<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 MARCH 31, 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 Identification No.)
incorporation or organization)
555 DEL REY AVENUE, SUNNYVALE, CA 94086
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 328-6300
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 May 10, 1999 was 14,029,914 shares.
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SPLASH TECHNOLOGY HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
March 31,
December 31, 1999
1998 (UNAUDITED)
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 51,013 $ 57,362
Marketable securities 9,814 10,420
Accounts receivable, net of allowance for doubtful accounts
of $303 and $298 as of December 31, 1998 and March 31,
1999, respectively 9,316 5,940
Inventories 2,830 1,665
Prepaid expenses and other current assets 997 499
Deferred income taxes 3,880 3,880
----- -----
Total current assets 77,850 79,766
Property and equipment, net 2,256 2,146
Deferred income taxes 10,514 10,514
Other assets 3,112 4,247
----- -----
Total assets $ 93,732 $ 96,673
------ ------
------ ------
LIABILITIES
Current liabilities:
Trade accounts payable $2,056 $ 3,877
Accrued and other liabilities 16,286 15,877
Deferred revenue 1,355 1,242
------ ------
Total current liabilities 19,697 20,996
Other long term liabilities 742 753
------ ------
Total liabilities 20,439 21,749
------ ------
STOCKHOLDERS' EQUITY
Common stock, par value $.001 per share:
Authorized: 50,000,000 shares
Issued and outstanding: 13,962,863 shares and 13,973,974 shares as of
December 31, 1998 and March 31, 1999, respectively 14 14
Additional paid-in capital 86,581 86,571
Accumulated deficit (13,302) (11,661)
------ ------
Total stockholders' equity 73,293 74,924
------ ------
Total liabilities and stockholders' equity $ 93,732 $ 96,673
------ ------
------ ------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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SPLASH TECHNOLOGY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED))
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1998 1999
----------- ----------
<S> <C> <C>
Net revenue $ 17,997 $16,302
Cost of net revenue 8,264 7,315
------ ------
Gross profit 9,733 8,987
------ ------
Operating expenses:
Research and development 3,163 3,289
Sales, general and administrative 3,671 4,109
------ ------
Total operating expenses 6,834 7,398
------ ------
Income from operations 2,899 1,589
Interest income, net 442 687
------ ------
Income before income taxes 3,341 2,276
Provision for income taxes 1,203 501
------ ------
Net income $ 2,138 $ 1,775
------ ------
------ ------
Basic net income per share $ .15 $ .13
------ ------
------ ------
Diluted net income per share $ .15 $ .13
------ ------
------ ------
Shares used in basic net income per share
calculation 13,857 13,966
------ ------
------ ------
Shares used in diluted net income per share
calculation 14,057 14,087
------ ------
------ ------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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SPLASH TECHNOLOGY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998 1999
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,138 $ 1,775
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 455 298
Changes in assets and liabilities:
Accounts receivable (1,053) 3,376
Inventories 518 1,165
Prepaid expenses and other current assets 118 498
Other assets 14 (1,345)
Trade accounts payable 1,195 1,821
Accrued and other liabilities (485) (398)
Deferred revenue 1,298 (113)
------ ------
Net cash provided by operating activities 4,198 7,077
------ ------
Cash flows from investing activities:
Redemption (purchase) of marketable securities 5,573 (606)
Purchase of property and equipment (324) (112)
------ ------
Net cash provided by (used in) investing activities 5,249 (718)
------ ------
Cash flows from financing activities:
Exercise (repurchase) of stock under stock plans 10 (10)
------ ------
Net cash provided by (used in) financing activities 10 (10)
------ ------
Net increase in cash 9,457 6,349
Cash and cash equivalents, beginning of period 43,637 51,013
------ ------
Cash and cash equivalents, end of period $ 53,094 $ 57,362
------ ------
------ ------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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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
March 31, 1999, and the results of operations and cash flows for the three
months ended March 31, 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, March 31,
1998 1999
----------- -----------
<S> <C> <C>
INVENTORIES:
Raw materials $ 1,447 $ 575
Finished goods 1,383 1,090
------ ------
$ 2,830 $ 1,665
------ ------
------ ------
ACCRUED AND OTHER LIABILITIES:
Royalties payable $ 1,335 $ 1,328
Accrued and other liabilities 3,647 2,956
Accrued product-related obligations 5,234 4,515
Accrued compensation and related expenses 1,487 1,946
Income taxes payable 4,583 5,132
------ ------
$16,286 $15,877
------ ------
------ ------
</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.
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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
Ended March 31,
1998 1999
------------ ------------
<S> <C> <C>
Numerator - Basic and Diluted EPS
Net income available to common
stockholders $ 2,138 $ 1,775
------ ------
------ ------
Denominator - Basic EPS
Weighted average shares outstanding 13,857 13,966
------ ------
Basic net income per share $ .15 $ .13
------ ------
------ ------
Denominator - Diluted EPS
Denominator - Basic EPS 13,857 13,966
Effect of dilutive common stock options 200 121
------ ------
Dilutive shares 14,057 14,087
------ ------
Diluted net income per share $ .15 $ .13
------ ------
------ ------
</TABLE>
Options to purchase 1.4 million and 1.8 million shares of common stock were
outstanding at March 31, 1998, and March 31, 1999, respectively, but were not
included in the calculation of diluted earnings per share because the options'
exercise price was greater than the average market price of the common shares
during the three months ended March 31, 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
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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
In the past the Company had achieved significant growth in net revenue and
operating income each year since fiscal 1994, before purchase accounting
adjustments. The Company's profitability and growth are 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 and growth may be difficult to attain or
exceed in the future. In addition, the Company's overall expense level has
increased and is expected to continue 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 March 31,
1998 1999
----------- -----------
<S> <C> <C>
Net revenue 100% 100%
Cost of net revenue 46 45
---- ----
Gross profit 54 55
---- ----
Operating expenses:
Research and development 18 20
Sales, general and administrative 20 25
---- ----
Total operating expenses 38 45
---- ----
Income from operations 16 10
Interest income 3 4
---- ----
Income before income taxes 19 14
Provision for income taxes 7 3
---- ----
Net income 12% 11%
---- ----
---- ----
</TABLE>
NET REVENUE. The Company's net revenue decreased to $16.3 million in the
three months ended March 31, 1999 from $18.0 million in the three months
ended March 31, 1998. This decrease was primarily attributable to lower
average selling prices due to increasing pricing pressure on Company's
products, as well as poor economic conditions in Asia. The Company has
experienced a decrease in sales in North America and Japan, partially offset
by sales to other regions. The Company sells a range of products, and the
revenue for any period will be determined by the product mix sold in that
period. In addition, the Company sells a substantial portion of its products
to two customers, Fuji Xerox Company Ltd. ("Fuji Xerox") and Xerox
Corporation ("Xerox") on an OEM basis and, historically, fluctuations in net
revenue are in part due to the purchasing patterns of these customers. There
can be no assurance that either of the Company's two major customers, Fuji
Xerox, particularly in light of the current adverse economic circumstances in
Japan, or Xerox will not change their mix of product or purchasing patterns
in a manner which would adversely impact net revenue.
All sales to Fuji Xerox, and a portion of the Company's sales to Xerox, are
international sales. In addition, given Xerox's
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international customer base, the Company believes that a portion of Splash
products purchased by Xerox in the U.S. are resold outside the United States.
The Company expects that direct and indirect international sales will
continue to represent a substantial portion of its net revenue for the
foreseeable future. While the Company's international sales are generally
denominated in U.S. dollars, fluctuations in currency exchange rates could
cause, and, in the case of Japan, have caused, the Company's products to
become relatively more expensive to end users in a particular country,
leading to pressure to reduce the U.S. dollar denominated price to the
Company's OEM customers and lost sales. Such pressure has in the past and
could in the future result in a reduction in net revenue and profitability.
GROSS MARGIN. Gross margins were 54% and 55% in the three months ended
March 31, 1998 and 1999, respectively. The Company expects that gross margins
will fluctuate from period to period and will decrease in future periods. Gross
margin is affected by a number of factors, including product mix, product
pricing and manufacturing, and royalty and component costs. The average selling
price of the Company's products has decreased in the past primarily as a result
of competitive market pressures, the introduction of lower-priced products and,
in certain cases, in response to new product introductions by the Company's
customers and competitors. The Company expects this trend to continue in the
future. Any decline in average selling prices of a particular product which is
not offset by a reduction in production costs or by sales of other products with
higher gross margins would decrease the Company's overall gross margin and
adversely affect the Company's operating results.
RESEARCH AND DEVELOPMENT. Research and development expenses increased 3% to
$3.3 million in the three months ended March 31, 1999 from $3.2 million in the
three months ended March 31, 1998. As a percentage of net revenue, research and
development increased to 20% in the three months ended March 31, 1999 from 18%
in the three months ended March 31, 1998. The Company invests in research and
development to enhance the Company's product line and to introduce new product
lines. 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 future periods.
SALES, GENERAL AND ADMINISTRATIVE. Sales, general and administrative
expenses increased 11% to $4.1 million in the three months ended March 31, 1999
from $3.7 million in the three months ended March 31, 1998. As a percentage of
net revenue, sales, general and administrative expenses increased to 25% in the
three months ended March 31, 1999 from 20% in the three months ended March 31,
1998. The increases in these expenditures were primarily related to expansion of
the Company's sales support and marketing staff and associated costs (primarily
to increase the Company's level of support for Xerox's sales organization), the
implementation of promotional programs designed to improve name and product
recognition in the end user community and the Company's increased participation
in industry trade shows. In addition, the increases in these expenditures were
due to increased salary and related costs from increased headcount related to
the Company's efforts to enhance its corporate infrastructure and to support
expansion of its operations. The Company believes that its sales, general and
administrative expenses will increase in the foreseeable future as it continues
to implement additional management and operational systems, and expand its
administrative staff. Sales, general, and administrative expenses are also
expected to increase in future periods as the Company increases its sales
support and marketing staff and associated costs to expand its presence in sales
channels other than Xerox and Fuji Xerox. There is no assurance that the Company
will be able to maintain or increase its presence in its existing customers or
to successfully penetrate any additional sales channels.
PROVISION FOR INCOME TAXES. The Company accounts for income taxes in
accordance with the Financial Accounting Standards Board's Statement of
Financial Accounting Standard No.109 "Accounting for Income Taxes". The
Company's effective tax rate was 36% and 22% for the three months ended March
31, 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.
The Company had $60.8 million and $67.8 million of cash, cash equivalents
and marketable securities and had no borrowings outstanding under its $10
million bank line of credit as of March 31, 1998 and 1999, respectively.
Borrowings under the line of credit bear interest at the prime rate or libor
plus 1.25% to 2%, and are available based on a percentage of eligible accounts
receivable.
For the three months ended March 31, 1998, the Company generated $4.2
million in cash from operating activities, primarily due to an increase in trade
accounts payable and deferred revenue, partially offset by an increase in
accounts receivable. For the three months ended March 31, 1999, the Company
generated $7.1 million in cash from operating activities primarily due to a
decrease in accounts receivable and inventories and increases in trade accounts
payable, partially offset by increases in other assets.
In the three months ended March 31, 1998, investing activities provided
$5.2 million primarily related to the redemption of marketable securities. In
the three months ended March 31, 1999, investing activities consumed $0.7
million, primarily from
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the purchase of marketable securities.
Financing activities for the three months ended March 31, 1998 and March
31, 1999 were immaterial. The Company has no material financing commitments
other than its obligations under operating leases.
The Company believes that cash flows from operations and existing cash
balances will be sufficient to satisfy the Company's cash requirements for at
least the next twelve months.
YEAR 2000 ISSUES
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish twenty-first century dates
from twentieth century dates. As a result, many companies' software and computer
systems may need to be upgraded or replaced in order to comply with such "Year
2000" requirements. The Company has tested its current products for Year 2000
compliance and believes that its current products are Year 2000 compliant.
However, the failure of the Company's current or prior products to operate
properly with regard to the Year 2000 requirements could cause the Company to
incur unanticipated expenses to remedy any problems, could cause a reduction in
sales and could expose the Company to related litigation by its customers, each
of which could have a material adverse effect on the Company's business,
operating results and financial condition.
Although the Company believes that its products and systems are Year 2000
compliant, the Company utilizes third party equipment and software that may not
be Year 2000 compliant. The Company has made inquiries to the majority of its
material equipment and software suppliers as to the Year 2000 compliance of
their products. Each such supplier has indicated that its equipment and/or
software either is, or will be by December 31, 1999, Year 2000 compliant.
Failure of such third-party equipment or software to operate properly with
regard to the year 2000 and thereafter could require the Company to incur
unanticipated expenses to remedy any problems, which could have a material
adverse effect on the Company's business, operating results and financial
condition.
The Company also has material relationships with third party suppliers and
service providers who may utilize equipment or software that may not be Year
2000 compliant, such as financial institutions, shipping companies and payroll
services. The Company is in the process of conducting Year 2000 compliance
inquiries of such third parties. Based upon the results of such inquiries, the
Company intends to take appropriate action. Nonetheless, while the Company would
be affected by any such failure, the Company believes that it could continue to
operate despite any such failure of a material party to be Year 2000 compliant.
Failure of any third-party's equipment or software to operate properly with
regard to the Year 2000 requirements could cause the Company to incur
unanticipated expenses to remedy any problems and could cause a reduction in
sales, each of which could have a material adverse effect on the Company's
business, operating results and financial condition.
The business, operating results and financial condition of the Company's
customers could also be adversely affected to the extent that they utilize
equipment or software that is not Year 2000 compliant. Furthermore, the
purchasing patterns of customers or potential customers may be affected by Year
2000 issues as companies expend significant resources to correct their current
systems for Year 2000 compliance. These expenditures may result in reduced funds
available to purchase products and services such as those offered by the
Company, which could have a material adverse effect on the Company's business,
operating results and financial condition.
The Company has not established a formal contingency plan for any potential
failure of any of the Company's or any third party's equipment or software, but
the Company plans to create such a formal contingency plan.
The Company has, and will continue to make, certain investments in its
equipment, software systems and applications to ensure that the Company is Year
2000 compliant and to evaluate the Year 2000 preparedness of the material third
parties with whom it deals. To date, the Company has primarily used existing
personnel to evaluate the Year 2000 exposure. The financial impact to the
Company for Year 2000 compliance has not been and is not anticipated to be
material to its financial position, results of operations or cash flows in any
given year.
FACTORS AFFECTING FUTURE RESULTS
FLUCTUATIONS IN OPERATING RESULTS; SEASONAL PURCHASING PATTERNS. The
Company's operating results have fluctuated and will likely continue to
fluctuate in the future on a quarterly and annual basis as a result of a number
of factors, many of which are outside the Company's control. These fluctuations
are in part due to the purchasing patterns of the Company's two 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. For example, in May 1996, as the
Company transitioned from its Power Series line of products to its PCI Series
line of products, Xerox informed Splash that it held in its inventory a
substantial quantity of Power Series
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<PAGE>
products accumulated since January 1996. As a result of the Company's product
transition and Xerox's accumulation of inventory of these products, sales of
Power Series products shipped to Xerox between January 1996 and April 1996
were generally recorded as net revenue when Xerox sold these products to end
users. All other product sales are recorded as net revenue upon shipment to
the OEM customer. There can be no assurance that the Company will receive
sufficient inventory information from its OEM customers or that the Company
will be able to prevent a recurrence of a similar problem in the future. In
addition, particularly in light of the current adverse economic circumstances
in Japan, the Company believes that inventory levels in 1998 were higher than
normal at Fuji Xerox which 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 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, manufacturing, component and royalty costs.
The average selling price of the Company's products has decreased in the past
primarily as a result of competitive market pressures, the introduction of
lower priced products and, in certain cases, in response to new product
introductions by the Company's customers. The Company expects this trend to
continue. In the event of significant price competition in the market for
color copier servers or competitive systems, the Company could be at a
significant disadvantage compared to its competitors, many of which have
substantially greater resources or lower product costs than the Company and
therefore could more readily withstand an extended period of downward pricing
pressure. Any decline in average selling prices of a particular product which
is not offset by a reduction in production costs or by sales of other
products with higher gross margins would decrease the Company's overall gross
margin and adversely affect the Company's operating results. The Company
establishes its expenditure levels for product development and other
operating expenses based on projected sales levels and margins, and expenses
are relatively fixed in the short term. Moreover, the Company's overall
expense level is expected to increase as the Company continues to build
corporate infrastructure and to support expansion of operations. Accordingly,
if sales are below expectations in any given period, the adverse impact of
the shortfall on the Company's operating results may be increased by the
Company's inability to adjust spending in the short term to compensate for
the shortfall.
EMERGING COLOR SERVER MARKET. The market for the Company's color server
products has only recently begun to develop. Because the markets for digital
color copiers and connected color servers are relatively new, and because
current and future competitors are likely to continue to introduce competing
solutions, it is difficult to predict the rate at which these markets will grow,
if at all. 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 adversely affected. The
Company intends to continue to spend resources educating potential customers
about color servers. However, there can be no assurance that such expenditures
will enable the Company's products to achieve any additional degree of market
acceptance. Moreover, the Company has historically focused on certain segments
of the market (the prepress and graphic arts segments) and has had only limited
penetration to date into the broader office segment or other market segments.
There can be no assurance that the Company will be able to maintain or increase
its presence in its existing market segments or to successfully penetrate such
additional market segments.
DEPENDENCE ON XEROX AND FUJI XEROX. The Company's products operate
primarily with certain color laser copiers offered by Xerox and Fuji Xerox,
and the Company currently sells its products primarily to Xerox and Fuji
Xerox, which resell the Company's products on an OEM basis to their color
copier end users. As a result, sales of the Company's products have been and
will continue to be heavily influenced by the market acceptance of the Xerox
and Fuji Xerox color copiers with which the Company's products operate and
the sales efforts of Xerox and Fuji Xerox with respect to Splash products.
Xerox and Fuji Xerox face substantial competition from other manufacturers of
color copiers, including Canon Inc. ("Canon"), which the Company believes has
the largest share of the worldwide market for color copiers. If sales of the
color copiers of Xerox and Fuji Xerox with which Splash's products are
compatible decrease, the Company's business, operating results and financial
condition would be and have been in the past, materially and adversely
affected. During calendar 1998, sales of Splash compatible copiers by Fuji
Xerox were 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
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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 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 meets their respective quality standards. 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. For example, in May 1996, as the Company transitioned from
its Power Series line of products to its PCI Series line of products, Xerox
informed Splash that it held in its inventory a substantial quantity of Power
Series products accumulated since January 1996. Xerox indicated to Splash that,
to eliminate this inventory and to permit Xerox to introduce the PCI Series
products, Xerox substantially reduced the selling prices of the Power Series
products beginning in June 1996. Sales by Xerox of the Power Series products at
a discount may have resulted in reduced sales of the Company's PCI Series
products. In addition, the Company believed that inventory levels in 1998 were
higher than normal at Fuji Xerox which materially adversely affected 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.
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.
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
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Company's products. Any increase in royalties payable to Adobe also could have a
material adverse effect on the Company's operating results. In addition, the
Adobe PostScript software is incorporated in the products of certain of the
Company's competitors. The Company's business could be materially and adversely
affected if Adobe were to make available to the Company's competitors future
versions of Adobe PostScript software that include enhancements to the Adobe
PostScript software that were originally developed or implemented by Splash.
DEPENDENCE ON APPLE COMPUTER INC. The majority of the Company's current
products require the use of an Apple Power Macintosh computer as a computer
platform. Apple has experienced significant financial difficulties and losses in
market acceptance, and its products have particularly low levels of market
acceptance in the office color printing market into which the Company is seeking
to expand. In addition, Apple has experienced significant changes in management.
If Apple were to discontinue production of the Power Macintosh models with which
Splash products operate or were unable to provide or otherwise cease to provide
an acceptable level of end user customer support, the Company's business,
operating results and financial condition would be materially and adversely
affected. For example, Apple phased out the manufacture of Power Macintosh
products based on the NuBus architecture in the second half of calendar 1995 in
favor of Power Macintosh products based on the PCI bus architecture. As a
result, the Company had to expend significant resources and faced substantial
risk of technological failure or lack of market acceptance in developing and
introducing its PCI-based products. In addition, the Company has experienced
sourcing difficulties related to Apple's delay in the release of new models. 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 a
different computer platform would require a substantial expenditure of resources
and time, and there can be no assurance that any such products can be
successfully developed or introduced in a timely fashion and at competitive cost
or otherwise achieve widespread market acceptance.
DEPENDENCE ON COMPONENT AVAILABILITY AND COST. The Company purchases
components comprising a significant portion of the total cost of its color
servers. The balance of the inventory required to manufacture the Company's
products is purchased by Logistix 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.
Certain components necessary for the manufacture of the Company's
products are obtained from a sole supplier or a limited group of suppliers.
These include Apple Power Macintosh computers, certain ASICs and other
semiconductor components. The Company does not maintain any long-term
agreements with any of its suppliers of components. Because the purchase of
certain key components involves long lead times, in the event of
unanticipated increases in demand for the Company's products, the Company
could be unable to manufacture certain products in a quantity sufficient to
meet end user demand. The Company has experienced difficulties related to
Apple's delay in the release of new systems 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 volume capabilities. In
order to attempt to mitigate the risk of such shortages in the future, the
Company has increased its inventory of components for which the Company is
dependent upon sole or limited source suppliers. As a result, the Company is
subject to an increasing risk of inventory obsolescence, which could
materially and adversely affect its operating results and financial condition.
The market prices and availability of certain components, particularly
memory, other semiconductor components, 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 SINGLE PRODUCT LINE. Substantially all of Splash's current
shipments consist, and are expected to continue to consist, of the Company's
color server products. Because of this product concentration, a significant
decline in demand for or pricing of these products would have a material adverse
effect on the Company's business, operating results and financial condition,
whether as a result of a decline in sales of complementary Xerox and Fuji Xerox
copiers; a further decline in the market for Apple Power Macintosh computers;
increased sales by Xerox or Fuji Xerox of color servers offered by competitors
of the Company or developed internally by Xerox or Fuji Xerox; new product
introductions by competitors; price competition; or technological change. Any
decline in the market for this product line or any failure to timely produce new
and enhanced
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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 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.
There can be no assurance that any of the Company's future products will
achieve widespread market acceptance. In addition, the Company has in the past
experienced delays in the development of new products and the enhancement of
existing products, and such delays may occur in the future. If the Company is
unable, due to resource constraints or technological or other reasons, to
develop and introduce new products or versions in a timely manner, or if such
new products or releases do not achieve timely and widespread market acceptance,
it would have a material adverse effect on the Company's business, operating
results and financial condition.
COMPETITION. The markets for the Company's products are characterized by
intense competition and rapid change. The Company competes directly with other
independent manufacturers of color servers and with copier manufacturers, and
indirectly with printer manufacturers and others. The Company has a number of
direct competitors for color server products, the most significant of which is
EFI. Splash also faces competition from copier manufacturers that offer
internally developed color server products, such as a non-PostScript color
server offered by Fuji Xerox, or that incorporate color server features into
their copiers. In addition, the Company faces competition from desktop color
laser printers that offer increasing speed and color server capability. As
component prices decrease and the processing power and other functionality of
copiers, printers and computers increases, it becomes more likely that copier,
printer and computer manufacturers will continue to add color server
functionality to their systems, which could reduce the market for the Company's
existing line of products.
The Company also competes indirectly with manufacturers of electronic color
prepress systems, which offer similar functionality for the short-run and
commercial printing market as is provided by the Company's products. The Company
also competes indirectly with providers of color separation, color editing and
page layout software. While such software typically is complementary to the
Company's systems, such software can also be competitive with the Company's
systems and may become increasingly competitive to the extent that the providers
of such software extend the functionality of their products in future releases.
Many of the Company's current and potential direct and indirect competitors
have longer operating histories, are substantially larger, and have
substantially greater financial, technical, manufacturing, marketing and other
resources than Splash. A number of these current and potential competitors also
have substantially greater name recognition and a significantly larger installed
base of products than the Company, which could provide leverage to such
companies in their competition with Splash. The Company expects competition to
increase to the extent the color server market grows, and such increased
competition may result in price reductions, reduced gross margins and loss of
market share, any of which could materially adversely affect the Company's
business, operating results and financial condition. As a result of their
greater resources, many of such competitors are in a better position than Splash
to withstand significant price competition or downturns in the economy. There
can be no assurance that Splash will be able to continue to compete effectively,
and any failure to do so would have a material adverse effect upon the Company's
business, operating results and financial condition.
RISKS ASSOCIATED WITH 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 made two acquisitions: Quintar
Company ("Quintar") and Colorage Inc ("Colorage") in May and October 1997,
respectively. In connection with the Quintar and ColorAge acquisitions,
Splash recorded an expense related to purchased in-process research and
development of $11.0
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million and $26.9 million, 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 THIRD PARTY MANUFACTURERS. The Company generally outsources
the manufacture of its products to third party subcontract manufacturers
including SCI, MSL and Logistix. MSL 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. MSL
and 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 MSL and SCI-assembled boards, to Logistix and SCI for
final assembly. Logistix and SCI directly purchase a small 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, Logistix, MSL or other third party manufacturing facilities
utilized by the Company become unavailable to the Company, or if the
manufacturing operations at these facilities are slowed, interrupted or
terminated, the Company's business, operating results and financial condition
could be adversely affected. Although the Company believes that there are a
variety of companies available with the capability to provide the Company with
such services, there can be no assurance that the Company would be able to enter
into alternative third party manufacturing arrangements on terms satisfactory to
the Company, in a timely fashion, or at all.
DEPENDENCE ON PROPRIETARY TECHNOLOGY; RELIANCE ON THIRD PARTY LICENSES. The
Company relies in part on trademark, copyright and trade secret law to protect
its intellectual property in the United States and abroad. The Company seeks to
protect its software, documentation and other written materials under trade
secret and copyright laws, which afford only limited protection, and there can
be no assurances that the steps taken by the Company will prevent
misappropriation of its technology. The Splash software included as a part of
the Company's products is sold pursuant to "shrink wrap" licenses that are not
signed by the end user and, therefore, may be unenforceable under the laws of
certain jurisdictions. The Company owns several patents. There can be no
assurance that any patent, trademark or copyright owned by the Company, or any
patent, trademark or copyright obtained by the Company in the future, will not
be invalidated, circumvented or challenged, that the rights granted thereunder
will provide competitive advantages to the Company or that any of the Company's
pending or future patent applications will be issued with the scope of the
claims sought by the Company, if at all. In addition, the laws of some foreign
countries do not protect the Company's proprietary rights as fully as do the
laws of the United States. Thus, effective intellectual property protection may
be unavailable or limited in certain foreign countries. There can be no
assurance 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
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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.
NEED FOR ADDITIONAL CAPITAL. The Company believes that in order to remain
competitive it may require additional financial resources over the next several
years for working capital, research and development, expansion of sales and
marketing resources, capital expenditures and potential acquisitions. Although
the Company believes that it will be able to fund planned expenditures for at
least the next twelve months from a combination of the proceeds of its public
offerings, cash flow from operations, existing cash balances and the Company's
bank line of credit, there can be no assurance that the Company will be able to
obtain any additional financing which may be required in the future on
acceptable terms or at all.
RISK OF PRODUCT DEFECTS. The Company's products consist of hardware and
software developed by Splash and others. Products such as those of the Company
may contain undetected errors when first introduced or when new versions are
released, and the Company has in the past discovered software and hardware
errors in certain of its new products after their introduction. 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. Effective April 30, 1999 the Company's Chief Financial Officer
left the Company. The Company has begun a search for a replacement.
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
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dates from twentieth century dates. As a result, many companies' software and
computer systems may need to be upgraded or replaced in order to comply with
such "Year 2000" requirements. Although the Company believes that its
products and systems are Year 2000 compliant, the Company utilizes third
party equipment and software that may not be Year 2000 compliant. Failure of
such third-party equipment or software to operate properly with regard to the
year 2000 and thereafter could require the Company to incur unanticipated
expenses to remedy any problems, which could have a material adverse effect
on the Company's business, operating results and financial condition.
Furthermore, the purchasing patterns of customers or potential customers may
be affected by Year 2000 issues as companies expend significant resources to
correct 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.
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PART II
ITEM 1. LEGAL PROCEEDINGS
On January 13, 1999 and 28th, 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--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
NONE
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS
27.1 FINANCIAL DATA SCHEDULE
REPORTS ON FOR 8-K
NONE
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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 May 17 1999.
SPLASH TECHNOLOGY HOLDINGS, INC
By: /s/ Kevin Macgillivray
-------------------------------------
Kevin Macgillivray
President and Chief Executive Officer
18
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