<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 June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____ TO _____
COMMISSION FILE NUMBER 000-21171
SPLASH TECHNOLOGY HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0418472
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
555 DEL REY AVENUE, SUNNYVALE, CA 94086
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 328-6300
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 August 9, 1999 was 14,046,184 shares.
1
<PAGE>
SPLASH TECHNOLOGY HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
----------- ----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 51,013 $62,415
Marketable securities 9,814 7,964
Accounts receivable, net of allowance for doubtful accounts of $303 and $297 as
of December 31, 1998 and June 30,1999, respectively 9,316 7,717
Inventories 2,830 1,330
Prepaid expenses and other current assets 997 408
Deferred income taxes 3,880 3,879
-------- --------
Total current assets 77,850 83,713
Property and equipment, net 2,256 2,389
Deferred income taxes 10,514 10,513
Other assets 3,112 4,197
-------- --------
Total assets $ 93,732 $100,812
-------- --------
-------- --------
LIABILITIES
Current liabilities:
Trade accounts payable $ 2,056 $6,253
Accrued and other liabilities 17,641 16,441
-------- --------
Total current liabilities 19,697 22,694
Other long term liabilities 742 746
-------- --------
Total liabilities 20,439 23,440
-------- --------
STOCKHOLDERS' EQUITY
Common stock, par value $.001 per share:
Authorized: 50,000,000 shares
Issued and outstanding: 13,962,863 shares and 14,031,867 shares as of
December 31, 1998 and June 30, 1999, respectively 14 14
Additional paid-in capital 86,581 86,940
Accumulated deficit (13,302) (9,582)
-------- --------
Total stockholders' equity 73,293 77,372
-------- --------
Total liabilities and stockholders' equity $ 93,732 $100,812
-------- --------
-------- --------
</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 June 30, Six Months Ended June 30,
1998 1999 1998 1999
----------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Net revenue $25,797 $16,945 $43,795 $33,247
Cost of net revenue 11,907 7,542 20,171 14,857
------- ------- ------- -------
Gross profit 13,890 9,403 23,624 18,390
------- ------- ------- -------
Operating expenses:
Research and development 3,398 3,748 6,561 7,037
Sales, general and administrative 3,871 3,818 7,542 7,927
------- ------- ------- -------
Total operating expenses 7,269 7,566 14,103 14,964
------- ------- ------- -------
Income from operations 6,621 1,837 9,521 3,426
Interest income, net 497 799 938 1,486
------- ------- ------- -------
Income before income taxes 7,118 2,636 10,459 4,912
Provision for income taxes 2,349 557 3,552 1,058
------- ------- ------- -------
Net income $ 4,769 $ 2,079 $ 6,907 $ 3,854
------- ------- ------- -------
------- ------- ------- -------
Basic net income per share $ 0.34 $ 0.15 $ 0.50 $ 0.28
------- ------- ------- -------
------- ------- ------- -------
Diluted net income per share $ 0.34 $ 0.15 $ 0.49 $ 0.27
------- ------- ------- -------
------- ------- ------- -------
Shares used in basic net income per share
calculation 13,884 14,014 13,870 13,990
------- ------- ------- -------
------- ------- ------- -------
Shares used in diluted net income per share
calculation 14,076 14,131 14,066 14,105
------- ------- ------- -------
------- ------- ------- -------
</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>
Six Months Ended June 30,
1998 1999
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $6,907 $3,854
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 816 611
Changes in assets and liabilities:
Accounts receivable (8,555) 1,599
Inventories 1,549 1,500
Prepaid expenses and other current assets (172) 590
Other assets (1,369)
Trade accounts payable 2,637 4,197
Accrued and other liabilities (42) (1,196)
--------- ----------
Net cash provided by operating activities 3,140 9,786
--------- ----------
Cash flows from investing activities:
Redemption/purchase of marketable securities 8,573 1,850
Purchase of property and equipment (1,036) (593)
--------- ----------
Net cash provided by investing activities 7,537 1,257
--------- ----------
Cash flows from financing activities:
Exercise (repurchase) of stock under stock plans 388 359
--------- ----------
Net cash provided by financing activities 388 359
--------- ----------
Net increase in cash 11,065 11,402
Cash and cash equivalents, beginning of period 43,637 51,013
--------- ----------
Cash and cash equivalents, end of period $54,702 $62,415
--------- ----------
--------- ----------
</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, 1998 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 June 30, 1999, the cash
flows for the six months ended June 30, 1999 and the results of operations
for the three and six months ended June 30, 1999, which results are not
necessarily indicative of results on an annual basis. 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 December 31, 1998.
2. BALANCE SHEET DETAIL (IN THOUSANDS):
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
------------ ---------
<S> <C> <C>
INVENTORIES
Raw materials $ 1,447 $ 923
Finished goods 1,383 407
-------- --------
$ 2,830 $ 1,330
-------- --------
-------- --------
ACCRUED AND OTHER LIABILITIES:
Royalties payable $ 1,335 $ 2,566
Accrued payables 3,647 2,770
Accrued product-related obligations 5,234 3,712
Accrued compensation and related expenses 1,487 2,029
Deferred revenue 1,355 488
Income taxes payable 4,583 4,876
-------- --------
$ 17,641 $ 16,441
-------- --------
-------- --------
</TABLE>
3. COMPUTATION OF NET INCOME PER SHARE
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 Six Months
Ended June 30, Ended June 30,
1998 1999 1998 1999
-------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Numerator - Basic and Diluted EPS
Net income available to common stockholders $ 4,769 $ 2,079 $ 6,907 $ 3,854
-------- -------- -------- --------
-------- -------- -------- --------
Denominator - Basic EPS
Weighted average shares outstanding 13,884 14,014 13,870 13,990
-------- -------- -------- --------
Basic net income per share $ 0.34 $ 0.15 $ 0.50 $ 0.28
-------- -------- -------- --------
-------- -------- -------- --------
Denominator - Diluted EPS
Denominator - Basic EPS 13,884 14,014 13,870 13,990
Effect of dilutive common stock options 192 117 196 115
-------- -------- -------- --------
Dilutive shares 14,076 14,131 14,066 14,105
-------- -------- -------- --------
Diluted net income per share $ 0.34 $ 0.15 $ 0.49 $ 0.27
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
Options to purchase 1.5 million and 1.8 million shares of common stock were
outstanding at June 30, 1998, and June 30, 1999, respectively, but were not
included in the calculation of diluted earnings per share because the options'
exercise prices were greater than the average market price of the common shares
during the six months ended June 30, 1998 and 1999, respectively.
4. RECENT ACCOUNTING PRONOUNCEMENTS
The Company has adopted Statement No. 130 ("SFAS"), "Reporting
Comprehensive Income." Comprehensive income is defined as the change in equity
of a business enterprise during a period from transactions and other events and
circumstances from non-owner sources. As the components of comprehensive income
are not material, the Company has not reflected the additional reporting and
display provisions of SFAS 130 in the accompanying financial statements.
5. CONTINGENCIES
In January 1999, two class action complaints were filed against the
Company, certain of its officers and directors, and its investment bankers in
the United States District Court for the Northern District of California,
alleging violations of the federal securities laws. The class period runs from
January 7, 1997 to October 13, 1998 and the complaints allege that the
defendants concealed and/or misrepresented material adverse information about
the Company and the individual defendants sold shares of the Company's stock
based upon material nonpublic information. The complaints seek unspecified
monetary damages. There has been no discovery and no actions have been taken.
The Company believes that the above complaints are without merit and
intends to defend them vigorously. However, litigation is subject to inherent
uncertainties and, thus, there can be no assurance that these complaints will be
resolved favorably to the Company or that they will not have a material adverse
affect on the Company's financial condition and results of operations. No
provision for any liability that may result upon adjudication has been made in
the accompanying financial statements.
The Company and its subsidiaries are also parties to various other legal
actions and administrative proceedings. The Company believes that the
disposition of these matters will not have a material effect on the financial
position of the Company.
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 operating income each year since fiscal 1994,
before purchase accounting adjustments. The Company's profitability 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 profitability 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 Ended June 30, Six Months Ended June 30,
1998 1999 1998 1999
------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net revenue 100% 100% 100% 100%
Cost of net revenue 46 45 46 45
-- -- -- --
Gross profit 54 55 54 55
-- -- -- --
Operating expenses:
Research and development 13 22 15 21
Sales, general and administrative 15 23 17 24
-- -- -- --
Total operating expenses 28 45 32 45
-- -- -- --
Income from operations 26 10 22 10
-- -- -- --
Interest income 2 5 2 5
-- -- -- --
Income before income taxes 28 15 24 15
Provision for income taxes 10 3 8 3
-- -- -- --
Net income 18 12 16 12
-- -- -- --
-- -- -- --
</TABLE>
NET REVENUE. The Company's net revenue decreased 34% to $16.9 million in
the three months ended June 30, 1999 from $25.8 million in the three months
ended June 30, 1998. The Company's net revenue decreased 24% to $33.2 million
in the six months ended June 30, 1999 from $43.8 million in the six months
ended June 30, 1998. These decreases were primarily attributable to lower
average selling prices ("ASPs") of the Company's products as well as an
insignificant level of sales to its customer in Japan. The Company sells a
range of products, and the revenue for any period will be determined by the
product mix sold in that period. The lower ASPs also reflect a shift in
product mix to a great number of Intel based products. During the quarter
ended June 30, 1999, the number of Intel based M Series products sold
exceeded the aggregate number of the DC and PCI Series products for the first
time. The Company's M Series products have selling prices that are
significantly lower than those of the PCI series and DC series products. For
example the lowest priced M Series product has a selling price of less than
half that of the lowest priced PCI Series product. During the second half of
the year the Company expects to deliver its first embedded product. This
product is expected to have significantly lower gross margins. In addition,
the Company expects a decrease in shipments of its Intel based M Series
products primarily related to Xerox's reduced shipments of M Series
compatible copiers. A decrease in M Series shipments, in addition to
substantial shipments of embedded product, may have a significant adverse
affect on the Company's operating results.
The Company sells a substantial portion of its products to two
customers, Xerox Corporation ("Xerox") and to a lesser extent Fuji Xerox
Company Ltd. ("Fuji Xerox") on an OEM basis and, historically, fluctuations
in net revenue are in part due to the purchasing patterns of these customers.
There can be no assurance that either of the Company's two major customers,
Xerox and Fuji Xerox, will not change their mix of product or purchasing
patterns in a manner which would adversely impact net revenue. In the case of
Fuji Xerox, the Company has been materially affected by an insignificant
level of sales to this customer in the current quarter.
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
7
<PAGE>
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. Such pressure could in turn result in a reduction in
net revenue and profitability.
GROSS MARGIN. Gross margins were 54% and 55% in the three months ended
June 30, 1998 and 1999, respectively. Gross margins were 54% and 55% in the
six months ended June 30, 1998 and 1999, respectively. The increase in gross
margin was primarily due to economies of scale derived from higher unit
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 may decrease in future
periods. Gross margin is affected by a number of factors, including product
mix, product pricing and manufacturing and component costs. The average
selling price of the Company's products has decreased in the past primarily
as a result of competitive market pressures, the introduction of lower priced
products and, in certain cases, in response to new product introductions by
the Company's customers and competitors. During the second half of the year
the Company expects to deliver its first embedded product. This product is
expected to have significantly lower gross margins. In addition, the Company
expects a decrease in shipments of its Intel based M series products
primarily related to Xerox's reduced shipments of M Series compatible
copiers. A decrease in M Series shipments in addition to substantial
shipments of embedded product, may have a significant adverse affect on the
Company's operating results. The Company expects this trend to continue in
the future. Any decline in average selling prices, such as was experienced in
the current quarter, 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 9%
to $3.7 million in the three months ended June 30, 1999 from $3.4 million in
the three months ended June 30, 1998. Research and development expenses
increased 6% to $7.0 million in the six months ended June 30, 1999 from $6.6
million in the six months ended June 30, 1998. As a percentage of net
revenue, research and development increased to 22% in the three months ended
June 30, 1999 from 13% in the three months ended June 30, 1998. As a
percentage of net revenue, research and development expenses increased to 21%
in the six months ended June 30, 1999 from 15% in the six months ended June
30, 1998. These percentage increases reflect primarily a decline in net
revenue. If revenues fall below expectations, as they did in the current
quarter, these percentages may increase due to the Company's inability to
adjust research and development expenses to compensate for the revenue
shortfall. Except for charges related to acquisitions, all research and
development costs to date have been expensed as incurred. In view of current
projects under development and planned, research and development expenses are
expected to increase in absolute dollars although such expenses may vary as a
percentage of net revenue.
SALES, GENERAL AND ADMINISTRATIVE. Sales, general and administrative
remained relatively constant, $3.8 million in the three months ended June 30,
1999 and $3.9 million in the three months ended June 30, 1998. Sales,
general and administrative expenses increased 5% to $7.9 million in the six
months ended June 30, 1999 from $7.5 million in the six months ended June 30,
1998. As a percentage of net revenue, sales, general and administrative
expenses increased to 23% in the three months ended June 30, 1999 from 15% in
the three months ended June 30, 1998. As a percentage of net revenue, sales,
general and administrative expenses increased to 24% in the six months ended
June 30, 1999 from 17% in the six months ended June 30, 1998. These
percentage increases reflect primarily a decline in net revenue. If revenues
fall below expectations, as they did in the current quarter, these
percentages may increase due to the Company's inability to adjust sales,
general and administrative expenses to compensate for the revenue shortfall.
The Company believes that its sales, general and administrative expenses will
increase in absolute dollars 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
expected to increase in absolute dollars in future periods, although such
expenses may vary as a percentage of net revenue.
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 34% and 22% for the six months ended June
30, 1998 and 1999, 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company has obtained sufficient cash from its public offerings and
operations to satisfy its current liquidity requirements.
As of June 30, 1999, the Company had $70.4 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.
8
<PAGE>
For the six months ended June 30, 1999, the Company generated $9.8
million in cash from operating activities, primarily due to a decrease in
accounts receivable and inventories and an increase in trade accounts payable
partially offset by a decrease in other liabilities. The Company's operating
activities provided $3.1 million in cash in the six months ended June 30,
1998, primarily from an increase in trade accounts payable and a decrease in
inventory, offset by a significant increase in accounts receivable.
For the six months ended June 30, 1999 and June 30, 1998, the Company
generated $1.3 million and $7.5 million, respectively, in investing
activities, primarily from the redemption of marketable securities.
Financing activities were not material for the six months ended June 30,
1998 and 1999. 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 its major
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.
9
<PAGE>
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
large 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 and
March quarters than in the preceding September and June quarters. 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. 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 significant inventory issues in the future. In 1999, the Company has
suffered a substantial decrease in sales to its customer, Fuji Xerox. This
has materially adversely affected 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 also be affected and in the current year
have been materially adversely affected by changes in market demand,
competitive market conditions, sales promotion activities by the Company, its
OEM customers or its competitors, market acceptance of new or existing
products, sales of color copiers with which the Company's products are
compatible, the cost and availability of components, the mix of the Company's
customer base and sales channels, the amount of any third-party funding of
development expenses, the mix of products sold, the Company's ability to
effectively expand its sales and marketing organization, the Company's
ability to attract and retain key technical and managerial employees, and
general economic conditions. As a result, the Company believes that
period-to-period comparisons of its results of operations are not necessarily
meaningful and should not be relied upon as indicative of future performance.
Due to all of the foregoing factors, the Company's operating results in one
or more future periods may be subject to significant fluctuations. In the
event this results in the Company's financial performance being below the
expectations of public market analysts and investors, the price of the
Company's Common Stock would be materially and adversely affected.
The Company's gross margin is affected by a number of factors, including
product mix, product pricing, and manufacturing, component and royalty costs.
The average selling price of the Company's products has decreased
substantially in the past primarily as a result of competitive market
pressures, the introduction of lower priced products and, in certain cases,
in response to new product introductions by the Company's customers. The
Company expects this trend to continue. During the quarter ended June 30,
1999 unit sales of Intel based M Series products, for the first time,
exceeded aggregate unit sales of the PCI and DC Series. The Company's M
Series products have selling prices that are significantly lower than those
of the PCI series and DC series products. For example the lowest priced M
Series product has a selling price less than half that of the lowest priced
PCI Series product. During the second half of the year the Company expects to
deliver its first embedded product. This product is expected to have
significantly lower gross margins. In addition the Company expects a decrease
in shipments of its Intel based M series products primarily related to
Xerox's reduced shipments of M Series compatible copiers. A decrease in M
Series shipments in addition to substantial shipments of embedded product,
may have a significant adverse affect on the Company's operating results. 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, such as was
experienced in the current quarter, 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.
Accordingly, if sales are below expectations, as they were in the current
quarter, 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. The color server market has grown more slowly than
anticipated. If the market continues to grow slowly, or not grow at all, the
Company's business, operating results and financial condition will be and
have been 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
10
<PAGE>
and will continue to be heavily influenced by the market acceptance of the
Xerox and Fuji Xerox color copiers with which the Company's products operate
and the sales efforts of Xerox and Fuji Xerox with respect to Splash
products. Xerox and Fuji Xerox face substantial competition from other
manufacturers of color copiers, including Canon Inc. ("Canon"), which the
Company believes has the largest share of the worldwide market for color
copiers. If sales of the color copiers of Xerox and Fuji Xerox with which
Splash's products are compatible decrease, the Company's business, operating
results and financial condition would be and have been in the past,
materially and adversely affected. During 1999, sales of Splash compatible
copiers by Fuji Xerox have been significantly lower than in prior periods.
This reduction in sales has, and any continued reduction from historical
levels could, materially and adversely affect the Company's business,
operating results and financial condition. 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 will 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 and has had a material adverse effect on
the Company's business, operating results and financial condition.
Xerox currently sells a substantial number of color servers made by
companies other than Splash, including those of the Company's principal
competitor, EFI. The Company is 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 meet their respective quality
standards. Any delay in meeting such respective standards would have a
detrimental effect to the Company. Xerox and Fuji Xerox promote the use of
color servers manufactured by competitors of the Company to the detriment of
sales of the Company's products. Either Xerox or Fuji Xerox 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 Xerox or Fuji Xerox. Any decrease in the
level of sales to Xerox or continued decrease in the level of sales to Fuji
Xerox would have a material adverse effect on the Company's business,
operating results and financial condition.
INVENTORY RISKS. Xerox and Fuji Xerox may from time to time carry excess
inventory of Splash color servers, inaccurately project future demand for
Splash products or fail to optimally manage their ordering of Splash
products, any of which could result in a significant decrease in orders from
such customers in subsequent periods. The Company believes that inventory
levels have been and may still be higher than normal at Fuji Xerox which
materially adversely affects 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 similar
problems 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. The Company's
customers, in an effort to reduce their inventory levels, order product with
increasingly shorter lead times. If the Company can not deliver product
within these shortened lead times it would have a materially adverse affect
on the Company's results. 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 have had and would have in
the future a material adverse effect on the business, operating results and
financial condition of Splash.
11
<PAGE>
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 has, and may continue to experience, delays
in the release of its products due to Adobe product delays. 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 COMPONENT AVAILABILITY, COST, AND CERTAIN SUPPLIERS. The
majority of the Company's current products require the use of an Apple
product as a computer platform. In the past, 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 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.
The Company ships products which may contain discontinued components. The
Company has experienced sourcing difficulties in procuring discontinued
components in the past. 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 different computer platforms will 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.
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 Intel motherboards and processor, 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 and the discontinuation of
computers used in Splash's current products. There can be no assurance that
the Company will not experience similar difficulties in the future. The
Company also purchases memory modules from several suppliers. A change in
memory suppliers 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. 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 Company purchases components comprising a 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 and SCI. The Company
currently sources most of its Power Macintosh computers that serve as the
platforms for its DC and PCI color servers from Apple. The Company is
currently operating on a purchase order basis with Apple.
12
<PAGE>
The market prices and availability of certain components, particularly
memory, other semiconductor components, Apple Power Macintosh computers and
Intel designed components, 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 THIRD PARTY MANUFACTURERS. The Company generally
outsources the manufacture of its products to third party subcontract
manufacturers including SCI and Logistix. Logistix and SCI purchase the
components used in Splash boards from their component suppliers and perform
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. SCI also performs in-warranty and out-of-warranty repair
of failed boards for the Company's products. The Company directly purchases
Apple Power Macintosh computers, Intel designed components, monitors and
memory, and furnishes these components, as well as the SCI-assembled boards,
to Logistix and SCI for final assembly. Logistix and SCI directly purchase a
portion of the components used in Splash color servers and do 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. 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 SCI or Logistix, 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 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 and has had 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. In 1998, the Company's main competitor added enhancements to
its product that competed with the Company's DC Series products. These
enhancements have had, and may continue to have, an adverse effect on the
market acceptance of the Company's DC Series products. 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.
In 1999, the Company began significant volume shipments of products
based on Intel designed components. There can be no assurance that these
Intel based products or that any of the Company's future products will
achieve widespread market acceptance. In addition, the Company has in the
past experienced delays in the development of new products and the
enhancement of existing products, and such delays may occur in the future. If
the Company is unable, due to resource constraints or technological or other
reasons, to develop and introduce new products or versions in a timely
manner, or if such new products or releases do not achieve timely and
widespread market acceptance, it would have a material adverse effect on the
Company's business, operating results and financial condition.
COMPETITION. The markets for the Company's products are characterized by
intense competition and rapid change. The Company competes directly with
other independent manufacturers of color servers and with copier
manufacturers, and indirectly with printer manufacturers and others. The
Company has a number of direct competitors for color server products, the
most significant of which is EFI. Splash also faces competition from copier
manufacturers that offer internally developed color server products, such as
a non-PostScript color server offered by Fuji Xerox, or that incorporate
color server features into their copiers. In addition, the Company faces
competition from desktop color laser printers that offer increasing speed and
color server capability. As component prices decrease and the processing
power and other functionality of copiers, printers and computers increases,
it becomes more likely that copier, printer and computer manufacturers will
continue to add color server functionality
13
<PAGE>
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 reduced gross margins and
loss of market share and has resulted in price reductions, any of which could
and have had 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. To date, the Company has completed two acquisitions;
Quintar Company ("Quintar") and ColorAge ("ColorAge") in May and October of
1997, respectively.
There can be no assurance that acquired technology can be successfully
developed on a timely basis or at all, or that products based on acquired
technology will receive widespread market acceptance. Moreover, there can be
no assurance that the Company can successfully integrate 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.
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
14
<PAGE>
property protection may be unavailable or limited in certain foreign
countries. There can be no assurance that the Company's means of protecting
its proprietary rights in the United States or abroad will be adequate or
that others will not independently develop technologies that are similar or
superior to the Company's technology, duplicate the Company's technology or
design around any patent of the Company. Moreover, litigation may be
necessary in the future to enforce the Company's intellectual property
rights, to determine the validity and scope of the proprietary rights of
others or to defend against claims of infringement or invalidity. Such
litigation could result in substantial costs and diversion of management time
and resources and could have a material adverse effect on the Company's
business, operating results and financial condition.
There have been substantial amounts of litigation in the computer and
related industries regarding intellectual property rights, and there can be
no assurance that third parties will not claim infringement by the Company of
their intellectual property rights. The addition of Splash as a defendant in
any claims that the Company is infringing on proprietary rights of others,
with or without merit, could be time-consuming to defend, result in costly
litigation, divert management's attention and resources, and cause product
shipment delays. If the Company were found to be infringing on the
intellectual property rights of any third party, the Company could be subject
to liabilities for such infringement, which liabilities could be material,
and could be required to seek licenses from other companies or to refrain
from using, manufacturing or selling certain products or using certain
processes. Although holders of patents and other intellectual property rights
often offer licenses to their patent or other intellectual property rights,
no assurance can be given that licenses would be offered or that the terms of
any offered license would be acceptable to the Company. Any need to redesign
the products or enter into any royalty or licensing agreement could have a
material adverse effect on the Company's business, operating results and
financial condition.
The Company relies upon certain software licensed from third parties.
There can be no assurance that the software licensed by the Company will
continue to provide competitive features and functionality or that licenses
for software currently utilized by the Company or other software which the
Company may seek to license in the future will be available to the Company on
commercially reasonable terms. The loss of, or inability to maintain,
existing licenses could result in shipment delays or reductions until
equivalent software or suitable alternative products could be developed,
identified, licensed and integrated, and the inability to license key new
software that may be developed, on commercially reasonable terms, would have
a material adverse effect on the Company's competitive position. Any such
event would materially adversely affect the Company's business, operating
results and financial condition.
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.
There can be no assurance that errors would not be found in new versions of
Splash products after commencement of commercial shipments, or that any such
errors would not result in a loss of or delay in market acceptance and have a
material adverse effect upon the Company's business, operating results and
financial condition. In addition, errors in the Company's products (including
errors in licensed third party software) detected prior to new product
release could result in delay in the introduction of new products and
incurring of additional expense, which also could have a material adverse
effect upon the Company's business, operating results and financial condition.
INTERNATIONAL SALES. All sales to Fuji Xerox are international sales. In
addition, although a majority of sales to Xerox are accounted for as U.S.
sales, Xerox has a significant international customer base, and the Company
believes that a portion of Splash products purchased by Xerox are resold
outside the United States. The Company expects that direct and indirect
international sales will continue to represent a substantial portion of its
net revenue for the foreseeable future. While the Company's international
sales are generally denominated in U.S. dollars, fluctuations in currency
exchange rates could cause the Company's products to become relatively more
expensive to end users in a particular country, leading to pressure to reduce
the U.S. dollar denominated price to the Company's OEM customers, which could
in turn result in a reduction in net revenue and profitability. In addition,
to the extent that an increased portion the Company's sales are denominated
in foreign currencies, the Company could be exposed to currency exchange
risks. Other risks inherent in international sales include unexpected changes
in regulatory requirements, tariffs and other trade barriers and
uncertainties relative to regional circumstances. These risks, and in
particular risks related to the economic circumstances in Japan, could have a
material adverse affect on the Company's business, operating results and
financial condition. In addition, the Company's business, operating results
and financial condition would be materially adversely affected if foreign
markets do not continue to develop.
DEPENDENCE ON KEY PERSONNEL. Because of the nature of the Company's
business, the Company is highly dependent on the continued service of, and on
its ability to attract and retain, qualified technical, marketing, sales and
managerial personnel, including senior members of management. The competition
for such personnel is intense, and the loss of any of such persons, as well
as the failure to recruit additional key technical and sales personnel in a
timely manner, would have a material adverse effect on the Company's business
and operating results. There can be no assurance that the Company will be
able to continue to attract and retain the qualified personnel necessary for
the development of its business. The Company currently does not have
employment contracts with any of its employees, other than one employee from
the ColorAge acquisition, and does not maintain key person life insurance
policies on any of its employees. During the quarter ended June 30, 1999 the
Company's chief financial officer and vice president of sales and marketing
left the Company.
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
15
<PAGE>
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 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.
PART II
ITEM 1. LEGAL PROCEEDINGS
On January 13 and 28, 1999, two class action complaints were filed
in the United States district Court for the Northern District of
California against the Company, certain of its officers and
directors, and certain underwriters. The complaints allege that
defendants made false and misleading statements about the Company's
business condition and prospects during a class period of January 7,
1997 through October 13, 1998, and assert claims for violations of
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and
SEC Rule 10b-5. The complaints in both actions seek damages of an
unspecified amount.
There has been no discovery to date and no trial is scheduled in
these actions. The Company believes it has meritorious defenses in
these actions and intends to defend them vigorously. Failure by the
Company to obtain a favorable resolution of the claims set forth in
these actions could have a material adverse affect on the Company's
business, results of operations and financial condition. Currently,
the amount of such material effect cannot be reasonably estimated.
ITEM 2. CHANGES IN SECURITIES
NONE
ITEM 3. DEFAULT UPON SENIOR SECURITIES
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders held on May 26, 1999
Kevin Macgillivray and Gregory M. Avis were elected to serve as
Class III Directors of the Company with 10,546,733 and 10,061,607
votes for and 414,163 and 899,289 votes withheld, respectively.
Messrs. Macgillivray and Avis will serve for three year terms
expiring upon the Annual Meeting of Stockholders in 2002.
Also, at the Company's Annual Meeting of Stockholders the proposal
to approve and ratify an amendment to the Company's 1996 Stock
Purchase Plan (the "Purchase Plan") which increases the number of
shares of Common Stock reserved for issuance thereunder from 175,000
to 350,000 and provides for an annual share increase to the purchase
plan consisting of the lesser of (a) 175,000 share of Common Stock,
(b) that number of share of Common Stock issued pursuant to the
Purchase Plan in the one-year period ending on the date of said
annual increase, or (c) a lesser amount determined by the Board.
That was approved with 9,569,366 votes for, 1,377,818 votes against,
and 13,712 votes abstaining.
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS
10.3 1996 EMPLOYEE STOCK PURCHASE PLAN AND FORM OF
SUBSCRIPTION AGREEMENT, AS AMENDED MAY 26, 1999
27.1 FINANCIAL DATA SCHEDULE
REPORTS ON FOR 8-K
NONE
16
<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 August 16, 1999.
SPLASH TECHNOLOGY HOLDINGS, INC
By: /s/ Kevin Macgillivray
---------------------------------------
Kevin Macgillivray
President and Chief Executive Officer
17
<PAGE>
EXHIBIT 10.3
SPLASH TECHNOLOGY, INC.
1996 EMPLOYEE STOCK PURCHASE PLAN
(AMENDED May 26, 1999)
The following constitute the provisions of the 1996 Employee Stock Purchase
Plan of Splash Technology, Inc.
1. PURPOSE. The purpose of the Plan is to provide employees of the
Company and its Designated Subsidiaries with an opportunity to purchase Common
Stock of the Company through accumulated payroll deductions. It is the
intention of the Company to have the Plan qualify as an "Employee Stock Purchase
Plan" under Section 423 of the Internal Revenue Code of 1986, as amended. The
provisions of the Plan, accordingly, shall be construed so as to extend and
limit participation in a manner consistent with the requirements of that section
of the Code.
2. DEFINITIONS.
(a) "BOARD" shall mean the Board of Directors of the Company, or a
committee of the Board appointed in accordance with Section 13.
(b) "CODE" shall mean the Internal Revenue Code of 1986, as amended.
(c) "COMMON STOCK" shall mean the Common Stock of the Company.
(d) "COMPANY" shall mean Splash Technology, Inc., and any Designated
Subsidiary of the Company.
(e) "COMPENSATION" shall mean all base straight time gross earnings
including commissions, overtime, shift premium, incentive compensation,
incentive payments, bonuses and other compensation.
(f) "DESIGNATED SUBSIDIARIES" shall mean the Subsidiaries which have
been designated by the Board from time to time in its sole discretion as
eligible to participate in the Plan.
(g) "EMPLOYEE" shall mean any individual who is an Employee of the
Company for tax purposes whose customary employment with the Company is at least
twenty (20) hours per week and more than five (5) months in any calendar year.
For purposes of the Plan, the employment relationship shall be treated as
continuing intact while the individual is on sick leave or other leave of
absence approved by the Company. Where the period of leave exceeds 90 days and
the individual's right to reemployment is not guaranteed either by statute or by
contract, the employment relationship shall be deemed to have terminated on the
91st day of such leave.
(h) "ENROLLMENT DATE" shall mean the first day of each Offering
Period.
<PAGE>
(i) "EXERCISE DATE" shall mean the last trading day of each Purchase
Period, if any, or each Offering Period.
(j) "FAIR MARKET VALUE" shall mean, as of any date, the value of
Common Stock determined as follows:
(1) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day prior to the time of determination, as reported in
The Wall Street Journal or such other source as the Board deems reliable, or;
(2) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean of the closing bid and asked prices for the Common Stock on
the date of such determination, as reported in The Wall Street Journal or such
other source as the Board deems reliable, or;
(3) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Board.
(4) For purposes of the Enrollment Date under the first Offering
Period under the Plan, the Fair Market Value shall be the initial price to the
public as set forth in the final Prospectus included within the registration
statement in Form S-1 filed with the Securities and Exchange Commission for the
initial public offering of the Company's Common Stock.
(k) "OFFERING PERIOD" shall mean the period beginning with the date
an option is granted under the Plan and ending with the date determined by the
Board. During the term of the Plan, the duration of each Offering Period shall
be determined from time to time by the Board, provided that no Offering Period
may exceed twenty-four (24) months in duration. If determined by the Board, an
Offering Period may include one or more Purchase Periods. The first Offering
Period shall begin on the effective date of the Company's initial public
offering of its Common Stock that is registered with the Securities and Exchange
Commission (the "Effective Date") and shall end on the last Trading Day on or
before April 30, 1997.
(l) "PLAN" shall mean this Employee Stock Purchase Plan.
(m) "PURCHASE PRICE" shall mean an amount equal to 85% of the Fair
Market Value of a share of Common Stock on the Enrollment Date or on the
Exercise Date, whichever is lower.
(n) "PURCHASE PERIOD" shall mean the period commencing on an
Enrollment Date or after an Exercise Date and which is of such duration as the
Board shall determine.
-2-
<PAGE>
(o) "RESERVES" shall mean the number of shares of Common Stock
covered by each option under the Plan which have not yet been exercised and the
number of shares of Common Stock which have been authorized for issuance under
the Plan but not yet placed under option.
(p) "SUBSIDIARY" shall mean a corporation, domestic or foreign, of
which not less than 50% of the voting shares are held by the Company or a
Subsidiary, whether or not such corporation now exists or is hereafter organized
or acquired by the Company or a Subsidiary.
(q) "TRADING DAY" shall mean a day on which national stock exchanges
and the Nasdaq System are open for trading.
3. ELIGIBILITY.
(a) Any Employee who shall be employed by the Company on a given
Enrollment Date shall be eligible to participate in the Plan.
(b) Any provisions of the Plan to the contrary notwithstanding, no
Employee shall be granted an option under the Plan (i) to the extent that,
immediately after the grant, such Employee (or any other person whose stock
would be attributed to such Employee pursuant to Section 424(d) of the Code)
would own capital stock of the Company and/or hold outstanding options to
purchase such stock possessing five percent (5%) or more of the total combined
voting power or value of all classes of the capital stock of the Company or of
any Subsidiary, or (ii) to the extent that his or her rights to purchase stock
under all employee stock purchase plans of the Company and its subsidiaries
accrues at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) worth of
stock (determined at the fair market value of the shares at the time such option
is granted) for each calendar year in which such option is outstanding at any
time.
4. OFFERING AND PURCHASE PERIODS. The Plan shall be implemented by
consecutive, overlapping Offering Periods, each of which shall be of such
duration (not to exceed 24 months) as the Board shall determine from time to
time in its discretion, and each of which shall consist of such number of
Purchase Periods as the Board shall determine from time to time in its
discretion. The Plan shall continue until terminated in accordance with Section
19 hereof. The first Offering Period shall commence on the Effective Date and
shall end on the last Trading Day on or before April 30, 1997. Unless otherwise
specified by the Board, the Offering Periods shall be six months in duration
without any Purchase Periods with the first Offering Period commencing on the
Effective Date and ending on April 30, 1997, as aforesaid, and the second
commencing on May 1, 1997, and ending on October 31, 1997. The Board shall
have the power to change the duration of Offering Periods (including the
commencement dates thereof) at any time or from time to time, provided that
(except as the shareholders may otherwise approve) any such change shall be
effected only with respect to Offering Periods commencing at least five (5) days
following the date on which the change is announced.
-3-
<PAGE>
5. PARTICIPATION.
(a) An eligible Employee may become a participant in the Plan by
completing a subscription agreement authorizing payroll deductions in the form
of Exhibit A to this Plan and filing it with the Company's payroll office prior
to the applicable Enrollment Date.
(b) Payroll deductions for a participant shall commence on the first
payroll following the Enrollment Date and shall end on the last payroll in the
Offering Period to which such authorization is applicable, unless sooner
terminated by the participant as provided in Section 10 hereof.
6. PAYROLL DEDUCTIONS.
(a) At the time a participant files his or her subscription
agreement, he or she shall elect to have payroll deductions made on each pay day
during the Offering Period in an amount not exceeding ten percent (10%) of the
Compensation which he or she receives on each pay day during the Offering
Period, provided, however, that for purposes of the first Offering Period, the
maximum payroll deduction shall not exceed twenty percent (20%) of the
Compensation which a participant receives during the first Offering Period.
(b) All payroll deductions made for a participant shall be credited
to his or her account under the Plan and shall be withheld in whole percentages
only. A participant may not make any additional payments into such account.
(c) A participant may discontinue his or her participation in the
Plan as provided in Section 10 hereof, or may increase or decrease the rate of
his or her payroll deductions during the Offering Period by completing or filing
with the Company a new subscription agreement authorizing a change in payroll
deduction rate. The Board may, in its discretion, limit the number of
participation rate changes during any Offering Period. The change in rate shall
be effective with the first full payroll period following five (5) business days
after the Company's receipt of the new subscription agreement unless the Company
elects to process a given change in participation more quickly. A participant's
subscription agreement shall remain in effect for successive Offering Periods
unless terminated as provided in Section 10 hereof.
(d) Notwithstanding the foregoing, to the extent necessary to comply
with Section 423(b)(8) of the Code and Section 3(b) hereof, a participant's
payroll deductions may be decreased to zero percent (0%) at such time during any
Offering Period, or, if applicable, any Purchase Period which is scheduled to
end during the current calendar year (collectively, the "Current Offering
Period") that the aggregate of all payroll deductions which were previously used
to purchase stock under the Plan in a prior Offering Period, or, if applicable,
prior Purchase Period which ended during that calendar year plus all payroll
deductions accumulated with respect to the Current Offering Period equal
$21,250. Payroll deductions shall recommence at the rate provided in such
participant's subscription agreement at the beginning of the first Offering
Period, or, if applicable, first Purchase Period which is scheduled to end in
the following calendar year, unless terminated by the participant as provided in
Section 10 hereof.
-4-
<PAGE>
(e) At the time the option is exercised, in whole or in part, or at
the time some or all of the Company's Common Stock issued under the Plan is
disposed of, the participant must make adequate provision for the Company's
federal, state, or other tax withholding obligations, if any, which arise upon
the exercise of the option or the disposition of the Common Stock. At any time,
the Company may, but shall not be obligated to, withhold from the participant's
compensation the amount necessary for the Company to meet applicable withholding
obligations, including any withholding required to make available to the Company
any tax deductions or benefits attributable to sale or early disposition of
Common Stock by the Employee.
7. GRANT OF OPTION. On the Enrollment Date of each Offering Period, each
eligible Employee participating in such Offering Period shall be granted an
option to purchase on each Exercise Date during such Offering Period (at the
applicable Purchase Price) up to a number of shares of the Company's Common
Stock determined by dividing such Employee's payroll deductions accumulated
prior to such Exercise Date and retained in the Participant's account as of the
Exercise Date by the applicable Purchase Price; provided that in no event shall
an Employee be permitted to purchase during each Offering Period, or Purchase
Period, if applicable, more than 5,000 shares (subject to any adjustment
pursuant to Section 19), and provided further that such purchase shall be
subject to the limitations set forth in Sections 3(b) and 12 hereof. Exercise
of the option shall occur as provided in Section 8 hereof, unless the
participant has withdrawn pursuant to Section 10 hereof. The option shall
expire on the last day of the Offering Period.
8. EXERCISE OF OPTION.
(a) Unless a participant withdraws from the Plan as provided in
Section 10 hereof, his or her option for the purchase of shares shall be
exercised automatically on the Exercise Date, and the maximum number of full
shares subject to option shall be purchased for such participant at the
applicable Purchase Price with the accumulated payroll deductions in his or her
account. No fractional shares shall be purchased; any payroll deductions
accumulated in a participant's account which are not sufficient to purchase a
full share shall be retained in the participant's account for the subsequent
Offering Period or, if applicable, Purchase Period subject to earlier withdrawal
by the participant as provided in Section 10 hereof. Any other monies left over
in a participant's account after the Exercise Date shall be returned to the
participant. During a participant's lifetime, a participant's option to purchase
shares hereunder is exercisable only by him or her.
(b) In the event, on a given Exercise Date, the number of shares with
respect to which options are to be exercised exceeds 50,000 shares (post split)
for the calendar year, the Company shall make a pro rata allocation of the
shares remaining below the 50,000 share limit in as uniform a manner as shall be
practicable and as it shall determine to be equitable. Notwithstanding the above
sentence, the 50,000 share limit shall apply seperately to the first Offering
Period under the Plan.
9. DELIVERY. As promptly as practicable after each Exercise Date on
which a purchase of shares occurs, the Company shall arrange the delivery to
each participant, as appropriate, of the shares purchased upon exercise of his
or her option.
-5-
<PAGE>
10. WITHDRAWAL; TERMINATION OF EMPLOYMENT.
(a) A participant may withdraw all but not less than all the payroll
deductions credited to his or her account and not yet used to exercise his or
her option under the Plan at any time by giving written notice to the Company in
the form of Exhibit B to this Plan. All of the participant's payroll deductions
credited to his or her account shall be paid to such participant promptly after
receipt of notice of withdrawal and such participant's option for the Offering
Period shall be automatically terminated, and no further payroll deductions for
the purchase of shares shall be made for such Offering Period. If a participant
withdraws from an Offering Period, payroll deductions shall not resume at the
beginning of the succeeding Offering Period unless the participant delivers to
the Company a new subscription agreement.
(b) Upon a participant's ceasing to be an Employee, for any reason,
he or she shall be deemed to have elected to withdraw from the Plan and the
payroll deductions credited to such participant's account during the Offering
Period but not yet used to exercise the option shall be returned to such
participant or, in the case of his or her death, to the person or persons
entitled thereto under Section 14 hereof, and such participant's option shall be
automatically terminated. The preceding sentence notwithstanding, a participant
who receives payment in lieu of notice of termination of employment shall be
treated as continuing to be an Employee for the participant's customary number
of hours per week of employment during the period in which the participant is
subject to such payment in lieu of notice.
(c) A participant's withdrawal from an Offering Period shall not have
any effect upon his or her eligibility to participate in any similar plan which
may hereafter be adopted by the Company or in succeeding Offering Periods which
commence after the termination of the Offering Period from which the participant
withdraws.
11. INTEREST. No interest shall accrue on the payroll deductions of a
participant in the Plan.
12. STOCK.
(a) The maximum number of shares of the Company's Common Stock which
shall be made available for sale under the Plan shall be 350,000 shares (post
split), PLUS an annual increase on the April 30th of the each year commencing
April 30, 2000 equal to the lesser of, (i) 175,000 shares, (ii) that number of
shares issued under the Plan in the one year period ending on the date of the
annual increase, and (iii) a lesser amount determined by the Board, in each case
subject to adjustment upon changes in capitalization of the Company as provided
in Section 18 hereof. If, on a given Exercise Date, the number of shares with
respect to which options are to be exercised exceeds the number of shares then
available under the Plan, the Company shall make a pro rata allocation of the
shares remaining available for purchase in as uniform a manner as shall be
practicable and as it shall determine to be equitable.
(b) The participant shall have no interest or voting right in shares
covered by his option until such option has been exercised.
-6-
<PAGE>
(c) Shares to be delivered to a participant under the Plan shall be
registered in the name of the participant or in the name of the participant and
his or her spouse.
13. ADMINISTRATION.
(a) ADMINISTRATIVE BODY. The Plan shall be administered by the Board
or a committee of members of the Board appointed by the Board. The Board or its
committee shall have full and exclusive discretionary authority to construe,
interpret and apply the terms of the Plan, to determine eligibility and to
adjudicate all disputed claims filed under the Plan. Every finding, decision and
determination made by the Board or its committee shall, to the full extent
permitted by law, be final and binding upon all parties.
(b) RULE 16b-3 LIMITATIONS. Notwithstanding the provisions of
Subsection (a) of this Section 13, in the event that Rule 16b-3 promulgated
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or
any successor provision ("Rule 16b-3") provides specific requirements for the
administrators of plans of this type, the Plan shall be administered only by
such a body and in such a manner as shall comply with the applicable
requirements of Rule 16b-3. Unless permitted by Rule 16b-3, no discretion
concerning decisions regarding the Plan shall be afforded to any committee or
person that is not "disinterested" as that term is used in Rule 16b-3.
14. DESIGNATION OF BENEFICIARY.
(a) A participant may file a written designation of a beneficiary who
is to receive any shares and cash, if any, from the participant's account under
the Plan in the event of such participant's death subsequent to an Exercise Date
on which the option is exercised but prior to delivery to such participant of
such shares and cash. In addition, a participant may file a written designation
of a beneficiary who is to receive any cash from the participant's account under
the Plan in the event of such participant's death prior to exercise of the
option. If a participant is married and the designated beneficiary is not the
spouse, spousal consent shall be required for such designation to be effective.
(b) Such designation of beneficiary may be changed by the participant
at any time by written notice. In the event of the death of a participant and in
the absence of a beneficiary validly designated under the Plan who is living at
the time of such participant's death, the Company shall deliver such shares
and/or cash to the executor or administrator of the estate of the participant,
or if no such executor or administrator has been appointed (to the knowledge of
the Company), the Company, in its discretion, may deliver such shares and/or
cash to the spouse or to any one or more dependents or relatives of the
participant, or if no spouse, dependent or relative is known to the Company,
then to such other person as the Company may designate.
15. TRANSFERABILITY. Neither payroll deductions credited to a
participant's account nor any rights with regard to the exercise of an option or
to receive shares under the Plan may be assigned, transferred, pledged or
otherwise disposed of in any way (other than by will, the laws of descent and
distribution or as provided in Section 14 hereof) by the participant. Any such
attempt at assignment, transfer, pledge or other disposition shall be without
effect, except that the Company may treat such act as an election to withdraw
funds from an Offering Period in accordance with Section 10 hereof.
-7-
<PAGE>
16. USE OF FUNDS. All payroll deductions received or held by the Company
under the Plan may be used by the Company for any corporate purpose, and the
Company shall not be obligated to segregate such payroll deductions.
17. REPORTS. Individual accounts shall be maintained for each participant
in the Plan. Statements of account shall be given to participating Employees at
least annually, which statements shall set forth the amounts of payroll
deductions, the Purchase Price, the number of shares purchased and the remaining
cash balance, if any.
18. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, DISSOLUTION, LIQUIDATION,
MERGER OR ASSET SALE.
(a) CHANGES IN CAPITALIZATION. Subject to any required action by the
shareholders of the Company, the Reserves, as well as the price per share and
the number of shares of Common Stock covered by each option under the Plan which
has not yet been exercised, shall be proportionately adjusted for any increase
or decrease in the number of issued shares of Common Stock resulting from a
stock split, reverse stock split, stock dividend, combination or
reclassification of the Common Stock, or any other increase or decrease in the
number of shares of Common Stock effected without receipt of consideration by
the Company; provided, however, that conversion of any convertible securities of
the Company shall not be deemed to have been "effected without receipt of
consideration". Such adjustment shall be made by the Board, whose determination
in that respect shall be final, binding and conclusive. Except as expressly
provided herein, no issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of shares of Common Stock subject to an option.
(b) DISSOLUTION OR LIQUIDATION. In the event of the proposed
dissolution or liquidation of the Company, the Offering Periods shall terminate
immediately prior to the consummation of such proposed action, unless otherwise
provided by the Board.
(c) MERGER OR ASSET SALE. In the event of a proposed sale of all or
substantially all of the assets of the Company, or the merger of the Company
with or into another corporation, any Offering Periods then in progress shall be
shortened by setting a new Exercise Date (the "New Exercise Date") and any
Offering Periods then in progress shall end on the New Exercise Date. The New
Exercise Date shall be before the date of the Company's proposed sale or merger.
The Board shall notify each participant in writing, at least ten (10) business
days prior to the New Exercise Date, that the Exercise Date for the
participant's option has been changed to the New Exercise Date and that the
participant's option shall be exercised automatically on the New Exercise Date,
unless prior to such date the participant has withdrawn from the Offering Period
as provided in Section 10 hereof.
19. AMENDMENT OR TERMINATION.
(a) The Board may at any time and for any reason terminate or amend
the Plan. Except as provided in Section 18 hereof, no such termination can
affect options previously granted, provided that an Offering Period may be
terminated by the Board on any Exercise Date if the Board
-8-
<PAGE>
determines that the termination of the Plan is in the best interests of the
Company and its shareholders. Except as provided in Section 18 hereof, no
amendment may make any change in any option theretofore granted which
adversely affects the rights of any participant. To the extent necessary to
comply with Section 423 of the Code (or any successor rule or provision or
any other applicable law or regulation), the Company shall obtain shareholder
approval in such a manner and to such a degree as required.
(b) Without shareholder consent and without regard to whether any
participant rights may be considered to have been "adversely affected," the
Board (or its committee) shall be entitled to change the Offering Periods, limit
the frequency and/or number of changes in the amount withheld during an Offering
Period, establish the exchange ratio applicable to amounts withheld in a
currency other than U.S. dollars, permit payroll withholding in excess of the
amount designated by a participant in order to adjust for delays or mistakes in
the Company's processing of properly completed withholding elections, establish
reasonable waiting and adjustment periods and/or accounting and crediting
procedures to ensure that amounts applied toward the purchase of Common Stock
for each participant properly correspond with amounts withheld from the
participant's Compensation, and establish such other limitations or procedures
as the Board (or its committee) determines in its sole discretion advisable
which are consistent with the Plan.
20. NOTICES. All notices or other communications by a participant to the
Company under or in connection with the Plan shall be deemed to have been duly
given when received in the form specified by the Company at the location, or by
the person, designated by the Company for the receipt thereof.
21. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued with
respect to an option unless the exercise of such option and the issuance and
delivery of such shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreign, including, without limitation, the
Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as
amended, the rules and regulations promulgated thereunder, and the requirements
of any stock exchange upon which the shares may then be listed, and shall be
further subject to the approval of counsel for the Company with respect to such
compliance.
As a condition to the exercise of an option, the Company may require the
person exercising such option to represent and warrant at the time of any such
exercise that the shares are being purchased only for investment and without any
present intention to sell or distribute such shares if, in the opinion of
counsel for the Company, such a representation is required by any of the
aforementioned applicable provisions of law.
22. TERM OF PLAN. The Plan shall become effective upon the earlier to
occur of its adoption by the Board of Directors or its approval by the
shareholders of the Company. It shall continue in effect for a term of ten (10)
years unless sooner terminated under Section 19 hereof.
-9-
<PAGE>
EXHIBIT A
SPLASH TECHNOLOGY, INC.
1996 EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
_____ Original Application Enrollment Date: ________
_____ Change in Payroll Deduction Rate
_____ Change of Beneficiary(ies)
1. _____________________________________________________ hereby elects to
participate in the Splash Technology, Inc. 1996 Employee Stock Purchase Plan
(the "Employee Stock Purchase Plan") and subscribes to purchase shares of the
Company's Common Stock in accordance with this Subscription Agreement and the
Employee Stock Purchase Plan.
2. I hereby authorize payroll deductions from each paycheck in the amount
of ____% of my Compensation on each payday (from 1 to 20% for the first Offering
Period) during the Offering Period in accordance with the Employee Stock
Purchase Plan. (Please note that no fractional percentages are permitted.)
3. I understand that said payroll deductions shall be accumulated for the
purchase of shares of Common Stock at the applicable Purchase Price determined
in accordance with the Employee Stock Purchase Plan. I understand that if I do
not withdraw from an Offering Period, any accumulated payroll deductions will be
used to automatically exercise my option.
4. I have received a copy of the complete Employee Stock Purchase Plan.
I understand that my participation in the Employee Stock Purchase Plan is in all
respects subject to the terms of the Plan. I understand that my ability to
exercise the option under this Subscription Agreement is subject to shareholder
approval of the Employee Stock Purchase Plan.
5. Shares purchased for me under the Employee Stock Purchase Plan should
be issued in the name(s) of (Employee or Employee and spouse only):
_______________________________________________________________________________
6. I understand that if I dispose of any shares received by me pursuant
to the Plan within 2 years after the Enrollment Date (the first day of the
Offering Period during which I purchased such shares) or one year after the
Exercise Date, I will be treated for federal income tax purposes as having
received ordinary income at the time of such disposition in an amount equal to
the excess of the fair market value of the shares at the time such shares were
purchased by me over the price which I paid for the shares. I hereby agree to
notify the Company in writing within 30 days after the date of any disposition
of my shares and I will make adequate provision for Federal, state or other
<PAGE>
tax withholding - obligations, if any, which arise upon the disposition of
the Common Stock. - The Company may, but will not be obligated to, withhold
from my compensation the amount necessary to meet any applicable withholding
obligation including any withholding necessary to make available to the
Company any tax deductions or benefits attributable to sale or early
disposition of Common Stock by me. If I dispose of such shares at any time
after the expiration of the 2-year and 1-year holding periods, I understand
that I will be treated for federal income tax purposes as having received
income only at the time of such disposition, and that such income will be
taxed as ordinary income only to the extent of an amount equal to the lesser
of (1) the excess of the fair market value of the shares at the time of such
disposition over the purchase price which I paid for the shares, or (2) 15%
of the fair market value of the shares on the first day of the Offering
Period. The remainder of the gain, if any, recognized on such disposition
will be taxed as capital gain.
7. I hereby agree to be bound by the terms of the Employee Stock Purchase
Plan. The effectiveness of this Subscription Agreement is dependent upon my
eligibility to participate in the Employee Stock Purchase Plan.
8. In the event of my death, I hereby designate the following as my
beneficiary(ies) to receive all payments and shares due me under the Employee
Stock Purchase Plan:
NAME: (Please print)
___________________________________________________
(First) (Middle) (Last)
____________________________________ ____________________________________
Relationship
____________________________________
(Address)
Employee's Social
Security Number: ____________________________________
Employee's Address: ____________________________________
____________________________________
____________________________________
I UNDERSTAND THAT THIS SUBSCRIPTION AGREEMENT SHALL REMAIN IN EFFECT THROUGHOUT
SUCCESSIVE OFFERING PERIODS UNLESS TERMINATED BY ME.
Dated: ____________________________ ____________________________________
Signature of Employee
____________________________________
Spouse's Signature (If beneficiary
other than spouse)
-2-
<PAGE>
EXHIBIT B
SPLASH TECHNOLOGY, INC.
1996 EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
The undersigned participant in the Offering Period of the Splash
Technology, Inc. 1996 Employee Stock Purchase Plan which began on ____________,
19____ (the "Enrollment Date") hereby notifies the Company that he or she hereby
withdraws from the Offering Period. He or she hereby directs the Company to pay
to the undersigned as promptly as practicable all the payroll deductions
credited to his or her account with respect to such Offering Period. The
undersigned understands and agrees that his or her option for such Offering
Period will be automatically terminated. The undersigned understands further
that no further payroll deductions will be made for the purchase of shares in
the current Offering Period and the undersigned shall be eligible to participate
in succeeding Offering Periods only by delivering to the Company a new
Subscription Agreement.
Name and Address of Participant:
____________________________________
____________________________________
____________________________________
Signature:
____________________________________
Date: ______________________________
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 62,415
<SECURITIES> 7,964
<RECEIVABLES> 7,717
<ALLOWANCES> 297
<INVENTORY> 1,330
<CURRENT-ASSETS> 83,713
<PP&E> 2,389
<DEPRECIATION> 3,154
<TOTAL-ASSETS> 100,812
<CURRENT-LIABILITIES> 22,694
<BONDS> 0
0
0
<COMMON> 14
<OTHER-SE> 77,372
<TOTAL-LIABILITY-AND-EQUITY> 100,812
<SALES> 33,247
<TOTAL-REVENUES> 33,247
<CGS> 14,857
<TOTAL-COSTS> 14,857
<OTHER-EXPENSES> 14,964
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,912
<INCOME-TAX> 1,058
<INCOME-CONTINUING> 3,854
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,854
<EPS-BASIC> 0.28
<EPS-DILUTED> 0.27
</TABLE>
