EXHIBIT 99.1
Non-GAAP Financial Measures
The SEC has issued rules to regulate the use in filings with the SEC and in public disclosures of non-GAAP financial measures, such as operating results for the fiscal year ended May 31, 2007, net income before interest (income) expense, net, provision for income taxes and depreciation and amortization (“EBITDA”), and Adjusted EBITDA and the ratios related thereto. Palm has included non-GAAP financial measures in this presentation, including, for example, with respect to its operating results for the fiscal year ended May 31, 2007, EBITDA and Adjusted EBITDA, which may not comply with the SEC rules governing the presentation of non-GAAP financial measures in SEC filings. Palm defines Adjusted EBITDA as EBITDA further adjusted to exclude stock based compensation, net other non-operating income (expense), in-process research and development, legal settlements, restructuring charges (adjustments) and employee separation costs. Adjusted EBITDA is not a measure of operating income, performance or liquidity under GAAP and is subject to important limitations. In particular, these non-GAAP financial measures are not based on a comprehensive set of accounting rules or principles and many of the adjustments to the GAAP financial measures reflect the exclusion of items that are recurring and will be reflected in the Company’s financial results for the foreseeable future. In addition, other companies, including other companies in Palm’s industry, may calculate non-GAAP financial measures differently than the Company does, limiting their usefulness as a comparative tool. Palm’s management uses Adjusted EBITDA principally as a measure of its operating performance and believes that Adjusted EBITDA is useful to investors because it is frequently used by securities analysts, investors and other interested parties in their evaluation of companies in similar industries. Palm also believes Adjusted EBITDA is useful to its management and investors as a measure of comparative operating performance between time periods and among companies as it is reflective of changes in pricing decisions, cost controls and other factors that affect operating performance. For a presentation of net income (loss) as calculated under GAAP and a reconciliation to Palm’s EBITDA and Adjusted EBITDA, see “Summary historical financial information”.
Summary of historical financial information
Historical financial performance
Years ended May 31, | Pro forma for the year ended May 31, 2007 | |||||||||||||||
(dollars in thousands except average selling prices (“ASP”) | 2005 | 2006 | 2007 | |||||||||||||
Statement of income data: | ||||||||||||||||
Revenues1 | $ | 1,270,410 | $ | 1,578,509 | $ | 1,560,507 | $ | 1,560,507 | ||||||||
Cost of revenues2 | 879,458 | 1,057,708 | 985,369 | 985,369 | ||||||||||||
Gross profit | $ | 390,952 | $ | 520,801 | $ | 575,138 | $ | 575,138 | ||||||||
Operating expenses: | ||||||||||||||||
Sales and marketing2 | 171,646 | 205,794 | 248,685 | 248,685 | ||||||||||||
Research and development2 | 90,060 | 136,243 | 190,952 | 194,272 | ||||||||||||
General and administrative2 | 40,872 | 44,297 | 59,762 | 59,762 | ||||||||||||
In-process research and development | — | — | 3,700 | 3,700 | ||||||||||||
Amortization of intangible assets | 7,806 | 4,589 | 1,981 | 1,981 | ||||||||||||
Legal settlements | — | 23,775 | — | — | ||||||||||||
Restructuring charges (adjustments) | (360 | ) | 792 | — | — | |||||||||||
Employee separation costs2 | 3,400 | — | — | — | ||||||||||||
Total operating expenses | 313,424 | 415,490 | 505,080 | 508,400 | ||||||||||||
Operating income | 77,528 | 105,311 | 70,058 | 66,738 | ||||||||||||
Interest and other income (expense) net | 3,003 | 11,336 | 22,369 | (18,325 | ) | |||||||||||
Income before income taxes | 80,531 | 116,647 | 92,427 | 48,413 | ||||||||||||
Income tax provision (benefit)3 | 14,144 | (219,523 | ) | 36,044 | 18,741 | |||||||||||
Net income | $ | 66,387 | $ | 336,170 | $ | 56,383 | $ | 29,672 | ||||||||
Balance sheet data (as of the end of the period): | ||||||||||||||||
Cash, cash equivalents and short-term investments4 | $ | 362,699 | $ | 518,894 | $ | 546,685 | $ | 308,463 | ||||||||
Total assets | 950,032 | 1,487,522 | 1,548,002 | 1,327,313 | ||||||||||||
Total debt5 | 54,757 | 56,105 | 9,219 | 409,219 | ||||||||||||
Series B convertible preferred stock6 | — | — | — | 313,476 | ||||||||||||
Total stockholders’ equity | 581,023 | 983,905 | 1,062,411 | 128,246 | ||||||||||||
Statement of cash flow data: | ||||||||||||||||
Net cash provided by (used in): | ||||||||||||||||
Operating activities | $ | 113,048 | $ | 138,200 | $ | 168,191 | ||||||||||
Investing activities | (102,706 | ) | (191,461 | ) | (98,910 | ) | ||||||||||
Financing activities | 19,253 | 38,558 | (54,612 | ) | ||||||||||||
Other data: | ||||||||||||||||
EBITDA7 | $ | 99,451 | $ | 122,328 | $ | 90,070 | $ | 86,750 | ||||||||
Adjusted EBITDA7 | 105,947 | 151,348 | 119,644 | 119,044 | ||||||||||||
Capital expenditures | 15,279 | 18,944 | 24,651 | 24,651 | ||||||||||||
Ratio of total debt to Adjusted EBITDA | — | — | — | 3.4x | ||||||||||||
Ratio of net total debt to Adjusted EBITDA8 | — | — | — | 0.3x | ||||||||||||
Ratio of pro forma Adjusted EBITDA to pro forma interest expense9 | — | — | — | 3.0x | ||||||||||||
Smartphone units (sell-through) (units in millions) | 1.1 | 2.0 | 2.7 | 2.7 | ||||||||||||
Handheld units (sell-through) (units in millions) | 3.3 | 2.6 | 1.8 | 1.8 | ||||||||||||
Smartphone ASP | $ | 454 | $ | 468 | $ | 463 | $ | 463 | ||||||||
Handheld ASP | $ | 192 | $ | 176 | $ | 173 | $ | 173 | ||||||||
Free cash flow data: | ||||||||||||||||
Adjusted EBITDA | $ | 105,947 | $ | 151,348 | $ | 119,644 | $ | 119,044 | ||||||||
Less: Capital expenditures | (15,279 | ) | (18,944 | ) | (24,651 | ) | (24,651 | ) | ||||||||
Less: Cash taxes | (7,561 | ) | (5,878 | ) | (8,900 | ) | (8,900 | ) | ||||||||
Plus: Change in working capital | 23,396 | 5,848 | 39,839 | 39,839 | ||||||||||||
Plus: Interest income / (Expense) | 4,432 | 14,020 | 23,988 | (16,706 | ) | |||||||||||
Free cash flow | $ | 110,935 | $ | 146,394 | $ | 149,920 | $ | 108,626 | ||||||||
Free cash flow as a % of revenue | 9 | % | 9 | % | 10 | % | 7 | % |
1 | Palm sells products in two product lines: smartphones and handheld computers. Revenues by product line are as follows (dollars in thousands): |
Years ended May 31, | Pro forma for the year ended May 31, 2007 | |||||||||||
2005 | 2006 | 2007 | ||||||||||
Revenues | ||||||||||||
Smartphones | $ | 587,740 | $ | 1,088,312 | $ | 1,250,040 | 1,250,040 | |||||
Handheld computers | 682,670 | 490,197 | 310,467 | 310,467 | ||||||||
$ | 1,270,410 | $ | 1,578,509 | $ | 1,560,507 | $ | 1,560,507 | |||||
2 | Prior to June 1, 2006, the Company accounted for stock-based compensation expense under APB No. 25, Accounting for Stock issued to Employees, which measured stock-based compensation expense using the intrinsic value method. As of June 1, 2006, the Company accounts for stock-based compensation expense under SFAS No. 123(R),Share-Based Payment, which requires stock-based compensation expense to be recognized based on grant date fair value. Periods prior to June 1, 2006, have not been restated to conform with the provisions of SFAS No. 123(R). |
Years ended May 31, | Pro forma for the year ended May 31, 2007 | |||||||||||
2005 | 2006 | 2007 | ||||||||||
Cost of revenues | $ | 23 | $ | 13 | $ | 2,276 | $ | 2,276 | ||||
Sales and marketing | 753 | 656 | 6,012 | 6,012 | ||||||||
Research and development | 256 | 284 | 9,024 | 11,744 | ||||||||
General and administrative | 661 | 816 | 6,943 | 6,943 | ||||||||
Employee separation costs | 334 | — | — | — | ||||||||
$ | 2,027 | $ | 1,769 | $ | 24,255 | $ | 26,975 | |||||
Pro forma stock-based compensation expense includes $2.7 million of stock-based compensation for Mr. Rubinstein’s option and restricted stock unit grants he will receive upon the closing of the Transaction.
3 | Income tax benefit in fiscal 2006 includes a $250.3 million reversal of Palm’s valuation allowance on its deferred tax assets based on the conclusion that it is more likely than not that Palm’s domestic deferred tax assets will be realized in the future and, accordingly, that it would be appropriate to release the valuation allowance recorded against those deferred tax assets. |
4 | Cash, cash equivalents and short-term investments pro forma as of May 31, 2007 do not include the proceeds of approximately $64.5 million received from the June 2007 sale of land. |
5 | Total debt as of May 31, 2005 and 2006 relates to convertible debt and a payable to ACCESS Systems related to the acquisition of the Palm brand. Total debt as of May 31, 2007 relates to payables to ACCESS Systems and to Oracle. The debt to ACCESS Systems relates to the acquisition of the Palm trademark in 2005 and is due in equal installments in May 2008 and in November 2008. The debt to Oracle relates to the purchase of an Oracle license and is due in quarterly installments through July 2009. Total debt on a pro forma basis relates to payables to Access Systems, to Oracle and the new debt. |
6 | Elevation will invest $325.0 million in Palm in the form of 325,000 shares of Series B Convertible Preferred Stock, which will represent approximately 27% of the voting shares outstanding of Palm on an as-converted basis. Palm will incur issuance costs of approximately $11.5 million relating to the Series B Convertible Preferred Stock. |
7 | EBITDA represents net income before net interest income (expense), income taxes, depreciation and amortization. EBITDA does not represent and should not be considered as an alternative to net income or cash flow from operations, as determined in accordance with Generally Accepted Accounting Principles (“GAAP”) and Palm’s calculations thereof may not be comparable to similarly entitled measures reported by other companies. |
Adjusted EBITDA is defined as EBITDA further adjusted to exclude stock-based compensation, net other non-operating income (expense), in-process research and development, legal settlements, restructuring charges (adjustments) and employee separation costs. Palm presents EBITDA and Adjusted EBITDA because the Company believes them to be additional useful indicators of their operating performance. Palm’s management uses Adjusted EBITDA principally as a measure of its operating performance and believes that Adjusted EBITDA is useful to investors because it is frequently used by securities analysts, investors and other interested parties in their evaluation of companies in industries similar to ours. Palm also believes Adjusted EBITDA is useful to the Company’s management and investors as a measure of comparative operating performance between time periods and among companies as it is reflective of changes in pricing decisions, cost controls and other factors that affect operating performance.
The reconciliation of net income to EBITDA to Adjusted EBITDA is as follows (dollars in thousands):
Years ended May 31, | Pro forma for the year ended May 31, 2007 | ||||||||||||||
2005 | 2006 | 2007 | |||||||||||||
Net income | $ | 66,387 | $ | 336,170 | $ | 56,383 | $ | 29,672 | |||||||
Interest (income) expense, net | (4,432 | ) | (14,020 | ) | (23,988 | ) | 16,706 | ||||||||
Income tax provision (benefit) | 14,144 | (219,523 | ) | 36,044 | 18,741 | ||||||||||
Depreciation and amortization | 23,352 | 19,701 | 21,631 | 21,631 | |||||||||||
EBITDA | $ | 99,451 | $ | 122,328 | $ | 90,070 | $ | 86,750 | |||||||
Adjustments | |||||||||||||||
Stock-based compensationa | $ | 2,027 | $ | 1,769 | $ | 24,255 | $ | 26,975 | |||||||
Other non-operating income (expense), netb | 1,429 | 2,684 | 1,619 | 1,619 | |||||||||||
In-process research and developmentc | — | — | 3,700 | 3,700 | |||||||||||
Restructuring charges (adjustments)d | (360 | ) | 792 | — | — | ||||||||||
Legal settlementse | — | 23,775 | — | — | |||||||||||
Employee separation costsf | 3,400 | — | — | — | |||||||||||
Adjusted EBITDAg | $ | 105,947 | $ | 151,348 | $ | 119,644 | $ | 119,044 | |||||||
a | Amounts represent non-cash stock-based compensation expense. |
b | Other non-operating income (expense), net represents fees and expenses for asset and cash management and gains (losses) on sale of cash investments. |
c | In-process research and development for fiscal 2007 represents a write-off during the third quarter of fiscal 2007 of in-process research and development which was acquired in conjunction with the purchase of assets and which had not yet reached technological feasibility and had no alternative future use. |
d | Restructuring charges (adjustments) are recorded in accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, and are recorded as incurred. Restructuring charges (adjustments) consist of workforce reductions, facilities and property and equipment disposed of or removed from service and canceled projects recorded during fiscal 2003 through fiscal 2006. |
e | Represents legal settlements in the fourth quarter of fiscal 2006, including a $22.5 million settlement with Xerox Corporation, as well as an additional settlement for $1.3 million. |
f | Represents employee separation costs in fiscal year 2005 of $3.1 million recorded for one-time payments to certain of Palm’s employees, including Palm’s former chief executive officer, and $0.3 million associated with unvested shares of Palm restricted stock and a portion of the unvested options to purchase shares of Palm common stock that had their vesting accelerated in connection with employee separation costs |
g | Adjusted EBITDA on a pro forma basis includes the anticipated annual cash salary of Jonathan Rubinstein of $0.6 million upon the closing of the Transaction. |
8 | Ratio of net debt to Adjusted EBITDA represents the debt disclosed in the balance sheet data above as of the period minus cash, cash equivalents and short-term investments divided by Adjusted EBITDA. For purposes of calculating this ratio for the pro forma May 31, 2007 period, we have included in the calculation of net debt the proceeds of approximately $64.5 million received from the sale of land which occurred in June 2007. |
9 | Ratio of pro forma Adjusted EBITDA to pro forma interest expense represents Adjusted EBITDA divided by the total interest expense less the amortization of transaction fees. |