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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO. 0-30719
HANDSPRING, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 77-0490705
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
189 BERNARDO AVENUE
MOUNTAIN VIEW, CA 94043
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(650) 230-5000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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 [ ]
As of January 26, 2001 there were 128,110,891 shares of the Registrant's
common stock outstanding.
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HANDSPRING, INC.
FORM 10-Q
TABLE OF CONTENTS
PAGE
----
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets....................... 1
Condensed Consolidated Statements of Operations............. 2
Condensed Consolidated Statements of Cash Flows............. 3
Notes to Condensed Consolidated Financial Statements........ 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 7
Item 3. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 21
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings........................................... 21
Item 2. Changes in Securities and Use of Proceeds................... 21
Item 3. Defaults Upon Senior Securities............................. 21
Item 4. Submission of Matters to a Vote of Security Holders......... 21
Item 5. Other Information........................................... 21
Item 6. Exhibits and Reports on Form 8-K............................ 21
SIGNATURES........................................................... 22
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HANDSPRING, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
DECEMBER 30, JULY 1,
2000 2000
------------ --------
(UNAUDITED)
Current assets:
Cash and cash equivalents................................. $ 128,203 $196,548
Short-term investments.................................... 78,846 --
Accounts receivable, net.................................. 39,233 20,484
Prepaid expenses and other current assets................. 7,737 1,816
--------- --------
Total current assets.............................. 254,019 218,848
Property and equipment, net................................. 12,088 8,280
Investments................................................. 19,085 --
Other assets................................................ 3,419 3,344
--------- --------
Total assets...................................... $ 288,611 $230,472
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 47,095 $ 20,152
Accrued liabilities....................................... 34,022 16,034
--------- --------
Total current liabilities......................... 81,117 36,186
--------- --------
Long-term liabilities....................................... -- 57
--------- --------
Stockholders' equity:
Common stock.............................................. 127 125
Additional paid-in capital................................ 349,185 321,116
Deferred stock compensation............................... (41,693) (58,268)
Accumulated other comprehensive income (loss)............. 122 (64)
Accumulated deficit....................................... (100,247) (68,680)
--------- --------
Total stockholders' equity........................ 207,494 194,229
--------- --------
Total liabilities and stockholders' equity........ $ 288,611 $230,472
========= ========
See accompanying notes to condensed consolidated financial statements.
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HANDSPRING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------- --------------------------
DECEMBER 30, JANUARY 1, DECEMBER 30, JANUARY 1,
2000 2000 2000 2000
------------ ---------- ------------ ----------
(UNAUDITED)
Revenue..................................... $115,616 $ 15,790 $186,133 $ 15,790
-------- -------- -------- --------
Costs and operating expenses:
Cost of revenue........................... 79,283 10,822 127,791 10,822
Research and development.................. 4,884 2,146 9,666 4,618
Selling, general and administrative....... 40,743 6,720 68,529 10,376
Amortization of deferred stock
compensation........................... 8,191 6,221 16,575 9,423
-------- -------- -------- --------
Total costs and operating
expenses........................ 133,101 25,909 222,561 35,239
-------- -------- -------- --------
Loss from operations........................ (17,485) (10,119) (36,428) (19,449)
Interest and other income, net.............. 3,041 59 6,361 188
-------- -------- -------- --------
Net loss before taxes....................... (14,444) (10,060) (30,067) (19,261)
Income tax provision........................ 750 -- 1,500 --
-------- -------- -------- --------
Net loss.................................... $(15,194) $(10,060) $(31,567) $(19,261)
======== ======== ======== ========
Basic and diluted net loss per share........ $ (0.15) $ (0.32) $ (0.32) $ (0.69)
-------- -------- -------- --------
Shares used in calculating basic and diluted
net loss per share........................ 100,922 31,353 98,752 27,885
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
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HANDSPRING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
SIX MONTHS ENDED
--------------------------
DECEMBER 30, JANUARY 1,
2000 2000
------------ ----------
(UNAUDITED)
Cash flows from operating activities:
Net loss.................................................. $ (31,567) $(19,261)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization.......................... 3,003 626
Amortization of deferred stock compensation............ 16,575 9,423
Amortization of costs associated with financing
agreement............................................. -- 303
Amortization of premium or discount on short-term
investments, net...................................... (847) (83)
Gain on sale of available-for-sale securities.......... (5) --
Stock compensation to non-employees.................... -- 30
Changes in assets and liabilities:
Accounts receivable.................................. (18,876) (2,485)
Prepaid expenses and other current assets............ (5,946) (431)
Other assets......................................... (72) (530)
Accounts payable..................................... 26,913 10,987
Accrued liabilities.................................. 17,909 2,332
--------- --------
Net cash provided by operating activities......... 7,087 911
--------- --------
Cash flows from investing activities:
Purchases of available-for-sale securities................ (126,282) (1,968)
Sales and maturities of available-for-sale securities..... 29,671 5,308
Purchases of property and equipment....................... (6,832) (3,576)
--------- --------
Net cash used in investing activities............. (103,443) (236)
--------- --------
Cash flows from financing activities:
Principal payments on borrowings.......................... (83) --
Issuance of Series B redeemable convertible preferred
stock, net............................................. -- 9,990
Net proceeds from issuance of common stock upon exercise
of underwriter's over-allotment........................ 27,969 --
Proceeds from issuance of common stock.................... 143 601
Repurchase of common stock................................ (41) --
--------- --------
Net cash provided by financing activities......... 27,988 10,591
--------- --------
Effect of exchange rate changes on cash........... 23 --
--------- --------
Net increase (decrease) in cash and cash equivalents........ (68,345) 11,266
Cash and cash equivalents:
Beginning of period....................................... 196,548 7,533
========= ========
End of period............................................. $ 128,203 $ 18,799
========= ========
Supplemental disclosure of cash flow information:
Cash paid for interest.................................... $ 5 $ --
--------- --------
See accompanying notes to condensed consolidated financial statements.
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HANDSPRING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission and generally accepted accounting principals. However, certain
information or footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed, or omitted, pursuant to such rules and regulations. In the opinion of
management, the statements include all adjustments necessary (which are of a
normal and recurring nature) for the fair presentation of the results of the
interim periods presented. These financial statements should be read in
conjunction with our audited consolidated financial statements and the notes
thereto for the year ended July 1, 2000. The results of operations for the three
months and six months ended December 30, 2000 are not necessarily indicative of
the operating results for the full fiscal year or any future period.
The Company's fiscal year ends on the Saturday closest to June 30, and each
fiscal quarter ends on the Saturday closest to the end of each calendar quarter.
2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for
Derivatives and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative investments, including certain derivative
instruments embedded in other contracts, and for hedging activities. In July
1999, the FASB issued SFAS No. 137, Accounting for Derivative and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133. SFAS No.
137 deferred the effective date of SFAS No. 133 until fiscal years beginning
after June 15, 2000. The Company adopted SFAS No. 133 at the beginning of fiscal
2001. To date, the Company has not engaged in derivative or hedging activities.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial
Statements. SAB 101 provides guidance for revenue recognition under certain
circumstances. SAB 101 is effective beginning in the fourth quarter of fiscal
2001. Implementation of SAB 101 is not expected to require the Company to change
existing revenue recognition policies and therefore is not expected to have a
material effect on the Company's financial position or results of operations.
In March 2000, the FASB issued 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 No. 25 for (a) the
definition of employee for purposes of applying Opinion No. 25, (b) the criteria
for determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequences 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. FIN 44 did not have a material effect on the
Company's financial position or results of operations.
3. NET LOSS PER SHARE
Net loss per share is calculated in accordance with SFAS No. 128, Earnings
per Share. Under the provisions of SFAS No. 128, basic net loss per share is
computed by dividing the net loss applicable to common stockholders for the
period by the weighted average number of common shares outstanding during the
period (excluding shares subject to repurchase). Diluted net loss per share is
computed by dividing the net loss applicable to common stockholders for the
period by the weighted average number of common and potential common shares
outstanding during the period if their effect is dilutive.
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HANDSPRING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The following table sets forth the computation of basic and diluted net
loss per share for the periods indicated (in thousands, except per share
amounts):
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------- --------------------------
DECEMBER 30, JANUARY 1, DECEMBER 30, JANUARY 1,
2000 2000 2000 2000
------------ ---------- ------------ ----------
Net loss.................................... $(15,194) $(10,060) $(31,567) $(19,261)
======== ======== ======== ========
Basic and diluted:
Weighted average common shares
outstanding............................ 126,862 70,633 126,875 70,082
Weighted average common shares subject to
repurchase............................. (25,940) (39,280) (28,123) (42,197)
-------- -------- -------- --------
Weighted average common shares used to
compute basic and diluted net loss per
share..................................... 100,922 31,353 98,752 27,885
======== ======== ======== ========
Basic and diluted net loss per share........ $ (0.15) $ (0.32) $ (0.32) $ (0.69)
======== ======== ======== ========
Diluted net loss per share does not include the effect of the following
potential common shares at the dates indicated as their effect is anti-dilutive
(in thousands):
DECEMBER 30, JANUARY 1,
2000 2000
------------ ----------
Common stock subject to repurchase................... 23,859 38,267
Shares issuable under stock options.................. 28,812 17,153
Shares issuable pursuant to right to purchase
redeemable convertible preferred stock............. -- 895
Shares of redeemable convertible preferred stock on
an "as if converted" basis......................... -- 40,524
The weighted average repurchase price of unvested stock was $0.06 and $0.03
as of December 30, 2000 and January 1, 2000, respectively. The weighted-average
exercise price of stock options outstanding was $8.92 and $0.27 as of December
30, 2000 and January 1, 2000, respectively.
4. COMPREHENSIVE LOSS
The components of comprehensive loss are as follows (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------- --------------------------
DECEMBER 30, JANUARY 1, DECEMBER 30, JANUARY 1,
2000 2000 2000 2000
------------ ---------- ------------ ----------
Net loss.................................... $(15,194) $(10,060) $(31,567) $(19,261)
Other comprehensive income (loss):
Unrealized gain on securities............. 257 5 295 6
Foreign currency translation
adjustments............................ (374) -- (109) --
-------- -------- -------- --------
Comprehensive loss.......................... $(15,311) $(10,055) $(31,381) $(19,255)
======== ======== ======== ========
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HANDSPRING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. BUSINESS SEGMENT REPORTING
The Company operates in one operating segment, handheld computing, with its
headquarters and most of its operations located in the United States. The
Company also conducts sales, marketing and customer service activities
throughout the world. Geographic revenue information is based on the location of
the end customer. Geographic long-lived assets information is based on the
physical location of the assets at the end of each period. Revenue from
unaffiliated customers and long-lived assets by geographic region are as follows
(in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------- --------------------------
DECEMBER 30, JANUARY 1, DECEMBER 30, JANUARY 1,
2000 2000 2000 2000
------------ ---------- ------------ ----------
Revenue:
North America................................ $ 92,666 $15,790 $152,033 $15,790
Rest of the world............................ 22,950 -- 34,100 --
-------- ------- -------- -------
Total.............................. $115,616 $15,790 $186,133 $15,790
======== ======= ======== =======
DECEMBER 30, JULY 1,
2000 2000
------------ -------
Property and equipment:
North America......................................... $32,853 $ 9,914
Rest of the world..................................... 1,739 1,710
------- -------
Total....................................... $34,592 $11,624
======= =======
6. ACQUISITION
In December 2000, the Company signed a definitive agreement to acquire
Bluelark Systems, Inc., a provider of client and server based software designed
to deliver content and services to mobile handheld devices, including PDAs,
smartphones, and large-screen pagers. Under the terms of the agreement related
to this acquisition, which is to be accounted for as a purchase, the Company
will issue up to 450,000 shares and options to purchase the Company's common
stock in exchange for all of Bluelark Systems' outstanding shares and options.
The closing of the transaction is subject to certain conditions, including the
approval of Bluelark Systems' shareholders and certain regulatory approvals, and
is expected to be completed later this month. The historical operations of
Bluelark Systems are not material to the Company's financial position or results
of operations.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
We may make statements in this Form 10-Q, such as statements regarding our
plans, objectives, expectations and intentions that are forward-looking
statements within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act. We may identify these statements by the use of words
such as "believe", "expect", "anticipate", "intend", "plan", and similar
expressions. These forward-looking statements involve risks and uncertainties.
Our actual results could differ materially from those anticipated in these
forward-looking statements as a result of these risks and uncertainties,
including those we discuss in "Factors Affecting Future Results" and elsewhere
in this Form 10-Q. These forward-looking statements speak only as of the date of
this Form 10-Q, and we caution you not to rely on these statements without also
considering the risks and uncertainties associated with these statements and our
business as addressed in this Form 10-Q.
OVERVIEW
We were incorporated in July 1998 to develop innovative handheld computers
that are fun, smart, approachable, compelling and personal. Our business is
focused on becoming a global market leader in the handheld computing and
communications marketplace. During the period from inception to the date of our
first product shipments, our operating activities were focused on developing our
products, obtaining license rights, establishing third party manufacturing and
distribution relationships, recruiting personnel and raising capital. Shipments
of our first Visor products began in October 1999 for orders received through
our Web site. Today we sell our Visor line of handhelds through our Web site and
through select distributors, retailers and e-commerce partners in Asia, Canada,
Europe, Japan, the Middle East and the United States.
As is typical for other companies in our industry, we have experienced
seasonality in the sales of our products with strong demand occurring in our
second fiscal quarter due in part to increased consumer spending on electronic
devices during the holiday season. We also expect that demand for our products
may decline on a relative basis during the summer months because of typical
slower consumer spending in this period, particularly in Europe. These seasonal
variations in our sales may lead to fluctuations in our quarterly operating
results.
RESULTS OF OPERATIONS
Revenue. Revenue is comprised almost entirely of sales of our handheld
computer devices, modules and related accessories. Product orders placed by end
user customers are received via our Web site or over the telephone via our third
party customer support partner. Retail sales orders are placed in our internal
order processing system. All orders are then transmitted to our logistics
partner. We take title at the point of transfer from this logistics partner to
the common carrier. Title generally then transfers once the carrier has received
the products. We recognize revenue when a purchase order has been received, the
product has been shipped, the sales price is fixed and determinable and
collection of the resulting receivable is probable. No significant post-delivery
obligations exist with respect to revenue recognized. Provisions are made at the
time the related revenue is recognized for estimated product returns and
warranty. Also included in revenue are shipping and handling charges billed to
our customers.
Revenue grew to $115.6 million during the second quarter of fiscal 2001
from $15.8 million during the second quarter of fiscal 2000. Revenue for the six
months ended December 30, 2000 was $186.1 million, compared with $15.8 million
during the six months ended January 1, 2000. Shipping and handling charges
represent $563,000 of revenue during the three and six months ended January 1,
2000, and $256,000 and $757,000 during the three and six months ended December
30, 2000, respectively. The increase in revenue between both periods was
primarily due to three factors. First, we expanded our distribution channels.
Our first product shipments began during the second quarter of fiscal 2000, and
were only for orders received through our Web site. Toward the end of the third
quarter of fiscal 2000 we began selling our products through select retailers.
During the following three quarters we added additional retailers as well as
distributors and e-commerce partners. Second, we entered into a number of
international markets. During the fourth quarter of fiscal 2000 and the first
two quarters of fiscal 2001, we launched our products in Asia, Canada, Europe,
Japan
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and the Middle East. As a result of this global expansion, revenue outside North
America now represents 20% of revenue during the three months ended December 30,
2000 and 18% of revenue during the six months ended December 30, 2000, while
revenue during the same periods of the previous fiscal year was entirely from
North America. Third, we added two new products, the Visor Prism and the Visor
Platinum, to our Visor family of handheld computers during the second quarter of
fiscal 2001. These products have broadened the range of markets and customers to
which our products appeal. We anticipate that revenue will increase throughout
the remainder of the calendar year, with revenue outside North America gradually
representing a higher percentage of the total.
Cost of revenue. Cost of revenue consists primarily of materials, labor,
royalty expenses, warranty expenses and shipping and handling. Cost of revenue
was $79.3 million during the quarter ended December 30, 2000 and $127.8 million
during the six months ended December 30, 2000, compared with $10.8 million
recorded during the three and six months ended January 1, 2000, respectively.
These increases are attributable to an increase in revenue. Shipping and
handling costs represented $633,000 of the cost of revenue during the three and
six months ended January 1, 2000, and $2.4 million and $4.0 million during the
three and six months ended December 30, 2000, respectively. Cost of revenue
excluding amortization of deferred stock compensation was 68.6% of revenue,
resulting in a 31.4% gross margin, during the quarter ended December 30, 2000.
Research and development. Research and development expenses consist
principally of salaries and related personnel expenses, consultant fees and the
cost of materials and software used in product development. Research and
development expenses increased to $4.9 million during the quarter ended December
30, 2000 from $2.1 million during the quarter ended January 1, 2000, and to $9.7
million during the six months ended December 30, 2000 from $4.6 million during
the six months ended January 1, 2000. These increases were primarily associated
with the hiring of personnel devoted to the development of new products. We
believe that continued investment in research and development is critical to
attaining our strategic objectives and we expect research and development
expenses to increase in absolute dollars in the future.
Selling, general and administrative. Selling, general and administrative
expenses consist primarily of promotional and advertising costs, Web site design
and maintenance expenses, salaries and related expenses, accounting and
administrative expenses, costs for legal and professional services and general
corporate expenses. Selling, general and administrative expenses increased to
$40.7 million during the three months ended December 30, 2000 from $6.7 million
during the same period of the previous fiscal year, and to $68.5 million during
the six months ended December 30, 2000 as compared with $10.4 million in the
same period of the previous fiscal year. These increases reflect the additional
costs and expenses relating to sales and marketing activities for the Company's
products which first shipped in the second quarter of fiscal 2000, and the
overall expansion in the Company's level of operations. In addition, marketing
expenses increased during the holiday season of fiscal 2001. We anticipate that
selling, general and administrative expenses will increase in absolute dollars
as we continue to increase staff, develop product marketing and branding
campaigns, and develop our infrastructure to support a larger, global
organization.
Amortization of deferred stock compensation. Prior to our initial public
offering on June 20, 2000, we granted stock options to our officers and
employees at prices subsequently deemed to be below the fair value of the
underlying stock. The cumulative difference between the fair value of the
underlying stock at the date the options were granted and the exercise price of
the granted options was $102.0 million. This amount is being amortized, using
the multiple option method, over the four-year vesting period of the granted
options. Accordingly, our results of operations will include amortization of
deferred stock compensation through fiscal 2004. We recognized $8.2 million and
$16.6 million of this expense during the three-month and six-month period ended
December 30, 2000, respectively, and $6.2 million and $9.4 million of this
expense during the same periods of the previous fiscal year.
Future compensation expense resulting from the grant of these stock options
is estimated to be $14.7 million, $18.1 million, $7.7 million, and $1.2 million
for the fiscal years ended 2001, 2002, 2003 and 2004, respectively.
Interest and other income, net. Interest and other income, net increased to
$3.0 million during the quarter ended December 30, 2000 from $59,000 during the
same period of the previous fiscal year, and
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increased to $6.4 million during the six months ended December 30, 2000 from
$188,000 during the same period of the previous fiscal year. The primary reason
for the increase in interest income during these periods is interest income
earned on the proceeds received from our initial public offering in June 2000,
and the subsequent exercise of the underwriter's over-allotment in July 2000.
Of our $207 million in cash, cash equivalents and short term investments,
we currently hold $7.0 million in commercial paper issued by PG&E with a
maturity date of February 20, 2001. Due to the challenges now confronting the
California energy market, the redemption of this obligation is uncertain. There
is a possibility that payment of this obligation may be postponed. In the event
PG&E does not fully redeem this obligation, our operating results would be
adversely affected.
Income Tax Provision. Provision for income taxes increased from zero during
the three and six months ended January 1, 2000 to $750,000 during the three
months ended December 30, 2000 and $1.5 million during the six months ended
December 30, 2000. The provision for income taxes consists of foreign taxes
which were provided for when we generated our first international revenues
during the fourth quarter of fiscal 2000. No provision for federal and state
income taxes has been recorded because we have experienced significant net
losses, which have resulted in deferred tax assets. In light of our recent
history of operating losses, we have provided a full valuation allowance for all
deferred tax assets as we are presently unable to conclude that it is more
likely than not that the deferred tax asset will be realized.
LIQUIDITY AND CAPITAL RESOURCES
Prior to our initial public offering on June 20, 2000, we funded our
operations primarily from the sale of preferred stock, through which we raised
net proceeds of $28.0 million. Net proceeds from the initial public offering and
the exercise of the underwriter's over-allotment option were $184.9 million and
$28.0 million, respectively. As of December 30, 2000 we had $207.0 million in
cash and cash equivalents and short-term investments.
During the six months ended December 30, 2000 net cash provided by
operating activities was $7.1 million, as compared with $911,000 during the six
months ended January 1, 2000. Net cash provided by operating activities during
both periods is primarily due to an increase in current liabilities due to the
general increase in the level of operations during each period. This source of
cash was offset by net losses reduced by the non-cash charge of deferred stock
compensation during each period. An additional substantial offset to the sources
of cash was the increase in accounts receivable balances due to the introduction
of revenue during the quarter ended January 1, 2000, and the continued increase
in revenue during the six months ended December 30, 2000.
Net cash used for investing activities was $103.4 million during the six
months ended December 30, 2000, primarily due to purchases of available-for-sale
securities of $126.3 million and, to a smaller extent, purchases of property and
equipment of $6.8 million. These uses of cash were partially offset by proceeds
of $29.7 million received upon the sale and maturity of available-for-sale
securities during the period. During the six months ended January 1, 2000, there
were purchases of available-for-sale securities of $2.0 million and purchases of
property and equipment of $3.6 million. These cash uses were largely offset by
$5.3 million of proceeds received for the sale and maturity of
available-for-sale securities, resulting in net cash used for investing
activities during the six months ended January 1, 2000 of $236,000.
Of our $207 million in cash, cash equivalents and short term investments,
we currently hold $7.0 million in commercial paper issued by PG&E with a
maturity date of February 20, 2001. Due to the challenges now confronting the
California energy market, the redemption of this obligation is uncertain. There
is a possibility that payment of this obligation may be postponed. In the event
PG&E does not fully redeem this obligation, our cash, cash equivalents and short
term investments would be reduced by the amount of principal then outstanding.
Net cash provided by financing activities was $28.0 million during the six
months ended December 30, 2000 compared with $10.6 million during the six months
ended January 1, 2000. The $28.0 million provided by financing activities during
the six months ended December 30, 2000 resulted from the underwriters of our
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initial public offering exercising their over-allotment to purchase 1,500,000
shares of common stock in July 2000. During the six months ended January 1,
2000, the most significant component of cash provided by financing activities
was $10.0 million of net proceeds that we received from the issuance of Series B
preferred stock. In addition, we received proceeds of $143,000 and $601,000 from
the issuance of common stock during the six months ended December 30, 2000 and
January 1, 2000, respectively.
Our future capital requirements will depend upon many factors, including
the timing of research and product development efforts and expansion of our
marketing efforts. We believe that our cash and cash equivalents will be
sufficient to meet our working capital needs for at least the next 12 months. To
the extent that we grow more rapidly than expected in the future, we may need
additional cash to finance our operating and investing needs. We intend to
invest the cash in excess of current operating requirements in interest-
bearing, investment-grade securities with maturities no greater than two years.
BLUELARK ACQUISITION
In December 2000, we signed a definitive agreement to acquire Bluelark
Systems, Inc., a provider of client and server based software designed to
deliver content and services to mobile handheld devices, including PDAs,
smartphones, and large-screen pagers. Under the terms of the agreement related
to this acquisition, which is to be accounted for as a purchase, we will issue
up to 450,000 shares and options to purchase Handspring common stock in exchange
for all of Bluelark Systems' outstanding shares and options. The closing of the
transaction is subject to certain conditions, including the approval of Bluelark
Systems' shareholders and certain regulatory approvals, and is expected to be
completed later this month. The historical operations of Bluelark Systems are
not material to our financial position or results of operations.
FACTORS AFFECTING FUTURE RESULTS
OUR LIMITED OPERATING HISTORY MAKES IT DIFFICULT FOR YOU TO EVALUATE OUR
BUSINESS AND PROSPECTS.
We incorporated in July 1998. We did not start selling our Visor handheld
computer or generating revenue until the quarter ended January 1, 2000.
Accordingly, we have only a limited operating history upon which you can
evaluate our business. The revenue and income potential of our products and
business are unproven. Our chances of financial and operational success are
subject to the risks, uncertainties, expenses, delays and difficulties
associated with starting a new business in a highly competitive field, many of
which may be beyond our control. If we fail to address these risks,
uncertainties, expenses, delays and difficulties, our business will be harmed.
FLUCTUATIONS IN OUR QUARTERLY REVENUES AND OPERATING RESULTS MIGHT LEAD TO
REDUCED PRICES FOR OUR STOCK.
Given our lack of operating history, you should not rely on
quarter-to-quarter comparisons of our results of operations as an indication of
our future performance. In some future periods, our results of operations could
be below the expectations of investors and public market analysts. In this
event, the price of our common stock would likely decline. Factors that are
likely to cause our results to fluctuate include the following:
- the announcement and timely introduction of new products by us and our
competitors;
- the timing and the availability of Springboard modules and software
programs that are compatible with our products;
- market acceptance of existing and future versions of our products and
compatible Springboard modules and software programs;
- fluctuations in the royalty rates and manufacturing costs we pay to
produce our handheld computers;
- the availability of components required to manufacture our products;
- the seasonality of our product sales;
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- our success in developing and maintaining relationships with wireless
carriers and other third parties whose services are required to offer
products with wireless voice and data capabilities;
- the price of products that both we and our competitors offer;
- the mix of products that we offer; and
- our ability to avoid potential system failures on our Web site.
WE HAVE A HISTORY OF LOSSES, WE EXPECT LOSSES TO CONTINUE AND WE MIGHT NOT
ACHIEVE OR MAINTAIN PROFITABILITY.
Our accumulated deficit as of December 30, 2000 was approximately $100.2
million. We had net losses of approximately $31.6 million for the six month
period ended December 30, 2000 and $19.3 million during the same period of the
previous fiscal year. To date we have funded our operations primarily through
product sales and the sale of equity securities. Moreover, we expect to incur
significant operating expenses. We also expect to continue to incur substantial
non-cash costs relating to the amortization of deferred compensation, which will
contribute to our net losses. As of December 30, 2000, we had a total of $41.7
million of deferred compensation to be amortized. As a result, we expect to
continue to incur losses for most of calendar year 2001. Even if we ultimately
do achieve profitability, we may not be able to sustain or increase
profitability on a quarterly or annual basis. If our revenue grows more slowly
than we anticipate, or if our operating expenses exceed our expectations and
cannot be adjusted accordingly, our business will be harmed.
WE DEPEND HEAVILY UPON OUR LICENSE FROM PALM, INC. AND OUR FAILURE TO MAINTAIN
THIS LICENSE COULD SERIOUSLY HARM OUR BUSINESS.
We rely on technologies that we license or acquire from third parties,
including Palm. Our failure to maintain these licenses could seriously harm our
business. The Palm OS operating system is integrated with our
internally-developed software and hardware, and is used to enhance the value of
our products. Our license of the Palm OS operating system is critical to our
Visor handheld computer. The license agreement extends until September 2003 and
may be renewed for successive one-year terms if both parties agree. It is
possible that Palm will choose not to renew the license at the end of its term
for competitive or other reasons. Upon expiration or termination of the Palm OS
operating system license agreement, other than due to our breach, we may choose
to keep the license granted under the agreement for two years following the
expiration or termination. However, the license during this two-year period is
limited and does not entitle us to upgrades to the Palm OS operating system. If
we were not a licensee of the Palm OS operating system, we would be required to
license a substitute operating system, which could be less desirable and could
be costly in terms of cash and other resources. In the alternative, we could
develop our own operating system, which would take considerable time, resources
and expense, would divert our engineers' attention from product innovations and
likely would not have the advantage of Palm OS operating system applications
compatibility. In addition, we may not assign the Palm license agreement to a
third party without the written consent of Palm unless it is to a purchaser of
substantially all of our assets who is not a competitor of Palm. The existence
of these license termination provisions may have an anti-takeover effect in that
it could discourage competitors of Palm from acquiring us.
OUR BUSINESS COULD BE HARMED BY LAWSUITS WHICH HAVE BEEN FILED OR MAY IN THE
FUTURE BE FILED AGAINST PALM INVOLVING THE PALM OS OPERATING SYSTEM.
Suits against Palm involving the Palm OS operating system, which we license
from Palm, could adversely affect us. A disruption in Palm's business because of
these suits could disrupt our operations and cost us money. Palm is a defendant
in several intellectual property lawsuits involving the Palm OS operating
system. Although we are not a party to these cases and we are indemnified by
Palm for damages arising from lawsuits of this type, we could still be adversely
affected by a determination adverse to Palm as a result of market uncertainty or
product changes that could arise from such a determination.
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WE ARE HIGHLY DEPENDENT ON RETAILERS AND DISTRIBUTORS TO SELL OUR PRODUCTS, AND
DISRUPTIONS IN THIS CHANNEL AND OTHER EFFECTS OF SELLING THROUGH RETAILERS AND
DISTRIBUTORS WOULD HARM OUR ABILITY TO GENERATE REVENUES FROM THE SALE OF OUR
HANDHELD COMPUTERS.
We sell our products through retailers and distributors as well as online
through our handspring.com Web site and e-commerce partners. We began using
retailers in March 2000 when we entered into agreements with Best Buy, CompUSA
and Staples, currently our three largest retail partners, to resell our products
in their stores in the United States. Since that time we have added retailers or
distributors in Asia, Canada, Europe, Japan, and the Middle East. We have also
added additional retail partners in the United States. We expect to add
additional retailers and distributors worldwide as we continue to expand our
business. We are subject to many risks relating to the distribution of our
products by retailers and distributors including the following:
- retailers and distributors may not maintain inventory levels sufficient
to meet customer demand;
- if we reduce the prices of our products, we may have to compensate
retailers and distributors for the difference between the higher price
they paid to buy their inventory and the new lower prices;
- product returns could increase as a result of our strategic interest in
assisting retailers and distributors in balancing inventories;
- retailers and distributors may emphasize our competitors' products or
decline to carry our products;
- we may not be able to attract or retain a sufficient number of qualified
retailers and distributors; and
- conflicts may develop between the retail and distribution channel and
sales of our products through our handspring.com Web site and by our
e-commerce partners.
In addition, to the extent our revenues through the retail and distribution
channel increase as a percentage of total revenues, our gross margins may
decrease because sales through retailers and distributors typically are made at
lower margins than sales through our Web site and by our e-commerce partners. A
higher percentage of sales by retailers and distributors also would negatively
impact our cash cycle.
A PORTION OF OUR REVENUE HAS BEEN DERIVED FROM SALES ON OUR WEB SITE AND SYSTEM
FAILURES OR DELAYS HAVE IN THE PAST AND MIGHT IN THE FUTURE HARM OUR BUSINESS.
A portion of our revenue is generated through our Web site. As a result,
our business depends on our ability to maintain and expand our computer systems.
We must also protect our computer systems against damage from fire, water, power
loss, telecommunications failures, computer viruses, vandalism and other
malicious acts and similar unexpected adverse events. During our initial product
launch during the quarter ended January 1, 2000, we experienced system
interruptions and slowdowns due to an improper design and implementation of our
Web site from which consumers purchase our products. This caused long wait times
on our Web site, long delivery times, lost orders, lost revenues and harm to our
reputation. Despite precautions we have taken and improvements that we have
made, unanticipated problems affecting our systems could again in the future
cause temporary interruptions or delays in the services we provide. Our
customers might become dissatisfied by any system failure or delay that
interrupts our ability to provide service to them or slows our response time.
Sustained or repeated system failures or delays would affect our reputation,
which would harm our business. Slow response time or system failures could also
result from straining the capacity of our systems due to an increase in the
volume of traffic on our Web site. While we carry business interruption
insurance, it might not be sufficient to cover any serious or prolonged
emergencies.
OUR PRODUCTION COULD BE SERIOUSLY HARMED IF WE EXPERIENCE COMPONENT SHORTAGES OR
IF OUR SUPPLIERS ARE NOT ABLE TO MEET OUR DEMAND AND ALTERNATIVE SOURCES ARE NOT
AVAILABLE.
Our products contain components, including liquid crystal displays, touch
panels, connectors, memory chips and microprocessors, that are procured from a
variety of suppliers and that are in great demand. We rely on our suppliers to
deliver necessary components to our contract manufacturers in a timely manner
based on forecasts that we provide. At various times, some of the key components
for handheld computers have been in short supply. From time-to-time a number of
suppliers have been capacity constrained due to high industry
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demand for their components and relatively long lead times required to expand
factory capacity. Due in part to these component shortages, some of our
competitors have some times been unable to meet demand for their products.
Ongoing shortages of components would harm our ability to deliver our products
on a timely basis. The cost, quality and availability of components are
essential to the successful production and timely sale of our products.
Some components, such as power supply integrated circuits, microprocessors
and certain discrete components, come from sole or single source suppliers.
Alternative sources are not currently available for these sole and single source
components. If suppliers are unable to meet our demand for sole source
components and if we are unable to obtain an alternative source or if the price
for an alternative source is prohibitive, our ability to maintain timely and
cost-effective production of our handheld computer products would be seriously
harmed. Due to market-related supply and demand conditions, we cannot predict
with certainty our ability to procure components in the longer term. If we
receive a smaller allocation of components than is necessary to manufacture
products in quantities sufficient to meet customer demand, customers could
choose to purchase competing products.
IF WE FAIL TO KEEP UP WITH RAPID TECHNOLOGICAL CHANGE AND EVOLVING INDUSTRY
STANDARDS, OUR PRODUCTS COULD BECOME LESS COMPETITIVE OR OBSOLETE.
The market for our products is characterized by rapidly changing
technology, evolving industry standards, changes in customer needs, heavy
competition and frequent new product introductions. If we fail to modify or
improve our products in response to changes in technology or industry standards,
our products could rapidly become less competitive or obsolete. Our future
success will depend, in part, on our ability to:
- use leading technologies effectively;
- continue to develop our technical expertise;
- enhance our current products and develop new products that meet changing
customer needs;
- time new product introductions in a way that minimizes the impact of
customers delaying purchases of existing products in anticipation of new
product releases;
- adjust the prices of our existing products to increase customer demand;
- successfully advertise and market our products; and
- influence and respond to emerging industry standards and other
technological changes.
We must respond to changing technology and industry standards in a timely
and cost-effective manner. We may not be successful in effectively using new
technologies, developing new products or enhancing our existing products on a
timely basis. These new technologies or enhancements may not achieve market
acceptance. Our pursuit of necessary technology may require substantial time and
expense. We may need to license new technologies to respond to technological
change. These licenses may not be available to us on terms that we can accept.
Finally, we may not succeed in adapting our products to new technologies as they
emerge.
IF WE ARE NOT SUCCESSFUL IN THE DEVELOPMENT AND INTRODUCTION OF NEW PRODUCTS,
DEMAND FOR OUR PRODUCTS COULD DECREASE.
We depend on our ability to develop new or enhanced products that achieve
rapid and broad market acceptance. We may fail to identify new product
opportunities successfully and develop and bring to market new products in a
timely manner. In addition, our product innovations may not achieve the market
penetration or price stability necessary for profitability.
As the use of our Visor handheld computer and Springboard slot continue to
evolve, we plan to develop additional complementary products and services as
additional sources of revenue are available. Accordingly, we may change our
business model to take advantage of new business opportunities, including
business areas in which we do not have extensive experience. For example, during
the quarter ended December 30, 2000 we
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began selling VisorPhone, our GSM cell phone module that relies on a wireless
infrastructure, and signed a definitive agreement to acquire Bluelark Systems,
Inc., a provider of technology designed to deliver content and services to
mobile devices. If we fail to further develop and commercialize these or other
products or services successfully, our business would be harmed.
IF POPULAR SPRINGBOARD MODULES ARE NOT DEVELOPED FOR OUR VISOR HANDHELD
COMPUTER, DEMAND FOR OUR PRODUCTS MAY BE LIMITED.
To differentiate our products from competitors and attract large numbers of
consumer purchasers of our products, we and third parties need to develop
compelling Springboard modules for our Visor handheld computer. We may be unable
to attract a sufficient number of talented third-party Springboard module
developers because of our relatively small market share in the handheld computer
industry or for technological or other reasons. There is a limited number of
Springboard modules available for sale. If Springboard module developers fail to
anticipate market needs in a timely manner, or if there is not a successful
distribution outlet for the sale of Springboard modules, demand for our Visor
handheld computer may diminish.
OUR REPUTATION COULD BE HARMED IF THE SPRINGBOARD MODULES DEVELOPED BY THIRD
PARTIES ARE DEFECTIVE.
Because we offer an open development environment, third party developers
are free to design, market and sell modules for our Springboard slot without our
consent, endorsement or certification. Nevertheless our reputation is
inextricably tied to the Springboard modules designed for our Visor handheld
computer. If modules sold by third parties are defective or are of poor quality,
our reputation could be harmed and the demand for our Visor handheld computer
and modules could decline.
IF THE EXPANDABLE DESIGN OF OUR PRODUCTS IS NOT ACCEPTED BY CONSUMERS, OUR
REVENUES WILL FAIL TO MEET OUR EXPECTATIONS.
Much of the perceived value of our Visor handheld computer lies in the
Springboard expansion slot, which enables users to add functions by inserting
modules into the base device. Many of these modules will perform functions that
are today generally performed by a dedicated standalone device. While we believe
that the simple customization provided by the Springboard slot will be
attractive to users, the uniqueness of the feature combined with the relatively
recent introduction of the product make it unclear whether consumers will prefer
our approach as compared either to multiple dedicated devices or to other
designs for multifunction devices. For example, a number of companies, including
Palm, are developing products that will feature the Secure Digital (SD) card
slot for expansion.
IF WE FAIL TO ACCURATELY ANTICIPATE DEMAND FOR OUR PRODUCTS, WE MAY NOT BE ABLE
TO SECURE SUFFICIENT QUANTITIES OR COST-EFFECTIVE PRODUCTION OF OUR HANDHELD
COMPUTERS OR WE COULD HAVE COSTLY EXCESS PRODUCTION.
Because we did not begin selling our products until October 1999, we have
limited information about demand for our products. The demand for our products
depends on many factors and is difficult to forecast. We experienced product
shortages when we introduced our Visor handheld computer because we
underestimated initial demand. It has become even more difficult to forecast
demand now that we support multiple products and due to increased competition in
the market for our products. Significant unanticipated fluctuations in demand
could cause problems in our operations.
If demand does not develop as expected, we could have excess production
resulting in excess finished products and components. We have limited capability
to reduce manufacturing capacity once a purchase order has been placed. If we
have excess production, we could incur cancellation charges or other liabilities
to our manufacturing partners.
If demand exceeds our expectations, we will need to rapidly increase
production at our third-party manufacturers. Our suppliers will also need to
provide additional volumes of components, which may not be possible within our
timeframes. Even if our third-party manufacturers are able to obtain enough
components, they might not be able to produce enough of our products as fast as
we need them. The inability of either our manufacturers or our suppliers to
increase production rapidly enough could cause us to fail to meet customer
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demand. In addition, rapid increases in production levels to meet unanticipated
demand could result in higher costs for manufacturing and supply of components
and other expenses. These higher costs would lower our profit margins.
IF ANY OF OUR MANUFACTURING PARTNERS FAIL TO PRODUCE QUALITY PRODUCTS ON TIME
AND IN SUFFICIENT QUANTITIES, OUR REPUTATION AND RESULTS OF OPERATIONS WOULD
SUFFER.
We depend on third-party manufacturers to produce sufficient volume of our
handheld devices, modules and accessories in a timely fashion and at
satisfactory quality levels. The cost, quality and availability of third-party
manufacturing operations are essential to the successful production and sale of
our products. We currently have manufacturing agreements with Flextronics and
Solectron under which we order products on a purchase order basis in accordance
with a forecast. The absence of dedicated capacity under our manufacturing
agreements means that, with little or no notice, our manufacturers could refuse
to continue to manufacture all or some of the units of our devices that we
require or change the terms under which they manufacture our devices. If they
were to stop manufacturing our devices, it could take from three to six months
to secure alternative manufacturing capacity and our results of operations could
be harmed. In addition, if our manufacturers were to change the terms under
which they manufacture for us, our manufacturing costs could increase and our
results of operations could suffer.
Our reliance on third-party manufacturers exposes us to risks outside our
control, including the following:
- unexpected increases in manufacturing and repair costs;
- interruptions in shipments if one of our manufacturers is unable to
complete production;
- inability to control quality of finished products;
- inability to control delivery schedules;
- unpredictability of manufacturing yields; and
- potential lack of adequate capacity to fill all or a part of the services
we require.
WE RELY ON THIRD PARTIES FOR ORDER FULFILLMENT, REPAIR SERVICES AND TECHNICAL
SUPPORT. OUR REPUTATION AND RESULTS OF OPERATIONS COULD BE HARMED BY OUR
INABILITY TO CONTROL THEIR OPERATIONS.
We rely on third parties to package and ship customer orders, repair units
and provide technical support. If our order fulfillment services, repair
services or technical support services are interrupted or experience quality
problems, our ability to meet customer demands would be harmed, causing a loss
of revenue and harm to our reputation. Although we have the ability to add new
service providers or replace existing ones, transition difficulties and lead
times involved in developing additional or new third party relationships could
cause interruptions in services and harm our business.
THE SUCCESS OF VISORPHONE, AND OUR ABILITY TO OFFER ADDITIONAL VOICE AND DATA
ENABLED DEVICES IN THE FUTURE, COULD BE IMPAIRED IF WE ARE NOT ABLE TO DEVELOP
AND MAINTAIN APPROPRIATE RELATIONSHIPS WITH WIRELESS CARRIERS ON REASONABLE
TERMS.
Service for VisorPhone, a Springboard module that allows a Visor to be used
as a GSM mobile telephone, currently is provided in the United States by
VoiceStream Wireless, Cingular Wireless, and Powertel, Inc. In addition, we
intend to establish relationships with other carriers located in the United
States and in foreign countries to support our plans to offer a variety of voice
and data enabled devices. The success of VisorPhone, and our ability to offer
other voice and data enabled devices in the future, could be impaired if we are
not able to develop and maintain appropriate relationships with the wireless
carriers on reasonable terms.
WE FACE SEASONALITY IN OUR SALES, WHICH COULD CAUSE OUR QUARTERLY OPERATING
RESULTS TO FLUCTUATE.
As is typical for other companies in our industry, we have experienced
seasonality in the sales of our products with strong demand occurring in our
second fiscal quarter due in part to increased consumer spending
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on electronic devices during the holiday season. We also expect that demand for
our products may decline on a relative basis during the summer months because of
typical slower consumer spending in this period, particularly in Europe. These
seasonal variations in our sales may lead to fluctuations in our quarterly
operating results.
OUR FAILURE TO DEVELOP BRAND RECOGNITION COULD LIMIT OR REDUCE THE DEMAND FOR
OUR PRODUCTS.
We believe that continuing to strengthen our brand will be critical to
increasing demand for, and achieving widespread acceptance of, our handheld
computer products. Some of our competitors and potential competitors have better
name recognition and powerful brands. Promoting and positioning our brand will
depend largely on the success of our marketing efforts, our ability and the
ability of third party developers to deliver Springboard modules, software and
accessories that are engaging to our users and our ability to provide high
quality support. To promote our brand, we expect to increase our marketing
expenditures and otherwise increase our financial commitment to creating and
maintaining brand loyalty among users. Brand promotion activities may not yield
increased revenues or customer loyalty and, even if they do, any increased
revenues may not offset the expenses we incur in building and maintaining our
brand.
IF WE ARE UNABLE TO COMPETE EFFECTIVELY WITH EXISTING OR NEW COMPETITORS, OUR
RESULTING LOSS OF COMPETITIVE POSITION COULD RESULT IN PRICE REDUCTIONS, FEWER
CUSTOMER ORDERS, REDUCED MARGINS AND LOSS OF MARKET SHARE.
The market for handheld computing and communication products is highly
competitive and we expect competition to increase in the future. Some of our
competitors or potential competitors have significantly greater financial,
technical and marketing resources than we do. These competitors may be able to
respond more rapidly than we can to new or emerging technologies or changes in
customer requirements. They may also devote greater resources to the
development, promotion and sale of their products than we do.
Our handheld computers compete with a variety of handheld devices,
including keyboard-based devices, sub-notebook computers, smart phones and
two-way pagers. Our principal competitors include:
- Palm, from whom we license the Palm OS operating system;
- licensees of the Microsoft Windows CE operating system for devices such
as the PocketPC, including Casio, Compaq and Hewlett-Packard;
- members of the Symbian consortium, including Psion, Ericsson and
Motorola;
- other Palm OS operating system licensees, including IBM, Kyocera, Nokia,
Samsung and Sony; and
- Research In Motion Limited, a provider of devices and services that
enable wireless email, instant messaging and Internet connectivity.
We expect our competitors to continue to improve the performance of their
current products and to introduce new products, services and technologies.
Successful new product introductions or enhancements by our competitors could
reduce sales and the market acceptance of our products, cause intense price
competition or make our products obsolete. To be competitive, we must continue
to invest significant resources in research and development, sales and marketing
and customer support. We cannot be sure that we will have sufficient resources
to make these investments or that we will be able to make the technological
advances necessary to be competitive. Increased competition could result in
price reductions, fewer customer orders, reduced margins and loss of market
share. Our failure to compete successfully against current or future competitors
could seriously harm our business.
OUR MANAGEMENT AND INTERNAL SYSTEMS MIGHT BE INADEQUATE TO HANDLE OUR POTENTIAL
GROWTH.
We have experienced rapid growth and expansion since our inception. From
July 29, 1998 to December 30, 2000, we increased the number of our employees
from two to 329. This growth has placed, and will continue to place, a
significant strain on our management and information systems and operational and
financial resources. To manage future growth, our management must continue to
improve our operational and financial systems and expand, train, retain and
manage our employee base. Our management may not be able
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to manage our growth effectively. If our systems, procedures and controls are
inadequate to support our operations, our expansion would be halted and we could
lose our opportunity to gain significant market share. Any inability to manage
growth effectively may harm our business.
OUR PRODUCTS MAY CONTAIN ERRORS OR DEFECTS, OR COULD BE SUBJECT TO VIRUSES,
WHICH COULD RESULT IN THE REJECTION OF OUR PRODUCTS AND DAMAGE TO OUR
REPUTATION, AS WELL AS LOST REVENUES, DIVERTED DEVELOPMENT RESOURCES AND
INCREASED SERVICE COSTS AND WARRANTY CLAIMS.
Our handheld computers and Springboard modules are complex and must meet
stringent user requirements. We must develop our products quickly to keep pace
with the rapidly changing handheld computing and communications market. Products
as sophisticated as ours are likely to contain detected and undetected errors or
defects, especially when first introduced or when new models or versions are
released. In the future, we may experience delays in releasing new products as
problems are corrected. From time to time, we have become aware of problems with
components and other defects. Errors or defects in our products that are
significant, or are perceived to be significant, could result in the rejection
of our products, damage to our reputation, lost revenues, diverted development
resources and increased customer service and support costs and warranty claims.
In addition, some undetected errors or defects may only become apparent as new
functions are added to our handheld computers through the use of future
Springboard modules. Currently, consumers that purchase through our Web site may
return their handheld computers for any reason within 30 days of purchase. In
addition, we warrant that our hardware will be free of defects for one year from
date of purchase. Delays, costs and damage to our reputation due to product
defects could harm our business.
Our products also could be affected by viruses. In September 2000, the
first-ever virus written to destroy programs based on the Palm OS was
discovered. While there have been few reports of users affected by viruses, it
is possible that viruses may become more prevalent, particularly as handheld
computers and communication devices are more commonly used for wireless
applications that facilitate the sharing of files and other information. To the
extent that antivirus software was unable to protect users of our product from
such viruses, our products could be rejected and result in increased service
costs.
IF WE LOSE OUR KEY PERSONNEL, WE MAY NOT BE ABLE TO MANAGE OUR BUSINESS
SUCCESSFULLY.
Our future success depends to a significant extent on the continued service
of our key technical, sales and senior management personnel and their ability to
execute our growth strategy. In particular, we rely on Jeffrey C. Hawkins, our
Chief Product Officer, Donna L. Dubinsky, our Chief Executive Officer, and
Edward T. Colligan, our Senior Vice President, Marketing and Sales. The loss of
the services of any of our senior level management, or other key employees,
could harm our business. Our future performance will depend, in part, on the
ability of our executive officers to work together effectively. Our executive
officers may not be successful in carrying out their duties or running our
company. Any dissent among executive officers could impair our ability to make
strategic decisions quickly in a rapidly changing market.
IF WE FAIL TO ATTRACT, RETAIN AND MOTIVATE QUALIFIED EMPLOYEES, OUR ABILITY TO
EXECUTE OUR BUSINESS PLAN WOULD BE COMPROMISED.
Our future success depends on our ability to attract, retain and motivate
highly skilled employees. Competition for employees in our industry is intense.
Although we provide compensation packages that include stock options, cash
incentives and other employee benefits, we may be unable to retain our key
employees or to attract, assimilate and retain other highly qualified employees
in the future. For example, fluctuations in the market price of our common stock
could lead potential and existing employees to believe that our equity
incentives are less attractive, which could adversely affect our ability to
attract and retain qualified employees. We expect to experience difficulty in
hiring and retaining highly skilled employees with appropriate qualifications.
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WE DEPEND ON PROPRIETARY RIGHTS TO DEVELOP AND PROTECT OUR TECHNOLOGY.
Our success and ability to compete substantially depends on our internally
developed proprietary technologies, which we protect through a combination of
trade secret, trademark, copyright and patent laws. While we have patent
applications pending, to date no U.S. or foreign patents have been granted to
us.
Patent applications or trademark registrations may not be approved. Even if
they are approved, our patents or trademarks may be successfully challenged by
others or invalidated. In addition, any patents that may be granted to us may
not provide us a significant competitive advantage. If our trademark
registrations are not approved because third parties own these trademarks, our
use of these trademarks would be restricted unless we enter into arrangements
with the third-party owners, which might not be possible on commercially
reasonable terms or at all. If we fail to protect or enforce our intellectual
property rights successfully, our competitive position could suffer.
We may be required to spend significant resources to protect, monitor and
police our intellectual property rights. We may not be able to detect
infringement and may lose competitive position in the market before we do so. In
addition, competitors may design around our technology or develop competing
technologies. Intellectual property rights may also be unavailable or limited in
some foreign countries, which could make it easier for competitors to capture
market share.
WE COULD BE SUBJECT TO CLAIMS OF INFRINGEMENT OF THIRD-PARTY INTELLECTUAL
PROPERTY, WHICH COULD RESULT IN SIGNIFICANT EXPENSE AND LOSS OF INTELLECTUAL
PROPERTY RIGHTS.
Our industry is characterized by uncertain and conflicting intellectual
property claims and frequent intellectual property litigation, especially
regarding patent rights. From time to time, third parties have in the past and
may in the future assert patent, copyright, trademark or other intellectual
property rights to technologies that are important to our business. For example,
we have received a letter from NCR notifying us of potential infringement of its
patents, although we do not believe that resolution of the matter will have a
material impact on us. We may in the future receive other notices of claims that
our products infringe or may infringe intellectual property rights. Any
litigation to determine the validity of such claims, including claims arising
through our contractual indemnification of our business partners, regardless of
their merit or resolution, would likely be costly and time consuming and divert
the efforts and attention of our management and technical personnel. We cannot
assure you that we would prevail in such litigation given the complex technical
issues and inherent uncertainties in intellectual property litigation. If such
litigation resulted in an adverse ruling, we could be required to:
- pay substantial damages and costs;
- cease the manufacture, use or sale of infringing products;
- discontinue the use of certain technology; or
- obtain a license under the intellectual property rights of the third
party claiming infringement, which license may not be available on
reasonable terms, or at all.
OUR FUTURE RESULTS COULD BE HARMED BY ECONOMIC, POLITICAL, REGULATORY AND OTHER
RISKS ASSOCIATED WITH INTERNATIONAL SALES AND OPERATIONS.
We now sell our products in Asia, Canada, Europe, Japan and the Middle East
in addition to the United States. We expect to enter additional international
markets over time. We anticipate that our revenue from international operations
will represent an increasing portion of our total revenue, and accordingly we
will be subject to increased exposure to international risks. In addition, the
facilities where our Visor handheld computers are, and will be, manufactured are
located outside the United States. A substantial number of our
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material suppliers also are based outside of the United States, and are subject
to a wide variety of international risks. Accordingly, our future results could
be harmed by a variety of factors, including:
- changes in foreign currency exchange rates;
- development risks and expenses associated with customizing our products
for local languages;
- difficulty in managing widespread sales and manufacturing operations;
- potentially negative consequences from changes in tax laws;
- trade protection measures and import or export licensing requirements;
- less effective protection of intellectual property;
- changes in a specific country's or region's political or economic
conditions, particularly in emerging markets; and
- impact of natural disasters with an inability of the local government to
quickly provide recovery services.
WE MAY PURSUE STRATEGIC ACQUISITIONS AND WE COULD FAIL TO SUCCESSFULLY INTEGRATE
ACQUIRED BUSINESSES.
We expect to evaluate acquisition opportunities that could provide us with
additional product or services offerings, technologies or additional industry
expertise. In December 2000, we commenced our first acquisition by signing a
definitive agreement to acquire Bluelark Systems, Inc. Acquisitions could result
in difficulties assimilating acquired operations and products, diversion of
capital and management's attention away from other business issues and
opportunities and amortization of acquired intangible assets. Integration of
acquired companies may result in problems related to integration of technology
and management teams. We could fail to integrate the operations, personnel or
products that we may acquire in the future. If we fail to successfully integrate
acquisitions, our business could be materially harmed.
WE MIGHT NEED ADDITIONAL CAPITAL IN THE FUTURE AND ADDITIONAL FINANCING MIGHT
NOT BE AVAILABLE.
We currently anticipate that our available cash resources will be
sufficient to meet our anticipated working capital and capital expenditure
requirements for at least the next 12 months. However, our resources may prove
to be insufficient for these working capital and capital expenditure
requirements. We may need to raise additional funds through public or private
debt or equity financing in order to:
- take advantage of opportunities, including the purchase of technologies
or acquisitions of complementary businesses;
- develop new products or services; or
- respond to competitive pressures.
Depending on market conditions, any additional financing we need may not be
available on terms acceptable to us, or at all. If adequate funds are not
available or are not available on acceptable terms, we might not be able to take
advantage of unanticipated opportunities, develop new products or services or
otherwise respond to unanticipated competitive pressures, and our business could
be harmed.
THE PRICE OF OUR COMMON STOCK HAS BEEN AND IS LIKELY TO CONTINUE TO BE VOLATILE
AND SUBJECT TO WIDE FLUCTUATIONS.
The market price of our common stock has been and is likely to continue to
be subject to wide fluctuations, particularly given that securities of
technology-related companies are typically volatile and because only a small
portion of our outstanding shares currently are publicly traded. If our revenues
do not grow or grow more slowly than we anticipate, or, if operating or capital
expenditures exceed our expectations and cannot be adjusted accordingly, or if
some other event adversely affects us, the market price of our common stock
could decline. In addition, the market price of our common stock could fall for
reasons unrelated to our business, results of operations and financial condition
if there are negative developments in
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the market for technology-related stocks or the stock market in general. The
market price of our stock also might decline in reaction to events that affect
other companies in our industry, such as Palm, even if these events do not
directly affect us. In the past, companies that have experienced volatility in
the market price of their stock have been the subject of securities class action
litigation. If we were to become the subject of securities class action
litigation, it could result in substantial costs and a diversion of management's
attention and resources.
PROVISIONS IN OUR CHARTER DOCUMENTS MIGHT DETER A COMPANY FROM ACQUIRING US.
We have a classified board of directors. In addition, our stockholders are
unable to call special meetings of stockholders, to act by written consent, to
remove any director or the entire board of directors without a super majority
vote or to fill any vacancy on the board of directors. Our stockholders must
also meet advance notice requirements for stockholder proposals. Our board of
directors may also issue preferred stock without any vote or further action by
the stockholders. These provisions and other provisions under Delaware law could
make it more difficult for a third party to acquire us, even if doing so would
benefit our stockholders.
OUR OFFICERS AND DIRECTORS EXERT SUBSTANTIAL INFLUENCE OVER US.
Our executive officers, our directors and entities affiliated with them
together beneficially own a substantial portion of our outstanding common stock.
As a result, these stockholders are able to exercise substantial influence over
all matters requiring approval by our stockholders, including the election of
directors and approval of significant corporate transactions. This concentration
of ownership may also have the effect of delaying or preventing a change in our
control that may be viewed as beneficial by other stockholders.
FUTURE SALES OF SHARES BY EXISTING STOCKHOLDERS COULD AFFECT OUR STOCK PRICE.
If our existing stockholders sell substantial amounts of our common stock
in the public market, the market price of our common stock could decline. The
lock-up agreements pertaining to our initial public offering expired in December
2000 and a large number of our shares now are eligible for sale in the public
market. Many of these shares are held by directors, executive officers and other
affiliates, and are subject to volume limitations under Rule 144 of the
Securities Act of 1933 and various vesting agreements. In addition, shares
subject to outstanding options, and shares reserved for future issuance under
our stock option and purchase plans, will continue to become eligible for sale
in the public market to the extent permitted by the provisions of various
vesting agreements and the securities rules and regulations applicable to these
shares.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Sensitivity. We maintain an investment portfolio consisting
mainly of fixed income securities with an average maturity of less than one
year. These securities are subject to interest rate risk and will fall in value
if market interest rates increase. We have the ability to hold our fixed income
investments until maturity, and therefore we do not expect our operating results
or cash flows to be affected to any significant degree by the effect of a sudden
change in market interest rates. We do not hedge any interest rate exposures.
Foreign Currency Exchange Risk. Revenue and expenses of our international
operations are denominated in various foreign currencies and, accordingly, we
are subject to exposure from adverse movements in foreign currency exchange
rates. To date, the effect of changes in foreign currency exchange rates on
revenues and expenses have not been material. We currently do not hedge our
foreign currency exposure. We intend to assess the need to utilize financial
instruments to hedge currency exposures on an ongoing basis.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we may be involved in litigation relating to claims
arising out of our operations. As of the date of filing this Form 10-Q, we are
not subject to any material legal proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Our Registration Statement on Form S-1 (File No. 333-33666) related to our
initial public offering was declared effective by the SEC on June 20, 2000. A
total of 11,500,000 shares of our Common Stock were registered on our behalf.
Net offering proceeds to us (after deducting underwriting discounts and
commissions and offering expenses) were approximately $212.9 million. As of
December 30, 2000, approximately $23.6 million of these net offering proceeds
had been allocated to general working capital and the remainder had been
invested in short-term, interest-bearing, investment-grade securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Not applicable.
(b) Reports on Form 8-K.
We did not file any reports on Form 8-K during the quarter.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: February 13, 2001 HANDSPRING, INC.
By: /s/ BERNARD J. WHITNEY
------------------------------------
Bernard J. Whitney
Vice President and Chief Financial
Officer
(Principal Financial Officer and
Duly Authorized Officer)
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