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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 SEPTEMBER 29, 2001
[ ] 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 October 26, 2001 there were 131,917,526 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................................ 19
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings......................................................................... 20
Item 2. Changes in Securities and Use of Proceeds................................................. 20
Item 3. Defaults Upon Senior Securities........................................................... 20
Item 4. Submission of Matters to a Vote of Security Holders....................................... 20
Item 5. Other Information......................................................................... 20
Item 6. Exhibits and Reports on Form 8-K.......................................................... 21
SIGNATURES............................................................................................ 22
i
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HANDSPRING, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
SEPTEMBER 29, 2001 JUNE 30, 2001
------------------ -------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents ............................... $ 60,683 $ 87,580
Short-term investments .................................. 16,351 33,943
Accounts receivable, net ................................ 22,170 12,850
Prepaid expenses and other current assets ............... 33,368 19,473
Inventories ............................................. 6,750 2,857
--------- ---------
Total current assets ............................... 139,322 156,703
Long-term investments ...................................... 67,109 80,237
Property and equipment, net ................................ 14,888 15,041
Intangibles and other assets ............................... 1,661 1,254
--------- ---------
Total assets ....................................... $ 222,980 $ 253,235
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................ $ 48,235 $ 37,881
Accrued liabilities ..................................... 55,811 70,152
--------- ---------
Total current liabilities .......................... 104,046 108,033
--------- ---------
Stockholders' equity:
Common stock ............................................ 132 130
Additional paid-in capital .............................. 369,429 368,166
Deferred stock compensation ............................. (22,964) (29,445)
Accumulated other comprehensive income (loss) ........... (312) 994
Accumulated deficit ..................................... (227,351) (194,643)
--------- ---------
Total stockholders' equity ......................... 118,934 145,202
--------- ---------
Total liabilities and stockholders' equity ......... $ 222,980 $ 253,235
========= =========
See accompanying notes to condensed consolidated financial statements
1
HANDSPRING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
QUARTER ENDED
--------------------------------------
SEPTEMBER 29, 2001 SEPTEMBER 30, 2000
------------------ ------------------
(UNAUDITED)
Revenue ............................................................. $ 61,414 $ 70,517
--------- ---------
Costs and operating expenses:
Cost of revenue .................................................. 56,102 48,508
Research and development ......................................... 7,025 4,782
Selling, general and administrative .............................. 26,718 27,786
Amortization of deferred stock compensation and intangibles (*)... 6,532 8,384
--------- ---------
Total costs and operating expenses ....................... 96,377 89,460
--------- ---------
Loss from operations ................................................ (34,963) (18,943)
Interest and other income, net ...................................... 3,005 3,320
--------- ---------
Loss before taxes ................................................... (31,958) (15,623)
Income tax provision ................................................ 750 750
--------- ---------
Net loss ............................................................ $ (32,708) $ (16,373)
========= =========
Basic and diluted net loss per share ................................ $ (0.28) $ (0.17)
========= =========
Shares used in calculating basic and diluted net loss per share...... 116,619 96,582
========= =========
(*) Amortization of deferred stock compensation and intangibles:
Cost of revenue ................................................. $ 829 $ 1,220
Research and development ........................................ 1,546 1,604
Selling, general and administrative ............................. 4,157 5,560
--------- ---------
$ 6,532 $ 8,384
========= =========
See accompanying notes to condensed consolidated financial statements
2
HANDSPRING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
QUARTER ENDED
-------------------------------------------
SEPTEMBER 29, 2001 SEPTEMBER 30, 2000
------------------ ------------------
(UNAUDITED)
Cash flows from operating activities:
Net loss .................................................................... $ (32,708) $ (16,373)
Adjustment to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization ............................................ 2,084 1,376
Amortization of deferred stock compensation and intangibles .............. 6,532 8,384
Amortization of premium or discount on available-for-sale securities, net 23 (278)
Gain on sale of available-for-sale securities ............................ (724) --
Changes in assets and liabilities:
Accounts receivable ............................................... (9,259) (15,074)
Prepaid expenses and other current assets ......................... (14,119) (2,647)
Inventories ....................................................... (3,810) (130)
Intangibles and other assets ...................................... 67 (67)
Accounts payable .................................................. 9,634 19,137
Accrued liabilities ............................................... (14,795) 9,477
--------- ---------
Net cash provided by (used in) operating activities ............. (57,075) 3,805
--------- ---------
Cash flows from investing activities:
Purchases of available-for-sale securities .................................. (55,646) (50,156)
Sales and maturities of available-for-sale securities ....................... 87,185 6,546
Purchases of property and equipment ......................................... (1,864) (4,297)
--------- ---------
Net cash provided by (used in) investing activities .............. 29,675 (47,907)
--------- ---------
Cash flows from financing activities:
Principal payments on borrowings ............................................ -- (83)
Net proceeds from issuance of common stock upon exercise
of underwriter's over-allotment .......................................... -- 27,970
Proceeds from issuance of common stock ...................................... 1,265 13
Repurchase of common stock .................................................. -- (41)
--------- ---------
Net cash provided by financing activities ........................ 1,265 27,859
--------- ---------
Effect of exchange rate changes on cash .......................... (762) (16)
--------- ---------
Net decrease in cash and cash equivalents .......................................... (26,897) (16,259)
Cash and cash equivalents:
Beginning of period ......................................................... 87,580 196,548
--------- ---------
End of period ............................................................... $ 60,683 $ 180,289
========= =========
See accompanying notes to condensed consolidated financial statements
3
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 June 30, 2001. The results of operations for the
quarter ended September 29, 2001 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.
Certain prior period balances have been reclassified to conform to current
period presentation.
2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No.
141 eliminates the pooling-of-interest method of accounting for business
combinations and provides guidance for accounting under the purchase
method. This statement is effective for all transactions initiated after June
30, 2001. SFAS No. 142 establishes accounting standards for recording goodwill.
It prohibits the periodic recording of amortization expense on goodwill, and
requires new methods of reviewing all intangible assets for impairments. SFAS
No. 142 is effective for all fiscal years beginning after December 15, 2001 and,
accordingly, the Company will adopt this standard at the beginning of fiscal
2003. The adoption is not expected to have a material impact on the Company's
financial position and results of operations.
In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, which addresses financial accounting and
reporting for the impairment of certain long-lived assets to be disposed of.
Although SFAS No. 144 supersedes SFAS No. 121 and Accounting Principles Board
Opinion No. 30 ("APB 30"), it retains the requirement of APB 30 to report
discontinued operations separately from continuing operations and extends that
reporting to a component of an entity that either has been disposed of (by sale,
by abandonment, or in a distribution to owners) or is classified as held for
sale. SFAS No. 144 is effective for fiscal years beginning after December 15,
2001 and, accordingly, the Company will adopt this standard at the beginning of
fiscal 2003. The adoption is not expected to have a material impact on the
Company's financial position and 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.
4
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):
QUARTER ENDED
------------------------------------------
SEPTEMBER 29, 2001 SEPTEMBER 30, 2000
------------------ ------------------
Net loss ................................................... $ (32,708) $ (16,373)
========= =========
Basic and diluted:
Weighted average common shares outstanding .............. 131,307 126,887
Weighted average common shares subject to repurchase .... (14,688) (30,305)
--------- ---------
Weighted average common shares used to compute basic
and diluted net loss per share .......................... 116,619 96,582
========= =========
Basic and diluted net loss per share ....................... $ (0.28) $ (0.17)
========= =========
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):
SEPTEMBER 29, 2001 SEPTEMBER 30, 2000
------------------ ------------------
Common stock subject to repurchase ............... 12,969 28,359
Shares issuable under stock options .............. 30,772 27,460
The weighted average repurchase price of unvested stock was $0.06 and $0.07
as of September 29, 2001 and September 30, 2000, respectively. The
weighted-average exercise price of stock options outstanding was $10.63 and
$5.85 as of September 29, 2001 and September 30, 2000, respectively.
4. INVENTORIES
The components of inventories are as follows (in thousands):
SEPTEMBER 29, 2001 JUNE 30, 2001
------------------ -------------
Raw materials ................. $1,116 $1,174
Finished goods ................ 5,634 1,683
------ ------
$6,750 $2,857
====== ======
5. COMPREHENSIVE LOSS
The components of comprehensive loss are as follows (in thousands):
QUARTER ENDED
------------------------------------------
SEPTEMBER 29, 2001 SEPTEMBER 30, 2000
------------------ ------------------
Net loss ...................................................... $(32,708) $(16,373)
Other comprehensive income:
Unrealized gain on securities .............................. 118 38
Foreign currency translation adjustments ................... (1,424) 265
-------- --------
Comprehensive loss ............................................ $(34,014) $(16,070)
======== ========
6. 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
5
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):
QUARTER ENDED
----------------------------------------
SEPTEMBER 29, 2001 SEPTEMBER 30, 2000
------------------ ------------------
REVENUE:
North America ...................... $57,387 $59,367
Rest of the world .................. 4,027 11,150
------- -------
Total ........................... $61,414 $70,517
======= =======
SEPTEMBER 29, 2001 JUNE 30, 2001
------------------ -------------
LONG-LIVED ASSETS:
North America ...................... $81,925 $94,544
Rest of the world .................. 1,733 1,988
------- -------
Total ........................... $83,658 $96,532
======= =======
7. LITIGATION
On March 14, 2001, NCR Corporation filed suit against Handspring and Palm,
Inc. in the United States District Court for the District of Delaware. The
complaint alleges infringement of two U.S. patents. The complaint seeks
unspecified compensatory and treble damages and to permanently enjoin the
defendants from infringing the patent in the future. The Company filed an
answer on April 30, 2001, denying NCR's allegations and asserting counterclaims
for declaratory judgments that we do not infringe the patents in suit, that the
patents in suit are invalid, and that they are unenforceable.
On June 19, 2001, DataQuill Limited filed suit against Handspring and Kyocera
Wireless Corp. in the United States District Court for the Northern District of
Illinois. The complaint alleges infringement of one U.S. Patent. The complaint
seeks unspecified compensatory and treble damages and to permanently enjoin the
defendants from infringing the patent in the future. The Company filed an
answer on August 1, 2001, denying DataQuill's allegations and asserting
counterclaims for declaratory judgments that we do not infringe the patent in
suit, that the patent in suit is invalid, and that it is unenforceable.
On August 13, 2001, Handspring and two of its officers were named as
defendants in a purported securities class action lawsuit filed in United States
District Court for the Southern District of New York. On September 6, 2001, a
substantially identical suit was filed. The complaints assert that the
prospectus for the Company's June 20, 2000 initial public offering failed to
disclose certain alleged actions by the underwriters for the offering. The
complaints also name as defendants the underwriters for Handspring's initial
public offering. The Company has sought indemnification from its underwriters
pursuant to the Underwriting Agreement dated as of June 20, 2000 with the
underwriters in connection with the Company's initial public offering. Neither
Handspring nor its officers have responded to the complaints.
6
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.
Our goal is to become a global market leader in the handheld computing market,
which includes the emerging market for integrated wireless devices offering
voice, data, email and personal information management capabilities.
Shipments of our first Visor products began in October 1999 for orders
received through our Web site. Today we also sell our Visor line of handhelds
through select distributors, retailers and e-commerce partners in the United
States, Canada, Europe, Asia Pacific, Japan and the Middle East.
Revenue is comprised almost entirely of sales of our handheld computers,
modules and related accessories. Retail sales orders are placed in our internal
order processing system. Product orders placed by end user customers are
received via our Web site or over the telephone via our third-party customer
support partner. All orders are then transmitted to our logistics partners. We
recognize revenue when a purchase order has been received, the product has been
shipped, the sales price is fixed or 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.
As is typical for other companies in our industry, we have experienced
seasonality in the sales of our products with increased demand typically
occurring in our second fiscal quarter due in part to increased consumer
spending on electronic devices during the holiday season. It is unknown at this
time how the recent terrorist attacks and resulting impact on the economy and
consumer spending will affect holiday purchases. In addition, demand for our
products may decline during the summer months because of typical decreased
consumer spending patterns during this period. These seasonal variations in our
sales may lead to fluctuations in our quarterly operating results.
Beginning in the fourth quarter of fiscal 2001, we saw significant adverse
changes in the handheld market due to the economic slowdown, excess inventory,
aggressive price reductions and increased competition from both PocketPC and
Palm OS handheld manufacturers. The market for handheld computers continues to
be difficult due to these factors.
We believe that integrated wireless devices are the future of handheld
computing and recognize that continued innovation in this area is critical to
our future success. In October 2001, we introduced the Treo family of
communicators that combine a mobile phone, wireless email, messaging, web
browsing, and a Palm OS organizer. We plan to continue to invest in the
development of the Treo family of communicators for both the consumer and
enterprise markets.
RESULTS OF OPERATIONS
REVENUE. Revenue for the first quarter of fiscal 2002 was $61.4 million as
compared with $70.5 million for the same quarter of the previous fiscal year, a
decline of 13%. Revenue decreased primarily due to price reductions that we made
in response to increased competition, excess inventory and the overall slowdown
in the economy. The revenue decrease also was attributable in part to a slight
decline in unit sales between the two periods. These factors that adversely
affected revenue were partially offset by the expansion of
7
our Visor family of handheld computers to include new products with higher
average selling prices. In addition, during the first quarter of fiscal 2002, we
sold our products in more countries within Europe, Asia Pacific and the Middle
East as compared to the same quarter of the previous fiscal year. However,
revenue outside North America declined to 7% of revenue during the first quarter
of fiscal 2002 as compared to 16% of revenue during the first quarter of fiscal
2001, primarily due to price reductions in Europe and Japan.
COST OF REVENUE. Cost of revenue was $56.1 million for the first quarter of
fiscal 2002 compared to $48.5 million for the same quarter of the previous
fiscal year. Cost of revenue, excluding the amortization of deferred stock
compensation, resulted in gross margin declining from 31% during the first
quarter of fiscal 2001 to 9% during the first quarter of fiscal 2002. This
decline was primarily attributable to pricing and promotion actions taken in
order to increase demand and reduce inventory. Future gross margins may be
adversely affected by new product introductions by our competitors, competitor
pricing actions and higher inventory balances. We also expect our gross margin
to fluctuate in the future due to channel mix, geographic mix, new product
introductions and seasonal effects.
RESEARCH AND DEVELOPMENT. Research and development expenses increased to $7.0
million during the first quarter of fiscal 2002 from $4.8 million during the
same quarter of the previous fiscal year. This increase was primarily due to the
hiring of additional personnel required for the development of new products. We
believe that continued investment in research and development is critical to our
plans to develop wireless communication products.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses decreased to $26.7 million during the first quarter of fiscal 2002 from
$27.8 million during the same quarter of the previous fiscal year due to general
cost reductions made company-wide, including significant reductions in
advertising and marketing activities, that offset increased spending on
additional headcount. As a result of ongoing cost reduction efforts, we expect
that selling, general and administrative expenses will be lower in absolute
dollars throughout fiscal 2002 compared to fiscal 2001.
AMORTIZATION OF DEFERRED STOCK COMPENSATION AND INTANGIBLES. We recognized
$6.5 million and $8.4 million of amortization of deferred stock compensation and
intangibles during the first quarter of fiscal 2002 and the first quarter of
fiscal 2001, respectively. This amount is primarily related to the stock options
that we granted to our officers and employees prior to our initial public
offering on June 20, 2000, 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. In addition, in February 2001,
we recorded $3.9 million of deferred stock compensation in relation to the
unvested stock options and restricted stock assumed in the acquisition of
BlueLark Systems. All of the deferred stock compensation is being amortized,
using the multiple option method, over the vesting period of the related options
and restricted stock. Accordingly, our results of operations will include
amortization of deferred stock compensation through fiscal 2004.
As part of the acquisition of BlueLark Systems, we also recorded goodwill and
other intangible assets of $612,000. The goodwill and intangibles are being
amortized on a straight-line basis over three years.
Future amortization of deferred stock compensation and intangibles is
estimated to be $13.6 million, $8.2 million and $1.3 million for the fiscal
years ending 2002, 2003 and 2004, respectively. However, the amortization of
deferred stock compensation and intangibles may be higher than these expected
amounts if we acquire additional companies or technologies.
INTEREST AND OTHER INCOME, NET. Interest and other income, net decreased to
$3.0 million during the first quarter of fiscal 2002 from $3.3 million during
the first quarter of fiscal 2001. The decrease was primarily attributable to the
lower average cash balances and lower interest rates during the first quarter of
fiscal 2002 compared with the same quarter of fiscal 2001. Also included within
this line item are gains and losses from fluctuations in foreign currency
exchange rates. During the first quarter of fiscal 2002 we recorded gains on our
foreign subsidiaries' U.S. dollar liabilities as the dollar weakened against the
entities' functional currencies. These gains partially offset the effect of the
lower interest income during the quarter, and contrasted with foreign currency
exchange losses in the same quarter of the previous year. We enter into foreign
exchange forward contracts to minimize the impact of foreign currency
fluctuations on assets and liabilities denominated in currencies other than the
functional currency of the reporting entity.
INCOME TAX PROVISION. The provision for income taxes was $750,000 during the
first quarter of both fiscal 2002 and fiscal 2001. The provision for income
taxes consists of foreign taxes related to our business outside of the United
States. No provision for federal and state income taxes was recorded because we
have experienced significant net losses, which have resulted in deferred tax
assets. We provided a full valuation allowance for all deferred tax assets
because, in light of our history of operating losses, we are presently unable to
conclude that it is more likely than not that the deferred tax assets will be
realized.
8
LIQUIDITY AND CAPITAL RESOURCES
As of September 29, 2001, we had cash, cash equivalents and short-term
investments of $77.0 million, down $44.5 million from the balances as of June
30, 2001. The decrease was primarily attributable to the impact of recent price
reductions, additional prepayments made to our suppliers for inventories and
payments to our partners for certain excess and obsolete inventories owned by
them that were identified during the fourth quarter of fiscal 2001.
During the first quarter of fiscal 2002, we used $57.1 million of cash for
operating activities. This usage was primarily attributable to our net loss
during the quarter. An increase in our accounts receivable, prepaid expenses,
other current assets and inventories, and a decrease in current liabilities also
contributed significantly to the usage of cash during the quarter. These uses
were partially offset by non-cash charges for depreciation and amortization, and
amortization of deferred stock compensation and intangibles. Operating
activities during the first quarter of fiscal 2001 provided cash of $3.8
million. The net loss during this quarter and the usage of cash for an increase
in receivables, prepaid expenses and other current assets was more than offset
by the non-cash charges of depreciation and amortization and amortization of
deferred stock compensation, as well as cash provided by an increase in current
liabilities.
As of September 29, 2001, we had prepaid $25.7 million for inventory held on
our behalf by Modus Media International, our logistics partner responsible for
the pack-out process for all of our handheld computers. This prepayment was
applied to the total inventory that we purchased from Modus in October 2001 when
we amended our agreement with them. Under the amended agreement, we now own all
inventory held at Modus until it is sold and title transfers to the customer.
Prior to this amendment we took title to all products at the point of transfer
to the common carrier.
Net cash provided by investing activities during the first quarter of fiscal
2002 was $29.7 million, consisting primarily of cash received from the sales and
maturities of available-for-sale securities, partially offset by purchases of
available-for-sale securities and property and equipment. During the first
quarter of fiscal 2001 we used $47.9 million for investing activities,
predominantly attributable to the purchases of available-for-sale securities,
and to a lesser extent the purchases of property and equipment, partially offset
by the cash received from the sales and maturities of available-for-sale
securities.
Net cash provided by financing activities was $1.3 million during the first
quarter of fiscal 2002, consisting entirely of cash received upon the issuance
of common stock for stock option exercises and for purchases under our employee
stock purchase program. During the first quarter of fiscal 2001 there was $27.9
million of cash provided by financing activities, primarily attributable to the
underwriters of our initial public offering exercising their over-allotment to
purchase 1,500,000 shares of common stock.
Our future capital requirements will depend on many factors, including the
level and timing of our revenue and expenses. We believe that our cash, cash
equivalents and investments 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 or if cash generated from operations is insufficient to
satisfy our liquidity requirements, we may need additional cash to finance our
operating and investing needs. However, depending on market conditions, any
additional financing we need may not be available on terms acceptable to us, or
at all. 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.
FACTORS AFFECTING FUTURE RESULTS
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:
- uncertain economic conditions and declining consumer confidence;
- increased competition from new devices such as those from Compaq, Palm and
Sony;
- further price reductions by Palm or other competitors on their older
devices that could cause reduced sales of Handspring Visor products;
- the timely introduction of new products by us and our competitors;
9
- market acceptance of existing and future versions of our products;
- the seasonality of our product sales;
- our success in developing and marketing products for the wireless voice
and data markets;
- the price of products that both we and our competitors offer;
- fluctuations in manufacturing costs we pay to produce our handheld
computers; and
- the mix of products that we offer.
A GENERAL DECLINE IN ECONOMIC CONDITIONS COULD LEAD TO REDUCED DEMAND FOR OUR
PRODUCTS.
The current downturn in general economic conditions has led to reduced demand
for a variety of goods and services, including many technology products. If
conditions continue to decline, or fail to improve, we could see a significant
additional decrease in the overall demand for our products that could harm our
operating results. The risk that economic conditions will not improve in the
near term has been compounded by the terrorist attacks on the World Trade Center
and the Pentagon that occurred in September 2001, and the subsequent acts of
bioterrorism.
WE HAVE A HISTORY OF LOSSES, WE EXPECT LOSSES TO CONTINUE AND WE MIGHT NOT
ACHIEVE OR MAINTAIN PROFITABILITY.
Our accumulated deficit as of September 29, 2001 was approximately $227.4
million. We had net losses of approximately $32.7 million during the first
quarter of fiscal 2002 and $16.4 million during the same quarter of the previous
fiscal year. We also expect to continue to incur substantial non-cash costs
relating to the amortization of deferred compensation and intangibles, which
will contribute to our net losses. As of September 29, 2001, we had a total of
$23.4 million of deferred compensation and intangibles to be amortized. 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 ON OUR LICENSE FROM PALM AND ITS FOCUS ON ITS LICENSING
BUSINESS. OUR FAILURE TO MAINTAIN THIS LICENSE OR A CHANGE IN PALM'S BUSINESS
FOCUS COULD SERIOUSLY HARM OUR BUSINESS.
Our license of the Palm OS operating system is critical to our Visor handheld
computers. If the license is not maintained or if Palm changes its business
focus, it could seriously harm our business. This could happen in several ways.
First, we could breach the license agreement, in which case Palm would be
entitled to terminate the license. Second, if Palm were to be acquired, the new
licensor may not be as strategically aligned with us as Palm. Third, Palm has
announced that it is separating its software business into a new division, which
may be spun off as a separate entity. It is unclear how that restructuring will
affect us. Moreover, we are dependent on Palm to continuously upgrade the Palm
OS to operate on faster processors and otherwise remain competitive with other
handheld operating systems.
The Palm OS operating system license agreement was renewed in April 2001 and
extends until April 2009. Upon expiration or termination of the license
agreement, other than due to our breach, we may choose to keep the license
granted under the agreement for two years following its 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. In addition,
there are limitations on our ability to assign the Palm license agreement to a
third-party. The existence of these license termination provisions and
limitations on assignment may have an anti-takeover effect in that it could
discourage third parties from seeking to acquire us.
While we are not required to exclusively license the Palm OS operating
system, to license a substitute operating system could be less desirable and
could be costly in terms of cash and other resources. We may also develop our
own operating system, which would take considerable time, resources and expense.
THE DEVELOPMENT OF NEW PRODUCTS AND SERVICES IS LENGTHY AND COSTLY AND REQUIRES
HIGH LEVELS OF INNOVATION.
If we fail to anticipate our end users' needs and technological trends
accurately or are otherwise unable to complete the development of products and
services in a timely fashion, we will be unable to introduce new products and
services into the market,
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which will affect our ability to successfully compete. We cannot guarantee that
we will be able to introduce new products on a timely or cost-effective basis or
that customer demand will meet our expectations.
OUR EFFORTS TO REDUCE OUR EXPENSES FOLLOWING THE RECENT ADVERSE CHANGES IN THE
HANDHELD COMPUTER MARKET MAY NOT BE SUCCESSFUL.
Beginning in the fourth quarter of fiscal year 2001, we saw significant
adverse changes in the handheld market that caused our revenue to decline by 51%
from our third fiscal quarter and our gross margins to decline substantially. In
the first and second quarters of fiscal year 2002, we implemented a cost
reduction program to lower overall costs and expenses. Cost reduction measures
included decreasing our work force by approximately 14%, changing some positions
from full to part time status, canceling certain projects, reducing marketing
activities, deciding to substantially shut down the company during Christmas
week, changing our business model in some international markets and altering our
technical support and repair strategies.
In the event that we are not able to achieve the planned expense reductions,
our operating results and ability to operate the business could be adversely
impacted. It is possible that a worsening economy, new competitive developments,
or changes in our business may require additional cost reduction activities in
the future that in turn may affect our operations and limit our future product
development opportunities.
OUR BUSINESS COULD BE HARMED BY LAWSUITS THAT 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. 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.
WE ARE HIGHLY DEPENDENT ON RETAILERS AND DISTRIBUTORS TO SELL OUR PRODUCTS AND
DISRUPTIONS IN THESE CHANNELS AND OTHER EFFECTS OF SELLING THROUGH RETAILERS AND
DISTRIBUTORS WOULD HARM OUR ABILITY TO SELL 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 to resell our products in their stores in the United
States. Currently, our three largest retail partners are Best Buy, Staples and
Wynit (which distributes to CompUSA). Since that time we have added numerous
additional retail and online partners within the United States. We also have
expanded into international markets and now offer our products through
distributors in Asia Pacific, Canada, Japan, Europe and the Middle East.
Disruptions to these channels would adversely affect our ability to generate
revenues from the sale of our handheld devices.
As the global information technology market weakens, the likelihood of the
erosion of the financial condition of these distributors and retailers
increases, which could cause a disruption in distribution as well as a loss of
any of our outstanding accounts receivable.
We are subject to many risks relating to the distribution of our products by
retailers and distributors, including the following:
- if we reduce the prices of our products, as we did for the first time in
the fourth quarter of fiscal year 2001, 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 from retailers and distributors could increase as a result
of our strategic interest in assisting retailers and distributors in
maintaining appropriate inventory levels;
- retailers and distributors may not maintain inventory levels sufficient to
meet customer demand;
- retailers and distributors may emphasize our competitors' products or
decline to carry our products; and
- conflicts may develop between the retail and distribution channels and
direct sales of our products through our handspring.com Web site and by
our e-commerce partners.
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In addition, to the extent our revenues through the retail and distribution
channels increase as a percentage of total revenue, our gross margin 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 could negatively
impact our cash flow cycle. This is due to the fact that we offer payment terms
to retailers and distributors, but our sales on the Web site are for cash.
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, we
must maintain our computer systems in good operating order and protect them
against damage from fire, water, power loss, telecommunications failures,
computer viruses, vandalism and other malicious acts and similar unexpected
adverse events. Our servers currently are co-located with Exodus Communications,
which recently filed for Chapter 11 bankruptcy protection due to its financial
difficulties. Any disruption in the co-location services provided by Exodus or
its failure to handle current or higher volumes of use could have a material
adverse effect on our business. Despite precautions we have taken and
improvements that we have made, unanticipated problems affecting our systems
have in the past and could in the future cause temporary interruptions or delays
in the services we provide. Sustained or repeated system failures or delays
would affect our reputation, which would harm our business. While we carry
business interruption insurance, it might not be sufficient to cover any serious
or prolonged emergencies.
BUSINESS INTERRUPTIONS COULD ADVERSELY AFFECT OUR BUSINESS.
Our facilities, information systems and general business operations, and
those of our partners and customers, are vulnerable to interruption by fire,
earthquake, power loss, telecommunications failure, terrorist attacks, wars and
other events beyond our control, including the possibility of terrorist attacks.
The business interruption insurance we carry may not be sufficient to compensate
us fully for losses or damages that may occur as a result of such events. Any
such losses or damages incurred by us could have a material adverse effect on
our business
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. 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 due to high industry demand. Shortages of components
would harm our ability to deliver our products on a timely basis.
In addition, 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 products would be seriously harmed.
THE CHANGE IN OUR INVENTORY SYSTEM WITH MODUS MEDIA INTERNATIONAL COULD EXPOSE
US TO RISK OF LOSS FOR DAMAGED PRODUCTS NOT MANAGED BY US.
In October 2001, we amended our agreement with Modus Media International. Under
the amended agreement, we own but do not directly manage the inventory held at
Modus's
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facilities. We are in the process of implementing operational procedures with
Modus with respect to handling this inventory. While Modus is contractually
obligated for all risk of loss or damage to this inventory, if such inventory
were to be lost or damaged, or if appropriate operational procedures are not
successfully implemented, our ability to meet customer demand for our products
would be harmed.
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, intense 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;
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 such as the Treo family of wireless
communicators, 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 TREO AND OTHER
NEW WIRELESS COMMUNICATOR PRODUCTS AND RELATED SERVICES, DEMAND FOR OUR PRODUCTS
COULD DECREASE.
We depend on our ability to develop new or enhanced products and services
that achieve rapid and broad market acceptance. We may fail to identify new
product and service opportunities successfully and develop and bring to market
new products and services in a timely manner. In addition, our product and
service innovations may not achieve the market penetration or price stability
necessary for profitability. If we are unsuccessful at developing and
introducing new products and services that are appealing to customers, our
business and operating results would be negatively impacted.
As the use of handheld computers and wireless communication devices continue
to evolve, we plan to continue to develop products and services that compliment
our existing ones and products and services in new areas where we see technology
trends moving. For example, in October 2001, we announced our new Treo family of
wireless communicators. This development effort focuses on new wireless
technologies, as opposed to more traditional handheld electronic organizers
where we have more extensive engineering and marketing experience. Also, we face
uncertainties as we evolve our business to include the licensing of our Blazer
Web browser, including our ability to support a much larger user base. If we
fail to successfully develop and commercialize Treo, Blazer and other innovative
wireless products and services, our business would be harmed.
OUR TREO WIRELESS COMMUNICATOR PRODUCTS PRESENT MANY SIGNIFICANT RISKS AND
UNCERTAINTIES, MANY OF WHICH ARE BEYOND OUR CONTROL.
The expansion of our business beyond traditional handheld computers to our
Treo wireless communicator products present many significant risks and
uncertainties, many of which are beyond our control. Factors that could affect
the success of Treo include:
- Our need to establish appropriate relationships, and build on our existing
relationships, with wireless carriers on reasonable terms;
- The wireless carriers' interest and success in testing Treo on their
networks;
- The quality and coverage area of voice and data services offered by the
wireless carriers for use with Treo;
- The degree to which wireless carriers will facilitate the successful
introduction of Treo and actively promote Treo after it becomes
commercially available;
- The pricing and terms of rate plans that the wireless carriers will offer
for use with Treo;
- The timing of the build-out of advanced wireless networks such as General
Packet Radio Service (GPRS), also known as 2.5G, that will enhance the
user experience for data applications including email;
- Our plans to deliver additional software that will enable Treo to fully
exploit the benefits of GPRS networks;
- The availability of the monochrome display version of Treo in early 2002
and color display version in mid-2002;
- The type of distribution channels where Treo will be available;
- The end user price of Treo; and
- The extent to which people will appreciate, and therefore purchase, a
product like Treo that combines multiple functions in a pocket sized
device.
13
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 tied to
the Springboard modules designed for our Visor handheld computers. 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 computers and modules could
decline.
IF WE FAIL TO ACCURATELY ANTICIPATE DEMAND FOR OUR PRODUCTS, WE MAY HAVE COSTLY
EXCESS PRODUCTION OR NOT BE ABLE TO SECURE SUFFICIENT QUANTITIES OR
COST-EFFECTIVE PRODUCTION OF OUR HANDHELD COMPUTERS.
The demand for our products depends on many factors and is difficult to
forecast, particularly given that we have multiple products, increased
competition and a difficult economic environment. 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 and may be required to
incur excess and obsolete inventory charges. We have limited capability to
reduce manufacturing capacity once a purchase order has been placed and in some
circumstances incur cancellation charges or other liabilities to our
manufacturing partners if we cancel or reschedule purchase orders. Moreover, if
we reduce manufacturing capacity, we would incur higher per unit costs based on
smaller volume purchases.
We experienced significant excess capacity for the first time in the fourth
quarter of fiscal 2001 when the slowing global economy, aggressive price
reductions by Palm and increased competition resulted in our sales falling
substantially below our forecasts. As a result, our inventory balances and
inventory commitments were higher than our forecasted future sales, causing us
to take a charge of $26.8 million for excess inventory and related costs during
the fourth quarter of fiscal 2001.
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
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them. The inability of either our manufacturers or our suppliers to increase
production rapidly enough could cause us to fail to meet customer 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.
WE FACE SEASONALITY IN OUR SALES, WHICH COULD CAUSE OUR QUARTERLY OPERATING
RESULTS TO FLUCTUATE.
Seasonal variations in our sales may lead to fluctuations in our quarterly
operating results. As is typical for other companies in our industry, we have
experienced seasonality in the sales of our products with increased demand
typically occurring in our second fiscal quarter due in part to increased
consumer spending on electronic devices during the holiday season. It is unknown
at this time how the recent terrorist attacks and resulting impact on the
economy and consumer spending will affect holiday purchases. In addition, demand
for our products may decline during the summer months because of typical
decreased consumer spending patterns during this period. 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 is critical to increasing
demand for and achieving widespread acceptance of our products. Some of our
competitors and potential competitors have better name recognition and more
powerful brands. Promoting and positioning our brand will depend largely on the
success of our marketing efforts and our ability to produce well received new
products. However, currently we have only limited marketing resources given our
focus on reducing our overall costs while increasing
15
research and development expenditures for new wireless communication products.
Moreover, 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 wireless 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 products compete with a variety of handheld devices, including
keyboard-based devices, sub-notebook computers, smart phones and two-way pagers.
Our principal competitors, and possible new competitors, include:
- Palm, from whom we license our operating system;
- licensees of the Microsoft's PocketPC operating system for handheld
devices such as Casio, Compaq and Hewlett-Packard;
- licensees of Symbian EPOCH operating systems for wireless communication
devices such as Panasonic and Siemens;
- other Palm OS operating system licensees, including Acer, Handera, Sony
and Symbol;
- smart phone manufacturers such as Ericsson, Kyocera, Motorola, Nokia and
Samsung;
- Research In Motion Limited, or RIM, a leading provider of wireless email,
instant messaging and Internet connectivity; and
- Danger, a provider of integrated wireless products and services.
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 the sales and market acceptance of our products, cause intense price
competition and result in reduced gross margins and loss of market share.
Our failure to compete successfully against current or future competitors
could seriously harm our business. We cannot be sure that we will have
sufficient resources or that we will be able to make the technological advances
necessary to be competitive.
OUR PRODUCTS MAY CONTAIN ERRORS OR DEFECTS THAT 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 products 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,
we warrant that our hardware will be free of defects for one year after the 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 AND SECURITY RISKS.
There have been computer viruses and security risks impacting handheld device
operating systems and wireless networks. It is possible that these viruses and
security risks 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. Such viruses and security
risks, and their attendant publicity, may adversely impact sales of our
products.
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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 Chief Operating Officer. The loss of the services of any of
these or any of our other senior level management, or other key employees, could
harm our business.
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. Further, when our common stock price is less than the exercise
price of stock options granted to employees, turnover may increase, which could
harm our results of operations or financial condition. In order to help retain
employees, we implemented a program pursuant to which we will grant new options
to existing employees on an ongoing basis where the size of each grant will be
determined based on performance and grade level. If we fail to retain, hire and
integrate qualified employees and contractors, we will not be able to maintain
and expand our business.
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 numerous
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 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.
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. On March 14,
2001, NCR Corporation filed suit against Handspring and Palm, Inc. in the United
States District Court for the District of Delaware. The complaint alleges
infringement of two U.S. patents. We filed an answer on April 30, 2001, denying
NCR's allegations and asserting counterclaims. On June 19, 2001, DataQuill
Limited filed suit against Handspring and Kyocera Wireless Corp. in the United
States District Court for the Northern District of Illinois. The complaint
alleges infringement of one U.S. patent. We filed an answer on August 1, 2001,
denying DataQuill's allegations and asserting counterclaims. We believe that the
claims in both lawsuits are without merit and intend to defend vigorously
against them.
We may in the future receive other notices of claims that our products
infringe or may infringe on 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 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;
17
- 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 Pacific, Canada, Europe, Japan and the
Middle East in addition to the United States. We expect to enter additional
international markets over time. If our revenue from international operations
increases as a percentage of our total revenue, we will be subject to increased
exposure to international risks. In addition, the facilities where our products
are and will be manufactured are located outside the United States. A
substantial number of our 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; and
- changes in a specific country's or region's political or economic
conditions, particularly in emerging markets.
WE MAY PURSUE STRATEGIC ACQUISITIONS AND WE COULD FAIL TO SUCCESSFULLY INTEGRATE
ACQUIRED BUSINESSES.
In February 2001, we completed the acquisition of BlueLark Systems. We expect
to evaluate future acquisition opportunities that could provide us with
additional product or services offerings, technologies or industry expertise.
Integration of acquired companies may result in problems relating to integrating
technology and management teams. Management's attention may also be diverted
away from other business issues and opportunities while focusing on the
acquisitions. If we fail to integrate the operations, personnel or products that
we may acquire in the future, 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.
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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 only a small portion of
our outstanding shares currently are publicly traded. Our stock price fell below
our initial public offering price for the first time in the third quarter of the
2001 fiscal year.
Among the factors that could affect our stock price are:
- quarterly variations in our operating results;
- changes in revenues or earnings estimates or publication of research
reports by analysts;
- speculation in the press or investment community;
- reactions to events that affect other companies in our industry,
particularly Palm, even if these events do not directly affect us;
- actions by institutional stockholders;
- negative developments in the market for technology related stock or the
stock market in general; and
- domestic and international economic factors unrelated to our performance.
In the past, companies that have experienced volatility in the market price
of their stock have been the subject of securities class action litigation. We
recently have been named as a party in several purported securities class action
lawsuits that claim that the prospectus for Handspring's June 20, 2000 initial
public offering failed to disclose certain alleged actions by the underwriters
for the offering. We have sought indemnification from our underwriters pursuant
to the Underwriting Agreement that we entered into with them in connection with
our initial public offering.
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, or
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. Many of
the shares eligible for sale in the public market 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Sensitivity. We maintain a portfolio of short-term and
long-term investments consisting mainly of fixed income securities with an
average maturity of less than one year. These securities may fall in value if
interest rates rise and if liquidated prior
19
to their maturity dates. We have the ability to hold our fixed income
investments until maturity and therefore we do not anticipate our operating
results or cash flows to be significantly affected by any increase in market
interest rates. We do not hedge 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 movements in foreign currency exchange rates. We
enter into foreign exchange forward contracts to hedge certain balance sheet
exposures and intercompany balances against future movements in foreign exchange
rates. We do not use derivative financial instruments for speculative or trading
purposes. Gains and losses on the forward contracts are largely offset by the
underlying transactions' exposure and, consequently, a sudden or significant
change in foreign exchange rates is not expected to have a material impact on
future net income or cash flows. We are exposed to credit-related losses in the
event of nonperformance by counter parties to these financial instruments, but
do not expect any counter party to fail to meet its obligation.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On March 14, 2001, NCR Corporation filed suit against Handspring and Palm,
Inc. in the United States District Court for the District of Delaware. The
complaint alleges infringement of two U.S. patents. The complaint seeks
unspecified compensatory and treble damages and to permanently enjoin the
defendants from infringing the patent in the future. We filed an answer on
April 30, 2001, denying NCR's allegations and asserting counterclaims for
declaratory judgments that we do not infringe the patents in suit, that the
patents in suit are invalid, and that they are unenforceable.
On June 19, 2001, DataQuill Limited filed suit against Handspring and Kyocera
Wireless Corp. in the United States District Court for the Northern District of
Illinois. The complaint alleges infringement of one U.S. Patent. The complaint
seeks unspecified compensatory and treble damages and to permanently enjoin the
defendants from infringing the patent in the future. We filed an answer on
August 1, 2001, denying DataQuill's allegations and asserting counterclaims for
declaratory judgments that we do not infringe the patent in suit, that the
patent in suit is invalid, and that it is unenforceable.
On August 13, 2001, Handspring and two of our officers were named as
defendants in a purported securities class action lawsuit filed in United States
District Court for the Southern District of New York. On September 6, 2001, a
substantially identical suit was filed. The complaints assert that the
prospectus for Handspring's June 20, 2000 initial public offering failed to
disclose certain alleged actions by the underwriters for the offering. The
complaints allege claims against Handspring and two of our officers under
Sections 11 and 15 of the Securities Act of 1933, as amended, and under Section
10(b) and Section 20(a) of the Securities Exchange Act of 1934, as amended. The
complaints also name as defendants the underwriters for Handspring's initial
public offering. We have sought indemnification from our underwriters pursuant
to the Underwriting Agreement dated as of June 20, 2000 with our underwriters in
connection with our initial public offering. Neither Handspring nor our officers
have responded to the complaints.
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. We have
used, and expect to continue to use, the net proceeds for general working
capital. Funds not used for general working capital are invested in available-
for-sale, 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
20
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
EXHIBIT
NUMBER EXHIBIT TITLE
------ -------------
10.30 Incentive Bonus Program FY 2002
(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: November 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)
22
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
10.30 Incentive Bonus Program FY 2002