticipated to be used for current operations and
are therefore classified as current assets, even though maturities may extend
beyond one year. At September 30, 1997, the longest maturity of a marketable
security was less than 180 days.
Financial Instruments
The Company's financial instruments, including cash and cash equivalents,
marketable securities, and 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 operations. The Predecessor Business' accounting
policy was to expense all items of property and equipment upon acquisition.
Accordingly, appropriate adjustments have been included in the financial
statements to reflect the capitalization and depreciation of property and
equipment during the applicable periods presented.
Concentration of Credit Risks
Cash, cash equivalents and marketable securities are deposited with major
banks and financial institutions primarily in the United States. Deposits in
these banks may exceed the amount of insurance provided on such deposits. The
Company is exposed to credit risk in the event of default by the financial
institutions or issuers of these investments to the extent of amounts recorded
in the consolidated balance sheet. The Company has not experienced any losses on
its deposits of cash, cash equivalents and marketable securities.
The Company sells its products to two OEM customers, Xerox and Fuji Xerox,
who distribute the Company's products with their own color photocopier systems
on a worldwide basis. The Company performs ongoing credit evaluations of its
customers. The Company does not require collateral for its receivables and
maintains an allowance for potential credit losses. At September 30, 1996, the
accounts receivable balance was comprised primarily of one customer, Fuji Xerox,
which represented 93% of the accounts receivable balance, and, at September 30,
1997, the accounts receivable was comprised primarily of the two customers,
Xerox and Fuji Xerox, which represented 39% and 61% of accounts receivable,
respectively.
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 February 1997, the Financial Accounting Standards Board issued
Statement 128 (SFAS 128) "Earnings Per Share" which specifies the computation,
presentation and disclosure requirements for earnings per share. SFAS 128 will
become effective for the Company's first quarter of 1998. The impact of adopting
SFAS 128 on the Company's financial statements has not yet been determined.
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive
Income" which establishes standards for the reporting and display of financial
statements. The impact of adopting SFAS No. 130, which is effective for the
Company in fiscal 1999 has not been determined.
In June 1997, the FASB issued SFAS No. 131 "Disclosures about Segments of
an Enterprise and Related Information" which requires publicly-held companies to
report financial and other information about key revenue-producing segments of
the entity for which such information is available and is utilized by the chief
operation decision-maker. Specific information to be reported for individual
segments includes profit or loss, certain revenue and expense items and total
assets. A reconciliation of segment financial information to amounts reported in
the financial statements would be provided. SFAS No. 131 is effective for the
Company in fiscal 1999 and the impact of adoption has not been determined.
In October 1997, the Accounting Standards Executive Committee issued
Statement of Position 97-2 (SOP 97-2) "Software
31
<PAGE>
Revenue Recognition" which delineates the accounting for software product and
maintenance revenues. SOP 97-2 supersedes the Accounting Standards Executive
Committee Statement of Position 91-1 "Software Revenue Recognition" and is
effective for transactions entered into in fiscal years beginning after December
15,1997. The Company is evaluating the requirements of SOP 97-2 and the effects,
if any, on the Company's current revenue recognition policies.
Computation of Net Income (Loss) Per Share
Net income (loss) per share is computed using the weighted average number
of common and dilutive common equivalent shares outstanding during the period.
The Company has determined the number of shares used in calculating
earnings per share for all periods presented prior to the Company's initial
public offering 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.
Reclassifications
Certain items have been reclassified within the balance sheet at September
30, 1996 to be consistent with the presentation at September 30, 1997. The
reclassifications have no effect on previously disclosed net income or
stockholders' equity.
3. BALANCE SHEET DETAIL (in thousands):
--------------------
Inventories:
<TABLE>
<CAPTION>
September 30, September 30,
1996 1997
------ -------
<S> <C> <C>
Raw materials $1,580 $ 4,028
Finished goods 2,071 889
------ -------
$3,651 $ 4,917
====== =======
Property and Equipment:
Furniture and fixtures $ 392 $ 479
Computer equipment 415 1,641
Leasehold improvements 81 142
Marketing equipment 146 163
------ -------
1,034 2,425
Less accumulated depreciation and amortization (121) (1,138)
------ -------
$ 913 $ 1,287
====== =======
Accrued and Other Liabilities:
Royalties payable $1,260 $ 2,812
Accrued product-related obligations 1,282 3,706
Accrued compensation and related expenses 581 1,050
Income taxes payable 1,725 1,767
Other liabilities 1,485 2,565
------ -------
$6,333 $11,900
====== =======
</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 by 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 required
liquidity, net worth and indebtedness ratios as well as required profitability.
The Company has no borrowings outstanding under the line of credit as of
September 30, 1997.
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 bore interest at 12%, payable
quarterly. The subordinated promissory notes were issued to certain stockholders
concurrent with the
32
<PAGE>
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
stockholders with proceeds of its initial public offering.
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 lease are as follows (in
thousands):
<TABLE>
<CAPTION>
Period Ending
-------------
<S> <C>
September 30, 1998 $ 576
September 30, 1999 486
September 30, 2000 500
September 30, 2001 325
------
$1,887
======
</TABLE>
Rent expense for the eight months ended September 30, 1996 and the year
ended September 30, 1997, was $226 and $439, respectively.
7. PREFERRED STOCK
The Company authorized and issued 15,426 shares of Series A preferred
stock at a face value of $1,000 per share and 4,282 shares of Series B preferred
stock in a non-cash transaction as part of the consideration for the Splash
Acquisition. The valuation of the Series A and Series B preferred stock by an
independent third party resulted in values of $14,700,000 and $4,100,000,
respectively, for those instruments. The carrying amounts of both Series A and
Series B preferred stock were increased by amounts representing dividends not
currently declared or paid but which may be payable under each series' dividend
rights. The increases were effected by a charge against retained earnings.
On October 9, 1996, the Company initiated trading of its common stock
following an initial public offering and the Series B preferred stock converted
to common stock. On October 18, 1996, the Company redeemed the Series A
preferred stock.
8. COMMON STOCK
On July 31, 1996, the Board of Directors adopted a payroll deduction
Employee Stock Purchase Plan (the "Purchase Plan"), effective upon the closing
of the Company's initial public offering, and reserved an aggregate of 175,000
shares of common stock for issuance thereunder. As of September 30, 1997, the
Company issued 50,000 shares under the Purchase Plan.
Stock Options and Repurchase Agreements
The Company 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. The terms of each option are no more than
10 years from the date of grant. 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.
At September 30, 1997, approximately 1.1 million shares of common stock relating
to exercised and unexercised option shares under the stock option plan were
subject to the Company's right of repurchase.
33
<PAGE>
Activity for the Company's stock option plan is summarized as follows:
<TABLE>
<CAPTION>
Average Price Weighted
Available Outstanding Per Share Amount Average
--------- ----------- ------------ ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C>
Options authorized 3,150,000
Options granted (894,880) 894,880 $0.14-$11.00 $ 776 $ 0.87
Options canceled 27,128 (27,128) $0.14 (4) 0.14
Options repurchased 5,250 - - -
Options exercised - (599,627) $ 0.14-$0.29 (101) 0.17
--------- -------- ------- ------
Balances, September 30, 1996 2,287,498 268,125 $0.14-$11.00 671 2.50
Options granted (600,643) 600,643 $0.80-$41.88 13,366 22.25
Options canceled 14,870 (14,870) $1.60-$26.50 (315) 21.18
Options repurchased 5,471
Options exercised - (48,668) $ 0.14-$4.00 (27) 0.55
--------- -------- ------------ ------- ------
Balances, September 30, 1997 1,707,196 805,230 $0.14-$41.88 $13,695 $17.01
========= ======== ============ ======= ======
</TABLE>
During 1995, the Financial Accounting Standards Board issued Statement No.
123 (SFAS 123) "Accounting for Stock-Based Compensation." This standard, which
establishes a fair value based method for stock-based compensation plans, also
permits an election to continue following the requirements of APB Opinion No.
25. "Accounting for Stock Issued to Employees" with additional disclosures. The
Company continues to follow the requirements of APB Opinion No. 25, with
disclosure of pro forma information concerning its stock option plan and
employee stock purchase plan in accordance with SFAS 123.
The following table summarizes information with respect to stock options
outstanding at September 30, 1997.
<TABLE>
<CAPTION>
Options Outstanding
Weighted Average
Number at Remaining
Range of Exercise September 30, Contractual Life Weighted Average
Prices 1997 (Years) Exercise Price
- ----------------- ------------- ---------------- ----------------
<S> <C> <C> <C>
$ 0.14 134,279 8.39 $ 0.14
$ 0.80 - $11.00 136,581 8.93 6.02
$ 14.50 5,250 9.09 14.50
$ 21.00 311,675 9.27 21.00
$ 23.69 - $26.50 143,000 9.58 26.00
$ 29.25 - $41.88 74,445 9.74 36.01
------- ---- ------
$ 0.14 - $41.88 805,230 9.16 $17.01
======= ==== ======
</TABLE>
Fair value of each option grant is estimated on the date of the grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1996 and 1997.
<TABLE>
<CAPTION>
Eight Months Ended Year Ended
September 30, September 30,
1996 1997
----------------- -------------
<S> <C> <C>
Risk-free interest rates 6.44% 6.32%
Expected life 4.92 years 4.92 years
Volatility 0.0% 60.0%
Dividend yield 0.0% 0.0%
</TABLE>
The weighted average fair value of those options granted in 1996 and 1997
was $0.87 and $22.25, respectively.
34
<PAGE>
The Company has also estimated the fair value for the purchase rights
issued under the Company's Employee Stock Purchase Plan, using the Black-Scholes
valuation model with the following assumptions for 1997.
<TABLE>
<CAPTION>
September 30,
1997
---------------
<S> <C>
Risk free interest rates 5.03%
Expected life 6 months
Volatility 60.0%
Dividend yield 0.0%
</TABLE>
The weighted average fair value of those purchase rights granted in 1997
was $ 9.35.
The following pro forma income (loss) information has been prepared
following the provisions of SFAS No. 123 (in thousands except per share data):
<TABLE>
<CAPTION>
Eight Months Ended Year Ended
September 30, September 30,
1996 1997
------------------ -------------
<S> <C> <C>
Net income (loss) - pro forma $(8,362) $(3,736)
Net income (loss) - per share - pro forma $ (0.95) $ (0.31)
</TABLE>
The above pro forma effects on income may not be representative of the
effects on net income for future years as option grants typically vest over
several years and additional options are generally granted each year.
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 product to OEM customers in the United States,
Europe, Japan and Asia Pacific. Net revenue from export sales accounted for 59%,
61%, 55% and 65% of net revenue for the year ended September 30, 1995, the four
months ended January 31, 1996, the eight months ended September 30, 1996 and the
year ended September 30, 1997, respectively.
In the year ended September 30, 1995, the four months ended January
31,1996, the eight months ended September 30, 1996 and the year ended September
30, 1997, two customers accounted for 59% and 41%; 61% and 39%; 55% and 45%; and
56% and 44% of net revenue, 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>
Predecessor Business Splash Technology Holdings Inc.
--------------------------- ---------------------------------
Four Months Eight Months
Year Ended Ended Ended Year Ended
September 30, January 31, September 30, September 30,
1995 1996 1996 1997
------ ------ -------- ------
<S> <C> <C> <C> <C>
Current:
Federal $1,095 $192 $ 4,690 $7,635
State 300 22 1,210 1,322
------ ---- -------- ------
1,395 214 5,900 8,957
------ ---- -------- ------
Deferred:
Federal - 537 (9,794) 401
State - 85 (1,615) 62
------ ---- -------- ------
- 622 (11,409) 463
------ ---- -------- ------
Total $1,395 $836 $ (5,509) $9,420
====== ==== ======== ======
</TABLE>
35
<PAGE>
The Company's effective tax rate differs from the statutory federal income tax
rate as shown in the following schedule:
<TABLE>
<CAPTION>
Predecessor Business Splash Technology Holdings, Inc.
--------------------------- ---------------------------------
Four Eight Months
Year Ended Months Ended Ended Year Ended
September 30, January 31, September 30, September 30,
1995 1996 1996 1997
------- ------- -------- -------
<S> <C> <C> <C> <C>
Tax provision at federal statutory rate 34.0% 34.0% (35.0)% 35.0%
State taxes, net of federal tax benefit 6.1 6.1 (6.0) 6.2
Write-off of in-process and purchased
technology - - - 26.6
Foreign sales corporation benefit - - (2.7) (7.1)
Other (0.1) (0.1) 3.5 4.2
---- ---- ----- ----
Total 40.0% 40.0% (40.2)% 64.9%
==== ==== ===== ====
</TABLE>
The components of the deferred tax asset are as follows (in thousands):
<TABLE>
<CAPTION>
September 30,
---------------------------------
1996 1997
------- --------
<S> <C> <C>
Deferred tax assets:
In-process and purchased technology $ 8,903 $ 8,299
Receivable allowances and product related liabilities 702 1,686
Inventory valuation allowance 422 1,023
State taxes 424 446
Deferred revenue 1,704 164
Net operating losses - 2,797
All other 122 698
------- --------
Total deferred tax assets 12,277 15,113
Long term portion of deferred tax asset (8,315) (11,198)
------- --------
Current portion of deferred tax asset $ 3,962 $ 3,915
======= ========
</TABLE>
At September 30, 1997, the Company assessed the recoverability of the
deferred tax asset and, based on its expectations about taxable income for
future periods, determined that it was more likely than not that the deferred
tax asset would be recovered.
The Company's income tax currently payable for both federal and state
purposes have been reduced by the tax benefit derived from the disqualifying
dispositions of incentive stock options and the exercise of non-qualified stock
options. The benefit, which totaled $804,000 for the year ended September 30,
1997, was credited directly to additional paid-in-capital.
At September 30, 1997, the Company had approximately $7,600,000 of
federal net operating loss carryforwards and $320,000 of research and
development tax credits available to offset future federal income taxes. The
federal carryforwards expire in 2005 through 2012 if not utilized. For state
income tax purposes, the Company had approximately $3,300,000 of net operating
loss carryforwards and research and development tax credits of $150,000. The
state carryforwards expire in 1997 through 2002 if not utilized. The Company's
net operating loss and tax credit carryforwards primarily relate to Quintar for
which utilization is subject to an annual limitation of $700,000.
11. EMPLOYEE BENEFIT PLAN
The Company adopted the Splash Technology, Inc. 401(k) Profit Sharing
Plan (the "Plan") effective April 1996, which qualifies under Section 401(k) of
the Internal Revenue Code of 1986, as amended, and covers essentially all
employees. Each eligible employee may elect to contribute to the Plan, through
payroll deductions, up to 15% of compensation, subject to certain limitations.
The Company, at its discretion, may make additional contributions. All employer
contributions are 100% vested after four years. During the year ended September
30, 1997, the Company recorded approximately $180,000 of contributions to the
Plan.
12. ACQUISITIONS
QUINTAR ACQUISITION
On May 28, 1997, the Company acquired the shares of Quintar Holdings
Corporation ("Quintar") for an aggregate purchase price of $13,532,000 plus
contingent earn-out payments of up to $3,200,000, subject to achieving certain
net revenue and operating income targets. The purchase price was comprised of a
cash payment of $11,519,000, issuance of Company stock options valued at
$1,588,000 in exchange for Quintar stock options and net acquisition costs of
$425,000.
36
<PAGE>
The acquisition was accounted for using the purchase method of accounting
and the results of Quintar were included in the Company's results from the date
of acquisition. The purchase price was allocated to the tangible and intangible
assets and liabilities acquired based on their estimated fair values at May 28,
1997, as follows (in thousands):
<TABLE>
<S> <C>
Current assets $ 784
Other assets 170
Deferred tax asset 3,300
Liabilities (1,761)
In-process research and development 11,039
-------
$13,532
=======
</TABLE>
Summary unaudited pro forma information for the combined results of
operations of Quintar and the Company for the years ended September 30, 1996 and
1997 is presented below. The pro forma information assumes the acquisition
occurred on October 1, 1995 and presents the combined results of the companies,
excluding the $11,039,000 nonrecurring write-off of in-process research and
development activities for which there were no alternative future uses and
technological feasibility had not been established.
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1996 1997
----------- ----------
(in thousands except per share data)
<S> <C> <C>
Net revenue $ 53,104 $78,922
Operating income (loss) $(12,541) $22,847
Net income (loss) $ (8,530) $14,666
Net income (loss) per share $ (0.97) $ 1.18
Shares used in computing per share amounts 9,583 12,423
</TABLE>
COLORAGE ACQUISITION
On October 30, 1997, the Company acquired the shares of ColorAge
Corporation ("ColorAge") for an aggregate purchase price of $28.4 million. The
purchase price was comprised of a cash payment of approximately $25.5 million,
issuance of common stock with a fair value of approximately $2.9 million in
exchange for all outstanding ColorAge stock, and net acquisition costs of $1
million. The shares of the Company's common stock, which have been placed in
escrow, have been included in the purchase consideration at consummation because
the outcome of the contingency upon which release of the escrowed shares is
dependent can be determined in the Company's judgment, based upon the applicable
facts and circumstances, beyond reasonable doubt. The acquisition will be
accounted for using the purchase method of accounting. The Company expects to
write-off approximately $26.9 million of the purchase price as in-process and
purchased technology in the quarter ending December 31, 1997.
37
<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 29,1997.
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 connections 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 Chief Officer December 29, 1997
- -------------------------- (Principal Executive Officer)
Kevin K. Macgillivray
/s/ Joan P. Platt Chief Financial Officer and Vice President, December 29, 1997
- -------------------------- Finance and Administration (Principal
Joan P. Platt Financial and Accounting Officer)
/s/ Gregory M. Avis Director December 29, 1997
- --------------------------
Gregory M. Avis
/s/ Charles W. Berger Director December 29, 1997
- --------------------------
Charles W. Berger
/s/ Peter Y. Chung Director December 29, 1997
- --------------------------
Peter Y. Chung
/s/ Lawrence G. Finch Director December 29, 1997
- --------------------------
Lawrence G. Finch
</TABLE>
38
<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 1997 and for the eight months ended September 30, 1996 and the year ended
September 30, 1997, and in connection with our audit of the Predecessor
Business, and for the year ended September 30, 1995 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 13, 1997, except for Note 12 as to which the date is October 30, 1997
39
<PAGE>
FINANCIAL STATEMENT SCHEDULE
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT
VALUATION FOR DOUBTFUL ACCOUNTS BEGINNING OF BALANCE AT
------------------------------- PERIOD ADDITIONS DEDUCTIONS OTHER END OF PERIOD
------ --------- ---------- ----- -------------
<S> <C> <C> <C> <C> <C>
Year ended 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
Year ended September 30, 1997 299 - $(273) 147(2) 173
</TABLE>
<TABLE>
<CAPTION>
BALANCE AT
VALUATION FOR INVENTORY RESERVES BEGINNING OF BALANCE AT
-------------------------------- PERIOD ADDITIONS DEDUCTIONS OTHER END OF PERIOD
------ --------- ---------- ----- -------------
<S> <C> <C> <C> <C> <C>
Year ended September 30, 1995 (1) $ 575 - $ (25) $ 550
Four months ended January 31, 1996 (1) 550 - (550) -
Eight months ended September 30, 1996 - $1,028 - 1,028
Year ended September 30, 1997 1,028 1,672 (458) 378(3) 2,620
</TABLE>
(1) Predecessor Business
(2) 147 of additions (other) relates to Quintar acquisition
(3) 378 of additions (other) relates to Quintar acquisition
40
<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 Financial Data Schedule
41
<PAGE>
EXHIBIT 11.1
SPLASH TECHNOLOGY HOLDINGS, INC.
COMPUTATION OF EARNINGS PER SHARE (1)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Eight Months Year Ended
Ended September 30,
September 30, 1997
1996
---------------- ----------------
<S> <C> <C>
Weighted average common shares outstanding for the period: 7,009 12,002
Common equivalent shares deemed outstanding from
options and warrants to acquire common stock deemed
converted using Modified Treasury Stock Method 833 378
Common equivalent shares outstanding from conversion
of preferred stock 1,741 2,574 43 421
----- ------- --- -------
Shares used in per share calculation 9,583 12,423
======= =======
Net income (loss) $(8,196) $ 5,091
Cumulative dividends on preferred stock (730) (4)
------- -------
Adjusted net income (loss) $(8,926) $ 5,087
======= =======
Net income (loss) per share $ (0.93) $ 0.41
======= =======
</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.
42
<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-1 (File No. 333-32243) of our report
dated October 13, 1997, except for Note 12, for which the date is October 30,
1997 on our audits of the consolidated financial statements and financial
statement schedule of Splash Technology Holdings, Inc. as of September 30, 1997
and 1996 and for the year ended September 30,1997 and the eight months ended
September 30, 1996 and of the Predecessor Business for the year ended September
30, 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
43
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 55,831
<SECURITIES> 11,350
<RECEIVABLES> 7,933
<ALLOWANCES> 173
<INVENTORY> 4,917
<CURRENT-ASSETS> 84,325
<PP&E> 1,287
<DEPRECIATION> 1,138
<TOTAL-ASSETS> 98,215
<CURRENT-LIABILITIES> 19,277
<BONDS> 0
0
0
<COMMON> 14
<OTHER-SE> 78,524
<TOTAL-LIABILITY-AND-EQUITY> 98,215
<SALES> 76,327
<TOTAL-REVENUES> 76,327
<CGS> 37,229
<TOTAL-COSTS> 37,229
<OTHER-EXPENSES> 25,842
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 14,511
<INCOME-TAX> 9,420
<INCOME-CONTINUING> 5,091
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,091
<EPS-PRIMARY> .41
<EPS-DILUTED> .41
</TABLE>
