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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended
May 31, 2002
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from
to
Commission File No. 000-29597
Palm, Inc.
(Exact name of registrant as specified in its charter)
| Delaware |
|
94-3150688 |
| (State or other jurisdiction of incorporation or organization) |
|
(I.R.S. Employer Identification
No.) |
| 400 N. McCarthy Blvd. |
|
95035 |
| Milpitas, California |
|
(Zip Code) |
| (Address of principal executive offices) |
|
|
Registrant’s telephone number, including area code (408) 503-7000
Securities registered pursuant to Section 12(b) of the Act: |
|
NONE |
Securities registered pursuant to Section 12(g) of the Act: |
|
Common Stock, $.001 par value |
Preferred
Share Purchase Rights, $.001 par value.
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
The aggregate market value of the Registrant’s Common Stock held by
non-affiliates, based upon the closing price of the Common Stock on July 15, 2002, as reported by the NASDAQ National Market, was approximately $863,000,000. Shares of Common Stock held by each executive officer and director and by each person who
owns 5% or more of the outstanding Common Stock, based on Schedule 13G filings, have been excluded since such persons may be deemed affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
As of July 15, 2002, 579,181,371 shares of the Registrant’s Common Stock were outstanding.
The Registrant’s definitive Proxy
Statement for the Annual Meeting of Stockholders to be held on October 1, 2002 is incorporated by reference in Part III of this Form 10-K to the extent stated herein.
Form 10-K
For the Fiscal Year Ended May 31, 2002
Table of Contents
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As used in this report on Form 10-K, unless the context otherwise
requires, the terms “we,” “us,” or “the Company” and “Palm” refer to Palm, Inc., a Delaware corporation.
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the federal securities laws.
These statements include those concerning the following: our intentions, beliefs and expectations regarding handheld devices, the market for handheld devices and the handheld device industry; the Palm platform and licensing opportunities for the
Palm platform; the timetable, plans and benefits of the separation of our businesses into two independent entities, the Solutions Group and PalmSource; wireless services, applications and technologies and our network services; our strategies; growth
opportunities for us and our developer community; product development, design, innovation and introduction relating to new and existing products, technologies and solutions; development of the ARM Economy; expandability options; support and software
applications developed by third party developers; the Palm Economy and our support of the Palm Economy; the enterprise market and related opportunities; international business, international sales and international markets; customer service and
technical support; competition and our competitive advantages; industry standards and compatibility of our products; our rights in the Palm trademark portfolio; the licensing of complementary technologies from other parties; our relationship with
our employees and our workforce reductions; our facilities, operating leases and our ability to secure additional space; cash dividends; expense allocations and costs relating to our separation from 3Com Corporation; excess inventory; our expenses;
research and development; cost reductions and our restructuring program; charges for the discontinuance of projects; interest and other income; our credit facility; our belief that our cash and cash equivalents and our credit facility will be
sufficient to satisfy our anticipated cash requirements; our beliefs and expectations about our future success and results; our ability to forecast demand; our operating results; our expectations regarding our revenues and customers; our
distributors, retailers and resellers; joint development arrangements; strategic acquisitions; strategic investments; our beliefs about provisions in our charter documents and Delaware law and our adoption of a stockholder rights plan; and
investment activities, interest rates, and derivative financial instruments. These statements are subject to risks and uncertainties that could cause actual results and events to differ materially. For a detailed discussion of these risks and
uncertainties, see the “Business Environment and Risk Factors” section of this Form 10-K.
The
stockholder communication document accompanying this Annual Report on Form 10-K contains forward-looking statements within the meaning of the federal securities laws. These statements include those concerning the following: competing business
strategies; operational problems; existing and future opportunities and the future for handheld devices; the markets for our products and services and our position in these markets; our plans for PalmSource; our beliefs regarding the operating
system software licensing business; our management and its execution capabilities; our developer community; our plans to develop two well-capitalized, high-growth and profitable companies; our deployment of behind-the-firewall enterprise email
software; strategic alliances; our plans for, and deployment of, Palm OS 5 and the ARM platform; returns to our shareholders; opportunities in the enterprise market, entry level consumer market and in new geographies; and the transition to networked
applications, communication and gaming and entertainment. These statements are subject to risks and uncertainties that could cause actual results and events to differ materially. For a detailed discussion of these risks and uncertainties, see the
“Business Environment and Risk Factors” section of this Form 10-K.
Palm, Inc. undertakes no obligation
to update forward-looking statements to reflect events or circumstances occurring after the date of this Form 10-K.
Graffiti, HotSync, Palm.Net and Palm OS are registered trademarks and Palm and Palm Powered are trademarks of Palm, Inc. or its subsidiaries.
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PART I
Overview
Palm, Inc. is the leading global provider of handheld computing devices and operating systems for handheld devices. For purposes of this
report, we refer to the devices designed and sold by Palm as Palm Branded devices, and we refer to devices running on the Palm operating system (the Palm OS) as Palm Powered devices. Palm Powered devices include Palm Branded devices as well as
devices designed and sold by third parties licensing the Palm OS. According to International Data Corporation’s report “Sync or Swim: Worldwide Smart Handheld Devices Forecast and Analysis, 2002-2006”, Palm Branded devices held a
leading 39% share of the worldwide pen-based handheld computing device market, and Palm Powered devices held approximately 57% share of such market in calendar year 2001. We believe our focus on ease of use, usefulness and style have contributed to
our leading market share position in both handheld devices and operating systems for handheld devices.
Palm was
founded in 1992 as Palm Computing, Inc. In 1995, it was acquired by U.S. Robotics Corporation and sold its first handheld product in 1996, quickly establishing a leadership role in the handheld device industry. In 1997, 3Com Corporation acquired
U.S. Robotics and in 1999, 3Com announced the intent to separate the Palm business into an independent company. In preparation for becoming an independent, publicly traded company, Palm Computing, Inc. changed its name to Palm, Inc. and was
incorporated in Delaware in December 1999. In March 2000, approximately 6% of the shares of Palm’s common stock were sold in an initial public offering and concurrent private placements and in July 2000, 3Com distributed the remaining
approximately 94% of Palm’s common stock outstanding to 3Com’s stockholders.
Palm’s total revenue
has grown from approximately $1 million in fiscal year 1995 to $1 billion in fiscal year 2002. Substantially all of our revenues to date have been generated from sales of our handheld devices and related peripherals and accessories. To date, we have
shipped over 18 million Palm Branded devices and approximately 23 million Palm Powered devices have been sold worldwide.
Today, Palm is organized into two operating segments—PalmSource, Inc., a wholly owned subsidiary of Palm, Inc. (“PalmSource”), and the Solutions Group. In the first quarter of fiscal year 2002, we announced our
strategy to separate our Palm OS business (PalmSource) and our device business (Solutions Group) into two, independent companies. We believe this independence will bring greater clarity of mission and focus to both units and better serve our
existing and future licensees. We intend to achieve external separation between the two businesses in fiscal year 2003 by making PalmSource an independent public company. In addition, in order to facilitate a distribution of PalmSource stock to Palm
stockholders, in June 2002 we filed a ruling request with the Internal Revenue Service, which is still pending, seeking a determination that such a distribution, if it occurs, would be tax-free.
Consistent with our separation strategy our summary is organized into two parts: Solutions Group and PalmSource.
SOLUTIONS GROUP
Business Summary
The Solutions Group develops, manufactures and markets handheld devices, add-ons and peripherals as well as related services and
value-added software. Palm’s Solutions Group targets consumer, enterprise, education and government users. The Solutions Group currently offers the m100, m500, and i705 families of Palm Branded devices, each of which runs on the Palm OS. The
Solutions Group also markets a wireless access service (Palm.Net) which provides handheld user subscribers with wireless access to Internet-based information and email. Additionally, the Solutions Group develops and sells certain application
software as part of its strategy to sell handhelds to enterprises for use by their employees.
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Solutions Group revenues totaled $1,005.7, $1,532.6, and $1,050.6 million in
fiscal years 2002, 2001 and 2000, respectively. Solutions Group operating income (loss) totaled $(132.3), $(77.5), and $90.5 million in fiscal years 2002, 2001 and 2000, respectively. Operating income (loss) includes intersegment cost of revenues
which are eliminated in consolidation and totaled $40.9, $59.6, and $42.7 million in fiscal years 2002, 2001 and 2000, respectively. For management reporting purposes, we do not allocate certain costs to the operating segments. Those costs not
allocated include the following financial statement line items: ‘cost of revenues—charge (reduction) for special inventory and related costs’, ‘amortization of goodwill and intangible assets’, ‘restructuring
charges’, ‘impairment charges’, ‘legal settlements’, ‘separation costs’ and ‘purchased in-process technology’. Total assets for the Solutions Group totaled $1,066.0 million in fiscal year 2002. Assets
were not allocated to segments for internal reporting purposes in fiscal years 2001 and 2000.
Solutions Group Strategy
The Solutions Group strategy is centered around achieving operational excellence and innovation for the
enterprise and consumer markets.
Operational Excellence. Over the past year we have
made significant changes in our Solutions Group organization. A new management team has reshaped our operations and is improving our competitive advantage by helping us to become one of the low cost producers in the handheld industry. We have
achieved substantial cost reductions in our supply chain, reduced our development cycle times and focused our sales and marketing in line with each of these strategies. Going forward, we intend to expand our competitive advantage through operational
excellence.
Innovation for the Enterprise Market. We believe the enterprise market
represents a significant opportunity for the Solutions Group. Palm Branded devices that are used in professional environments have historically been primarily purchased by users on an individual basis rather than by corporations or institutions for
enterprise-wide deployment. We intend to increase the deployment of Palm Branded devices in the enterprise by developing enterprise-focused solutions and by marketing our solutions more directly to enterprise decision makers such as IT managers and
line-of-business leaders. Several of the enterprise solutions currently in place or being developed make use of wireless technologies as well as software applications for email and database access. When combined with the core functionality of the
Palm Branded device, these applications create an end-to-end solution that addresses the needs of business users and IT managers.
Future solutions will benefit from the recent introduction of Palm OS 5 based on Advanced RISC Machines (“ARM”) technology. The transition to ARM technology through Palm OS 5 is significant because it will give us greater
performance and offer extra features that enterprise customers are looking for, such as enhanced security and native support of wireless technologies including wide area network (“WAN”), Bluetooth and 802.11b for wireless local area
networks.
To accelerate the adoption of our devices by enterprises, we have established interoperability with
many enterprise grade applications and aligned ourselves with key enterprise solution providers. Large Integrated Software Vendors (“ISV’s”) such as Oracle, McKesson, BEA Systems and Siebel develop and/or distribute applications that
provide access to enterprise data using Palm Branded devices. In fiscal year 2002, we have increased our resources focused on the enterprise and will use strategic partner relationships to supplement our enterprise sales force and gain further
penetration in the enterprise market. These partnerships will range across ISV’s, Global System Integrators, providers of web service platforms and the carrier market.
Innovation for the Consumer Market. The majority of Solutions Group sales have been made to consumers and individual business users.
Palm’s brand identity remains a powerful asset in the consumer market and it has helped us build a strong retail presence to market and sell to individual purchasers. As of May 31, 2002, NPD Techworld stated that we had a 50.8% share of the US
retail handheld market.
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Our solutions for the consumer market center around a great personal information
management (“PIM”) experience; expansion options like our Secure Digital (“SD”) and MultiMediaCard (“MMC”) slot used to provide consumer content and applications such as games, travel, storage, information and Bluetooth
capability; and ability to customize the look and feel of certain devices through add-ons like color face plates and other accessories. Our transition to the ARM based Palm OS 5 will allow us to provide further capability to the consumer market such
as enhanced displays and an improved multimedia experience.
We believe there is a substantial market opportunity
for entry-level devices. Focusing on this group of customers expands our available market and establishes an installed base that has the potential to upgrade devices in the future. It has also been our experience that consumers tend to use their
device both at home and at work, thereby, possibly influencing purchasing decisions in the enterprise as well.
Solutions Group
Products and Services
Handheld Devices. The Palm device family currently
includes the m100, m500 and i705 devices.
The m100 product family is our affordable, entry-level product,
designed to appeal to a broad cross section of consumers. The m100 series features removable faceplates in many different colors and includes the entry-level monochrome m105, m125 with SD/MMC and the m130 which has a 16-bit color display.
The m500 product family, our professional line of products, features Palm’s slimmest form factor, and
currently includes the monochrome m500 and the color display m515.
The i705 is our integrated wireless device
that runs on the Cingular network. The i705 has been specifically designed to address the needs of the mobile professional and provides secure, always-on “push” email with notification and Instant Messaging from AOL. Users can also access
both personal and business email and have access to Internet content.
Customers buying Palm Branded handheld
devices also receive with each device a cradle or a cable to connect the device to a personal computer for synchronization and downloading of information. We also sell peripherals and accessories including portable keyboards, SD/MMC expansion cards
for storage and content, modems, leather cases, flip covers, faceplates and other accessories for our products, and we provide the ability to purchase and download software applications via a link from our Palm.com website.
The majority of our products feature a dual expansion architecture which includes an SD/MMC slot and a universal connector. We were one of
the first in the handheld industry to provide expansion slots for use with SD and MMC cards. SD and MMC cards are stamp-sized expansion cards that provide applications or content, with SD also providing input/output (“I/O”) capability such
as Palm’s Bluetooth card and Margi Systems Presenter To Go card. Our universal connector, which supports add-on modules, is uniform across our current product line, allowing users of different Palm devices to use one set of peripherals.
Our products are differentiated in terms of price, functionality and software applications that are pre-loaded
onto the device. Standard software in all of our products includes: address book, date book, clock, to do list, memo pad, note pad, calculator and the Mobile Connectivity Software which allows users to access the Internet using a Palm device and a
data enabled mobile phone. In addition, all of our devices are equipped with an infrared port which allows users to beam each other information and users can synchronize their information with a PC or Mac using the Palm Desktop Software or Microsoft
Outlook.
Also available on certain models is the ability to read eBooks with the Palm Reader provided by
PalmSource; view and edit Microsoft Word and Excel files and view and share PowerPoint presentations using DataViz® Documents to Go®; and store, view and share video clips and images with
MGI® PhotoSuite Mobile Edition.
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Wireless Services and Internet. We currently offer
a wireless access service with our i705 wireless device (and previous Palm VII family), called Palm.Net, and offer a variety of monthly service plans. Users of this service can send or receive email and access Internet content using their Palm
device.
Software Solutions. Software solutions are an integral part of the
Solutions Group strategy and we have dedicated resources to improve our focus in this area. Some solutions will be for the consumer, while others will be more focused on the enterprise. Solutions for the enterprise encompass the soon to be released
Wireless Messaging Server Software (WMS) which provides a behind-the-firewall, push email solution with notification, and the Wireless Database Access Server Software (WDBAS) which is available today and can be used to access many of the common
relational databases today. The underlying technology for these two solutions came from ThinAirApps, which Palm acquired in December 2001.
Solutions Group Competition
The Solutions Group competes in the mobile device and wireless
services markets, both of which are highly competitive. Our devices compete with a variety of mobile devices, including pen- and keyboard-based devices, mobile phones, converged voice/data devices and sub-notebook personal computers. Our principal
competitors include Casio, Hewlett-Packard (Compaq), Research in Motion Limited and Sharp as well as licensees of the Palm OS such as HandEra, Handspring, Kyocera, Sony and Symbol. We believe the principal competitive factors impacting the market
for our handheld devices are functionality, features, operating system performance, styling, brand, price, availability of third party software applications and customer and developer support. We believe that we compete more favorably than many of
our current competitors with respect to some or all of these factors, which is reflected by our greater number of users, our leading market share and strong brand recognition.
The i705 handheld and our Palm.Net wireless access service compete with a variety of alternative technologies and services. Mobile phone manufacturers and service providers
including Motorola, Nokia and Sprint offer mobile phones that provide Internet connectivity. Research in Motion Limited offers a handheld device that provides mobile email, instant messaging and Internet connectivity, and new companies that will
compete with our wireless solutions include companies such as Danger and Good Technology.
Solutions Group Sales and Marketing
We sell to our end users primarily through distributors, retailers and resellers. We use our dedicated
enterprise sales force to market Palm Branded products directly to enterprises, which then purchase devices through one of our other sales channels. We also sell directly to end-user customers through our Palm.com website.
In the United States, distributors represent our largest sales channel. These distributors generally sell to both traditional and Internet
retailers and resellers, including enterprise and education resellers. The retail channel is our second largest United States distribution channel and encompasses office supply, computer superstore, consumer electronics retailers and catalog and
mail order companies.
In Europe and Asia, we currently sell our product primarily through distributors. We have
over 100 international distributors, located throughout Europe, Asia, the Middle East and South Africa. These distributors sell primarily to retailers and resellers.
We also act as an OEM and provide our products to third parties, such as Franklin Covey, who sell the products under their own brand name. In addition, we use our Palm.com
store as a vehicle to sell our products and third party peripherals, focusing particularly on mining the installed base of Palm Branded devices. This is accomplished through e-marketing campaigns and product bundles. We also offer a wide array of
software titles on our Software Connection website which is accessed from the Palm.com store.
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We build awareness of our products and the Palm brand through mass-media
advertising, targeted advertising, public relations efforts, in-store promotions and merchandising and through our Palm Branded Internet properties. We also receive feedback from our end users and our channel customers through market research. We
use this feedback to continually refine our product development as well as marketing of our products in our sales channels.
Solutions
Group Customer Service and Support
We believe that customer service and technical support are essential to
the sales process within our industry. In order to provide a high level of customer service, our Customer Service Organization works closely with our entire customer base including distributors, retailers, resellers, enterprises, and individual
customers to develop service programs that meet specific customer needs.
Individual consumers have access to the
Palm Knowledge Base, which is an Internet-based repository for technical information and troubleshooting techniques. They also can obtain support through other means such as the Palm website, email, web chat, and telephone support. We also provide a
variety of support offerings for our enterprise customers.
Solutions Group Product Development and Technology
Our product development efforts are focused on both improving the functionality of our existing products and
developing new products. We believe the innovation and design of our products has played an important role in our success. We intend to continue to identify and respond to the needs of our customers by introducing new product designs with an
emphasis on innovations in the functionality, simplicity, wearability, mobility, style and ease of use of our products and services.
To identify and develop technologies for the next generations of Palm Branded devices, we use parallel development teams to avoid schedule dependencies from one product to the next. At the same time, these parallel
development teams share results to avoid duplication of effort. As a result, we have a rapid product development cycle that targets releasing new versions of products approximately every six months and introducing new generation products
approximately every 12-18 months, depending on the complexity of the next generation product release.
Solutions Group Manufacturing
and Supply Chain
We currently outsource all of our manufacturing operations to third party manufacturers.
This outsourcing extends from prototyping to volume manufacturing and includes activities such as material procurement, final assembly, test, quality control and shipment to our distribution centers which are physically separated from our
manufacturing locations. The majority of Palm’s products are assembled in Mexico and China. Distribution centers are operated on an outsourced basis in Tennessee and Ireland.
Solutions Group Backlog
We order finished products from
our third party manufacturers based upon our forecast of worldwide customer demand and in advance of receiving orders from our customers. Our customers generally place orders on an as needed basis, and products are shipped as soon as possible after
receipt of an order, usually within one to four weeks. Generally, orders may be canceled or rescheduled by the customer without penalty.
PALMSOURCE, INC.
Business Summary
PalmSource develops and licenses operating system software, communication and personal information management software and software development tools for mobile devices.
PalmSource targets licensees in the
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handheld and smart phone space, as well as developers, enterprises and consumers with its Palm OS. PalmSource’s product offering includes Palm OS, Palm Digital Media and professional
services.
PalmSource revenues totaled $66.9, $86.6, and $48.0 million in fiscal years 2002, 2001 and 2000,
respectively. PalmSource recognizes intersegment revenues from the Solutions Group on a “contractually reported” basis. Intersegment revenues are eliminated in consolidation and totaled $41.8, $59.9, and $41.0 million in fiscal years 2002,
2001 and 2000, respectively. PalmSource operating loss totaled $17.1, $7.9, and $7.9 million in fiscal years 2002, 2001 and 2000, respectively. For management reporting purposes, we do not allocate certain costs to the operating segments. Those
costs not allocated include the following financial statement line items: ‘cost of revenues—charge (reduction) for special inventory and related costs’, ‘amortization of goodwill and intangible assets’, ‘restructuring
charges’, ‘impairment charges’, ‘legal settlements’, ‘separation costs’ and ‘purchased-in process technology’. Total assets for PalmSource were $144.3 million in fiscal year 2002. Assets were not
allocated to segments for internal reporting purposes in fiscal years 2001 and 2000.
PalmSource Strategy
The PalmSource strategy is centered around providing superior software, increasing influential licensees and fostering the Palm Economy.
Superior Software. According to IDC, in the first quarter of calendar year 2002,
the PalmOS held the leading worldwide share at 61% of the pen-based handheld market. This strong share has also led to a robust software developer community with over 220,000 registered developers and over 13,000 commercially available applications,
as of May 31, 2002.
Today, PalmSource provides Palm OS 4 which runs on the Motorola 68K processor design
and Palm OS 5, released to licensees and developers in June 2002, which runs on ARM Holdings designed processors. Palm OS 5 will increase the capabilities of the hardware available to our licensees for inclusion in their products. It is known to
provide a substantial performance increase, as much as ten fold, for applications that directly access the ARM native features of the platform. PalmSource believes the ARM Economy, like the Palm Economy, will be a strong asset to the platform due to
its broad industry support and wide array of developers across numerous industries including digital imaging, industrial, networking, security, storage and wireless.
New capabilities of Palm OS 5 include: enhanced security; new multimedia functionality, including the ability to record and play CD quality sound and support higher
resolution screens; and additional wireless support for 802.11b in addition to WAN and Bluetooth. We believe these new capabilities combined with the ARM and Palm Economies will create a compelling set of solutions for customers.
To ease the transition to Palm OS 5 for licensees and developers, PalmSource has created the Palm OS Ready program. This
program brings together key silicon vendors of the ARM processor including Intel, Motorola and Texas Instruments. These companies received a porting kit from PalmSource enabling them to port their respective processors and capabilities to Palm OS 5.
The Palm OS Ready program provides licensees a time-to-market advantage and leverages silicon vendor relationships to expand licensing opportunities. In addition, by encouraging a wide array of silicon capabilities, developers have a much more
robust environment to deploy solutions.
PalmSource has also put in place a Palm OS 5 software certification
program for developers. This helps ensure that existing and new applications will run seamlessly on Palm OS 5. We believe the majority of the applications available today will run properly on Palm OS 5, provided they were written to OS 4 application
program interfaces.
Influential Licensees. PalmSource has licensed the platform to
device and smart handheld device manufacturers including Acer, AlphaSmart, Garmin, HandEra, Handspring, Kyocera, Palm Solutions Group,
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Samsung, Sony, and Symbol. PalmSource intends to further expand the licensing of the Palm platform for use in a wide variety of handheld devices, smartphones and information appliances. This
strategy involves licensing the Palm platform to device manufacturers that will differentiate and help expand the handheld market. For example, licensees such as Sony and Symbol differentiate themselves by focusing on different customer groups and
technologies such as multimedia and rugged industrial design. International markets will also be a focus as we look to companies to take the Palm OS into emerging markets.
Palm Economy. PalmSource’s broad user base has attracted a large community of third party developers creating software applications,
peripherals and accessories that increase the performance and functionality of Palm Powered devices. As of May 31, 2002, more than 220,000 developers had registered to use Palm developer tools to create software applications for the Palm platform.
We view this community as a competitive advantage for the Palm OS, and we continue to expand our efforts to support this robust economy. Support of the developer community takes a variety of forms, ranging from offering software tools and technical
support services for third party developers to hosting PalmSource developer conferences allowing us to give direction regarding product and strategy trends. While no license revenue is derived directly from these developers, we believe the existence
of software applications, peripherals and accessories developed by third party developers helps to increase the market for our licensees’ handheld device products and services.
PalmSource Products and Services
Operating
System. Our Palm platform integrates a number of components around the Palm OS operating system. For example, the Palm platform features standard personal information management applications, including date book, address
book, to do list, memo pad, calculator and expense management functions. The Palm OS includes a variety of features such as security parameters, support for high resolution 65,000 color displays and support for wireless technology.
PalmSource shares select parts of its source code to enable licensees and developers to optimize the interface of their
applications with the Palm platform while retaining proprietary control over key aspects of the source code. Often times technologies developed by licensees are later incorporated in the Palm OS. The Palm OS is able to run across a variety of
different devices such as smartphones and handhelds while maintaining the ability to run the same applications. Some competing operating systems do not have this capability and we believe the ability to run the same applications across different
devices is a competitive advantage in the eyes of our licensees, developers and end customers.
The Palm platform
offers a variety of benefits to developers of handheld devices. The Palm platform software code is designed to allow applications to run quickly and reliably. It minimizes power, processing and memory requirements without sacrificing performance,
which in turn reduces component costs for manufacturers. These attributes help our licensees to design products with a slim form factor that allocates more processing resources to applications rather than to running a complex operating system. In
addition, the architecture of the Palm platform enables the addition of peripheral devices and software libraries, which broadens the functionality of Palm Powered devices.
Palm Digital Media. Palm Digital Media is a provider of an eBook reader and eBooks. Palm Digital Media develops, archives, hosts, and securely
distributes eBook collections on behalf of publishers of books. PalmSource provides the Palm Reader to allow users to read books on their handheld device. Books can be purchased from the Palm Digital Media website.
Professional Services. Our professional services organization allows Palm OS platform licensees to bring
their Palm OS products to market quicker, at a lower cost and with more differentiation than they could otherwise achieve alone. Our professional services help the licensee’s staff build a software design that fulfills their unique
requirements. From design or conception to implementation and release, experienced PalmSource trained engineers supplement the licensees development staff to build and test the software they need to ensure compatibility with the licensee products
and Palm OS platform compatibility guidelines.
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PalmSource Competition
Competition in the software operating system market is intense and characterized by rapid change, new and complex technology. PalmSource competes primarily with operating
systems such as Microsoft’s Pocket PC operating system for handheld personal computers and Symbian’s EPOC operating system for wireless communication devices. We believe that the principal competitive factors affecting the market for
operating systems are the overall number of end users, technological features and capabilities, number and quality of third party applications available, architecture and relative ease of developing compatible applications. We believe that we
compete more favorably than many of our current competitors with respect to some or all of these factors due to the ease of use of our user interface, the simplicity of developing applications for the Palm OS, our greater number of users, greater
number of third party software developers and applications and greater brand recognition. Our Palm platform also competes with the proprietary operating systems of other companies as well as alternative operating systems such as Linux and Java for
handheld devices.
PalmSource Sales and Marketing
We market and sell our products and services in North America, Europe and the Asia Pacific region, primarily through our direct sales force. Our direct sales force targets
the customers we believe provide the highest potential to improve PalmSource revenues and profits by expanding the handheld market. The primary attributes we consider are the customers demonstrated and planned ability to improve and differentiate
the Palm OS based products and to reach new geographies and markets through their sale forces, customer relationships and geographical presence. We build awareness of Palm OS and the Palm brand primarily through the advertising and marketing of our
licensees, including the Palm Solutions Group, and through public relations efforts.
PalmSource Product Development and Technology
PalmSource product development efforts are focused on maintaining and enhancing the Palm OS in order to
maintain technological competitiveness and meet an ever-expanding range of licensee and market requirements. We primarily develop our software internally. We occasionally license products developed by others pursuant to license agreements, which may
require us to pay royalties based on units sold.
PALM, INC.
Intellectual Property
Our software, hardware and
operations rely on and benefit from an extensive portfolio of intellectual property, including a number of both United States and foreign patents. We own a number of trademarks, including Palm, Palm OS, the Palm logo, Palm Powered, PalmConnect,
PalmPak, Palm.Net, PalmSource, HotSync, Graffiti, and Simply Palm. We are working to increase and enforce our rights in the Palm trademark portfolio, the protection of which is important to our reputation and branding. We also own copyrights to the
Palm platform and our software development applications.
We license a number of technologies from third parties
for integration into our products. We believe that the licensing of complementary technologies from parties with specific expertise is an effective means of expanding the features and functionality of our products.
We rely on a combination of patent, trademark, copyright and trade secret laws and restrictions on disclosure to protect our intellectual
property rights.
11
Employees
As of June 28, 2002, we had a total of 1,171 employees, of which 840 were in Solutions Group and 331 were in PalmSource. None of our employees is subject to a collective bargaining agreement. We
consider our relationship with our employees to be good.
Financial Information about Geographic Areas
Palm’s headquarters and most of its operations are located in the United States. Palm conducts its sales, marketing and customer
service activities throughout the world and also has a research and development facility in France. Geographic revenue information is based on the location of the customer. For fiscal years 2002, 2001 and 2000, no single country outside the United
States accounted for 10% or more of total revenues. Total revenues in the United States totaled $670.3 million; $966.6 million and $690.5 million and total revenues in other geographic locations totaled $ 360.5 million; $592.7 million and $367.1
million in fiscal years 2002, 2001 and 2000, respectively. Net land, property and equipment in the United States totaled $206.5 million; $219.6 million and $11.6 million in fiscal years 2002, 2001, and 2000, respectively and net land, property and
equipment in other geographic locations totaled $5.1 million; $3.9 million and $1.4 million in fiscal years 2002, 2001 and 2000, respectively.
Financial Information about Revenues by Customer
A significant portion of our consolidated
revenues comes from only a small number of Solutions Group customers. Ingram Micro represents 20%, 19% and 25% and Tech Data represents 12%, 9% and 8% of consolidated revenues in fiscal years 2002, 2001 and 2000, respectively. No other customers
represent greater than 10% of consolidated revenues.
We currently occupy
approximately 196,300 square feet of leased space in Santa Clara, California in three buildings. The leases for these facilities have expiration dates commencing September 30, 2002. In the fourth quarter of fiscal year 2002, Palm announced plans to
move to new headquarters’ facilities in August 2002. The Solutions Group entered into a three year lease in Milpitas, California for three buildings with a total of 153,274 square feet. PalmSource entered into a three year lease in Sunnyvale,
California for one building with a total of 88,096 square feet. A restructuring charge was taken in the fourth quarter of fiscal year 2002 for the remaining lease commitments at our principal offices in Santa Clara, California. We also lease
research and development facilities in Oregon, Washington, Illinois, New York, Massachusetts and Montpellier, France and sales and support offices domestically and internationally. We believe that existing facilities are adequate for our current
needs and we are attempting to sublease excess space. If we require additional space, we believe that we will be able to secure such space on commercially reasonable terms without undue operational disruption.
In November 2000, Palm entered into a seven-year master lease agreement with Societe General Financial Corporation relating to a future
headquarters facility to be constructed in San Jose, California which was cash collateralized and contained certain financial covenants as well as certain requirements to begin construction. On May 31, 2001, we terminated the master lease agreement
and exercised our option to purchase the land. The land is approximately 39 acres, located in San Jose, California.
Item 3. Legal Proceedings
On April 28,
1997, Xerox Corporation filed suit against U.S. Robotics Corporation and U.S. Robotics Access Corp. in the United States District Court for the Western District of New York. The case came to be captioned Xerox Corporation v. 3Com
Corporation, U.S. Robotics Corporation, U.S. Robotics Access Corp., Palm Computing, Inc. and Palm, Inc., Civil Action No. 97-CV-6182T. The complaint alleged willful infringement of U.S. Patent No. 5,596,656, entitled “Unistrokes for
Computerized Interpretation of
12
Handwriting.” The complaint sought unspecified damages and to permanently enjoin the defendants from infringing the patent in the future. In 2000, the District Court dismissed the case,
ruling that the patent is not infringed by the Graffiti handwriting recognition system used with Palm handheld computers. Xerox appealed the dismissal to the United States Court of Appeals for the Federal Circuit (“CAFC”). On October 5,
2001, the CAFC affirmed-in-part, reversed-in-part and remanded the case to the District Court for further proceedings. On December 20, 2001, the District Court granted Xerox’s motion for summary judgment that the patent is valid, enforceable,
and infringed. We filed a Notice of Appeal on December 21, 2001. We may not be successful in our appeal of the court’s ruling. On February 22, 2002, the court rejected an injunction sought by Xerox to prohibit the manufacture or sale of
products using the Graffiti handwriting recognition system. The court also rejected a request by Xerox to set a trial date to determine damages Xerox claims it is owed. In addition, the court required us to post a $50 million bond pending the
resolution of the appeal, which was satisfied with a letter of credit from a financial institution. If we are not successful in our appeal, Xerox might again seek an injunction from the court, and we might be required to pay Xerox significant
damages or license fees.
On February 28, 2000, E-Pass Technologies, Inc. filed suit against “3Com,
Inc.” in the United States District Court for the Southern District of New York and later filed on March 6, 2000 an amended complaint against Palm and 3Com. The case is now captioned E-Pass Technologies, Inc. v. 3Com Corporation, a/k/a 3Com,
Inc. and Palm, Inc. (Civil Action No. 00 CIV 1523). The amended complaint alleges willful infringement of U.S. Patent No. 5,276,311, entitled “Method and Device for Simplifying the Use of Credit Cards, or the Like.” The complaint seeks
unspecified compensatory and treble damages and to permanently enjoin the defendants from infringing the patent in the future. The case was transferred to the U.S. District Court for the Northern District of California. The parties have engaged in
discovery. On December 5, 2001, the Court issued a Markman order that interpreted certain patent claim terms at issue. In light of the Markman order, the defendants filed a motion for summary judgment of noninfringement, and E-Pass
filed a motion for summary judgment of infringement. The motions have been fully briefed, but have not yet been ruled upon by the Court. No trial date has been set.
In January 2001, a shareholder derivative and class action lawsuit captioned Shaev v. Benhamou, et al., No. CV795128, was filed in California Superior Court. The
complaint alleges that our directors breached fiduciary duties by not having our public shareholders approve the 1999 director stock option plan. 3Com Corporation, the sole shareholder at the time, approved the 1999 director plan prior to our March
2000 initial public offering. The complaint alleges that we were required to seek approval for the plan by shareholders after the initial public offering. The plaintiff filed an amended complaint in November 2001 adding new defendants and new
allegations, including that defendants breached fiduciary duties by approving the 2001 director stock option plan and by making misrepresentations in our September 2001 proxy statement concerning the 2001 director stock option plan and the 1999
employee stock option plan. Thereafter, the plaintiff filed a second amended complaint in June 2002. The plaintiff added a fifth claim based on allegations that the Company did not have proper board approvals for some of the actions taken in
connection with the Company’s separation from 3Com, including the merger between Palm Computing, Inc. and Palm, the issuance of our stock, and the adoption of equity and stock option plans. The plaintiff also alleges that we do not have, and
have never had, a valid board. The plaintiff has not specified the amount of damages, if any, he may seek. However, he has indicated that he seeks to rescind our director and employee stock option plans. The plaintiff also purports to seek an
accounting and to enjoin us from any distribution of PalmSource stock. The case is currently in discovery. No trial date has been set.
On March 14, 2001, NCR Corporation filed suit against Palm and Handspring, Inc. in the United States District Court for the District of Delaware. The case is captioned NCR Corporation v. Palm, Inc. and Handspring,
Inc. (Civil Action No. 01-169). The complaint alleges infringement of U.S. Patent Nos. 4,634,845 and 4,689,478, entitled, respectively, “Portable Personal Terminal for Use in a System for Handling Transactions” and “System for
Handling Transactions Including a Portable Personal Terminal.” The complaint seeks unspecified compensatory and treble damages and to permanently enjoin the defendants from infringing the patents in the future. Although the case was initially
assigned to Judge Roderick R. McKelvie, Judge McKelvie stepped down from the bench. Thereafter, the case was reassigned to the vacant judgeship position and referred to Magistrate Judge Mary P. Thynge. In an Order dated July 11, 2002, Magistrate
Judge Thynge granted Palm’s motion for summary judgment that all asserted claims were not infringed.
13
In June 2001, the first of several putative shareholder class action lawsuits
were filed in United States District Court, Southern District of New York against certain of the underwriters for our initial public offering, Palm, several of our officers and a director. The complaints, which have been consolidated under In re
Palm, Inc. Initial Public Offering Securities Litigation, No. 01 CV 5613, assert that the prospectus from our March 2, 2000 initial public offering failed to disclose certain alleged actions by the underwriters for the offering. The complaints
allege claims against us, several of our officers, and the director under Sections 11 and 15 of the Securities Act of 1933, as amended. Certain of the complaints also allege claims under Section 10(b) and Section 20(a) of the Securities Exchange Act
of 1934, as amended. Other actions have been filed making similar allegations regarding the initial public offerings of more than 300 other companies. All of these various consolidated cases have been coordinated for pretrial purposes as In re
Initial Public Offering Securities Litigation, Civil Action No. 21-MC-92. An amended consolidated complaint was filed in April 2002. Neither Palm nor our officers and director have responded to these actions.
On August 7, 2001, a purported consumer class action lawsuit was filed against Palm and 3Com Corporation in California Superior Court, San
Francisco County. The case is captioned Connelly et al v. Palm, Inc., 3Com Corp et al (Case No. 323587). An amended complaint was filed and served on us on August 15, 2001. The amended complaint, filed on behalf of purchasers of Palm III,
IIIc, V and Vx handhelds, alleges that certain Palm handhelds may cause damage to PC motherboards by permitting an electrical charge, or “floating voltage,” from either the handheld or the cradle to be introduced into the PC via the serial
and/or USB port on the PC. The plaintiffs allege that this damage is the result of a design defect in one or more of the following: HotSync software, handheld, cradle and/or the connection cable. The complaint seeks restitution, rescission, damages,
an injunction mandating corrective measures to protect against future damage as well as notifying users of potential harm. Our answer was filed on October 1, 2001. The parties are engaging in discovery. A trial date of October 15, 2002 has been set.
On January 23, 2002, a purported consumer class action lawsuit was filed against Palm in California Superior
Court, San Francisco County. The case is captioned Eley et al v. Palm, Inc. (Case No. 403768). The unverified complaint, filed on behalf of purchasers of Palm m500 and m505 handhelds, alleges (1) that the HotSync function in certain Palm
handhelds does not perform as advertised and the products are therefore defective and (2) that upon learning of the problem, we did not perform proper corrective measures for individual customers as set forth in the product warranty. The complaint
alleges that our actions are a violation of California’s Unfair Competition Law and a breach of express warranty. The complaint seeks alternative relief including an injunction to have us desist from selling and advertising the handhelds, to
recall the defective handhelds, to restore the units to their advertised functionality, to pay restitution or disgorgement of the purchase price of the units and/or damages and attorneys’ fees. We filed our answer denying the allegations and
the parties are in the early stages of discovery. No trial date has been set.
On March 11, 2002, a
purported consumer class action lawsuit was filed against Palm in Wayne County Circuit Court, Detroit, Michigan. The case is captioned Hayman vs. Palm, Inc. (Case No. 02-208249-CF). The unverified Complaint, filed on behalf of purchasers of
Palm III, Palm IIIxe, Palm V, and Palm m100 handhelds, alleges that Palm advertisements for those handhelds misled consumers regarding the capabilities of the units to remotely and wirelessly access the Internet, emails and to access documents in
Microsoft compatible formats without the need for additional software and/or peripheral hardware. The complaint alleges claims against us for purported violations of the Michigan Consumer Protection Act, fraudulent misrepresentation, negligence,
unjust enrichment and breach of express and implied warranties. The complaint seeks to have us pay restitution or disgorgement of the purchase price of the units and/or damages and attorneys’ fees. We filed an answer denying the allegations and
the parties are in the early stages of discovery. No trial date has been set.
In connection with our separation
from 3Com, pursuant to the terms of the Indemnification and Insurance Matters Agreement between 3Com and us, we agreed to indemnify and hold 3Com harmless for any damages or losses which might arise out of the Xerox, E-Pass, and Connelly litigation.
14
Item 4. Submission of Matters to a Vote of Security Holders
None.
Set forth below is information concerning our current executive
officers and their ages as of July 15, 2002.
| Name
|
|
Age
|
|
Position
|
| Eric A. Benhamou |
|
46 |
|
Chairman and Chief Executive Officer |
| R. Todd Bradley |
|
43 |
|
President and Chief Operating Officer, Solutions Group |
| David Nagel |
|
57 |
|
President and Chief Executive Officer, PalmSource, Inc. |
| Judy Bruner |
|
43 |
|
Senior Vice President and Chief Financial Officer |
| Marianne Jackson |
|
47 |
|
Senior Vice President and Chief Human Resources Officer |
Eric A. Benhamou has served as our Chief Executive Officer
since November 2001 and our Chairman of the Board of Directors since September 1999. From September 1990 to December 2000, he served as Chief Executive Officer of 3Com Corporation. Previously, he held a variety of senior management positions in
engineering, operations, and management at 3Com. In 1981, Mr. Benhamou co-founded Bridge Communications and was Vice President of Engineering until its merger with 3Com in 1987. Before joining Bridge Communications, he worked at Zilog, Inc. Mr.
Benhamou also serves as Chairman of the Board of PalmSource, Inc., a Palm subsidiary, Cypress Semiconductor Inc. and of 3Com Corporation and as a director of Legato Systems, Inc., Intransa and Atrica. Mr. Benhamou serves on the Executive Committee
of TechNet and is a member of the President’s Information Technology Advisory Committee. In addition, he serves on the Stanford University School of Engineering Board of Advisors, as Vice Chairman of the Board of Governors of Ben Gurion
University. Mr. Benhamou holds honorary doctoral degrees from Ben Gurion University of the Negev, Widener University and the University of South Carolina. He has a master of science degree from Stanford University’s School of Engineering and a
Diplôme d’Ingénieur from Ecole Nationale Supérieure d’Arts et Métiers, Paris.
R. Todd Bradley has served as one of our directors since July 2002. Mr. Bradley was named Chief Executive Officer of the Solutions Group of Palm, Inc. in June 2002, effective as of September 2002. He has served as President
and Chief Operating Officer of the Solutions Group since May 2002. From June 2001 to May 2002 Mr. Bradley served as Executive Vice President and Chief Operating Officer of the Solutions Group. From September 1998 to January 2001, Mr. Bradley held
executive positions at Gateway Corporation, serving most recently as Senior Vice President, Consumer. From February 1997 to September 1998, he served as President and Chief Executive Officer of Transport International Pool, a GE Capital Services
company that is a global transportation equipment leasing and rental business. From September 1993 to February 1997, Mr. Bradley was with Dun & Bradstreet, most recently serving as President of NCH Promotional Services, a Dun & Bradstreet
subsidiary. Mr. Bradley previously held various management positions within logistics, production and quality control at Federal Express Corporation and the Miller Brewing Company. Mr. Bradley holds a Bachelor of Science degree in Business
Administration from Towson State University. Mr. Bradley serves on the Advisory Boards of Consumer Electronics Association of America and Sonic Wall Corporation.
David Nagel has served as President and Chief Executive Officer of PalmSource, Inc., a subsidiary of Palm, since December 2001 and has served as one of Palm’s directors since February 2000.
From September 2001 until December 2001, Dr. Nagel served as President and Chief Executive Officer of the Platform Solutions Group of Palm. Dr. Nagel served as President of AT&T Labs from April 1996 until September 2001 and served as Chief
Technology Officer of AT&T from August 1997 until September 2001. Prior to joining AT&T, Dr. Nagel was a Senior Vice President of Apple Computer, where he led the worldwide research and development group responsible for Macintosh hardware,
Mac OS software, imaging and other peripheral products. Before joining
15
Apple’s Advanced Technology Group in 1988, Dr. Nagel was a research scientist and head of human factor research at NASA’s Ames Research Center. Dr. Nagel holds undergraduate and
graduate degrees in engineering and a doctorate in experimental psychology, all from the University of California, Los Angeles. Dr. Nagel also serves as a director of Liberate Technologies and ArcSoft, Inc., and is a member of the newly announced
PalmSource, Inc. Board of Directors.
Judy Bruner has served as Senior Vice President and Chief Financial
Officer since September 1999. From April 1988 to September 1999, Ms. Bruner held several executive and management positions at 3Com Corporation. From April 1998 to September 1999, she was Vice President and Corporate Controller of 3Com. From October
1996 to April 1998, Ms. Bruner was the Vice President, Finance for 3Com’s Enterprise Systems Business Unit and from June 1995 to October 1996, she served as 3Com’s Vice President and Corporate Treasurer. From April 1988 to June 1995 Ms.
Bruner served in a variety of 3Com financial management positions including Corporate Treasurer. Prior to joining 3Com, Ms. Bruner served as the Vice President and Chief Financial Officer for Ridge Computers Inc., a privately held company that
designed and manufactured computer systems. She was with Ridge Computers Inc. from December 1984 until April 1988. From July 1980 to December 1984, Ms. Bruner held a variety of accounting and finance positions at Hewlett-Packard Company. Ms. Bruner
holds a Bachelor of Arts degree in economics from the University of California, Los Angeles and a Master of Business Administration degree from Santa Clara University. Ms. Bruner also serves on the Board of Directors of SanDisk Corporation.
Marianne Jackson has served as Senior Vice President and Chief Human Resources Officer since February
2002. Prior to joining Palm, from November 1998 to October 2001, Ms. Jackson was Vice President, Human Resources for Cisco Systems, Inc. Ms. Jackson has also held executive leadership positions in Human Resources at SanDisk Corporation, Logitech
Inc., Silicon Graphics and Sun Microsystems. Ms. Jackson holds bachelor degrees in Psychology and Sociology from the University of California, Santa Barbara. She also completed graduate course work from Santa Clara University in Counseling
Psychology. Ms. Jackson has held Advisory Board positions with MemeStreams, LifeMap Communications, and the CDI Corporation.
16
Part II
Item 5. Market for Common Stock and Related Stockholder Matters
Our common stock has traded on the NASDAQ stock market under the symbol PALM since our initial public offering on March 2, 2000. The following table sets forth the high and low closing sales prices as reported on the NASDAQ
stock market for the periods indicated.
| |
|
High
|
|
Low
|
|
|
|
High
|
|
Low
|
| Fiscal 2002 |
|
|
|
|
|
|
|
Fiscal 2001 |
|
|
|
|
|
|
| Fourth quarter |
|
$ |
3.99 |
|
$ |
1.59 |
|
Fourth quarter |
|
$ |
22.06 |
|
$ |
5.05 |
| Third quarter |
|
$ |
4.66 |
|
$ |
2.88 |
|
Third quarter |
|
$ |
56.63 |
|
$ |
17.38 |
| Second quarter |
|
$ |
3.87 |
|
$ |
1.45 |
|
Second quarter |
|
$ |
66.94 |
|
$ |
34.50 |
| First quarter |
|
$ |
6.26 |
|
$ |
3.58 |
|
First quarter |
|
$ |
45.00 |
|
$ |
25.44 |
As of July 15, 2002, we had approximately 8,237 registered
shareholders of record. Other than the $150 million cash dividend paid to 3Com in March 2000 out of the proceeds from our initial public offering, Palm has not paid and does not anticipate paying cash dividends in the future.
Item 6. Selected Financial Data
The
following selected consolidated financial data for each of the five years in the period ended May 31, 2002 have been derived from our audited financial statements. Certain prior year balances have been reclassified to conform to the current year
presentation.
The information set forth below is not necessarily indicative of results of future operations and
should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes to those statements included in Items 7 and 8 of Part II of
this Form 10-K.
| |
|
Years ended
|
| |
|
May 31, 2002
|
|
|
June 1,
2001
|
|
|
June 2,
2000
|
|
May 28, 1999
|
|
May 31, 1998
|
| |
|
(In thousands, except per share data) |
| Consolidated Statements of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Revenues |
|
$ |
1,030,831 |
|
|
$ |
1,559,312 |
|
|
$ |
1,057,597 |
|
$ |
563,525 |
|
$ |
272,137 |
| Cost of revenues* |
|
|
651,683 |
|
|
|
1,335,107 |
|
|
|
614,470 |
|
|
315,616 |
|
|
157,749 |
| Operating income (loss) |
|
|
(108,843 |
) |
|
|
(571,522 |
) |
|
|
61,449 |
|
|
48,339 |
|
|
6,461 |
| Net income (loss) |
|
|
(82,168 |
) |
|
|
< |