<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended SEPTEMBER 30, 1998
------------------
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 (IRS Employer Identification No.)
of incorporation or organization)
555 DEL REY AVENUE, SUNNYVALE, CA 94086
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 328-6300
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of the Registrant's Common Stock. $.001 par
value, as of September 30, 1998 was 13,929,457 shares.
<PAGE>
SPLASH TECHNOLOGY HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
-------------- -------------
ASSETS (UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 43,637 $ 58,726
Marketable securities 10,073 7,150
Accounts receivable, net of allowance for doubtful accounts of
$369 and $361 as of December 31, 1997 and September 30, 1998,
respectively 4,399 10,137
Inventories 3,541 2,099
Prepaid expenses and other current assets 527 647
Deferred income taxes 4,094 4,094
--------- ---------
Total current assets 66,271 82,853
Property and equipment, net 1,385 2,253
Deferred income taxes 11,198 11,198
Other assets 3,639 2,844
--------- ---------
Total assets $ 82,493 $ 99,148
--------- ---------
--------- ---------
LIABILITIES
Current liabilities:
Trade accounts payable $ 2,283 3,488
Accrued and other liabilities 18,711 23,162
Deferred revenue 1,700 791
--------- ---------
Total current liabilities 22,694 27,441
Other long term liabilities 932 848
--------- ---------
Total liabilities 23,626 28,289
--------- ---------
STOCKHOLDERS' EQUITY
Common stock, par value $.001 per share:
Authorized: 50,000,000 shares
Issued and outstanding: 13,855,089 shares and
13,929,457 shares as of December 31, 1997 and
September 30, 1998, respectively 14 14
Additional paid-in capital 85,458 86,077
Accumulated deficit
(26,605) (15,232)
--------- ---------
Total stockholders' equity 58,867 70,859
--------- ---------
Total liabilities and stockholders' equity $ 82,493 $ 99,148
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
SPLASH TECHNOLOGY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED))
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
1997 1998 1997 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net revenue $25,100 $25,264 $60,955 $69,058
Cost of net revenue 12,364 11,684 29,718 31,855
------- ------- ------- -------
Gross profit 12,736 13,580 31,237 37,203
------- ------- ------- -------
Operating expenses:
Research and development 2,090 3,694 4,922 10,255
Sales, general and administrative 2,671 3,733 7,048 11,274
Amortization and write-off of technology - - 11,039 -
------- ------- ------- -------
Total operating expenses 4,761 7,427 23,009 21,529
------- ------- ------- -------
Income from operations 7,975 6,153 8,228 15,674
Interest income, net 277 512 572 1,450
------- ------- ------- -------
Income before income taxes 8,252 6,665 8,800 17,124
Provision for income taxes 2,974 2,199 7,250 5,751
------- ------- ------- -------
Net income $ 5,278 $ 4,466 $ 1,550 $11,373
------- ------- ------- -------
------- ------- ------- -------
Basic net income per share $ .41 $ .32 $ .13 $ .82
------- ------- ------- -------
------- ------- ------- -------
Diluted net income per share $ .40 $ .32 $ .12 $ .81
------- ------- ------- -------
------- ------- ------- -------
Shares used in basic net income per
share calculation 12,765 13,920 12,300 13,887
------- ------- ------- -------
------- ------- ------- -------
Shares used in diluted net income per
share calculation 13,188 14,118 12,703 14,082
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
SPLASH TECHNOLOGY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1997 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,550 $ 11,373
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 418 1,259
Provision for doubtful accounts - -
Amortization and write off of technology 11,039 -
Changes in assets and liabilities:
Accounts receivable (4,964) (5,738)
Inventories (516) 1,442
Prepaid expenses and other current assets 2 (120)
Other assets 244 21
Trade accounts payable 4,829 1,205
Accrued and other liabilities (25) 4,367
Deferred revenue (1,982) (909)
--------- ---------
Net cash provided by operating
activities 10,595 12,900
--------- ---------
Cash flows from investing activities:
Redemption (purchase) of marketable
securities (11,350) 2,923
Purchase of property and equipment (531) (1,353)
Acquisition of business (net of cash) (11,196) -
--------- ---------
Net cash provided (used in)
by investing activities (23,077) 1,570
--------- ---------
Cash flows from financing activities:
Proceeds (expenses) from public offering/
exercise/repurchase of stock under
stock plans 48,456 619
Benefit from disqualifying
dispositions of common stock 804 -
--------- ---------
Net cash provided by
financing activities 49,260 619
--------- ---------
Net increase in cash 36,778 15,089
Cash and cash equivalents,
beginning of period 19,053 43,637
--------- ---------
Cash and cash equivalents,
end of period $ 55,831 $ 58,726
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
SPLASH TECHNOLOGY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 substantially all of its color
servers through two original equipment manufacturers ("OEMs") which
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 accompanying unaudited consolidated financial information has been
prepared by the Company in accordance with generally accepted accounting
principles for interim financial statements and pursuant to the rules of
the Securities and Exchange Commission on Form 10-Q. Certain information
and footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. The December 31, 1997 balance sheet was
derived from audited financial statements but does not include all
disclosures required by generally accepted accounting principles. In the
opinion of management, the accompanying consolidated financial statements
contain all normal, recurring adjustments necessary to present fairly the
Company's consolidated financial position as of September 30, 1998, the
results of operations for the three months and nine months ended September
30, 1998 and cash flows for the nine months ended September 30, 1998, which
results are not necessarily indicative of results on an annual basis.
Effective January 1, 1998, the Company changed its fiscal year end from
September 30 to December 31. The consolidated financial statements should
be read in conjunction with the consolidated financial statements and
related notes contained in the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 1997 and the form 10-Q for the period ended
December 31, 1997.
2. BALANCE SHEET DETAIL (IN THOUSANDS):
INVENTORIES:
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
------------ ------------
<S> <C> <C>
Raw materials $ 2,403 $ 1,127
Finished goods 1,138 972
------- -------
$ 3,541 $ 2,099
------- -------
------- -------
ACCRUED AND OTHER LIABILITIES:
Royalties payable $5,391 $8,131
Accrued payables 3,796 2,743
Accrued product-related obligations 4,063 4,136
Accrued compensation and related expenses 682 1,747
Income taxes payable 4,193 5,793
Other liabilities 586 612
------- -------
$18,711 $23,162
------- -------
------- -------
</TABLE>
3. RECENT ACCOUNTING PRONOUNCEMENTS
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 "Disclosures about Segments of an
Enterprise and Related Information." The pronouncement is effective for the
year ended December 31, 1998. The Company is evaluating this recent
pronouncement and the effects, if any, on the Company's current policies.
4. COMPUTATION OF NET INCOME PER SHARE
The Company adopted the provisions of Statement of Financial
Accounting Standards No. 128, "Earnings Per Share," ("SFAS 128") effective
December 31, 1997. SFAS 128 requires the presentation of basic and diluted
earnings per share (EPS). Basic EPS is computed by dividing income
available to common shareholders by the weighted average number of common
shares outstanding for the period. Diluted EPS is computed giving effect
to all dilutive potential common shares that were outstanding during the
period. Dilutive potential common shares consist of incremental shares
issuable upon exercise of stock options.
5
<PAGE>
In accordance with the disclosure requirements of SFAS 128, a
reconciliation of the numerator and denominator of basic and diluted EPS is
provided as follows (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS):
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1997 1998 1997 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Numerator - Basic and Diluted EPS
Net income attributable to common
stockholders $ 5,278 $ 4,466 $ 1,550 $11,373
------- ------- ------- -------
Denominator - Basic EPS
Weighted average shares outstanding 12,765 13,920 12,300 13,887
------- ------- ------- -------
------- ------- ------- -------
Basic net income per share $ 0.41 $ 0.32 $ 0.13 $ 0.82
------- ------- ------- -------
------- ------- ------- -------
Denominator - Diluted EPS
Denominator - Basic EPS 12,765 13,920 12,300 13,887
Effect of dilutive common stock options 423 198 403 195
------- ------- ------- -------
Dilutive shares 13,188 14,118 12,703 14,082
------- ------- ------- -------
------- ------- ------- -------
Diluted net income per share $ 0.40 $ 0.32 $ 0.12 $ 0.81
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
Options to purchase 0.4 million and 1.6 million shares of common stock were
outstanding at September 30, 1997, and September 30, 1998, respectively, but
were not included in the calculation of diluted earnings per share because the
options' exercise price was greater than the average market price of the common
shares.
6
<PAGE>
ITEM 2 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 10Q 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".
RESULTS OF OPERATIONS
The Company has achieved significant growth in net revenue and operating
income each year since fiscal 1994, before purchase accounting adjustments. The
Company's growth is contingent on a number of factors, many of which are outside
of its control. These factors include the overall rate of growth in the color
server market, the impact of economic conditions in Japan (including the
dollar/yen currency exchange rate) on the demand for Splash's products and
customer purchasing patterns. Due to these and other factors (including an
increasingly higher base from which to grow), the Company's historical growth
rate will be difficult to sustain or exceed in the future. 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.
The Company establishes its expenditure levels for operating expenses based
on projected sales levels and margins, and expenses are relatively fixed in the
short term. Moreover, the Company expects to 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.
The following table sets forth consolidated statement of operations data as
a percentage of net revenue for the periods indicated:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1997 1998 1997 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net revenue 100% 100% 100% 100%
Cost of net revenue 49 46 49 46
------- ------- ------- -------
Gross profit 51 54 51 54
------- ------- ------- -------
Operating expenses:
Research and development 8 15 8 15
Sales, general and administrative 11 15 12 16
Amortization and write-off of technology - - 18 -
------- ------- ------- -------
Total operating expenses 19 30 38 31
------- ------- ------- -------
Income from operations 32 24 13 23
Interest income 1 2 1 2
------- ------- ------- -------
Income before income taxes 33 26 14 25
Provision for income taxes 12 8 11 8
------- ------- ------- -------
Net income 21% 18% 3% 17%
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
NET REVENUE. The Company's net revenue increased to $25.3 million in
the three months ended September 30, 1998 from $25.1 million in the three
months ended September 30, 1997. The Company's net revenue increased 13% to
$69.1 million in the nine months ended September 30, 1998 from $61.0 million
in the nine months ended September 30, 1997. These increases were primarily
attributable to higher unit sales of the Company's products due to increasing
market acceptance of the Company's PCI and DC Series products and expanded
product offerings. Primarily due to poor economic conditions in Asia, the
Company has experienced a significant decrease in sales to its customer in
Japan, partially offset by a significant increase in sales to other regions.
In addition, particularly in light of the current adverse economic
circumstances in Japan, the Company believes that inventory levels are
currently higher than normal at Fuji Xerox which has affected and may, in
the future, materially adversely affect the Company's business and operating
results. The Company sells a range of products, and the revenue for any
period will be determined by the product mix sold in that period. In
addition, the Company sells a substantial portion of its products to two
customers, Fuji Xerox Company Ltd. ("Fuji Xerox") and Xerox Corporation
("Xerox") on an OEM basis and, historically, fluctuations in net revenue are
in part due to the purchasing patterns of these
7
<PAGE>
customers. As a result of these purchasing patterns, the Company's sales
historically have been lower, and are expected to continue to be lower, in the
December quarter than in the immediately preceding September quarter. There can
be no assurance that either of the Company's two major customers, Fuji Xerox,
particularly in light of the current adverse economic circumstances in Japan, or
Xerox will not change their mix of product or purchasing patterns in a manner
which would adversely impact net revenue.
All sales to Fuji Xerox, and a portion of the Company's sales to Xerox, are
international sales. In addition, given Xerox's international customer base,
the Company believes that a portion of Splash products purchased by Xerox in the
U.S. 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, and, in the case of Japan, have caused, 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 and lost sales. Such pressure could in
turn result in a reduction in net revenue and profitability.
GROSS MARGIN. Gross margins were 51% and 54% in the three months ended
September 30, 1997 and 1998, respectively. Gross margins were 51% and 54% in the
nine months ended September 30, 1997 and 1998, respectively. The increase in
gross margin was 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. The Company expects that gross margins will
fluctuate from period to period and will 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 and competitors. The Company expects this trend to continue in the
future. Any decline in average selling prices of a particular product which is
not offset by a reduction in production costs or by sales of other products with
higher gross margins would decrease the Company's overall gross margin and
adversely affect the Company's operating results.
RESEARCH AND DEVELOPMENT. Research and development expenses increased 76%
to $3.7 million in the three months ended September 30, 1998 from $2.1 million
in the three months ended September 30, 1997. Research and development expenses
increased 110% to $10.3 million in the nine months ended September 30, 1998 from
$4.9 million in the nine months ended September 30, 1997. As a percentage of net
revenue, research and development increased to 15% in the three months ended
September 30, 1998 from 8% in the three months ended September 30, 1997. The
increase in research and development expenses reflects the addition of
engineering resources through the acquisitions of Quintar Holdings Corporation
("Quintar") and ColorAge Corporation ("ColorAge") in May 1997 and October 1997,
respectively. In addition, the increases in these expenses were also
attributable to increased staffing and associated support required to enhance
the Company's product line. Except for charges related to acquisitions, all
research and development costs to date have been expensed as incurred. In view
of the acquisitions and current projects under development and planned, research
and development expenses are expected to increase in future periods.
SALES, GENERAL AND ADMINISTRATIVE. Sales, general and administrative expenses
increased 37% to $3.7 million in the three months ended September 30, 1998 from
$2.7 million in the three months ended September 30, 1997. Sales, general and
administrative expenses increased 61% to $11.3 million in the nine months ended
September 30, 1998 from $7.0 million in the nine months ended September 30,
1997. As a percentage of net revenue, sales, general and administrative expenses
increased to 15% in the three months ended September 30, 1998 from 11% in the
three months ended September 30, 1997. As a percentage of net revenue, sales,
general and administrative expenses increased to 16% in the nine months ended
September 30, 1998 from 12% in the nine months ended September 30, 1997. The
increases in 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. In addition, the increases in these expenditures were
due to increased salary and related costs from increased headcount related to
the Company's efforts to enhance its corporate infrastructure and to support
expansion of its operations. The Company believes that its sales, general and
administrative expenses will increase in the foreseeable future as it continues
to implement additional management and operational systems, and expand its
administrative staff. Sales, general, and administrative expenses are also
expected to increase in future periods as the Company increases its sales
support and marketing staff and associated costs to expand its presence in sales
channels other than Xerox and Fuji Xerox. There is no assurance that the Company
will be able to maintain or increase its presence in its existing customers or
to successfully penetrate any additional sales channels.
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". The
Company's effective tax rate was 36.5% (excluding purchase accounting
adjustments) and 33.6% for the nine months ended September 30, 1997 and 1998,
respectively. The effective tax rate differs from the statutory rate primarily
due to the benefits derived from the Splash Foreign Sales Corporation and
research and development credits.
8
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has obtained sufficient cash from its public offerings and
operations to satisfy its current liquidity requirements.
As of September 30, 1998, the Company had $65.9 million of cash, cash
equivalents and marketable securities and had no borrowings under its $10
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.
For the nine months ended September 30, 1997, the Company generated $10.6
million in cash from operating activities, primarily due to an increase in trade
accounts payable, partially offset by an increase in accounts receivable and a
decrease in deferred revenue. For the nine months ended September 30, 1998, the
Company generated $12.9 million in cash from operation activities primarily due
to a decrease in inventories and increases in trade accounts payable and accrued
and other liabilities, partially offset by increases in accounts receivable.
In the nine months ended September 30, 1997, investing activities consumed
$23.1 million primarily related to the acquisition of Quintar and the purchase
of marketable securities. In the nine months ended September 30, 1998, investing
activities provided $1.6 million, primarily from the redemption of marketable
securities.
Financing activities provided $49.3 million for the nine months ended
September 30, 1997 primarily due to the Company's August 1997 stock offering.
Financing activities for the nine months ended September 30, 1998 were
immaterial. The Company has no material financing commitments other than its
obligations under operating leases.
The Company believes that cash flows from operations and existing cash
balances will be sufficient to satisfy the Company's cash requirements for at
least the next twelve months.
YEAR 2000 ISSUES
Many currently installed computer systems and software products are
coded to accept only two digit entries in the date code field. These date
code fields will need to accept four digit entries to distinguish
twenty-first century dates from twentieth century dates. As a result, many
companies' software and computer systems may need to be upgraded or replaced
in order to comply with such "Year 2000" requirements. The Company has
tested its current products for Year 2000 compliance and believes that its
current products are Year 2000 compliant. However, the failure of the
Company's current or prior products to operate properly with regard to the
Year 2000 requirements could cause the Company to incur unanticipated
expenses to remedy any problems, could cause a reduction in sales and could
expose the Company to related litigation by its customers, each of which
could have a material adverse effect on the Company's business, operating
results and financial condition.
Although the Company believes that its products and systems are Year
2000 compliant the Company utilizes third party equipment and software that
may not be Year 2000 compliant. The Company has made inquiries to the
majority of its material equipment and software suppliers as to the Year 2000
compliance of their products. Each such supplier has indicated that its
equipment and/or software either is, or will be by December 31, 1999, Year
2000 compliant. Failure of such third-party equipment or software to operate
properly with regard to the year 2000 and thereafter could require the
Company to incur unanticipated expenses to remedy any problems, which could
have a material adverse effect on the Company's business, operating results
and financial condition.
The Company also has material relationships with third party suppliers
and service providers who may utilize equipment or software that may not be
Year 2000 compliant, such as financial institutions, shipping companies and
payroll services. The Company is in the process of conducting Year 2000
compliance inquiries of such third parties. Based upon the results of such
inquiries, the Company intends to take appropriate action. Nonetheless, while
the Company would be affected by any such failure, the Company believes that
it could continue to operate despite any such failure of a material party to
be Year 2000 compliant. Failure of any third-party's equipment or software to
operate properly with regard to the Year 2000 requirements could cause the
Company to incur unanticipated expenses to remedy any problems and could
cause a reduction in sales, each of which could have a material adverse
effect on the Company's business, operating results and financial condition.
The business, operating results and financial condition of the Company's
customers could also be adversely affected to the extent that they utilize
equipment or software that is not Year 2000 compliant. Furthermore, the
purchasing patterns of customers or potential customers may be affected by
Year 2000 issues as companies expend significant resources to correct their
current systems for Year 2000 compliance. These expenditures may result in
reduced funds available to purchase products and services such as those
offered by the Company, which could have a material adverse effect on the
Company's business, operating results and financial condition.
The Company has not established a formal contingency plan for any potential
failure of any of the Company's or any third party's equipment or software,
but the Company plans to create such a formal contingency plan.
The Company has, and will continue to make, certain investments in its
equipment, software systems and applications to ensure that the Company is
Year 2000 compliant and to evaluate the Year 2000 preparedness of the
material third parties with whom it deals. To date, the Company has primarily
used existing personnel to evaluate the Year 2000 exposure. The financial
impact to the Company for Year 2000 compliance has not been and is not
anticipated to be material to its financial position results of operations or
cash flows in any given year.
FACTORS AFFECTING FUTURE RESULTS
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
expected to be lower, in the December quarter than in the immediately preceding
September quarter. In addition, any increases in inventories held 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
9
<PAGE>
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
or that the Company will be able to prevent a recurrence of a similar problem in
the future. In addition, particularly in light of the current adverse economic
circumstances in Japan, the Company believes that inventory levels are higher
than normal at Fuji Xerox which has materially adversely affected, and could
continue to materially adversely affect, the Company's business and operating
results. Also, 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 be, and in the current period, have been
affected by changes in market demand, competitive market conditions and 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 will 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 market pressures, the introduction of lower priced
products and, in certain cases, in response to new product introductions by the
Company's customers and competitors. The Company expects this trend to continue.
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 has increased and is expected to
continue 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, which occurred in Japan in the current fiscal year, 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
primarily 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. 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, as they have in
Japan during the fiscal year, the
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Company's business, operating results and financial condition will 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, Electronics for Imaging Inc. ("EFI"). The Company is a 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
(including components contained therein) and cannot begin shipping any
version to Xerox or Fuji Xerox until such version and components 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 (particularly in light of the current adverse
economic situation in Japan and Asia) has had and would have a material
adverse effect on the Company's business, operating results and financial
condition.
INTERNATIONAL SALES. All sales to Fuji Xerox, and a portion of the
Company's sales to Xerox, are international sales. In addition, given Xerox's
significant international customer base, the Company believes that a portion
of Splash products purchased by Xerox in the U.S. 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 and, in the case of Japan, have caused 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 of 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, adverse and
other trade barriers and uncertainties relative to regional circumstances.
These risks, and in particular risks related to the adverse economic
circumstances in Asia, and in particular Japan, have had and would 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 may continue to be materially adversely affected if
foreign markets do not continue to develop.
INVENTORY RISKS. Xerox and Fuji Xerox may from time to time carry excess
inventory of Splash color servers, inaccurately project future demand for
Splash products or fail to optimally manage their ordering of Splash
products, any of which could result in a significant decrease in orders from
such customers in subsequent periods. For example, in May 1996, as the
Company transitioned from its Power Series line of products to its PCI Series
line of products, Xerox informed Splash that it held in its inventory a
substantial quantity of Power Series products accumulated since January 1996.
Xerox 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. In addition, particularly in
light of the current adverse economic circumstances in Japan, the Company
believes that inventory levels are currently higher than normal at Fuji Xerox
which has affected and may, in the future, materially adversely affect the
Company's business and operating results. 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
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material adverse effect on the business, operating results and financial
condition of Splash.
DEPENDENCE ON ADOBE SYSTEMS INCORPORATED. The majority of 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 1999, 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. The majority of the Company's current
products require the use of an Apple Power Macintosh computer as a computer
platform. Apple has experienced significant financial difficulties and losses in
market acceptance, and its products have particularly low levels of market
acceptance in the office color printing market into which the Company is seeking
to expand. 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.
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
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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 ACQUISITIONS. The Company frequently evaluates
potential acquisitions of complementary businesses, products and technologies.
As part of the Company's expansion plans, the Company has acquired and may
continue to 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 ColorAge acquisition, Splash recorded an
expense related to purchased in-process research and development of $ 26.9
million. The Company's recent acquisition transactions were the Quintar and
ColorAge acquisitions, which occurred on May 28, 1997 and October 30, 1997,
respectively. Both acquired companies had technology under development. There
can be no assurance that the acquired 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. 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. 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.
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DEPENDENCE ON THIRD PARTY MANUFACTURERS. The Company generally outsources
the manufacture of its products to third party subcontract manufacturers
including Manufacturer's Services Limited ("MSL") and Logistics Software
Corporation ("Logistix"). For example, 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 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 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 PC 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
Power PC 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. The Company
will likely 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 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 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 Power PC 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 owns several patents. There can be no
assurance that any patent, 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
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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 Radius and
requesting unspecified monetary damages and injunction relief. The technology
which is the subject of the patent claim was acquired by Splash from Radius.
EFI could add Splash as a defendant to this suit at any time. 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. In addition
certain software licensed from third parties may be subject to governmental
export regulations . The inability to meet such export regulatory
requirements could result in shipment delays and would have a material
adverse effect on the Company's business. Any such events would materially
adversely affect the Company's 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
least the next twelve months from a combination of 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.
YEAR 2000 ISSUES. Many currently installed computer systems and software
products are coded to accept only two digit entries in the date code field.
These date code fields will need to accept four digit entries to distinguish
twenty-first century dates from twentieth century dates. As a result, many
companies' software and computer systems may need to be upgraded or replaced in
order to comply with such "Year 2000" requirements. Although the Company
believes that its products and systems are Year 2000 compliant, the Company
utilizes third party equipment and software that may not be Year 2000 compliant.
Failure of such third-party equipment or software to operate properly with
regard to the year 2000 and thereafter could require the Company to incur
unanticipated expenses to remedy any problems, which could have a material
adverse effect on the Company's business, operating results and financial
condition. Furthermore, the purchasing patterns of customers or potential
customers may be affected by Year 2000 issues as companies expend significant
resources to correct
15
<PAGE>
their current systems for Year 2000 compliance. These expenditures may result
in reduced funds available to purchase products and services such as those
offered by the Company, which could have a material adverse effect on the
Company's business, operating results and financial condition.
The Company's internal systems and technology are relatively new and as a
result, the majority are already Year 2000 compliant. The Company is currently
working with its suppliers and business partners to identify at what stage they
are in the process of identifying and addressing Year 2000 issues. The Company
will continue to perform reviews with its suppliers and business partners to
ensure compliance on an ongoing basis. The Company has no formal contingency
plan for any potential failure of any Company's or any third party's equipment
or software.
16
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
NONE
ITEM 2. CHANGES IN SECURITIES
NONE
ITEM 3. DEFAULT UPON SENIOR SECURITIES
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE HOLDERS
NONE
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS
27.1 FINANCIAL DATA SCHEDULE
REPORTS ON FOR 8-K
NONE
17
<PAGE>
SIGNATURE
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 November 16, 1998.
SPLASH TECHNOLOGY HOLDINGS, INC
By: /s/ Joan P. Platt
---------------------------------------------
Joan P. Platt
Vice President, Finance & Administration, Chief
Financial Officer
18
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