10-Q 1 d10q.htm FORM 10-Q Form 10-Q
Table of Contents

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 August 31, 2007

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 No. 000-29597

 


Palm, Inc.

(Exact name of registrant as specified in its charter)

 


 

Delaware   94-3150688

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

950 West Maude

Sunnyvale, California

94085

(Address of principal executive offices and zip code)

Registrant’s telephone number, including area code: (408) 617-7000

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  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one)

Large accelerated filer  x    Accelerated filer  ¨    Non-Accelerated filer  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)    Yes  ¨    No  x

As of September 28, 2007, 104,845,178 shares of the Registrant’s Common Stock were outstanding.

This report contains a total of 46 pages of which this page is number 1.

 



Table of Contents

Palm, Inc. (*)

Table of Contents

 

     Page

PART I. FINANCIAL INFORMATION

  

Item 1. Financial Statements

  

Condensed Consolidated Statements of Operations
Three months ended August 31, 2007 and 2006

   3

Condensed Consolidated Balance Sheets
August 31, 2007 and May 31, 2007

   4

Condensed Consolidated Statements of Cash Flows
Three months ended August 31, 2007 and 2006

   5

Notes to Condensed Consolidated Financial Statements

   6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

   19

Item 3. Quantitative and Qualitative Disclosures About Market Risk

   28

Item 4. Controls and Procedures

   28

PART II. OTHER INFORMATION

  

Item 1. Legal Proceedings

   29

Item 1A. Risk Factors

   29

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

   42

Item 6. Exhibits

   43

Signatures

   46

(*) Palm’s 52-53 week fiscal year ends on the Friday nearest May 31, with each fiscal quarter ending on the Friday generally nearest August 31, November 30 and February 28. For presentation purposes, the periods are shown as ending on August 31, November 30, February 28 and May 31, as applicable.

The page numbers in this Table of Contents reflect actual page numbers, not EDGAR page tag numbers.

Palm, Treo, Foleo and Palm OS are among the trademarks or registered trademarks owned by or licensed to Palm, Inc. All other brand and product names are or may be trademarks of, and are used to identify products or services of, their respective owners.

 

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Table of Contents

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

August 31,

 
     2007     2006  

Revenues

   $ 360,759     $ 355,773  

Cost of revenues (*)

     230,335       224,487  
                

Gross profit

     130,424       131,286  

Operating expenses:

    

Sales and marketing (*)

     60,195       52,932  

Research and development (*)

     52,616       40,845  

General and administrative (*)

     13,996       13,760  

Amortization of intangible assets

     961       340  

Patent acquisition cost

     5,000       —    

Restructuring charges

     6,604       —    

Gain on sale of land

     (4,446 )     —    
                

Total operating expenses

     134,926       107,877  
                

Operating income (loss)

     (4,502 )     23,409  

Interest expense

     (153 )     (668 )

Interest income

     7,918       6,496  

Other income (expense), net

     (301 )     (390 )
                

Income before income taxes

     2,962       28,847  

Income tax provision

     3,803       12,344  
                

Net income (loss)

   $ (841 )   $ 16,503  
                

Net income (loss) per share:

    

Basic

   $ (0.01 )   $ 0.16  
                

Diluted

   $ (0.01 )   $ 0.16  
                

Shares used in computing per share amounts:

    

Basic

     103,998       103,347  
                

Diluted

     103,998       104,590  
                

(*)    Costs and expenses include stock-based compensation as follows:

    

Cost of revenues

   $ 411     $ 604  

Sales and marketing

     1,307       1,654  

Research and development

     1,822       2,510  

General and administrative

     1,588       1,906  
                
   $ 5,128     $ 6,674  
                

See notes to condensed consolidated financial statements.

 

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Palm, Inc.

Condensed Consolidated Balance Sheets

(In thousands, except par value amounts)

(Unaudited)

 

    

August 31,

2007

   

May 31,

2007

 
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 368,822     $ 128,130  

Short-term investments

     258,236       418,555  

Accounts receivable, net of allowance for doubtful accounts of $3,131 and $3,172, respectively

     178,998       204,335  

Inventories

     34,173       39,168  

Deferred income taxes

     79,678       135,906  

Investment for committed tenant improvements

     1,012       1,331  

Prepaids and other

     9,102       10,222  
                

Total current assets

     930,021       937,647  

Land held for sale

     —         60,000  

Property and equipment, net

     38,450       36,634  

Goodwill

     167,465       167,596  

Intangible assets, net

     71,763       76,058  

Deferred income taxes

     268,669       267,348  

Other assets

     5,352       2,719  
                

Total assets

   $ 1,481,720     $ 1,548,002  
                
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Current liabilities:

    

Accounts payable

   $ 167,962     $ 196,155  

Income taxes payable

     3,345       62,006  

Accrued restructuring

     6,630       5,406  

Provision for committed tenant improvements

     1,012       1,331  

Other accrued liabilities

     219,511       216,125  
                

Total current liabilities

     398,460       481,023  

Non-current liabilities:

    

Non-current tax liabilities

     5,960       —    

Other non-current liabilities

     4,368       4,568  

Stockholders’ equity:

    

Series A preferred stock, $0.001 par value, 125,000 shares authorized; none outstanding

     —         —    

Common stock, $0.001 par value, 2,000,000 shares authorized; outstanding: 104,398 shares and 103,796 shares, respectively

     104       104  

Additional paid-in capital

     1,504,111       1,492,362  

Accumulated deficit

     (432,906 )     (431,698 )

Accumulated other comprehensive income

     1,623       1,643  
                

Total stockholders’ equity

     1,072,932       1,062,411  
                

Total liabilities and stockholders’ equity

   $ 1,481,720     $ 1,548,002  
                

See notes to condensed consolidated financial statements.

 

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Palm, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

    

Three Months Ended

August 31,

 
     2007     2006  

Cash flows from operating activities:

    

Net income (loss)

   $ (841 )   $ 16,503  

Adjustments to reconcile net income (loss) to net cash flows from operating activities:

    

Depreciation

     4,595       2,974  

Stock-based compensation

     5,128       6,674  

Amortization of intangible assets

     4,295       340  

Deferred income taxes

     4,545       11,792  

Realized gain on sale of equity investments

     (113 )     (6 )

Excess tax benefit related to stock-based compensation

     (1,375 )     (569 )

Realized gain on sale of land

     (4,446 )     —    

Changes in assets and liabilities:

    

Accounts receivable

     25,337       36,207  

Inventories

     4,995       6,135  

Prepaids and other

     1,256       1,103  

Accounts payable

     (28,193 )     (37,174 )

Income taxes payable

     (1,499 )     (1,001 )

Accrued restructuring

     1,378       (988 )

Other accrued liabilities

     2,981       (22,265 )
                

Net cash provided by operating activities

     18,043       19,725  
                

Cash flows from investing activities:

    

Purchase of property and equipment

     (6,565 )     (5,936 )

Proceeds from sale of land

     64,446       —    

Purchase of short-term investments

     (181,934 )     (194,337 )

Sale of short-term investments

     342,673       200,942  
                

Net cash provided by investing activities

     218,620       669  
                

Cash flows from financing activities:

    

Proceeds from issuance of common stock, employee stock plans

     5,545       641  

Excess tax benefit related to stock-based compensation

     1,375       569  

Repayment of debt

     (272 )     (7,500 )

Debt issuance costs

     (2,619 )     —    
                

Net cash provided by (used in) financing activities

     4,029       (6,290 )
                

Change in cash and cash equivalents

     240,692       14,104  

Cash and cash equivalents, beginning of period

     128,130       113,461  
                

Cash and cash equivalents, end of period

   $ 368,822     $ 127,565  
                

Other cash flow information:

    

Cash paid for income taxes

   $ 926     $ 995  
                

Cash paid for interest

   $ 1     $ 882  
                

See notes to condensed consolidated financial statements.

 

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Palm, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

1. Basis of Presentation

The accompanying unaudited 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, or 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 August 31, 2007 and results of operations and cash flows for the three months ended August 31, 2007 and 2006. 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 May 31, 2007. The results of operations for the three months ended August 31, 2007 are not necessarily indicative of the operating results for the full fiscal year or any future period.

Palm was incorporated in 1992 as Palm Computing, Inc. In 1995, the Company was acquired by U.S. Robotics Corporation. In 1996, the Company sold its first handheld computer, quickly establishing a significant position in the handheld computing industry. In 1997, 3Com Corporation, or 3Com, acquired U.S. Robotics. In 1999, 3Com announced its intent to separate the handheld device business from 3Com’s business to form an independent, publicly-traded company. In preparation for that spin-off, Palm Computing, Inc. changed its name to Palm, Inc., or Palm, and was reincorporated in Delaware in December 1999. In March 2000, Palm sold shares in an initial public offering and concurrent private placements. In July 2000, 3Com distributed its remaining shares of Palm common stock to 3Com stockholders.

In December 2001, Palm formed PalmSource, Inc., or PalmSource, a stand-alone subsidiary for its operating system, or OS, business. On October 28, 2003, Palm distributed all of the shares of PalmSource common stock held by Palm to Palm stockholders. On October 29, 2003, Palm acquired Handspring, Inc., or Handspring, and also changed the Company’s name to palmOne, Inc., or palmOne.

In connection with the spin-off of PalmSource, the Palm Trademark Holding Company, LLC, was formed to hold trade names, trademarks, service marks and domain names containing the word or letter string “palm”. In May 2005, the Company acquired PalmSource’s interest in the Palm Trademark Holding Company, LLC, including the Palm trademark and brand, for $30.0 million, payable over 3.5 years. In July 2005, the Company changed its name back to Palm, Inc., or Palm.

Palm’s 52-53 week fiscal year ends on the Friday nearest to May 31, with each fiscal quarter ending on the Friday generally nearest to August 31, November 30 and February 28. Fiscal years 2008 and 2007 both contain 52 weeks. For presentation purposes, the periods are shown as ending on August 31, November 30, February 28 and May 31, as applicable.

 

2. Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards, or SFAS, No. 157, Fair Value Measurements. SFAS No. 157 provides a framework for measuring fair value, clarifies the definition of fair value, and expands disclosures regarding fair value measurements. SFAS No. 157 does not require any new fair value measurements and eliminates inconsistencies in guidance found in various prior accounting pronouncements. Palm is required to adopt SFAS No. 157 for the fiscal year beginning June 1, 2008. The Company is currently evaluating the effect that the adoption of SFAS No. 157 will have on its consolidated financial statements, but does not expect it to have a material impact.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of SFAS No. 115. SFAS No. 159 allows measurement at fair value of eligible financial assets and liabilities that are not otherwise measured at fair value. If the fair value option for an eligible item is elected, unrealized gains and losses for that item shall be reported in current earnings at each subsequent reporting date. SFAS No. 159 also establishes presentation and disclosure requirements designed to draw comparison between the different measurement attributes the company elects for similar types of assets and liabilities. The provisions of SFAS No. 159 are effective for financial statements issued for fiscal years beginning after November 15, 2007. Palm is required to adopt SFAS No. 159 for the fiscal year beginning June 1, 2008. The Company is currently evaluating the effect, if any, that the adoption of SFAS No. 159 will have on its consolidated financial statements.

 

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3. 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, excluding shares of restricted stock subject to repurchase. Diluted net loss per share is calculated based on the weighted average shares of common stock outstanding for the period, excluding shares of restricted stock subject to repurchase, because the effect of shares of restricted stock subject to repurchase, stock options outstanding and the assumed issuance of stock under the Company’s employee stock purchase plan and restricted stock units calculated using the treasury stock method would have been anti-dilutive. Diluted net income per share is calculated based on the weighted average shares of common stock outstanding during the period, plus the dilutive effect of shares of restricted stock subject to repurchase, stock options outstanding, the assumed issuance of stock under the Company’s employee stock purchase plan and restricted stock units calculated using the treasury stock method and the convertible debt, calculated using the “if converted” method.

The following table sets forth the computation of basic and diluted net income (loss) per share for the three months ended August 31, 2007 and 2006 (in thousands, except per share amounts):

 

    

Three Months Ended

August 31,

     2007     2006

Numerator:

    

Net income (loss), basic and diluted

   $ (841 )   $ 16,503
              

Denominator:

    

Shares used to compute basic net income (loss) per share (weighted average shares outstanding during the period, excluding shares of restricted stock subject to repurchase)

     103,998       103,347

Effect of dilutive securities:

    

Restricted stock awards subject to repurchase

     —         16

Stock options and employee stock purchase plan

     —         1,227

Restricted stock units

     —         —  
              

Shares used to compute diluted net income (loss) per share

     103,998       104,590
              

Basic net income (loss) per share

   $ (0.01 )   $ 0.16
              

Diluted net income (loss) per share

   $ (0.01 )   $ 0.16
              

For the three months ended August 31, 2007, approximately 14,340,000 weighted average options to purchase Palm common stock were excluded from the computation of diluted net loss per share because the inclusion of such items would be anti-dilutive to the loss. For the three months ended August 31, 2006, approximately 7,161,000 weighted average options to purchase Palm common stock were excluded from the computation of diluted net income per share because these options’ exercise prices were above the average market price during the period and the effect of including such stock options would have been anti-dilutive. Palm accounted for the effect of the convertible debt in the diluted earnings per share calculation using the “if converted” method. Under that method, the convertible debt is assumed to be converted to shares at a conversion price of $32.30, and interest expense, net of taxes, related to the convertible debt is added back to net income. For the three months ended August 31, 2006, approximately 1,084,000 shares were excluded from the computation of diluted net income per share because the effect would have been anti-dilutive. Palm retired its outstanding convertible debt during the third quarter of fiscal year 2007.

 

4. Stock-Based Compensation

Effective June 1, 2006, Palm adopted SFAS No. 123(R), Share-Based Payment, or SFAS No. 123(R) under the modified prospective method.

Determining Fair-Value

Palm uses the Black-Scholes option valuation model to determine the fair value of stock options and employee stock purchase plan shares. The determination of the fair value of share-based payment awards on the date of grant using an

 

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option-valuation model is affected by the Company’s stock price as well as assumptions regarding a number of complex variables. These variables include the Company’s expected stock price volatility over the term of the awards, projected employee stock option exercise behavior, expected risk-free interest rate and expected dividends.

Palm estimates the expected term of options granted based on historical time from vesting until exercise. Palm estimates the volatility of its common stock based upon the implied volatility derived from the historical market prices of the Company’s traded options with similar terms. Palm’s decision to use this measure of volatility was based upon the availability of actively traded options on its common stock and the Company’s assessment that this measure of volatility is more representative of future stock price trends than the historical volatility in the Company’s common stock. Palm bases the risk-free interest rate for option valuation on Constant Maturity Rates provided by the U.S. Treasury with remaining terms similar to the expected term of the options. Palm does not anticipate paying any cash dividends in the foreseeable future and therefore uses an expected dividend yield of zero in the option valuation model. In addition, SFAS No. 123(R) requires forfeitures of share-based awards to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Palm uses historical data to estimate pre-vesting option forfeitures and records stock-based compensation expense only for those awards that are expected to vest. The expected term of employee stock purchase plan shares is the average life of the purchase periods under each offering.

Palm uses the straight-line attribution as its expensing method of the value of share-based compensation for options and awards granted beginning June 1, 2006. Compensation expense for all share-based awards granted prior to June 1, 2006 will continue to be recognized using the accelerated expensing method.

Under SFAS No. 123(R) Palm uses the Black-Scholes option valuation model to estimate the fair value of the Company’s option awards. The key assumptions used in the model during the three months ended August 31, 2007 and 2006 are provided below:

 

    

Three Months Ended

August 31,

 
     2007     2006  

Risk-free interest rate

     4.6 %     4.9 %

Volatility

     37 %     45 %

Option term (in years)

     3.1       3.4  

Dividend yield

     0.0 %     0.0 %

Weighted average per share fair value at date of grant

   $ 5.01     $ 5.73  

Income Tax Benefits Recorded in Stockholders Equity

The total income tax benefit realized from stock option exercises and Employee Stock Purchase Plan, or ESPP, rights for the three months ended August 31, 2007 and 2006 was $1.1 million and $1.8 million, respectively.

In accordance with SFAS No. 123(R), Palm has presented tax benefits for deductions in excess of the compensation cost recognized for those options as financing cash flows.

Stock-Based Options and Awards Activity

Palm had no stock-based compensation costs capitalized as part of the cost of an asset.

A summary of Palm’s stock option program as of August 31, 2007 is as follows (dollars and shares in thousands, except per share data):

 

     Outstanding Options   

Weighted

Average

Remaining

Contractual
Term

  

Aggregate

Intrinsic

Value

     Number of
Shares
  

Weighted

Average

Exercise
Price

     

Options vested and expected to vest at August 31, 2007

   12,167    $ 13.77    6.8    $ 29,818

Options exercisable at August 31, 2007

   7,409    $ 13.20    6.5    $ 25,034

 

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The aggregate intrinsic value represents the difference between the Company’s closing stock price on the last trading day of the fiscal period, which was $15.01 as of August 31, 2007, and the option exercise price of the shares for options that were in the money multiplied by the number of options outstanding. Total intrinsic value of options exercised was $4.4 million and $1.0 million during the three months ended August 31, 2007 and 2006, respectively.

As of August 31, 2007, there was $15.9 million of unrecognized compensation cost, adjusted for estimated forfeitures, related to non-vested options granted to Palm employees. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures and is expected to be recognized over the next 1.7 years.

As of August 31, 2007, total unrecognized compensation costs related to non-vested restricted stock awards was $1.7 million, which is expected to be recognized over the next 1.8 years.

A summary of Palm’s restricted stock unit program as of August 31, 2007 is as follows (dollars and units in thousands, except per share data):

 

     Restricted Stock
Units
  

Weighted

Average

Grant Date Fair

Value

   Weighted
Average
Remaining
Contractual
Term
   Aggregate
Intrinsic
Value

Restricted stock units vested and expected to vest at August 31, 2007

   136    $ 14.64    1.3    $ 2,038
             

As of August 31, 2007, total unrecognized compensation costs, adjusted for estimated forfeitures, related to non-vested restricted stock units was $1.3 million, which is expected to be recognized over the next 1.7 years.

A summary of Palm’s ESPP as of August 31, 2007 is as follows (dollars and shares in thousands, except per share data):

 

     Number of
Shares
  

Weighted

Average

Exercise Price

  

Weighted

Average

Remaining

Contractual

Term

  

Aggregate

Intrinsic
Value

Outstanding/exercisable at August 31, 2007

   989    $ 14.34    1.1    $ 1,224
             

ESPP shares vested and expected to vest at August 31, 2007

   762    $ 14.34    1.1    $ 943
             

The remaining unamortized compensation cost for the ESPP plan at August 31, 2007 of $3.3 million is expected to be recognized over the next 1.1 years.

 

5. Comprehensive Income (Loss)

The components of comprehensive income (loss) are (in thousands):

 

    

Three Months Ended

August 31,

 
     2007     2006  

Net income (loss)

   $ (841 )   $ 16,503  

Other comprehensive income (loss):

    

Unrealized gain on available-for-sale investments

     251       1,343  

Reclassification of realized gain included in earnings

     (113 )     (6 )

Accumulated translation adjustments

     (158 )     64  
                
   $ (861 )   $ 17,904  
                

 

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6. Cash and Available-for-Sale Investments and Investment for Committed Tenant Improvements

The Company’s cash and available-for-sale investments and investment for committed tenant improvements are as follows (in thousands):

 

     August 31, 2007    May 31, 2007
    

Adjusted

Cost

  

Net Unrealized

Gain/(Loss)

   

Carrying

Value

  

Adjusted

Cost

  

Net Unrealized

Gain/(Loss)

   

Carrying

Value

Cash

   $ 60,902    $ —       $ 60,902    $ 65,279    $ —       $ 65,279

Cash equivalents, money market funds

     307,920      —         307,920      62,851      —         62,851
                                           

Total cash and cash equivalents

   $ 368,822    $ —       $ 368,822    $ 128,130    $ —       $ 128,130
                                           

Short-term investments:

               

Corporate notes/bonds

   $ 152,280    $ (687 )   $ 151,593    $ 234,875    $ 2     $ 234,877

Federal government obligations

     93,355      290       93,645      127,211      (531 )     126,680

State and local government obligations

     8,200      —         8,200      47,200      —         47,200

Foreign corporate notes/bonds

     4,799      (1 )     4,798      9,805      (7 )     9,798
                                           

Total short-term investments

   $ 258,634    $ (398 )   $ 258,236    $ 419,091    $ (536 )   $ 418,555
                                           

Investment for committed tenant improvements, money market funds

   $ 1,012    $ —       $ 1,012    $ 1,331    $ —       $ 1,331
                                           

Due to the short-term nature of these investments, the carrying value approximates fair value. The unrealized losses on these investments were primarily due to interest rate fluctuations and are considered to be temporary in nature.

 

7. Inventories

Inventories consist of the following (in thousands):

 

    

August 31,

2007

  

May 31,

2007

Finished goods

   $ 31,973    $ 37,736

Work-in-process and raw materials

     2,200      1,432
             
   $ 34,173    $ 39,168
             

 

8. Land Held for Sale

In August 2005, the Company entered into an agreement with a real estate broker to market for sale the 39 acres of land owned by Palm in San Jose, California. In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the Company reclassified the land to land held for sale at that time. In February 2006, the Company entered into a Purchase and Sale Agreement, or the Agreement, with Hunter/Storm, LLC, a California limited liability company, or the Buyer, pursuant to which the Company would sell these 39 acres of land. The sale closed in June 2007 and Palm received proceeds from the sale of land of approximately $64.5 million and recognized a gain on sale, net of closing costs, of approximately $4.4 million.

 

9. Business Combinations

During February 2007, Palm acquired the assets of two sole proprietorships focused on mobile computing and media devices, one a developer of user interface environments and the other a developer of email software applications. Palm acquired these assets in all-cash transactions and agreed to the purchase prices based on arm’s length negotiations. The Company expects these acquisitions to accelerate the development of future products. The purchase prices of $19.2 million in the aggregate are comprised of $19.0 million in cash, of which $2.5 million was deposited with an escrow agent pursuant to the terms of escrow agreements and $0.2 million in direct transaction costs. These acquisitions were accounted for as a purchase in accordance with SFAS No. 141, Business Combinations.

The Company has performed valuations and allocated the total purchase consideration to the assets and liabilities acquired, including identifiable intangible assets based on their respective fair values on the acquisition dates, generally using a discounted cash flow approach. The Company acquired $14.6 million of intangible assets consisting of $13.7 million in core-technology, $0.5 million in non-compete agreements and $0.4 million in customer relationships to be amortized over a weighted-average period of approximately 79 months. Additionally,

 

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approximately $3.7 million of the purchase prices represented in-process research and development, or IPR&D, that had not yet reached technological feasibility, had no future alternative use and was charged to operations. Palm did not acquire any tangible assets or assume any liabilities as a result of the acquisitions. Goodwill, representing the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired, was $0.9 million and is expected to be fully deductible for tax purposes.

The results of operations for the acquisitions completed during the year ended May 31, 2007 have been included in the Company’s results of operations since the acquisition dates. The financial results of these businesses prior to their acquisition are immaterial for purposes of pro forma financial disclosures.

 

10. Goodwill

Changes in the carrying amount of goodwill are (in thousands):

 

     Total  

Balances, May 31, 2006

   $ 166,538  

Acquisition of businesses (see Note 9)

     916  

Goodwill adjustments

     142  
        

Balances, May 31, 2007

   $ 167,596  

Goodwill adjustments

     (131 )
        

Balances, August 31, 2007

   $ 167,465  
        

Goodwill increased during fiscal year 2007 due to the acquisition of the assets of two sole proprietorships resulting in goodwill of $0.9 million. In addition, the Company made other adjustments to goodwill relating to the Handspring acquisition for the recognition of foreign tax loss carry forwards of $0.1 million for the year ended May 31, 2007 and $(0.1) million for the three months ended August 31, 2007. The Company will continue to adjust goodwill as required for changes in tax associated with the Handspring acquisition.

 

11. Intangible Assets

Intangible assets consist of the following (dollars in thousands):

 

          August 31, 2007    May 31, 2007
     Weighted Average
Amortization
Period (Months)
  

Gross

Carrying

Amount

  

Accumulated

Amortization

    Net   

Gross

Carrying

Amount

  

Accumulated

Amortization

    Net

Brand

   240    $ 27,200    $ (3,117 )   $ 24,083    $ 27,200    $ (2,777 )   $ 24,423

Palm OS Garnet license

   60      44,000      (9,600 )     34,400      44,000      (6,300 )     37,700

Acquisition related (see Note 9):

                  

Core technology

   83      13,670      (1,024 )     12,646      13,670      (512 )     13,158

Contracts and customer relationships

   12      400      (200 )     200      400      (100 )     300

Non-compete covenants

   36      520      (86 )     434      520      (43 )     477
                                              
      $ 85,790    $ (14,027 )   $ 71,763    $ 85,790    $ (9,732 )   $ 76,058
                                              

Amortization expense related to intangible assets was $4.3 million and $0.3 million for the three months ended August 31, 2007 and 2006, respectively. Amortization of the Palm OS Garnet license and the applicable portion of core technology are included in cost of revenues.

 

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The following table presents the estimated future amortization of intangible assets (in thousands):

 

Years Ended May 31,

    

Remaining nine months in fiscal year 2008

   $ 12,986

2009

     12,947

2010

     9,904

2011

     8,878

2012

     6,074

2013

     3,274

Thereafter

     17,700
      
   $ 71,763
      

In May 2005, Palm acquired PalmSource’s 55 percent share of the Palm Trademark Holding Company and its rights to the brand name Palm. The rights to the brand had been co-owned by the two companies since the October 2003 spin-off of PalmSource from Palm, Inc. The agreement provides for Palm to pay $30.0 million in installments over 3.5 years (net present value of $27.2 million) and grants PalmSource certain rights to Palm trademarks for PalmSource and its licensees for a four-year transition period.

In December 2006, Palm signed an agreement with ACCESS Systems Americas, Inc. (formerly PalmSource, Inc.), or ACCESS Systems, to license the source code for Palm OS Garnet, the version of the Palm OS used in several Treo smartphone models and all Palm handheld computers. Under the agreement, Palm has a royalty-free perpetual license to use as well as to innovate on the Palm OS Garnet code base. Palm will retain ownership rights in its innovations. The new agreement also provides Palm flexibility to use Palm OS Garnet in whole or in part in any Palm product, and together with any other system technologies. In addition, Palm secured an expansion of its existing patent license from ACCESS Systems to cover all current and future Palm products, regardless of the underlying operating system. For all of these rights, Palm paid ACCESS Systems a total of $44.0 million in the third quarter of fiscal year 2007 and is amortizing the intangible asset over five years.

 

12. Income Taxes

On June 1, 2007, the first day of fiscal year 2008, Palm adopted the provisions of FASB Interpretation, or FIN, No. 48, Accounting for Uncertainty of Income Taxes, as amended. FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN No. 48 also provides guidance on derecognition of tax benefits, classification on the balance sheet, interest and penalties, accounting in interim periods, disclosure and transition.

The cumulative effect of adopting FIN No. 48 resulted in a $0.4 million increase to the opening balance of accumulated deficit related to certain unrecognized tax benefits as of the end of fiscal year 2007, including certain amounts which were reclassified among the Company’s condensed consolidated balance sheet accounts as follows (dollars in thousands):

 

Total decrease in income taxes payable

   $ (60,121 )

Increase to non-current tax liability

     5,960  

Decrease in deferred tax assets

     54,528  
        

Accumulated deficit cumulative effect

   $ 367  
        

The total amount of unrecognized tax benefits as of August 31, 2007 was $67.4 million. Included in the balance as of August 31, 2007 were approximately $45.1 million of unrecognized tax benefits that, if recognized, would affect the effective tax rate. The recognition of the remaining unrecognized tax benefits of $22.3 million would affect goodwill, if recognized. However, one or more of these unrecognized tax benefits could be subject to a valuation allowance if and when recognized in a future period, which could impact the timing of any related effective tax rate benefit.

In accordance with Palm’s accounting policies, interest and/or penalties related to uncertain tax positions are recognized in income tax expense. To the extent accrued interest and penalties do not ultimately become payable, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision in the period that such determination is made. These policies did not change as a result of the adoption of FIN No. 48. Upon adoption

 

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of FIN No. 48 on June 1, 2007, Palm recognized total accrued interest and penalties of approximately $0.6 million. Approximately $0.1 million of additional interest and penalties were recognized for the three months ended August 31, 2007.

Palm is subject to taxation in the United States, various states and several foreign jurisdictions. We are effectively subject to US federal and state tax examination adjustments for tax years ending on or after fiscal year 1998, in that we have significant net operating loss and tax credit carryforwards from these years that could be subject to adjustment, if and when utilized. With some exceptions, the tax years 2001 to 2006 remain open to examination by tax authorities in the major foreign jurisdictions in which we operate, including Brazil, Hong Kong, Ireland and the United Kingdom. Palm’s federal income tax return for fiscal year 2003 is currently being audited by the Internal Revenue Service. We are unable to make a determination as to whether or not recognition of any unrecognized tax benefits will occur within the next 12 months.

The effective tax rate for the fiscal quarter ended August 31, 2007 of approximately 128% resulted from the computation of income tax expense for the US and other jurisdictions with pre-tax income at the applicable tax rates while, for certain foreign jurisdictions with pre-tax losses, no tax benefit was available to offset the tax expense computed for profitable jurisdictions.

 

13. Commitments

Palm facilities are leased under operating leases that expire at various dates through March 2018.

In May 2005, Palm acquired PalmSource’s 55 percent share of Palm Trademark Holding Company and its rights to the brand name Palm. The rights to the brand had been co-owned by the two companies since the October 2003 spin-off of PalmSource from Palm. Palm agreed to pay $30.0 million in five installments due in May 2005, 2006, 2007 and 2008 and November 2008, and granted PalmSource certain rights to Palm trademarks for PalmSource and its licensees for a four-year transition period. The net present value of these payments, $27.2 million, was recorded as an intangible asset and is being amortized over 20 years. The remaining amount due to PalmSource under this agreement was $7.5 million as of both August 31, 2007 and May 31, 2007.

Palm accrues for royalty obligations to certain technology and patent holders based on unit shipments of its smartphone and handheld computer devices, as a percentage of applicable revenue for the net sales of products using certain software technologies or as a fully paid-up license fee, all as determined in accordance with the terms of the applicable license agreements. Where agreements are not finalized, accrued royalty obligations represent management’s current best estimates using appropriate assumptions and projections based on negotiations with third party licensors. Palm has accrued royalty obligations of $31.1 million and $29.4 million as of August 31, 2007 and May 31, 2007, respectively, including estimated royalties of $25.7 million and $23.1 million, respectively, which are reported in other accrued liabilities. While the amounts ultimately agreed upon may be more or less than the current accrual, management does not believe that finalization of the agreements would have had a material impact on the amounts reported for its financial position as of August 31, 2007 or for the reported results for the three months then ended. The effect of finalization of these agreements in the future may be significant to the period in which recorded.

Palm utilizes contract manufacturers to build its products. These contract manufacturers acquire components and build products based on demand forecast information supplied by Palm, which typically covers a rolling 12-month period. Consistent with industry practice, Palm acquires inventories from such manufacturers through blanket purchase orders against which orders are applied based on projected demand information and availability of goods. Such purchase commitments typically cover Palm’s forecasted product and manufacturing requirements for periods ranging from 30 to 90 days. In certain instances, these agreements allow Palm the option to cancel, reschedule and/or adjust its requirements based on its business needs. Consequently, only a portion of Palm’s purchase commitments arising from these agreements may be non-cancelable and unconditional commitments. As of August 31, 2007 and May 31, 2007, Palm’s commitments to contract with third-party manufacturers for their inventory on-hand and component purchase commitments related to the manufacture of Palm products were approximately $148.2 million and $159.8 million, respectively.

In October 2005, Palm entered into a three-year, $30.0 million revolving credit line with Comerica Bank. The interest rate is equal to Comerica’s prime rate (8.25% at August 31, 2007) or, at Palm’s election, subject to specific requirements, equal to LIBOR plus 1.75% (7.42% at August 31, 2007). The interest rate may vary based on fluctuations in market rates. The line of credit is unsecured as long as the Company maintains over $100.0 million in unrestricted domestic cash, cash equivalents and short-term investments. If the Company’s domestic unrestricted cash plus cash equivalents and short-term investments fall below $100.0 million, Comerica will have a first priority security interest in all of the Company’s assets including but not limited to cash and cash equivalents, short-term investments, accounts receivable, inventory and property and equipment but excluding intellectual property and real estate. As of August 31, 2007 and May 31, 2007, Palm used its credit line to support the issuance of letters of credit totaling $8.6 million and $9.1 million, respectively.

 

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During fiscal year 2007, Palm entered into a license agreement with Oracle Corporation to purchase software and one year of maintenance for $3.3 million (net present value of $2.9 million). Under the terms of the agreement, Palm agreed to make quarterly payments over a three-year period ending July 2009. As of August 31, 2007 and May 31, 2007 Palm made payments of $1.1 million and $0.8 million, respectively, under the agreement. The remaining amount due under the agreement is $2.2 million and $2.5 million as of August 31, 2007 and May 31, 2007, respectively.

During February 2007, Palm acquired the assets of two sole proprietorships for $19.2 million. Under the purchase agreements, the Company agreed to pay up to $8.0 million over four years in employee incentive compensation based upon continued employment with the Company which will be recognized as compensation expense over the service period of the applicable employees.

In December 2006, Palm entered into a minimum purchase commitment obligation with Microsoft Licensing, GP over a 2-year contract period. Under the terms of the agreement, the Company agreed to pay a minimum of $17.5 million per year ending November 2008. In September 2007, the agreement was amended to include an additional minimum purchase commitment of $6.7 million. As of August 31, 2007 and May 31, 2007, the Company has made payments of $17.4 million and $12.3 million, respectively. The remaining amount due under the agreement is $17.6 million and $22.7 million as of August 31, 2007 and May 31, 2007, respectively, which increased to $24.2 million pursuant to the amendment described above.

Under the indemnification provisions of Palm’s customer and certain of its supply agreements, Palm agrees to offer some level of indemnification protection against certain types of claims arising from Palm’s products and services (such as intellectual property infringement or personal injury or property damage caused by Palm’s products or by Palm’s negligence or misconduct).

Under the indemnification provisions with respect to representations and covenants made to PalmSource in connection with the Palm brand and with respect to trademark infringement in the amended and restated trademark license agreement with PalmSource, Palm agrees to defend and indemnify PalmSource and its affiliates for losses incurred, up to $25.0 million under each agreement.

Palm defends and indemnifies its directors and certain of its current and former officers from third-party claims. Certain costs incurred for providing such defense and indemnification may be recoverable under various insurance policies. Palm is unable to reasonably estimate the maximum amount that could be payable under these arrangements since these exposures are not capped and due to the conditional nature of its obligations and the unique facts and circumstances involved in any situation that might arise.

Palm’s product warranty accrual reflects management’s best estimate of probable liability under its product warranties. Management determines the warranty liability based on historical rates of usage as a percentage of shipment levels and the expected repair cost per unit, service policies and its experience with products in production or distribution.

Changes in the product warranty accrual are (in thousands):

 

    

Three Months Ended

August 31,

 
     2007     2006  

Balance, beginning of period

   $ 41,087     $ 42,909  

Payments made

     (28,056 )     (18,774 )

Change in liability for product sold during the period

     23,186       17,712  

Change in liability for pre-existing warranties

     (1,631 )     (2,023 )
                

Balance, end of period

   $ 34,586     $ 39,824  
                

 

14. Restructuring Charges

In accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, restructuring costs are recorded as incurred. Restructuring charges for employee workforce reductions are recorded upon employee notification for employees whose required continuing service period is 60 days or less, and ratably over the employee’s continuing service period for employees whose required continuing service period is greater than 60 days.

The first quarter of fiscal year 2008 restructuring actions consisted of workforce reductions, of approximately 80 regular employees primarily in the United States, facilities and property and equipment disposed of or removed from service. Restructuring charges were the result of reorganization actions to streamline our business structure.

 

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The fourth quarter of fiscal year 2001 restructuring actions related to carrying and development costs related to the land on which Palm had previously planned to build its corporate headquarters, facilities costs related to lease commitments for space no longer intended for use, workforce reduction costs across all geographic regions and discontinued project costs. These workforce reductions affected approximately 205 regular employees and were completed during the year ended May 31, 2003. As of August 31, 2007, the balance consists of lease commitments, payable over approximately four years, offset by estimated sublease proceeds of approximately $13.4 million.

The restructuring action recorded in connection with the Handspring acquisition included $1.8 million related to workforce reductions primarily in the United States, of approximately 50 Handspring employees, $3.7 million related to Handspring facilities not intended for use for Palm operations and therefore considered excess, and $0.7 million related to other miscellaneous charges incurred as a result of the acquisition which did not benefit Palm in the future. From the date of acquisition through fiscal year 2005, the Company made net increases to goodwill reflecting adjustments to the initial estimate of liabilities directly related to the acquisition as a result of greater costs than originally estimated for employee termination benefits, costs to exit certain facilities and other costs associated with the acquisition. As of May 31, 2005, cost reduction actions initiated in connection with the Handspring acquisition were complete, except for remaining contractual payments for excess facilities.

Accrued liabilities related to restructuring actions consist of (in thousands):

 

     Q1 2008 Action    

Q4 2001

Action

   

Action Recorded

In Connection

with the

Handspring
Acquisition

       
     Workforce
Reduction
Costs
   

Excess Facilities

and Equipment

Costs

   

Excess

Facilities

Costs

   

Excess

Facilities

Costs

    Total  

Balance, May 31, 2006

   $ —       $ —       $ 6,634     $ 575     $ 7,209  

Cash payments

     —         —         (1,542 )     (261 )     (1,803 )
                                        

Balance, May 31, 2007

     —         —         5,092       314       5,406  

Restructuring charges

     6,450       154       —         —         6,604  

Cash payments

     (4,889 )     —         (274 )     (63 )     (5,226 )

Write-offs

     —         (154 )     —         —         (154 )
                                        

Balance, August 31, 2007

   $ 1,561     $ —       $ 4,818     $ 251     $ 6,630  
                                        

 

15. Patent acquisition cost

Palm acquired more than 1,600 patents and patent applications for $5.0 million during the first quarter of fiscal year 2008. These patents and patent applications were acquired for strategic purposes in order to more effectively respond to intellectual property claims which may arise in the course of Palm’s business and were not acquired for the purpose of incorporating specific features into future products or for specific features in current products for which Palm currently pays or expects to pay royalties. Accordingly, the acquisition cost was expensed during the period of acquisition.

 

16. 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 pending against it, including those set forth below, and is vigorously contesting each matter. Palm is not currently able to estimate, with reasonable certainty, the possible loss, or range of loss, if any, from the cases listed below, and accordingly no provision for any potential loss which may result from the resolution of these matters has been recorded in the accompanying condensed consolidated financial statements except with respect to those cases where preliminary settlement agreements have been reached. An unfavorable resolution of these lawsuits could materially adversely affect Palm’s business, results of operations or financial condition. (Although Palm was formerly known as palmOne, Inc. and is now Palm, Inc. once again and Handspring has been merged into Palm, the pleadings in the pending litigation continue to use former company names, including Palm Computing, Inc., Palm, Inc., palmOne, Inc. and Handspring, Inc.).

 

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In June 2001, the first of several putative stockholder class action lawsuits was filed in the United States District Court for the Southern District of New York against certain of the underwriters for Palm’s initial public offering, Palm and several of its former officers. The complaints, which have been consolidated under the caption In re Palm, Inc. Initial Public Offering Securities Litigation, Case No. 01 CV 5613, 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 and the officers 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. Similar complaints were filed against Handspring in August and September 2001 in regard to Handspring’s June 2000 initial public offering. Other actions have been filed making similar allegations regarding the initial public offerings of more than 300 other companies. An amended consolidated complaint was filed in April 2002. The claims against the individual defendants have been dismissed without prejudice pursuant to an agreement with plaintiffs. The Court denied Palm’s motion to dismiss. In June 2004, a stipulation of settlement and release of claims against the issuer defendants, including Palm and Handspring, was submitted to the Court for approval. On August 31, 2005, the Court preliminarily approved the settlement. In December 2006, the Appellate Court overturned the certification of classes in the six test cases that were selected by the underwriter defendants and plaintiffs in the coordinated proceedings. Because class certification was a condition of the settlement, it was unlikely that the settlement would receive final Court approval. On June 25, 2007, the Court entered an order terminating the proposed settlement based upon a stipulation among the parties to the settlement. Plaintiffs have indicated that they will seek to amend their allegations and file amended complaints as well as seek certification of differently defined classes. It is uncertain whether there will be any revised or future settlement.

In September and October 2005, five purported consumer class action lawsuits were filed against Palm, four in the U.S. District Court for the Northern District of California (Moya v. Palm, Berliner v. Palm, Loew v. Palm, and Geisen v. Palm) and one in the Superior Court of California for Santa Clara County (Palza v. Palm), on behalf of all purchasers of Palm Treo 600 and Treo 650 products. All five complaints allege in substance that Palm made false or misleading statements regarding the reliability of its Treo 600 and 650 products in violation of various California laws, that the products have certain alleged defects, and that Palm breached its warranty of these products. The complaints seek unspecified damages, restitution, disgorgement of profits and injunctive relief. In September 2005, a purported consumer class action lawsuit entitled Gans v. Palm was filed against Palm in the U.S. District Court for the Northern District of California on behalf of all purchasers of the Treo 650 product. The complaint alleges that, in violation of various California laws, Palm made false or misleading statements regarding automatic email delivery to the Treo 650 product. The complaint seeks unspecified damages, restitution, disgorgement of profits and injunctive relief. Palm removed the Palza case to the U.S. District Court for the Northern District of California. Subsequently, all six cases were consolidated before a single judge in that Court and the plaintiffs provided a consolidated, amended complaint. The parties have agreed to a tentative settlement and are in the process of negotiating a full settlement agreement. If completed, the settlement will be submitted to the Court for preliminary approval. If approved, the terms of the settlement will result in a resolution which is not material to Palm’s financial position.

On November 6, 2006, NTP, Inc. filed suit against Palm in the United States District Court for the Eastern District of Virginia. In the lawsuit, entitled NTP, Inc. v. Palm, Inc., NTP alleges direct and indirect infringement of seven patents and seeks unspecified compensatory and treble damages and to enjoin Palm from infringing the patents in the future. On December 22, 2006, Palm responded to the complaint. Palm also moved to stay the litigation pending conclusion and any appeal of reexamination proceedings currently before the U.S. Patent and Trademark Office. On March 22, 2007 the Court granted Palm’s motion and ordered the case be stayed “…until the validity of the patents-in-suit is resolved at the Patent and Trademark Office and through any consequent appeals.”

On May 18, 2007 Intermec Inc. filed suit against Palm in the United States District Court for the District of Delaware. In the lawsuit, entitled Intermec Technologies Corp., Inc. v. Palm, Inc., Intermec alleges direct and indirect infringement of five patents and seeks unspecified compensatory and treble damages and to enjoin Palm from future infringement. In August 2007, Palm filed counterclaims against Intermec including allegations of infringement by Intermec of two Palm patents. Palm seeks compensatory damages and to permanently enjoin Intermec from future infringement. The case is in discovery.

 

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17. Related Party Transactions

Transactions with PalmSource

In December 2001, Palm entered into a software license agreement with PalmSource which was amended and restated in May 2005. The agreement included a minimum annual royalty and license commitment of $42.5 million for the contract year ending December 2, 2006 at which time the agreement expired. Under the software license and source code agreement, Palm incurred expenses of $0 and $11.0 million during the three months ended August 31, 2007 and 2006, respectively. Palm’s Chairman of the Board, Eric Benhamou, was also the Chairman of the Board of PalmSource through October 2004. On November 14, 2005, PalmSource was acquired by ACCESS Co., Ltd.

Other Transactions and Relationships

In fiscal year 2005, Palm made a $1.0 million equity investment in and entered into an agreement to host Palm’s software sales with Motricity, Inc. This equity investment is included in other assets. Palm paid nominal service fees to Motricity for hosting Palm’s software sales during the three months ended August 31, 2007 and 2006.

 

18. Elevation Transaction

The Company entered into an agreement with the private-equity firm Elevation Partners, or Elevation. Elevation will invest $325 million in Palm in the form of 325,000 shares of Series B Redeemable Convertible Preferred Stock, which will represent approximately 27% of the voting shares outstanding of the Company. The Company will utilize the proceeds along with existing cash and the net proceeds from $400 million of new debt to finance a $9.00 per share one-time cash distribution, which is expected to total approximately $939.6 million, based on the Company’s shares of common stock outstanding at August 31, 2007. In addition, upon closing of the transaction, Elevation will have the right to elect two members to Palm’s Board of Directors and in conjunction with the closing it is expected that Jonathan Rubinstein, former senior vice president of hardware engineering and head of the iPod division at Apple, will join Palm as executive chairman of the board.

The Company has prepared the following unaudited pro forma summary consolidated balance sheet information as of August 31, 2007 which gives effect to the above transaction as if it occurred on August 31, 2007. The unaudited pro forma summary consolidated statement of operations information for the three months ended August 31, 2007 gives effect to the above transaction, and the related income tax effects, as if they occurred as of the beginning of the fiscal quarter presented, or June 1, 2007. This information has been prepared based on preliminary estimates; the actual amounts recorded as of the completion of the transaction may differ materially from the information presented. This unaudited pro forma summary consolidated information does not include the impact, if any, of nonrecurring charges or credits and the related tax effects resulting directly from the transaction which may include, among other items, adjustments arising from the modification of the Company’s stock awards, evaluation of the valuation allowance of the deferred tax assets or evaluation of the valuation of goodwill and intangible assets.

Palm will incur issuance costs of approximately $11.5 million relating to the Series B Redeemable Convertible Preferred Stock. The anticipated net proceeds will be classified as mezzanine equity due to mandatory redemption provisions which provide for redemption in seven years if the instruments are not otherwise converted. The issuance costs are being accreted over the life of the shares with such accretion being recorded against accumulated deficit. On a pro forma basis, accretion of issuance costs of approximately $0.4 million would be recognized during the three months ended August 31, 2007.

At the closing of the transaction, the Company will consummate a debt financing for $400 million, which is due in six and a half years after issuance. The debt is payable at 1% per annum for the first five and a half years, and is payable in four equal quarterly installments per year. The remaining amount is to be paid during the final year preceding maturity. In addition, the Company will enter into a five-year $30.0 million revolving credit facility. On a pro forma basis, interest expense related to the new debt and the revolving credit facility would be approximately $9.1 million and $0.3 million, respectively, during the three months ended August 31, 2007. The Company will also incur debt issuance costs comprised of underwriting fees, a solvency opinion, credit rating fees and administrative agent fees which total approximately $17.2 million. The fees will be capitalized and amortized to interest expense over the applicable periods. On a pro forma basis, the amortization of these fees will result in a charge to interest expense of approximately $0.7 million during the three months ended August 31, 2007.

Upon the closing of the transaction, Jonathan Rubinstein will receive an annual salary of $0.6 million, or $0.2 million on a quarterly basis. Mr. Rubinstein will not participate in the Company’s discretionary cash bonus plan or earn paid vacation or sabbatical. Mr. Rubinstein will be granted options to purchase 2,000,000 shares of Palm common stock of which 1,000,000 shares are subject only to time-based vesting and 1,000,000 shares vest based on market conditions. In

 

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addition, Mr. Rubinstein will be granted 1,000,000 restricted stock units, or RSUs, of which 500,000 RSUs are subject only to time-based vesting and 500,000 RSUs vest based on market conditions. These stock options and RSU grants are subject to four year vesting terms. On a pro forma basis, Palm will record stock-based compensation expense to research and development expense of $0.7 million for Mr. Rubinstein’s grants during the three months ended August 31, 2007.

The Series B Redeemable Convertible Preferred Stock is considered to be a participating security. Accordingly, the shares used to compute basic and diluted earnings per common share have been adjusted by 38.2 million shares to reflect the Series B Redeemable Convertible Preferred Stock using the “if converted” method. On a pro forma basis, for the three months ended August 31, 2007, the estimated 2.6 million stock options granted to maintain intrinsic value of Palm’s 1999 Stock Plan, Handspring and board of director stock option plans have been excluded from the computation of diluted net loss per share because the effect of including these options would have been anti-dilutive.

As of August 31, 2007, the Company has incurred debt issuance costs of approximately $2.6 million. These costs have been capitalized in other assets in the condensed consolidated balance sheet and classified in the “cash flow from financing” section of the condensed consolidated statement of cash flows.

Palm, Inc.

Pro Forma Summary Consolidated Balance Sheet Information

(In thousands)

(Unaudited)

 

     August 31, 2007    Pro Forma
Adjustments
   

Pro Forma

August 31, 2007

Cash and cash equivalents/short-term investments

   $ 627,058    $ (243,262 )   $ 383,796

Total current assets

     930,021      (240,465 )     689,556

Total assets

     1,481,720      (226,104 )     1,255,616

Current portion of debt

     —        4,000       4,000

Total current liabilities

     398,460      4,000       402,460

Long-term debt

     —        396,000       396,000

Series B redeemable convertible preferred stock

     —        313,476       313,476

Total stockholders’ equity

     1,072,932      (939,580 )     133,352

Palm, Inc.

Pro Forma Summary Consolidated Statement of Operations Information

(In thousands, except per share amounts)

(Unaudited)

 

    

For the Three

Months Ended

August 31, 2007

    Pro Forma
Adjustments
   

Pro Forma

for the Three

Months Ended
August 31, 2007

 

Operating loss

   $ (4,502 )   $ (830 )   $ (5,332 )

Interest expense

     (153 )     (10,073 )     (10,226 )

Interest income and other income (expense), net

     7,617       —         7,617  
                        

Income (loss) before income taxes

     2,962       (10,903 )     (7,941 )

Income tax provision

     3,803       1,563       5,366  
                        

Net loss

   $ (841 )   $ (12,466 )   $ (13,307 )
                        

Net loss per common share:

      

Basic

   $ (0.01 )     $ (0.10 )
                  

Diluted

   $ (0.01 )     $ (0.10 )
                  

Shares used in computing per common share amounts:

      

Basic

     103,998       38,235       142,233  
                        

Diluted

     103,998       38,235       142,233  
                        

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the condensed consolidated financial statements and notes to those financial statements included in this Form 10-Q. Our 52-53 week fiscal year ends on the Friday nearest to May 31, with each quarter ending on the Friday generally nearest August 31, November 30 and February 28. For presentation purposes, the periods have been presented as ending on August 31 and May 31.

This quarterly report contains forward-looking statements within the meaning of the federal securities laws, including, without limitation, statements concerning Palm’s expectations, beliefs and/or intentions regarding the following: unamortized compensation cost under our stock plans; our objective of being the leader in mobile computing; revenue and income growth; expansion of the smartphone market and our ability to capitalize on this expansion; revenue and credit concentration with our largest customers; the development and introduction of new products and services; our leadership in the handheld device market; competitors and competition in the markets Palm operates; the sufficiency of Palm’s cash, cash equivalents and credit facility to satisfy its anticipated cash requirements; the effects of changes in market interest rates; investment activities, the value of investments and the use of Palm’s financial instruments; dividends; the effect of unrecognized tax benefits; Palm’s defenses to, and the effects and outcomes of, legal proceedings and litigation matters; provisions in Palm’s charter documents and Delaware law and the potential effects of a stockholder rights plan; the closing of our transactions with Elevation Partners, including obtaining new debt and delivering $9.00 per share without interest to our stockholders; restructuring charges for the second fiscal quarter of 2008; the increase in our outstanding debt and related interest expense for future periods; and the potential impact of our critical accounting policies and changes in financial accounting standards or practices. Actual results and events could differ materially from those contemplated by these forward-looking statements due to various risks and uncertainties, including those discussed in the “Risk Factors” section and elsewhere in this quarterly report. Palm undertakes no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this report.

Overview and Executive Summary

Palm, Inc. is a leading provider of mobile computing solutions. Our leadership is the result of creating devices that make it easy for end users to manage their lives and communicate with others, to access and share their most important information and to avail themselves of the power of computing wherever they are. We design our devices to appeal to consumer, professional, business, education and government users around the world. We currently offer Treo smartphones and handheld computers as well as add-ons and accessories. We distribute these products through a network of wireless carriers and retail and business distributors worldwide.

Palm was founded on two fundamental beliefs: the future of personal computing is mobile and the mobile computing solutions that we create should deliver a powerful computing experience in a simple and intuitive manner. Eleven years after we introduced our first product, these beliefs remain the driving tenets of our business.

Our objective is to be the leader in mobile computing. We intend to achieve this objective by providing our customers and end users with high quality innovative products, services and support that are easy to use. Management periodically reviews certain key business metrics in order to evaluate our strategy and operational efficiency, allocate resources and maximize the financial performance of our business. These key business metrics include the following:

Revenue—Management reviews many elements to understand our revenue stream. These elements include supply availability, unit shipments, average selling prices and channel inventory levels. Revenue growth is impacted by increased unit shipments and variations in average selling prices. Unit shipments are determined by supply availability, timing of carrier certification, end-user and channel demand, and channel inventory. We monitor average selling prices throughout the product life cycle, taking into account market demand and competition. To avoid empty shelves at retail store locations and to minimize product returns and obsolescence, we strive to maintain channel inventory levels within a desired range.

Margins—We review gross margin in conjunction with revenues to maximize operating performance. We strive to improve our gross margin through disciplined cost and product life-cycle management, supply/demand management and control of our warranty and technical support costs. To achieve desired operating margins, we also monitor our operating expenses closely to keep them in line with our projected revenue.

Cash flows—We strive to convert operating results to cash. To that effect, we carefully manage our working capital requirements through balancing accounts receivable and inventory with accounts payable. We monitor our cash balances to maintain cash available to support our operating, investing and financing requirements.

We believe the mobile computing solutions market dynamics are generally favorable to us.

 

 

The high-speed wireless networks which enable true “always-on” connectivity are fueling the growth of the market for smartphone devices. With our computing heritage, we are able to work closely with carriers to deploy advanced wireless data applications that take advantage of their wireless data networks.

 

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While the market for handheld computers is maturing, our leadership position and our ability to develop and deliver high quality products enable us to produce solid operating performance from this product line. Our handheld computing device product line also provides a brand and scale that can be leveraged across our entire product portfolio.

We expect to experience annual revenue growth of our smartphone product line. The smartphone market is emerging and people are beginning to understand the personal and professional benefits of being able to access email or browse the web on a smartphone. We expect this market to expand and we expect to capitalize on this expansion.

Critical Accounting Policies

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, assumptions and estimates that affect the amounts reported in Palm’s condensed consolidated financial statements and accompanying notes. We base our estimates and judgments on historical experience and on various other assumptions that we believe are reasonable under the circumstances. However, these estimates and judgments are subject to change and the best estimates and judgments routinely require adjustment. The amounts of assets and liabilities reported in our balance sheets and the amounts of revenues and expenses reported for each of our fiscal periods are affected by estimates and assumptions which are used for, but not limited to, the accounting for rebates, price protection, product returns, allowance for doubtful accounts, warranty and technical service costs, royalty obligations, goodwill and intangible asset valuations, restructurings, inventory, stock-based compensation and income taxes. Actual results could differ from these estimates. The following critical accounting policies are significantly affected by judgments, assumptions and estimates used in the preparation of our condensed consolidated financial statements.

Revenue is recognized when earned in accordance with applicable accounting standards and guidance, including Staff Accounting Bulletin, or SAB, No. 104, Revenue Recognition, and AICPA Statement of Position, or SOP, No. 97-2, Software Revenue Recognition, as amended. We recognize revenues from sales of mobile computing devices under the terms of the customer agreement upon transfer of title to the customer, net of estimated returns, provided that the sales price is fixed or determinable, collection is determined to be probable and no significant obligations remain. For our web sales distributors, we recognize revenue based on a sell-through method utilizing information provided by the distributor. Sales to resellers are subject to agreements allowing for limited rights of return and price protection. Accordingly, revenue is reduced for our estimates of liability related to these rights. The estimate for returns is recorded at the time the related sale is recognized and is adjusted periodically based upon historical rates of returns and other related factors. Actual returns may differ from our estimates. The reserves for rebates and price protection are recorded at the time these programs are offered in accordance with Emerging Issues Task Force, or EITF, Issue No. 01-9, Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products), and are estimated based on specific programs, expected usage and historical experience. Actual claims for rebates and price protection may vary over time and could differ from our estimates.

Revenue from software arrangements with end users of our devices is recognized upon delivery of the software, provided that collection is determined to be probable and no significant obligations remain. For arrangements with multiple elements, we allocate revenue to each element using the residual method. When all of the undelivered elements are software-related, this allocation is based on vendor specific objective evidence, or VSOE, of fair value of the undelivered items. VSOE is based on the price determined by management having the relevant authority when the element is not yet sold separately, but is expected to be sold in the marketplace within six months of the initial determination of the price by management. When the undelivered elements include non-software related items, this allocation is based on objective and reliable evidence of fair value, in accordance with EITF Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. We defer the portion of the arrangement fee equal to the fair value of the undelivered elements until they are delivered.

The allowance for doubtful accounts is based on our assessment of the collectibility of specific customer accounts and an assessment of international, political and economic risk as well as the aging of the accounts receivable. If there is a change in a major customer’s creditworthiness or actual defaults differ from our historical experience, our actual results could differ from our estimates of recoverability.

We accrue for warranty costs based on historical rates of repair as a percentage of shipment levels and the expected repair cost per unit, service policies and our experience with products in production or distribution. If we experience claims or significant changes in costs of services, such as third-party vendor charges, materials or freight, which could be higher or lower than our historical experience, our cost of revenues could differ from our estimates.

Palm accrues for royalty obligations to other technology and patent holders based on unit shipments of its smartphone and handheld computer devices, as a percentage of applicable revenue for the net sales of products using certain software technologies or as a fully paid-up license fee, all as determined in accordance with the terms of the applicable license

 

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agreements. Where agreements are not finalized, accrued royalty obligations represent management’s current best estimates using appropriate assumptions and projections based on negotiations with third party licensors. Palm has accrued royalty obligations of $31.1 million and $29.4 million as of August 31, 2007 and May 31, 2007, respectively, including estimated royalties of $25.7 million and $23.1 million, respectively, which are reported in other accrued liabilities. While the amounts ultimately agreed upon may be more or less than the current accrual, management does not believe that finalization of the agreements would have had a material impact on the amounts reported for its financial position as of August 31, 2007 or for the reported results for the three months then ended; however, the effect of finalization in the future may be significant to the period in which recorded.

Long-lived assets such as property and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not ultimately be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its ultimate disposition.

We evaluate the recoverability of goodwill annually during the fourth quarter of the fiscal year, or more frequently if impairment indicators arise, as required under Statement of Financial Accounting Standard, or SFAS, No. 142, Goodwill and Other Intangible Assets. Goodwill is reviewed for impairment by applying a fair-value-based test at the reporting unit level within our single reporting segment. A goodwill impairment loss would be recorded for any goodwill that is determined to be impaired. Under SFAS No. 144, Accounting for the Disposal of Long-Lived Assets, intangible assets are evaluated whenever events or changes in circumstances indicate that the carrying value of the asset may be impaired. An impairment loss would be recognized for an intangible asset to the extent that the asset’s carrying value exceeds its fair value, which is determined based upon the estimated undiscounted future cash flows expected to result from the use of the asset, including disposition. Cash flow estimates used in evaluating for impairment represent management’s best estimates using appropriate assumptions and projections at the time.

Effective for calendar year 2003, in accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which supersedes EITF Issue No. 94-3, Liability Recognition for Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring), we record liabilities for costs associated with exit or disposal activities when the liability is incurred. Prior to calendar year 2003, in accordance with EITF Issue No. 94-3, we accrued for restructuring costs when we made a commitment to a firm exit plan that specifically identified all significant actions to be taken. We record initial restructuring charges based on assumptions and related estimates that we deem appropriate for the economic environment at the time these estimates are made. We reassess restructuring accruals on a quarterly basis to reflect changes in the costs of the restructuring activities, and we record new restructuring accruals as liabilities are incurred.

Inventory purchases and purchase commitments are based upon forecasts of future demand. We value our inventory at the lower of standard cost (which approximates first-in, first-out cost) or market. If we believe that demand no longer allows us to sell our inventory above cost or at all, then we write down that inventory to market or write-off excess inventory levels. If customer demand subsequently differs from our forecasts, requirements for inventory write offs could differ from our estimates.

We account for stock-based compensation in accordance with, SFAS No. 123(R), Share-Based Payment, under the modified prospective method. Under the fair value recognition provisions of this statement, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the requisite service period, which is generally the vesting period.

We currently use the Black-Scholes option valuation model to determine the fair value of stock options and employee stock purchase plan shares. The determination of the fair value of stock-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of complex variables. These variables include our expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behaviors, expected risk-free interest rate and expected dividends.

We estimate the expected term of options granted based on historical time from vesting until exercise. We estimate the volatility of our common stock based upon the implied volatility derived from the historical market prices of our traded options with similar terms. Our decision to use this measure of volatility was based upon the availability of actively traded options on our common stock and our assessment that this measure of volatility is more representative of future stock price trends than is historical volatility. We base the risk-free interest rate for option valuation on Constant Maturity Rates provided by the U.S. Treasury with remaining terms similar to the expected term of the options. We do not anticipate paying any cash dividends in the foreseeable future and therefore use an expected dividend yield of zero in the option valuation model. We are required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. We use historical data to estimate pre-vesting option forfeitures and record stock-based compensation expense only for those awards that are expected to vest.

 

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There are significant differences among valuation models, and there is a possibility that we will adopt different valuation models in the future. This may result in a lack of consistency in future periods and materially affect the fair value estimate of stock-based payments. It may also result in a lack of comparability with other companies that use different models, methods and assumptions.

Our deferred tax assets are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. A valuation allowance reduces deferred tax assets to estimated realizable value, based on estimates and certain tax planning strategies. The carrying value of our net deferred tax assets assumes that it is more likely than not that we will be able to generate sufficient future taxable income in certain tax jurisdictions to realize the net carrying value. The valuation allowance is reviewed quarterly and is maintained until sufficient positive evidence exists to support the reversal of the valuation allowance based upon current and preceding years’ results of operations and anticipated profit levels in future years. If these estimates and related assumptions change in the future, we may be required to adjust our valuation allowance against the deferred tax assets with a corresponding impact to the provision for income taxes.

On June 1, 2007, we adopted Financial Accounting Standards Board, or FASB, Financial Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109”, or FIN, No. 48. FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. As a result of the implementation of FIN No. 48, we recognize the tax liability for uncertain income tax positions on the income tax return based on the two-step process prescribed in the interpretation. The first step is to determine whether it is more likely than not that each income tax position would be sustained upon audit. The second step is to estimate and measure the tax benefit as the amount that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority. Estimating these amounts requires us to determine the probability of various possible outcomes. We evaluate these uncertain tax positions on a quarterly basis. This evaluation is based on the consideration of several factors, including changes in facts or circumstances, changes in applicable tax law, settlement of issues under audit, and new exposures. If we later determine that our exposure is lower or that the liability is not sufficient to cover our revised expectations, we adjust the liability and effect a related change in our tax provision during the period in which we make such determination.

Our key critical accounting policies are reviewed with the Audit Committee of the Board of Directors.

Results of Operations

Revenues

 

     Three Months Ended August 31,      
     2007    % of Revenue     2006    % of Revenue     Increase/(Decrease)
     (dollars in thousands)

Revenues

   $ 360,759    100.0 %   $ 355,773    100.0 %   $ 4,986

We derive our revenues from sales of our smartphone and handheld computing devices, add-ons and accessories. Revenues for the three months ended August 31, 2007 increased approximately 1% from the three months ended August 31, 2006. Smartphone revenue was $302.2 million for the three months ended August 31, 2007 and increased 12% from $268.8 million for the three months ended August 31, 2006. Handheld computer revenue was $58.6 million for the three months ended August 31, 2007 and decreased 33% from $87.0 million for the three months ended August 31, 2006. During the three months ended August 31, 2007, net device units shipped were 1,008,000 units at an average selling price of $348. During the three months ended August 31, 2006, net device units shipped were 984,000 units at an average selling price of $347. Unit shipments increased approximately 2% for the three months ended August 31, 2007, as compared to the same period a year ago. The increase in unit shipments reflects a continuing shift towards smartphones. Average selling prices remained relatively flat during the three months ended August 31, 2007 as compared to the year ago period due to a shift in product mix towards smartphones, which carry higher average selling prices, substantially offset by a reduction of the selling prices of our existing smartphone products and the introduction of new smartphone products at lower price points.

International revenues were approximately 21% of worldwide revenues in the three months ended August 31, 2007 compared with approximately 17% in the three months ended August 31, 2006. Of the 1% increase in worldwide revenues in the three months ended August 31, 2007 as compared to the three months ended August 31, 2006, approximately 3 percentage points resulted from an increase in international revenues, partially offset by approximately a 2 percentage point decrease in United States revenues. Average selling prices for our devices increased internationally by approximately 10% and decreased in the

 

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United States by approximately 1% during the three months ended August 31, 2007 from the three months ended August 31, 2006. The increase in average selling price internationally is primarily the result of the continuing shift towards smartphones, which carry higher average selling prices. The decrease in the United States in the average selling price in the first quarter of fiscal year 2008 as compared to the same period a year ago is primarily the result of a greater mix of recently introduced products at lower average selling prices. Net units sold increased internationally by 12% and remained relatively flat in the United States from the year-ago period. The increase of net units sold internationally is primarily due to the expansion of our smartphones available internationally during the three months ended August 31, 2007 as compared to the three months ended August 31, 2006, partially offset by a decrease in traditional handheld computer unit sales.

Cost of Revenues

 

     Three Months Ended August 31,      
     2007    % of Revenue     2006    % of Revenue     Increase/(Decrease)
     (dollars in thousands)

Cost of revenues

   $ 230,335    63.8 %   $ 224,487    63.1 %   $ 5,848

Cost of revenues principally consists of material and transformation costs to manufacture our products, operating system, or OS, and other royalty expenses, warranty and technical support costs, freight, scrap and rework costs, the cost of excess or obsolete inventory, and manufacturing overhead which includes manufacturing personnel related costs, depreciation, and allocated information technology and facilities costs. Cost of revenues as a percentage of revenues increased by approximately 0.7 percentage points to 63.8% for the three months ended August 31, 2007 from 63.1% for the three months ended August 31, 2006. The increase in cost of revenues as a percentage of revenues is primarily due to an increase of 1.4 percentage points in the costs of warranty repairs for the products which we are currently selling compared to those we sold in the year ago period. We experienced 1.2 percentage points of higher product costs due to a shift in product mix as well as a benefit resulting from lower royalty rates on certain radio technologies recognized in the prior year which did not recur during the three months ended August 31, 2007. In addition, we experienced a 0.1 percentage point increase in excess and obsolete costs during the current year as compared to the year-ago period. These were partially offset by a 1.4 percentage point decrease in OS royalty rates primarily because the quarterly amortization costs of the new ACCESS license agreement entered into in December 2006 is less than the per-unit royalty payments paid under the original agreement. We experienced a decrease in scrap and rework costs of approximately 0.6 percentage points as a result of lower open-box returns compared to the same period a year ago.

Sales and Marketing

 

     Three Months Ended August 31,      
     2007    % of Revenue     2006    % of Revenue     Increase/(Decrease)
     (dollars in thousands)

Sales and marketing

   $ 60,195    16.7 %   $ 52,932    14.9 %   $ 7,263

Sales and marketing expenses consist principally of advertising and marketing programs, salaries and benefits for sales and marketing personnel, sales commissions, travel expenses and allocated information technology and facilities costs. Sales and marketing expenses for the three months ended August 31, 2007 increased approximately 14% from the three months ended August 31, 2006. The increase in sales and marketing expenses as a percentage of revenues and in absolute dollars is due to several factors. Product promotional programs and advertising increased approximately $5.4 million as a result of increased product advertising related to product launches and a branding campaign which was partially offset as a result of fewer units provided to our carrier partners for product certification and demonstration purposes during the current period as compared to the year ago period. Allocated costs increased by approximately $1.2 million during the current period as compared to the comparable period a year ago as a result of higher information technology and facilities costs. We experienced increases in marketing development expenses with our retail and carrier customers of approximately $0.6 million as a result of our increased smartphone revenues. Consulting services increased $0.3 million to support our web store activities. We also experienced an increase in employee related expenses of approximately $0.1 million primarily resulting from an increased average number of sales and marketing employees during the first quarter of fiscal year 2008 compared to the prior year period. These increases were partially offset by reduced stock-based compensation expense of approximately $0.4 million as a result of lower weighted-average fair value assumptions during the three months ended August 31, 2007 as compared to the year ago period.

 

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Research and Development

 

     Three Months Ended August 31,      
     2007    % of Revenue     2006    % of Revenue     Increase/(Decrease)
     (dollars in thousands)

Research and development

   $ 52,616    14.6 %   $ 40,845    11.5 %   $ 11,771

Research and development expenses consist principally of employee related costs, third party development costs, program materials, depreciation and allocated information technology and facilities costs. Research and development expenses during the three months ended August 31, 2007 increased approximately 29% from the comparable quarter a year ago. The increase in research and development expenses as a percentage of revenues and in absolute dollars during the three months ended August 31, 2007 is due to several factors. We experienced an increase in outsourced engineering, data communications and project material costs of approximately $4.3 million, reflecting our commitment to the development of our smartphone products. In addition, consulting expense increased by approximately $3.5 million to further support our efforts in the smartphone space. Employee-related expense increased approximately $2.5 million reflecting an increase of 25 additional employees hired to support our commitment to the development of smartphone products. Allocated costs increased approximately $2.3 million as a result of increased research and development headcount and higher information technology and facilities costs. These increases were partially offset by a decrease in stock-based compensation expense of approximately $0.7 million as a result of lower weighted-average fair value assumptions during the three months ended August 31, 2007 as compared to the year ago period.

General and Administrative

 

     Three Months Ended August 31,      
     2007    % of Revenue     2006    % of Revenue     Increase/(Decrease)
     (dollars in thousands)

General and administrative

   $ 13,996    3.9 %   $ 13,760    3.9 %   $ 236

General and administrative expenses consist of employee related costs, travel expenses and allocated information technology and facilities costs for finance, legal, human resources and executive functions, outside legal and accounting fees, provision for doubtful accounts and business insurance costs. The increase in absolute dollars is due to several factors. Allocated costs increased by $0.4 million as a result of an increase in our headcount of approximately 10 additional employees hired to support our infrastructure and higher information technology and facilities costs. Professional and legal expenses increased by approximately $0.2 million, primarily related to the defense of patent litigation. Stock-based compensation expense decreased approximately $0.3 million as a result of lower weighted-average fair value assumptions during the three months ended August 31, 2007 as compared to the year ago period.

Amortization of Intangible Assets

 

     Three Months Ended August 31,      
     2007    % of Revenue     2006    % of Revenue     Increase/(Decrease)
     (dollars in thousands)

Amortization of intangible assets

   $ 961    0.3 %   $ 340    0.1 %   $ 621

The increase in amortization of intangible assets in absolute dollars and as a percentage of revenue is due to $0.6 million in amortization of intangible assets that were acquired during the third quarter of fiscal year 2007.

Patent acquisition cost

 

     Three Months Ended August 31,      
     2007    % of Revenue     2006    % of Revenue     Increase/(Decrease)
     (dollars in thousands)

Patent acquisition cost

   $ 5,000    1.4 %   $ —      —   %   $ 5,000

Palm acquired more than 1,600 patents and patent applications for $5.0 million during the first quarter of fiscal year 2008. These patents and patent applications were acquired for strategic purposes in order to more effectively respond to intellectual property claims which may arise in the course of our business and were not acquired for the purpose of incorporating specific features into future products or for specific features in current products for which we currently pay or expect to pay royalties. Accordingly, the acquisition cost was expensed during the period of acquisition.

 

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Restructuring Charges

 

     Three Months Ended August 31,      
     2007    % of Revenue     2006    % of Revenue     Increase/(Decrease)
     (dollars in thousands)

Restructuring charges

   $ 6,604    1.8 %   $ —      —   %   $ 6,604

Restructuring charges in fiscal year 2008 relate to the implementation of a series of reorganization actions to streamline our business structure. Restructuring programs initiated during the first quarter resulted in workforce reductions of approximately 80 regular employees, primarily in the United States, during the quarter. Cash payments of approximately $4.9 million were made related to these workforce reductions as of August 31, 2007. In connection with this first quarter restructuring action, certain facilities in the United States will be vacated during the second quarter of fiscal year 2008. During September 2007, we announced that we will be canceling development on our current Foleo mobile companion product. As a result, we expect restructuring charges during the second quarter of fiscal year 2008 related to these actions to be approximately $8 million to $10 million.

Gain on Sale of Land

 

     Three Months Ended August 31,        
     2007     % of Revenue     2006    % of Revenue     Increase/(Decrease)  
     (dollars in thousands)  

Gain on sale of land

   $ (4,446 )   (1.2 )%   $ —      —   %   $ (4,446 )

In August 2005, the Company entered into an agreement with a real estate broker to market for sale the 39 acres of land owned by Palm in San Jose, California. In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the Company reclassified the land to land held for sale at that time. In February 2006, the Company entered into a Purchase and Sale Agreement with Hunter/Storm, LLC, a California limited liability company, pursuant to which the Company would sell these 39 acres of land. The sale closed in June 2007 and Palm received proceeds from the sale of land of approximately $64.5 million and recognized a gain on sale, net of closing costs, of approximately $4.4 million.

Interest Expense

 

     Three Months Ended August 31,        
     2007     % of Revenue     2006     % of Revenue     Increase/(Decrease)  
     (dollars in thousands)  

Interest expense

   $ (153 )   —   %   $ (668 )   (0.2 )%   $ (515 )

Interest expense during the three months ended August 31, 2007 decreased as a result of the lower outstanding debt compared to the year ago period. Following the closing of the Elevation transaction, we expect to increase our outstanding debt by an additional $400 million. As such, we expect that our interest expense will increase significantly in future quarters.

Interest Income

 

     Three Months Ended August 31,      
     2007    % of Revenue     2006    % of Revenue     Increase/(Decrease)
     (dollars in thousands)

Interest income

   $ 7,918    2.2 %   $ 6,496    1.8 %   $ 1,422

The overall increase in interest income, both in absolute dollars and as a percentage of revenue, is due to both the increased average balances of cash, cash equivalents, and short-tem investments and more favorable interest rates for the first quarter of fiscal year 2008 as compared to the same period last year.

 

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Other Income (Expense), Net

 

     Three Months Ended August 31,        
     2007     % of Revenue     2006     % of Revenue     Increase/(Decrease)  
     (dollars in thousands)  

Other income (expense), net

   $ (301 )   (0.1 )%   $ (390 )   (0.1 )%   $ (89 )

Other income (expense) for the three months ended August 31, 2007 consisted of bank and other miscellaneous charges and net gains on sales of cash investments. The change for the three months ended August 31, 2007 compared to the year ago quarter is not significant.

Income Tax Provision

 

     Three Months Ended August 31,        
     2007    % of Revenue     2006    % of Revenue     Increase/(Decrease)  
     (dollars in thousands)  

Income tax provision

   $ 3,803    1.1 %   $ 12,344    3.5 %   $ (8,541 )

For the three months ended August 31, 2007, Palm’s income tax expense was $3.8 million, which consisted of federal, state and foreign income taxes. The effective tax rate for the fiscal quarter ended August 31, 2007 of approximately 128.4% resulted from the computation of income tax expense for the US and other jurisdictions with pre-tax income at the applicable tax rates while, for certain foreign jurisdictions with pre-tax losses, no tax benefit was available to offset the tax expense computed for profitable jurisdictions.

Our estimate of the effective tax rate is based on the application of existing tax laws to current projections of our annual consolidated results, including projections of the mix of income (loss) earned among our entities and tax jurisdictions in which they operate.

The effective tax rate was 42.8% for the three months ended August 31, 2006, which included an effective rate of 42.5% and discreet items of 0.3% related to deficiencies of disqualifying dispositions of ESPP and ISOs and prior year adjustments of foreign taxes. The increase in the effective tax rate year over year is primarily due to the significant decrease in pre-tax income levels and the increase in foreign losses for which no tax benefit is provided.

Liquidity and Capital Resources

Cash and cash equivalents at August 31, 2007 were $368.8 million, compared to $128.1 million at May 31, 2007, an increase of $240.7 million. Contributing to this increase were non-cash charges of $12.6 million, the changes in assets and liabilities of $6.4 million, net sales of short-term investments of $160.7 million and net proceeds from the sale of land of $64.4 million. In addition, we had $6.9 million of increases from stock-related activity. These increases were partially offset by our net loss of $0.8 million, purchases of property and equipment of $6.6 million, debt issuance costs of $2.6 million and $0.3 million used to repay outstanding debt.

We anticipate our August 31, 2007 total cash, cash equivalents and short-term investments balance of $627.1 million will satisfy our operational cash flow requirements for at least the next twelve months and the anticipated impact of the impending recapitalization transaction in which the private-equity firm Elevation Partners will invest $325 million in Palm and we will utilize these proceeds along with existing cash and the net proceeds from $400 million of new debt to finance a cash distribution to shareholders of $9.00 per share, or approximately $939.6 million based on the outstanding shares of common stock at August 31, 2007. Based on our current forecast, we do not anticipate any short-term or long-term cash deficiencies. As shown in the accompanying unaudited pro forma information in the notes to the condensed consolidated financial statements, the recapitalization transaction will materially increase our debt and reduce our equity.

Net accounts receivable was $179.0 million at August 31, 2007, a decrease of $25.3 million, or 12%, from $204.3 million at May 31, 2007. Days sales outstanding, or DSO, of receivables was 45 days and 46 days at August 31, 2007 and May 31, 2007, respectively. The decrease in net accounts receivable and the decrease in DSO are primarily due to the linearity of our quarterly sales as compared to the sales at the end of the fourth quarter of fiscal year 2007. We ended the first quarter of fiscal year 2008 with a cash conversion cycle of -8 days compared to -5 days at fiscal year end 2007. The cash conversion cycle is the duration between the purchase of inventories and services and the collection of the cash for the sale of our products and is a quarterly metric on which we have focused as we continue to try to efficiently manage our assets. The cash conversion cycle results from the calculation of DSO added to days of supply in inventories, or DSI, reduced by days payable outstanding, or DPO.

 

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Palm facilities are leased under operating leases that expire at various dates through March 2018.

In May 2005, we acquired PalmSource’s 55 percent share of the Palm Trademark Holding Company and our rights to the brand name Palm. The rights to the brand had been co-owned by the two companies since the October 2003 spin-off of PalmSource from Palm. We agreed to pay $30.0 million in five installments due in May 2005, 2006, 2007 and 2008 and November 2008, and granted PalmSource certain rights to Palm trademarks for PalmSource and its licensees for a four-year transition period. The net present value of these payments, $27.2 million, was recorded as an intangible asset and is being amortized over 20 years. The remaining amount due to PalmSource under this agreement was $7.5 million as of both August 31, 2007 and May 31, 2007.

We accrue for royalty obligations to other technology and patent holders based on unit shipments of its smartphone and handheld computer devices, as a percentage of applicable revenue for the net sales of products using certain software technologies or as a fully paid-up license fee, all as determined in accordance with the terms of the applicable license agreements. Where agreements are not finalized, accrued royalty obligations represent management’s current best estimates using appropriate assumptions and projections based on negotiations with third party licensors. We have accrued royalty obligations of $31.1 million and $29.4 million as of August 31, 2007 and May 31, 2007, respectively, including estimated royalties of $25.7 million and $23.1 million, respectively, which are reported in other accrued liabilities. While the amounts ultimately agreed upon may be more or less than the current accrual, management does not believe that finalization of the agreements would have had a material impact on the amounts reported for its financial position as of August 31, 2007 or for the reported results for the three months then ended. The effect of finalization of these agreements in the future may be significant to the period in which recorded.

We utilize contract manufacturers to build our products. These contract manufacturers acquire components and build products based on demand forecast information we supply, which typically covers a rolling 12-month period. Consistent with industry practice, we acquire inventories from such manufacturers through blanket purchase orders against which orders are applied based on projected demand information and availability of goods. Such purchase commitments typically cover our forecasted product and manufacturing requirements for periods ranging from 30 to 90 days. In certain instances, these agreements allow us the option to cancel, reschedule and/or adjust our requirements based on our business needs. Consequently, only a portion of our purchase commitments arising from these agreements may be non-cancelable and unconditional commitments. As of August 31, 2007 and May 31, 2007, our commitments to contract with third-party manufacturers for their inventory on-hand and component purchase commitments related to the manufacture of our products were approximately $148.2 million and $159.8 million, respectively.

In October 2005, we entered into a three-year, $30.0 million revolving credit line with Comerica Bank. The interest rate is equal to Comerica’s prime rate (8.25% at August 31, 2007) or, at our election, subject to specific requirements, equal to LIBOR plus 1.75% (7.42% at August 31, 2007). The interest rate may vary based on fluctuations in market rates. The line of credit is unsecured as long as we maintain over $100.0 million in unrestricted domestic cash, cash equivalents and short-term investments. If our domestic unrestricted cash plus cash equivalents and short-term investments fall below $100.0 million, Comerica will have a first priority security interest in all of our assets including but not limited to cash and cash equivalents, short-term investments, accounts receivable, inventory and property and equipment but excluding intellectual property and real estate. As of August 31, 2007 and May 31, 2007, we had used our credit line to support the issuance of letters of credit totaling $8.6 million and $9.1 million, respectively.

During fiscal year 2007, we entered into a license agreement with Oracle Corporation to purchase software and one year of maintenance for $3.3 million (net present value of $2.9 million). Under the terms of the agreement, we agreed to make quarterly payments over a three-year period ending July 2009. As of August 31, 2007 and May 31, 2007, we made payments of $1.1 million and $0.8 million, respectively, under the agreement. The remaining amount due under the agreement is $2.2 million and $2.5 million as of August 31, 2007 and May 31, 2007, respectively.

During February 2007, we acquired the assets of two sole proprietorships for $19.2 million. Under the purchase agreements, we agreed to pay up to $8.0 million over four years in employee incentive compensation based upon continued employment with the Company which will be recognized as compensation expense over the service period of the applicable employees.

In December 2006, we entered into a minimum purchase commitment obligation with Microsoft Licensing, GP over a 2-year contract period. Under the terms of the agreement, we agreed to pay a minimum of $17.5 million per year ending November 2008. In September 2007, the agreement was amended to include an additional minimum purchase commitment of $6.7 million. As of August 31, 2007 and May 31, 2007, we have made payments of $17.4 million and $12.3 million, respectively. The remaining amount due under the agreement is $17.6 million and $22.7 million as of August 31, 2007 and May 31, 2007, respectively, which increased to $24.2 million pursuant to the amendment described above.

 

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As of August 31, 2007, we had $6.0 million of non-current liabilities in our condensed consolidated balance sheet for unrecognized tax positions. However, the periods of cash settlement with the respective tax authority cannot be reasonably estimated.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Sensitivity

We currently maintain an investment portfolio consisting mainly of cash equivalents and short-term investments. These available-for-sale securities are subject to interest rate risk and will fall in value if market interest rates increase. The objectives of our investment activities are to maintain the safety of principal, assure sufficient liquidity and achieve appropriate returns. This is accomplished by investing in marketable investment grade securities and by limiting exposure to any one issuance or issuer. We do not use derivative financial investments in our investment portfolio. Our cash equivalents are primarily money market funds and an immediate and uniform increase in market interest rates of 100 basis points from levels at August 31, 2007 would cause an immaterial decline in the fair value of our cash equivalents. As of August 31, 2007, we had short-term investments of $258.2 million. Our investment portfolio primarily consists of highly liquid investments with original maturities at the date of purchase of greater than three months, and of marketable equity securities. These available-for-sale investments, consisting primarily of auction-rate securities, including government, domestic and foreign corporate debt securities and marketable equity securities, are subject to interest rate risk and will decrease in value if market interest rates increase. An immediate and uniform increase in market interest rates of 100 basis points from levels at August 31, 2007 would cause a decline of less than 2%, or $3.1 million, in the fair market value of our short-term investment portfolio. We would expect our net income (loss) or cash flows to be similarly affected, in absolute dollars, by such a change in market interest rates.

Foreign Currency Exchange Risk

We denominate our sales to certain international customers in the Euro, in Pounds Sterling, in Brazilian Real and in Swiss Francs. Expenses and other transactions are also incurred in a variety of currencies. We hedge certain balance sheet exposures and intercompany balances against future movements in foreign currency exchange rates by using foreign exchange forward contracts. Gains and losses on the contracts are intended to offset foreign exchange gains or losses from the revaluation of assets and liabilities denominated in currencies other than the functional currency of the reporting entity. Our foreign exchange forward contracts generally mature within 30 days. We do not intend to utilize derivative financial instruments for trading purposes. Movements in currency exchange rates could cause variability in our revenues, expenses or interest and other income (expense). Our foreign exchange forward contracts outstanding on August 31, 2007 had a notional contract value in U.S. dollars of approximately $10.2 million which settled within 30 days.

Equity Price Risk

As of August 31, 2007 we do not own any material equity investments. Therefore, we do not currently have any material direct equity price risk.

 

Item 4. Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of the end of the period covered by this report. Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Palm have been detected. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Based on our evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective in providing reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer as appropriate to allow timely decisions regarding required disclosure.

 

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There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934, as amended) identified in connection with management’s evaluation that occurred during the first quarter of fiscal year 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

The information set forth in Note 16 of the condensed consolidated financial statements of this Form 10-Q is incorporated herein by reference.

 

Item 1A. Risk Factors

You should carefully consider the risks described below and the other information in this Form 10-Q. The business, results of operations or financial condition of Palm could be seriously harmed and the trading price of Palm common stock may decline due to any of these risks.

Risks Related to Our Business

Our operating results are subject to fluctuations, and if we fail to meet the expectations of securities analysts or investors, our stock price may decrease significantly.

Our operating results are difficult to forecast. Our future 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 will likely decline. Many factors may cause fluctuations in our operating results including, but not limited to, the following:

 

   

timely introduction and market acceptance of new products and services;

 

   

competition from other smartphone, handheld computer devices or other devices with similar functionality;

 

   

quality issues with our products;

 

   

changes in consumer, business and carrier preferences for our products and services;

 

   

loss or failure of carriers or other key sales channel partners;

 

   

failure by our third party manufacturers or suppliers to meet our quantity and quality requirements for products or product components on time;

 

   

failure to add or replace third party manufacturers or suppliers in a timely manner;

 

   

seasonality of demand for some of our products and services;

 

   

changes in terms, pricing or promotional programs;

 

   

variations in product costs or the mix of products sold;

 

   

failure to achieve product cost and operating expense targets;

 

   

changes in and competition for consumer and business spending levels;

 

   

excess inventory or insufficient inventory to meet demand;

 

   

growth, decline, volatility and changing market conditions in the mobile computing device market;

 

   

litigation brought against us; and

 

   

changes in general economic conditions and specific market conditions.

Any of the foregoing factors could have a material adverse effect on our business, results of operations and financial condition.

We have announced our intention to accept a $325 million investment from Elevation Partners, take on $400 million in senior secured debt and a revolving credit facility of $30 million and distribute approximately $939.6 million to our shareholders based on the number of shares outstanding at August 31, 2007. If the transaction is not completed, our stock price and business may be adversely affected.

We have announced a Preferred Stock Purchase Agreement and Agreement and Plan of Merger, or the Purchase Agreement, with Elevation Partners, L.P., or Elevation, and our wholly-owned subsidiary Passport Merger Corporation, or Merger

 

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Sub. The transactions contemplated by the Purchase Agreement, or the Transactions, include our sale of 325,000 shares of Series B Convertible Preferred Stock to Elevation and/or its permitted assigns for $325 million, a cash distribution of $9.00 per share without interest to holders of our common stock at the effective time of the merger with Merger Sub, and the entering into of a credit facility providing for senior secured debt and revolving credit facility of $430 million in the aggregate. Our Board of Directors and our shareholders have approved the Transactions, but consummation of the Transactions, is subject to risks and uncertainties such as the availability of sufficient surplus under Delaware law, finalizing debt agreements and other customary closing conditions. If the Transactions are not completed, the trading price of our common stock may decline. In addition, our business and operations may be harmed to the extent that customers, suppliers and others believe that we cannot compete effectively in the marketplace without the Transaction, or if there is customer or employee uncertainty surrounding the future direction of our product and service offerings and our business strategy on a standalone basis. We may find it more difficult to attract and retain employees, and the attention of management may be strained or diverted from operating the business. Moreover, we have incurred, and will continue to incur, substantial investment of time by our Board of Directors, our management team and our employees in preparing for the Transactions. In addition, costs associated with the Transactions, including but not limited to legal, banking, financial advisory, consulting, printing and accounting fees, will not be recoverable if the Transactions do not close. Further, under certain circumstances we may be required to pay Elevation a termination fee of up to $25 million, or to reimburse Elevation for expenses incurred up to $4 million. Any delay in the completion of the Transactions could diminish the anticipated benefits of the Transactions, result in additional costs, or result in loss of revenue or other effects associated with uncertainty about the Transactions.

If we fail to develop and introduce new products and services successfully and in a cost effective and timely manner, we will not be able to compete effectively and our ability to generate revenues will suffer.

We operate in a highly competitive, rapidly evolving environment, and our 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 our customers and end users with acceptable quality, prices and terms, we will not be able to compete effectively and our ability to generate revenues will suffer. The development of new products and services is very difficult and requires high levels of innovation. The development process is also lengthy and costly. If we fail to accurately anticipate technological trends or our end users’ needs or preferences or are unable to complete the development of products and services in a cost effective and timely fashion, we will be unable to introduce new products and services into the market or successfully compete with other providers.

As we introduce new or enhanced products or integrate new technology into new or existing products, we face risks including, among other things, disruption in customers’ ordering patterns, excessive levels of older product inventories, delivering sufficient supplies of new products to meet customers’ demand, possible product and technology defects, and a potentially different sales and support environment. Premature announcements or leaks of new products, features or technologies may exacerbate some of these risks. Our failure to manage the transition to newer products or the integration of newer technology into new or existing products could adversely affect our business, results of operations and financial condition.

Our products may contain errors or defects, which could result in the rejection or return of our products, damage to our reputation, lost revenues, diverted development resources and increased service costs, warranty claims and litigation.

Our products are complex and must meet stringent user requirements. In addition, we warrant that our products will be free of defect for 90 to 365 days after the date of purchase, depending on the product. In Europe, we are required in some countries to provide a two-year warranty for certain defects. In addition, certain of our contracts with wireless carriers include epidemic failure clauses with low thresholds that we have in some instances exceeded. If invoked, these clauses may entitle the carrier to return or obtain credits for products in inventory, or to cancel outstanding purchase orders.

In addition, we must develop our hardware and software application products quickly to keep pace with the rapidly changing mobile computing market, and we have a history of frequently introducing new products. Products as sophisticated as ours are likely to contain undetected errors or defects, especially when first introduced or when new models or versions are released. Our products may not be free from errors or defects after commercial shipments have begun, which could result in the rejection of our products and jeopardize our relationship with carriers. End users may also reject or find issues with our products and have a right to return them even if the products are free from errors or defects. In either case, returns or quality issues could result in damage to our reputation, lost revenues, diverted development resources, increased customer service and support costs, additional contractual obligations to wireless carriers and warranty claims and litigation which could harm our business, results of operations and financial condition.

 

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If we are unable to compete effectively with existing or new competitors, we could experience price reductions, reduced demand for our products and services, reduced margins and loss of market share, and our business, results of operations and financial condition would be adversely affected.

The mobile computing device market is highly competitive, and we expect increased competition in the future, particularly as companies from established industry segments, such as mobile handset, personal computer and consumer electronics, enter this market or increasingly expand and market their competitive product offerings or both.

Some of our competitors or potential competitors possess capabilities developed over years of serving customers in their respective markets that might enable them to compete more effectively than we compete in certain segments. In addition, many of our competitors have significantly greater engineering, technical, manufacturing, sales, marketing and financial resources and capabilities than we do. These competitors may be able to respond more rapidly than we can to new or emerging technologies or changes in customer requirements, including introducing a greater number and variety of products than we can. They may also be in a better position financially or otherwise to acquire and integrate companies and technologies that enhance their competitive positions and limit our competitiveness. In addition, they may devote greater resources to the development, promotion and sale of their products than we do. They may have lower costs and be better able to withstand lower prices in order to gain market share at our expense. They may also be more diversified than we are and better able to leverage their other businesses, products and services to be able to accept lower returns in the mobile computing device market and gain market share. Finally, these competitors bring with them customer loyalties, which may limit our ability to compete despite superior product offerings.

Our devices compete with a variety of mobile devices. Our principal competitors include: mobile handset and smartphone manufacturers such as High Tech Computer, or HTC, Motorola, Nokia, Research in Motion, Samsung and Sony-Ericsson; computing device companies such as Acer, Dell, Fujitsu Siemens Computers, Hewlett-Packard, and Mio Technology; ultra mobile personal computing companies such as FlipStart Labs, OQO and Pepper Computer; consumer electronics companies, such as Apple, NEC, Sharp Electronics, Sony and Yakumo; and a variety of early-stage technology companies.

Some of these competitors, such as HTC, produce smartphones as carrier-branded devices in addition to their own branded devices. As technology advances, we also expect to compete with mobile phones without branded operating systems that synchronize with personal computers, as well as ultra-mobile personal computers and laptop computers with wide area network or data cards with VoIP, and WiFi phones with VoIP.

In addition, our devices compete for a share of disposable income and business spending on consumer electronic, telecommunications and computing products such as MP3 players, iPods, media/photo viewers, digital cameras, personal media players, digital storage devices, handheld gaming devices, GPS devices and other such devices.

Some competitors sell or license server, desktop and/or laptop computing products, software and/or recurring services in addition to mobile computing products and may choose to market their mobile computing products at a discounted price or give them away for free with their other products or services, which could negatively affect our ability to compete.

A number of our competitors have longer and closer relationships with the senior management of business customers who decide which products and technologies will be deployed in their business. Many competitors have larger and more established sales forces calling on carriers and business 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 carriers and business customers deciding not to choose our products and services, which would adversely impact our revenues.

Successful new product introductions or enhancements by our competitors could cause intense price competition or make our products obsolete. To remain 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, reduced demand for our products and services, increased expenses, reduced margins and loss of market share. Failure to compete successfully against current or future competitors could harm our business, results of operations and financial condition.

We are highly dependent on wireless carriers for the success of our smartphone products.

The success of our business strategy and our smartphone products is highly dependent on our ability to establish new relationships and build on our existing relationships with domestic and international wireless carriers. We cannot assure you that we will be successful in establishing new relationships, or maintaining or advancing existing relationships, with wireless carriers or that these wireless carriers will act in a manner that will promote the success of our smartphone products. Factors that are largely within the control of wireless carriers, but which are important to the success of our smartphone products, include:

 

   

testing of our smartphone products on wireless carriers’ networks;

 

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quality and coverage area of wireless voice and data services offered by the wireless carriers;

 

   

the degree to which wireless carriers facilitate the introduction of and actively market, advertise, promote, distribute and resell our smartphone products;

 

   

the extent to which wireless carriers require specific hardware and software features on our smartphone products to be used on their networks;

 

   

timely build out of advanced wireless carrier networks that enhance the user experience for data centric services through higher speed and “always on” functionality;

 

   

contractual terms and conditions imposed on us by wireless carriers that, in some circumstances, could limit our ability to make similar products available through competitive carriers in some market segments;

 

   

wireless carriers’ pricing requirements and subsidy programs; and

 

   

pricing and other terms and conditions of voice and data rate plans that the wireless carriers offer for use with our smartphone products.

For example, flat data rate pricing plans offered by some wireless carriers may represent some risk to our relationship with such carriers. While flat data pricing helps customer adoption of the data services offered by carriers and therefore highlights the advantages of the data applications of our smartphone products, such plans may not allow our smartphones to contribute as much average revenue per user, or ARPU, to wireless carriers as when they are priced by usage, and therefore reduces our differentiation from other, non-data devices in the view of the carriers. In addition, if wireless carriers charge higher rates than consumers are willing to pay, the acceptance of our wireless solutions could be less than anticipated and our revenues and results of operations could be adversely affected.

Wireless carriers have substantial bargaining power as we enter into agreements with them. They may require contract terms that are difficult for us to satisfy and could result in higher costs to complete certification requirements and negatively impact our results of operations and financial condition. Moreover, we do not have agreements with some of the wireless carriers with whom we do business internationally and, in some cases, the agreements may be with third-party distributors and may not pass through rights to us or provide us with recourse or contact with the carrier. The absence of agreements means that, with little or no notice, these wireless carriers could refuse to continue to purchase all or some of our products or change the terms under which they purchase our products. If these wireless carriers were to stop purchasing our products, we may be unable to replace the lost sales channel on a timely basis and our results of operations could be harmed.

Wireless carriers also significantly affect our ability to develop and launch products for use on their wireless networks. If we fail to address the needs of wireless carriers, identify new product and service opportunities or modify or improve our smartphone products in response to changes in technology, industry standards or wireless carrier requirements, our products could rapidly become less competitive or obsolete. If we fail to timely develop smartphone products that meet carrier product planning cycles or fail to deliver sufficient quantities of products in a timely manner to wireless carriers, those carriers may choose to emphasize similar products from our competitors and thereby reduce their focus on our products which would have a negative impact on our business, results of operations and financial condition.

Carriers, who control most of the distribution and sale of, and virtually all of the access for, smartphone products could commoditize smartphones, thereby reducing the average selling prices and margins for our smartphone products which would have a negative impact on our business, results of operations and financial condition. In addition, if carriers move away from subsidizing the purchase of smartphone products, this could significantly reduce the sales or growth rate of sales of smartphone products. This could have an adverse impact on our business, revenues and results of operations.

As we build strategic relationships with wireless carriers, we could be exposed to significant fluctuations in revenue for our smartphone products.

Because of their large sales channels, wireless carriers may purchase large quantities of our products prior to launch so that the products are widely available. Reorders of products may fluctuate quarter to quarter, depending on end-customer demand and inventory levels required by the carriers. As we develop new strategic relationships and launch new products with wireless carriers, our smartphone products-related revenue could be subject to significant fluctuation based on the timing of carrier product launches, carrier inventory requirements, marketing efforts and our ability to forecast and satisfy carrier and end-customer demand.

 

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If our products do not meet wireless carrier and governmental or regulatory certification or other requirements, we will not be able to compete effectively and our ability to generate revenues will suffer.

We are required to certify our products with governmental and regulatory agencies and with the wireless carriers for use on their networks and meet other requirements. These processes can be time consuming, could delay the offering of our smartphone products on carrier networks and affect our ability to timely deliver products to customers. As a result, carriers may choose to offer, or consumers may choose to buy, similar products from our competitors and thereby reduce their purchases of our products, which would have a negative impact on our smartphone products sales volumes, our revenues and our cost of revenues.

We are dependent on a concentrated number of significant customers and the loss or credit failure of any of those customers could have an adverse effect on our business, results of operations and financial condition.

Our three largest customers in terms of revenue represented 56% of our revenues during fiscal year 2007 compared to 55% of our revenues during fiscal year 2006 and 34% of our revenues during fiscal year 2005. We determine our largest customers to be those who represent 10% or more of our total revenues. We expect this trend of revenue concentration with our largest customers, particularly with wireless carriers, to continue. If any significant customer discontinues its relationship with us for any reason, or reduces or postpones current or expected purchases from us, it could have an adverse impact on our business, results of operation and financial condition.

In addition, our largest customers in terms of outstanding customer accounts receivable balances accounted for 63% of our accounts receivable at the end of fiscal year 2007 compared to 66% of our accounts receivable at the end of fiscal year 2006 and 24% of our accounts receivable at the end of fiscal year 2005. We determine our largest customers to be those who have outstanding customer accounts receivable balances at the period end of 10% or more of our total net accounts receivables. We expect this trend of increased credit concentration with our largest customers, particularly with wireless carriers, to continue, concentrating our bad debt risks and the costs of mitigating those risks. We routinely monitor the financial condition of our customers and review the credit history of each new customer.

While we believe that our allowances for doubtful accounts adequately reflect the credit risk of our customers, as well as historical trends and other economic factors, we cannot assure you that such allowances will be accurate or sufficient. If any of our significant customers defaults on its account, or if we experience significant credit expense for any reason, it could have an adverse impact on our business, results of operations and financial condition.

If we do not correctly forecast demand for our products, we could have costly excess production or inventories or we may not be able to secure sufficient or cost effective quantities of our products or production materials and our revenues, cost of revenues and financial condition could be adversely impacted.

The demand for our products depends on many factors, including pricing and channel inventory levels, and is difficult to forecast due in part to variations in economic conditions, changes in consumer and business preferences, relatively short product life cycles, changes in competition, seasonality and reliance on key sales channel partners. It is particularly difficult to forecast demand by individual product. Significant unanticipated fluctuations in demand, the timing and disclosure of new product releases or the timing of key sales orders could result in costly excess production or inventories or the inability to secure sufficient, cost-effective quantities of our products or production materials. This could adversely impact our revenues, cost of revenues and financial condition.

The market for our products is volatile, and changing market conditions, or failure to adjust to changing market conditions, may adversely affect our revenues, results of operations and financial condition, particularly given our size, limited resources and lack of diversification.

Over the last few years, we have seen year-over-year declines in the volume of handheld computer devices while demand for smartphone devices has increased. Although we are the leading provider of handheld computer products, we have shifted our investment to smartphone products and related products in response to forecasted market demand trends. We expect that the rate of declines in the volume of handheld computer device units will continue. We cannot assure you that the growth of smartphone devices will offset any decline in handheld computer device sales. Nor can we assure you that the smartphone market will continue to grow as forecasted. If we are unable to adequately respond to changes in demand for our products, our revenues and results of operations could be adversely affected. In addition, as our products and product categories mature and face greater competition, we may experience pressure on our product pricing to preserve demand for our products, which would adversely affect our margins, results of operations and financial condition.

This reliance on the success of and trends in our industry is compounded by the size of our organization and our focus on smartphone and related products. These factors also make us more dependent on investments of our limited resources. For

 

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example, we face many resource allocation decisions, such as: where to focus our research and development, geographic sales and marketing and partnering efforts; which aspects of our business to outsource; which operating systems and email solutions to support; and the balance among our products. We have shifted the focus of our engineering resources towards the smartphone opportunity. Given the size and undiversified nature of our organization, any error in investment strategy could harm our business, results of operations and financial condition.

We rely on third parties to sell and distribute our products, and we rely on their information to manage our business. Disruption of our relationship with these channel partners, changes in their business practices, their failure to provide timely and accurate information or conflicts among our channels of distribution could adversely affect our business, results of operations and financial condition.

The wireless carriers, distributors, retailers and resellers who sell and distribute our products also sell products offered by our competitors. If our competitors offer our sales channel partners more favorable terms or have more products available to meet their needs or utilize the leverage of broader product lines sold through the channel, those wireless carriers, distributors, retailers and resellers may de-emphasize or decline to carry our products. In addition, certain of our sales channel partners could decide to de-emphasize the product categories that we offer in exchange for other product categories that they believe provide higher returns. If we are unable to maintain successful relationships with these sales channel partners or to expand our distribution channels, our business will suffer.

Because we sell our products primarily to wireless carriers, distributors, retailers and resellers, we are subject to many risks, including risks related to product returns, either through the exercise of contractual return rights or as a result of our strategic interest in assisting them in balancing inventories. In addition, these sales channel partners could modify their business practices, such as inventory levels, or seek to modify their contractual terms, such as return rights or payment terms. Unexpected changes in product return requests, inventory levels, payment terms or other practices by these sales channel partners could negatively impact our business, results of operations and financial condition.

We rely on wireless carriers, distributors, retailers and resellers to provide us with timely and accurate information about their inventory levels as well as sell-through of products purchased from us. We use this information as one of the factors in our forecasting process to plan future production and sales levels, which in turn influences our public financial forecasts. We also use this information as a factor in determining the levels of some of our financial reserves. If we do not receive this information on a timely and accurate basis, our results of operations and financial condition may be adversely impacted.

Distributors, retailers and traditional resellers experience competition from Internet-based resellers that distribute directly to end-customers, and there is also competition among Internet-based resellers. We also sell our products to end-customers from our Palm.com web site and our Palm stores. These varied sales channels could cause conflict among our channels of distribution, which could harm our business, revenues and results of operations.

We rely on third parties, some of which are our competitors, to design, manufacture, distribute, warehouse and support our products, and our reputation, revenues and results of operations could be adversely affected if these third parties fail to meet their performance obligations.

We outsource most of our hardware design and certain software development to third party manufacturers, some of whom compete with us. We depend on their design expertise, and we rely on them to design our products at satisfactory quality levels. If our third party manufacturers fail to provide quality hardware design or software development, our reputation and revenues could suffer. These third party designers and manufacturers have access to our intellectual property which increases the risk of infringement or misappropriation of such intellectual property. In addition, these third parties may claim ownership rights in certain of the intellectual property developed for our products, which may limit our ability to have these products manufactured by others.

We outsource all of our manufacturing requirements to third party manufacturers at their international facilities, which are located primarily in China, Taiwan and Brazil. In general our products are manufactured by sole source providers. We depend on these third parties to produce a 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 they fail to place timely and sufficient orders with suppliers, our revenues and cost of revenues could suffer. Our reliance on third party manufacturers in foreign countries exposes us to risks that are not in our control, including outbreaks of disease (such as an outbreak of bird flu), economic slowdowns, labor disruptions, trade restrictions, political conflicts and other events that could result in quarantines, shutdowns or closures of our third party manufacturers or their suppliers. The cost, quality and availability of third party manufacturing operations are essential to the successful production and sale of our products. If our third party manufacturers fail to produce quality products on time and in sufficient quantities, our reputation, business and results of operations could suffer.

 

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These manufacturers could refuse to continue to manufacture all or some of the units of our devices that we require or change the terms under which they manufacture our device products. If these manufacturers 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. If these manufacturers were to change the terms under which they manufacture for us, our manufacturing costs and cost of revenues could increase. While we may have contractual remedies under manufacturing agreements, our business and reputation could be harmed. In addition, our contractual relationships are principally with the manufacturers of our products, and not with component suppliers. In the absence of a contract with the manufacturer that requires it to obtain and pass through warranty and indemnity rights with respect to component suppliers, we may not have recourse to any third party in the event of a component failure.

We may choose from time to time to transition to or add new third party manufacturers. If we transition the manufacturing of any product to a new manufacturer, there is a risk of disruption in manufacturing and revenues and our results of operations could be adversely impacted. The learning curve and implementation associated with adding a new third party manufacturer may adversely impact revenues and our results of operations.

We rely on third party distribution and warehouse services providers to warehouse and distribute our products. Our contract warehouse facilities are physically separated from our contract manufacturing locations. This requires additional lead-time to deliver products to customers. If we are shipping products near the end of a fiscal quarter, this extra time could result in us not meeting anticipated shipment volumes for that quarter, which may negatively impact our revenues for that fiscal quarter. Any disruption of distribution facility services could have a negative impact on our revenues and results of operations.

As a result of economic conditions or other factors, our distribution and warehouse services providers may close or move their facilities with little notice to us, which could cause disruption in our ability to deliver products. With little or no notice, these distribution and warehouse services providers could refuse to continue to provide distribution and warehouse services for all or some of our devices, fail to provide the quality of services and security that we require or change the terms under which they provide such services. Any disruption of distribution and warehouse services could have a negative impact on our revenues and results of operations.

Changes in transportation schedules or the timing of deliveries due to shipping problems, carrier financial difficulties, acts of nature or other business interruptions could cause transportation delays and increase our costs for both receipt of inventory and shipment of products to our customers. If these types of disruptions occur, our results of operations could be adversely impacted.

We outsource most of the warranty support, product repair and technical support for our products to third party providers, which are located around the world. We depend on their expertise, and we rely on them to provide satisfactory levels of service. If our third party providers fail to provide consistent quality service in a timely manner and sustain customer satisfaction, our reputation and results of operations could suffer.

We depend on our suppliers, some of which are the sole source and some of which are our competitors, for certain components, software applications and elements of our technology, and our production or reputation could be harmed if these suppliers were unable or unwilling to meet our demand or technical requirements on a timely and/or a cost-effective basis.

Our products contain software and hardware, including liquid crystal displays, touch panels, memory chips, microprocessors, cameras, radios and batteries, which are procured from a variety of suppliers, including some who are our competitors. The cost, quality and availability of software and hardware are essential to the timely and successful development, production and sale of our device products. For example, components such as radio technologies and software such as email applications are critical to the functionality of our smartphone and mobile companion devices. Some components, such as liquid crystal displays and related integrated circuits, digital signal processors, microprocessors, radio frequency components and other discrete components, come from sole source suppliers. Alternative sources are not always available or may be prohibitively expensive. In addition, even when we have multiple qualified suppliers, we may compete with other purchasers for allocation of scarce components. Some components come from companies with whom we compete in the mobile computing device market. If suppliers are unable or unwilling to meet our demand for components and if we are unable to obtain alternative sources or if the price for alternative sources is prohibitive, our ability to maintain timely and cost-effective production of our products will be harmed. Shortages affect the timing and volume of production for some of our products as well as increase our costs due to premium prices paid for those components. Some of our suppliers may be capacity-constrained due to high industry demand for some components and relatively long lead times to expand capacity.

 

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Our product strategy is substantially dependent on the operating systems, or OS, that we include in our mobile computing devices.

We provide a choice of operating systems for our mobile computing products to provide a differentiated experience for our users. Our Treo smartphones feature either the Palm OS or Windows Mobile OS.

Our licenses to the Palm OS and Windows Mobile OS are subject to the terms of the agreements we have with ACCESS Systems Americas and Microsoft, respectively, and our license to various components of the Linux platform are subject to the terms of certain open source licenses. Our business could be harmed if we were to breach the license agreements and cause our licensors to terminate our licenses.

Although ACCESS Systems and Microsoft offer some level of indemnification for damages arising from lawsuits involving their respective operating systems, and from damages relating to intellectual property infringement caused by such operating systems, we could still be adversely affected by a determination adverse to our licensors, product changes that may be advisable or required due to such lawsuits, or the failure of our licensors to indemnify us adequately. We currently do not have contractual indemnification coverage for certain components of the Linux platform that we obtain under an open source license. Therefore, we could be adversely affected by any lawsuits involving the Linux-based platform included in our products.

Moreover, there is significant competition from makers of smartphones using other operating system software (including proprietary operating systems such as Symbian, as well as any other proprietary or open source operating systems). These and other competitors could devote greater resources to the development and promotion of alternative operating systems and to the support of the third-party developer community, which could attract the attention of influential user segments.

We cannot assure you that the operating systems we license or our efforts to innovate using those operating systems will continue to draw the customer interest necessary to provide us with a level of competitive differentiation. If the use of the Palm OS, the Windows Mobile OS or the Linux platform in our mobile computing devices does not continue to be competitive, our revenues and results of operations could be adversely affected.

If we are unable to obtain key technologies from third parties on a timely basis and free from errors or defects, we may have to delay or cancel the release of certain products or features in our products or incur increased costs.

We license third-party software for use in our products, including the operating systems. Our ability to release and sell our products, as well as our reputation, could be harmed if the third-party technologies are not delivered to us in a timely manner, on acceptable business terms or contain errors or defects that are not discovered and fixed prior to release of our products and we are unable to obtain alternative technologies on a timely and cost effective basis to use in our products. As a result, our product shipments could be delayed, our offering of features could be reduced or we may need to divert our development resources from other business objectives, any of which could adversely affect our reputation, business and results of operations.

We rely on third parties to manage and operate our e-commerce web store, related telesales call center and retail stores and disruption to these sales channels could adversely affect our revenues and results of operations.

We outsource the operations of our e-commerce web store, related telesales call centers and retail stores to third parties. We depend on their expertise and rely on them to provide satisfactory levels of service. If these third party providers fail to provide consistent quality service in a timely manner and sustain customer satisfaction, our operations and revenues could suffer. If these third parties were to stop providing these services, we may be unable to replace them on a timely basis and our results of operations could be harmed. In addition, if these third parties were to change the terms and conditions under which they provide these services, our selling costs could increase.

The order issued by the International Trade Commission, or ITC, banning import of future models of 3G mobile broadband handsets containing chips, chipsets and software of Qualcomm Incorporated could hinder our ability to provide certain models of our smartphone products to our customers and to compete effectively, and could adversely affect our customer relationships, revenues, results of operations and financial condition.

The ITC has issued an order banning the import of future models of 3G mobile broadband handsets containing Qualcomm chips, chipsets and software after ruling that Qualcomm’s cellular chips, chipsets and software infringe on a Broadcom Corporation patent relating to power-saving technology. In addition, the ITC also issued a cease-and-desist order that prevents Qualcomm from engaging in certain activities within the United States related to the infringing chips. The banned chips, chipsets and software are used in handheld wireless communications devices that are capable of operating on 3G cellular telephone networks, such as EVDO and wCDMA networks operated by carriers such as AT&T, Sprint and Verizon.

 

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An exception to the ban allows the import of handheld wireless communications devices that are of the same model as handheld wireless communications devices that were being imported for sale to the general public on or before June 7, 2007.

Our ability to import and sell certain models of our smartphone products containing the affected Qualcomm chips, chipsets, and software can be affected by several factors, including the scope of the exclusion on the import ban (for example, whether a particular model of a smartphone previously sold by us to a carrier before June 7, 2007 will be treated as a “new” model when it is launched with a different carrier after June 7, 2007) and the effectiveness of the workaround that Qualcomm has announced to avoid infringement of the Broadcom patent (for example, the workaround may require additional testing, certification and approval before it can be used for our smartphone products sold to carriers).

In addition, the effectiveness of any workaround or other means of meeting the requirements of the import ban may be limited by Qualcomm’s ability to provide services and support in implementing the workaround or otherwise addressing the impact of the import ban.

The workaround and other means of addressing the import ban can be time consuming, can delay the offering of our smartphone products on carrier networks and also affect our ability to deliver products to customers in a timely manner. As a result, carriers may choose to offer, or consumers may choose to buy, unaffected products from our competitors and thereby reduce their purchases of our products, causing a negative impact on our smartphone products sales volumes, our revenues and our cost of revenues.

Third parties have claimed, and may claim in the future, that we are infringing their intellectual property, and we could suffer significant litigation or licensing expenses or be prevented from selling products regardless of whether 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. For example, as our focus has shifted to smartphone products, we have received, and expect to continue to receive communications from holders of patents related to mobile communication standards. We evaluate the validity and applicability of these intellectual property rights, and determine in each case whether we must negotiate licenses to incorporate or use the proprietary technologies in our products. Third parties may claim that our customers or we 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 may be required to pay significant damages and obligated either to refrain from the further sale of our products or to license the right to sell our products on an ongoing basis. We may be unaware of intellectual property rights of others that may cover some of our technology, products and services. We may not have contractual relationships with some of the software and applications providers for our products, including some software and applications provided with our products, and as a result, we may not have indemnification, warranties or other protection with respect to such software or applications. Furthermore, claims against us or our suppliers may cause us or our customers to delay the introduction of or to stop using our devices or applications for our devices and, as a result, our revenues, business and results of operations may be adversely affected.

Any litigation regarding patents or other intellectual property could be costly and time consuming and could divert our management and key personnel from our business operations. The complexity of the technology involved and the uncertainty of litigation generally increase the risks associated with intellectual property litigation. Moreover, patent litigation has increased due to the increased numbers of cases asserted by intellectual property licensing entities as well as increasing competition and overlap of product functionality in our markets. Claims of intellectual property infringement may also require us to enter into costly royalty or license agreements or to indemnify our customers. However, we may not be able to obtain royalty or license agreements on terms acceptable to us or at all. We also may be subject to significant damages or injunctions against the development and sale of our products.

We are subject to general commercial litigation and other litigation claims as part of our operations, and we could suffer significant litigation expenses in defending these claims and could be subject to significant damage awards or other remedies.

In the course of our business, we receive consumer protection claims, general commercial claims related to the conduct of our business and the performance of our products and services, employment claims and other litigation claims. Any litigation resulting from these claims could be costly and time-consuming and could divert the attention of our management and key personnel from our business operations. The complexity of the technology involved and the uncertainty of consumer, commercial, employment and other litigation increase these risks. We also may be subject to significant damages or equitable remedies regarding the development and sale of our products and operation of our business.

 

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Our products are subject to increasingly stringent laws, standards and other regulatory requirements, and the costs of compliance or failure to comply may adversely impact our business, results of operations and financial condition.

Our products must comply with a variety of laws, standards and other requirements governing, among other things, safety, materials usage, packaging and environmental impacts and must obtain regulatory approvals and satisfy other regulatory concerns in the various jurisdictions where our products are sold. Many of our products must meet standards governing, among other things, interference with other electronic equipment and human exposure to electromagnetic radiation. Failure to comply with such requirements can subject us to liability, additional costs and reputational harm and in severe cases prevent us from selling our products in certain jurisdictions.

For example, many of our products are subject to laws and regulations that restrict the use of lead and other substances and require producers of electrical and electronic equipment to assume responsibility for collecting, treating, recycling and disposing of our products when they have reached the end of their useful life. In Europe, substance restrictions began to apply in July 2006 to the products we sell, and new recycling, labeling, financing and related requirements came into effect in August 2005 with respect to certain of our products. Failure to comply with applicable environmental requirements can result in fines, civil or criminal sanctions and third-party claims. If products we sell in Europe are found to contain more than the permitted percentage of lead or another listed substance, it is possible that we could be forced to recall the products, which could lead to substantial replacement costs, contract damage claims from customers, and reputational harm. We are now and expect in the future to become subject to additional requirements in the United States, China and other parts of the world.

As a result of these European requirements and anticipated developments elsewhere, we are now facing increasingly complex procurement and design challenges, which, among other things, require us to incur additional costs identifying suppliers and contract manufacturers who can provide, and otherwise obtain, compliant materials, parts and end products and re-designing products so that they comply with these and the many other requirements applicable to them.

Allegations of health risks associated with electromagnetic fields and wireless communications devices, and the lawsuits and publicity relating to them, regardless of merit, could adversely impact our business, results of operations and financial condition.

There has been public speculation about possible health risks to individuals from exposure to electromagnetic fields, or radio signals, from base stations and from the use of mobile devices. While a substantial amount of scientific research by various independent research bodies has indicated that these radio signals, at levels within the limits prescribed by public health authority standards and recommendations, present no evidence of adverse effect to human health, we cannot assure you that future studies, regardless of their scientific basis, will not suggest a link between electromagnetic fields and adverse health effects. Government agencies, international health organizations and other scientific bodies are currently conducting research into these issues. In addition, other mobile device companies have been named in individual plaintiff and class action lawsuits alleging that radio emissions from mobile phones have caused or contributed to brain tumors and the use of mobile phones pose a health risk. Although our products are certified as meeting applicable public health authority safety standards and recommendations, even a perceived risk of adverse health effects from wireless communications or handheld computer devices could adversely impact use of such devices or subject us to costly litigation and could harm our reputation, business, results of operations and financial condition.

Our success largely depends on our ability to hire, retain, integrate and motivate sufficient numbers of qualified personnel, including senior management. Our strategy and our ability to innovate, design and produce new products, sell products, maintain operating margins and control expenses depend on key personnel that may be difficult to replace.

Our success depends on our ability to attract and retain highly skilled personnel, including senior management and international personnel. From time to time, we experience turnover in some of our senior management positions. We compensate our employees through a combination of salary, bonuses, benefits and equity compensation. Recruiting and retaining skilled personnel, including software and hardware engineers, is highly competitive, particularly in the San Francisco Bay Area where we are headquartered. If we fail to provide competitive compensation to our employees, it will be difficult to retain, hire and integrate qualified employees and contractors and we may not be able to maintain and expand our business. If we do not retain our senior managers or other key employees for any reason, we risk losing institutional knowledge and experience, expertise and other benefits of continuity. In addition, we must carefully balance the growth of our employee base with our current infrastructure, management resources and anticipated revenue growth. If we are unable to manage the growth of our employee base, particularly software and hardware engineers, we may fail to develop and introduce new products successfully and in a cost effective and timely manner. If our revenue growth or employee levels vary significantly, our results of operations and financial condition could be adversely affected. Volatility or lack of positive performance in our stock price may also affect our ability to retain key employees, all of whom have been granted stock options, other equity incentives or both. We are expanding design centers internationally and expanding our international

 

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workforce. Entry into new locations involves seeking initial management hiring and competing for technical talent in the local labor markets. For example, as we hire international personnel in new locations we need to familiarize ourselves with the local labor laws and regulations and competitive compensation practices. In addition, as we expand our international presence the competition for highly qualified and experienced technical talent is particularly high.

Palm’s practice has been to provide incentives to all of its employees through the use of broad-based stock option and other equity plans, but the number of shares available for new option and other forms of securities grants is limited and accounting rules from the Financial Accounting Standards Board, or FASB, and other agencies concerning the expensing of stock options, which require us and other companies to record substantial charges to earnings, may cause us to re-evaluate our use of stock options as an employee incentive. Therefore, we may find it difficult to provide competitive stock option grants or other equity incentives and our ability to hire, retain and motivate key personnel may suffer.

Recently and in past years, we have initiated reductions in our workforce of both employees and contractors to align our employee base with our anticipated revenue base or areas of focus and we have seen some turnover in our workforce. These reductions have resulted in reallocations of duties, which could result in employee and contractor uncertainty. Reductions in our workforce could make it difficult to attract, motivate and retain employees and contractors, which could affect our ability to deliver our products in a timely fashion and adversely affect our business.

If third parties infringe our intellectual property or if we are unable to secure and protect 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 and other intellectual property rights. We have a significant investment in the rights to the Palm brand and related trademarks and will continue to invest in that brand and in our patent portfolio.

We rely on a combination of patents, copyrights, trademarks and trade secrets, confidentiality provisions and licensing arrangements to establish and protect our proprietary rights. Our intellectual property, particularly our patents, may not provide us a significant competitive advantage. If we fail to protect or to enforce our intellectual property rights successfully, our competitive position could suffer, which could harm our results of operations.

Our pending patent and trademark applications for registration may not be allowed, or others may challenge the validity or scope of our patents or trademarks, including patent or trademark applications or registrations. Even if our patents or trademark registrations are issued and maintained, these patents or trademarks may not be of adequate scope or benefit to us or may be held invalid and unenforceable against third parties.

We may be required to spend significant resources to monitor and police our intellectual property rights. Effective policing of the unauthorized use of our products or intellectual property is difficult and litigation may be necessary in the future to enforce our intellectual property rights. Intellectual property litigation is not only expensive, but time-consuming, regardless of the merits of any claim, and could divert attention of our management from operating our business. Despite our efforts, 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.

In the past, there have been leaks of proprietary information associated with our intellectual property. We have implemented a security plan to reduce the risk of future leaks of proprietary information. We may not be successful in preventing those responsible for past leaks of proprietary information from using our technology to produce competing products or in preventing future leaks of proprietary information.

Despite our efforts to protect our proprietary rights, existing laws, contractual provisions and remedies afford only limited protection. Intellectual property lawsuits are subject to inherent uncertainties due to, among other things, the complexity of the technical issues involved, and we cannot assure you that we will be successful in asserting intellectual property claims. Attempts may be made to copy or reverse engineer aspects of our products or to obtain and use information that we regard as proprietary. Accordingly, we cannot assure you that we will be able to protect our proprietary rights against unauthorized third party copying or use. The unauthorized use of our technology or of our proprietary information by competitors could have an adverse effect on our ability to sell our products.

 

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We have an international presence in countries whose laws may not provide protection of our intellectual property rights to the same extent as the laws of the United States, which may make it more difficult for us to protect our intellectual property.

As part of our business strategy, we target customers and relationships with suppliers and ODMs, in countries with large populations and propensities for adopting new technologies. However, many of these countries do not address to the same extent as the United States misappropriation of intellectual property or deter others from developing similar, competing technologies or intellectual property. Effective protection of patents, copyrights, trademarks, trade secrets and other intellectual property may be unavailable or limited in some foreign countries. In particular, the laws of some foreign countries in which we do business may not protect our intellectual property rights to the same extent as the laws of the United States. As a result, we may not be able to effectively prevent competitors in these regions from infringing our intellectual property rights, which would reduce our competitive advantage and ability to compete in those regions and negatively impact our business.

We are subject to audit by the Internal Revenue Service and other taxing authorities. Any assessment arising from an audit and the cost of any related dispute could adversely affect our results of operations and financial condition.

Our operations are subject to income and transaction taxes in the United States and in multiple foreign jurisdictions and to review or audit by the Internal Revenue Service, or IRS, and state, local and foreign tax authorities. While we strongly believe our tax positions are compliant with applicable tax laws and regulations, our positions could be subject to dispute by the taxing authorities. Any such dispute could be costly and time-consuming and could divert the attention of our management and key personnel from our business operations.

We may pursue strategic acquisitions and investments which could have an adverse impact on our business if they are unsuccessful.

We have made acquisitions in the past and will continue to evaluate other acquisition opportunities that could provide us with additional product or service offerings or with additional industry expertise, assets and capabilities. Acquisitions could result in difficulties integrating acquired operations, products, technology, internal controls, personnel and management teams and result in the diversion of capital and management’s attention away from other business issues and opportunities. If we fail to successfully integrate acquisitions, including timely integration of internal controls to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, our business could be harmed. In addition, our acquisitions may not be successful in achieving our desired strategic objectives, which would also cause our business to suffer. Acquisitions can also lead to large non-cash charges that can have an adverse effect on our results of operations as a result of write-offs for items such as acquired in-process research and development, impairment of goodwill or the recording of stock-based compensation. In addition, from time to time we make strategic venture investments in other companies that provide products and services that are complementary to ours. If these investments are unsuccessful, this could have an adverse impact on our results of operations and financial condition.

We may need or find it advisable to seek additional funding which may not be available or which may result in substantial dilution of the value of our common stock.

We currently believe that our existing cash, cash equivalents and short-term investments will be sufficient to satisfy our anticipated operating cash requirements for at least the next 12 months. We could be required to seek additional funding if our expectations are not met.

Even if our expectations are met, we may find it advisable to seek additional funding. If we seek additional funding, adequate funds may not be available on favorable terms, or at all. If adequate funds are not available on acceptable terms, or at all, we may be unable to adequately fund our business plans and it could have a negative effect on our business, results of operations and financial condition. In addition, if funds are available, the issuance of equity securities or securities convertible into equity could dilute the value of shares of our common stock and cause the market price to fall and the issuance of debt could impose restrictive covenants that could impair our ability to engage in certain business transactions.

Our future results could be harmed by economic, political, regulatory and other risks associated with international sales and operations.

Because we sell our products worldwide and most of the facilities where our devices are manufactured, distributed and supported are located outside the United States, our business is subject to risks associated with doing business internationally, such as:

 

   

changes in foreign currency exchange rates;

 

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changes in a specific country’s or region’s political or economic conditions, particularly in emerging markets;

 

   

changes in international relations;

 

   

trade protection measures and import or export licensing requirements;

 

   

changes in tax laws;

 

   

compliance with a wide variety of laws and regulations which may have civil and/or criminal consequences for us and our officers and directors who we indemnify;

 

   

difficulty in managing widespread sales operations; and

 

   

difficulty in managing a geographically dispersed workforce in compliance with diverse local laws and customs.

In addition, 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 and results of operations could be harmed by decreases in demand for our products or reductions in margins.

While we sell our products worldwide, one component of our strategy is to further expand our international sales efforts. We have limited experience with sales and marketing in some countries. There can be no assurance that we will be able to market and sell our products in all of our targeted international markets. If our international efforts are not successful, our business growth and results of operations could be harmed.

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 is interrupted or does not meet our requirements.

We use third parties to provide services such as data center operations, desktop computer support and facilities services. Should any of these third parties fail to deliver an adequate level of service on a timely basis, our business could suffer. Some of our operations rely on electronic data systems interfaces with third parties or on the Internet to communicate information. Interruptions in the availability and functionality of systems interfaces or the Internet could adversely impact the operations of these systems and consequently our results of operations.

Business interruptions could adversely affect our business.

Our operations and those of our suppliers and customers are vulnerable to interruption by fire, hurricanes, earthquake, power loss, telecommunications failure, computer viruses, computer hackers, terrorist attacks, wars, military activity, labor disruptions, health epidemics and other natural disasters and events beyond our control. For example, a significant part of our third-party manufacturing is based in Taiwan that has experienced earthquakes and is considered seismically active. In addition, the business interruption insurance we carry may not cover, in some instances, or be sufficient to compensate us fully for losses or damages—including, for example, loss of market share and diminution of our brand, reputation and customer loyalty—that may occur as a result of such events. Any such losses or damages incurred by us could have an adverse effect on our business.

Wars, terrorist attacks or other threats beyond our control could negatively impact consumer confidence, which could harm our operating results.

Wars, terrorist attacks or other threats beyond our control could have an adverse impact on the United States and world economy in general, and consumer confidence and spending in particular, which could harm our business, results of operations and financial condition.

Risks Related to the Securities Markets and Ownership of Our Common Stock

Our common stock price may be subject to significant fluctuations and volatility.

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:

 

   

quarterly variations in our operating results;

 

   

changes in revenues or earnings estimates or publication of research reports by analysts;

 

   

speculation in the press or investment community;

 

41


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strategic actions by us, our customers, our suppliers or our competitors, such as new product announcements, acquisitions or restructurings;

 

   

actions by institutional stockholders or financial analysts;

 

   

general market conditions; and

 

   

domestic and international economic factors unrelated to our performance.

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 shares of our common stock.

Our certificate of incorporation and bylaws and Delaware law contain provisions that could make it more difficult 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 outstanding 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 of the rights 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.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table summarizes employee stock repurchase activity for the three months ended August 31, 2007:

 

    

Total

Number

of

Shares

Purchased

  

Average

Price Paid

Per Share

  

Total Number of Shares

Purchased as Part of a

Publicly Announced

Plan (2)

  

Average

Price Paid

Per Share

  

Approximate Dollar

Value of Shares that
May Yet be

Purchased under
the

Plan (2)

June 1, 2007—June 30, 2007(1)

   4,675    $ 17.96    —      —      $ 219,037,247

July 1, 2007—July 31, 2007

   —        —      —      —      $ 219,037,247

August 1, 2007—August 31, 2007

   —        —      —      —      $ 219,037,247
                  
   4,675    $ 17.96    —        
                  

(1) During the three months ended August 31, 2007, the Company repurchased 4,675 shares of common stock at an average price of $17.96. These shares repurchased represent shares of Palm common stock that employees deliver back to the Company to satisfy tax-withholding obligations at the settlement of restricted stock vesting and the forfeiture of restricted shares upon the termination of an employee. As of August 31, 2007, a total of approximately 124,000 restricted shares may still be repurchased.
(2) In September 2006, the Company’s Board of Directors authorized a stock buyback program for the Company to repurchase up to $250.0 million of its common stock. The program does not have a specified expiration date. During the three months ended August 31, 2007 no shares were repurchased under the stock buyback program. As of August 31, 2007, $219.0 million remains available for future repurchase.

 

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Table of Contents
Item 6. Exhibits

 

          Incorporated by Reference     
Exhibit
Number
  

Exhibit Description

   Form    File No.    Exhibit    Filing
Date
  

Filed

Herewith

  2.1   

Master Separation and Distribution Agreement between 3Com and the registrant effective as of December 13, 1999, as amended.

   S-1/A    333-92657    2.1    1/28/00   
  2.2   

Tax Sharing Agreement between 3Com and the registrant.

   10-Q    000-29597    2.7    4/10/00   
  2.3   

Indemnification and Insurance Matters Agreement between 3Com and the registrant.

   10-Q    000-29597    2.11    4/10/00   
  2.4   

Form of Non-U.S. Plan.

   S-1    333-92657    2.12    12/13/99   
  2.5   

Agreement and Plan of Reorganization between the registrant, Peace Separation Corporation, Harmony Acquisition Corporation and Handspring, Inc., dated June 4, 2003.

   8-K    000-29597    2.1    6/6/03   
  2.6   

Amended and Restated Master Separation Agreement between the registrant and PalmSource, Inc.

   S-4/A    333-106829    2.14    8/18/03   
  2.7   

Amended and Restated Indemnification and Insurance Matters Agreement between the registrant and PalmSource, Inc.

   S-4/A    333-106829    2.17    8/18/03   
  2.8   

Amended and Restated Tax Sharing Agreement between the registrant and PalmSource, Inc.

   S-4/A    333-106829    2.23    8/18/03   
  2.9   

Master Patent Ownership and License Agreement between the registrant and PalmSource, Inc.

   S-4/A    333-106829    2.30    8/18/03   
  2.10   

Xerox Litigation Agreement between the registrant and PalmSource, Inc., as amended.

   10-K/A    000-29597    2.34    9/26/03   
  3.1   

Amended and Restated Certificate of Incorporation.

   10-Q    000-29597    3.1    10/11/02   
  3.2   

Amended and Restated Bylaws.

   10-Q    000-29597    3.2    10/5/06   
  4.1   

Reference is made to Exhibits 3.1 and 3.2 hereof.

   N/A    N/A    N/A    N/A    N/A
  4.2   

Specimen Stock Certificate.

   10-K    000-29597    4.2    7/29/05   
  4.3   

Preferred Stock Rights Agreement between the registrant and EquiServe Trust Company, N.A. (formerly Fleet National Bank), as amended.

   8-K    000-29597    4.1    11/22/00   
  4.4   

5% Convertible Subordinated Note, dated as of November 4, 2003.

   10-Q    000-29597    4.4    4/6/04   
  4.5   

Amendment to Preferred Stock Rights Agreement between the registrant and EquiServe Trust Company, N.A.

   8-A/A    000-29597    4.2    11/18/04   
  4.6   

Certificate of Ownership and Merger Merging Palm, Inc. into palmOne, Inc.

   10-K    000-29597    4.6    7/29/05   
  4.7   

Amendment No. 2 to Preferred Stock Rights Agreement between the registrant and EquiServe Trust Company, N.A.

   8-K    000-29597    4.1    6/5/07   
10.1*   

Amended and Restated 1999 Stock Plan.

   10-K    000-29597    10.1    7/29/05   
10.2*   

Form of 1999 Stock Plan Agreements.

   S-1/A    333-92657    10.2    1/28/00   
10.3*   

Amended and Restated 1999 Employee Stock Purchase Plan.

   S-8    000-29597    10.2    11/18/04   
10.4*   

Form of 1999 Employee Stock Purchase Plan Agreements.

   S-1/A    333-92657    10.4    1/28/00   
10.5*   

Amended and Restated 1999 Director Option Plan.

   S-8    333-47126    10.5    10/2/00   
10.6*   

Form of 1999 Director Option Plan Agreements.

   S-1/A    333-92657    10.6    1/28/00   

 

43


Table of Contents
          Incorporated by Reference     
Exhibit
Number
  

Exhibit Description

   Form    File No.    Exhibit    Filing
Date
  

Filed

Herewith

10.7   

Form of Indemnification Agreement entered into by the registrant with each of its directors and executive officers.

   S-1/A    333-92657    10.8    1/28/00   
10.8*   

Form of Management Retention Agreement.

   S-1/A    333-92657    10.14    2/28/00   
10.9*   

Form of Severance Agreement for Executive Officers.

   10-Q    000-29597    10.44    10/11/02   
10.10*   

Amended and Restated 2001 Stock Option Plan for Non-Employee Directors.

   10-Q    000-29597    10.13    10/5/06   
10.11*   

Handspring, Inc. 1998 Equity Incentive Plan, as amended.

   S-8    333-110055    10.1    10/29/03   
10.12*   

Handspring, Inc. 1999 Executive Equity Incentive Plan, as amended.

   S-8    333-110055    10.2    10/29/03   
10.13*   

Handspring, Inc. 2000 Equity Incentive Plan, as amended.

   S-8    333-110055    10.3    10/29/03   
10.14   

Separation Agreement between the registrant and R. Todd Bradley dated as of January 24, 2005.

   10-Q    000-29597    10.26    4/5/05   
10.15   

Amendment No. 3 to the Loan and Security Agreement between the registrant and Silicon Valley Bank.

   10-Q    000-29597    10.29    4/5/05   
10.16   

Sub-Lease between the registrant and Philips Electronics North America Corporation.

   10-Q    000-29597    10.30    4/5/05   
10.17   

Offer Letter from the registrant to Andrew J. Brown dated as of December 13, 2004.

   10-Q    000-29597    10.31    4/5/05   
10.18   

Loan Modification Agreement between the registrant and Silicon Valley Bank.

   10-K    000-29597    10.25    7/29/05   
10.19   

Second Amended and Restated Software License Agreement between the registrant and PalmSource, Inc., PalmSource Overseas Limited and palmOne Ireland Investment, dated May 23, 2005.

   8-K    000-29597    10.2    7/28/05   
10.20   

Purchase Agreement between the registrant, PalmSource, Inc. and Palm Trademark Holding Company, LLC, dated May 23, 2005.

   8-K    000-29597    10.1    5/27/05   
10.21   

Retention Agreement between the registrant and Celeste Baranski, dated June 29, 2005.

   10-Q    000-29597    10.28    10/7/05   
10.22   

Purchase and Sale Agreement and Escrow Instructions between the registrant and Hunter/Storm, LLC, dated February 2, 2006.

   10-Q    000-29597    10.25    4/11/06   
10.23   

Release Agreement between the registrant and Ken Wirt dated as of March 13, 2006.

   10-Q    000-29597    10.26    4/11/06   
10.24   

First Amendment of Purchase and Sale Agreement and Escrow Instructions, dated March 13, 2006.

   10-Q    000-29597    10.27    4/11/06   
10.25   

Second Amendment of Purchase and Sale Agreement and Escrow Instructions, dated April 3, 2006.

   10-Q    000-29597    10.28    4/11/06   
10.26   

Patent License and Settlement Agreement between the registrant and Xerox Corporation, dated June 27, 2006.

   10-K    000-29597    10.29    7/28/06   
10.27*   

Form of Performance Share Agreement for Directors under 1999 Stock Plan.

   8-K    000-29597    10.1    10/12/06   
10.28*   

Form of Performance Share Agreement for US Grantees Under 1999 Stock Plan.

   10-Q    000-29597    10.31    1/9/07   

 

44


Table of Contents
          Incorporated by Reference     
Exhibit
Number
  

Exhibit Description

   Form    File No.    Exhibit    Filing
Date
  

Filed

Herewith

10.29**   

2006 Software License Agreement between the registrant and ACCESS Systems Americas, Inc., dated December 5, 2006.

   8-K    000-29597    10.1    4/4/07   
10.30   

Amendment No. 1 to Master Patent Ownership and License Agreement between the registrant and ACCESS Systems Americas, Inc., dated December 5, 2006.

   8-K    000-29597    10.2    4/4/07   
10.31   

Preferred Stock Purchase Agreement and Agreement and Plan of Merger by and among the registrant, Elevation Partners, L.P. and Passport Merger Corporation, dated June 1, 2007.

   8-K    000-29597    2.1    6/5/07   
31.1   

Rule 13a-14(a)/15d—14(a) Certification of Chief Executive Officer.

               X
31.2   

Rule 13a-14(a)/15d—14(a) Certification of Chief Financial Officer.

               X
32.1   

Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer.

               X

* Indicates a management contract or compensatory plan, contract arrangement in which any Director or Executive Officer participates.
** Confidential treatment granted on portions of this exhibit.

 

45


Table of Contents

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)
Date: October 8, 2007     By:  

/s/ ANDREW J. BROWN

      Andrew J. Brown
      Senior Vice President and Chief Financial Officer
      (Principal Financial and Accounting Officer)

 

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Table of Contents

EXHIBIT INDEX

 

          Incorporated by Reference     
Exhibit
Number
  

Exhibit Description

   Form    File No.    Exhibit    Filing
Date
  

Filed

Herewith

  2.1   

Master Separation and Distribution Agreement between 3Com and the registrant effective as of December 13, 1999, as amended.

   S-1/A    333-92657    2.1    1/28/00   
  2.2   

Tax Sharing Agreement between 3Com and the registrant.

   10-Q    000-29597    2.7    4/10/00   
  2.3   

Indemnification and Insurance Matters Agreement between 3Com and the registrant.

   10-Q    000-29597    2.11    4/10/00   
  2.4   

Form of Non-U.S. Plan.

   S-1    333-92657    2.12    12/13/99   
  2.5   

Agreement and Plan of Reorganization between the registrant, Peace Separation Corporation, Harmony Acquisition Corporation and Handspring, Inc., dated June 4, 2003.

   8-K    000-29597    2.1    6/6/03   
  2.6   

Amended and Restated Master Separation Agreement between the registrant and PalmSource, Inc.

   S-4/A    333-106829    2.14    8/18/03   
  2.7   

Amended and Restated Indemnification and Insurance Matters Agreement between the registrant and PalmSource, Inc.

   S-4/A    333-106829    2.17    8/18/03   
  2.8   

Amended and Restated Tax Sharing Agreement between the registrant and PalmSource, Inc.

   S-4/A    333-106829    2.23    8/18/03   
  2.9   

Master Patent Ownership and License Agreement between the registrant and PalmSource, Inc.

   S-4/A    333-106829    2.30    8/18/03   
  2.10   

Xerox Litigation Agreement between the registrant and PalmSource, Inc., as amended.

   10-K/A    000-29597    2.34    9/26/03   
  3.1   

Amended and Restated Certificate of Incorporation.

   10-Q    000-29597    3.1    10/11/02   
  3.2   

Amended and Restated Bylaws.

   10-Q    000-29597    3.2    10/5/06   
  4.1   

Reference is made to Exhibits 3.1 and 3.2 hereof.

   N/A    N/A    N/A    N/A    N/A
  4.2   

Specimen Stock Certificate.

   10-K    000-29597    4.2    7/29/05   
  4.3   

Preferred Stock Rights Agreement between the registrant and EquiServe Trust Company, N.A. (formerly Fleet National Bank), as amended.

   8-K    000-29597    4.1    11/22/00   
  4.4   

5% Convertible Subordinated Note, dated as of November 4, 2003.

   10-Q    000-29597    4.4    4/6/04   
  4.5   

Amendment to Preferred Stock Rights Agreement between the registrant and EquiServe Trust Company, N.A.

   8-A/A    000-29597    4.2    11/18/04   
  4.6   

Certificate of Ownership and Merger Merging Palm, Inc. into palmOne, Inc.

   10-K    000-29597    4.6    7/29/05   
  4.7   

Amendment No. 2 to Preferred Stock Rights Agreement between the registrant and EquiServe Trust Company, N.A.

   8-K    000-29597    4.1    6/5/07   
10.1*   

Amended and Restated 1999 Stock Plan.

   10-K    000-29597    10.1    7/29/05   
10.2*   

Form of 1999 Stock Plan Agreements.

   S-1/A    333-92657    10.2    1/28/00   
10.3*   

Amended and Restated 1999 Employee Stock Purchase Plan.

   S-8    000-29597    10.2    11/18/04   
10.4*   

Form of 1999 Employee Stock Purchase Plan Agreements.

   S-1/A    333-92657    10.4    1/28/00   
10.5*   

Amended and Restated 1999 Director Option Plan.

   S-8    333-47126    10.5    10/2/00   
10.6*   

Form of 1999 Director Option Plan Agreements.

   S-1/A    333-92657    10.6    1/28/00   

 

47


Table of Contents
          Incorporated by Reference     
Exhibit
Number
  

Exhibit Description

   Form    File No.    Exhibit    Filing
Date
  

Filed

Herewith

10.7   

Form of Indemnification Agreement entered into by the registrant with each of its directors and executive officers.

   S-1/A    333-92657    10.8    1/28/00   
10.8*   

Form of Management Retention Agreement.

   S-1/A    333-92657    10.14    2/28/00   
10.9*   

Form of Severance Agreement for Executive Officers.

   10-Q    000-29597    10.44    10/11/02   
10.10*   

Amended and Restated 2001 Stock Option Plan for Non-Employee Directors.

   10-Q    000-29597    10.13    10/5/06   
10.11*   

Handspring, Inc. 1998 Equity Incentive Plan, as amended.

   S-8    333-110055    10.1    10/29/03   
10.12*   

Handspring, Inc. 1999 Executive Equity Incentive Plan, as amended.

   S-8    333-110055    10.2    10/29/03   
10.13*   

Handspring, Inc. 2000 Equity Incentive Plan, as amended.

   S-8    333-110055    10.3    10/29/03   
10.14   

Separation Agreement between the registrant and R. Todd Bradley dated as of January 24, 2005.

   10-Q    000-29597    10.26    4/5/05   
10.15   

Amendment No. 3 to the Loan and Security Agreement between the registrant and Silicon Valley Bank.

   10-Q    000-29597    10.29    4/5/05   
10.16   

Sub-Lease between the registrant and Philips Electronics North America Corporation.

   10-Q    000-29597    10.30    4/5/05   
10.17   

Offer Letter from the registrant to Andrew J. Brown dated as of December 13, 2004.

   10-Q    000-29597    10.31    4/5/05   
10.18   

Loan Modification Agreement between the registrant and Silicon Valley Bank.

   10-K    000-29597    10.25    7/29/05   
10.19   

Second Amended and Restated Software License Agreement between the registrant and PalmSource, Inc., PalmSource Overseas Limited and palmOne Ireland Investment, dated May 23, 2005.

   8-K    000-29597    10.2    7/28/05   
10.20   

Purchase Agreement between the registrant, PalmSource, Inc. and Palm Trademark Holding Company, LLC, dated May 23, 2005.

   8-K    000-29597    10.1    5/27/05   
10.21   

Retention Agreement between the registrant and Celeste Baranski, dated June 29, 2005.

   10-Q    000-29597    10.28    10/7/05   
10.22   

Purchase and Sale Agreement and Escrow Instructions between the registrant and Hunter/Storm, LLC, dated February 2, 2006.

   10-Q    000-29597    10.25    4/11/06   
10.23   

Release Agreement between the registrant and Ken Wirt dated as of March 13, 2006.

   10-Q    000-29597    10.26    4/11/06   
10.24   

First Amendment of Purchase and Sale Agreement and Escrow Instructions, dated March 13, 2006.

   10-Q    000-29597    10.27    4/11/06   
10.25   

Second Amendment of Purchase and Sale Agreement and Escrow Instructions, dated April 3, 2006.

   10-Q    000-29597    10.28    4/11/06   
10.26   

Patent License and Settlement Agreement between the registrant and Xerox Corporation, dated June 27, 2006.

   10-K    000-29597    10.29    7/28/06   
10.27*   

Form of Performance Share Agreement for Directors under 1999 Stock Plan.

   8-K    000-29597    10.1    10/12/06   
10.28*   

Form of Performance Share Agreement for US Grantees Under 1999 Stock Plan.

   10-Q    000-29597    10.31    1/9/07   

 

48


Table of Contents
          Incorporated by Reference     
Exhibit
Number
  

Exhibit Description

   Form    File No.    Exhibit    Filing
Date
  

Filed

Herewith

10.29**   

2006 Software License Agreement between the registrant and ACCESS Systems Americas, Inc., dated December 5, 2006.

   8-K    000-29597    10.1    4/4/07   
10.30   

Amendment No. 1 to Master Patent Ownership and License Agreement between the registrant and ACCESS Systems Americas, Inc., dated December 5, 2006.

   8-K    000-29597    10.2    4/4/07   
10.31   

Preferred Stock Purchase Agreement and Agreement and Plan of Merger by and among the registrant, Elevation Partners, L.P. and Passport Merger Corporation, dated June 1, 2007.

   8-K    000-29597    2.1    6/5/07   
31.1   

Rule 13a-14(a)/15d—14(a) Certification of Chief Executive Officer.

               X
31.2   

Rule 13a-14(a)/15d—14(a) Certification of Chief Financial Officer.

               X
32.1   

Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer.

               X

* Indicates a management contract or compensatory plan, contract arrangement in which any Director or Executive Officer participates.
** Confidential treatment granted on portions of this exhibit.

 

49