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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 1, 2000 COMMISSION FILE NO. 0-29597
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
---------------------------------
PALM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-3150688
------------------------------ ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5470 GREAT AMERICA PARKWAY 95052
SANTA CLARA, CALIFORNIA --------
-------------------------------------- (Zip Code)
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 326-9000
FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT: N/A
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES /X/ NO / /
AS OF JANUARY 2, 2001, 566,450,175 SHARES OF THE REGISTRANT'S COMMON STOCK WERE
OUTSTANDING.
THIS REPORT CONTAINS A TOTAL OF 43 PAGES OF WHICH THIS PAGE IS NUMBER 1.
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PALM, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Statements of Operations
THREE AND SIX MONTHS ENDED DECEMBER 1, 2000 AND NOVEMBER 26, 1999 3
Condensed Consolidated Balance Sheets
DECEMBER 1, 2000 AND JUNE 2, 2000 4
Condensed Consolidated Statements of Cash Flows
SIX MONTHS ENDED DECEMBER 1, 2000 AND NOVEMBER 26, 1999 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 36
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 38
ITEM 4. Submission of Matters to a Vote of Security Holders 40
ITEM 6. Exhibits and Reports on Form 8-K 40
Signatures 43
</TABLE>
Palm OS and Palm.Net are registered trademarks and Palm is a trademark of
Palm, Inc. or its subsidiaries.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PALM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------------------- ---------------------------------
December 1, November 26, December 1, November 26,
2000 1999 2000 1999
------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Revenues $ 522,192 $ 258,555 $ 923,168 $ 435,060
Cost of revenues 333,427 148,018 580,940 246,342
------------- ------------- ------------- -------------
Gross profit 188,765 110,537 342,228 188,718
------------- ------------- ------------- -------------
Operating expenses:
Sales and marketing 89,829 59,904 165,830 102,418
Research and development 40,993 15,671 71,313 27,805
General and administrative 24,865 9,796 45,356 16,956
Amortization of goodwill
and intangible assets 7,504 507 12,739 1,014
Purchased in-process
technology - - 853 -
Separation costs 802 3,780 2,617 3,780
------------- ------------- ------------- -------------
Total operating expenses 163,993 89,658 298,708 151,973
------------- ------------- ------------- -------------
Operating income 24,772 20,879 43,520 36,745
Interest and other income
(expense), net 12,744 277 25,988 214
------------- ------------- ------------- -------------
Income before income taxes 37,516 21,156 69,508 36,959
Income tax provision 17,257 8,294 31,974 14,439
------------- ------------- ------------- -------------
Net income $ 20,259 $ 12,862 $ 37,534 $ 22,520
============= ============= ============= =============
Net income per share:
Basic $ 0.04 $ 0.02 $ 0.07 $ 0.04
Diluted $ 0.04 $ 0.02 $ 0.07 $ 0.04
Shares used in computing per share amounts:
Basic 565,946 532,000 565,548 532,000
Diluted 571,594 532,000 569,845 532,000
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
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PALM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value amounts)
<TABLE>
<CAPTION>
December 1, June 2,
2000 2000
------------ ---------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 742,888 $ 1,062,128
Accounts receivable, net of allowance for doubtful
accounts of $13,413 and $6,810, respectively 246,379 122,276
Inventories 33,787 24,057
Deferred income taxes 48,397 34,907
Prepaids and other 15,831 9,590
------------- --------------
Total current assets 1,087,282 1,252,958
Restricted investments 231,098 -
Property and equipment, net 41,630 13,013
Goodwill, intangibles and other assets 92,961 14,330
Deferred income taxes - 2,375
------------- --------------
Total assets $ 1,452,971 $ 1,282,676
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 186,849 $ 123,106
Other accrued liabilities 139,663 117,376
------------- --------------
Total current liabilities 326,512 240,482
Non-current liabilities:
Deferred revenue and other 12,826 13,006
Deferred income taxes 2,993 -
Stockholders' equity:
Preferred stock, $.001 par value, 125,000 shares
authorized; none outstanding - -
Common stock, $.001 par value, 2,000,000 shares
authorized; outstanding: December 1, 2000,
566,410; June 2, 2000, 564,963 566 565
Additional paid-in capital 1,076,913 1,032,449
Unamortized restricted stock grants (16,841) (16,053)
Retained earnings 49,971 12,437
Accumulated other comprehensive income (loss) 31 (210)
------------- --------------
Total stockholders' equity 1,110,640 1,029,188
------------- --------------
Total liabilities and stockholders' equity $ 1,452,971 $ 1,282,676
============= ==============
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
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PALM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
------------------------------------------
December 1, November 26,
2000 1999
----------------- ------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 37,534 $ 22,520
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 18,629 4,395
Tax benefit from employee stock plans 13,591 -
Amortization of restricted stock 3,136 -
Loss on disposal of property and equipment 7 872
Deferred income taxes (11,211) (5,449)
Purchased in-process technology 853 -
Changes in assets and liabilities:
Accounts receivable (123,839) (33,887)
Inventories (9,730) (24,509)
Prepaids and other (6,301) (1,144)
Accounts payable 62,106 53,435
Other accrued liabilities 10,983 50,039
------------- -------------
Net cash provided by (used in) operating activities (4,242) 66,272
-------------- -------------
Cash flows from investing activities:
Purchases of property and equipment (31,118) (5,717)
Acquisition of business, net of cash acquired (67,023) -
Purchases of restricted investments (231,098) -
Purchases of equity investments (6,880) -
Other, net - (593)
------------- --------------
Net cash used in investing activities (336,119) (6,310)
-------------- --------------
Cash flows from financing activities:
Proceeds from issuance of common stock 22,278 -
Net transfers to 3Com Corporation - (30,276)
Other, net (1,157) (596)
-------------- --------------
Net cash provided by (used in) financing activities 21,121 (30,872)
------------- --------------
Change in cash and cash equivalents (319,240) 29,090
Cash and cash equivalents, beginning of period 1,062,128 478
------------- -------------
Cash and cash equivalents, end of period $ 742,888 $ 29,568
============= =============
Other cash flow information:
Cash paid for income taxes $ 12,913 $ -
============= =============
Cash paid for interest $ 18 $ 11
============= =============
Unrealized gain/loss on investments $ 103 $ -
============= =============
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE>
PALM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The condensed consolidated financial statements have been prepared by
Palm, Inc. ("Palm," "us," "we," or "our"), without audit, pursuant to
the rules of the Securities and Exchange Commission ("SEC"). In the
opinion of management, these unaudited condensed consolidated financial
statements include all adjustments necessary for a fair presentation of
Palm's financial position as of December 1, 2000, and Palm's results of
operations and cash flows for the three and six months ended December
1, 2000 and November 26, 1999. Certain prior year balances have been
reclassified to conform to the current year presentation.
Palm has a 52-53 week fiscal year ending on the Friday nearest to May
31. Accordingly, fiscal 2001 will end on June 1, 2001, resulting in a
52-week fiscal 2001, compared to 53 weeks for fiscal 2000. The results
of operations for the three and six months ended December 1, 2000 may
not be indicative of the results to be expected for the fiscal year
ending June 1, 2001. These condensed consolidated financial statements
should be read in conjunction with the consolidated financial
statements and related notes thereto included in Palm's Annual Report
on Form 10-K for the fiscal year ended June 2, 2000.
Through February 25, 2000, Palm was wholly-owned by 3Com Corporation
("3Com"). Through this date, Palm's condensed consolidated financial
statements reflect the historical results of operations and cash flows
of the handheld computing business of 3Com during each respective
period. The condensed consolidated financial statements have been
prepared using 3Com's historical bases in the assets and liabilities
and the historical results of operations of Palm. The financial
information included herein may not reflect the consolidated financial
statements, operating results and cash flows of Palm in the future or
what they would have been had Palm been a separate stand-alone entity
during the periods presented.
Through February 25, 2000, the condensed consolidated financial
statements include allocations of certain 3Com expenses, including
centralized legal, accounting, treasury, real estate, information
technology, distribution, customer service, sales, marketing,
engineering, and other 3Com corporate services and infrastructure
costs. The expense allocations were determined on the bases that 3Com
and Palm considered to be reasonable reflections of the utilization of
services provided or the benefit received by Palm. The allocation
methods used included relative revenues, headcount and square footage.
Management believes that the expenses allocated to Palm are
representative of the operating expenses it would have incurred had
Palm been operated on a stand-alone basis.
The allocated amounts from 3Com included in Palm's condensed
consolidated statement of operations for the six months ended November
26, 1999 were as follows (in thousands):
<TABLE>
<S> <C>
Cost of revenues $ 6,333
Sales and marketing 13,209
Research and development 3,746
General and administrative 9,657
Other (income) and expense, net (214)
</TABLE>
6
<PAGE>
2. Separation from 3Com and Initial Public Offering
On September 13, 1999, 3Com announced its plan to create an independent
publicly-traded company, Palm, Inc., comprised of 3Com's handheld
computing business. Following the completion of Palm's initial public
offering in March 2000, 3Com owned 532,000,000 shares of Palm,
representing approximately 94% of Palm's outstanding common stock. On
July 27, 2000, 3Com distributed the shares of Palm common stock it
owned to the stockholders of 3Com, and options to purchase shares of
3Com common stock held by Palm employees were converted into options to
purchase shares of Palm common stock.
3Com and Palm entered into a Master Separation and Distribution
Agreement in December 1999. In accordance with the separation
agreement, 3Com transferred to Palm the 3Com-owned assets and
liabilities which related to Palm prior to the date of separation from
3Com, except for most of Palm's accounts receivable and accounts
payable, which were retained by 3Com for administrative convenience.
Palm began incurring separation costs in the second quarter of fiscal
2000, which are costs associated with the process of becoming a
stand-alone, publicly-held company, including consulting and
professional fees.
Palm's legal separation from 3Com occurred on February 26, 2000 ("the
separation date"), at which time Palm began to operate independently
from 3Com. Beginning in the fourth quarter of fiscal 2000, Palm's
consolidated financial statements no longer include an allocated
portion of 3Com's corporate services and infrastructure costs. However,
Palm continues to incur amounts payable to 3Com under transitional
service agreements, under which 3Com provides services such as
information systems, real estate and transaction processing in
accounting and human resources. Amounts charged by 3Com to Palm under
transitional service agreements and facilities lease agreements and
included in operating expenses during the six months ended December 1,
2000 totaled $16.9 million.
Palm completed its initial public offering in March 2000, receiving net
proceeds of $947.5 million, after deducting underwriting commissions
and offering expenses, from the sale of 26,450,000 shares of common
stock. Palm also received net proceeds of $225.0 million from the sale
of a total of 5,921,052 shares of common stock to America Online,
Motorola and Nokia in private placements. Using a portion of the
proceeds from the offering, Palm paid a dividend of $150.0 million to
3Com in March 2000.
In May 2000, Palm entered into an agreement with 3Com relating to the
acquisition of approximately 39 acres of land located in San Jose,
California. Palm assigned its obligations under the agreement to a
third party in conjunction with an operating lease agreement which Palm
entered into in September 2000, and which was amended and finalized in
November 2000 (see Note 9 to the condensed consolidated financial
statements).
7
<PAGE>
3. Comprehensive Income
The components of comprehensive income are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------- -------------------------------
December 1, November 26, December 1, November 26,
2000 1999 2000 1999
------------ -------------- ------------- --------------
<S> <C> <C> <C> <C>
Net income $ 20,259 $ 12,862 $ 37,534 $ 22,520
Other comprehensive income:
Unrealized gain (loss) on investments (19) - 103 -
Change in accumulated translation adjustments 135 154 138 169
------------ -------------- ------------- --------------
Total comprehensive income $ 20,375 $ 13,016 $ 37,775 $ 22,689
============ ============== ============= ==============
</TABLE>
4. Net Income Per Share
Basic net income per share is calculated based on the weighted average
shares of common stock outstanding during the period. Diluted net
income per share is calculated based on the weighted average shares of
common stock outstanding, plus the dilutive effect of stock options,
calculated using the treasury stock method. The dilutive effect of
stock options was approximately 5,648,000 and 4,297,000 shares for the
three and six months ended December 1, 2000, respectively. For the
corresponding periods of fiscal 2000, there was no dilutive effect from
stock options, as there were no Palm stock options outstanding.
5. Inventories
Inventories consist of (in thousands):
<TABLE>
<CAPTION>
December 1, June 2,
2000 2000
----------- -----------
<S> <C> <C>
Finished goods $ 29,023 $ 22,557
Work-in-process 4,764 1,500
----------- -----------
$ 33,787 $ 24,057
=========== ===========
</TABLE>
6. Acquisition of AnyDay.com
During the first quarter of fiscal 2001, Palm completed the acquisition
of AnyDay.com. The total purchase price of $85.7 million consisted of
$71.4 million of cash, $4.7 million of stock options assumed,
contractual commitments of $9.2 million and direct transaction costs of
$0.4 million. Total liabilities assumed in the transaction of $13.7
million included accounts payable, accrued liabilities, contractual
commitments, and long-term debt.
The purchase price was allocated as follows: identifiable intangible
assets - $20.3 million, net tangible assets - $2.3 million, purchased
in-process technology - $0.9 million, and goodwill - $65.3 million.
Goodwill and other intangible assets from the AnyDay.com acquisition
are being amortized over periods ranging from two to four years. The
purchased in-process technology of $0.9 million had not reached
technological feasibility, had no alternative future use and was
charged to operations in the first quarter of fiscal 2001.
8
<PAGE>
7. Litigation
Palm is a party to lawsuits in the normal course of its business.
Litigation in general, and intellectual property litigation in
particular, can be expensive and disruptive to normal business
operations. Moreover, the results of complex legal proceedings are
difficult to predict. Palm believes that it has defenses to the cases
set forth below and is vigorously contesting these matters. Palm is not
currently able to estimate, with reasonable certainty, the possible
loss, or range of loss, if any, from the cases listed below, but an
unfavorable resolution of these lawsuits could adversely affect Palm's
business, results of operations or financial condition.
On April 28, 1997, Xerox Corporation filed suit against U.S. Robotics
Corporation and U.S. Robotics Access Corp. in the United States
District Court for the Western District of New York. The case came to
be captioned: Xerox Corporation v. U.S. Robotics Corporation, U.S.
Robotics Access Corp., Palm Computing, Inc. and 3Com Corporation, Civil
Action No. 97-CV-6182T. The complaint alleged willful infringement of
U.S. patent 5,596,656 entitled "Unistrokes for Computerized
Interpretation of Handwriting." The complaint sought unspecified
damages and to permanently enjoin the defendants from infringing the
patent in the future. In an Order entered by the District Court on June
6, 2000, the District Court granted the defendants' motion for summary
judgment of non-infringement and dismissed the case in its entirety.
Xerox appealed the dismissal to the U.S. Court of Appeals for the
Federal Circuit as Appeal No. 00-1464. Xerox has filed a brief in
support of its appeal, and we have filed our responsive brief with the
court. No date for oral argument has been set.
On July 22, 1999, we filed a copyright infringement action against
Olivetti Office USA, Inc. and CompanionLink Software, Inc. in the
United States District Court for the Northern District of California
alleging that Olivetti's "Royal daVinci" handheld device and the
daVinci OS Software Development Kit (distributed by CompanionLink)
contained source code copied from the Palm OS operating system. We
obtained a preliminary injunction against further distribution, sale,
import or export of any product containing source code or object code
copied or derived from the Palm OS operating system. The injunction is
to remain in effect pending the outcome of the lawsuit. We also
initiated a copyright infringement action in Hong Kong on July 21,
1999, against EchoLink Design, Ltd., the company responsible for
developing the operating system software contained in the Olivetti
daVinci devices that are the subject of the action against Olivetti in
the Northern District of California. The High Court of the Hong Kong
Special Administrative Region issued an order the same day restraining
EchoLink from further copying, distribution, sale, import or export of
Palm OS operating system source code or EchoLink's "NEXUS OS" source
code, which we maintain infringes our copyrights. Kessel Electronics
(H.K.), Limited, which supplied Olivetti with the daVinci devices, was
subsequently added to the Hong Kong action. Kessel consented to an
injunction against reproducing, copying, importing, exporting,
distributing, or making available to the public any software contained
in certain files of the Palm OS source code or object code. By letter
dated October 7, 1999, 3Com notified certain third-party retailers
about the preliminary injunction order issued against Olivetti and
CompanionLink. Olivetti has filed an action against Palm and 3Com in
the Superior Court of California, Santa Clara County, for unfair
competition, intentional interference with potential economic
advantage, libel and trade libel, based upon certain statements that
were allegedly made, or that 3Com allegedly omitted to make, in the
October 7, 1999 letter. In addition, Olivetti has filed the identical
action, as counterclaims and third party claims against Palm and 3Com,
in the United States District Court for the Northern District of
California.
9
<PAGE>
On December 13, 1999, WaveWare Communications, Inc. filed suit against
3Com, Palm and others in the Superior Court of California, San Mateo
County. The case is captioned WaveWare Communications, Inc. v. 3Com
Corporation, Palm Computing, Inc., and Mark Bercow, No. 411331. The
complaint alleges breach of contract, constructive fraud, fraud and
deceit, negligent misrepresentation, misappropriation of assets and
trade secrets, unfair competition, unjust enrichment and intentional
interference with economic advantage in connection with our and 3Com's
discussions with WaveWare concerning WaveWare's potential acquisition
by 3Com. The complaint seeks unspecified monetary damages and
injunctive relief. The case is set for trial in January 2001.
On December 27, 1999, Telxon Corporation and Penright! Corporation
filed a complaint in the U.S. District Court for the Northern District
of Ohio, Eastern Division (Case No. 1:99CV3157) against 3Com and Palm
alleging copyright infringement, unfair competition and theft of trade
secrets. The plaintiffs allege that the Palm OS operating system
contains graphical user interface software copied from the plaintiffs'
software. The complaint seeks unspecified compensatory and treble
damages and to enjoin, among other things, distribution and sales of
the Palm OS operating system. No trial date has been set. The case is
still in the early stages of discovery.
On February 28, 2000, E-Pass Technologies, Inc. filed suit against
"3Com, Inc." in the United States District Court for the Southern
District of New York and later filed on March 6, 2000 an Amended
Complaint against Palm and 3Com. The case is now captioned E-Pass
Technologies, Inc. v. 3Com Corporation, a/k/a 3Com, Inc. and Palm, Inc.
(Civil Action No. 00 CIV 1523). The Amended Complaint alleges willful
infringement of U.S. patent 5,276,311 entitled "Method and Device for
Simplifying the Use of Credit Cards, or the Like." The complaint seeks
unspecified compensatory and treble damages and to permanently enjoin
the defendants from infringing the patent in the future. In an Order
dated June 9, 2000, the Federal Judge assigned to the action
transferred the case to the U.S. District Court for the Northern
District of California. The U.S. District Court scheduled a Markman
hearing for May 2001 to determine the meaning of certain terms used in
the claims of the patent in suit. No trial date has been set.
On May 2, 2000, Rotis Technologies Corporation filed suit against Palm
and two other defendants in the U.S. District Court for the Northern
District of Texas. The case is captioned Rotis Technologies Corporation
v. Track Data Corporation, Palm, Inc. and Sprint FON Group (Case No.
300CV-931-L). The complaint alleges infringement of U.S. patent
4,473,824 entitled "Price Quotation System." The complaint seeks
unspecified compensatory and treble damages and to permanently enjoin
the defendants from infringing the patent in the future. Palm is
investigating the allegations contained in the suit. No discovery has
been exchanged. No trial date has been set.
In connection with our separation from 3Com, pursuant to the terms of
the Indemnification and Insurance Matters Agreement between 3Com and
us, we will indemnify and hold 3Com harmless for any damages or losses
which may arise out of the Xerox, WaveWare, Telxon and Penright!,
E-Pass, Rotis and Olivetti litigation.
10
<PAGE>
8. Recent Accounting Pronouncements
In June 1998 and June 1999, the Financial Accounting Standards Board
("FASB") issued SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities and SFAS No. 137, Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of
FASB Statement No. 133. These statements require companies to record
derivatives on the balance sheet as assets or liabilities, measured at
fair value. Gains or losses resulting from changes in the values of
those derivatives would be accounted for depending on the use of the
derivative and whether it qualifies for hedge accounting. SFAS 133 will
be effective for Palm's fiscal year ending May 31, 2002. Management is
currently in the process of assessing the impact of SFAS 133 and
believes that the adoption of these statements is unlikely to have a
significant impact on Palm's financial position or results of
operations.
In December 1999, the Securities and Exchange Commission (`SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in
Financial Statements. SAB 101 provides guidance on the recognition,
presentation, and disclosure of revenue in financial statements of all
public registrants. In October 2000, the SEC issued a Frequently Asked
Questions document related to SAB 101 which provides interpretive
guidance. SAB 101 will be effective in the fourth quarter of our fiscal
year ending June 1, 2001. The adoption of SAB 101 is not expected to
have a significant impact on our financial position or results of
operations.
9. Commitments and Contingencies
In November 2000, Palm entered into a seven-year master lease agreement
with Societe Generale Financial Corporation relating to its future
headquarters facility that will be constructed in San Jose, California.
The property site is approximately 39 acres, and is intended to
eventually accommodate 1.6 million square feet of general office
facilities. Rental payments under the lease agreement will be indexed
to the London Interbank Offered Rate, applied to the total cost of the
lease. The total cost of the lease will include the cost of the land
plus the construction cost of the first phase of the facilities
(approximately 620,000 square feet) which together are expected to cost
up to $460 million. Palm has the ability to purchase the property from
the lessor at any time prior to the expiration of the lease for the
remaining lease balance, and may, at its option, remarket the property
prior to the end of the lease. Palm has guaranteed the payment and
performance of the lessor under certain promissory notes made by the
lessor with respect to the property. Under the terms of the lease
agreements, Palm is required to place on deposit up to $460 million of
investment securities as collateral for the term of the lease. As of
December 1, 2000, the amount of the collateral was approximately $231
million. As the leased facilities are constructed and interest accrues
on the amount funded by the lessor, the amount of cash collateral will
increase over time. The investment securities are restricted as to
their withdrawal from a third party trustee and are classified as
restricted investments on Palm's balance sheet. Palm will continue to
receive the interest income earned on the investments deposited as
collateral.
11
<PAGE>
10. Subsequent Events
In December 2000, Palm announced a definitive agreement to acquire
WeSync.com, Inc., a developer of group and wireless synchronization
technology, for $40 million to $45 million in cash or stock, depending
on circumstances at the time of closing. The transaction will be
accounted for using the purchase method of accounting and is expected
to close during the third quarter of fiscal 2001.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This quarterly report contains forward-looking statements within the meaning
of the federal securities laws. These statements include those concerning the
following: the intention to continue pursuing licensing opportunities for the
Palm platform; the intention to expand Internet services and solutions; the
intention to continue to expand Palm's international business; the intention
to make strategic investments to develop and introduce products and Internet
solutions; the intention to make strategic acquisitions; Palm's expectation
that its acquisition of WeSync.com, Inc. will close during the third quarter
of fiscal 2001; Palm's expectation that an increasing portion of its revenues
will come from Palm platform licensing and Internet services and solutions;
Palm's expectation that international revenues will continue to increase as a
percentage of total revenues; Palm's belief that it will continue to
experience strong growth in unit shipments of Palm handheld devices; Palm's
expectation of future gross margins; Palm's expectation that it will continue
to make significant strategic investments throughout fiscal year 2001; Palm's
anticipation of future operating margins and interest income; and Palm's
belief that its cash and cash equivalents will be sufficient to satisfy its
anticipated cash requirements for at least the next 12 months. These
statements are subject to risks and uncertainties that could cause actual
results and events to differ materially. These risks and uncertainties
include, among others: possible development or marketing delays with the
products and solutions to be offered; potential defects in the products and
solutions to be developed; the acceptance by the market of these products and
solutions; possible fluctuations in demand for Palm's products and services;
Palm's ability to anticipate demand for its products and services in order to
secure sufficient quantities or cost-effective production and avoid costly
excess production or inventories; Palm's dependence on suppliers and
distributors; Palm's acquisition of WeSync.com, Inc. is subject to certain
closing conditions and approvals; Palm's ability to compete effectively with
existing or new competitors; and possible future price cutting or other
actions by competitors.
For a detailed discussion of these risks and uncertainties, see the "Business
Environment and Risk Factors" section of this report. Palm undertakes no
obligation to update forward-looking statements to reflect events or
circumstances occurring after the date of this report.
OVERVIEW
We were founded in 1992 and introduced our first handheld device in 1996.
Immediately prior to our initial public offering on March 2, 2000, we were a
wholly-owned subsidiary of 3Com. Through 1999, our business was focused
primarily on developing and selling our Palm-branded handheld devices, and as of
December 1, 2000, we had sold nearly 10.9 million Palm devices worldwide. In
1999, we expanded our strategy of licensing our Palm platform and developed our
wireless Internet access service to support Internet-enabled handheld devices.
Our revenues have increased from approximately $1 million in fiscal 1995 to
$1.06 billion in fiscal 2000. Through our initial public offering and concurrent
private placements to America Online, Motorola, and Nokia, we raised net
proceeds of $1.17 billion, out of which a dividend of $150 million was paid to
3Com. On July 27, 2000, 3Com completed the distribution of the remaining shares
of Palm it owned to the stockholders of 3Com. Immediately prior to the
distribution, 3Com owned approximately 94% of the Palm shares outstanding.
Substantially all of our revenues to date have been generated from sales of our
handheld devices and related peripherals and accessories. A small percentage of
our revenues has been derived from licensing our Palm platform or from
subscriptions to our wireless Internet access service. With our expanded focus
on Palm platform licensing and Internet services and solutions, we expect that
an increasing portion of our revenues in future years will come from these
sources, although they will still represent a
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relatively small portion of our total revenues in fiscal 2001. International
revenues represented 35% of total revenues in the first six months of fiscal
2001, compared to 32% of revenues for the first six months of fiscal 2000.
International revenues have generally been increasing as a percentage of total
revenues, and this trend is expected to continue, although there may be quarters
in which international revenues decline as a percentage of total revenue. We
believe that we will continue to experience strong growth in unit shipments of
our Palm handheld devices, although the year over year growth rates may decline
on a percentage basis compared to recent levels.
Gross margins as a percentage of revenues remained relatively constant through
the third quarter of fiscal 2000, but have declined over the past three
quarters. Gross margin levels declined significantly in each of the first two
quarters of fiscal 2001 compared to the corresponding periods in fiscal 2000,
and we anticipate that gross margins throughout the remainder of fiscal 2001
will be lower than gross margins in the second quarter of fiscal 2001. Factors
which we believe may contribute to lower gross margins in fiscal 2001 relative
to fiscal 2000 include an increasing percentage of revenues derived from entry
level price point devices, price reductions and promotional programs on certain
products, and higher prices paid for certain supply constrained components.
In line with our strategy to expand our business, we expect to continue to make
significant strategic investments throughout fiscal year 2001. These investments
will focus on development and introduction of new products and Internet
solutions, as well as continued investment in sales and marketing. In addition,
we will continue to pay 3Com for certain transition services as well as
incurring costs related to our separation from 3Com throughout fiscal 2001.
Due primarily to the impact of these factors, our operating margins as a
percentage of revenues declined in fiscal 2001 as compared to fiscal 2000. We
anticipate our operating margins will continue to be lower in fiscal 2001 than
they were in fiscal 2000. Furthermore, we intend to make strategic acquisitions,
which will likely result in amortization costs that could adversely effect our
operating results.
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RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage of
total revenues represented by the line items reflected in Palm's condensed
consolidated income statements:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------ ------------------------------
December 1, November 26, December 1, November 26,
2000 1999 2000 1999
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 63.9 57.2 62.9 56.6
------------- -------------- ------------- --------------
Gross profit 36.1 42.8 37.1 43.4
Operating expenses:
Sales and marketing 17.2 23.1 18.0 23.5
Research and development 7.8 6.1 7.7 6.4
General and administrative 4.8 3.8 4.9 3.9
Amortization of goodwill
and intangible assets 1.4 0.2 1.4 0.2
Purchased in-process
technology - - 0.1 -
Separation costs 0.2 1.5 0.3 0.9
------------- -------------- ------------- --------------
Total operating expenses 31.4 34.7 32.4 34.9
------------- -------------- ------------- --------------
Operating income 4.7 8.1 4.7 8.5
Interest and other income (expense) 2.5 0.1 2.8 -
------------- -------------- ------------- --------------
Income before income taxes 7.2 8.2 7.5 8.5
Income tax provision 3.3 3.2 3.4 3.3
------------- -------------- ------------- --------------
Net income 3.9% 5.0% 4.1% 5.2%
============= ============== ============= ==============
Effective tax rate 46.0% 39.2% 46.0% 39.1%
Excluding amortization of goodwill
and intangible assets, purchased in-
process technology and separation costs:
Total operating expenses 29.8% 33.0% 30.6% 33.8%
Operating income 6.3% 9.8% 6.5% 9.6%
Effective tax rate 40.0% 39.2% 40.0% 39.1%
</TABLE>
REVENUES
Revenues for the second quarter ended December 1, 2000 were $522.2 million, an
increase of $263.6 million or 102% over revenues for the same quarter of the
previous year. Revenue growth was primarily driven by a 137% increase in unit
shipments of Palm devices, offset by a 19% decline in the blended average
selling price. The decrease in the average selling price was largely
attributable to the introduction of our new entry level m100 device, and price
reductions on other devices. Revenues increased in all geographic areas, with
international regions growing at a faster rate than the United States.
International revenues for the second quarter of fiscal 2001 were 38% of
revenues compared with 33% of revenues in the same period of fiscal 2000.
Revenues for the six months ended December 1, 2000 were $923.2 million, an
increase of $488.1 million or 112% over revenues for the same period of the
previous year. The increase in revenues was
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primarily due to a 144% increase in unit shipments of Palm devices, offset by a
16% decline in the blended average selling price. Revenues increased in all
geographic areas, with international regions growing at a faster rate than the
United States. International revenues for the first six months of fiscal 2001
were 35% of revenues compared with 32% of revenues in the same period of fiscal
2000.
GROSS PROFIT
Gross profit was $188.8 million and $342.2 million for the second quarter and
first six months of fiscal 2001, increasing by 71% and 81%, respectively, over
the corresponding periods in fiscal 2000. Gross profit as a percentage of
revenues was 36.1% and 37.1% for the second quarter and first six months of
fiscal 2001, declining by 6.7 and 6.3 percentage points, respectively, compared
to the corresponding periods in fiscal 2000. These declines were primarily
attributable to a shift in product mix towards products with lower average
selling prices and lower gross profit margins. In addition, gross profit in each
period of fiscal 2001 was negatively impacted by the added cost of purchasing
certain supply-constrained components at premiums.
SALES AND MARKETING
Sales and marketing expenses were $89.8 million and $165.8 million for the
second quarter and first six months of fiscal 2001, increasing by 50% and 62%,
respectively, as compared to the same periods in fiscal 2000. Sales and
marketing expenses decreased as a percentage of revenue from 23.5% for the first
six months of fiscal 2000 to 18.0% in the same period of fiscal 2001. The
increases in absolute dollars compared to the prior year periods were due to
increased spending on worldwide branding efforts, demand generation activities,
media advertising, tradeshows, headcount and related expenses.
RESEARCH AND DEVELOPMENT
Research and development expenses were $41.0 million and $71.3 million for the
second quarter and first six months of fiscal 2001, increasing by 162% and 156%,
respectively, as compared to the same periods in fiscal 2000. Research and
development expenses increased as a percentage of revenue from 6.4% for the
first six months of fiscal 2000 to 7.7% in the same period of fiscal 2001. The
increases compared to the prior year periods were primarily due to increased
headcount and related expenses to support new product introductions, and
expansion of development efforts in areas such as wireless Internet solutions
and future versions of the Palm OS operating system.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $24.9 million and $45.4 million for the
second quarter and first six months of fiscal 2001, increasing by 154% and 167%,
respectively, as compared to the same periods in fiscal 2000. General and
administrative expenses increased as a percentage of revenue from 3.9% for the
first six months of fiscal 2000 to 4.9% in the same period of fiscal 2001. The
increases compared to the prior year periods were primarily due to increased
spending for headcount and related expenses, in order to build the
infrastructure necessary for a stand-alone public company, particularly in areas
such as finance, human resources and legal, while at the same time paying 3Com
for transitional services.
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AMORTIZATION OF GOODWILL AND INTANGIBLE ASSETS
Amortization of goodwill and intangible assets were $7.5 million and $12.7
million for the second quarter and first six months of fiscal 2001, compared to
$0.5 million and $1.0 million for the corresponding periods in fiscal 2000. The
increases relate to amortization charges resulting from the acquisitions of
Actual Software and AnyDay.com, which closed in May 2000 and June 2000,
respectively.
PURCHASED IN-PROCESS TECHNOLOGY
Purchased in-process technology for the first six months of fiscal 2001 relates
to the acquisition of AnyDay.com in June 2000. Approximately $0.9 million of the
purchase price represented purchased in-process technology that had not yet
reached technological feasibility, had no alternative future use and was charged
to operations in first quarter of fiscal 2001.
SEPARATION COSTS
Separation costs, relating to our separation from 3Com, were $0.8 million and
$2.6 million for the second quarter and first six months of fiscal 2001,
compared to $3.8 million for both the second quarter and first six months of
fiscal 2000. We expect to continue to incur separation costs over the remainder
of fiscal 2001.
INTEREST AND OTHER INCOME (EXPENSE)
Interest and other income (expense), on a net basis was $12.7 million and $26.0
million for the second quarter and first six months of fiscal 2001, as compared
to a nominal amount for each period in fiscal 2000. Substantially all of the
interest income relates to the interest earned on the proceeds of the initial
public offering and private placements. We anticipate that interest income is
likely to decline over the remainder of fiscal 2001, as we make acquisitions or
other investments in order to execute our strategic plan.
INCOME TAX PROVISION
The effective tax rate for the first six months of fiscal 2001 was 46.0%, up
from 39.1% for the first six months of fiscal 2000. Excluding the effect of
non-deductible amortization of goodwill and intangible assets and purchased
in-process technology, the effective tax rate for the second quarter and first
six months of fiscal 2001 was 40.0%, which represents a slight decline from the
41.0% effective rate for the full year of fiscal 2000.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at December 1, 2000 were $742.9 million, compared to
$1,062.1 million at June 2, 2000. The decrease of $319.2 million for the six
months ended December 1, 2000 was attributable to cash used in investing
activities of $336.1 million and cash used in operating activities of $4.2
million, offset by cash provided by financing activities of $21.1 million.
Cash used in investing activities of $336.1 million consisted primarily of
purchases of restricted investments of $231.1 million related to collateral
deposits required under a lease agreement, the net cash utilized for the
acquisition of AnyDay.com of $67.0 million and purchases of property and
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equipment of $31.1 million. Cash provided by financing activities of $21.1
million consisted primarily of the proceeds from the issuance of common stock
resulting from employee stock plan activity.
In November 2000, Palm entered into a seven-year master lease agreement with
Societe Generale Financial Corporation relating to its future headquarters
facility that will be constructed in San Jose, California. The property site is
approximately 39 acres, and is intended to eventually accommodate 1.6 million
square feet of general office facilities. Rental payments under the lease
agreement will be indexed to the London Interbank Offered Rate, applied to the
total cost of the lease. The total cost of the lease will include the cost of
the land plus the construction cost of the first phase of the facilities
(approximately 620,000 square feet) which together are expected to cost up to
$460 million. Palm has the ability to purchase the property from the lessor at
any time prior to the expiration of the lease for the remaining lease balance,
and may, at its option, remarket the property prior to the end of the lease.
Palm has guaranteed the payment and performance of the lessor under certain
promissory notes made by the lessor with respect to the property. Under the
terms of the lease agreements, Palm is required to place on deposit up to $460
million of investment securities as collateral for the term of the lease. As of
December 1, 2000, the amount of the collateral was approximately $231 million.
As the leased facilities are constructed and interest accrues on the amount
funded by the lessor, the amount of cash collateral will increase over time. The
investment securities are restricted as to their withdrawal from a third party
trustee and are classified as restricted investments on Palm's balance sheet.
Palm will continue to receive the interest income earned on the investments
deposited as collateral.
Based on current plans and business conditions, we believe that our existing
cash and cash equivalents and short-term investments will be sufficient to
satisfy our anticipated cash requirements for at least the next twelve months.
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BUSINESS ENVIRONMENT AND RISK FACTORS
COMPANY-SPECIFIC TRENDS AND RISKS:
RISKS RELATED TO OUR BUSINESS
IF WE FAIL TO DEVELOP AND INTRODUCE NEW PRODUCTS AND SERVICES TIMELY AND
SUCCESSFULLY, WE WILL NOT BE ABLE TO COMPETE EFFECTIVELY AND OUR ABILITY TO
GENERATE REVENUES WILL SUFFER.
We operate in a highly competitive, quickly changing environment, and our future
success depends on our ability to develop and introduce new products and
services that our customers and end users choose to buy. If we are unsuccessful
at developing and introducing new products and services that are appealing to
end users, our business and operating results would be negatively impacted
because we would not be able to compete effectively and our ability to generate
revenues would suffer.
The development of new products and services can be very difficult and requires
high levels of innovation. The development process is also lengthy and costly.
If we fail to anticipate our end users' needs and technological trends
accurately or are otherwise unable to complete the development of products and
services quickly, we will be unable to introduce new products and services into
the market on a timely basis, if at all. For example, we are currently
developing Internet services and content such as web-based calendaring and have
also announced new handheld device products which will contain wireless
communications and expansion capabilities. We cannot assure you that we will be
able to introduce these services and products on a timely or cost effective
basis, or that customer demand for these services and products will meet our
expectations.
Because the sales and marketing life cycle of our handheld solutions is
generally 12 to 18 months or less, we must:
- continue to develop updates to our Palm platform, new handheld
devices and new Internet services, or our existing products and
services will quickly become obsolete;
- manage the timing of new product introductions so that we
minimize the impact of customers delaying purchases of existing
products in anticipation of new product releases;
- manage the timing of new product introductions to meet
seasonal market demands, including the holiday shopping season;
- manage the levels of existing and older product and component
inventories to minimize inventory write-offs; and
- adjust the prices of our existing products and services in
order to increase or maintain customer demand for these products and
services.
IF WE DO NOT CORRECTLY ANTICIPATE DEMAND FOR OUR PRODUCTS, WE MAY NOT BE ABLE TO
SECURE SUFFICIENT QUANTITIES OR COST-EFFECTIVE PRODUCTION OF OUR HANDHELD
DEVICES OR WE COULD HAVE COSTLY EXCESS PRODUCTION OR INVENTORIES.
The demand for our products depends on many factors and is difficult to
forecast, in part due to the
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market for our products being relatively new and currently experiencing high
growth rates. As we introduce and support additional handheld device products
and as competition in the market for our products intensifies, we expect that it
will become more difficult to forecast demand. Significant unanticipated
fluctuations in demand could adversely impact our financial results and cause
the following problems in our operations:
- If demand increases beyond what we forecast, we would have to
rapidly increase production at our third party manufacturers. We depend
on our suppliers to provide additional volumes of components and those
suppliers might not be able to increase production rapidly enough to
meet unexpected demand or may choose to allocate capacity to other
customers. There is the risk that even if we are able to procure enough
components, our third party manufacturers might not be able to produce
enough of our devices to meet the market demand for our products. The
inability of either our manufacturers or our suppliers to increase
production rapidly enough could cause us to fail to meet customer
demand.
- Rapid increases in production levels to meet unanticipated
demand could result in higher costs for manufacturing and supply of
components and other expenses. These higher costs could lower our
profits. Furthermore, if production is increased rapidly, manufacturing
yields could decline, which may also lower our profits.
- If forecasted demand does not develop, we could have excess
production resulting in higher inventories of finished products and
components, which would use cash and could lead to write-offs of some
or all of the excess inventories. Lower than forecasted demand could
also result in excess manufacturing capacity at our third party
manufacturers and failure to meet some minimum purchase commitments,
each of which could result in lower margins.
OUR QUARTERLY OPERATING RESULTS ARE SUBJECT TO FLUCTUATIONS AND SEASONALITY, AND
IF WE FAIL TO MEET THE EXPECTATIONS OF SECURITIES ANALYSTS OR INVESTORS, OUR
SHARE PRICE MAY DECREASE SIGNIFICANTLY.
Our operating results are difficult to predict. Our future quarterly operating
results may fluctuate significantly and may not meet our expectations or those
of securities analysts or investors. If this occurs, the price of our stock
would likely decline. Factors that may cause fluctuations in our operating
results include the following:
- Seasonality. Historically, our revenues have usually been
weaker in the first and third quarters of each fiscal year and have,
from time to time, been lower than the preceding quarter. Consistent
with this seasonality, we expect our revenues for the third quarter of
fiscal 2001 to be lower than our revenues for the second quarter of
fiscal 2001. This seasonality is due to the fact that our devices are
highly consumer-oriented, and consumer buying is traditionally lower in
these quarters. In addition, we attempt to time our new product
releases to coincide with relatively higher consumer spending in the
second and fourth fiscal quarters, which contributes to these seasonal
variations.
- Increases in Operating Expenses. As we expand our operations,
we expect that our operating expenses, particularly our sales,
marketing and research and development costs, will continue to
increase. We also expect to make significant expenditures to expand our
Internet solutions and services. If revenues decrease and we are unable
to reduce our costs rapidly enough, our operating results would be
negatively affected.
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- Revenue Mix. Our profit margins differ among the handheld
device, Palm platform licensing and Internet services parts of our
business. In addition, the product mix and sales prices of our device
products affects profit margins in any particular quarter. The product
mix and sales prices of our device products in a particular quarter
depend in part on the timing of new product introductions and the
relative demand for our higher price point products as compared to our
lower price point products. For example, we expect our gross margins in
the third and fourth fiscal quarters of the current fiscal year to be
lower than our gross margins for the second quarter due in part to
increased demand for products at lower price points, like the m100. As
our business evolves and the mix of revenues from devices, licenses and
services varies from quarter to quarter, our operating results will
likely fluctuate. For example, increased demand for our licensees'
products could negatively impact sales of our handheld devices, which
could adversely impact our operating results.
- New Product Introductions and Transitions. As we introduce new
products and services, the timing of these introductions will affect
our quarterly operating results. We may have difficulty predicting the
timing of new product and service introductions and the user acceptance
of these new products and services. If products and services are
introduced earlier or later than anticipated, or if user acceptance is
unexpectedly high or low, our quarterly operating results may fluctuate
unexpectedly. In addition, we typically increase sales and marketing
expenses to support new product introductions. In the second half of
fiscal 2001, we plan to introduce multiple new handheld devices, such
as the previously announced new products that will include a secured
digital expansion card slot, which could wholly or partially replace
existing products. As a result of these proposed new product
introductions, sales could be delayed or negatively affected as
potential purchasers may delay purchasing our products in anticipation
of the introduction of these new products.
- Component Availability and Quarterly Linearity of Revenues. We
experienced component shortages during our quarter ended December 1,
2000, primarily due to shortages of the driver chips used in display
units of the Palm Vx and m100 handheld devices. We were also
constrained by a shortage of radio frequency chips for the Palm VIIx
handheld devices. We expect shortages of these components to continue
to limit our production of the Palm Vx and m100 handheld devices until
the component availability eases. In addition, in the last two
quarters, we recorded approximately 50% of our revenues in the last
five weeks of the quarter due primarily to the timing of new product
introductions and the availability of components. Shipping a high
percentage of our quarterly revenue near the end of the quarter
subjects us to risks such as unexpected disruptions in component
availability, manufacturing, order management, information systems and
shipping. If a significant disruption occurs, our results of operations
or financial condition could be adversely affected.
- Use of Purchase Orders with Customers. We rely on one-time
purchase orders rather than long-term contracts with our customers.
Because we cannot predict with certainty incoming purchase orders,
decreases in orders or failure to fulfill orders may cause our
operating results to fluctuate.
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WE RELY ON THIRD PARTY MANUFACTURERS TO PRODUCE OUR HANDHELD DEVICES, AND OUR
REPUTATION AND RESULTS OF OPERATIONS COULD BE ADVERSELY AFFECTED BY OUR
INABILITY TO CONTROL THEIR OPERATIONS.
We outsource all of our manufacturing to Manufacturers' Services Limited and
Flextronics. We depend on these third party manufacturers to produce sufficient
volume of our products in a timely fashion and at satisfactory quality levels.
In addition, we rely on our third party manufacturers to place orders with
suppliers for the components they need to manufacture our products. If our third
party manufacturers fail to produce quality products on time and in sufficient
quantities, our reputation and results of operations would suffer. If they fail
to place timely and sufficient orders with suppliers, our results of operations
would suffer. For example, in the second quarter of fiscal 2001, one of our
third party manufacturers failed to order certain components on a timely basis,
which may have limited our ability to further increase revenue from the prior
quarter. We depend on Flextronics to manufacture some of our device products at
its facilities in Mexico, California, Malaysia and Hungary, and the rest of our
device products are manufactured by Manufacturers' Services Limited at its Utah
facility. The cost, quality and availability of third party manufacturing
operations are essential to the successful production and sale of our handheld
devices. Our reliance on third parties exposes us to the following risks outside
our control:
- unexpected increases in manufacturing costs;
- interruptions in shipments if one of our manufacturers is
unable to complete production;
- inability to control quality of finished device products;
- inability to control delivery schedules;
- unpredictability of manufacturing yield;
- potential lack of adequate capacity; and
- potential inability to secure adequate volumes of components.
We believe that both Manufacturers' Service Limited and Flextronics are
currently experiencing significant growth due in part to acquisitions of
additional manufacturing facilities. This may present challenges to effectively
integrate these new facilities. Operational challenges at Manufacturers' Service
Limited or Flextronics could impact their ability to meet our manufacturing
requirements, which could harm our results of operations.
We do not have a manufacturing agreement with Flextronics, upon whom we rely to
manufacture a significant number of our device products. We presently order our
products on a purchase order basis from Flextronics. The absence of a
manufacturing agreement means that, with little or no notice, Flextronics could
refuse to continue to manufacture all or some of the units of our devices that
we require or change the terms under which it manufactures our device products.
If Flextronics were to stop manufacturing our devices, we may be unable to
replace the lost manufacturing capacity on a timely basis and our results of
operations could be harmed. In addition, if Flextronics were to change the terms
under which they manufacture for us, our manufacturing costs could increase and
our profitability could suffer.
WE DEPEND ON OUR SUPPLIERS, MANY OF WHICH ARE THE SOLE SOURCE FOR OUR
COMPONENTS, AND OUR PRODUCTION WOULD BE SERIOUSLY HARMED IF THESE SUPPLIERS ARE
NOT ABLE TO MEET OUR DEMAND ON A COST EFFECTIVE BASIS AND ALTERNATIVE SOURCES
ARE NOT AVAILABLE.
Our products contain components, including liquid crystal displays, touch
panels, memory chips and microprocessors, that are procured from a variety of
suppliers. The cost, quality and availability of components are essential to the
successful production and sale of our device products. Recently,
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including during each of the past three quarters, we have experienced shortages
of some key components, including liquid crystal displays and related
components, flash memory chips and dynamic random access memory, or DRAM, chips.
A number of our suppliers are capacity constrained, due to high industry demand
for their components and relatively long lead times required to expand factory
capacity. We have recently been constrained in our ability to obtain sufficient
quantities of driver chips used in the display units used in the Palm Vx and
m100 devices, which limited our ability to increase sales of those products. In
addition, recently our ability to obtain certain radio frequency integrated
circuits has been adversely impacted, due in part to a fire which occurred at
one of the manufacturing facilities used by one of our suppliers. Shortages of
these radio frequency integrated circuits has impaired, and is continuing to
impair, our ability to produce Palm VIIx devices. Reduced sales of these Palm
VIIx devices limits the potential growth rate of our Palm.Net service revenues.
Some components, such as displays and related driver chips, power supply
integrated circuits, digital signal processors, microprocessors, crystals and
several radio frequency and discrete components, come from sole source
suppliers. Alternative sources are not currently available for these sole source
components. If suppliers are unable or unwilling to meet our demand for sole
source components and if we are unable to obtain an alternative source or if the
price for an alternative source is prohibitive, our ability to maintain timely
and cost-effective production of our handheld computing device products would be
seriously harmed. In addition, because we rely primarily on one-time purchase
orders with our suppliers, including our sole source suppliers, we cannot
predict with certainty our ability to procure components if the demand for our
products exceeds our forecast. If the shortages of liquid crystal displays and
related components, flash memory chips, radio frequency integrated circuits or
any other key component persists or worsens, we will likely not be able to
deliver sufficient quantities of our products to satisfy demand. This could
result in quarterly fluctuations in operating results and could result in market
share loss to competitors who are able to supply sufficient quantities of their
products to meet demand. In addition our costs to purchase these components
would increase, which would lower our profits.
WE USE THIRD PARTIES TO PROVIDE SIGNIFICANT OPERATIONAL AND ADMINISTRATIVE
SERVICES, AND OUR ABILITY TO SATISFY OUR CUSTOMERS AND OPERATE OUR BUSINESS WILL
SUFFER IF THE LEVEL OF SERVICES DOES NOT MEET OUR REQUIREMENTS.
We use third parties to provide services such as customer service, product
distribution, data center operations and desktop support, and facilities
services. Should any of these third parties fail to deliver an adequate level of
service, our business could suffer.
WE DO NOT KNOW IF THE PALM PLATFORM LICENSING AND INTERNET SERVICES PARTS OF OUR
BUSINESS WILL BE ABLE TO GENERATE SIGNIFICANT REVENUE IN THE FUTURE, AND WE WILL
CONTINUE TO RELY ON OUR HANDHELD DEVICE PRODUCTS AS THE PRIMARY SOURCE OF OUR
REVENUE FOR THE FORESEEABLE FUTURE.
Our future growth and a significant portion of our future revenue depend on the
commercial success of our Palm handheld devices, which comprise the primary
product line that we currently offer. We expanded our Palm platform licensing
and Internet services parts of our business only recently, and these parts of
our business have generated a small percentage of our revenues. If revenues from
our device business do not grow, our other business activities may not be able
to compensate for this shortfall.
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A SIGNIFICANT PORTION OF OUR REVENUES CURRENTLY COMES FROM A SMALL NUMBER OF
DISTRIBUTORS, AND ANY DECREASE IN REVENUES FROM THESE DISTRIBUTORS COULD HARM
OUR RESULTS OF OPERATIONS.
A significant portion of our revenues comes from only a small number of
distributors. For example, in the quarter ended December 1, 2000, Ingram Micro
represented approximately 18% and Tech Data represented approximately 9% of our
revenues. We expect that the majority of our revenues will continue to depend on
sales of our handheld devices to a small number of distributors. Any downturn in
the business of these customers could seriously harm our revenues and results of
operations.
WE RELY ON DISTRIBUTORS, RETAILERS AND RESELLERS TO SELL OUR PRODUCTS, AND
DISRUPTIONS TO THESE CHANNELS WOULD ADVERSELY AFFECT OUR ABILITY TO GENERATE
REVENUES FROM THE SALE OF OUR HANDHELD DEVICES.
Because we sell our products primarily to distributors, retailers and
traditional and Internet-based resellers, we are subject to many risks,
including risks related to their inventory levels and support for our products.
Historically, our distributors, retailers and resellers have maintained
significant levels of our products in their inventories. However, since the
fourth quarter of fiscal 2000, we have generally been unable to fully meet the
demand for certain of our products from our distributors, retailers and
resellers. If we are unable to supply our distributors, retailers and resellers
with sufficient levels of inventory to meet customer demand, our sales could be
negatively impacted.
Our distributors, retailers and resellers also sell products offered by our
competitors. If our competitors offer our distributors, retailers and resellers
more favorable terms or have more products available to meet their needs, those
distributors, retailers and resellers may de-emphasize or decline to carry our
products or carry our competitors' products instead. In the future, we may not
be able to retain or attract a sufficient number of qualified distributors,
retailers and resellers. Further, distributors, retailers and resellers may not
recommend, or continue to recommend, our products. If we are unable to maintain
successful relationships with distributors, retailers and resellers or to expand
our distribution channels, our business will suffer.
If we reduce the prices of our products to our distributors, retailers and
resellers, we may have to compensate them for the difference between the higher
price they paid to buy their inventory and the new lower prices. In addition,
like other manufacturers, we are exposed to the risk of product returns from
distributors, either through their exercise of contractual return rights or as a
result of our strategic interest in assisting distributors in balancing
inventories.
We believe our distributors, retailers and traditional resellers are
experiencing competition from Internet-based suppliers that distribute directly
to end-user customers, and there is also competition among Internet-based
suppliers. We also sell our products directly to end-user customers from our
Palm.com web site. These actions could cause conflict among our channels of
distribution, which could seriously harm our revenues and results of operations.
IF WE ARE UNABLE TO COMPETE EFFECTIVELY WITH EXISTING OR NEW COMPETITORS, OUR
RESULTING LOSS OF COMPETITIVE POSITION COULD RESULT IN PRICE REDUCTIONS, FEWER
CUSTOMER ORDERS, REDUCED MARGINS AND LOSS OF MARKET SHARE.
We compete in the handheld device, operating system software and Internet
services markets. The markets for these products and services are highly
competitive and we expect competition to increase in
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the future. Some of our competitors or potential competitors have significantly
greater financial, technical and marketing resources than we do. These
competitors may be able to respond more rapidly than Palm to new or emerging
technologies or changes in customer requirements. They may also devote greater
resources to the development, promotion and sale of their products than we do.
- Our handheld computing device products compete with a variety
of smart handheld devices, including keyboard-based devices,
sub-notebook computers, smart phones and two-way pagers. Our principal
competitors include Casio, Compaq, Hewlett-Packard, Psion, Research in
Motion Limited, or RIM, Sharp and Palm platform licensees such as
Handspring, Sony and TRG.
- Our Palm platform competes primarily with operating systems
such as Microsoft's Windows CE for palm-sized personal computers, or
Pocket PC, and Symbian's EPOC for wireless devices. Licensees of our
Palm platform are under no obligation to introduce new products based
on our operating system, and may elect to use an alternative operating
system, in which case we may not be able to increase our revenue from
licensing the Palm platform, or expand the proliferation of the Palm
economy.
- Our Internet services compete with a variety of alternative
technologies and services, such as those based on different industry
standards for wireless Internet access, information appliances that
provide Internet connectivity and other traditional and developing
methods. Competitors to our wireless Internet services include RIM and
Omnisky. Our Internet access business also competes indirectly with
other providers of Internet access, ranging from dedicated Internet
service providers, such as America Online and Earthlink, to local phone
companies.
We expect our competitors to continue to improve the performance of their
current products and services and to introduce new products, services and
technologies. For example, in the first half of calendar 2000, Microsoft
introduced a new version of its Windows CE operating system. We believe that
Microsoft is investing aggressively to assist its licensees in marketing the
Pocket PC line of handheld computers based on this new version of the Windows CE
operating system. Successful new product introductions or enhancements by our
competitors, or increased market acceptance of competing products, such as the
Pocket PC and RIM devices or devices offered by our licensees, such as
Handspring and Sony, could reduce the sales and market acceptance of our
products and services, cause intense price competition or make our products
obsolete. To be competitive, we must continue to invest significant resources in
research and development, sales and marketing and customer support. We cannot be
sure that we will have sufficient resources to make these investments or that we
will be able to make the technological advances necessary to be competitive.
Increased competition could result in price reductions, fewer customer orders,
reduced margins and loss of market share. Our failure to compete successfully
against current or future competitors could seriously harm our business,
financial condition and results of operations.
IF WE FAIL TO EFFECTIVELY RESPOND TO COMPETITION FROM PRODUCTS INTRODUCED BY
LICENSEES OF OUR PALM PLATFORM OR IF OUR LICENSEES FAIL TO SELL PRODUCTS BASED
ON THE PALM PLATFORM, OUR RESULTS OF OPERATIONS MAY SUFFER AS THE REVENUES WE
RECEIVE FROM LICENSE FEES MAY NOT COMPENSATE FOR THE LOSS OF REVENUES FROM OUR
DEVICE PRODUCTS.
The success of our business depends on both the sale of handheld device products
and the licensing of our Palm platform. However, licensees of our Palm platform
offer products that compete directly or indirectly with our handheld computing
devices. For example, licensees such as Handspring and Sony
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use our Palm platform in products that can compete with our handheld devices. In
addition, our Palm platform has been licensed by other manufacturers such as
Kyocera, Nokia and Samsung for use in devices such as mobile phones or other
similar products that can compete indirectly with our handheld devices. If
revenues from our handheld devices suffer because of competition from licensees
of our Palm platform, our results of operations would suffer and our ability to
implement our business model would be seriously challenged. In addition, our
licensees may not be successful in selling products based on the Palm platform,
which could harm our business and results of operations.
DEMAND FOR OUR PRODUCTS IS PARTIALLY DEPENDENT UPON SUPPORT FROM THIRD PARTY
SOFTWARE AND HARDWARE DEVELOPERS.
Decisions by customers to purchase our handheld device products, as opposed to
competitive product offerings, are sometimes based on the availability of third
party software, hardware and other expansion capabilities. In the future, we
believe that the level of support from third party developers in developing
products which provide expansion capabilities to handheld devices will become
increasingly important. For example, Handspring's line of Visor products feature
a hardware expansion slot. Our operating results could suffer if third party
developers focus their efforts on developing products that provide expansion
capabilities to products offered by our competitors.
OUR PALM PLATFORM AND HANDHELD DEVICES MAY CONTAIN ERRORS OR DEFECTS, WHICH
COULD RESULT IN THE REJECTION OF OUR PRODUCTS AND DAMAGE TO OUR REPUTATION, AS
WELL AS LOST REVENUES, DIVERTED DEVELOPMENT RESOURCES AND INCREASED SERVICE
COSTS AND WARRANTY CLAIMS.
Our Palm platform and our devices are complex and must meet stringent user
requirements. We must develop our software and hardware products quickly to keep
pace with the rapidly changing handheld device market. Products and services as
sophisticated as ours are likely to contain undetected errors or defects,
especially when first introduced or when new models or versions are released. We
have in the past experienced delays in releasing some models and versions of our
products until problems were corrected. Our products may not be free from errors
or defects after commercial shipments have begun, which could result in the
rejection of our products, damage to our reputation, lost revenues, diverted
development resources and increased customer service and support costs and
warranty claims. Any of these results could harm our business. For instance, we
recently experienced increased support costs related to a faulty memory
component used in a limited number of our handheld devices, which required us to
develop a software patch to address the problem.
There have been reports of computer viruses impacting handheld device operating
systems. Viruses and publicity about them may adversely impact sales of our
products. In particular, if anti-virus protection which users deem to be
adequate is not developed to combat these viruses, this could harm both our
device business and our Internet services and solutions business.
IF WE FAIL TO MANAGE OUR GROWTH EFFECTIVELY, WE MAY NOT BE ABLE TO SUCCESSFULLY
MANAGE OUR BUSINESS, WHICH COULD CAUSE US TO FAIL TO MEET OUR CUSTOMER DEMAND OR
TO ATTRACT NEW CUSTOMERS.
Our ability to successfully offer our products and implement our business plan
in a rapidly evolving market requires an effective planning and management
process. We continue to increase the scope of our operations domestically and
internationally and have grown our shipments and headcount substantially. At
December 31, 1999, we had a total of approximately 652 employees. At December 1,
2000 we had a total of approximately 1,391 employees. In addition, we plan to
continue to hire a
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significant number of employees this year. This growth has placed, and our
anticipated growth in future operations will continue to place, a significant
strain on our management systems and resources and increase our expenses.
We expect that we will need to continue to improve our financial and managerial
controls, reporting systems and procedures. While we have implemented
stand-alone versions of most of the transaction processing systems historically
used by 3Com, we intend to implement new systems over the next 3-12 months that
more closely match our business needs and to incur significant additional
expenses in connection with those systems. In addition, we will need to continue
to expand, train and manage our work force worldwide.
We recently acquired two companies and announced an agreement to acquire a third
company. We may make additional strategic acquisitions in the future.
Acquisitions will make it more difficult to effectively manage our growth, due
to a number of factors including the addition of new employees, the expansion of
our operations into new geographic areas and the increased geographic dispersion
of our personnel, and the expansion of our product and service offerings. If we
are not able to successfully integrate acquired companies into our business, our
results of operations could be adversely impacted.
THE MARKET FOR THE DELIVERY OF INTERNET SERVICES THROUGH HANDHELD DEVICES IS NEW
AND RAPIDLY EVOLVING, AND OUR BUSINESS AND OUR ABILITY TO GENERATE REVENUES FROM
OUR HANDHELD DEVICES, PALM PLATFORM OR INTERNET SERVICES COULD SUFFER IF THIS
MARKET DOES NOT DEVELOP OR WE FAIL TO ADDRESS THIS MARKET EFFECTIVELY.
The market for the delivery of Internet services through handheld devices is new
and rapidly evolving. In addition, our Internet services strategy has been
developed only recently, and we must continue to adapt it to compete in the
rapidly evolving Internet services market. We currently offer our Palm.Net
service, a subscription-based wireless access service that enables users of the
Palm VII family of handheld devices to access web-clipped content on the
Internet. Competitors have introduced or developed, or are in the process of
introducing or developing, competing Internet services accessible through a
variety of handheld devices and other information appliances. We cannot assure
you that there will be demand for the Internet services provided by us or that
individuals will widely adopt our handheld devices as a means of accessing
Internet services. Accordingly, it is extremely difficult to predict which
products and services will be successful in this market or the future size and
growth of this market. In addition, given the limited history and rapidly
evolving nature of this market, we cannot predict the price that wireless
subscribers will be willing to pay for these products and services. If
acceptance of our Internet services and solutions is less than anticipated, our
ability to expand our business could be impacted. In addition, our ability to
produce Palm VIIx devices is currently constrained, which is limiting the
addition of new subscribers to our Palm.Net service.
WE MAY NOT BE ABLE TO DELIVER OR EXPAND INTERNET ACCESS IF OUR WIRELESS CARRIER
RAISES ITS RATES, DISCONTINUES DOING BUSINESS WITH US OR DOES NOT DELIVER
ACCEPTABLE SERVICE OR IF WE FAIL TO PROVIDE OUR SERVICES ON ADDITIONAL CARRIER
NETWORKS.
The future success of our Internet services business substantially depends on
the capacity, affordability, reliability and security of our wireless networks.
Only a small number of wireless providers offer the network services we require.
We currently rely on BellSouth Wireless Data to provide all of our Palm VII and
Palm VIIx handheld wireless network services pursuant to an agreement. Our
agreement with BellSouth permits each party to terminate the agreement on an
annual basis. If BellSouth failed to
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provide us with service at rates acceptable to us or at all, we may not be able
to provide Internet access to our users. If BellSouth delivers unacceptable
service, the quality of our Internet services would suffer and we would likely
lose users who are dissatisfied with our service. For example, we are aware that
BellSouth, like other wireless carriers, has experienced service outages from
time to time in their wireless data network. In addition, our Palm VII series of
products are configured around the frequency standard used by BellSouth. If we
needed to switch to another wireless carrier, we would have to redesign
significant portions of our software and hardware to permit transmission on a
different frequency. Users of Palm VII series products existing before the
redesign would not be able to access the service provided by the new wireless
carrier. If we were required to redesign these elements, our business could be
adversely affected.
Our Internet services strategy depends on our ability to develop new wireless
access devices that operate on additional wireless networks other than BellSouth
in the U.S. We may be unsuccessful at building relationships with additional
carriers, and we may not be successful at developing new devices that operate on
other wireless networks. If we fail in either of these ways, our ability to
expand our Internet services business, and therefore our results of operations,
will suffer.
WE MAY NOT BE ABLE TO SUCCESSFULLY EXPAND OUR WIRELESS INTERNET SERVICES INTO
INTERNATIONAL MARKETS.
BellSouth provides wireless data services only in the United States. We intend
to expand our network services to support Internet services internationally, but
doing so will require us to enter into new relationships with wireless providers
abroad. We may not be able to enter into relationships on favorable terms to us
with international wireless carriers. In addition, because many international
wireless carriers use different standards and transmit data on different
frequencies than BellSouth, we are likely to incur incremental expenses related
to the redesign of significant portions of our software and hardware. Our
products may be subject to a lengthy certification process with each wireless
carrier with whom we seek to enter into a relationship. These certification
requirements could delay expanding our wireless Internet services into
international markets. In addition, in order to expand our Internet services
internationally, we need to develop localized information and services that are
appealing to users in each new geographic region. If we fail to develop
localized content for our Internet services in an area, our ability to sell
Internet services in that area will be seriously constrained.
OUR REPUTATION AND ABILITY TO GENERATE REVENUES WILL BE HARMED IF DEMAND FOR OUR
INTERNET SERVICES EXCEEDS OUR TELECOMMUNICATIONS AND NETWORK CAPACITY.
We may from time to time experience increases in our Internet services usage
which exceed our available telecommunications capacity and the capacity of our
third party network servers. As a result, users may be unable to register or log
on to our service, may experience a general slow-down in their Internet access
or may be disconnected from their sessions. Excessive user demand could also
result in system failures of our third party network servers' networks.
Inaccessibility, interruptions or other limitations on the ability to access our
service due to excessive user demand, or any failure of our third party network
servers to handle user traffic, would have a material adverse effect on our
reputation and our revenues.
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IF THE SECURITY OF OUR WEBSITES IS COMPROMISED, OUR REPUTATION COULD SUFFER AND
CUSTOMERS MAY NOT BE WILLING TO USE OUR INTERNET SERVICES, WHICH COULD CAUSE OUR
REVENUES TO DECLINE.
A significant barrier to widespread use of electronic commerce sites and network
services sites, such as our Palm.com and Palm.Net sites, is concern for the
security of confidential information transmitted over public networks. Despite
our efforts to protect the integrity of our Palm.com and Palm.Net sites, a party
may be able to circumvent our security measures and could misappropriate
proprietary information or cause interruptions in our operations and damage our
reputation. Any such action could negatively affect our customers' willingness
to engage in online commerce with us. We may be required to expend significant
capital and other resources to protect against these security breaches or to
alleviate problems caused by these breaches.
WE MAY NOT BE ABLE TO MAINTAIN AND EXPAND OUR BUSINESS IF WE ARE NOT ABLE TO
HIRE, RETAIN AND INTEGRATE SUFFICIENT QUALIFIED PERSONNEL.
Our future success depends to a significant extent on the continued contribution
of our key executive, technical, sales, marketing, supply chain and
administrative personnel. It also depends on our ability to expand, integrate
and retain our management team. The loss of services of key employees could
adversely affect our business, operating results or financial condition. Many
members of our senior management have been with the business only a short time.
In addition, recruiting and retaining skilled personnel, including software and
hardware engineers, is highly competitive, particularly in the San Francisco Bay
Area where we are headquartered. Further, our common stock price has been, and
may continue to be, extremely volatile. When our common stock price is less than
the exercise price of stock options granted to employees, turnover may increase,
which could harm our results of operations or financial condition. If we fail to
retain, hire and integrate qualified employees and contractors, we will not be
able to maintain and expand our business. In addition, we must carefully balance
the growth of our employees with our anticipated revenue growth. If our revenue
growth or attrition levels vary significantly, our results of operations or
financial condition could be adversely affected.
THIRD PARTIES HAVE CLAIMED AND MAY CLAIM IN THE FUTURE WE ARE INFRINGING THEIR
INTELLECTUAL PROPERTY, AND WE COULD SUFFER SIGNIFICANT LITIGATION OR LICENSING
EXPENSES OR BE PREVENTED FROM SELLING PRODUCTS IF THESE CLAIMS ARE SUCCESSFUL.
In the course of our business, we frequently receive claims of infringement or
otherwise become aware of potentially relevant patents or other intellectual
property rights held by other parties. We evaluate the validity and
applicability of these intellectual property rights, and determine in each case
whether we must negotiate licenses or cross-licenses to incorporate or use the
proprietary technologies in our products. Third parties may claim that we or our
customers or Palm platform licensees are infringing their intellectual property
rights, and we may be found to infringe those intellectual property rights and
require a license to use those rights. We may be unaware of intellectual
property rights of others that may cover some of our technology, products and
services.
Any litigation regarding patents or other intellectual property could be costly
and time-consuming, and divert our management and key personnel from our
business operations. The complexity of the technology involved and the
uncertainty of intellectual property litigation increase these risks. Claims of
intellectual property infringement might also require us to enter into costly
royalty or license agreements or indemnify our Palm platform licensees. 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
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injunctions against development and sale of our products.
We often rely on licenses of intellectual property for use in our business. We
cannot assure you that these licenses will be available in the future on
favorable terms or at all.
On April 28, 1997, Xerox Corporation filed suit against U.S. Robotics
Corporation and U.S. Robotics Access Corp. in the United States District Court
for the Western District of New York. The case came to be captioned: XEROX
CORPORATION v. U.S. ROBOTICS CORPORATION, U.S. ROBOTICS ACCESS CORP., PALM
COMPUTING, INC. AND 3COM CORPORATION, Civil Action No. 97-CV-6182T. The
complaint alleged willful infringement of U.S. patent 5,596,656 entitled
"Unistrokes for Computerized Interpretation of Handwriting." The complaint
sought unspecified damages and to permanently enjoin the defendants from
infringing the patent in the future. In an Order entered by the District Court
on June 6, 2000, the District Court granted the defendants' motion for summary
judgment of non-infringement and dismissed the case in its entirety. Xerox
appealed the dismissal to the U.S. Court of Appeals for the Federal Circuit as
Appeal No. 00-1464. Xerox has filed a brief in support of its appeal, and we
have filed our responsive brief with the court. No date for oral argument has
been set.
On December 13, 1999, WaveWare Communications, Inc. filed suit against 3Com,
Palm and others in the Superior Court of California, San Mateo County. The case
is captioned WAVEWARE COMMUNICATIONS, INC. v. 3COM CORPORATION, PALM COMPUTING,
INC., AND MARK BERCOW, No. 411331. The complaint alleges breach of contract,
constructive fraud, fraud and deceit, negligent misrepresentation,
misappropriation of assets and trade secrets, unfair competition, unjust
enrichment and intentional interference with economic advantage in connection
with our and 3Com's discussions with WaveWare concerning WaveWare's potential
acquisition by 3Com. The complaint seeks unspecified monetary damages and
injunctive relief. The case is set for trial in January 2001.
On December 27, 1999, Telxon Corporation and Penright! Corporation filed a
complaint in the U.S. District Court for the Northern District of Ohio, Eastern
Division (Case No. 1:99CV3157) against 3Com and Palm alleging copyright
infringement, unfair competition and theft of trade secrets. The plaintiffs
allege that the Palm OS operating system contains graphical user interface
software copied from the plaintiffs' software. The complaint seeks unspecified
compensatory and treble damages and to enjoin, among other things, distribution
and sales of the Palm OS operating system. No trial date has been set. The case
is still in the early stages of discovery.
On February 28, 2000, E-Pass Technologies, Inc. filed suit against "3Com, Inc."
in the United States District Court for the Southern District of New York and
later filed on March 6, 2000 an Amended Complaint against Palm and 3Com. The
case is now captioned E-PASS TECHNOLOGIES, INC. V. 3COM CORPORATION, A/K/A 3COM,
INC. AND PALM, INC. (Civil Action No. 00 CIV 1523). The Amended Complaint
alleges willful infringement of U.S. patent 5,276,311 entitled "Method and
Device for Simplifying the Use of Credit Cards, or the Like." The complaint
seeks unspecified compensatory and treble damages and to permanently enjoin the
defendants from infringing the patent in the future. In an Order dated June 9,
2000, the Federal Judge assigned to the action transferred the case to the U.S.
District Court for the Northern District of California. The U.S. District Court
scheduled a Markman hearing for May 2001 to determine the meaning of certain
terms used in the claims of the patent in suit. No trial date has been set.
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On May 2, 2000, Rotis Technologies Corporation filed suit against Palm and two
other defendants in the U.S. District Court for the Northern District of Texas.
The case is captioned ROTIS TECHNOLOGIES CORPORATION V. TRACK DATA CORPORATION,
PALM, INC. AND SPRINT FON GROUP (Case No. 300CV-931-L). The complaint alleges
infringement of U.S. patent 4,473,824 entitled "Price Quotation System." The
complaint seeks unspecified compensatory and treble damages and to permanently
enjoin the defendants from infringing the patent in the future. Palm is
investigating the allegations contained in the suit. No discovery has been
exchanged. No trial date has been set.
In connection with our separation from 3Com, pursuant to the terms of the
Indemnification and Insurance Matters Agreement between 3Com and us, we will
indemnify and hold 3Com harmless for any damages or losses which may arise out
of the Xerox, WaveWare, Telxon and Penright!, E-Pass and Rotis litigation.
IF THIRD PARTIES INFRINGE OUR INTELLECTUAL PROPERTY, WE MAY EXPEND SIGNIFICANT
RESOURCES ENFORCING OUR RIGHTS OR SUFFER COMPETITIVE INJURY.
Our success depends in large part on our proprietary technology. We rely on a
combination of patents, copyrights, trademarks and trade secrets,
confidentiality provisions and licensing arrangements to establish and protect
our proprietary rights. If we fail to protect or to enforce our intellectual
property rights successfully, our competitive position could suffer, which could
harm our operating results.
Our pending patent and trademark registration applications may not be allowed or
competitors may challenge the validity or scope of these patent applications or
trademark registrations. In addition, our patents may not provide us a
significant competitive advantage.
We may be required to spend significant resources to monitor and police our
intellectual property rights. We may not be able to detect infringement and may
lose competitive position in the market before we do so. In addition,
competitors may design around our technology or develop competing technologies.
Intellectual property rights may also be unavailable or limited in some foreign
countries, which could make it easier for competitors to capture market share.
On July 22, 1999, we filed a copyright infringement action against Olivetti
Office USA, Inc. and CompanionLink Software, Inc. in the United States District
Court for the Northern District of California alleging that Olivetti's "Royal
daVinci" handheld device and the daVinci OS Software Development Kit
(distributed by CompanionLink) contained source code copied from the Palm OS
operating system. We obtained a preliminary injunction against further
distribution, sale, import or export of any product containing source code or
object code copied or derived from the Palm OS operating system. The injunction
is to remain in effect pending the outcome of the lawsuit. We also initiated a
copyright infringement action in Hong Kong on July 21, 1999, against EchoLink
Design, Ltd., the company responsible for developing the operating system
software contained in the Olivetti daVinci devices that are the subject of the
action against Olivetti in the Northern District of California. The High Court
of the Hong Kong Special Administrative Region issued an order the same day
restraining EchoLink from further copying, distribution, sale, import or export
of Palm OS operating system source code or EchoLink's "NEXUS OS" source code,
which we maintain infringes our copyrights. Kessel Electronics (H.K.), Limited,
which supplied Olivetti with the daVinci devices, was subsequently added to the
Hong Kong action. Kessel consented to an injunction against reproducing,
copying, importing, exporting, distributing, or making available to the public
any software contained in certain files of the Palm OS
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source code or object code. By letter dated October 7, 1999, 3Com notified
certain third-party retailers about the preliminary injunction order issued
against Olivetti and CompanionLink. Olivetti has filed an action against Palm
and 3Com in the Superior Court of California, Santa Clara County, for unfair
competition, intentional interference with potential economic advantage, libel
and trade libel, based upon certain statements that were allegedly made, or that
3Com allegedly omitted to make, in the October 7, 1999 letter. In addition,
Olivetti has filed the identical action, as counterclaims and third party claims
against Palm and 3Com, in the United States District Court for the Northern
District of California.
In connection with our separation from 3Com, pursuant to the terms of the
Indemnification and Insurance Matters Agreement between 3Com and us, we will
indemnify and hold 3Com harmless for any damages or losses which may arise out
of the Olivetti litigation.
In the past, there have been thefts of computer equipment from us and our
employees. This computer equipment has contained proprietary information. We
have formulated a security plan to reduce the risk of any future thefts and have
cooperated with state and federal law enforcement officials in an investigation
of past incidents. We may not be successful in preventing future thefts, or in
preventing those responsible for past thefts from using our technology to
produce competing products. The unauthorized use of Palm technology by
competitors could have a material adverse effect on our ability to sell our
products in some markets.
OUR FUTURE RESULTS COULD BE HARMED BY ECONOMIC, POLITICAL, REGULATORY AND OTHER
RISKS ASSOCIATED WITH INTERNATIONAL SALES AND OPERATIONS.
Since we sell our products worldwide, our business is subject to risks
associated with doing business internationally. We anticipate that revenue from
international operations will represent an increasing portion of our total
revenue over time. In addition, several of the facilities where our devices are
manufactured are located outside the United States. Accordingly, our future
results could be harmed by a variety of factors, including:
- changes in foreign currency exchange rates;
- changes in a specific country's or region's political or
economic conditions, particularly in emerging markets;
- trade protection measures and import or export licensing
requirements;
- potentially negative consequences from changes in tax laws;
- difficulty in managing widespread sales and manufacturing
operations; and
- less effective protection of intellectual property.
For example, several companies have recently reported decreased demand from
European customers, which they have attributed to unfavorable exchange rate
fluctuations and higher oil prices. Although substantially all of our revenues
are denominated in U.S. dollars, 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, such as the recent decline of the
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Euro relative to the US dollar, our business could be harmed by decreases in
demand for our products or reductions in gross margins.
WE INTEND TO PURSUE STRATEGIC ACQUISITIONS AND INVESTMENTS WHICH COULD HAVE AN
ADVERSE IMPACT ON OUR BUSINESS IF UNSUCCESSFUL.
We recently acquired Actual Software Corporation and AnyDay.com, Inc., and we
have entered into an agreement to acquire WeSync.com, Inc. We often evaluate
other acquisition opportunities that could provide us with additional product or
services offerings or additional industry expertise. Acquisitions could result
in difficulties assimilating acquired operations and products, and result in the
diversion of capital and management's attention away from other business issues
and opportunities. Integration of acquired companies may result in problems
related to integration of technology and inexperienced management teams. Our
management has had limited experience in assimilating acquired organizations and
products into our operations. We may not successfully integrate any operations,
personnel or products that we have acquired or may acquire in the future. If we
fail to successfully integrate acquisitions, our business could be materially
harmed.
In addition, we have designated up to $50 million for strategic venture
investments in other companies which provide products and services which are
complementary to ours. If these investments are unsuccessful, this could have a
material adverse impact on our results of operations and financial position.
OUR ABILITY TO PURSUE MERGERS AND ACQUISITIONS MAY BE LIMITED.
3Com has obtained a ruling from the Internal Revenue Service that the
distribution of 3Com's shares of Palm common stock to 3Com's stockholders will
not be taxable. This ruling requires 3Com and Palm, through July 27, 2002, not
to engage in certain transactions that would constitute a change of more than
50% of the equity interest in either company. Consequently, our ability to
engage in mergers and acquisitions will be limited by this requirement. If
either 3Com or Palm fails to conform to requirements set forth in the ruling,
there would be material adverse consequences, potentially including making the
distribution taxable, and causing the company that was responsible for the
non-conformance to indemnify the other company for any resulting damages.
RISKS RELATED TO OUR SEPARATION FROM 3COM
BECAUSE WE CURRENTLY USE PORTIONS OF 3COM'S NETWORK INFRASTRUCTURE, REAL ESTATE
FACILITIES, AND RELATED SITE SERVICES, OUR ABILITY TO OPERATE OUR BUSINESS COULD
BE IMPACTED BY DISRUPTIONS IN SERVICE LEVELS FROM 3COM.
We continue to rely upon the network infrastructure and certain other systems
provided and maintained by 3Com. We are in the process of migrating to our own
network infrastructure which we intend to outsource to a third party. We may
experience network interruptions related to either the current 3Com network
infrastructure or the migration to our new network infrastructure maintained by
a third party.
Any failure or significant downtime in 3Com's or our own network or information
systems could prevent us from taking customer orders, shipping products or
billing customers and could harm our business. In addition, our network and
information systems require the services of employees with extensive
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knowledge of these information systems and the business environment in which we
operate. In order to successfully implement and operate our systems, we must be
able to attract and retain a significant number of highly skilled employees. If
we fail to attract and retain the highly skilled personnel required to
implement, maintain, and operate our information systems, our business could
suffer.
The agreements with 3Com for these services were made in the context of a
parent-subsidiary relationship and were negotiated in the overall context of our
separation from 3Com. The prices charged to us under these agreements may be
lower than the prices that we may be required to pay third parties for similar
services or the costs of similar services if we undertake them ourselves.
In addition, we currently lease office space from 3Com in Santa Clara and other
locations. We have entered into arrangements with 3Com to lease our Santa Clara
facilities under leases that expire beginning in September 2002 through August
2003. After this transition period, we will need to secure alternative
facilities. We recently announced our intention to build a new campus which we
intend to be available in mid 2002. We expect to have to secure additional space
to meet our expected facilities requirements until the new campus is available.
If we fail to secure the additional space, our business will be harmed.
OUR HISTORICAL FINANCIAL INFORMATION MAY NOT BE REPRESENTATIVE OF OUR RESULTS AS
A SEPARATE COMPANY.
Through February 25, 2000, our consolidated financial statements were carved out
from the consolidated financial statements of 3Com using the historical results
of operations and historical bases of the assets and liabilities of the 3Com
handheld computing business that we comprised. Accordingly, the historical
financial information does not necessarily reflect what our financial position,
results of operations and cash flows would have been had we been a separate,
stand-alone entity during the periods presented. 3Com did not account for us,
and we were not operated, as a separate, stand-alone entity for the periods
presented.
Our historical costs and expenses include allocations from 3Com for centralized
corporate services and infrastructure costs, including legal, accounting,
treasury, real estate, information technology, distribution, customer service,
sales, marketing and engineering. These allocations were determined on bases
that 3Com and Palm considered to be reasonable reflections of the utilization of
services provided to or the benefit received by Palm. The historical financial
information is not necessarily indicative of what our results of operations,
financial position and cash flows will be in the future. We have not made
adjustments to our historical financial information to reflect the many
significant changes that have occurred and will occur in our cost structure,
funding and operations as a result of our separation from 3Com, including
increased costs associated with reduced economies of scale, increased marketing
expenses related to building a company brand identity separate from 3Com and
increased costs associated with being a publicly traded, stand-alone company.
WE MAY HAVE POTENTIAL BUSINESS CONFLICTS OF INTEREST WITH 3COM WITH RESPECT TO
OUR PAST AND ONGOING RELATIONSHIPS AND MAY NOT RESOLVE THESE CONFLICTS ON THE
MOST FAVORABLE TERMS TO US.
Conflicts of interest may arise between 3Com and us in a number of areas
relating to our past and ongoing relationships, including:
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<PAGE>
- labor, tax, employee benefit, indemnification and other
matters arising from our separation from 3Com;
- intellectual property matters;
- employee retention and recruiting;
- the nature, quality and pricing of transitional services 3Com
has agreed to provide us; and
- business opportunities that may be attractive to both 3Com and
us.
Nothing restricts 3Com from competing with us.
We may not be able to resolve any potential conflicts, and even if we do, the
resolution may be less favorable than if we were dealing with an unaffiliated
party. The agreements we have entered into with 3Com may be amended upon
agreement between the parties.
RISKS RELATED TO THE SECURITIES MARKETS AND OWNERSHIP OF OUR COMMON STOCK
OUR COMMON STOCK HAS NOT BEEN PUBLICLY TRADED VERY LONG, AND OUR STOCK PRICE MAY
BE SUBJECT TO SIGNIFICANT FLUCTUATIONS AND VOLATILITY.
Our common stock has been publicly traded only since March 2, 2000. The market
price of our common stock has been subject to significant fluctuations since the
date of our initial public offering. These fluctuations could continue. Among
the factors that could affect our stock price are:
- quarterly variations in our operating results;
- changes in revenue or earnings estimates or publication of
research reports by analysts;
- speculation in the press or investment community;
- strategic actions by us or our competitors, such as new
product announcements, acquisitions or restructuring;
- actions by institutional stockholders
- 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 extreme 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
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PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW AND OUR ADOPTION OF A
STOCKHOLDER RIGHTS PLAN MAY DELAY OR PREVENT ACQUISITION OF US, WHICH COULD
DECREASE THE VALUE OF YOUR SHARES.
Our certificate of incorporation and bylaws and Delaware law contain provisions
that could make it harder for a third party to acquire us without the consent of
our board of directors. These provisions include a classified board of directors
and limitations on actions by our stockholders by written consent. Delaware law
also imposes some restrictions on mergers and other business combinations
between us and any holder of 15% or more of our outstanding common stock. In
addition, our board of directors has the right to issue preferred stock without
stockholder approval, which could be used to dilute the stock ownership of a
potential hostile acquirer. Although we believe these provisions provide for an
opportunity to receive a higher bid by requiring potential acquirers to
negotiate with our board of directors, these provisions apply even if the offer
may be considered beneficial by some stockholders.
Our board of directors adopted a stockholder rights plan, pursuant to which we
declared and paid a dividend of one right for each share of common stock held by
stockholders of record as of November 6, 2000. Unless redeemed by us prior to
the time the rights are exercised, upon the occurrence of certain events, the
rights will entitle the holders to receive upon exercise thereof shares of our
preferred stock, or shares of an acquiring entity, having a value equal to twice
the then-current exercise price of the right. The issuance of the rights could
have the effect of delaying or preventing a change in control of us.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE SENSITIVITY
Palm's exposure to market risk for changes in interest rates relates primarily
to our investment portfolio, which consists of cash, cash equivalents and
restricted investments as of December 1, 2000. The primary objective of our
investment activities is to maintain the safety of principal and preserve
liquidity while maximizing yields without significantly increasing risk. This is
accomplished by investing in marketable investment grade securities and by
limiting exposure to any one issuer. As of December 1, 2000, all investments
mature within one year and are carried at amortized cost, which approximates
fair market value. We are exposed to market risk for changes in interest rates
due to the short term nature of our investment portfolio. A decline in interest
rates could have a material impact on our level of interest income, which
currently represents a significant portion of our income before income taxes.
In November 2000, we entered into an operating lease agreement related to our
new corporate campus, for which occupancy is planned beginning in mid-2002. In
conjunction with this agreement, we are required to guarantee a minimum residual
value for the property and to maintain certain levels of cash collateral over
the term of the agreement. Such cash collateral is classified as non-current
restricted investments in our consolidated balance sheet and totaled
approximately $231 million at December 1, 2000. As the leased facilities are
constructed and interest accrues on the amount funded by the lessor, the amount
of cash collateral required to be maintained is expected to increase to
approximately $460 million. Palm will continue to receive the interest income
earned on the cash collateral. Palm is exposed to interest rate risk on the
amount funded by the lessor, to the extent that interest rates increase, then
the amount of the required cash collateral will also increase. The total cost of
the project will be impacted by a number of factors, including changes in
interest rates. Once the construction of the leased
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facilities is complete, Palm will begin making rental payments under the
operating lease agreement, with these payments being indexed to the London
Interbank Offered Rate, exposing Palm to interest rate risk related to these
payments.
FOREIGN CURRENCY EXCHANGE RATE RISK
As Palm has significant revenue and supply sources outside of the United
States, we are subject to certain foreign exchange exposures. As substantially
all of our revenues and supply contracts are currently denominated in US
dollars, the exposure to foreign currency movements has not been significant to
date. We will continue to monitor and assess the risk associated with these
exposures and may at some point in the future take actions to hedge or mitigate
these risks. These actions may or may not involve the use of derivative
financial instruments.
EQUITY PRICE RISK
We recently designated up to $50 million for strategic venture investments in
other companies which provide products and services which are complementary to
ours, and have made approximately $7 million of investments in other companies
as of December 1, 2000. Investments in publicly traded companies are subject to
market price volatility, and investments in privately held companies are
illiquid and inherently risky, as their technologies or products are typically
in the early stages of development and may never materialize. We could
experience material declines in the value of our investments in publicly traded
companies, or even lose the initial value of our investments in both privately
held and publicly traded companies.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Palm is a party to lawsuits in the normal course of its business. Litigation in
general, and intellectual property litigation in particular, can be expensive
and disruptive to normal business operations. Moreover, the results of complex
legal proceedings are difficult to predict. Palm believes that it has defenses
to the cases set forth below and is vigorously contesting these matters. Palm is
not currently able to estimate, with reasonable certainty, the possible loss, or
range of loss, if any, from the cases listed below, but an unfavorable
resolution of these lawsuits could adversely affect Palm's business, results of
operations or financial condition.
On April 28, 1997, Xerox Corporation filed suit against U.S. Robotics
Corporation and U.S. Robotics Access Corp. in the United States District Court
for the Western District of New York. The case came to be captioned: Xerox
Corporation v. U.S. Robotics Corporation, U.S. Robotics Access Corp., Palm
Computing, Inc. and 3Com Corporation, Civil Action No. 97-CV-6182T. The
complaint alleged willful infringement of U.S. patent 5,596,656 entitled
"Unistrokes for Computerized Interpretation of Handwriting." The complaint
sought unspecified damages and to permanently enjoin the defendants from
infringing the patent in the future. In an Order entered by the District Court
on June 6, 2000, the District Court granted the defendants' motion for summary
judgment of non-infringement and dismissed the case in its entirety. Xerox
appealed the dismissal to the U.S. Court of Appeals for the Federal Circuit as
Appeal No. 00-1464. Xerox has filed a brief in support of its appeal, and we
have filed our responsive brief with the court. No date for oral argument has
been set.
On July 22, 1999, we filed a copyright infringement action against Olivetti
Office USA, Inc. and CompanionLink Software, Inc. in the United States District
Court for the Northern District of California alleging that Olivetti's "Royal
daVinci" handheld device and the daVinci OS Software Development Kit
(distributed by CompanionLink) contained source code copied from the Palm OS
operating system. We obtained a preliminary injunction against further
distribution, sale, import or export of any product containing source code or
object code copied or derived from the Palm OS operating system. The injunction
is to remain in effect pending the outcome of the lawsuit. We also initiated a
copyright infringement action in Hong Kong on July 21, 1999, against EchoLink
Design, Ltd., the company responsible for developing the operating system
software contained in the Olivetti daVinci devices that are the subject of the
action against Olivetti in the Northern District of California. The High Court
of the Hong Kong Special Administrative Region issued an order the same day
restraining EchoLink from further copying, distribution, sale, import or export
of Palm OS operating system source code or EchoLink's "NEXUS OS" source code,
which we maintain infringes our copyrights. Kessel Electronics (H.K.), Limited,
which supplied Olivetti with the daVinci devices, was subsequently added to the
Hong Kong action. Kessel consented to an injunction against reproducing,
copying, importing, exporting, distributing, or making available to the public
any software contained in certain files of the Palm OS source code or object
code. By letter dated October 7, 1999, 3Com notified certain third-party
retailers about the preliminary injunction order issued against Olivetti and
CompanionLink. Olivetti has filed an action against Palm and 3Com in the
Superior Court of California, Santa Clara County, for unfair competition,
intentional interference with potential economic advantage, libel and trade
libel, based upon certain statements that were allegedly made, or that 3Com
allegedly omitted to make, in the October 7, 1999 letter. In addition, Olivetti
has filed the identical action, as counterclaims and third party claims against
Palm and 3Com, in the United States District Court for the Northern District of
California.
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On December 13, 1999, WaveWare Communications, Inc. filed suit against 3Com,
Palm and others in the Superior Court of California, San Mateo County. The case
is captioned WaveWare Communications, Inc. v. 3Com Corporation, Palm Computing,
Inc., and Mark Bercow, No. 411331. The complaint alleges breach of contract,
constructive fraud, fraud and deceit, negligent misrepresentation,
misappropriation of assets and trade secrets, unfair competition, unjust
enrichment and intentional interference with economic advantage in connection
with our and 3Com's discussions with WaveWare concerning WaveWare's potential
acquisition by 3Com. The complaint seeks unspecified monetary damages and
injunctive relief. The case is set for trial in January 2001.
On December 27, 1999, Telxon Corporation and Penright! Corporation filed a
complaint in the U.S. District Court for the Northern District of Ohio, Eastern
Division (Case No. 1:99CV3157) against 3Com and Palm alleging copyright
infringement, unfair competition and theft of trade secrets. The plaintiffs
allege that the Palm OS operating system contains graphical user interface
software copied from the plaintiffs' software. The complaint seeks unspecified
compensatory and treble damages and to enjoin, among other things, distribution
and sales of the Palm OS operating system. No trial date has been set. The case
is still in the early stages of discovery.
On February 28, 2000, E-Pass Technologies, Inc. filed suit against "3Com, Inc."
in the United States District Court for the Southern District of New York and
later filed on March 6, 2000 an Amended Complaint against Palm and 3Com. The
case is now captioned E-Pass Technologies, Inc. v. 3Com Corporation, a/k/a 3Com,
Inc. and Palm, Inc. (Civil Action No. 00 CIV 1523). The Amended Complaint
alleges willful infringement of U.S. patent 5,276,311 entitled "Method and
Device for Simplifying the Use of Credit Cards, or the Like." The complaint
seeks unspecified compensatory and treble damages and to permanently enjoin the
defendants from infringing the patent in the future. In an Order dated June 9,
2000, the Federal Judge assigned to the action transferred the case to the U.S.
District Court for the Northern District of California. The U.S. District Court
scheduled a Markman hearing for May 2001 to determine the meaning of certain
terms used in the claims of the patent in suit. No trial date has been set.
On May 2, 2000, Rotis Technologies Corporation filed suit against Palm and two
other defendants in the U.S. District Court for the Northern District of Texas.
The case is captioned Rotis Technologies Corporation v. Track Data Corporation,
Palm, Inc. and Sprint FON Group (Case No. 300CV-931-L). The complaint alleges
infringement of U.S. patent 4,473,824 entitled "Price Quotation System." The
complaint seeks unspecified compensatory and treble damages and to permanently
enjoin the defendants from infringing the patent in the future. Palm is
investigating the allegations contained in the suit. No discovery has been
exchanged. No trial date has been set.
In connection with our separation from 3Com, pursuant to the terms of the
Indemnification and Insurance Matters Agreement between 3Com and us, we will
indemnify and hold 3Com harmless for any damages or losses which may arise out
of the Xerox, WaveWare, Telxon and Penright!, E-Pass, Rotis and Olivetti
litigation.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting on November 2, 2000, the following proposals
were adopted:
Proposal I
Election of Directors
<TABLE>
<CAPTION>
Total Vote For Director Total Vote Withheld From Director
<S> <C> <C>
Carl J. Yankowski 469,669,808 38,329,000
Michael Homer 469,627,158 38,371,650
</TABLE>
Proposal II
To ratify the appointment of Deloitte & Touche LLP as independent public
accountants for the fiscal year ending June 1, 2001.
<TABLE>
<CAPTION>
Votes For Votes Against Votes Abstained
<S> <C> <C>
506,159,678 483,978 1,355,151
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
2.1(1) Master Separation and Distribution Agreement between
3Com and the registrant effective as of December 13,
1999, as amended.
2.2(2) General Assignment and Assumption Agreement between 3Com and
the registrant, as amended.
2.3(2) Master Technology Ownership and License Agreement between
3Com and the registrant.
2.4(2) Master Patent Ownership and License Agreement between 3Com
and the registrant.
2.5(2) Master Trademark Ownership and License Agreement between 3Com
and the registrant.
2.6(2) Employee Matters Agreement between 3Com and the registrant.
2.7(2) Tax Sharing Agreement between 3Com and the registrant.
2.8(2) Master Transitional Services Agreement between 3Com and the
registrant.
2.9(2) Real Estate Matters Agreement between 3Com and the registrant.
2.10(2) Master Confidential Disclosure Agreement between 3Com and the
registrant.
2.11(2) Indemnification and Insurance Matters Agreement between 3Com
and the registrant.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
2.12(1) Form of Non-U.S. Plan.
3.1 (1) Amended and Restated Certificate of Incorporation.
3.2 Amended Bylaws.
3.3(5) Certificate of Designation of Rights, Preferences and
Privileges of Series A Participating Preferred Stock
4.1(1) Reference is made to Exhibits 3.1 and 3.2 hereof.
4.2(5) Specimen Stock Certificate.
4.3(5) Preferred Stock Rights Agreement between the Registrant and
Fleet National Bank
10.1(1)* 1999 Stock Plan.
10.2(1)* Form of 1999 Stock Plan Agreements.
10.3(1)* 1999 Employee Stock Purchase Plan.
10.4(1)* Form of 1999 Employee Stock Purchase Plan Agreements.
10.5(3)* Amended and Restated 1999 Director Option Plan.
10.6(1)* Form of 1999 Director Option Plan Agreements.
10.7(1)* Management Retention Agreement dated as of December 1, 1999 by
and between Carl J. Yankowski and the registrant.
10.8(1)* Form of Indemnification Agreement entered into by the
registrant with each of its directors and executive officers.
10.9(1)** RAM Mobile Data USA Limited Partnership Value Added Reseller
Agreement between RAM Mobile Data USA Limited Partnership (now
BellSouth Wireless Data, L.P.) and the registrant.
10.10(1)** Supply Agreement between Manufacturers' Services Salt Lake City
Operations, Inc. and the registrant.
10.11(1) Common Stock Purchase Agreement between America Online and the
registrant.
10.12(1) Common Stock Purchase Agreement between Motorola and the
registrant.
10.13(1) Common Stock Purchase Agreement Between Nokia and the
registrant.
10.14(1) Form of Management Retention Agreement.
10.15(4) Agreement for Purchase and Sale of Land between 3Com
Corporation and the registrant.
10.16(6) Master Lease dated as of November 16, 2000 by and between the
registrant and Societe Generale Financial Corporation, as
supplemented.
10.17(6) Participation Agreement dated as of November 16, 2000 by
and among the registrant, Societe Generale Financial
Corporation, Societe Generale and certain other parties.
10.18(6) Guaranty dated as of November 16, 2000 by and between the
registrant and Societe Generale, New York Branch.
27.1 Financial Data Schedule.
</TABLE>
(1) - Incorporated by reference from the Registrant's Registration Statement
on Form S-1 (No. 333-92657) filed with the Commission on December 13,
1999, as amended.
(2) - Incorporated by reference from the Registrant's Report on Form 10-Q
filed with the Commission on April 10, 2000.
(3) - Incorporated by reference from the Registration Statement on Form S-8
filed with the Commission on October 2, 2000.
(4) - Incorporated by reference from the Registrant's Report on Form 10-Q
filed with the Commission
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<PAGE>
on October 12, 2000.
(5) - Incorporated by reference from the Registrant's Report on Form 8-K
filed with the Commission on November 22, 2000.
(6) - Incorporated by reference from the Registrant's Report on Form 8-K
filed with the Commission on December 1, 2000.
* - Denotes an executive or director compensation plan or arrangement.
** - Confidential treatment granted on portions of this exhibit.
(b) Reports on Form 8-K
(1) - On October 3, 2000, Palm, Inc. filed a report on Form 8-K announcing the
adoption of a stockholder rights plan.
(2) - On November 22, 2000, Palm, Inc. filed a report on Form 8-K relating
to the previously announced stockholder rights plan. The Company issued
a dividend of one right to purchase one one-thousandth of a share of
the Company's Series A Participating Preferred Stock for each
outstanding share of common stock to stockholders of record on November
6, 2000.
(3) - On December 1, 2000, Palm, Inc. filed a report on Form 8-K relating
to an operating lease that the Company entered into with Societe
Generale Financial Corporation for approximately 39 acres of property,
intended for 1.6 million square feet of general office facilities in
San Jose, California.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Palm, Inc.
(Registrant)
Dated: January 9, 2001 By: /s/ Judy Bruner
--------------------- ---------------------------
Judy Bruner
Senior Vice President, Finance
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
43
