<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934. For the quarterly period
ended JUNE 30, 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 July 31, 2000 was 14,321,111 shares.
<PAGE>
SPLASH TECHNOLOGY HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
December 31, June 30,
------------ ------------
1999 2000
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $36,268 $ 51,000
Marketable securities 25,629 24,410
Accounts receivable, net of allowance for doubtful
accounts of $280 and $177 as of December 31, 1999 and
June 30, 2000, respectively 14,920 6,382
Inventories 3,134 4,910
Prepaid expenses and other current assets 930 1,246
Deferred income taxes 2,024 2,024
------- --------
Total current assets 82,905 89,972
Property and equipment, net 1,847 2,043
Deferred income taxes 10,651 10,651
Other assets 3,491 2,482
------- --------
Total assets $98,894 $105,148
======= ========
LIABILITIES
Current liabilities:
Trade accounts payable $ 7,608 $ 6,143
Accrued and other liabilities 10,854 9,476
Deferred revenue -- 3,217
------- --------
Total current liabilities 18,462 18,836
Other long term liabilities 374 323
------- --------
Total liabilities 18,836 19,159
------- --------
STOCKHOLDERS' EQUITY
Common stock, par value $.001 per share:
Authorized: 50,000,000 shares
Issued and outstanding: 14,085,342 shares and 14,321,111
shares as of December 31, 1999 and June 30, 2000 14 14
Additional paid-in capital 89,469 90,980
Deferred stock based compensation (1,914) (1,730)
Accumulated deficit (7,511) (3,275)
------- --------
Total stockholders' equity 80,058 85,989
------- --------
Total liabilities and stockholders' equity $98,894 $105,148
======= ========
</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 Six Months Ended
June 30, June 30,
--------------------- ---------------------
1999 2000 1999 2000
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net revenue $16,945 $22,371 $33,247 $46,225
Cost of net revenue 7,542 12,071 14,857 24,969
------- ------- ------- -------
Gross profit 9,403 10,300 18,390 21,256
------- ------- ------- -------
Operating expenses:
Research and development 3,748 4,071 7,037 7,963
Sales, general and administrative 3,818 4,803 7,927 10,082
------- ------- ------- -------
Total operating expenses 7,566 8,874 14,964 18,045
------- ------- ------- -------
Income from operations 1,837 1,426 3,426 3,211
------- ------- ------- -------
Interest income, net 799 1,112 1,486 2,084
------- ------- ------- -------
Income before income taxes 2,636 2,538 4,912 5,295
Provision for income taxes 557 507 1,058 1,059
------- ------- ------- -------
Net income $ 2,079 $ 2,031 $ 3,854 $ 4,236
======= ======= ======= =======
Basic net income per share $ 0.15 $ 0.14 $ 0.28 $ 0.30
======= ======= ======= =======
Diluted net income per share $ 0.15 $ 0.14 $ 0.27 $ 0.28
======= ======= ======= =======
Shares used in per share calculations-basic 14,014 14,261 13,990 14,192
======= ======= ======= =======
Shares used in per share calculations-diluted 14,131 14,755 14,105 14,872
======= ======= ======= =======
</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>
Six Months Ended
June 30,
----------------------------
1999 2000
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,854 $ 4,236
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 611 633
Change in assets and liabilities:
Accounts receivable 1,599 8,538
Inventories 1,500 (1,776)
Prepaid expenses and other current assets 590 (316)
Other assets (1,369) 1,226
Trade accounts payable 4,197 (1,465)
Accrued and other liabilities (1,196) (1,429)
Deferred revenue -- 3,217
------- -------
Net cash provided by operating activities 9,786 12,864
------- -------
Cash flows from investing activities:
Redemption of marketable securities 1,850 1,219
Purchase of property and equipment (593) (691)
------- -------
Net cash provided by investing activities 1,257 528
------- -------
Cash flows from financing activities:
Exercise of stock under stock plans 359 1,340
------- -------
Net cash provided by financing activities 359 1,340
------- -------
Net increase in cash 11,402 14,732
Cash and cash equivalents, beginning of period $51,013 $36,268
Cash and cash equivalents, end of period $62,415 $51,000
</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, through its wholly owned
subsidiaries 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 June 30, 2000, and the results of
operations for the three and six months ended June 30, 2000 and cash flows
for the six months ended June 30, 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, June 30,
1999 2000
-------------- -------------
<S> <C> <C>
INVENTORIES:
Raw materials $ 2,612 $3,194
Finished goods 522 1,716
------- ------
$ 3,134 $4,910
======= ======
ACCRUED AND OTHER LIABILITIES:
Royalties payable $ 1,464 $1,413
Accrued product-related obligations 1,784 1,717
Accrued compensation and related expenses 1,613 1,758
Income taxes payable 3,074 4,070
Other liabilities 2,919 518
------- ------
$10,854 $9,476
======= ======
</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 Six Months
Ended June 30, Ended June 30,
1999 2000 1999 2000
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Numerator - Basic and Diluted EPS
Net income available to common Stockholders $ 2,079 $ 2,031 $ 3,854 $ 4,236
======= ======= ======= =======
Denominator - Basic EPS
Weighted average shares outstanding 14,014 14,261 13,990 14,192
------- ------- ------- -------
Basic net income per share $ 0.15 $ 0.14 $ 0.28 $ 0.30
======= ======= ======= =======
Denominator - Diluted EPS
Denominator - Basic EPS 14,014 14,261 13,990 14,192
Effect of dilutive common stock options 117 494 115 680
------- ------- ------- -------
Dilutive shares 14,131 14,755 14,105 14,872
------- ------- ------- -------
Diluted net income per share $ 0.15 $ 0.14 $ 0.27 $ 0.28
======= ======= ======= =======
</TABLE>
Options to purchase 1.8 million and 1.5 million shares of common
stock were outstanding at June 30, 1999, and June 30, 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 June 30, 1999 and
2000, respectively.
4. New accounting pronouncements
In June 1998, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities," that
requires companies to record derivative financial instruments on their
balance sheets as assets or liabilities, measured at fair value. Gains
or losses resulting from changes in the values of those derivatives
would be accounted for depending on the use of the derivative
instrument and whether it qualifies for hedge accounting. The key
criterion for hedge accounting is that the hedging relationship must be
highly effective in achieving offsetting changes in fair value or cash
flows. In June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities--Deferral of the
Effective Date of FASB Statement No. 133," that amends SFAS No. 133 to
be effective for all fiscal quarters of fiscal years beginning after
June 15, 2000. In June 2000, the Financial Accounting Standards Board
issued SFAS No. 138, "Accounting for Derivative Instruments and Hedging
Activities--An Amendment of FASB No. 133." SFAS 138 amends the
accounting and reporting standards for certain derivatives and hedging
activities such as net settlement contracts, foreign currency
translations and intercompany derivatives. To date, the Company has not
engaged in derivatives or hedging activities.
In December 1999, the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin No. 101 ("SAB 101") "Revenue
Recognition in Financial Statements," which provides guidance on the
recognition, presentation and disclosure of revenue in financial
statements filed with the SEC. SAB 101 outlines the basic criteria that
must be met to recognize revenue and provides guidance for disclosures
related to revenue recognition policies. The Company must adopt SAB 101
in the first quarter of fiscal 2001. Management believes that the
impact of SAB 101 will not have a material effect on the financial
position or results of operations of the Company. However, the
interpretation of SAB 101 is still under discusison by the Securities
and Exchange Commission and may be revised. Such revisions could have
a material effect on the financial position or results of operations of
the Company.
In March 2000, the Financial Accounting Standards Board ("FASB")
issued FASB Interpretation No. 44 ("FIN 44") "Accounting for Certain
Transactions involving Stock Compensation," an interpretation of APB
Opinion No. 25. FIN 44 clarifies the application of Opinion 25 for (a)
the definition of employee for purposes of applying Opinion 25, (b) the
criteria for determining whether a plan qualifies as a noncompensatory
plan, (c) the accounting consequence of various modifications to the
terms of a previously fixed stock option or award, and (d) the
accounting for an exchange of stock compensation awards in a business
combination. FIN 44 is effective July 1, 2000, but certain conclusions
cover specific events that occur after either December 15, 1998, or
January 12, 2000. Management does not expect that the adoption of the
remaining provisions will have a material effect on the consolidated
financial statements.
5. 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 June 30, Six Months Ended June 30,
--------------------------- -------------------------
1999 2000 1999 2000
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Net revenue 100% 100% 100% 100%
Cost of net revenue 45 54 45 54
-- -- -- --
Gross profit 55 46 55 46
-- -- -- --
Operating expenses:
Research and development 22 18 21 17
Sales, general and administrative 23 22 24 22
-- -- -- --
Total operating expenses 45 40 45 39
-- -- -- --
Income from operations 10 6 10 7
Interest income 5 5 5 4
--- --- --- ---
Income before income taxes 15 11 15 11
Provision for income taxes 3 2 3 2
--- --- --- ---
Net income 12% 9% 12% 9%
== === == ===
</TABLE>
NET REVENUE. The Company's net revenue increased 32% to $22.4
million in the three months ended June 30, 2000 from $16.9 million in
the three months ended June 30, 1999. Net revenue increased 39% to
$46.2 million in the six months ended June 30, 2000 from $33.2 million
in the six months ended June 30, 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
7
<PAGE>
materially adversely impacts net revenue. During the first half of
2000, 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 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 to lost sales. Such pressure has in the past and could again
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 June 30, 1999 and 2000, respectively. Gross margins were 55% and 46%
for the six months ended June 30, 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 9% to $4.1 million in the three months ended June 30, 2000 from
$3.7 million in the three months ended June 30, 1999. Research and
development expenses increased 13% to 8.0 million in the six months ended
June 30, 2000 from 7.0 million in the six months ended June 30, 1999. As a
percentage of net revenue, research and development decreased to 18% in
the three months ended June 30, 2000 from 22% in the three months ended
June 30, 1999. As a percentage of net revenue, research and development
decreased to 17% in the six months ended June 30, 2000 from 21% in the six
months ended June 30, 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. For example, 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 may increase in future
periods.
SALES, GENERAL AND ADMINISTRATIVE. Sales, general and administrative
expenses increased 26% to $4.8 million in the three months ended June 30,
2000 from $3.8 million in the three months ended June 30, 1999. As a
percentage of net revenue, sales, general and administrative expenses
decreased to 22% in the three months ended June 30, 2000 from 23% in the
three months ended June 30, 1999. As a percentage of net revenue, sales,
general and administrative expenses decreased to 22% in the six months
ended June 30, 2000 from 24% in the six months ended June 30, 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
its customers 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 six months ended June
30, 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 $75.4 million of cash, cash equivalents and
marketable securities and had no borrowings outstanding under its $10
million bank line of credit as of June 30, 2000. 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 six months ended June 30, 2000, the Company generated $12.9
million in cash from operating activities, primarily due to a decrease in
accounts receivable and other assets and an increase in deferred revenue,
partially offset by an increase in inventories and a decrease in trade
accounts payable, and other accrued liabilities. For the six months ended
June 30, 1999, the Company generated $9.8 million in cash from operating
activities primarily from net income, a decrease in accounts receivable
and inventories, and an increase in trade accounts payable, partially
offset by an increase in other assets and a decrease in other liabilities.
In the six months ended June 30, 1999, investing activities
provided $1.3 million primarily related to the redemption of marketable
securities. In the six months ended June 30, 2000, investing activities
provided $0.5 million, primarily from the redemption of marketable
securities.
Financing activities for the six months ended June 30, 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. The
Company's customers may also vary their purchasing and inventory
patterns in conjunction with their or their competitor's introduction
of new products, their actual or potential delays in new product
introductions, or their cancellations of planned new products or
existing products. 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 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, 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
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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 Xerox DC12 color laser
copier has low levels of market acceptance, 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 ASPs 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 influenced heavily 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, as they 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 would be
materially and adversely affected. In addition, Fuji Xerox color copiers
are produced in a single location in Japan and any disruption of
production at 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, as it has in the
past, 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, Electronics For Imaging ("EFI"). The Company is also 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
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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
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. 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 customer, in an effort to reduce its inventory levels, orders
product with increasingly shorter lead times. If the Company cannot
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
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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. 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 substantially 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 increasingly substantial 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 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 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, if such new products or releases do not achieve timely and
widespread market acceptance, or if the Company's customers reduce, delay
or cease the introduction of new models of color copies which use the
Company's products, 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
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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. 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 Systems, Logistix, Arrow Electronics, and
Flash Electronics. Flash Electronics 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.
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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 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
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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 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
Executive Officers. The loss of service of any of these executive
officers could have a material adverse effect on the Company's business.
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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
At the Company's Annual Meeting of Shareholders held on May
24, 2000, Mark Hill and Peter Y. Chung were elected to
serve as Class I directors of the Company with 12,242,902
and 12,242,502 votes for and 22,774 and 23,174 votes
withheld, respectively. Mssrs. Hill and Chung will
serve for a three-year term expiring upon the Annual
Meeting of Stockholders in 2003.
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 August 14, 2000.
SPLASH TECHNOLOGY HOLDINGS, INC
By: /s/ Kevin MACGILLIVRAY
-------------------------------------
Kevin Macgillivray
President and Chief Executive Officer
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