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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended November 30, 2001
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 000-29597
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Palm, Inc.
(Exact name of registrant as specified in its charter)
Delaware 94-3150688
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5470 Great America Parkway 95052
Santa Clara, California -----
----------------------- (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (408) 878-9000
Former name, former address and former fiscal year, if changed since last
report: N/A
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 December 28, 2001, 577,508,708 shares of the Registrant's Common Stock
were outstanding.
This report contains a total of 51 pages of which this page is number 1.
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Palm, Inc.
Table of Contents
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations
Three and Six Months Ended November 30, 2001 and
December 1, 2000 3
Condensed Consolidated Balance Sheets
November 30, 2001 and June 1, 2001 4
Condensed Consolidated Statements of Cash Flows
Six Months Ended November 30, 2001 and December 1, 2000 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures about Market Risk 43
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 44
Item 4. Submission of Matters to a Vote of Security Holders 47
Item 6. Exhibits and Reports on Form 8-K 48
Signatures 51
Palm OS is a registered trademark, and MyPalm and Palm are trademarks of Palm,
Inc. or its subsidiaries.
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Palm, Inc.
Condensed Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
--------------------------- ---------------------------
November 30, December 1, November 30, December 1,
2001 2000 2001 2000
------------ ----------- ------------ -----------
Revenues $ 290,580 $522,192 $ 504,897 $923,168
Costs and operating expenses:
Cost of revenues 230,868 332,625 386,228 579,451
Cost of revenues-charge/(reduction)
for excess inventory and related costs (43,850) -- (58,150) --
Sales and marketing 60,757 89,829 126,304 165,830
Research and development 37,694 40,993 78,900 71,313
General and administrative 15,492 24,865 27,635 45,356
Amortization of goodwill
and intangible assets (*) 2,927 8,306 5,837 14,228
Restructuring charges 24,227 -- 25,988 --
Separation costs -- 802 376 2,617
Purchased in-process technology -- -- -- 853
--------- -------- --------- --------
Total costs and operating expenses 328,115 497,420 593,118 879,648
Operating income (loss) (37,535) 24,772 (88,221) 43,520
Interest and other income, net 464 12,744 3,458 25,988
--------- -------- --------- --------
Income (loss) before income taxes (37,071) 37,516 (84,763) 69,508
Income tax provision (benefit) (11,863) 17,257 (27,124) 31,974
--------- -------- --------- --------
Net income (loss) $ (25,208) $ 20,259 $ (57,639) $ 37,534
========= ======== ========= ========
Net income (loss) per share:
Basic $ (0.04) $ 0.04 $ (0.10) $ 0.07
Diluted $ (0.04) $ 0.04 $ (0.10) $ 0.07
Shares used in computing net income
(loss) per share amounts:
Basic 568,459 565,946 567,837 565,548
Diluted 568,459 571,594 567,837 569,845
(*) Amortization of goodwill and intangible assets:
Cost of revenues $ 1,401 $ 802 $ 2,780 $ 1,489
Sales and marketing -- 160 11 320
Research and development 1,515 7,344 3,035 12,419
General and administrative 11 -- 11 --
--------- -------- --------- --------
Total amortization of goodwill
and intangible assets $ 2,927 $ 8,306 $ 5,837 $ 14,228
========= ======== ========= ========
See notes to condensed consolidated financial statements.
3
Palm, Inc.
Condensed Consolidated Balance Sheets
(In thousands, except par value amounts)
November 30, June 1,
2001 2001
------------ -------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 241,978 $ 513,769
Accounts receivable, net of allowance for doubtful
accounts of $10,628 and $14,899, respectively 130,103 115,342
Inventories 78,633 107,813
Deferred income taxes 109,472 154,362
Prepaids and other 14,306 12,867
----------- -----------
Total current assets 574,492 904,153
Property and equipment, net 225,328 223,422
Goodwill, net 54,970 43,169
Intangible assets, net 12,469 18,218
Deferred income taxes 170,232 90,656
Other assets 20,069 17,633
----------- -----------
Total assets $ 1,057,560 $ 1,297,251
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 146,654 $ 238,235
Accrued restructuring 39,891 32,399
Other accrued liabilities 170,566 282,851
----------- -----------
Total current liabilities 357,111 553,485
Non-current liabilities:
Deferred revenue and other 8,576 9,614
Stockholders' equity:
Preferred stock, $.001 par value, 125,000 shares
authorized; none outstanding -- --
Common stock, $.001 par value, 2,000,000 shares
authorized; outstanding: November 30, 2001,
572,192; June 1, 2001, 567,215 572 567
Additional paid-in capital 1,103,067 1,092,329
Unamortized deferred stock-based compensation (10,464) (14,929)
Accumulated deficit (401,678) (344,039)
Accumulated other comprehensive income 376 224
----------- -----------
Total stockholders' equity 691,873 734,152
----------- -----------
Total liabilities and stockholders' equity $ 1,057,560 $ 1,297,251
=========== ===========
See notes to condensed consolidated financial statements
4
Palm, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Six Months Ended
---------------------------
November 30, December 1,
2001 2000
------------ -----------
Cash flows from operating activities:
Net income (loss) $ (57,639) $ 37,534
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 21,730 18,629
Amortization of deferred stock-based compensation 3,639 3,136
Loss on disposal of property and equipment -- 7
Deferred income taxes (34,425) (11,211)
Purchased in-process technology -- 853
Changes in assets and liabilities, net of effect of acquisitions:
Accounts receivable (14,761) (123,839)
Inventories 28,867 (9,730)
Prepaids and other (4,979) (6,301)
Accounts payable (91,581) 62,106
Tax benefit from employee stock options 91 13,591
Accrued restructuring 7,492 --
Other accrued liabilities (116,909) 10,983
--------- -----------
Net cash used in operating activities (258,475) (4,242)
--------- -----------
Cash flows from investing activities:
Purchase of property and equipment (13,841) (31,118)
Acquisition of businesses, net of cash acquired -- (67,023)
Purchases of restricted investments -- (231,098)
Purchase of equity investments -- (6,880)
--------- -----------
Net cash used in investing activities (13,841) (336,119)
--------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock 772 22,278
Repurchase of restricted stock grants (294) --
Other, net 47 (1,157)
--------- -----------
Net cash provided by financing activities 525 21,121
--------- -----------
Change in cash and cash equivalents (271,791) (319,240)
Cash and cash equivalents, beginning of period 513,769 1,062,128
--------- -----------
Cash and cash equivalents, end of period $ 241,978 $ 742,888
========= ===========
Other cash flow information:
Cash refund (paid) for income taxes $ 16,805 $ (12,913)
========= ===========
Cash paid for interest $ (44) $ (18)
========= ===========
Non-cash investing and financing activities are as follows:
Fair value of stock options assumed in
business combination $ -- $ 4,672
========= ===========
Common stock issued for acquisition of businesses $ 11,000 $ --
========= ===========
Unrealized gain (loss) on investments $ (14) $ 103
========= ===========
Purchase of property and equipment through a capital lease $ 2,436 $ --
========= ===========
See notes to condensed consolidated financial statements.
5
Palm, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The condensed consolidated financial statements have been prepared by Palm, Inc.
("Palm," "the Company", "us," "we," or "our"), without audit, pursuant to the
rules of the Securities and Exchange Commission ("SEC"). In the opinion of
management, these unaudited condensed consolidated financial statements include
all adjustments necessary for a fair presentation of Palm's financial position
as of November 30, 2001, cash flows for the six months ended November 30, 2001
and December 1, 2000 and Palm's results of operations for the three and six
months ended November 30, 2001 and December 1, 2000. Certain prior year balances
have been reclassified to conform to the current year presentation.
On September 13, 1999, 3Com announced its plan to create an independent
publicly-traded company, Palm, Inc., comprised of 3Com's handheld computing
business. Palm's legal separation from 3Com occurred on February 26, 2000, at
which time Palm began to operate independently from 3Com. Palm completed its
initial public offering in March 2000. Palm began incurring separation costs in
the second quarter of fiscal year 2000, which were costs associated with the
process of becoming a stand-alone company, including consulting and professional
fees. Palm believes that separation costs related to the separation from 3Com
are now complete.
Palm's 52-53 week fiscal year ends on the Friday nearest to May 31. Fiscal years
2002 and 2001 each contain 52 weeks. These condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and related notes thereto included in Palm's Annual Report on Form
10-K for the fiscal year ended June 1, 2001.
2. Recent Accounting Pronouncements
In August 2001, the Financial Accounting Standard Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 144, "Accounting for
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of", addressing financial accounting and reporting for the
impairment or disposal of long-lived assets. This statement is effective for our
fiscal year beginning June 1, 2002. Palm has not yet determined the impact on
its financial position or results of operations.
6
3. Comprehensive Income
The components of comprehensive income are as follows (in thousands):
Three Months Ended Six Months Ended
November 30, December 1, November 30, December 1,
2001 2000 2001 2000
------------ ----------- ------------ -----------
Net income (loss) $(25,208) $ 20,259 $(57,639) $ 37,534
Other comprehensive income:
Unrealized gain (loss) on investments 22 (19) (14) 103
Reclass of loss to income statement 119 -- 119 --
Change in accumulated translation adjustments (19) 135 47 138
-------- -------- -------- --------
Total comprehensive income (loss) $(25,086) $ 20,375 $(57,487) $ 37,775
======== ======== ======== ========
4. Net Income (Loss) Per Share
Basic net income (loss) per share is calculated based on the weighted average
shares of common stock outstanding during the period. Diluted net income (loss)
per share is calculated based on the weighted average shares of common stock
outstanding, plus the dilutive effect of stock options and warrants outstanding,
calculated using the treasury stock method. For the three and six months ended
November 30, 2001, stock options and warrants outstanding would have been
anti-dilutive. For the three and six months ended December 1, 2000, the dilutive
effect of stock options outstanding was approximately 5,648,000 and 4,297,000
shares, respectively.
5. Inventories
Inventories consist of the following (in thousands):
November 30, June 1,
2001 2001
------------ -------
Finished goods $ 75,361 $104,676
Work-in-process 3,272 3,137
-------- --------
$ 78,633 $107,813
======== ========
7
6. Restructuring Charges
During the second quarter of fiscal year 2002, Palm initiated a series of
restructuring actions intended to align its cost structure with its business
operations in order to return Palm to profitability. The fiscal year 2002
restructuring charges consist of workforce reduction costs and excess facilities
and related costs for lease commitments for space no longer needed to support
ongoing operations. These fiscal year 2002 actions are in addition to the cost
reduction actions announced and begun in the fourth quarter of fiscal year 2001.
The following describes the restructuring actions initiated during the second
quarter of fiscal year 2002:
o Palm recorded a workforce reduction charge of approximately $14.0
million, primarily related to severance, benefits and related costs.
This charge relates to the reduction of approximately 250 regular
employees across all geographic regions.
o Palm recorded a charge of $7.8 million for excess facilities. The
charge consisted of lease commitments for facilities which Palm is
exiting or will not occupy, net of anticipated sublease proceeds,
and property and equipment that was disposed of or removed from
service.
The restructuring charges initiated in the fourth quarter of fiscal year 2001
consisted of carrying and development costs related to the land on which Palm
had previously planned to build its future headquarters facility, excess
facilities consolidation costs related to lease commitments for space no longer
intended for use, workforce reduction across all geographic regions and
discontinued project costs. These workforce reductions affected approximately
300 regular employees. During the first two quarters of fiscal year 2002, Palm
recorded charges totalling $4.1 million due to changes from the original
estimate of the cost of the restructuring actions announced in the fourth
quarter of fiscal year 2001. As of November 30, 2001, approximately 260 regular
employees have been terminated pursuant to the fiscal year 2001 cost reduction
actions.
Palm expects to complete substantially all of the cost reduction actions
initiated in the second quarter of fiscal year 2002 and in the fourth quarter of
fiscal year 2001 during the remainder of fiscal year 2002. Palm cannot assure
that its current estimates of the costs associated with these restructuring
actions will not change during the implementation period.
Accrued restructuring charges related to the fiscal year 2002 announcement
consist of the following (in thousands):
Excess Workforce
facilities costs reduction costs Totals
---------------- --------------- ------
Restructuring expenses $ 7,845 $ 14,044 $ 21,889
Cash payments (303) (2,061) (2,364)
Write-offs -- (34) (34)
------- -------- --------
Balances, November 30, 2001 $ 7,542 $ 11,949 $ 19,491
======= ======== ========
8
As of November 30, 2001, the balance of accrued restructuring charges originally
recorded in the fourth quarter of fiscal year 2001 consist of the following (in
thousands):
Land carrying
and Workforce
development Excess reduction Discontinued
costs facilities costs costs project costs Total
------------- ---------------- --------- ------------- -----
Balances, June 1, 2001 $ 1,257 $ 17,530 $ 10,984 $ 2,628 $ 32,399
Restructuring expenses 1,186 5,099 (2,186) -- 4,099
Cash payments (2,029) (4,371) (6,752) (1,030) (14,182)
Write-offs -- (1,400) (25) (491) (1,916)
------- -------- -------- ------- --------
Balances, November 30, 2001 $ 414 $ 16,858 $ 2,021 $ 1,107 $ 20,400
======= ======== ======== ======= ========
7. Goodwill and Other Intangible Assets -- Adoption of SFAS No. 142
Palm elected early adoption of SFAS No. 142, Goodwill and Other Intangible
Assets. As defined by SFAS No. 142, the Company identified two reporting units
which constitute components of Palm's business that include goodwill. As of June
2, 2001, the fair value of these two reporting units were assessed and compared
to the respective carrying amounts. Upon completion of the transitional
impairment test, the fair value for each of the Company's reporting units
exceeded the reporting unit's carrying amount and no impairment was indicated.
Intangible assets consist of the following (in thousands):
November 30, 2001 June 1, 2001
----------------------------------------- ------------------------------------------
Amortization Gross Carrying Accumulated Gross Carrying Accumulated
Period Amount Amortization Net Amount Amortization Net
------ -------------- ------------ ------- -------------- ------------ -------
Core Technology 24-48 months $ 14,849 $ (7,156) $ 7,693 $ 14,049 $ (4,495) $ 9,554
Non-Compete Covenants 6-24 months 12,759 (8,525) 4,234 11,979 (5,468) 6,511
Acquired Workforce 24-36 months -- -- -- 2,601 (1,109) 1,492
Other 36 months 710 (168) 542 710 (49) 661
-------- -------- -------- -------- -------- --------
Total $ 28,318 $(15,849) $ 12,469 $ 29,339 $(11,121) $ 18,218
======== ======== ======== ======== ======== ========
In accordance with SFAS No. 142, all of Palm's intangible assets are subject to
amortization except for acquired workforce which has been recorded as goodwill
as of June 2, 2001.
9
The aggregate amortization expense was $2,927 and $5,837 for the three and six
months ended November 30, 2001, respectively. For the three and six months ended
December 1, 2000, the aggregate amortization expense was $8,306 and $14,228,
respectively. Estimated future amortization expense is as follows (in
thousands):
Fiscal Year
2002 (remaining 6 months) $ 6,059
2003 5,434
2004 865
2005 111
--------
Total $ 12,469
========
The changes in the carrying amount of goodwill for the six months ended November
30, 2001, are as follows (in thousands):
Total
-------
Balance as of June 1, 2001 $ 43,169
SFAS 142 adjustment, net of
deferred income taxes 1,231
--------
Balance as of June 2, 2001 44,400
Goodwill acquired during the period 10,570
--------
Balance as of November 30, 2001 $ 54,970
========
10
Had the provisions of SFAS No. 142 been applied for the three and six months
ended December 1, 2000, the Company's net income (loss) and net income (loss)
per share would have been as follows (in thousands, except per share amounts):
Three Months Ended Six Months Ended
November 30, 2001 December 1, 2000 November 30, 2001 December 1, 2000
----------------- ---------------- ----------------- ----------------
Net income (loss), as reported $(25,208) $ 20,259 $(57,639) $ 37,534
Add back amortization:
Goodwill -- 5,858 -- 9,903
Acquired workforce -- 387 -- 690
Related income tax effect -- (247) -- (66)
-------- -------- -------- --------
Adjusted net income (loss) $(25,208) $ 26,257 $(57,639) $ 48,061
======== ======== ======== ========
Net income (loss) per share:
Basic net income (loss) per share, as reported $ (0.04) $ 0.04 $ (0.10) $ 0.07
Add back amortization of goodwill and
acquired workforce, and related income
tax effect -- 0.01 -- 0.02
-------- -------- -------- --------
Adjusted basic net income (loss) per share $ (0.04) $ 0.05 $ (0.10) $ 0.09
======== ======== ======== ========
Diluted net income (loss) per share, as reported $ (0.04) $ 0.04 $ (0.10) $ 0.07
Add back amortization of goodwill and
acquired workforce, and related income
tax effect -- 0.01 -- 0.02
-------- -------- -------- --------
Adjusted diluted net income (loss) per share $ (0.04) $ 0.05 $ (0.10) $ 0.09
======== ======== ======== ========
8. Business Combinations
On November 13, 2001, Palm completed its purchase of specified assets of Be
Incorporated, including substantially all of Be's intellectual property and
other technology assets. Be is a provider of software solutions designed
specifically for Internet appliances and digital media. As a result of the asset
purchase, Palm expects to benefit from the addition of a substantial majority of
Be's engineers to Palm's Platform Solutions Group. In addition, potential
benefits of the acquisition include the possibility of integrating Be's
operating system technology into current and future versions of the Palm OS and
other Palm platform products to enhance Palm's Internet, communications and
multimedia offerings.
The total purchase price of $12.2 million consisted of $11.0 million of Palm
common stock (4,104,478 shares issued based on the closing stock price on
November 12, 2001) and $1.2 million of direct transaction costs. The transaction
was accounted for as a purchase pursuant to SFAS No. 141, Business Combinations.
Pursuant to SFAS No. 142, goodwill related to the Be acquisition will not be
amortized, but will be tested at least annually for impairment.
11
The Be asset purchase price was allocated as follows (in thousands):
Amortization
Period Amount
------ ------
Core Technology 36 mos. $ 800
Non-Compete Covenants 24 mos. 780
Goodwill 10,570
-------
Total Purchase Price $12,150
=======
The goodwill is deductible for tax purposes.
9. Litigation
Palm is a party to lawsuits in the normal course of its business. Litigation in
general, and intellectual property litigation in particular, can be expensive
and disruptive to normal business operations. Moreover, the results of complex
legal proceedings are difficult to predict. Palm believes that it has defenses
to the cases set forth below and is vigorously contesting these matters. Palm is
not currently able to estimate, with reasonable certainty, the possible loss, or
range of loss, if any, from the cases listed below, but an unfavorable
resolution of these lawsuits could adversely affect Palm's business, results of
operations or financial condition.
On April 28, 1997, Xerox Corporation filed suit against U.S. Robotics
Corporation and U.S. Robotics Access Corp. in the United States District Court
for the Western District of New York. The case came to be captioned: Xerox
Corporation v. U.S. Robotics Corporation, U.S. Robotics Access Corp., Palm
Computing, Inc. and 3Com Corporation, Civil Action No. 97-CV-6182T. The
complaint alleged willful infringement of U.S. Patent No. 5,596,656, entitled
"Unistrokes for Computerized Interpretation of Handwriting." The complaint
sought unspecified damages and to permanently enjoin the defendants from
infringing the patent in the future. In 2000, the District Court dismissed the
case, ruling that the patent is not infringed by the Graffiti handwriting
recognition system used with Palm handheld computers. Xerox appealed the
dismissal to the United States Court of Appeals for the Federal Circuit
("CAFC"). On October 5, 2001, the CAFC affirmed-in-part, reversed-in-part and
remanded the case to the District Court for further proceedings. On December 20,
2001, the District Court granted Xerox's motion for summary judgment that the
patent is valid, enforceable, and infringed. The defendants filed a Notice of
Appeal on December 21, 2001.
On July 22, 1999, Palm filed a copyright infringement action against Olivetti
Office USA, Inc. and CompanionLink Software, Inc. in the United States District
Court for the Northern District of California alleging that Olivetti's "Royal
daVinci" handheld device and the daVinci OS Software Development Kit
(distributed by CompanionLink) contained source code copied from the Palm OS
operating system. Palm obtained a preliminary injunction against further
distribution, sale, import or export of any product containing source code or
object code copied or derived from the Palm OS operating system. The injunction
is to remain in effect pending the outcome of the lawsuit. The Court has set the
case for trial beginning March 11, 2003. Palm also initiated a copyright
infringement action in Hong Kong on July 21, 1999, against EchoLink Design,
Ltd., the company responsible for developing the operating system software
contained in the Olivetti daVinci devices that are the subject of the action
against Olivetti in the Northern District of California. The High Court of the
Hong Kong Special Administrative Region issued an order the same day restraining
EchoLink from further copying, distribution, sale, import or export of Palm OS
operating system source code or EchoLink's "NEXUS OS" source code, which Palm
12
maintains infringes its copyrights. Kessel Electronics (H.K.), Limited, which
supplied Olivetti with the daVinci devices, was subsequently added to the Hong
Kong action. Kessel consented to an injunction against reproducing, copying,
importing, exporting, distributing, or making available to the public any
software contained in certain files of the Palm OS source code or object code.
In September 2001, Kessel Electronics (H.K.) Limited filed papers in Hong Kong
seeking to liquidate the company pursuant to section 228A of the Hong Kong
Companies Ordinance.
By letter dated October 7, 1999, 3Com notified certain third party retailers
about the preliminary injunction order issued against Olivetti and
CompanionLink. On October 5, 2000, Olivetti filed an action against Palm and
3Com in the Superior Court of California, Santa Clara County, for unfair
competition, intentional interference with potential economic advantage, libel
and trade libel, based upon certain statements that were allegedly made, or that
3Com allegedly omitted to make, in the October 7, 1999 letter. In addition,
Olivetti has filed the identical action, as counterclaims and third-party claims
against Palm and 3Com, in the United States District Court for the Northern
District of California. Palm and 3Com filed a motion to strike Olivetti's state
court complaint under California's anti-SLAPP statute. On April 3, 2001, the
Superior Court granted Palm's and 3Com's motion. Olivetti has appealed from the
order granting the motion to strike. Olivetti's identical claims against Palm
(and 3Com) have been stayed in the federal action pending Olivetti's appeal of
the state court ruling dismissing Olivetti's claims.
On February 28, 2000, E-Pass Technologies, Inc. filed suit against "3Com, Inc."
in the United States District Court for the Southern District of New York and
later filed on March 6, 2000 an amended complaint against Palm and 3Com. The
case is now captioned E-Pass Technologies, Inc. v. 3Com Corporation, a/k/a 3Com,
Inc. and Palm, Inc. (Civil Action No. 00 CIV 1523). The amended complaint
alleges willful infringement of U.S. Patent No. 5,276,311, entitled "Method and
Device for Simplifying the Use of Credit Cards, or the Like." The complaint
seeks unspecified compensatory and treble damages and to permanently enjoin the
defendants from infringing the patent in the future. The case was transferred to
the U.S. District Court for the Northern District of California. The parties
have engaged in discovery. On December 5, 2001, the Court issued a Markman order
that interpreted certain patent claim terms at issue. No trial date has been
set.
In January 2001, a shareholder derivative and class action lawsuit, captioned
Shaev v. Benhamou, et al., No. CV795128, was filed in California Superior Court.
The complaint alleged that Palm's directors breached fiduciary duties by not
having Palm's public shareholders approve Palm's 1999 director stock option
plan. The 1999 director plan was approved prior to Palm's March 2000 initial
public offering by 3Com Corporation, Palm's sole shareholder at the time. The
complaint alleged that Palm was required to seek approval for the plan by
shareholders after the initial public offering. Plaintiff filed an amended
complaint in November 2001 adding new defendants and new allegations, including
that defendants breached fiduciary duties by approving Palm's 2001 director
stock option plan and by making misrepresentations in Palm's September 2001
proxy statement. Plaintiff has not specified the amount of damages he may seek.
The case is in discovery. No trial date has been set.
On March 14, 2001, NCR Corporation filed suit against Palm and Handspring, Inc.
in the United States District Court for the District of Delaware. The case is
captioned, NCR Corporation v. Palm, Inc. and Handspring, Inc. (Civil Action No.
01-169). The complaint alleges infringement of U.S. Patent Nos. 4,634,845 and
4,689,478, entitled, respectively, "Portable Personal Terminal for Use in a
System for Handling Transactions" and "System for Handling Transactions
Including a Portable Personal Terminal." The complaint seeks unspecified
compensatory and treble damages and to permanently enjoin the defendants from
infringing the patents in the future. The parties have engaged in discovery. The
Court has tentatively scheduled trial to begin on July 29, 2002.
13
Starting on June 20, 2001, Palm, several of its officers, and a director were
named as defendants in purported securities class action lawsuits filed in
federal district court for the Southern District of New York. The first of these
lawsuits is captioned Weiner v. Palm, Inc., et al., No. 01 CV 5613. The
complaints assert that the prospectus from Palm's March 2, 2000 initial public
offering failed to disclose certain alleged actions by the underwriters for the
offering. The complaints allege claims against Palm, several of its officers,
and the director under Sections 11 and 15 of the Securities Act of 1933, as
amended. Certain of the complaints also allege claims 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 Palm's initial public offering.
Palm, its officers and the director have not responded to these actions.
On August 7, 2001, a purported consumer class action lawsuit was filed against
Palm and 3Com Corporation in California Superior Court, San Francisco County.
The case is captioned Connelly et al v. Palm, Inc., 3 Com Corp et al (Case No.
323587). An Amended Complaint was filed and served on Palm on August 15, 2001.
The Amended Complaint, filed on behalf of purchasers of Palm III, IIIc, V and Vx
handhelds, alleges that certain Palm handhelds may cause damage to PC
motherboards by permitting an electrical charge, or "floating voltage," from
either the handheld or the cradle to be introduced into the PC via the serial
and/or USB port on the PC. Plaintiffs allege that this damage is the result of a
design defect in one or more of the following: HotSync software, handheld,
cradle and/or the connection cable. The complaint seeks restitution, rescission,
damages, an injunction mandating corrective measures to protect against future
damage as well as notifying users of potential harm. Palm's answer was filed on
October 1, 2001. The parties have engaged in discovery. No trial date has been
set.
In connection with Palm's separation from 3Com, pursuant to the terms of the
Indemnification and Insurance Matters Agreement between 3Com and Palm, Palm
agreed to indemnify and hold 3Com harmless for any damages or losses which might
arise out of the Xerox, E-Pass, Olivetti, and Connelly litigation.
10. Subsequent Events
On December 7, 2001, Palm issued a $50.0 million, 5.0% convertible note due in
2006. The note is convertible into Palm common stock at $4.63 per share. Palm
may force a conversion at any time beyond one year of the closing, provided
Palm's common stock has traded above $7.13 per share for a defined period of
time.
On December 18, 2001, Palm acquired ThinAirApps, Inc., a developer of software
and applications enabling secure wireless access to corporate email and other
critical enterprise data, for approximately $19.0 million in Palm common stock,
based on the trading price of Palm's common stock at the closing date. The
transaction will be accounted for as a purchase in accordance with SFAS No. 141.
14
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This quarterly report contains forward-looking statements within the meaning of
the federal securities laws. These statements include those concerning the
following: Palm's beliefs and expectations about its financial statements;
Palm's intentions and expectations regarding restructuring charges, its cost
structure, its cost reduction actions, its return to profitability, its cost
reduction and restructuring program and its expenses; Palm's expectations
regarding amortization expenses; Palm's beliefs and expectations regarding the
purchase of assets of Be Incorporated, the benefits from the acquisition and
amortization and the testing of goodwill for impairment; Palm's beliefs,
intentions and expectations regarding litigation matters and legal proceedings,
its defenses to such matters and its contesting of such matters; Palm's beliefs
and expectations regarding its convertible note; Palm's beliefs and expectations
regarding its acquisition of ThinAirApps, Inc.; Palm's intentions and
expectations regarding the internal separation of its businesses and segment
reporting; Palm's beliefs and expectations regarding pro forma measures; Palm's
beliefs and expectations regarding price protection and other pricing and
promotion programs; Palm's beliefs and expectations regarding its sales; Palm's
beliefs and expectations regarding its existing cash and cash equivalents, its
credit facility and its cash requirements; Palm's intentions, beliefs and
expectations regarding its products and services and its introduction of new
products and services; Palm's expectations regarding its demand for its products
and services and its ability to forecast demand; Palm's beliefs and expectations
regarding its revenues; Palm's expectations regarding its revenue mix, profit
margins and operating results; Palm's beliefs and expectations regarding
competition, its competitors and its ability to compete; Palm's beliefs and
expectations regarding the near term success of its business and the sale of its
handheld device products and licensing of its Palm platform; Palm's expectations
regarding the licensing of third party software, entering joint development
arrangements and third party developers; Palm's beliefs and expectations
regarding undetected errors and defects; Palm's intentions and expectations
regarding its financial and managerial controls, reporting systems and
procedures and other systems and processes; Palm's intentions and expectations
regarding wireless services; Palm's beliefs and expectations regarding its
personnel, its management team and the search for a new chief executive officer;
Palm's beliefs and expectations regarding international revenues and
international operations; Palm's beliefs and expectations regarding economic
conditions, the recent terrorist attacks and the demand for its products and
services; Palm's intentions and expectations regarding its security plan; Palm's
intentions and expectations regarding acquisitions; Palm's beliefs about
provisions in its charter documents and Delaware law and its adoption of a
stockholder rights plan; and Palm's intentions and expectations regarding
interest rate risk, its investment activities, the effect of changes in market
interest rates; denominating its sales in the Euro and Great British Pound,
foreign currency exchange rate risk, hedging and the use of derivative financial
instruments. These statements are subject to risks and uncertainties that could
cause actual results and events to differ materially. For a detailed discussion
of these risks and uncertainties, see the "Business Environment and Risk
Factors" section of this report. Palm undertakes no obligation to update
forward-looking statements to reflect events or circumstances occurring after
the date of this report.
Overview
We were founded in 1992 and introduced our first handheld device in 1996.
Immediately prior to our initial public offering on March 2, 2000, we were a
wholly-owned subsidiary of 3Com. Until 1999, our business was focused primarily
on developing and selling our Palm-branded handheld devices, and as of November
30, 2001, we have sold over 15.9 million Palm devices worldwide. In 1999, we
expanded our strategy of licensing our Palm OS platform and developed our
wireless Internet access service to support wireless-enabled handheld devices.
Our revenues increased from approximately $1 million in
15
fiscal year 1995 to approximately $1.6 billion in fiscal year 2001.
During the first quarter of fiscal year 2002, we announced a plan to form an
internal subsidiary to contain the Palm OS organization, known as the Platform
Solutions Group, in order to more distinctly identify it from the Palm branded
device and services organization, known as Palm's Solutions Group. This internal
separation will foster the independence of both of the businesses, and is
intended to allow us to bring greater clarity of mission and to better serve our
licensees. We will begin to provide segment reporting information for these two
businesses beginning with our third quarter of fiscal year 2002.
In the fourth quarter of fiscal year 2001, we experienced a confluence of
factors that led to a significant decline in our fourth quarter revenues from
the previous quarter, and a net loss for the fourth quarter and for fiscal year
2001. In response to these events, we initiated a series of restructuring
actions to work through this challenging period as effectively and as quickly as
possible. As a result, we recorded a restructuring charge in the fourth quarter
of fiscal year 2001 related to these actions. Also, in the fourth quarter of
fiscal year 2001, we recorded a charge for excess inventory and inventory
commitments that we did not believe we could sell during fiscal year 2002. In
the second quarter of fiscal year 2002 we announced further restructuring
actions and a $21.9 million restructuring charge intended to align our cost
structure with our business operations. In the first two quarters of fiscal year
2002, we recorded an additional $4.1 million of restructuring charges due to
changes in the costs of the restructuring activities announced in fiscal year
2001. For the first two quarters of fiscal year 2002, our cost of revenues was
positively impacted by a total of $58.2 million primarily because we were able
to sell more of the inventory that had been previously written down than we had
originally anticipated.
16
Results of Operations
The following table sets forth, for the periods indicated, the percentage of
total revenues represented by the line items reflected in Palm's condensed
consolidated statements of operations:
Three months ended Six months ended
------------------ ----------------
November 30, December 1, November 30, December 1,
2001 2000 2001 2000
---- ---- ---- ----
Revenues 100.0% 100.0% 100.0% 100.0%
Costs and operating expenses:
Cost of revenues 79.5 63.7 76.5 62.8
Cost of revenues-charge/(reduction)
for excess inventory and related costs (15.1) -- (11.5) --
Sales and marketing 20.9 17.2 25.0 18.0
Research and development 13.0 7.8 15.6 7.7
General and administrative 5.3 4.8 5.5 4.9
Amortization of goodwill
and intangible assets (*) 1.0 1.6 1.2 1.5
Restructuring charges 8.3 -- 5.1 --
Separation costs -- 0.2 0.1 0.3
Purchased in-process technology -- -- -- 0.1
----- ----- ----- -----
Total costs and operating expenses 112.9 95.3 117.5 95.3
----- ----- ----- -----
Operating income (loss) (12.9) 4.7 (17.5) 4.7
Interest and other income, net 0.1 2.5 0.7 2.8
----- ----- ----- -----
Income (loss) before income taxes (12.8) 7.2 (16.8) 7.5
Income tax provision (benefit) (4.1) 3.3 (5.4) 3.4
----- ----- ----- -----
Net income (loss) (8.7)% 3.9% (11.4)% 4.1%
===== ===== ===== =====
Effective tax rate 32.0% 46.0% 32.0% 46.0%
(*) Amortization of goodwill and intangible assets:
Cost of revenues 0.5% 0.2% 0.6% 0.1%
Sales and marketing -- -- -- --
Research and development 0.5 1.4 0.6 1.4
General and administrative -- -- -- --
----- ----- ----- -----
Total amortization of goodwill
and intangible assets 1.0% 1.6% 1.2% 1.5%
===== ===== ===== =====
We calculate the following pro forma measures by excluding the effect of the
charge/(reduction) for excess inventory and related costs, amortization of
goodwill and intangible assets, restructuring charges, separation costs and
purchased in-process technology. This calculation is not in conformity with
generally accepted accounting principles and may not be comparable to the
methodology used by other companies in calculating pro forma results. We believe
that pro forma measures provide additional information useful in analyzing
underlying business results. However, investors are cautioned not to place undue
reliance on the pro forma measures. Investors should use the pro forma measures
in conjunction with the condensed consolidated statement of operations when
making investment decisions
Pro forma total costs and operating
expenses 118.7% 93.6% 122.6% 93.4%
Pro forma operating income (loss) (18.7)% 6.5% (22.6)% 6.6%
Pro forma effective tax rate 32.0% 40.0% 32.0% 40.0%
17
Revenues
Revenues for the second quarter ended November 30, 2001 were $290.6 million, a
decrease of $231.6 million or 44% from revenues for the same quarter of fiscal
year 2001. The decline in revenues was primarily driven by a decrease in the
blended average selling price of Palm devices and a decrease in unit shipments.
The decrease in the average selling price was largely attributable to a higher
mix of entry level products as well as a general reduction in the market prices
for handheld computers. International revenues for the second quarter of fiscal
year 2002 were 34% of revenues compared with 38% of revenues in the same period
of fiscal year 2001.
Revenues for the six months ended November 30, 2001 were $504.9 million, a
decrease of $418.3 million or 45% from revenues for the same period of the
previous year. The decrease in revenues was primarily due to a decline in the
blended average selling price of Palm devices and a decrease in unit shipments.
International revenues for the first six months of fiscal year 2002 were 34% of
revenues compared with 35% of revenues in the same period of fiscal year 2001.
Cost of Revenues
Cost of revenues, including the applicable portion of amortization of goodwill
and intangible assets, for the second quarter ended November 30, 2001 was $188.4
million. Cost of revenues as a percentage of revenues was 64.9% for the second
quarter of fiscal year 2002 compared to 63.9% over the corresponding period in
fiscal year 2001. The increase in the cost of revenues as a percentage of
revenues was due primarily to a reduction in average selling prices. As the
result of customer demand, our cost of revenues in the second quarter of fiscal
year 2002 was positively impacted by $43.9 million (15.1 % of revenues)
primarily because we were able to sell more of the inventory which had been
previously written down than we had originally anticipated.
Cost of revenues, including the applicable portion of amortization of goodwill
and intangible assets, for the six months ended November 30, 2001 was $330.9
million or 65.6% of revenues compared to 62.9% for the corresponding period in
fiscal year 2001. The increase in the cost of revenues as a percentage of
revenues was due primarily to a reduction in average selling prices. As the
result of customer demand, our cost of revenues in the first six months of
fiscal year 2002 was positively impacted by $58.2 million (11.5 % of revenues)
primarily because we were able to sell more of the inventory which had been
previously written down than we had originally anticipated.
Sales and Marketing
Sales and marketing expenses were $60.8 million for the second quarter of fiscal
year 2002, decreasing by 32% as compared to the second quarter of fiscal year
2001. Sales and marketing expenses as a percentage of revenues was 20.9% for the
second quarter of fiscal year 2002 compared to 17.2% for the second quarter of
fiscal year 2001. The increase in the sales and marketing expenses as a
percentage of revenues primarily reflects decreased revenues in the second
quarter of fiscal year 2002. The decrease in absolute dollars was due to
decreased advertising and collateral spending and a decline in the number of
marketing promotional events.
Sales and marketing expenses were $126.3 million for the first six months of
fiscal year 2002, decreasing by 24% as compared to the first six months of
fiscal year 2001. Sales and marketing expenses as a percentage of revenues was
25.0% for the first six months of fiscal year 2002 compared to
18
18.0% in the same period of fiscal year 2001. The increase in sales and
marketing expenses as a percentage of revenues primarily reflects decreased
revenues in the first six months of fiscal year 2002. The decrease in absolute
dollars was due to decreased advertising and collateral spending and a decline
in the number of marketing promotional events.
Research and Development
Research and development expenses were $37.7 million for the second quarter of
fiscal year 2002, decreasing by 8% compared to the second quarter in fiscal year
2001. Research and development expenses as a percentage of revenues were 13.0%
for the second quarter of fiscal year 2002 compared to 7.8% for the second
quarter of fiscal year 2001. The decrease in absolute dollars reflects decreased
personnel and project expenses in the second quarter of fiscal year 2002 as
compared to the second quarter of fiscal year 2001.
Research and development expenses were $78.9 million for the first six months of
fiscal year 2002, increasing by 11% compared to the first six months of fiscal
year 2001. Research and development expenses as a percentage of revenues were
15.6% for the first six months of fiscal year 2002 compared to 7.7% in the same
period of fiscal year 2001. The increase in absolute dollars reflects research
and development efforts in device, operating system, and content and access
engineering. Personnel and related expenses increased on a year-over-year basis
due to the need to develop an increasing number of new products and as a result
of the various acquisitions during the preceding twelve months.
General and Administrative
General and administrative expenses were $15.5 million for the second quarter of
fiscal year 2002, decreasing by 38% as compared to the second quarter of fiscal
year 2001. General and administrative expenses as a percentage of revenues was
5.3% for the second quarter of fiscal year 2002 compared to 4.8% for the second
quarter of fiscal year 2001. The decrease in absolute dollars was primarily due
to a decrease in personnel and related expenses.
General and administrative expenses were $27.6 million for the first six months
of fiscal year 2002, decreasing by 39% as compared to the first six months of
fiscal year 2001. General and administrative expenses as a percentage of
revenues was 5.5% for the first six months of fiscal year 2002 compared to 4.9%
in the same period of fiscal year 2001. The decrease in absolute dollars was
primarily due to a reduction in the allowance for bad debts due to a decrease in
the outstanding accounts receivable balance and a decrease in personnel and
related expenses.
19
Amortization of Goodwill and Intangible Assets
Amortization of goodwill and intangible assets was $2.9 million and $5.8 million
for the second quarter and first six months of fiscal year 2002, respectively,
compared to $8.3 million and $14.2 million for the corresponding period in
fiscal year 2001. The decrease was primarily the result of the implementation of
SFAS No. 142, resulting in goodwill no longer being amortized.
Separation Costs
Separation costs relating to our separation from 3Com were $0.4 million for the
first six months of fiscal year 2002 compared to $0.8 million and $2.6 million
for the second quarter and first six months of fiscal year 2001. Separation
costs, which consist of one-time costs associated with the process of separating
Palm's infrastructure from 3Com, were completed in the first quarter of fiscal
year 2002.
Restructuring Charges
During the second quarter of fiscal year 2002, we initiated a series of
restructuring actions intended to align our cost structure with our business
operations in order to return us to profitability. The fiscal year 2002
restructuring charges consist of workforce reduction costs and excess facilities
and related costs for lease commitments for space no longer needed to support
ongoing operations. When this restructuring program is fully implemented, we
expect pre-tax savings in operating expenses of approximately $50-60 million per
year. These fiscal year 2002 actions are in addition to the cost reduction
actions announced and begun in the fourth quarter of fiscal year 2001.
The following describes the restructuring actions initiated during the second
quarter of fiscal year 2002:
o We recorded a workforce reduction charge of approximately $14.0
million, primarily related to severance, benefits and related costs.
This charge relates to the reduction of approximately 250 regular
employees across all geographic regions.
o We recorded a charge of $7.8 million for excess facilities. The
charge consisted of lease commitments for facilities which Palm is
exiting or will not occupy, net of anticipated sublease proceeds,
and property and equipment that was disposed of or removed from
service.
The restructuring charges initiated in the fourth quarter of fiscal year 2001
consisted of carrying and development costs related to the land on which we had
previously planned to build our future headquarters facility, excess facilities
consolidation costs related to lease commitments for space no longer intended
for use, workforce reduction across all geographic regions and discontinued
project costs. These workforce reductions affected approximately 300 regular
employees. During the first two quarters of fiscal year 2002, we recorded
charges totaling $4.1 million due to changes from the original estimate of the
cost of the restructuring actions announced in the fourth quarter of fiscal year
2001. As of November 30, 2001, approximately 260 regular employees have been
terminated pursuant to the fiscal year 2001 cost reduction actions.
We expect to complete substantially all of the cost reduction actions initiated
in the second quarter of fiscal year 2002 and in the fourth quarter of fiscal
year 2001 during the remainder of fiscal year 2002. We cannot assure that our
current estimates of the costs associated with these restructuring actions will
20
not change during the implementation period.
Interest and Other Income, Net
Interest and other income, net was $0.5 million and $3.5 million for the second
quarter and the first six months of fiscal year 2002, respectively, compared to
$12.7 million and $26.0 million for the same period in fiscal year 2001.
Interest and other income primarily consist of interest income on our cash
balances offset by amortization of financing costs. The decline in interest and
other income was the result of lower cash balances, reduced interest rates on
investments, and the amortization of costs related to the line of credit that we
obtained in the first quarter of fiscal year 2002.
Income Tax Provision
The effective tax rate for the second quarter and first six months of fiscal
year 2002 was 32.0% of the loss before income taxes as compared to 46.0% of the
income before income taxes for the second quarter and first six months of fiscal
year 2001. The decrease in the effective tax rate was primarily due to losses in
a foreign subsidiary where no tax benefit was recorded.
Liquidity and Capital Resources
Cash and cash equivalents at November 30, 2001 were $242.0 million, compared to
$513.8 million at June 1, 2001. The decrease of $271.8 million for the six
months ended November 30, 2001 was attributable to cash used in operating
activities of $258.5 million and cash used in investing activities of $13.8
million, offset by cash provided by financing activities of $0.5 million.
Cash used by operating activities consisted of the net loss of $57.6 million, a
$91.6 million decrease in accounts payable, a $116.9 million decrease in accrued
liabilities, a $14.8 million increase in accounts receivable, and an increase of
$34.4 million in deferred tax assets. Cash used by investing activities of $13.8
million related to the purchase of property and equipment.
In June 2001, we obtained a two-year asset-backed borrowing-base credit facility
from a group of financial institutions for up to a maximum of $150 million with
the actual amount available determined by eligible accounts receivable and
inventory as well as a real estate line of credit less the amount of outstanding
letters of credit. The credit facility is secured by accounts receivable,
inventory, and certain fixed assets including real estate and property and
equipment. The interest rate may vary based on fluctuations in market rates and
margin borrowing levels. We are subject to certain financial covenant
requirements under the agreement including restrictions relating to cash
dividends.
On December 7, 2001, we issued a $50.0 million, 5.0% convertible note due in
2006. The note is convertible into our common stock at $4.63 per share. We may
force a conversion at any time beyond one year of the closing, provided our
common stock has traded above $7.13 per share for a defined period of time.
Based on current plans and business conditions, we believe that our existing
cash and cash equivalents and our credit facility will be sufficient to satisfy
our anticipated cash requirements for at least the next twelve months. We cannot
be certain, however, that our underlying assumed levels of revenues and expenses
will be accurate. If our operating results were to fail to meet our expectations
or if inventory,
21
accounts receivable or other assets were to require a greater
use of cash than is currently anticipated, we could be required to seek
additional funding through public or private financings or other arrangements.
In such event, adequate funds may not be available when needed or may not be
available on favorable terms, which could have a negative effect on our business
and results of operations.
22
Business Environment and Risk Factors
Company-Specific Trends and Risks:
Risks Related to Our Business
If we fail to develop and introduce new products and services timely and
successfully, we will not be able to compete effectively and our ability to
generate revenues will suffer.
We operate in a highly competitive, quickly changing environment, and our
future success depends on our ability to develop and introduce new products and
services that our customers and end users choose to buy. If we are unsuccessful
at developing and introducing new products and services that are appealing to
end users with acceptable prices and terms, our business and operating results
would be negatively impacted because we would not be able to compete effectively
and our ability to generate revenues would suffer.
The development of new products and services can be very difficult and
requires high levels of innovation. The development process is also lengthy and
costly. 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 to successfully compete. For example, in the fourth
quarter of fiscal year 2001, we introduced our m500 and m505 handheld device
products that feature a Secure Digital expansion slot. The production release
for these products was delayed and production volumes ramped later than we had
originally expected, which negatively impacted our fourth quarter revenues and
operating results. We cannot assure you that we will be able to introduce new
products on a timely or cost-effective basis or that customer demand for our
products will meet our expectations. In addition, Microsoft has recently
released Windows XP, a new version of its operating system for desktop and
laptop computers, and Apple has recently released a new version of its Mac OS
desktop and laptop operating system. Demand for our products could be adversely
affected if it is discovered that our products do not interoperate fully with
these new operating systems, and additional development and technical support
resources could be required to fix any incompatibilities which arise that could
adversely affect our results of operations.
Because the sales and marketing life cycle of our handheld solutions is
generally 12 to 18 months or less, we must:
o continue to develop updates to our Palm platform, new handheld
devices and new wireless services, or our existing products and
services will quickly become obsolete;
o manage the timing of new product introductions so that we minimize
the impact of customers delaying purchases of existing products in
anticipation of new product releases;
o manage the timing of new product introductions to meet seasonal
market demands;
o manage the levels of inventories to minimize inventory write-offs;
and
o adjust the prices of our products and services over the course of
their life cycles in order to increase or maintain customer demand
for these products and services.
23
If we do not correctly anticipate demand for our products, we could have costly
excess production or inventories or we may not be able to secure sufficient
quantities or cost-effective production of our handheld devices.
The demand for our products depends on many factors and is difficult to
forecast, in part due to the market for our products being relatively new,
variations in economic conditions and relatively short product life cycles. As
we introduce and support additional handheld device products and as competition
in the market for our products intensifies, we expect that it will become more
difficult to forecast demand. Significant unanticipated fluctuations in demand
could adversely impact our financial results and cause the following problems in
our operations:
o If forecasted demand does not develop, we could have excess production
resulting in higher inventories of finished products and components, which
would use cash and could lead to write-offs of some or all of the excess
inventories, increased returns and price promotion actions each of which
could result in lower revenue or lower gross margins. In addition, we may
also incur certain costs, such as fees for excess manufacturing capacity
and cancellation of orders and charges associated with excess and obsolete
materials and goods in our inventory, which could result in lower margins
and increased cash usage. For example, in our fourth quarter of fiscal
year 2001, our sales were lower than we had previously forecasted. Because
demand was lower than the manufacturing quantities to which we had
previously committed, our inventory balances and inventory commitments
were higher than our forecasted future sales for certain products. In the
fourth quarter of fiscal year 2001, we took a charge of $268.9 million for
excess inventory and related costs. We also implemented pricing actions in
order to assist our channel customers in selling their Palm product
inventory. These pricing actions lowered our revenue and gross margins.
o If we do not correctly anticipate declines in demand, our future results
of operations, liquidity and capital resources may be impacted. For
instance, in the fourth quarter of fiscal year 2001, we experienced a
sudden and unanticipated significant decrease in demand for our products.
As a result, we incurred a charge to cost of revenues of $268.9 million in
the fourth quarter of fiscal year 2001 related to excess inventory and
related costs, including $124.7 million for non-cancelable component
commitments which impact cash flow in fiscal year 2002. In addition, due
to this decrease in demand for our products, we experienced reduced
revenues, an operating loss and negative cash flow from operations in the
first and second quarter of fiscal year 2002. We initiated cost reduction
actions in the fourth quarter of fiscal year 2001 and the second quarter
of fiscal year 2002. These actions reduced our cost structure for fiscal
year 2002. However, if the decrease in demand continues or worsens, we
will continue to experience decreased revenues and will experience
operating losses and negative cash flow from operations until such time as
we are able to realize the benefit of additional reductions in our
operating cost structure or until demand recovers.
o If demand increases beyond what we forecast, we may have to increase
production at our third party manufacturers. We depend on our suppliers to
provide additional volumes of components and those suppliers might not be
able to increase production rapidly enough to meet unexpected demand or
may choose to allocate capacity to other customers. Even if we are able to
procure enough components, our third party manufacturers might not be able
to produce enough of our devices to meet the market demand for our
products. The inability of either our manufacturers or our suppliers to
increase production rapidly enough could cause us to fail to meet customer
demand. For example,
24
in the first three quarters of fiscal year 2001, we experienced shortages
of some key components, which resulted in an inability to meet customer
demand for some of our products.
o Rapid increases or decreases in production levels could result in higher
costs for manufacturing, supply of components and other expenses. These
higher costs could lower our profits. Furthermore, if production is
increased rapidly, manufacturing yields could decline, which may also
lower our profits.
Our quarterly operating results are subject to fluctuations and seasonality, and
if we fail to meet the expectations of securities analysts or investors, our
share price may decrease significantly.
Our operating results are difficult to predict. Our future quarterly
operating results may fluctuate significantly and may not meet our expectations
or those of securities analysts or investors. If this occurs, the price of our
stock would likely decline. Factors that may cause fluctuations in our operating
results include the following:
o Seasonality. Historically, our revenues have usually been weaker in the
first and third quarters of each fiscal year and have, from time to time,
been lower than the preceding quarter. This seasonality is due to consumer
buying being traditionally lower in these quarters. In addition, we
attempt to time our new product releases to coincide with relatively
higher consumer spending in the second and fourth fiscal quarters, which
contributes to these seasonal variations.
o Fluctuations in Operating Expenses. We have embarked on a cost reduction
and restructuring program which is lowering overall expenses. The cost
reduction and restructuring program includes actions taken or announced in
the fourth quarter of fiscal year 2001 and second quarter of fiscal year
2002. These actions include workforce reductions, actions taken to
consolidate or reduce facilities, and cancellation of certain projects. To
the extent 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 additional changes in the economy,
in competition, or in our business may necessitate additional
restructuring activities and expenses in the future that may affect our
operating results and our business could be adversely impacted.
o Economic Conditions. Demand for Palm's products and services by consumers,
individual business users as well as by enterprise customers is effected
by economic conditions. For example, beginning in the fourth quarter of
fiscal year 2001, Palm's business has been impacted globally by an
economic slowdown. In the current economic environment, demand is
difficult to predict and revenue could fluctuate significantly from our
forecasts. The terrorist attacks in the United States that occurred in
September 2001 add further uncertainty to worldwide economic forecasts,
including both end-user and enterprise demand.
o Revenue Mix and Pricing. Our profit margins differ among the handheld
device, Palm platform licensing and wireless services parts of our
business. In addition, the product mix and sales prices of our device
products affect profit margins in any particular quarter. The product mix
and sales prices of our device products in a particular quarter depend in
part on the timing of new product introductions and the relative demand
for different products in our product offerings. From time to time, we
offer price protection and other pricing and promotion programs to our
resellers in connection with reductions in the prices of certain of our
products, which may result in lower gross margins. We cannot anticipate
with certainty when we will need to take these pricing and promotion
25
actions, and our profit margins will fluctuate from quarter to quarter
depending on the timing of such actions. In addition, as our business
evolves and the mix of revenues from devices, licenses and services varies
from quarter to quarter, our operating results will likely fluctuate.
o New Product Introductions and Transitions. As we introduce new products
and services, the timing of these introductions will affect our quarterly
operating results. We may have difficulty predicting the timing of new
product and service introductions and the user acceptance of these new
products and services. If products and services are introduced earlier or
later than anticipated, or if user acceptance is unexpectedly high or low,
our quarterly operating results may fluctuate unexpectedly. For example,
in the fourth quarter of fiscal year 2001 our sales were negatively
impacted by the delay of the volume availability of the m500 and m505
devices because potential purchasers postponed buying certain other
products in anticipation of the new products. In addition, we cannot
predict the timing of new product and service introductions from our
competitors or the level of market acceptance they will achieve. As a
result, if a competitor introduces a product, users may delay purchasing
our products while they wait for the release of our competitor's product
or purchase our competitor's product instead of ours, which would cause
our quarterly operating results to fluctuate unexpectedly.
o Quarterly Linearity of Revenues. Depending on the timing of product
introductions, production, consumer demand, and competitive and economic
factors, the linearity of our sales within a quarter can fluctuate widely.
For example in the third and fourth quarters of fiscal year 2001, we
shipped a significant percentage of our quarterly revenues in the third
month of each quarter. When we ship a high percentage of our quarterly
revenues near the end of the quarter, we are subject to risks such as
unexpected disruptions in component availability, manufacturing, order
management, information systems and shipping. If a significant disruption
occurs, our results of operations or financial condition could be
adversely affected. In addition, shipping a significant portion of the
quarterly revenues near the end of the quarter could also cause our
channel customers to delay placing new orders until later in the following
quarter when they have reduced their inventory levels. This makes
projecting quarterly results difficult.
o Use of Purchase Orders with Customers. We rely on one-time purchase orders
rather than long-term purchase contracts with many of our customers.
Because we cannot predict with certainty incoming purchase orders,
decreases in orders or failure to fulfill orders may cause our operating
results to fluctuate.
o Product Introductions by Our Licensees. We derive licensing revenue from
the sale of products by our licensees. Because we cannot predict with
certainty the timing of new product introductions by our licensees or the
level of market acceptance such products will achieve, it is difficult to
predict the level of licensing revenue in a particular quarter. If one of
our licensees fails to introduce a new product on its anticipated schedule
or at all, our quarterly operating results could suffer. In addition,
increased demand for our licensees' products could negatively impact sales
of our handheld devices, which could adversely impact our operating
results.
26
We rely on third party manufacturers and distributors to manufacture and
distribute our handheld devices, and our reputation and results of operations
could be adversely affected by our inability to control their operations.
We outsource all of our manufacturing to Flextronics and Manufacturers'
Services Limited ("MSL"). We depend on these third party manufacturers to
produce sufficient volume of our products in a timely fashion and at
satisfactory quality levels. In addition, we rely on our third party
manufacturers to place orders with suppliers for the components they need to
manufacture our products. If our third party manufacturers fail to produce
quality products on time and in sufficient quantities, our reputation and
results of operations would suffer. If they fail to place timely and sufficient
orders with suppliers, our results of operations would suffer. For example, in
the second quarter of fiscal year 2001, one of our third party manufacturers
failed to order certain components on a timely basis, which resulted in delayed
shipments and contributed to unfavorable linearity of shipments in the quarter,
and may have limited our ability to further increase revenues from the prior
quarters.
We depend on Flextronics to manufacture most of our device products at its
facilities in Mexico and Hungary, and the rest of our device products are
manufactured by MSL at its Minnesota facility. The cost, quality and
availability of third party manufacturing operations are essential to the
successful production and sale of our handheld devices. Our reliance on third
parties exposes us to the following risks:
o unexpected increases in manufacturing costs;
o less ability to rapidly adjust build plans in response to changing demand
forecasts;
o interruptions in shipments if one of our manufacturers is unable to
complete production;
o less ability to control quality of finished device products;
o less ability to control delivery schedules;
o unpredictability of manufacturing yield;
o potential lack of adequate capacity; and
o potential inability to control component availability and purchase
commitments.
We do not have a manufacturing agreement with Flextronics, upon whom we rely to
manufacture our device products. We presently order our products on a purchase
order basis from Flextronics. The absence of a manufacturing agreement means
that, with little or no notice, Flextronics could refuse to continue to
manufacture all or some of the units of our devices that we require or change
the terms under which it manufactures our device products. If Flextronics were
to stop manufacturing our devices, we may be unable to replace the lost
manufacturing capacity on a timely basis and our results of operations could be
harmed. In addition, if Flextronics were to change the terms under which they
manufacture for us, our manufacturing costs could increase and our profitability
could suffer.
Our U.S. manufacturing and distribution are physically separated. This
requires additional lead-time to move products to customers. If we are shipping
products near the end of the quarter, this extra time could result in us not
meeting anticipated shipment volumes that quarter, which may negatively impact
our results of operations.
Disruption in air transportation as a result of the terrorist attacks in
the United States in September 2001 and further enhanced security measures in
response to the attacks may cause transportation delays and increases in our
costs for both receipt of inventory and shipment of products to our customers.
If these types of disruptions continue or increase, our results of operations
could be adversely impacted.
27
We depend on our suppliers, some of which are the sole source for certain
components and elements of our technology, and our production would be seriously
harmed if these suppliers are not able to meet our demand on a cost effective
basis and alternative sources are not available.
Our products contain components, including liquid crystal displays, touch
panels, memory chips and microprocessors, that are procured from a variety of
suppliers. The cost, quality and availability of components are essential to the
successful production and sale of our device products. During the first three
quarters of fiscal year 2001, we experienced shortages of some key components,
including liquid crystal displays and related components, flash memory chips and
dynamic random access memory ("DRAM") chips.
Some components, such as displays and related driver chips, power supply
integrated circuits, digital signal processors, microprocessors, crystals and
several radio frequency and discrete components, come from sole source
suppliers. Alternative sources are not currently available for all of these sole
source components. If suppliers are unable or unwilling to meet our demand for
sole source components and if we are unable to obtain an alternative source or
if the price for an alternative source is prohibitive, our ability to maintain
timely and cost-effective production of our handheld computing device products
would be seriously harmed.
We enter into agreements for the development and licensing of third party
technology to be incorporated into some of our products. Our ability to release
and sell these products could be seriously harmed if the third party technology
is not delivered to us in a timely manner or contains errors or defects which
are not discovered and fixed prior to release of the products and we are unable
to obtain alternative technology to use in our products. Our inability to obtain
alternative technology could result in damage to our reputation as well as lost
revenues and diverted development resources.
We use third parties to provide significant operational and administrative
services, and our ability to satisfy our customers and operate our business will
suffer if the level of services does not meet our requirements.
We use third parties to provide services such as customer service, data
center operations and desktop computer support, and facilities services. Should
any of these third parties fail to deliver an adequate level of service, our
business could suffer.
We do not know if the Palm platform licensing and wireless services parts of our
business will be able to generate significant revenues in the future, and we
will continue to rely on our handheld device products as the primary source of
our revenues for the foreseeable future.
Most of our revenues depend on the commercial success of our Palm handheld
devices, which comprise the primary product line that we currently offer.
Expansion of the Palm platform licensing and wireless services parts of our
business have generated a small percentage of our revenues. If revenues from our
device business fail to meet expectations, our other business activities will
likely not be able to compensate for this shortfall. For the second quarter of
fiscal year 2002, revenues from sales of devices and accessories constituted
approximately 94% of our revenues.
28
A significant portion of our revenues currently comes from a small number of
customers, and any decrease in revenues from these customers could harm our
results of operations.
A significant portion of our revenues comes from only a small number of
customers. For example, in the second quarter of fiscal year 2002, Office Depot
represented approximately 10.6% and Ingram Micro represented approximately 7.6%
of our revenues. We expect that a significant portion of our revenues will
continue to depend on sales of our handheld devices to a small number of
customers. Any downturn in the business from these customers could seriously
harm our revenues and results of operations.
We rely on distributors, retailers, and resellers to sell our products, and
disruptions to these channels would adversely affect our ability to generate
revenues from the sale of our handheld devices.
Our distributors, retailers and resellers sell products offered by our
competitors. If our competitors offer our distributors, retailers and resellers
more favorable terms or have more products available to meet their needs, those
distributors, retailers and resellers may de-emphasize or decline to carry our
products or carry our competitors' products instead. In the future, we may not
be able to retain or attract a sufficient number of qualified distributors,
retailers and resellers. Further, distributors, retailers and resellers may not
recommend, or continue to recommend, our products. If we are unable to maintain
successful relationships with distributors, retailers and resellers or to expand
our distribution channels, our business will suffer.
When we reduce the prices of our products to our distributors, retailers
and resellers, we may have to compensate them for the difference between the
higher price they paid to buy their inventory and the new lower prices. In
addition, like other manufacturers, we are exposed to the risk of product
returns from distributors, retailers and resellers, either through their
exercise of contractual return rights or as a result of our strategic interest
in assisting them in balancing inventories.
Because we sell our products primarily to distributors, retailers, and
resellers, we are subject to many risks, including risks related to their
inventory levels and support for our products. From the fourth quarter of fiscal
year 2000 through the second quarter of fiscal year 2001, we were generally
unable to fully meet the demand for certain of our products from our
distributors, retailers, and resellers. If we are unable to supply our
distributors, retailers and resellers with sufficient levels of inventory to
meet customer demand, our sales could be negatively impacted.
Many of our distributors, retailers and resellers are being impacted by the
current economic environment. The economic downturn could cause our
distributors, retailers or resellers to modify their business practices, such as
payment terms or inventory levels, which could in turn negatively impact our
balance sheet or results of operations.
Distributors, retailers and traditional resellers experience competition
from Internet-based resellers that distribute directly to end-user customers,
and there is also competition among Internet-based resellers. We also sell our
products directly to end-user customers from our Palm.com web site. These varied
sales channels could cause conflict among our channels of distribution, which
could seriously harm our revenues and results of operations.
29
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.
We compete in the handheld device, operating system software and wireless
services markets. The markets for these products and services are 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 Palm 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. For example,
several of these competitors sell or license server, desktop and/or laptop
computing products in addition to handheld computing products and may choose to
market and sell or license their handheld products at a discounted price or give
them away for free with their other products. These competitors also may have
longer and closer relationships with the senior management of enterprise
customers who decide what products and technologies will be deployed in their
enterprises. Moreover, these competitors may have larger and more established
sales forces calling upon potential enterprise customers and therefore could
contact a greater number of potential customers with more frequency.
Consequently, these competitors could have a better competitive position than we
do, which could result in potential enterprise customers deciding not to choose
our products and services, which would adversely impact our business, financial
condition and results of operations.
o Our handheld computing device products compete with a variety of smart
handheld devices, including keyboard based devices, sub-notebook
computers, smart phones and two-way pagers. Our principal competitors
include Casio, Compaq, Hewlett-Packard, Nokia, Research in Motion Limited
("RIM"), and AOL Time Warner (which resells RIM devices), Sharp and Palm
platform licensees such as HandEra (formerly TRG), Handspring, Kyocera,
Samsung and Sony. In addition, companies such as Matsushita, NEC and
Toshiba as well as several smaller companies in Asia and Europe have
announced handheld devices they intend to sell.
o Our Palm platform competes primarily with operating systems such as
Microsoft's Windows CE for sub-PC computers, Microsoft's Pocket PC,
Symbian's EPOC for wireless devices, proprietary operating systems from
companies such as Sharp Electronics, and more recently operating systems
based on Linux. Licensees of our Palm platform are under no obligation to
introduce new products based on our operating system, and may elect not to
use the Palm platform and instead use an alternative operating system, in
which case we may not be able to increase our revenues from licensing the
Palm platform or expand the proliferation of the Palm economy. For
example, Palm and Nokia have jointly decided to discontinue the
development of a previously planned product.
o Our wireless services compete with a variety of alternative technologies
and services, such as those based on different industry standards for
wireless access, information appliances that provide wireless connectivity
and other traditional and developing methods. Competitors to our wireless
services include Go America, OmniSky (which recently announced its
proposed acquisition by Earthlink), RIM and potentially other device
manufacturers such as Sony who offer Internet services. Our wireless
access business also competes indirectly with other providers of wireless
access, ranging from dedicated Internet service providers, such as AOL
Time Warner and Earthlink, to local phone companies and telecommunications
carriers. Wireless email that can synchronize with corporate mail servers
is an important offering to many enterprise customers. RIM currently has
such an email offering, and while we are developing such an offering, we
cannot be certain that
30
our development efforts in this area will be successful or that any
product offering we did develop would compete favorably in the market.
We expect our competitors to continue to improve the performance of their
current products and services and to introduce new products, services and
technologies. For example, Microsoft recently introduced a new version of its
Pocket PC operating system. We believe that Microsoft is investing aggressively
to assist its licensees in marketing handheld computers based on Microsoft's
handheld operating systems. Moreover, Microsoft has announced its .Net and
My.Net Internet initiatives. If the products and services proposed in these
initiatives and similar initiatives announced by other companies are successful
in the market, the demand for products based on our technologies could decrease.
Software layer technologies such as Java and Microsoft's .Net Compact Framework
might reduce our ability to attract software developers and differentiate our
products. Successful new product introductions or enhancements by our
competitors, or increased market acceptance of competing products, such as the
Pocket PC and RIM devices or devices offered by our licensees, such as
Handspring and Sony, could reduce the sales and market acceptance of our
products and services, cause intense price competition or make our products
obsolete. To be competitive, we must continue to invest significant resources in
research and development, sales and marketing and customer support. We cannot be
sure that we will have sufficient resources to make these investments or that we
will be able to make the technological advances necessary to be competitive.
Increased competition could result in price reductions, fewer customer orders,
reduced margins and loss of market share. Our failure to compete successfully
against current or future competitors could seriously harm our business,
financial condition and results of operations.
If we fail to effectively respond to competition from products introduced by
licensees of our Palm platform or if our licensees fail to sell products based
on the Palm platform, our results of operations may suffer.
The near term success of our business depends on both the sale of handheld
device products and the licensing of our Palm platform. However, licensees of
our Palm platform offer products that compete directly or indirectly with our
handheld computing devices. For example, licensees such as Handspring and Sony
use our Palm platform in products that can compete with our handheld devices. In
addition to Handspring and Sony, our Palm platform has been licensed by other
manufacturers such as Kyocera and Samsung for use in devices such as mobile
phones or other similar products that can compete indirectly with our handheld
devices. If revenues from our handheld devices suffer because of competition
from licensees of our Palm platform, our results of operations would suffer and
our ability to implement our business model would be seriously challenged. In
addition, our licensees may not be successful in selling products based on the
Palm platform or may seek reductions in the royalties payable to us, which could
harm our business and results of operations.
Demand for our products is partially dependent upon support from third party
software and hardware developers.
Decisions by customers to purchase our handheld device products, as opposed
to competitive product offerings, are sometimes based on the availability of
third party software, hardware, accessories and other expansion capabilities. In
the future, we believe that in addition to our efforts to develop products which
provide expansion capabilities to handheld devices, the level of support from
third party developers will become increasingly important. For example, we, as
well as our licensees HandEra, Handspring and Sony, all have products that
feature a hardware expansion slot. Devices offered by
31
other competitors also have hardware expansion slots. Because many of these
third party developers are small companies, their operations and financial
condition could be adversely affected by negative general economic conditions.
Our operating results could suffer if third party developers cease to develop
software or hardware for our products or focus their efforts on developing
software or hardware for products offered by our competitors, especially if we
are unable to offer attractive software, hardware, accessories and expansion
capabilities.
If incompatibilities among devices offered by different manufacturers prevent
successful adoption of the Secure Digital standard or if the standards ratified
by the Secure Digital Association are not favorable to us or third party
expansion solution developers, sales of our products that include Secure Digital
expansion slots, such as the m125 and m500 series devices, could be negatively
impacted.
Some device manufacturers may incorporate Secure Digital ("SD") into their
products in a manner that is not fully compliant with the SD Association
standards, which may result in potential compatibility problems among devices
offered by different manufacturers. Furthermore, the standards ratified by the
SD Association could have the effect of favoring the manufacturers whose
products incorporate the ratified standards. Non-compliant development or
deployment of SD expansion solutions and their functionality could prevent
successful adoption of the SD standard or of non-compliant products and
negatively impact our sales of our products that include SD expansion card
slots, such as the m125 and m500 series devices, which could harm our business
and results of operations.
If support from the electronics, software and/or publishing industries is
insufficient, Secure Digital expansion solutions might be limited, which could
negatively impact sales of our products that include Secure Digital expansion
slots, such as the m125 and m500 series devices.
The SD association is made up of many companies that plan to engage in the
design, development, manufacture or sale of products or services which utilize
the SD specifications. If these companies do not believe that there is
sufficient customer demand for SD products and services, they might limit the
development of products or services which utilize the SD specifications. This
possible limitation on the development or deployment of SD expansion solutions
and their functionality could negatively impact our sales of our products that
include SD expansion slots, such as the m125 and m500 series devices, which
could harm our business and results of operations.
Our Palm platform and handheld devices may contain errors or defects, which
could result in the rejection of our products and damage to our reputation, as
well as lost revenues, diverted development resources and increased service
costs and warranty claims.
Our Palm platform and our devices are complex and must meet stringent user
requirements. We must develop our software and hardware products quickly to keep
pace with the rapidly changing handheld device market. Products and services as
sophisticated as ours are likely to contain undetected errors or defects,
especially when first introduced or when new models or versions are released. We
have in the past experienced delays in releasing some models and versions of our
products until problems were corrected. For example, in the fourth quarter of
fiscal year 2001, the initial shipment of our m500 series of handhelds was
delayed due to start-up design and manufacturing issues which we needed to
resolve in order to meet our quality standards. Our products may not be free
from errors or defects after commercial shipments have begun, which could result
in the rejection of our products, damage to our
32
reputation, lost revenues, diverted development resources and increased customer
service and support costs and warranty claims. Any of these results could harm
our business. For instance we have, in the past experienced increased support
costs related to a faulty memory component used in a limited number of our
handheld devices, which required us to develop a software patch to address the
problem. There have been reports of computer viruses and security gaps impacting
handheld device operating systems. These viruses and security gaps and publicity
about them may adversely impact sales of our products. In particular, if
anti-virus protection and solutions for security gaps which users deem to be
adequate are not developed to combat these viruses and security gaps, this could
harm our business.
We depend on third party software as part of our Palm platform, and our ability
to release next generation versions of our Palm platform would be seriously
harmed if this third party software is not available in a timely fashion, which
could result in the decreased demand for our products and damage to our
reputation as well as lost revenues and diverted development resources.
We license third party software for use in the Palm platform. In addition
to third party licensed software, we also enter into joint development
agreements with certain licensees of the Palm platform whereby a licensee will
develop a specific feature for our Palm OS, which we will then own and may later
incorporate into new releases of the Palm platform. We expect that we will
continue to license third party software and to enter into joint development
arrangements. If a third party developer or a joint developer fails to develop
software in a timely fashion or at all, we may not be able to deliver certain
features in our products as expected or we could be required to expend
unexpected development costs to develop the software ourselves or to use cash to
obtain it from another third party. As a result, our product introductions could
be delayed or our offering of features could be reduced, which could affect our
operating results. Furthermore, the third party developer or joint developer may
improperly use or disclose the software, which could adversely affect our
competitive position. In addition, because we license some of our development
tools from third parties, our business would suffer if we could no longer obtain
those tools from those third parties.
We recently separated our business into two independent businesses by
transferring our Palm platform and licensing business to a separate internal
subsidiary. If we fail to manage our separate businesses effectively, our
on-going business prospects and overall financial performance may suffer.
In December 2001, we separated our business into two independent businesses
and formed a separate internal subsidiary to contain our Palm platform and
licensing business. We have modified our business practices, financial and
managerial controls, reporting systems and procedures to implement the formation
and operation of this subsidiary. The separate management of this subsidiary
could result in the diversion of capital and our attention away from other
business issues or opportunities, which could adversely affect our overall
business. We cannot be certain that we will be able to effectively implement and
manage these two independent businesses or that each of the businesses can
successfully run its own independent operations. We previously operated as a
single integrated company, and we may not have the requisite expertise to
successfully manage independently run businesses. There could be additional
changes in the management teams as the teams begin to operate independently,
thereby causing further disruption in both the specific business and our
combined operations. Failure to effectively implement and manage this separation
or to properly manage two independent business operations or failure of the two
businesses to sustain efficient operations or to successfully implement their
business strategies could cause deterioration in our revenues, compromise our
on-going business prospects and impair our overall financial performance.
33
If we fail to adequately evolve our systems and processes in a changing business
environment, our ability to manage our business and results of operations may be
negatively impacted.
Our ability to successfully offer our products and implement our business
plan in a rapidly evolving market requires an effective planning and management
process. We expect that we will need to continue to improve our financial and
managerial controls, reporting systems and procedures. We have recently
implemented new transaction processing, customer relationship management and
data warehouse systems. This was a significant change to the previous systems,
and we intend to continue to enhance and refine these new systems and processes,
in areas such as product development and supply chain. If we fail to evolve our
systems and processes, our ability to manage our business and results of
operations may be negatively impacted. Some of our systems use the Internet to
communicate information. Interruptions in Internet availability and
functionality could adversely impact the operation of these systems and
consequently our results of operations.
The market for the delivery of wireless services through handheld devices is new
and rapidly evolving, and our ability to generate revenues from handheld
devices, Palm platform licensing or wireless services could suffer if this
market does not develop or we fail to address this market effectively.
We must continue to adapt our wireless services strategy to compete in the
rapidly evolving wireless services market. We currently offer a
subscription-based wireless access service that enables users of the Palm VII
family of handheld devices to access web-clipped content on the Internet. We
recently announced that as of January 2002, our MyPalm portal will no longer
offer wireless personal information management services. Competitors have
introduced or developed, or are in the process of introducing or developing,
competing wireless services accessible through a variety of handheld devices and
other information appliances. We cannot assure you that there will be demand for
the wireless services provided by us or that individuals will widely adopt our
handheld devices as a means of accessing wireless services. Accordingly, it is
extremely difficult to predict which products and services will be successful in
this market or the future size and growth of this market. In addition, given the
limited history and rapidly evolving nature of this market, we cannot predict
the price that wireless subscribers will be willing to pay for these products
and services. If acceptance of our wireless services and solutions is less than
anticipated, our results from operations could be impacted.
We may not be able to deliver or expand wireless access if our wireless carrier
raises its rates, discontinues doing business with us or does not deliver
acceptable service or if we fail to provide our devices or services on
additional carrier networks, including networks in international markets.
The future success of our wireless services business substantially depends
on the geographic coverage, capacity, affordability, reliability and security of
wireless networks. Only a small number of wireless providers offer the network
services we require. We currently rely on Cingular Wireless (formerly BellSouth
Wireless Data) to provide all of our Palm VII and Palm VIIx handheld wireless
network services pursuant to an agreement. Our agreement with Cingular Wireless
permits each party to terminate the agreement on an annual basis. If Cingular
Wireless failed to provide us with service at rates acceptable to us or at all,
we may not be able to provide wireless access to our users. If Cingular Wireless
delivers unacceptable service, the quality of our wireless services would suffer
and we would
34
likely lose users who are dissatisfied with our service. For example, we are
aware that Cingular Wireless, like other wireless carriers, has experienced
service outages from time to time in their wireless data network. In addition,
our Palm VII series of products are configured around the frequency standard
used by Cingular Wireless. If we needed to switch to another wireless carrier,
we would have to redesign significant portions of our software and hardware to
permit transmission on a different frequency. Users of Palm VII series products
existing before the redesign would not be able to access the service provided by
the new wireless carrier. If we were required to redesign these elements, our
business could be adversely affected.
Our wireless services strategy depends on our ability to develop new wireless
access devices that operate on additional wireless networks other than Cingular
Wireless in the U.S. We may be unsuccessful at building favorable relationships
with additional U.S. and international carriers, and we may not be successful at
developing new devices that operate on other wireless networks.
In addition, because many international wireless carriers use different
standards and transmit data on different frequencies than Cingular Wireless, we
are likely to incur incremental expenses related to the redesign of certain
portions of our software and hardware. Our products may be subject to a lengthy
certification process with each wireless carrier with whom we seek to enter into
a relationship. These certification requirements could delay the offering of
wireless products and services into international markets. Consequently, our
ability to expand our wireless services business, and therefore our results of
operations, could suffer.
Our reputation and ability to generate revenues will be harmed if demand for our
Internet services exceeds our telecommunications and network capacity.
We may from time to time experience increases in our Internet services
usage which exceed our available telecommunications capacity and the capacity of
our third party network servers. As a result, users may be unable to register or
log on to our service, may experience a general slow-down in their Internet
access or may be disconnected from their sessions. Excessive user demand could
also result in system failures of our third party network servers' networks.
Inaccessibility, interruptions or other limitations on the ability to access our
service due to excessive user demand, or any failure of our third party network
servers to handle user traffic, could have an adverse effect on our reputation
and our revenues.
If the security of our websites is compromised, our reputation could suffer and
customers may not be willing to use our services, which could cause our revenues
to decline.
A significant barrier to widespread use of electronic commerce sites and
network services sites, such as our Palm.com site, is concern for the security
of confidential information transmitted over public networks. Despite our
efforts to protect the integrity of our Palm.com site, a party may be able to
circumvent our security measures and could misappropriate proprietary
information or cause interruptions in our operations and damage our reputation.
Any such action could negatively affect our customers' willingness to engage in
online commerce with us or purchase wireless services from us, which could harm
our revenues and results of operations. In addition, we may be required to
expend significant capital and other resources to protect against these security
breaches or to alleviate problems caused by these breaches.
35
We may not be able to maintain and expand our business if we are not able to
hire, retain, integrate and motivate sufficient qualified personnel.
Our future success depends to a significant extent on the continued
contribution of our key executive, technical, sales, marketing, supply chain and
administrative personnel. It also depends on our ability to expand, integrate
and retain our management team. The loss of services of key employees could
adversely affect our business, operating results or financial condition. In
addition, recruiting and retaining skilled personnel, including software and
hardware engineers, is highly competitive, particularly in the San Francisco Bay
Area where we are headquartered. Further, our common stock price per share has
been, and may continue to be, extremely volatile. 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. If
we fail to retain, hire and integrate qualified employees and contractors, we
will not be able to maintain and expand our business. In addition, we must
carefully balance the size of our employee base with our anticipated revenue
base. If our revenue or attrition levels vary significantly, our results of
operations or financial condition could be adversely affected.
In recent quarters, we initiated reductions in our workforce of both
employees and contractors. These reductions have resulted in reallocations of
employee duties which could result in employee and contractor uncertainty.
Reductions in our workforce could make it difficult to motivate and retain the
remaining employees and contractors, which would affect our ability to deliver
our products in a timely fashion and otherwise negatively affect our business.
In addition, since the resignation of our former chief executive officer,
our board of directors and current chief executive officer have been conducting
a search for a new chief executive officer. The search for a new chief executive
officer could result in the diversion of management's attention away from other
business issues and operations, which could adversely affect our business.
Furthermore, the transition to a new chief executive officer could be disruptive
to our business operations and harm our business.
Third parties have claimed and may claim in the future we are infringing their
intellectual property, and we could suffer significant litigation or licensing
expenses or be prevented from selling products if these claims are successful.
In the course of our business, we frequently receive claims of infringement
or otherwise become aware of potentially relevant patents or other intellectual
property rights held by other parties. We evaluate the validity and
applicability of these intellectual property rights, and determine in each case
whether we must negotiate licenses or cross-licenses to incorporate or use the
proprietary technologies in our products. Third parties may claim that we or our
customers or Palm platform licensees are infringing or contributing to the
infringement of their intellectual property rights, and we may be found to
infringe or contribute to the infringement of those intellectual property rights
and require a license to use those rights. We may be unaware of intellectual
property rights of others that may cover some of our technology, products and
services.
Any litigation regarding patents or other intellectual property could be
costly and time-consuming, and divert our management and key personnel from our
business operations. The complexity of the technology involved and the
uncertainty of intellectual property litigation increase these risks. Claims of
intellectual property infringement might also require us to enter into costly
royalty or license agreements or indemnify our customers or Palm platform
licensees. However, we may not be able to
36
obtain royalty or license agreements on terms acceptable to us, or at all. We
also may be subject to significant damages or injunctions against development
and sale of our products.
We often rely on licenses of intellectual property for use in our business. We
cannot assure you that these licenses will be available in the future on
favorable terms or at all.
On April 28, 1997, Xerox Corporation filed suit against U.S. Robotics
Corporation and U.S. Robotics Access Corp. in the United States District Court
for the Western District of New York. The case came to be captioned: Xerox
Corporation v. 3Com Corporation, U.S. Robotics Corporation, U.S. Robotics Access
Corp., Palm Computing, Inc. and Palm, Inc., Civil Action No. 97-CV-6182T. The
complaint alleged willful infringement of U.S. Patent No. 5,596,656, entitled
"Unistrokes for Computerized Interpretation of Handwriting." The complaint
sought unspecified damages and to permanently enjoin the defendants from
infringing the patent in the future. In 2000, the District Court dismissed the
case, ruling that the patent is not infringed by the Graffiti handwriting
recognition system used with Palm handheld computers. Xerox appealed the
dismissal to the United States Court of Appeals for the Federal Circuit
("CAFC"). On October 5, 2001, the CAFC affirmed-in-part, reversed-in-part and
remanded the case to the District Court for further proceedings. On December 20,
2001, the District Court granted Xerox's motion for summary judgment that the
patent is valid, enforceable, and infringed. We filed a Notice of Appeal on
December 21, 2001. We may not be successful in our appeal of the court's ruling.
Xerox might seek from the court an injunction prohibiting the manufacture or
sale of products using the Graffiti handwriting recognition system, and we might
be required to pay Xerox significant damages or license fees.
On February 28, 2000, E-Pass Technologies, Inc. filed suit against "3Com,
Inc." in the United States District Court for the Southern District of New York
and later filed on March 6, 2000 an amended complaint against Palm and 3Com. The
case is now captioned E-Pass Technologies, Inc. v. 3Com Corporation, a/k/a 3Com,
Inc. and Palm, Inc. (Civil Action No. 00 CIV 1523). The amended complaint
alleges willful infringement of U.S. Patent No. 5,276,311, entitled "Method and
Device for Simplifying the Use of Credit Cards, or the Like." The complaint
seeks unspecified compensatory and treble damages and to permanently enjoin the
defendants from infringing the patent in the future. The case was transferred to
the U.S. District Court for the Northern District of California. The parties
have engaged in discovery. On December 5, 2001, the Court issued a Markman order
that interpreted certain patent claim terms at issue. No trial date has been
set.
On March 14, 2001, NCR Corporation filed suit against Palm and Handspring,
Inc. in the United States District Court for the District of Delaware. The case
is captioned, NCR Corporation v. Palm, Inc. and Handspring, Inc. (Civil Action
No. 01-169). The complaint alleges infringement of U.S. Patent Nos. 4,634,845
and 4,689,478, entitled, respectively, "Portable Personal Terminal for Use in a
System for Handling Transactions" and "System for Handling Transactions
Including a Portable Personal Terminal." The complaint seeks unspecified
compensatory and treble damages and to permanently enjoin the defendants from
infringing the patents in the future. The parties have engaged in discovery. The
Court has tentatively scheduled trial to begin on July 29, 2002.
In connection with our separation from 3Com, pursuant to the terms of the
Indemnification and Insurance Matters Agreement between 3Com and us, we agreed
to indemnify and hold 3Com harmless for any damages or losses which might arise
out of the Xerox and E-Pass litigation.
37
If third parties infringe our intellectual property, we may expend significant
resources enforcing our rights or suffer competitive injury.
Our success depends in large part on our proprietary technology. We rely on
a combination of patents, copyrights, trademarks and trade secrets,
confidentiality provisions and licensing arrangements to establish and protect
our proprietary rights. If we fail to protect or to enforce our intellectual
property rights successfully, our competitive position could suffer, which could
harm our operating results.
Our pending patent and trademark registration applications may not be
allowed or competitors may challenge the validity or scope of these patent
applications or trademark registrations. In addition, our patents may not
provide us a significant competitive advantage.
We may be required to spend significant resources to monitor and police our
intellectual property rights. We may not be able to detect infringement and may
lose competitive position in the market before we do so. In addition,
competitors may design around our technology or develop competing technologies.
Intellectual property rights may also be unavailable or limited in some foreign
countries, which could make it easier for competitors to capture market share.
On July 22, 1999, we filed a copyright infringement action against Olivetti
Office USA, Inc. and CompanionLink Software, Inc. in the United States District
Court for the Northern District of California alleging that Olivetti's "Royal
daVinci" handheld device and the daVinci OS Software Development Kit
(distributed by CompanionLink) contained source code copied from the Palm OS
operating system. We obtained a preliminary injunction against further
distribution, sale, import or export of any product containing source code or
object code copied or derived from the Palm OS operating system. The injunction
is to remain in effect pending the outcome of the lawsuit. The Court has set the
case for trial beginning March 11, 2003. We also initiated a copyright
infringement action in Hong Kong on July 21, 1999, against EchoLink Design,
Ltd., the company responsible for developing the operating system software
contained in the Olivetti daVinci devices that are the subject of the action
against Olivetti in the Northern District of California. The High Court of the
Hong Kong Special Administrative Region issued an order the same day restraining
EchoLink from further copying, distribution, sale, import or export of Palm OS
operating system source code or EchoLink's "NEXUS OS" source code, which we
maintain infringes our copyrights. Kessel Electronics (H.K.), Limited, which
supplied Olivetti with the daVinci devices, was subsequently added to the Hong
Kong action. Kessel consented to an injunction against reproducing, copying,
importing, exporting, distributing, or making available to the public any
software contained in certain files of the Palm OS source code or object code.
In September 2001, Kessel Electronics (H.K.) Limited filed papers in Hong Kong
seeking to liquidate the company pursuant to section 228A of the Hong Kong
Companies Ordinance.
By letter dated October 7, 1999, 3Com notified certain third party
retailers about the preliminary injunction order issued against Olivetti and
CompanionLink. On October 5, 2000, Olivetti filed an action against Palm and
3Com in the Superior Court of California, Santa Clara County, for unfair
competition, intentional interference with potential economic advantage, libel
and trade libel, based upon certain statements that were allegedly made, or that
3Com allegedly omitted to make, in the October 7, 1999 letter. In addition,
Olivetti has filed the identical action, as counterclaims and third-party claims
against Palm and 3Com, in the United States District Court for the Northern
District of California. Palm and 3Com filed a motion to strike Olivetti's state
court complaint under California's anti-SLAPP statute. On April 3, 2001, the
Superior Court granted Palm's and 3Com's motion. Olivetti has appealed from the
order granting the motion to strike. Olivetti's identical claims against Palm
(and 3Com) have been stayed in the federal action pending Olivetti's appeal of
the state court ruling dismissing Olivetti's claims.
38
In connection with our separation from 3Com, pursuant to the terms of the
Indemnification and Insurance Matters Agreement between 3Com and us, we agreed
to indemnify and hold 3Com harmless for any damages or losses which might arise
out of the Olivetti litigation.
In the past, there have been thefts of computer equipment from us and our
employees. This computer equipment has contained proprietary information. We
have formulated a security plan to reduce the risk of any future thefts and have
cooperated with state and federal law enforcement officials in an investigation
of past incidents. We may not be successful in preventing future thefts, or in
preventing those responsible for past thefts from using our technology to
produce competing products. The unauthorized use of Palm technology by
competitors could have a material adverse effect on our ability to sell our
products in some markets.
Our future results could be harmed by economic, political, regulatory and other
risks associated with international sales and operations.
Since we sell our products worldwide, our business is subject to risks
associated with doing business internationally. We anticipate that revenues from
international operations will represent an increasing portion of our total
revenues over time. In addition, several of the facilities where our devices are
manufactured and distributed are located outside the United States. Accordingly,
our future results could be harmed by a variety of factors, including:
o changes in foreign currency exchange rates;
o changes in a specific country's or region's political or economic
conditions, particularly in emerging markets;
o trade protection measures and import or export licensing requirements;
o potentially negative consequences from changes in tax laws;
o difficulty in managing widespread sales and manufacturing operations;
o difficulty in managing a geographically dispersed workforce in compliance
with diverse local laws and customs; and
o less effective protection of intellectual property.
We are subject to changes in demand for our products resulting from
exchange rate fluctuations that make our products relatively more or less
expensive in international markets. If exchange rate fluctuations occur, our
business could be harmed by decreases in demand for our products or reductions
in gross margins.
We may pursue strategic acquisitions and investments which could have an adverse
impact on our business if unsuccessful.
Within the last two years, we have acquired ThinAirApps, Inc., certain
assets of Be Incorporated, peanutpress.com, Inc., WeSync.com, Inc., AnyDay.com,
Inc., and Actual Software Corporation. We evaluate other acquisition
opportunities that could provide us with additional product or services
offerings or additional industry expertise. Acquisitions could result in
difficulties assimilating acquired operations and products, and result in the
diversion of capital and management's attention away from other business issues
and opportunities. Integration of acquired companies may result in problems
related to integration of technology and management teams. We may not
successfully integrate
39
operations, personnel or products that we have acquired or may acquire in the
future. If we fail to successfully integrate acquisitions, our business could be
materially harmed. In addition, our acquisitions may not be successful in
achieving our desired strategic objectives, which would also cause our business
to suffer. For example, in the fourth quarter of fiscal year 2001, we had to
record a charge of approximately $47.7 million in connection with the impairment
of certain intangibles as a result of our reduced expectations for revenues and
cashflows from web calendaring associated with our acquisition of AnyDay. These
transactions may result in the diversion of capital and management's attention
away from other business issues and opportunities. In addition, we have made
strategic venture investments in other companies which provide products and
services which are complementary to ours. If these investments are unsuccessful,
this could have an adverse impact on our results of operations and financial
position.
Our ability to pursue mergers and acquisitions may be limited.
3Com has obtained a ruling from the Internal Revenue Service that the
distribution of 3Com's shares of Palm common stock to 3Com's stockholders will
not be taxable. This ruling could be revoked if either 3Com or Palm, through
July 27, 2002, engaged in certain transactions that would constitute a change of
more than 50% of the equity interest in either company and that transaction was
deemed to be related to our separation from 3Com in 2000. Consequently, our
ability to engage in mergers and acquisitions could be limited. If either 3Com
or Palm takes any action that causes the ruling to be revoked, there would be
material adverse consequences, potentially including making the distribution
taxable, and causing the company that was responsible for the revocation to
indemnify the other company for any resulting damages.
Our flexibility to operate our business may be constrained by the requirements
of our credit facility.
In June 2001, we obtained a two-year asset-backed, borrowing-base credit
facility from a group of financial institutions for up to a maximum of $150
million with the actual amount available determined by eligible accounts
receivable and inventory as well as a real estate line of credit. The terms of
our credit facility requires us to obtain the prior consent of our lenders
before we engage in certain specified actions such as incurring certain
indebtedness, making certain investments or distributions, making certain
acquisitions, making certain capital expenditures or causing a change in control
of Palm. If we are unable to obtain our lenders' consent, we will be unable to
take certain actions and our business may suffer. In addition, the credit
facility confers additional rights on our lenders in the event of a default
which could cause us to suffer adverse financial and business consequences. To
date, we have not drawn on our credit facility.
Business interruptions could adversely affect our business.
Our operations and those of our suppliers and customers are vulnerable to
interruption by fire, earthquake, power loss, telecommunications failure,
terrorist attacks, wars and other events beyond our control. Our facilities and
those of our suppliers and customers in the State of California may be subject
to electrical blackouts as a consequence of a shortage of available electrical
power. Such electrical blackouts could disrupt the operations of our affected
facilities and those of our suppliers and customers. In addition, the business
interruption insurance we carry may not be sufficient to compensate us fully for
40
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.
Risks Related to Our Separation from 3Com
Our historical financial information may not be representative of our future
results.
Through February 25, 2000, our consolidated financial statements were
carved out from the consolidated financial statements of 3Com using the
historical results of operations and historical bases of the assets and
liabilities of the 3Com handheld computing business that we comprised.
Accordingly, the historical financial information does not necessarily reflect
what our financial position, results of operations and cash flows would have
been had we been a separate, stand-alone entity during the periods presented.
Through February 2000, 3Com did not account for us and we were not operated as a
separate, stand-alone entity for the periods presented. From March 2000 through
August 2001, we incurred various costs related to transitional services procured
from 3Com. These costs were decreasing during this time period as we established
our own infrastructure.
Our historical costs and expenses through February 2000 include allocations
from 3Com for centralized corporate services and infrastructure costs, including
legal, accounting, treasury, real estate, information technology, distribution,
customer service, sales, marketing and engineering. These allocations were
determined on bases that we and 3Com considered to be reasonable reflections of
the utilization of services provided to or the benefit received by Palm.
Beginning from March 2000, our costs and expenses included a variety of
transitional services provided by 3Com to us while we were developing our own
infrastructure capabilities. The historical financial information is not
necessarily indicative of what our results of operations, financial position and
cash flows will be in the future.
We may have potential business conflicts of interest with 3Com with respect to
our past and ongoing relationships and may not resolve these conflicts on the
most favorable terms to us.
Conflicts of interest could arise between 3Com and us in a number of areas
relating to our past and ongoing relationships, including:
o tax and indemnification matters arising from our separation from 3Com;
o intellectual property matters; and
o employee recruiting.
These relationships were formed in the context of a parent-subsidiary
relationship and negotiated in the overall context of our separation from 3Com.
We may not be able to resolve any potential conflicts on terms most favorable to
us. Nothing restricts 3Com from competing with us.
41
Risks Related to the Securities Markets and Ownership of Our Common Stock
Our common stock price may be subject to significant fluctuations and
volatility.
Our common stock has been publicly traded since March 2, 2000. The market
price of our common stock has been subject to significant fluctuations since the
date of our initial public offering. These fluctuations could continue. Among
the factors that could affect our stock price are:
o quarterly variations in our operating results;
o changes in revenues or earnings estimates or publication of research
reports by analysts;
o speculation in the press or investment community;
o strategic actions by us or our competitors, such as new product
announcements, acquisitions or restructuring;
o actions by institutional stockholders;
o general market conditions; and
o domestic and international economic factors unrelated to our performance.
In addition, the stock markets in general, and the markets for high
technology stocks in particular, have experienced high volatility that has often
been unrelated to the operating performance of particular companies. These broad
market fluctuations may adversely affect the trading price of our common stock.
Provisions in our charter documents and Delaware law and our adoption of a
stockholder rights plan may delay or prevent acquisition of us, which could
decrease the value of your shares.
Our certificate of incorporation and bylaws and Delaware law contain
provisions that could make it harder for a third party to acquire us without the
consent of our board of directors. These provisions include a classified board
of directors and limitations on actions by our stockholders by written consent.
Delaware law also imposes some restrictions on mergers and other business
combinations between us and any holder of 15% or more of our outstanding common
stock. In addition, our board of directors has the right to issue preferred
stock without stockholder approval, which could be used to dilute the stock
ownership of a potential hostile acquirer. Although we believe these provisions
provide for an opportunity to receive a higher bid by requiring potential
acquirers to negotiate with our board of directors, these provisions apply even
if the offer may be considered beneficial by some stockholders.
Our board of directors adopted a stockholder rights plan, pursuant to which
we declared and paid a dividend of one right for each share of common stock held
by stockholders of record as of November 6, 2000. Unless redeemed by us prior to
the time the rights are exercised, upon the occurrence of certain events, the
rights will entitle the holders to receive upon exercise thereof shares of our
preferred stock, or shares of an acquiring entity, having a value equal to twice
the then-current exercise price of the right. The issuance of the rights could
have the effect of delaying or preventing a change in control of us.
42
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
Palm's exposure to market risk for changes in interest rates relates primarily
to our investment portfolio, which consists entirely of cash equivalents as of
November 30, 2001. The primary objective of our investment activities is to
maintain the safety of principal and preserve liquidity while maximizing yields
without significantly increasing risk. This is accomplished by investing in
marketable investment grade securities, and by limiting exposure to any one
issue or issuer. We do not use derivative financial instruments in our
investment portfolio and due to the nature of our investments, we do not expect
our operating results or cash flows to be affected to any significant degree by
the effect of a sudden change in market interest rates on our investment
portfolio. As of November 30, 2001, all investments mature within 90 days and
are carried at cost, which approximates fair market value.
Foreign Currency Exchange Rate Risk
Through the second quarter of fiscal year 2002, substantially all of Palm's
sales were denominated in U.S. dollars and we did not hold derivative financial
instruments. Palm will begin denominating its sales to certain European
customers in the Euro and the Great British Pound in the third quarter of fiscal
year 2002. We will hedge certain balance sheet exposures and intercompany
balances against future movements in foreign currency exchange rates by using
derivative financial instruments, including foreign exchange forward contracts.
We do not intend in the future to utilize derivative financial instruments for
trading purposes.
Equity Price Risk
We have invested approximately $13.2 million in other companies as of November
30, 2001. Investments in publicly traded companies are subject to market price
volatility, and investments in privately held companies are illiquid and
inherently risky, as their technologies or products are typically in the early
stages of development and may never materialize. We could experience material
declines in the value of our investments in publicly traded and privately held
companies or even lose the initial value of our investments in both privately
held and publicly traded companies.
43
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Palm is a party to lawsuits in the normal course of its business. Litigation in
general, and intellectual property litigation in particular, can be expensive
and disruptive to normal business operations. Moreover, the results of complex
legal proceedings are difficult to predict. Palm believes that it has defenses
to the cases set forth below and is vigorously contesting these matters. Palm is
not currently able to estimate, with reasonable certainty, the possible loss, or
range of loss, if any, from the cases listed below, but an unfavorable
resolution of these lawsuits could adversely affect Palm's business, results of
operations or financial condition.
On April 28, 1997, Xerox Corporation filed suit against U.S. Robotics
Corporation and U.S. Robotics Access Corp. in the United States District Court
for the Western District of New York. The case came to be captioned: Xerox
Corporation v. U.S. Robotics Corporation, U.S. Robotics Access Corp., Palm
Computing, Inc. and 3Com Corporation, Civil Action No. 97-CV-6182T. The
complaint alleged willful infringement of U.S. Patent No. 5,596,656, entitled
"Unistrokes for Computerized Interpretation of Handwriting." The complaint
sought unspecified damages and to permanently enjoin the defendants from
infringing the patent in the future. In 2000, the District Court dismissed the
case, ruling that the patent is not infringed by the Graffiti handwriting
recognition system used with Palm handheld computers. Xerox appealed the
dismissal to the United States Court of Appeals for the Federal Circuit
("CAFC"). On October 5, 2001, the CAFC affirmed-in-part, reversed-in-part and
remanded the case to the District Court for further proceedings. On December 20,
2001, the District Court granted Xerox's motion for summary judgment that the
patent is valid, enforceable, and infringed. The defendants filed a Notice of
Appeal on December 21, 2001.
On July 22, 1999, we filed a copyright infringement action against Olivetti
Office USA, Inc. and CompanionLink Software, Inc. in the United States District
Court for the Northern District of California alleging that Olivetti's "Royal
daVinci" handheld device and the daVinci OS Software Development Kit
(distributed by CompanionLink) contained source code copied from the Palm OS
operating system. We obtained a preliminary injunction against further
distribution, sale, import or export of any product containing source code or
object code copied or derived from the Palm OS operating system. The injunction
is to remain in effect pending the outcome of the lawsuit. The Court has set the
case for trial beginning March 11, 2003. We also initiated a copyright
infringement action in Hong Kong on July 21, 1999, against EchoLink Design,
Ltd., the company responsible for developing the operating system software
contained in the Olivetti daVinci devices that are the subject of the action
against Olivetti in the Northern District of California. The High Court of the
Hong Kong Special Administrative Region issued an order the same day restraining
EchoLink from further copying, distribution, sale, import or export of Palm OS
operating system source code or EchoLink's "NEXUS OS" source code, which we
maintain infringes our copyrights. Kessel Electronics (H.K.), Limited, which
supplied Olivetti with the daVinci devices, was subsequently added to the Hong
Kong action. Kessel consented to an injunction against reproducing, copying,
importing, exporting, distributing, or making available to the public any
software contained in certain files of the Palm OS source code or object code.
In September 2001, Kessel Electronics (H.K.) Limited filed papers in Hong Kong
seeking to liquidate the company pursuant to section 228A of the Hong Kong
Companies Ordinance.
By letter dated October 7, 1999, 3Com notified certain third party retailers
about the preliminary injunction order issued against Olivetti and
CompanionLink. On October 5, 2000, Olivetti filed an action against Palm and
3Com in the Superior Court of California, Santa Clara County, for unfair
44
competition, intentional interference with potential economic advantage, libel
and trade libel, based upon certain statements that were allegedly made, or that
3Com allegedly omitted to make, in the October 7, 1999 letter. In addition,
Olivetti has filed the identical action, as counterclaims and third-party claims
against Palm and 3Com, in the United States District Court for the Northern
District of California. Palm and 3Com filed a motion to strike Olivetti's state
court complaint under California's anti-SLAPP statute. On April 3, 2001, the
Superior Court granted Palm's and 3Com's motion. Olivetti has appealed from the
order granting the motion to strike. Olivetti's identical claims against Palm
(and 3Com) have been stayed in the federal action pending Olivetti's appeal of
the state court ruling dismissing Olivetti's claims.
On February 28, 2000, E-Pass Technologies, Inc. filed suit against "3Com, Inc."
in the United States District Court for the Southern District of New York and
later filed on March 6, 2000 an amended complaint against Palm and 3Com. The
case is now captioned E-Pass Technologies, Inc. v. 3Com Corporation, a/k/a 3Com,
Inc. and Palm, Inc. (Civil Action No. 00 CIV 1523). The amended complaint
alleges willful infringement of U.S. Patent No. 5,276,311, entitled "Method and
Device for Simplifying the Use of Credit Cards, or the Like." The complaint
seeks unspecified compensatory and treble damages and to permanently enjoin the
defendants from infringing the patent in the future. The case was transferred to
the U.S. District Court for the Northern District of California. The parties
have engaged in discovery. On December 5, 2001, the Court issued a Markman order
that interpreted certain patent claim terms at issue. No trial date has been
set.
In January 2001, a shareholder derivative and class action lawsuit, captioned
Shaev v. Benhamou, et al., No. CV795128, was filed in California Superior Court.
The complaint alleged that Palm's directors breached fiduciary duties by not
having Palm's public shareholders approve Palm's 1999 director stock option
plan. The 1999 director plan was approved prior to Palm's March 2000 initial
public offering by 3Com Corporation, Palm's sole shareholder at the time. The
complaint alleged that Palm was required to seek approval for the plan by
shareholders after the initial public offering. Plaintiff filed an amended
complaint in November 2001 adding new defendants and new allegations, including
that defendants breached fiduciary duties by approving Palm's 2001 director
stock option plan and by making misrepresentations in Palm's September 2001
proxy statement. Plaintiff has not specified the amount of damages he may seek.
The case is in discovery. No trial date has been set.
On March 14, 2001, NCR Corporation filed suit against Palm and Handspring, Inc.
in the United States District Court for the District of Delaware. The case is
captioned, NCR Corporation v. Palm, Inc. and Handspring, Inc. (Civil Action No.
01-169). The complaint alleges infringement of U.S. Patent Nos. 4,634,845 and
4,689,478, entitled, respectively, "Portable Personal Terminal for Use in a
System for Handling Transactions" and "System for Handling Transactions
Including a Portable Personal Terminal." The complaint seeks unspecified
compensatory and treble damages and to permanently enjoin the defendants from
infringing the patents in the future. The parties have engaged in discovery. The
Court has tentatively scheduled trial to begin on July 29, 2002.
Starting on June 20, 2001, Palm, several of its officers, and a director were
named as defendants in purported securities class action lawsuits filed in
federal district court for the Southern District of New York. The first of these
lawsuits is captioned Weiner v. Palm, Inc., et al., No. 01 CV 5613. The
complaints assert that the prospectus from Palm's March 2, 2000 initial public
offering failed to disclose certain alleged actions by the underwriters for the
offering. The complaints allege claims against Palm, several of its officers,
and the director under Sections 11 and 15 of the Securities Act of 1933, as
amended. Certain of the complaints also allege claims under Section 10(b) and
Section 20(a) of the Securities Exchange Act of 1934, as amended. The complaints
also name as defendants the
45
underwriters for Palm's initial public offering. Palm, its officers and the
director have not responded to these actions.
On August 7, 2001, a purported consumer class action lawsuit was filed against
Palm and 3Com Corporation in California Superior Court, San Francisco County.
The case is captioned Connelly et al v. Palm, Inc., 3 Com Corp et al (Case No.
323587). An Amended Complaint was filed and served on Palm on August 15, 2001.
The Amended Complaint, filed on behalf of purchasers of Palm III, IIIc, V and Vx
handhelds, alleges that certain Palm handhelds may cause damage to PC
motherboards by permitting an electrical charge, or "floating voltage," from
either the handheld or the cradle to be introduced into the PC via the serial
and/or USB port on the PC. Plaintiffs allege that this damage is the result of a
design defect in one or more of the following: HotSync software, handheld,
cradle and/or the connection cable. The complaint seeks restitution, rescission,
damages, an injunction mandating corrective measures to protect against future
damage as well as notifying users of potential harm. Palm's answer was filed on
October 1, 2001. The parties have engaged in discovery. No trial date has been
set.
In connection with our separation from 3Com, pursuant to the terms of the
Indemnification and Insurance Matters Agreement between 3Com and us, we agreed
to indemnify and hold 3Com harmless for any damages or losses which might arise
out of the Xerox, E-Pass, Olivetti, and Connelly litigation.
46
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Stockholders on October 11, 2001, the
following proposals were adopted:
Proposal I
Election of Directors
Total Votes For Total Votes Withheld
Director Each Director From Each Director
Gordon A. Campbell 450,979,488 22,650,998
Susan G. Swenson 451,028,057 22,602,429
As a result, Mr. Campbell and Ms. Swenson were re-elected as directors of the
Company. In addition, the term of office of each of the following directors
continued after the Annual Meeting of Stockholders: Eric A. Benhamou,
Jean-Jacques Damlamian, David C. Nagel, Carl J. Yankowski, Michael Homer and
Gareth C.C. Chang.
Proposal II
To approve the 1999 Stock Plan, as amended.
Votes For Votes Against Votes Abstained
399,009,792 59,683,941 14,936,753
Proposal III
To approve the 2001 Stock Option Plan for Non-Employee Directors.
Votes For Votes Against Votes Abstained
404,758,116 54,023,389 14,848,981
Proposal IV
To approve the Performance Based Bonus Plan.
Votes For Votes Against Votes Abstained Broker Non-Votes
191,378,471 19,258,372 14,470,991 248,522,652
Proposal V
To ratify the appointment of Deloitte & Touche LLP as independent public
accountants.
Votes For Votes Against Votes Abstained
446,734,045 13,227,410 13,669,031
47
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit
Number Description
------- -----------
2.1(1) Master Separation and Distribution Agreement between 3Com and
the registrant effective as of December 13, 1999, as amended.
2.2(2) General Assignment and Assumption Agreement between 3Com and
the registrant, as amended.
2.3(2) Master Technology Ownership and License Agreement between
3Com and the registrant.
2.4(2) Master Patent Ownership and License Agreement between 3Com
and the registrant.
2.5(2) Master Trademark Ownership and License Agreement between 3Com
and the registrant.
2.6(2) Employee Matters Agreement between 3Com and the registrant.
2.7(2) Tax Sharing Agreement between 3Com and the registrant.
2.8(2) Master Transitional Services Agreement between 3Com and the registrant.
2.9(2) Real Estate Matters Agreement between 3Com and the registrant.
2.10(2) Master Confidential Disclosure Agreement between 3Com and the registrant.
2.11(2) Indemnification and Insurance Matters Agreement between 3Com
and the registrant.
2.12(1) Form of Non-U.S. Plan.
3.1(1) Amended and Restated Certificate of Incorporation.
3.2(9) Amended and Restated Bylaws.
3.3(5) Certificate of Designation of Rights, Preferences and Privileges of Series A
Participating Preferred Stock.
4.1 Reference is made to Exhibits 3.1, 3.2 and 3.3 hereof.
4.2 Specimen Stock Certificate.
4.3(5) Preferred Stock Rights Agreement between the Registrant and
Fleet National Bank.
4.4 + 5% Convertible Subordinated Note Due 2006, dated as of December 6, 2001.
10.1(9) 1999 Stock Plan, as amended.
10.2(1) Form of 1999 Stock Plan Agreements.
10.3(1) 1999 Employee Stock Purchase Plan.
10.4(1) Form of 1999 Employee Stock Purchase Plan Agreements.
10.5(3) Amended and Restated 1999 Director Option Plan.
10.6(1) Form of 1999 Director Option Plan Agreements.
10.7(1) Management Retention Agreement dated as of December 1, 1999 by and
between Carl J. Yankowski and the registrant.
10.8(1) Form of Indemnification Agreement entered into by the registrant with
each of its directors and executive officers.
10.9(1)** RAM Mobile Data USA Limited Partnership Value Added Reseller
Agreement between RAM Mobile Data USA Limited Partnership (now
Cingular Wireless) and the registrant.
48
10.10(1)** Supply Agreement between Manufacturers' Services Salt Lake City
Operations, Inc. and the registrant.
10.11(1) Common Stock Purchase Agreement between America Online (now AOL Time Warner)
and the registrant.
10.12(1) Common Stock Purchase Agreement between Motorola and the registrant.
10.13(1) Common Stock Purchase Agreement Between Nokia and the registrant.
10.14(1) Form of Management Retention Agreement.
10.15(4) Agreement for Purchase and Sale of Land between 3Com Corporation
and the registrant.
10.16(6) Master Lease dated as of November 16, 2000 by and between the
registrant and Societe Generale Financial Corporation, as
supplemented.
10.17(6) Participation Agreement dated as of November 16, 2000 by and among
the registrant, Societe Generale Financial Corporation, Societe
Generale and certain other parties.
10.18(6) Guaranty dated as of November 16, 2000 by and between the registrant
and Societe Generale, New York Branch.
10.19(7)** First Amendment to Supply Agreement between Manufacturers' Services Salt Lake City
Operations, Inc. and the registrant.
10.20(8) Amended and Restated Lease, dated as of May 31, 2001, between the registrant
and Societe Generale Financial Corporation, as supplemented.
10.21(8) Termination Agreement, dated as of May 31, 2001, between the registrant, Societe
Generale Financial Corporation, Societe Generale and certain other parties.
10.22(9)+ Loan and Security Agreement by and among the registrant, Foothill Capital
Corporation, Heller Financial, Inc. and The CIT Group/Business Credit, Inc.
dated as of June 25, 2001.
10.23(9)+ Amendment Number One to Loan Agreement by and among the registrant, Foothill
Capital Corporation, Heller Financial, Inc. and The CIT Group/Business
Credit, Inc. dated as of August 6, 2001.
10.24(9) Employment Offer Letter for David C. Nagel dated September 13, 2001.
10.25 + Agreement and General Release of All Claims between the registrant and
Carl J. Yanowski dated as of November 8, 2001.
10.26 + Convertible Note Purchase Agreement dated December 6, 2001.
10.27 + Registration Rights Agreement dated as of December 6, 2001.
10.28 + Amendment Number Two to Loan Agreement by and among the registrant, Foothill
Capital Corporation, Heller Financial, Inc. and The CIT Group/Business
Credit, Inc. dated as of November 2001.
10.29 + Loan Agreement by and among Palm Europe Limited, Foothill Capital
Corporation, Heller Financial, Inc. and The CIT Group/Business Credit, Inc.
dated as of November 30, 2001.
10.30 + Guarantee and Debenture by and between Palm Europe Limited and
Foothill Capital Corporation dated as of November 30, 2001.
10.31 General Continuing Guaranty by the registrant in favor of Foothill Capital
Corporation, Heller Financial, Inc. and The CIT Group/Business Credit, Inc.
dated as of November 30, 2001.
10.32 Share Charge by and between Palm Ireland Investment and Foothill
Capital Corporation dated as of November 30, 2001.
10.33 + Loan Agreement by and among Palm Global Operations Ltd., Foothill Capital
Corporation, Heller Financial, Inc., and The CIT Group/Business Credit, Inc.
dated as of November 30, 2001.
10.34 Guarantee and Debenture by and between Palm Global Operations
Limited and Foothill Capital Corporation dated as of January 7, 2002.
49
10.35 General Continuing Guaranty by the registrant in favor of Foothill Capital
Corporation, Heller Financial, Inc. and The CIT Group/Business Credit, Inc.
dated as of November 30, 2001.
10.36 Share Charge by and between Palm Ireland Investment and Foothill
Capital Corporation dated as of November 30, 2001.
(1)- Incorporated by reference from the Registrant's Registration Statement on
Form S-1 (No. 333-92657) filed with the Commission on December 13, 1999,
as amended.
(2)- Incorporated by reference from the Registrant's Report on Form 10-Q filed
with the Commission on April 10, 2000.
(3)- Incorporated by reference from the Registration Statement on Form S-8
filed with the Commission on October 2, 2000.
(4)- Incorporated by reference from the Registrant's Report on Form 10-Q filed
with the Commission on October 12, 2000.
(5)- Incorporated by reference from the Registrant's Report on Form 8-K filed
with the Commission on November 22, 2000
(6)- Incorporated by reference from the Registrant's Report on Form 8-K filed
with the Commission on December 1, 2000
(7)- Incorporated by reference from the Registrant's Report on Form 10-Q filed
with the Commission on April 11, 2001.
(8)- Incorporated by reference from the Registrant's Report on Form 8-K filed
with the Commission on June 15, 2001.
(9)- Incorporated by reference from the Registrant's Report on Form 10-Q filed
with the Commission on October 15, 2001.
** - Confidential treatment granted on portions of this exhibit.
+ - Confidential treatment requested on portions of this exhibit. Unredacted
versions of this exhibit have been filed separately with the Commission.
(b) Reports on Form 8-K
The Company filed the following Current Reports on Form 8-K during the second
quarter of fiscal year 2002:
1. On November 9, 2001, Palm filed a Current Report on Form 8-K reporting under
Item 5 of Form 8-K that on November 8, 2001 Palm issued a press release entitled
"Palm CEO Carl Yankowski Resigns; Chairman Eric Benhamou to Serve as CEO; Palm
Platform Separation in Final Phase; Company Confirms Previous Q2 Revenue
Guidance."
- ---------------
50
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Palm, Inc.
(Registrant)
Dated: January 14, 2002 By: /s/ Judy Bruner
--------------------- -------------------------------------------
Judy Bruner
Senior Vice President, Finance and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
51
INDEX OF EXHIBITS
Exhibit
Number Description
------- -----------
2.1(1) Master Separation and Distribution Agreement between 3Com and
the registrant effective as of December 13, 1999, as amended.
2.2(2) General Assignment and Assumption Agreement between 3Com and
the registrant, as amended.
2.3(2) Master Technology Ownership and License Agreement between
3Com and the registrant.
2.4(2) Master Patent Ownership and License Agreement between 3Com
and the registrant.
2.5(2) Master Trademark Ownership and License Agreement between 3Com
and the registrant.
2.6(2) Employee Matters Agreement between 3Com and the registrant.
2.7(2) Tax Sharing Agreement between 3Com and the registrant.
2.8(2) Master Transitional Services Agreement between 3Com and the registrant.
2.9(2) Real Estate Matters Agreement between 3Com and the registrant.
2.10(2) Master Confidential Disclosure Agreement between 3Com and the registrant.
2.11(2) Indemnification and Insurance Matters Agreement between 3Com
and the registrant.
2.12(1) Form of Non-U.S. Plan.
3.1(1) Amended and Restated Certificate of Incorporation.
3.2(9) Amended and Restated Bylaws.
3.3(5) Certificate of Designation of Rights, Preferences and Privileges of Series A
Participating Preferred Stock.
4.1 Reference is made to Exhibits 3.1, 3.2 and 3.3 hereof.
4.2 Specimen Stock Certificate.
4.3(5) Preferred Stock Rights Agreement between the Registrant and
Fleet National Bank.
4.4 + 5% Convertible Subordinated Note Due 2006, dated as of December 6, 2001.
10.1(9) 1999 Stock Plan, as amended.
10.2(1) Form of 1999 Stock Plan Agreements.
10.3(1) 1999 Employee Stock Purchase Plan.
10.4(1) Form of 1999 Employee Stock Purchase Plan Agreements.
10.5(3) Amended and Restated 1999 Director Option Plan.
10.6(1) Form of 1999 Director Option Plan Agreements.
10.7(1) Management Retention Agreement dated as of December 1, 1999 by and
between Carl J. Yankowski and the registrant.
10.8(1) Form of Indemnification Agreement entered into by the registrant with
each of its directors and executive officers.
10.9(1)** RAM Mobile Data USA Limited Partnership Value Added Reseller
Agreement between RAM Mobile Data USA Limited Partnership (now
Cingular Wireless) and the registrant.
10.10(1)** Supply Agreement between Manufacturers' Services Salt Lake City
Operations, Inc. and the registrant.
10.11(1) Common Stock Purchase Agreement between America Online (now AOL Time Warner)
and the registrant.
10.12(1) Common Stock Purchase Agreement between Motorola and the registrant.
52
10.13(1) Common Stock Purchase Agreement Between Nokia and the registrant.
10.14(1) Form of Management Retention Agreement.
10.15(4) Agreement for Purchase and Sale of Land between 3Com Corporation
and the registrant.
10.16(6) Master Lease dated as of November 16, 2000 by and between the
registrant and Societe Generale Financial Corporation, as supplemented.
10.17(6) Participation Agreement dated as of November 16, 2000 by and among
the registrant, Societe Generale Financial Corporation, Societe
Generale and certain other parties.
10.18(6) Guaranty dated as of November 16, 2000 by and between the registrant
and Societe Generale, New York Branch.
10.19(7)** First Amendment to Supply Agreement between Manufacturers' Services Salt Lake
City Operations, Inc. and the registrant.
10.20(8) Amended and Restated Lease, dated as of May 31, 2001, between the
registrant and Societe Generale Financial Corporation, as
supplemented.
10.21(8) Termination Agreement, dated as of May 31, 2001, between the
registrant, Societe Generale Financial Corporation, Societe Generale
and certain other parties.
10.22(9)+ Loan and Security Agreement by and among the registrant, Foothill Capital
Corporation, Heller Financial, Inc. and The CIT Group/Business Credit, Inc.
dated as of June 25, 2001.
10.23(9)+ Amendment Number One to Loan Agreement by and among the registrant, Foothill
Capital Corporation, Heller Financial, Inc. and The CIT Group/Business
Credit, Inc. dated as of August 6, 2001.
10.24(9) Employment Offer Letter for David C. Nagel dated September 13, 2001.
10.25 + Agreement and General Release of All Claims between the registrant and
Carl J. Yanowski dated as of November 8, 2001.
10.26 + Convertible Note Purchase Agreement dated December 6, 2001.
10.27 + Registration Rights Agreement dated as of December 6, 2001.
10.28 + Amendment Number Two to Loan Agreement by and among the registrant, Foothill
Capital Corporation, Heller Financial, Inc. and The CIT Group/Business
Credit, Inc. dated as of November 2001.
10.29 + Loan Agreement by and among Palm Europe Limited, Foothill Capital
Corporation, Heller Financial, Inc. and The CIT Group/Business Credit, Inc.
dated as of November 30, 2001.
10.30 + Guarantee and Debenture by and between Palm Europe Limited and
Foothill Capital Corporation dated as of November 30, 2001.
10.31 General Continuing Guaranty by the registrant in favor of Foothill Capital
Corporation, Heller Financial, Inc. and The CIT Group/Business Credit, Inc.
dated as of November 30, 2001.
10.32 Share Charge by and between Palm Ireland Investment and Foothill
Capital Corporation dated as of November 30, 2001.
10.33 + Loan Agreement by and among Palm Global Operations Ltd., Foothill Capital
Corporation, Heller Financial, Inc., and The CIT Group/Business Credit, Inc.
dated as of November 30, 2001.
10.34 Guarantee and Debenture by and between Palm Global Operations
Limited and Foothill Capital Corporation dated as of January 7, 2002.
10.35 General Continuing Guaranty by the registrant in favor of Foothill Capital
Corporation, Heller Financial, Inc. and The CIT Group/Business Credit, Inc.
dated as of November 30, 2001.
10.36 Share Charge by and between Palm Ireland Investment and Foothill
Capital Corporation dated as of November 30, 2001.
53
(1)- Incorporated by reference from the Registrant's Registration Statement on
Form S-1 (No. 333-92657) filed with the Commission on December 13, 1999,
as amended.
(2)- Incorporated by reference from the Registrant's Report on Form 10-Q filed
with the Commission on April 10, 2000.
(3)- Incorporated by reference from the Registration Statement on Form S-8
filed with the Commission on October 2, 2000.
(4)- Incorporated by reference from the Registrant's Report on Form 10-Q filed
with the Commission on October 12, 2000.
(5)- Incorporated by reference from the Registrant's Report on Form 8-K filed
with the Commission on November 22, 2000
(6)- Incorporated by reference from the Registrant's Report on Form 8-K filed
with the Commission on December 1, 2000
(7)- Incorporated by reference from the Registrant's Report on Form 10-Q filed
with the Commission on April 11, 2001.
(8)- Incorporated by reference from the Registrant's Report on Form 8-K filed
with the Commission on June 15, 2001.
(9)- Incorporated by reference from the Registrant's Report on Form 10-Q filed
with the Commission on October 15, 2001.
**- Confidential treatment granted on portions of this exhibit.
+- Confidential treatment requested on portions of this exhibit. Unredacted
versions of this exhibit have been filed separately with the Commission.
54