<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
AMENDMENT TO CURRENT REPORT
Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
DATE OF REPORT: October 30, 1997
(Date of earliest event reported)
SPLASH TECHNOLOGY HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 000-21171
(State or other jurisdiction of Commission File Number
incorporation or organization)
77-0418472
(I.R.S. Employer Identification No.)
555 DEL REY AVENUE
SUNNYVALE, CA 94086
(408) 328-6300
(Address, including zip code, and telephone number, including
area code, of Registrant principal executive offices)
<PAGE>
SPLASH TECHNOLOGY HOLDINGS, INC.
FORM 8K/A
AMENDMENT OF CURRENT REPORT
TABLE OF CONTENTS
<TABLE>
<S> <C>
(a) HISTORICAL FINANCIALS OF COLORAGE INC.
Report of Independent Auditors................................................................................. 3
Consolidated Balance Sheets as of June 30, 1997 and 1996....................................................... 4
Consolidated Statements of Income for the years ended June 30, 1997, 1996 and 1995............................ 5
Consolidated Statements of Stockholders' Equity for the years ended June 30, 1997, 1996 and 1995............. 6
Consolidated Statements of Cash Flows for the years ended June 30, 1997, 1996 and 1995....................... 7
Notes to Consolidated Financial Statements..................................................................... 8
(b) PRO FORMAS FINANCIAL INFORMATION
Introductory paragraph to Pro Forma Combined Condensed Statements of Operations................................ 15
Pro Forma Combined Condensed Statement of Operations for the nine months ended June 30, 1997 (Unaudited)....... 16
Pro Forma Combined Condensed Statement of Operations for the year ended September 30, 1996 (Unaudited)......... 17
Notes to Unaudited Pro Forma Combined Condensed Statement of Operations........................................ 17
Pro Forma Combined Balance Sheet as of June 30, 1997........................................................... 18
Notes to Unaudited Pro Forma Balance Sheet..................................................................... 19
</TABLE>
2
<PAGE>
The undersigned registrant hereby amends the following items, financial
statements, exhibits, or other portions of its current report on Form 8-K
originally filed with the Securities and Exchange Commission on November 13,
1997.
Item 7. FINANCIAL STATEMENTS AND PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of ColorAge Inc.
We have audited the accompanying consolidated balance sheets of Colorage
Inc. and subsidiaries as of June 30, 1997 and 1996 and the related consolidated
statements of income, stockholders equity and cash flows for the three years in
the period ended June 30, 1997. These consolidated 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to in the
first paragraph present fairly, in all material respects, the financial position
of ColorAge Inc. and subsidiaries as of June 30, 1997 and 1996 and the results
of their operations and their cash flows for each of the three years in the
period ended June 30, 1997, in conformity with generally accepted accounting
principles.
Barry High & Associates, P. C. Certified Public Accountants
September 5, 1997, except for Note 22, for which the date is October 30, 1997
3
<PAGE>
COLORAGE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
ASSETS
1997 1996
---------- ----------
<S> <C> <C>
Current assets:
Cash $ 480,201 $ 309,399
Accounts receivable, net of allowance for doubtful accounts of $49,156 and $45,423 718,637 232,547
Inventories 532,102 288,960
Prepaid and refundable taxes 15,600 95,058
Prepaid expenses 44,676 29,800
Deferred tax asset 140,023 40,350
---------- ----------
Total current assets 1,931,239 996,114
---------- ----------
Property and equipment - net of accumulated depreciation 216,191 289,899
---------- ----------
Other assets:
Prepaid expense 24,453 11,314
Deposits 22,140 13,769
Design costs, net of accumulated amortization of $28,996 and $22,783 2,071 8,285
Organization costs, net of accumulated amortization of $2,000 and $1,800 -- 200
Patent costs, net of accumulated amortization of $913 8,401 --
Software development costs, net of accumulated amortization of $444,587 and $936,917 79,149 448,592
Software license 50,000 --
Trademarks, net of accumulated amortization of $21,204 and $18,272 8,115 11,047
Deferred tax asset 38,400 21,185
---------- ----------
232,729 514,392
---------- ----------
$2,380,159 $1,800,405
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade $ 292,629 $ 68,283
Accounts payable - rent 31,579 31,579
Customer advances 23,805 10,551
Current portion:
Stock bonuses payable 276 326
Notes payable - bank 83,333 163,460
Capital lease obligation 16,623 --
Accrued liabilities:
Accrued income taxes 900 --
Accrued vacation 41,735 47,335
Other expenses 120,923 122,917
Sales return reserves 72,000 --
Warranty reserves 27,000 --
Lease incentive - current 40,000 40,000
---------- ----------
Total current liabilities 750,803 484,451
---------- ----------
Long-term liabilities:
Accounts payable - rent 28,947 60,526
Stock bonuses payable 397 844
Notes payable - bank -- 83,330
Capital lease obligation 20,662 37,865
Note payable - other 100,000 200,000
Stockholder loans 170,611 170,611
Lease Incentive 38,333 78,333
Deferred income taxes -- 320
---------- ----------
Total long-term liabilities 358,950 631,829
---------- ----------
Stockholders' equity:
Class A common stock, no par value, voting, 15,000 shares authorized, 13,425 and
13,333 shares issued 147,395 57,367
Class B common stock, no par value, non-voting, 215,000 shares authorized,
154,020 and 152,513 shares issued 127,952 17,632
Paid-in capital 28,257 28,257
Retained earnings 967,552 581,619
---------- ----------
1,271,156 684,875
Less: Treasury stock, 300 shares of Class B common stock 750 750
---------- ----------
Total stockholders' equity 1,270,406 684,125
---------- ----------
$2,380,159 $1,800,405
========== ==========
</TABLE>
See Auditor's report and notes to the financial statements
4
<PAGE>
COLORAGE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
FOR THE YEARS ENDED
JUNE 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- -----------
<S> <C> <C> <C>
Net Revenue $5,812,966 $3,884,351 $10,564,230
---------- ---------- -----------
Materials costs 1,440,045 441,366 3,321,231
Marketing and sales 1,019,077 977,022 3,243,154
Engineering and development 1,559,948 1,194,883 1,843,961
General and administrative 810,944 811,975 1,660,696
---------- ---------- -----------
Income before depreciation and amortization 982,952 459,105 495,188
Depreciation and amortization 492,644 586,130 995,036
---------- ---------- -----------
Income (loss) from operations 490,308 (127,025) (499,848)
---------- ---------- -----------
Other income (expense):
Interest expense (26,809) (65,911) (95,257)
Interest income 5,973 2,631 3,057
Miscellaneous (3,847) 1,628 8,111
Loss on disposal of obsolete inventory - (87,517) -
Loss on equipment disposals - (66,827) -
---------- ---------- -----------
(24,683) (215,996) (84,089)
---------- ---------- -----------
Income (loss) from continuing operations 465,625 (343,021) (583,937)
Discontinued Operations:
Loss from discontinued operations - 17,447 -
Loss from disposal of the discontinued segment - 28,757 -
---------- ---------- -----------
Income (loss) before provision for income taxes 465,625 (389,225) (583,937)
(Provision) benefit for income taxes (79,692) 84,145 258,845
---------- ---------- -----------
Net Income (loss) $ 385,933 $ (305,080) $ (325,092)
========== ========== ===========
Net income (loss) per share $ 2.31 $ (1.72) $ (2.11)
========== ========== ===========
Shares used in per share calculation 170,076 171,311 152,077
========== ========== ===========
</TABLE>
See auditor's report and notes to the financial statements
5
<PAGE>
COLORAGE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CLASS A CLASS B
COMMON STOCK COMMON STOCK FOREIGN
------------------- ----------------- PAID-IN CURRENCY RETAINED TREASURY STOCKHOLDERS
SHARES AMOUNT SHARES AMOUNT CAPITAL TRANSLATION EARNINGS STOCK EQUITY
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1994 11,764 $45,858 131,495 $15,470 $28,257 $1,211,791 $1,301,376
Common stock issued as
compensation:
Class A 1,569 11,509 11,509
Class B 15,498 1,116 1,116
Incentive Class B Stock
Bonus Plan, 10,600 shares
reserved for 1995 plan, 590
shares removed from
outstanding status due to
employees leaving the
Company before vesting 10,010
Incentive Class B Stock Bonus
Plan shares vesting 487 487
Purchase of 300 Class B shares
for the Treasury $(750) (750)
Foreign currency translation
adjustment $(11,449) (11,449)
Net loss (325,092) (325,092)
------ ------- ------- ------- ------- ------- ------- ----- --------
Balances at June 30, 1995 13,333 $57,367 157,003 $17,073 $28,257 (11,449) 886,699 (750) 977,197
Incentive Class B Stock
Bonus Plan shares
removed from
outstanding status due to
employees leaving the
Company before vesting (4,490)
Incentive Class B Stock Bonus
Plan shares vesting 559 559
Foreign currency translation
adjustment 11,449 11,449
Net loss (305,080) (305,080)
------ ------- ------- ------- ------- ------- ------- ----- --------
Balances at June 30, 1996 13,333 $57,367 152,513 $17,632 $28,257 -- 581,619 (750) 684,125
Notes converted to Common
Stock:
Class A 92 90,028 90,028
Class B 1,019 9,972 9,972
Purchase of Class B Common 1,088 100,000 100,000
Stock
Incentive Class B Stock
Bonus Plan shares
removed from
outstanding status due to
employees leaving the
Company before vesting (600)
Incentive Class B Stock Bonus
Plan shares vesting 348 348
Net income 385,933 385,933
------ ------- ------- ------- ------- ------- ------- ----- ----------
Balances at June 30, 1997 13,425 $147,395 154,020 $127,952 $28,257 -- $967,552 $(750) $1,270,406
====== ======== ======= ======== ======= ======= ======== ===== ==========
</TABLE>
<PAGE>
COLORAGE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED
JUNE 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income (loss) $ 385,933 $(305,080) $(325,092)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 492,845 586,130 995,126
Loss on disposal of property and equipment 1,546 103,377 -
Prepaid and refundable income taxes 79,458 148,166 88,608
Capitalization of software development costs 49,387 (427,896) (426,642)
Patent acquisition costs (9,314) - -
Software license acquisition (50,000) - -
Deposits (paid) returned (8,371) 3,871 1,286
Organization expenses - 2,765 -
Deferred income taxes (117,208) 2,803 30,001
Issuance of Class A and Class B stock as compensation (149) (1,834) 15,138
Utilization of lease incentives (40,000) (40,000) (40,000)
Foreign currency translation adjustments - 11,449 (11,449)
Changes in operating assets and liabilities:
(Increase) Decrease in:
Accounts receivable (486,090) 495,853 (141,050)
Inventories (243,142) 40,178 146,108
Prepaid expenses (28,015) (24,667) 106,856
Increase (Decrease) in:
Accounts payable 192,767 (530,755) (20,142)
Customer advances 13,254 1,843 8,708
Accrued liabilities 97,906 3,528 112,345
Accrued payroll & payroll taxes - (4,515) (33,944)
Accrued vacation (5,600) (29,158) (54,954)
--------- --------- ---------
Net cash provided by operating activities 325,207 36,058 450,903
--------- --------- ---------
INVESTING ACTIVITIES:
Purchase of property and equipment (90,368) (9,931) (194,796)
Proceeds from sale of property and equipment - 30,284 33,649
--------- --------- ---------
Net cash provided (used) by investing activities (90,368) 20,353 (161,147)
--------- --------- ---------
FINANCING ACTIVITIES:
Proceeds from shareholder loans - - 6,261
Proceeds from bank line of credit - - 325,000
Proceeds from capital lease obligations - - 80,279
Proceeds from Class B Stock 100,000 - -
Proceeds from notes to others - 100,000 300,000
Payment of bank line of credit - (96,000) (372,500)
Payment of long-term obligations (146,834) (188,194) (237,500)
Payment of capital lease obligations (17,203) (15,069) (32,258)
Payment of notes to others - - (200,000)
Payment of treasury stock - - (750)
--------- --------- ---------
Net cash used in financing activities (64,037) (199,263) (131,468)
--------- --------- ---------
Increase (decrease) in cash 170,802 (142,852) 158,288
Cash, beginning of year 309,399 452,251 293,963
--------- --------- ---------
Cash, end of year $ 480,201 $ 309,399 $ 452,251
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Cash paid for Interest $ 18,641 $ 44,083 $ 85,471
Cash paid for Income Taxes 211,600 - 5,450
SUPPLEMENTAL SCHEDULE OF NONCASH OPERATING, INVESTING, AND FINANCING ACTIVITIES:
Incentive stock plans:
Issuance of Class B common stock as compensation $ 348 $ 559 $ 1,603
Issuance of Class A common stock as compensation - - 11,509
Landlord Non-cash lease incentive:
Rent expense reduction 40,000 40,000 40,000
Conversion of note to Class A and Class B shares 100,000 - -
</TABLE>
See auditor's report and notes to the financial statements
7
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company is principally engaged in the design, development and sale of
computer software and related products for color imaging. The principal markets
are to resellers located in North America and Europe. The Company extends credit
to its customers in the normal course of its business without requiring
collateral.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reported period. Actual results
could differ from those estimates.
Principles of Consolidation
- ---------------------------
For the periods ending June 30, 1996 and 1995, the Company owned a foreign
subsidiary corporation in the Netherlands. The records of this subsidiary were
maintained in the local currency and were converted to U.S. currency for
consolidation. The Company also wholly owns a foreign sales corporation. The
consolidated financial statements include the accounts of the wholly owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation.
Cash Flows
- ----------
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Accounts receivable - trade
- ---------------------------
Provision for losses on trade accounts receivable is made in amounts required to
maintain an adequate allowance to cover anticipated bad debts. Accounts
receivable are charged against the allowance when it is determined by the
Company that payment will not be received. Any subsequent receipts are credited
to the allowance. At year end, the allowance is adjusted by management based on
review of the accounts receivable.
Inventories
- -----------
Inventories, consisting of completed and partially completed software and
hardware units, materials and supplies are stated at the lower of cost (first-
in, first-out) or market.
Property and equipment
- ----------------------
Additions to property and equipment are recorded at cost when placed in service.
Depreciation is provided based on the estimated useful lives of the assets using
an accelerated method. Betterments and improvements that extend the useful life
of an asset are capitalized. Maintenance and repairs are charged to expense as
incurred.
Organization costs
- ------------------
The costs of incorporation of the subsidiaries are amortized over five years.
Research tax credits
- --------------------
The Company follows the "flow-through" method of accounting for the research tax
credits, recognizing the benefit for financial reporting purposes when the
credits are realized for tax purposes.
Income taxes
- ------------
Income taxes are provided for the tax effects of transactions reported in the
financial statements and consist of taxes
8
<PAGE>
currently due plus deferred taxes. Deferred taxes are recognized for temporary
differences between the basis of assets and liabilities for financial statement
and income tax purposes. The temporary differences relate primarily to
allowances for doubtful receivables, depreciation, accrued vacations, product
reserves and interest which are deductible for financial statement purposes but
not for income tax purposes. The deferred tax assets and liabilities represent
the future tax return consequences of those differences, which will either be
taxable or deductible when the assets and liabilities are recovered or settled.
Revenue Recognition
- -------------------
Software Licenses and Systems - The Company recognizes revenue from sales of
software licenses and turn-key systems upon shipment of these products to a
customer, unless the Company has significant related obligations remaining. When
significant obligations remain after the product has been delivered, revenue is
not recognized until such obligations have been completed or are no longer
significant.
Post-contract Customer Support and Services - Revenue from post-contract
customer support, when significant, is recognized over the period the customer
support services are provided and product service revenue is recognized as
services are performed.
Foreign Transactions
- --------------------
The Company sells some of its products and services to foreign customers.
Revenues from these sales are recorded in U.S. Dollars.
Trademark and Patents
- ---------------------
The cost associated with the acquisition of the Company trademark is amortized
using the straight line method over 10 years.
The costs associated with the acquisition of patents are amortized using the
straight line method over 17 years.
Computer Software Costs
- -----------------------
The Company classifies the costs of planning, designing and establishing the
technological feasibility of a computer software product as research and
development costs and charges those costs to expense when incurred (see Note
13). After technological feasibility has been established, costs of producing a
marketable product and product masters are capitalized and amortized over the
estimated life of the product (see Note 14). Costs incurred for duplicating
computer software from product masters, documentation and training materials and
for packaging the product for distribution are capitalized as inventory and
charged to cost of sales when revenue is recognized. Costs of maintenance and
customer support are charged to expense when costs are incurred.
Capitalized software development costs and the related accumulated amortization
are removed from the accounts at the beginning of the year after amortization is
complete (See Note 14).
Software Licenses
- -----------------
The costs associated with the acquisition of software licenses are amortized
over 3 years which is the expected useful life of the licenses.
Design Costs
- ------------
The costs for package design and logo are amortized over 5 years which is their
expected useful lives. The design costs for product brochures and inserts are
amortized over 2 years which is their expected useful lives.
Advertising Costs
- -----------------
The costs of advertising are expensed as incurred. The costs of advertising were
$0, $578 and $2,361 for the years ended June 30, 1997, 1996 and 1995.
9
<PAGE>
Product Reserves
- ----------------
The Company provides a reserve for estimated sales returns and for warranty
returns based upon historical return rates.
Earnings Per Share
- ------------------
Net income (loss) per share is computed using the weighted average number of
common stock and dilutive common stock equivalents outstanding during the
period.
2. ALLOWANCE FOR ACCOUNTS RECEIVABLE
The allowance for doubtful accounts were $49,156 and $45,423 for the years ended
June 30, 1997 and 1996, respectively.
3. INVENTORIES
Inventories are comprised of the following items at June 30, 1997 and 1996:
1997 1996
--------- ---------
Unassembled materials $ 233,123 $ 255,564
Finished Goods 298,979 33,396
--------- ---------
$ 532,102 $ 288,960
========= =========
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at June 30, 1997 and 1996:
1997 1996
--------- ----------
Computers, peripherals, and software $ 717,324 $1,334,752
Office equipment 207,822 224,017
Furniture and fixtures 84,688 91,697
Leasehold improvements 5,200 5,200
--------- ----------
1,015,034 1,655,666
Less accumulated depreciation 798,843 1,365,767
--------- ----------
Net property, plant and equipment $ 216,191 $ 289,899
========= ==========
Depreciation expense was $162,530, $243,811, and $350,931 for the years ended
June 30, 1997, 1996 and 1995, respectively.
Included in office equipment is a capitalized lease with a cost of $80,279 and
accumulated depreciation of $57,159 and $41,745 for the years ended June 30,
1997 and 1996, respectively.
5. LONG-TERM DEBT
The Company has a long term note due to a bank. Principal and interest are
payable in monthly installments. The interest rate on notes totaling $83,334 is
1.0% above the bank's prime lending rate and was 9.5% at June 30, 1997. This
note is secured by all assets of Company and is personally guaranteed by the
majority stockholders. The personal guarantee of the stockholders is limited to
$250,000 individually for certain stockholders. The Bank also requires the
Company to maintain certain financial ratios. Failure to maintain the ratios is
an event of default. The Company was in compliance with the ratios at June 30,
1997.
The minimum annual payment is $83,334 for 1998.
6. NOTE PAYABLE - OTHER
The Company borrowed $100,000 on a five year note subordinated to the bank loans
in December, 1994. The Company borrowed another $100,000 on a five year note
subordinated to the bank loans in March, 1996. The notes
10
<PAGE>
are renewable for a second five year term at the option of the registered owner.
Each note may be converted to Class A and Class B common stock on any
anniversary date during the term of the note at the option of the registered
owner. The conversion feature is based on a ratio measured by 1995 and 1996
gross sales, respectively. Exercise of the conversion feature would result in
the issuance of a small number of shares of Class A and Class B common stock and
waiver of all accrued interest. Both notes are secured by all assets of the
Company. In March, 1997 the first of these notes was converted to Class A and
Class B common stock. The second note is due in March 2000, and bears interest
at 7.74% compounded annually.
7. STOCKHOLDER DEBT
The Company has unsecured notes due to stockholders totaling $170,611. The notes
are subordinated to the bank debt. Notes totaling $110,611 bear interest at 6%
and notes totaling $60,000 bear interest at 10%. The notes are due in July and
August, 2000.
8. CAPITAL LEASES
The Company has acquired equipment under the provisions of long-term leases.
The present value of the net minimum lease payments has been capitalized. The
following is a schedule of the future minimum lease payments under capital
leases by year together with the present value of the net minimum lease
payments:
<TABLE>
<S> <C>
Year ended June 30, 1997 $19,237
1998 19,237
1999 1,603
-------
Total minimum lease payments 40,077
Less amount representing interest charges 2,792
-------
Present value of net minimum lease payments 37,285
=======
Current portion 16,623
Long-term portion 20,662
-------
37,285
=======
</TABLE>
9. INCENTIVE STOCK BONUS PLANS
In 1989, 1991 and 1995 the Company adopted incentive stock bonus plans whereby
certain employees were granted shares of the Class B common stock. The shares
are valued at the date they are granted and are held in escrow until they are
vested. The shares granted and the vesting schedule is as follows:
<TABLE>
<CAPTION>
Date vested No. of shares Price
- ----------------------------------------- ------------- --------------
<S> <C> <C>
Through June 30,
1998 1,105 $276
1999 1,105 276
2000 480 121
----- ----
2,690 $673
===== ====
</TABLE>
The shares are restricted and upon vesting must be offered to the Company for
right of first refusal in the event that an employee wants to transfer or sell
them. The employees that have been granted shares under the incentive stock
bonus plans have elected under section 83(b) of the Internal Revenue Code to
recognize the income in the year the plans were adopted. Therefore, the Company
reflects the compensation deduction in the year the plans were adopted.
Consequently, when the Company grants Class B common shares under an Incentive
Stock Bonus Plan, the shares are listed as outstanding. When an employee that
was granted shares leaves the Company, non-vested shares are removed from
outstanding status and are available to be issued. The value of the shares
granted are recorded to the Class B common stock account as they vest. The non-
vested value is recorded as an accrued bonus.
11
<PAGE>
10. INCOME TAXES
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
--------- -------- ---------
Current:
<S> <C> <C> <C>
Federal $ 222,532 $(87,404) $(245,357)
State 63,616 456 5,450
--------- -------- ---------
286,148 (86,948) (239,907)
--------- -------- ---------
Deferred:
Federal (91,611) 2,190 27,317
State (25,597) 613 2,684
--------- -------- ---------
(117,208) 2,803 30,001
--------- -------- ---------
Research tax credits:
Federal (35,332) - (48,939)
State (53,916) - -
--------- -------- ---------
(89,248) - (48,939)
--------- -------- ---------
Total Expense (Benefit) $ 79,692 $(84,145) $(258,845)
========= ======== =========
</TABLE>
The current federal income tax provision is different from the expense that
would result from applying statutory tax rates to financial statement income.
The difference results from expenses for meals and entertainment, officers' life
insurance, trademark amortization and research and development expenses that are
not deductible or have limited deductibility for income tax purposes. See Note 1
for explanation of the deferred taxes.
The current tax benefit results from the carryback of net operating losses to
reduce the tax liability for preceding years. The Company has federal research
tax credits totaling $63,400 and state research tax credits totaling $7,800 that
expire in 2012.
11. EARNINGS PER SHARE
The earnings per share computations are based on the weighted average number of
shares of common stock outstanding during the year as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Weighted average Class A common shares outstanding for the period 13,425 13,333 12,224
Weighted average Class B common shares outstanding for the period 153,851 152,513 136,038
Class B common equivalent shares deemed outstanding from shares
reserved for employee bonus plans that vest over time 2,800 5,465 3,815
-------- --------- ---------
Shares used in per share calculation 170,076 171,311 152,077
======== ========= =========
Net income (loss) from continuing operations, net of tax provisions $385,933 $(258,876) $(325,092)
Interest expense for notes convertible to stock computed on the "as if
converted" method 7,740 9,797 4,199
-------- --------- ---------
Adjusted net income (loss) from continuing operations, net of tax 393,673 (249,079) (320,893)
Loss from discontinued operations - (17,447) -
Loss from disposal of the discontinued segment - (28,757) -
-------- --------- ---------
Adjusted net income (loss) $393,673 $(295,283) $(320,893)
======== ========= =========
Earnings per share and Common Stock Equivalents:
Adjusted net income (loss) from continuing operations, net of tax
provision $ 2.31 $ (1.45) $ (2.11)
Loss from discontinued operations - (0.10) -
Loss from disposal of the discontinued segment - (0.17) -
-------- --------- ---------
Adjusted net income (loss) $ 2.31 $ (1.72) $ (2.11)
======== ========= =========
</TABLE>
12
<PAGE>
There is no significant difference in the per share amounts when applying either
the primary or fully diluted method in computing the per share amounts.
12. LEASE COMMITMENTS
The Company occupies premises in the U.S. under an operating lease agreement
through May 31, 1999. The area leased was reduced by 50% effective April 1,
1996. The minimum rent was reduced 32%. The lease requires a monthly fixed
rental payment which includes a pro rata share of the increase in the property's
operating costs. A company subsidiary occupied premises in the Netherlands
under an operating lease through December 31, 1995.
As an inducement to enter a new lease, the landlord provided incentives totaling
$200,000. The incentives were used to pay for leasehold improvements, moving
expenses and free rent. The lease incentives are amortized over the term of the
lease as a reduction in lease expense.
The operating lease expense was $221,093, $349,557, and $446,700 for 1997, 1996,
and 1995, respectively.
The future minimum rental payments through the expiration of the lease, net of
lease incentives, are:
<TABLE>
<CAPTION>
Year ending June 30, Minimum annual payments
------------------------ --------------------------------
<S> <C>
1998 $219,084
1999 200,831
--------
$419,915
========
</TABLE>
13. RESEARCH COSTS
Research costs for new products are expensed until feasibility for the product
is established (See Note 1). The amount of research costs expensed are
$515,957, $168,053, and $605,946 for 1997, 1996 and 1995, respectively.
14. COMPUTER SOFTWARE AND RELATED PRODUCT DEVELOPMENT COSTS
The Company capitalized a portion of certain expenditures that are in
conjunction with the development of their products (See Note 1). The Company
estimates that the life of the products will be 18 months before the development
of a new product is complete.
Software and related product development costs and related accumulated
amortization are removed from the accounts the year after amortization is
complete. The amount removed from the accounts for the years ended June 30,
1997, 1996 and 1995 was $812,386, $382,607, and $326,056, respectively.
The amortization of software development costs are $320,056, $317,132, and
$582,694 for 1997, 1996 and 1995, respectively.
The following is a schedule of future annual amortization of software
development costs:
<TABLE>
<CAPTION>
Software Development
Year end June 30, Cost Amortization
-------------------- ------------------------------
<S> <C>
1998 $79,149
=======
</TABLE>
15. OFF-BALANCE SHEET RISK
The Company sells and licenses software, turn-key systems and related products
domestically and internationally. Accordingly, the risk exists that the
ability to collect amounts due from customers could be affected by economic
fluctuations in various markets and industries.
At June 30, 1997 the Company has demand deposits in banks in excess of federally
insured limits of $279,945. The possibility of loss exists if a bank holding
excess deposits were to fail.
13
<PAGE>
16. PROFIT SHARING/401(k) PLAN
The Company maintains a Profit-Sharing/401(k) Plan that covers all full-time
employees, as defined by the plan, that have attained the age of 21 years.
Employees covered by the plan may make voluntary contributions to the plan.
The Company may also make optional contributions to the plan. The Company made
no contributions to the plan for the years ended June 30, 1997, 1996 and 1995.
17. FOREIGN CURRENCY TRANSACTIONS
The records of a foreign subsidiary are maintained in the local currency
and are converted to U.S. currency for consolidation. The gains and losses due
to changes in exchange rates at the time of conversion are recorded in the
consolidated balance sheet. The Company realized a net loss of $0, $3,681, and
$11,449 for the years ended June 30, 1997, 1996 and 1995 from such transactions.
18. SALES CONCENTRATION
Sales to one customer in 1997 were $2,580,745, or 44% of sales. Sales to a
second customer were $2,375,624, or 40% of sales.
19. CLOSURE OF FOREIGN SUBSIDIARY
The Company closed and liquidated their Netherlands subsidiary effective
December 31, 1995. The assets of the subsidiary were abandoned and the
liabilities were assumed by the Company. The results of operations from the date
of the determination to close the subsidiary to its closure and the loss from
the disposal of the subsidiary are disclosed in the income statement.
20. MATERIALS CONCENTRATION
Key connectors and semi-conductors used in the Company's product are supplied by
one manufacturer. There are no alternative sources for these items.
21. COMMON STOCK
Class A common shares have voting rights and Class B common shares do not have
voting rights. The Class A common shares are held by a voting trust. The
Class A common shares participate in liquidation proceeds at one hundred times
the participation of the Class B common shares.
22. SUBSEQUENT EVENT
The Company was acquired by Splash Technology Holdings, Inc. on October 30,
1997.
The note payable due March 2000, referred to in Note 6, was converted to Class A
and Class B shares prior to the acquisition.
14
<PAGE>
INTRODUCTORY PARAGRAPH
TO PROFORMA
COMBINED CONDENSED STATEMENTS OF OPERATION
The Company completed its acquisition of ColorAge Inc. ("ColorAge") on
October 30, 1997.
The accompanying unaudited pro forma combined condensed balance sheet
combines the historical consolidated balance sheet of the Company and the
balance sheet of ColorAge as if the acquisition had occurred on June 30, 1997.
The accompanying unaudited pro forma combined condensed statement of
operations for the nine months ended June 30, 1997 includes the historical
consolidated statement of operations of the Company and of ColorAge Inc. for the
nine months ended June 30, 1997 as if the acquisition had occurred on October 1,
1995.
The accompanying unaudited pro forma combined condensed statement of
operations for the year ended September 30, 1996 includes the historical
consolidated statement of operations of the Company's predecessor business for
the four months ended January 31, 1996, the historical consolidated statement of
operations of the Company for the eight months ended September 30, 1996 and the
historical statement of operations of ColorAge for the year ended June 30, 1996
as if the acquisition had occurred on October 1, 1995.
The unaudited pro forma condensed combined statements of operations give
effect to the acquisition using the purchase method of accounting, and are based
upon allocation of the purchase price and include the adjustments described in
the notes attached hereto.
The unaudited pro forma combined condensed financial statements do not
purport to represent what the Company's results of operations would have been
had the ColorAge acquisition occurred on the date indicated or for any future
period or date. The pro forma adjustments give effect to available information
and assumptions that the Company believes are reasonable. The unaudited pro
forma combined condensed financial statements should be read in conjunction with
the Company's historical consolidated financial statements and the financial
statements of ColorAge and the notes thereto included or incorporated elsewhere
herein.
15
<PAGE>
SPLASH TECHNOLOGY HOLDINGS, INC.
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
NINE MONTHS ENDED JUNE 30, 1997
(Unaudited)
(Amounts in thousands except per share data)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
SPLASH -------------------
TECHNOLOGY COLORAGE PRO FORMA
HOLDINGS, INC. INC. AMOUNT KEY COMBINED
-------------- ------ -------- --- --------
<S> <C> <C> <C> <C> <C>
Net revenue $51,227 $5,105 $56,332
Cost of net revenue 24,864 1,446 26,310
------- ------ -------
Gross profit 26,363 3,659 30,022
------- ------ -------
Operating expenses:
Research and development 3,972 1,172 5,144
Selling, general and administrative 6,071 1,549 7,620
Amortization of purchased technology
and write-off of in-process technology 11,039 - $ 1,254 ii, iii 12,293
------- ------ ------- -------
Total operating expenses 21,082 2,721 1,254 25,057
------- ------ ------- -------
Income (loss) from operations 5,281 938 (1,254) 4,965
Interest and other income (expense), net 979 (12) (1,243) i (276)
------- ------ ------- -------
Income (loss) before Income taxes 6,260 926 (2,497) 4,689
Provision for (benefit from) income taxes 6,447 224 (464) 6,207
------- ------ ------- -------
Net income (loss) $ (187) $ 702 $(2,033) $(1,518)
======= ====== ======= =======
Net income (loss) per share $ (0.02) $ (0.13)
======= =======
Shares used in per share calculation 11,903 12,017
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
16
<PAGE>
<TABLE>
<CAPTION>
SPLASH TECHNOLOGY HOLDINGS, INC.
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1996
(Unaudited)
(Amounts in thousands except per share data)
PREDECESSOR SPLASH TECHNOLOGY COLORAGE PRO FORMA
BUSINESS HOLDINGS, INC. INC. ADJUSTMENTS
----------- -------------------------- ---------- -----------
FOUR MONTHS EIGHT MONTHS PRO FORMA
ENDED ENDED YEAR ENDED YEAR ENDED
JANUARY 31, SEPTEMBER 30, SEPTEMBER 30, JUNE 30, PRO FORMA
1996 1996 1996 1996 AMOUNT KEY COMBINED
----------- ------------- ------------- ---------- ------ --- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenue $13,008 $ 34,713 $47,721 $3,884 $51,605
Cost of net revenue 8,427 19,381 27,808 846 ii 28,654
------- -------- ------- ------ -------
Gross profit 4,581 15,332 19,913 3,038 22,951
------- -------- ------- ------ -------
Operating Expenses:
Research and development 1,498 2,627 4,125 1,479 5,604
Selling, general and
administrative 975 3,032 4,007 1,841 5,848
Amortization of purchased
technology and write-off of
in-process technology _ 22,803 22,803 -- $1,447 ii,iii 24,250
------- -------- ------- ------ ------ -------
Total operating expenses 2,473 28,462 30,935 3,320 1,447 35,702
------- -------- ------- ------ ------ -------
Income (loss) from operations 2,108 (13,130) (11,022) (282) (1,447) (12,751)
Interest and other income
(expense), net (18) (575) (593) (107) (1,658) i (2,358)
------- -------- ------- ------ ------ -------
Income (loss) before
income taxes 2,090 (13,705) (11,615) (389) (3,105) (15,109)
Provision for (benefit from)
income taxes 836 (5,509) (4,673) (84) (618) (5,375)
------- -------- ------- ------ ------ -------
Net income (loss) $1,254 $ (8,196) $(6,942) $ (305) $(2,487) $(9,734)
======= ======== ======= ====== ======= =======
Net income (loss) per share $ (1.00)
=======
Shares used in per share calculation 9,697
=======
</TABLE>
The accompanying notes are an integral part of these financial statements.
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
i. To record effect on interest income (expense) as a result of cash used for
purchase price
ii. To record amortization of purchased technology over the life of the
technology
iii. The Company recorded the expense of approximately 26.0 million related to
purchased in-process research and development upon the consummation of the
purchase transaction. This amount has been excluded from the pro forma
statement of operations due to its nonrecurring nature.
<PAGE>
SPLASH TECHNOLOGY HOLDINGS, INC.
COMBINED PRO FORMA BALANCE SHEET
AS OF JUNE 30, 1997
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
SPLASH -------------------
TECHNOLOGY COLORAGE PRO FORMA
HOLDINGS, INC. INC. AMOUNT KEY COMBINED
-------------- ------ -------- --- --------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,601 $ 480 $ (7,081) A $ -
Accounts receivable, net 11,713 719 - 12,432
Inventories 3,112 532 - 3,644
Prepaid expenses and other current assets 321 60 - 381
Deferred income taxes 3,962 140 - 4,102
------- ------ -------- --------
Total current assets 25,709 1,931 (7,081) 20,559
Property and equipment, net 1,270 216 - 1,486
Deferred income taxes 11,615 38 - 11,653
Purchased technology and other intangibles - - 2,260 B 2,260
Other long term assets 1,457 195 (129) C 1,523
------- ------ -------- --------
Total assets 40,051 2,380 (4,950) $ 37,481
======= ====== ======== ========
LIABILITIES
Current liabilities:
Short term debt - - 18,419 A $ 18,419
Trade accounts payable 3,226 293 - 3,519
Other accrued liabilities 6,377 458 1,000 A 7,835
Royalties payable 1,950 - - 1,950
Deferred revenue 2,068 - - 2,068
Income taxes payable 2,078 - - 2,078
------- ------ -------- --------
Total current liabilities 15,699 751 19,419 35,869
Other long term liabilities 400 359 - 759
------- ------ -------- --------
Total liabilities 16,099 1,110 19,419 36,628
------- ------ -------- --------
STOCKHOLDERS' EQUITY
Common stock 13 275 (275) D 13
Additional paid-in capital 33,048 28 (28) D 33,048
- - 2,925 A 2,925
Accumulated deficit (9,109) 967 (967) D (9,109)
- - (26,024) E (26,024)
------- ------ -------- --------
Total stockholders' equity 23,952 1,270 (24,369) 853
------- ------ -------- --------
Total liabilities and stockholders' equity $40,051 $2,380 $ (4,950) $ 37,481
======= ====== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
18
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
A. Represents the purchase price for ColorAge:
<TABLE>
<S> <C>
Cash consideration $25,500
Stock consideration 2,925
Estimated acquisition costs 1,000
-------
Total consideration $29,425
=======
Net assets (after write-off of intangible) 1,141
Purchased in-process technology 26,024
Purchased technology and other intangibles 2,260
-------
$29,425
=======
</TABLE>
B. To record purchased technology and other intangibles
C. To eliminate previously recorded intangible assets of ColorAge Inc.
D. To adjust stockholders' equity for the acquisition of ColorAge Inc.
E. To record the write-off of purchased in-process technology
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: December 24, 1997
SPLASH TECHNOLOGY HOLDINGS, INC.
By: /s/ Kevin K. Macgillivray
--------------------------
Kevin K. Macgillivray
President and Chief Executive
Officer
20
