.<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, 2000
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 April 26, 2000 was 14,188,667 shares.
<PAGE>
SPLASH TECHNOLOGY HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
December 31, March 31,
------------------ -----------------
1999 2000
------------------ -----------------
ASSETS (UNAUDITED)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 36,268 $ 42,964
Marketable securities 25,629 24,259
Accounts receivable, net of allowance for doubtful
accounts of $280 as of December 31, 1999 and
March 31, 2000 14,920 11,242
Inventories 3,134 7,263
Prepaid expenses and other current assets 930 725
Deferred income taxes 2,024 2,024
-------- ---------
Total current assets 82,905 88,477
Property and equipment, net 1,847 2,021
Deferred income taxes 10,651 10,651
Other assets 3,491 3,390
-------- ---------
Total assets $ 98,894 $ 104,539
======== =========
LIABILITIES
Current liabilities:
Trade accounts payable $ 7,608 $ 7,883
Accrued and other liabilities 10,854 13,536
-------- ---------
Total current liabilities 18,462 21,419
Other long term liabilities 374 297
-------- ---------
Total liabilities 18,836 21,716
-------- ---------
STOCKHOLDERS' EQUITY
Common stock, par value $.001 per share: 14 14
Authorized: 50,000,000 shares
Issued and outstanding: 14,085,342 shares and 14,142,617
shares as of December 31, 1999 and March 31, 2000
Additional paid-in capital 89,469 89,955
Deferred stock based compensation (1,914) (1,841)
Accumulated deficit (7,511) (5,305)
-------- ---------
Total stockholders' equity 80,058 82,823
-------- ---------
Total liabilities and stockholders' equity $ 98,894 $ 104,539
======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
SPLASH TECHNOLOGY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------------------
1999 2000
----------------- -----------------
<S> <C> <C>
Net revenue $16,302 $23,854
Cost of net revenue 7,315 12,898
------- -------
Gross profit 8,987 10,956
------- -------
Operating expenses:
Research and development 3,289 3,892
Sales, general and administrative 4,109 5,280
------- -------
Total operating expenses 7,398 9,172
------- -------
Income from operations 1,589 1,784
Interest income, net 687 972
------- -------
Income before income taxes 2,276 2,756
Provision for income taxes 501 551
------- -------
Net income $ 1,775 $ 2,205
======= =======
Basic net income per share $ 0.13 $ 0.16
======= =======
Diluted net income per share $ 0.13 $ 0.15
======= =======
Shares used in per share calculations-basic 13,966 14,124
======= =======
Shares used in per share calculations-diluted 14,087 14,875
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE>
SPLASH TECHNOLOGY HOLDINGS, INC.
CONSOLIDATED STATEMENTS CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------------
1999 2000
---------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,775 $ 2,205
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 298 304
Change in assets and liabilities:
Accounts receivable 3,376 3,678
Inventories 1,165 (4,129)
Prepaid expenses and other current assets 498 205
Other assets (1,345) 26
Trade accounts payable 1,821 275
Accrued and other liabilities (511) 2,605
------- -------
Net cash provided by operating activities 7,077 5,169
------- -------
Cash flows from investing activities:
Redemption (purchase) of marketable securities (606) 1,370
Purchase of property and equipment (112) (403)
------- -------
Net cash provided by (used in) investing activities (718) 967
------- -------
Cash flows from financing activities:
Exercise (repurchase) of stock under stock plans (10) 560
------- -------
Net cash provided by (used in) financing activities (10) 560
------- -------
Net increase in cash 6,349 6,696
Cash and cash equivalents, beginning of period 51,013 36,268
------- -------
Cash and cash equivalents, end of period $57,362 $42,964
======= =======
</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 accounting principles
generally accepted in the United States 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, 1999 balance sheet was derived from audited financial statements but
does not include all disclosures required by accounting principles
generally accepted in the United States. 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, 2000, and the results of
operations and cash flows for the three months ended March 31, 2000, 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, 1999.
2. BALANCE SHEET DETAIL (IN THOUSANDS):
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
---------------- ----------------
<S> <C> <C>
INVENTORIES:
Raw materials $ 2,612 $ 4,152
Finished goods 522 3,111
------- -------
$ 3,134 $ 7,263
======= =======
ACCRUED AND OTHER LIABILITIES:
Royalties payable $ 1,464 $ 1,550
Accrued product-related obligations 1,784 828
Accrued compensation and related expenses 1,613 1,979
Deferred revenue - 1,961
Income taxes payable 3,074 4,304
Other liabilities 2,919 2,914
------- -------
$10,854 $13,536
======= =======
</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>
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,
1999 2000
-------------- -----------
<S> <C> <C>
Numerator - Basic and Diluted EPS
Net income available to common
Stockholders $ 1,775 $ 2,205
======= =======
Denominator - Basic EPS
Weighted average shares outstanding 13,966 14,124
------- -------
Basic net income per share $ .13 $ .16
======= =======
Denominator - Diluted EPS
Denominator - Basic EPS 13,966 14,124
Effect of dilutive common stock options 121 751
------- -------
Dilutive shares 14,087 14,875
------- -------
Diluted net income per share $ .13 $ .15
======= =======
</TABLE>
Options to purchase 1.8 million and 2.2 million shares of common stock were
outstanding at March 31, 1999, and March 31, 2000, 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, 1999 and 2000,
respectively.
4. CONTINGENCIES
In January 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 to 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 unspecified amounts.
On December 20, 1999 Electronics for Imaging ("EFI") filed a complaint in
the United States District Court for the Northern District of California
against the Company. The complaint alleges that the defendant's products
infringe upon three EFI patents. The suit is aimed at enforcing patents in
the areas of color management, color calibrations and continuous printing
technologies.
The Company believes that it has meritorious defenses and it 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 profitability 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 varying economic conditions in different regions
in which the Company sells its product, and customer purchasing patterns. Due
to these and other factors (including a relatively high base from which to
grow), the Company's historical profitability 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,
---------------------------------
1999 2000
--------------- --------------
<S> <C> <C>
Net revenue 100% 100%
Cost of net revenue 45 54
---- ----
Gross profit 55 46
---- ----
Operating expenses:
Research and development 20 16
Sales, general and administrative 25 22
---- ----
Total operating expenses 45 38
---- ----
Income from operations 10 8
Interest income 4 4
---- ----
Income before income taxes 14 12
Provision for income taxes 3 3
---- ----
Net income 11% 9%
==== ====
</TABLE>
NET REVENUE. The Company's net revenue increased 47% to $23.9 million in
the three months ended March 31, 2000 from $16.3 million in the three months
ended March 31, 1999. This increase was primarily attributable to an
increasing demand for Xerox's DC12 print engine to which the Company's
products connect. This resulted in increased demand for the Company's
products, including its G Series product, and the Company's first controller
device incorporated into the structure of the copier, ("integrated
controller") product. Any decrease in market acceptance for the Xerox DC12
print engine, or any other products to which the Company's products connect,
would adversely affect the Company. 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 Company currently sells a substantial portion of its
products to two customers, Xerox and to a significantly 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 or, to a significantly lesser extent, Fuji Xerox will
not change their mix of product or purchasing patterns in a manner which
materially adversely impacts net revenue. During the March 31, 2000 quarter,
the company introduced its T200 line of products. The T200 series products
are currently compatible with certain print engines manufactured by Canon
Corporation ("Canon"). There can be no assurance that the company will be
successful in selling these Canon compatible products, or any other non-Xerox
compatible product it develops in the future.
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
7
<PAGE>
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 that
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 55% and 46% in the three months ended
March 31, 1999 and 2000, respectively. The significant decline in gross
margins was primarily due to a sales shift toward certain lower margin,
integrated controllers partially offset by economies of scale derived from
higher sales volumes, and cost reductions achieved through product designs.
In 1999, the Company introduced its first integrated controller product. This
product has substantially lower margins than the Company's other products.
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 ("ASP") of the Company's products
has decreased in the past primarily as a result of competitive market
pressures, the introduction of lower priced products and, in certain cases,
in response to new product introductions by the Company's customers. The
Company expects this trend to continue in the future. 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
18% to $3.9 million in the three months ended March 31, 2000 from $3.3
million in the three months ended March 31, 1999. As a percentage of net
revenue, research and development decreased to 16% in the three months ended
March 31, 2000 from 20% in the three months ended March 31, 1999. The
increase in research and development spending in absolute dollars is
attributable to costs associated with expanding the Company's product line.
Historically, the Company had invested in research and development to develop
products which were primarily compatible with print engines distributed and
manufactured by Xerox and Fuji Xerox. The Company intends to increase its
research and development efforts to develop products for print engines from
suppliers other than Xerox and Fuji Xerox. The T200 line of products, which
the company recently introduced, is compatible with print engines
manufactured by Canon. 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 29% to $5.3 million in the three months ended March 31,
2000 from $4.1 million in the three months ended March 31, 1999. As a
percentage of net revenue, sales, general and administrative expenses
decreased to 22% in the three months ended March 31, 2000 from 25% in the
three months ended March 31, 1999. The increase in these expenditures in
absolute dollars was 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 Company incurred
significant expenses related to the introduction of its new T200 line of
product, as well as costs associated with developing its new distribution
channel for the T200 line. During the March 31, 2000 quarter, the Company
announced IKON Office Products as a distribution partner for the T200 product
line. 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 22% and 20% for the three months ended March
31, 1999 and 2000, respectively. The effective tax rate differs from the
statutory rate primarily due to the benefits derived from the Splash Foreign
Sales Corporation and research and development credits.
8
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash balances and marketable securities are sufficient to
satisfy its current liquidity requirements.
The Company had $61.9 million and $67.2 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, 1999 and 2000,
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, 1999, the Company generated $7.1
million in cash from operating activities, primarily due to a decrease in
accounts receivable and inventories and an increase in accounts payable,
partially offset by an increase in other assets. For the three months ended
March 31, 2000, the Company generated $5.2 million in cash from operating
activities primarily from net income, a decrease in accounts receivable, and
an increase in deferred revenue, partially offset by an increase in
inventories.
In the three months ended March 31, 1999, investing activities consumed
$0.7 million primarily related to the purchase of marketable securities. In
the three months ended March 31, 2000, investing activities provided $1.0
million, primarily from the redemption of marketable securities.
Financing activities for the three months ended March 31, 1999 and 2000
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.
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 results 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, to a significantly lesser extent, Fuji Xerox. In
the past, inventory balancing activities by the Company's customers have
resulted and may continue to 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 suffered a substantial decrease in sales to its customer, Fuji
Xerox. This materially adversely affected the Company's business and
operating results for 1999. 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 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 1999 were materially
adversely affected by changes in market demand, competitive market
conditions, sales promotion activities by the Company, its OEM customers or
its competitor, 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, expansion of and 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 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 and may continue to do so, 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 second half
of 1999, the Company delivered its first integrated product. The integrated
products and its Intel-based M series products have gross margins that are
significantly lower than those of the PCI and DC series. In September 1999,
the Company also launched its G610 and G710 server products. These products
replaced the Company's PCI and DC Series products, respectively. The average
selling price ("ASPs") of these newly introduced products are lower than
those of the PCI and DC Series products they replaced. The G610 is only
compatible with Xerox's newly introduced DC12 color laser copier. If the
newly introduced Xerox DC12 color laser copier has low levels of market
acceptance,
9
<PAGE>
the Company's operating results would be adversely affected. The Company
expects a lower gross margin on its G Series products. 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 1999, 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 1999, 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.
COLOR SERVER MARKET. The color server market has, in the past, grown
more slowly than anticipated. The markets for digital color copiers and
connected color servers are intense. Because current and future competitors
are likely to continue to introduce competing solutions, it is difficult to
predict the rate at which these markets will grow, if at all. If the 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, to a
substantially lesser extent, 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 of this
dependence, 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, which the Company believes has a significant 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 were significantly lower than in prior periods.
In particular, sales to Fuji Xerox of products for resale in Japan were
negligible in 1999. 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
this 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. During
1999, Fuji Xerox changed the means by which it sold products in Japan,
requiring that its OEM suppliers have a sales support and marketing
organization in Japan. The Company had a limited sales support and marketing
presence in Japan and only recently began the process of adding personnel in
Japan.
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
10
<PAGE>
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. 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
could have 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 March 2003, 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 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. 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 motherboards and processors, from Intel and Motorola, 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
11
<PAGE>
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. For instance, during the
second half of 1999, the memory market was extremely volatile. 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, including several instances in 1999, experienced shortages
in deliveries of certain ASICs sourced exclusively from Toshiba Corporation,
which 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 Apple Macintosh computers that serve as the
platforms for its DC, PCI, and G Series color servers from Apple. The Company
is currently operating on a purchase order basis with Apple.
The market prices and availability of certain components, particularly
memory, other semiconductor components, Apple 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. During late 1999, the Company experienced a significant increase
in the price of memory. This resulted in, and may continue to result in, a
reduction in gross margins.
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 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 had an adverse effect on the market acceptance of the Company's
DC Series products and its successor, the G710 product. 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 as well as its new generation of Apple
based product. The Company recently introduced its T200 product line which is
compatible with Canon print engines. There can be no assurance that these
products or, for that matter, 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
12
<PAGE>
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. In
addition, the Company competes indirectly with providers of color separation,
color editing and page layout software. While such software typically is
complementary to the Company's systems, this 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 completed two acquisitions:
Quintar Company and 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 THIRD PARTY MANUFACTURERS. The Company generally
outsources the manufacture of its products to third party subcontract
manufacturers including SCI, Logistix, Arrow, and Flash Electronics. 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 Macintosh computers, Intel designed
components, Motorola motherboards, 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
13
<PAGE>
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 SCI, 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 is 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 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. In December 1999, EFI
filed suit against Splash for patent infringement. Any need to redesign the
products or enter into any royalty or licensing agreement as the result of
any alleged infringement 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.
14
<PAGE>
INTERNATIONAL SALES. All sales to Fuji Xerox and some Xerox affiliated
entities are international sales. 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 and does not maintain key
person life insurance policies on any of its employees. The Company is highly
dependent on the services of its Chief Executive Officer, Kevin Macgillivray.
The loss of his services could have a material adverse effect on the
Company's business.
15
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
In January 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 - 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.
On December 20, 1999 Electronics For Imaging ("EFI") filed a
complaint in the United States District Court for the Northern
District of California against the Company. The complaint alleges
that the defendant's products infringe upon three EFI patents.
The suit is aimed at enforcing patents in the areas of color
management, color calibrations, and continuous printing
technologies.
On January 10, 2000 the Company filed a counter complaint in the
United States District Court for the Northern California District
of California against EFI. The complaint alleges EFI infringed
upon a Company patent. The EFI litigation is in the initial
stages of discovery. No trial date has been set.
The Company believes it has meritorious defenses in all 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 FORM 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 May 15, 2000.
SPLASH TECHNOLOGY HOLDINGS, INC.
By: /s/ Kevin Macgillivray
--------------------------------
Kevin Macgillivray
President and Chief Executive Officer
17
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