| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 36 | ||
| Item 7A. |
Quantitative and Qualitative Disclosures About Market Risk | 59 | ||
| Item 8. |
Financial Statements and Supplementary Data | 61 | ||
| Item 9. |
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure | 103 | ||
| Item 9A. |
Controls and Procedures | 103 | ||
| Item 9B. |
Other Information | 105 | ||
| Part III | ||||
| Item 10. |
Directors, Executive Officers and Corporate Governance | 105 | ||
| Item 11. |
Executive Compensation | 105 | ||
| Item 12. |
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 105 | ||
| Item 13. |
Certain Relationships and Related Transactions, and Director Independence | 105 | ||
| Item 14. |
Principal Accounting Fees and Services | 105 | ||
| Part IV | ||||
| Item 15. |
Exhibits, Financial Statement Schedule | 106 | ||
| Signatures | 111 | |||
| Schedule II—Valuation and Qualifying Accounts | 112 | |||
| * | Our fiscal year ends on the Friday nearest May 31. For presentation purposes, the periods have been presented as ending on May 31. |
1
Table of Contents
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS:
We may make statements in this Annual Report on Form 10-K, such as statements regarding our plans, objectives, expectations and intentions that are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements generally are identified by the words “believes,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would” and similar expressions and include, without limitation, statements regarding our intentions, expectations and beliefs regarding: mobile products and the mobile product market; our leadership position in mobile products; our market share; our ability to grow our business; our revenue, gross margins, operating income, operating results and profitability; our corporate strategy; developing market-defining products; growth in the smartphone market; capitalizing on industry trends and dynamics; economic trends and market conditions; our platform strategy; increasing the adoption of smartphones; the benefits of advertising; the domestic and international market opportunity available to us; international, political and economic risk; the development and introduction of new products and services; acceptance of our smartphone products; market demand for our products; our ability to differentiate our products, develop products to serve a broad range of customers, attract new customers and drive the upgrade cycle by consumers; our ability to lead on design, ease-of-use and functionality; pricing and average selling prices for our products; the development and timing of our new operating system and related software and the introduction of products based on this new platform; competition and our competitive advantages; our ability to build our brand and consumers’ awareness of our products; the resources that we and our competitors devote to development, promotion and sale of products; our expectations regarding our product lines; our product mix; our ability to broaden and expand our wireless carrier relationships; revenue and credit concentration with our largest customers; our ability to cause application providers to provide applications for our products; royalty obligations; inventory, channel inventory levels and inventory valuation; repair costs; rights of return; rebates and price protection; product warranty accrual and liability; our forecasted product and manufacturing requirements; seasonality in sales of our products; the adequacy of our properties, facilities and operating leases and our ability to secure additional space; our tax strategy; realization and recoverability of our net deferred tax assets; the need to increase our deferred tax asset valuation allowance; utilization of our net operating loss and tax credit carryforwards; our belief that our cash, cash equivalents and short-term investments will be sufficient to satisfy our anticipated cash requirements; impairment charges in connection with our investments in auction rate securities; the liquidity of, holding periods for and our ability and intent to hold our auction rate securities; the completion of restructuring actions; compensation and other expense reductions; dividends; interest rates; the timing and amount of our cash generation and cash flows; declines in the handheld market and in our handheld business; our use of options, restricted stock and restricted stock units; unrecognized compensation cost under our stock plans; stock price volatility; option exercise behavior under our stock plans; vesting, terms and forfeiture of our equity awards; our stock-based compensation valuation models; our defenses to, and the effects and outcomes of, legal proceedings and litigation matters; provisions in our charter documents, Delaware law and a Stockholders’ Agreement and the potential effects of a stockholder rights plan; our relationship with Elevation Partners, L.P.; our debt obligations, the related interest expense for future periods and the effect of any non-compliance; and the potential impact of our critical accounting policies and changes in financial accounting standards or practices. These statements are subject to risks and uncertainties that could cause actual results and events to differ materially. A detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in the section entitled “Risk Factors” on page 13 herein. We undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this Annual Report on Form 10-K.
Palm, Treo, Centro, Foleo, Tungsten and Palm OS are among the trademarks or registered trademarks owned by or licensed to Palm, Inc. All other brand and product names are or may be trademarks of, and are used to identify products or services of, their respective owners.
2
Table of Contents
Item 1. Business
Business Summary
Palm, Inc. is a leading provider of mobile products that enhance the lifestyles of individual users and business customers worldwide. Our leadership results from creating thoughtfully integrated technologies that better enable people to stay connected with their family, friends and colleagues, access and share the information that matters to them most and manage their daily lives on the go. Palm offers Treo™ and Centro™ smartphones, handheld computers and accessories through a network of wireless carriers, as well as retail and business outlets worldwide.
Corporate Background
We were incorporated in 1992 as Palm Computing, Inc. In 1995, we were acquired by U.S. Robotics Corporation. In 1996, we sold our first handheld computer, quickly establishing a significant position in the handheld computer industry. In 1997, 3Com Corporation, or 3Com, acquired U.S. Robotics. In 1999, 3Com announced its intent to separate our business from 3Com’s business to form an independent, publicly-traded company. In preparation for that spin-off, Palm Computing, Inc. changed its name to Palm, Inc., or Palm, and was reincorporated in Delaware in December 1999. In March 2000, Palm sold shares in an initial public offering and concurrent private placements. In July 2000, 3Com distributed its remaining shares of Palm common stock to 3Com stockholders.
In December 2001, Palm formed PalmSource, Inc., or PalmSource, a stand-alone subsidiary for its operating system, or OS, business. On October 28, 2003, Palm distributed all of the shares of PalmSource common stock held by Palm to Palm stockholders. On October 29, 2003, we acquired Handspring, Inc., or Handspring, and changed our name to palmOne, Inc., or palmOne.
In connection with our spin-off of PalmSource, Palm Trademark Holding Company, LLC, or PTHC, was formed to hold trade names, trademarks, service marks and domain names containing the word or letter string “palm”. In May 2005, we acquired PalmSource’s interest in PTHC, including the Palm trademark and brand. In July 2005, we changed our name back to Palm, Inc., or Palm.
In October 2007, we sold shares of Series B Redeemable Convertible Preferred Stock, or Series B Preferred Stock, to the private-equity firm Elevation Partners, L.P. On an as-converted basis, these shares represent approximately 26% of our voting shares as of May 31, 2008. As a result of this transaction, Elevation Partners, L.P. has the right to elect two members to our Board of Directors.
Corporate Strategy
Our objective is to be the leader in mobile lifestyle products for individual users and business customers. To achieve this, we focus on the following strategies:
| · | Differentiate our products through innovative software, inspiring industrial design and the seamless integration of hardware, system software, applications and services to deliver a delightful mobile user experience. We have a track record of innovation and creating new product categories. We revolutionized the handheld computing business in 1996 with the launch of the Pilot—the “connected organizer”—that allowed users to synchronize their calendar and contact list with a personal computer. We set the standard in smartphones with our Treo products and have continued to attract new users to the category with our successful Centro products. Customer requirements and user experience drive our product design and development. Our Treo and Centro products combine a powerful phone experience with easy messaging, personal and work email, mobile web browsing, entertainment features and personal information management. We are recognized by our industry and our customers for consistently delivering the easiest-to-use products in our category. |
3
Table of Contents
| · | Deliver a range of product choices around open platforms. Palm believes in the power of open platforms and the ecosystems that develop around those platforms of software and accessory developers that increase the breadth of solutions for a wide range of customers. Palm created the first successful open mobile development platform and continues today to offer individual users its trademark ease of use and integrated personal information management through the Palm systems software, currently based on the Palm Operating System by Access, or Palm OS. In addition, we partner with Microsoft to deliver a robust Windows Mobile user experience targeted to business customers who want to tie into their existing Microsoft-based systems for use at work and at home. |
| · | Focus on our core competencies by using a leveraged model to develop, manufacture, distribute and support our products. Palm leverages relationships with world class original design manufacturers, or ODMs, technology and service suppliers and wireless carriers to help design, manufacture, distribute and support our products worldwide. As a result, we are able to focus on our core competency as a technology and software innovator. |
| · | Build a brand synonymous with a mobile lifestyle. The Palm brand has widespread recognition and identification with mobile products. We build end-user awareness and preference for our products and our brand by focusing on the user experience and delivering products that generate strong customer loyalty. We also strive to enhance our brand through marketing, public relations, customer service and support, as well as community involvement. We believe that developing a strong Palm brand is key to product differentiation and market leadership. |
Products and Services
We sell mobile products in two product lines: smartphones and handheld computers. Our product lines provide a wide range of business productivity tools and personal and entertainment applications designed for mobile professionals and business customers as well as entry-level consumers.
Our products currently run on the Palm systems platform or Windows Mobile OS platform. We are currently developing a new OS and related next-generation systems software. We have announced that we expect this new OS and software to be completed in time to ship products based on this platform in the first half of calendar year 2009.
Our products are differentiated in terms of price, design, functionality and software applications that are delivered with the device. All of our products incorporate our hallmark of powerful simplicity, including instant-on one-touch access to the most frequently used applications and non-volatile flash memory that protects stored data even if the charge and power run out. Other features found in some of our products include:
| · | wireless communication capabilities, such as Bluetooth and wireless fidelity, or Wi-Fi; |
| · | support for IS95/CDMA2000/EvDO or GSM/GPRS/EDGE/UMTS/HSDPA network protocols, which enable messaging, email, web browsing, wireless synchronization and telephone communications; |
| · | multimedia features, allowing users to capture and view photos and video clips, listen to MP3 files and watch movies via audio and video streaming; |
| · | a slot for stamp-sized expansion cards for storage, content and input/output devices; and |
| · | productivity software, such as DataViz’s Documents to Go which allows users to create, view and edit Microsoft Office Word and Microsoft Office Excel files and view Microsoft Office PowerPoint Mobile presentations. |
4
Table of Contents
Treo and Centro Smartphones
Our Treo and Centro smartphones combine a full-featured mobile phone, wireless data applications, such as email, messaging and web browsing, multimedia features and productivity software in a small, compact, easy-to-use device that simplifies both business and personal life by integrating these applications into a single device. We design Treo and Centro smartphones for individuals who would otherwise carry multiple devices such as a cell phone and laptop. We customize our Treo and Centro smartphones for wireless carrier networks in markets around the world, such as AT&T, Inc., Sprint Corporation and Verizon Wireless in the United States and America Movil, Telstra and Vodafone internationally. We also offer non-customized versions of some of our Treo and Centro smartphone products through other wireless carriers and distributors worldwide. We currently offer the Centro and Treo 755p smartphones on the Palm OS platform and the Treo 700wx, 750, 500 and 800w smartphones powered by Windows Mobile. Each of these smartphones includes data synchronization technology, enabling the device to synchronize with desktop applications such as Microsoft Office Outlook and an infrared port for exchanging information between devices. Organizer software is also standard in our smartphone products, including an address book, date book, clock, to-do list, memo pad and calculator. In addition, most of our smartphones feature wireless modem capabilities, access to email, ability to respond to phone calls using text messaging, a QWERTY/AZERTY keyboard, a touch-screen, built-in viewers and editors allowing users to view and edit Word and Excel files and/or the ability to listen to music and view videos.
Palm OS Platform
The Centro smartphone was introduced in September 2007 and is the fastest selling smartphone in Palm history. The Centro was launched at a lower price point to reach a new end-user demographic, and is the smallest and lightest Palm phone to date. It runs on a version of the Palm OS that takes advantage of EvDO data speeds on broadband wireless networks. The Centro provides a fun, new compact design. The Centro smartphone is available through AT&T, Sprint and Verizon in the United States and a variety of wireless carriers in other countries.
The Treo 755p dual-band smartphone was introduced in December 2007. It runs on a version of the Palm OS that takes advantage of EvDO data speeds on broadband wireless networks. The Treo 755p has high-speed browsing capabilities. The Treo 755p smartphone is available through Sprint and Verizon in the United States and a variety of wireless carriers in other countries.
Windows Mobile OS Platform
The Treo 700wx digital dual-band smartphone was introduced in September 2006. It runs on Windows Mobile 5.0 which we have uniquely customized. It is designed to take advantage of CDMA2000 EvDO data speeds on broadband wireless networks. The Windows Mobile powered Treo 700wx is Direct Push email capable. The Treo 700wx smartphone is available through Sprint and Verizon in the United States and a variety of wireless carriers in other countries.
The Treo 750 quad-band GSM and tri-band UMTS smartphone was introduced in September 2006. It runs on Windows Mobile 6.0. The Treo 750 is Palm’s first UMTS product and is compatible with 3G UMTS/HSDPA networks. The Treo 750 allows mobile access to multiple business and personal email accounts, video and high-speed browsing and contains enhanced technology to support Bluetooth enabled stereo headsets. The Treo 750 smartphone is available through Vodafone in Europe, AT&T in the United States and a variety of wireless carriers in other countries.
The Treo 500 tri-band GSM and UMTS smartphone was introduced in September 2007. It runs on Windows Mobile 5 Standard. The Treo 500 combines multiple forms of communication and multimedia capabilities with high speed 3G UMTS/HSDPA mobile internet access in a compact package. The Treo 500 smartphone is available outside the United States.
5
Table of Contents
The Treo 800w digital dual-band smartphone was introduced in July 2008. It runs on Windows Mobile 6.1. In addition to a touchscreen and Palm’s hardware and software enhancements, this is the first Palm smartphone that has Wi-Fi, runs on EvDO Rev A high speed networks and, depending on the wireless carrier, has either built-in or downloadable GPS. The Treo 800w is available through Sprint in the United States.
Handheld Computers
Palm and Tungsten handheld computers include data synchronization technology (HotSync), enabling the devices to synchronize with desktop applications such as Outlook, and an infrared port for exchanging information between devices. Organizer software is also standard in our handheld computers, including an address book, date book, clock, to-do list, memo pad and calculator. The Palm and Tungsten handheld computers include advanced technologies that provide efficient personal information management and media experiences for entry-level consumers, mobile professionals and serious business users alike. We currently offer the Palm Z22, Tungsten E2 and Palm TX handheld computers.
The Palm Z22’s mix of price, functionality and performance allows us to expand our available market to new users, as indicated by our user registration data. We believe that by making an entry-level product such as the Z22 available, we are driving the early adoption of mobile products by consumers who would not otherwise own such a device. This increases the potential for future upgrade purchases as end users become accustomed to mobile product technology and demand additional functionality.
The Tungsten E2 is intended for cost-conscious professionals who require robust power and performance. The Tungsten E2 provides non-volatile flash memory and allows users to create, edit and view Word and Excel files with DataViz Documents to Go as well as listen to MP3 files and watch video clips.
The Palm TX is designed for professionals and business users who require premium computing power and performance. The Palm TX offers wireless capability using Bluetooth and Wi-Fi and the ability to store, create, edit and view Word and Excel files with DataViz Documents to Go.
Add-ons and Accessories
We offer add-ons and accessories to enhance the end user’s experience, including portable keyboards, memory expansion cards for storage and content, modems, headsets and carrying cases. In addition, we provide the ability to purchase and download software applications through a link on our Palm.com website.
Competition
Competition in the mobile product market is intense and characterized by rapid change and complex technology. The principal competitive factors affecting the market for our mobile products are access to sales and distribution channels, price, product quality and time to market. These factors are influenced by styling, usability, functionality, features, OS, brand, marketing, availability of third-party software applications and customer and developer support. Our devices compete with a variety of mobile products, including pen-and keyboard-based devices, mobile phones, converged voice/data devices and mobile and desktop computers.
Our principal competitors include: mobile handset and smartphone manufacturers such as Apple, Asustek, High Tech Computer, or HTC, LG, Motorola, Nokia, Pantech, Research in Motion, or RIM, Samsung and Sony-Ericsson; and computing device companies such as Acer, Hewlett-Packard and Mio Technology. In addition, our products compete for a share of disposable income and business spending on consumer electronic, telecommunications and computing products such as MP3 players, iPods, media/photo viewers, digital cameras, personal media players, digital storage devices, handheld gaming devices, GPS devices and other such devices.
6
Table of Contents
Some of our competitors, such as Asustek and HTC, produce smartphones as wireless-carrier-branded devices in addition to their own branded devices. As technology advances, we also expect to compete with mobile phones without branded operating systems that synchronize with personal computers, as well as ultra mobile personal computers and laptop computers with wide area network or data cards and voice over IP, or VoIP, and Wi-Fi phones with VoIP.
We believe we compete favorably with respect to some or all of the competitive factors affecting the mobile product market, which is reflected by our installed base of mobile product users, market share and brand recognition.
Sales and Marketing
We sell our products to wireless carriers, distributors, retailers and resellers through our sales force. Also, we sell to end users through our web site at www.palm.com.
For our smartphone products, wireless carriers collectively represent our largest sales channel, particularly in the United States. We also sell smartphones through distribution partners, particularly in Asia Pacific, Canada, Europe and Latin America where the distributors may customize our products for each country or region. These wireless carriers and distributors have a strong influence over the visibility and promotion of our products. In the case of smartphones, our end users often choose their phones based on what their chosen wireless carrier offers, and rely on the wireless carrier for wireless access, complementary applications, accessories and services the wireless carrier provides. We have worked to develop strong relationships with a variety of wireless carriers around the world. Some of our wireless carrier relationships include AT&T, Sprint and Verizon in the United States, Vodafone in Europe, America Movil and Movistar in Latin America and Telstra in the Asia Pacific region. We work with wireless carriers in different ways, depending on each wireless carrier’s unique situation and requirements. Some of these relationships include product customization for the wireless carrier’s network, systems integration or joint marketing and sales. Other wireless carriers typically purchase non-customized smartphones either from us directly or from a Palm-approved distributor. In addition, in conjunction with some of our wireless carrier partners we offer end-user and mail-in rebates for our smartphones to improve our competitive position in the marketplace. We have dedicated wireless carrier account teams for our largest wireless carrier customers by region. These teams are responsible for selling our products to those wireless carriers and ensuring certification on their networks. These teams also provide sales, marketing, training and technical support to help those wireless carriers sell Treo and Centro smartphones through their retail and business channels.
We have sales teams dedicated to selling our smartphone products to business customers. These dedicated teams educate and train wireless carrier and distributor business-to-business representatives on the advantages of the Treo and Centro smartphones and also work with business customers directly.
For our handheld computer products in the United States, retailers represent our largest sales channel and include national and regional office supply stores and consumer electronics retailers. Distributors represent our second largest United States sales channel for handheld computers and generally sell to both traditional and Internet retailers and resellers, including enterprise and education resellers. Internationally, we sell our products primarily through distributors who sell to retailers and resellers.
We use our Palm.com webstore as a direct sales channel to sell our products and third-party products, focusing particularly on our customer base. We also offer a wide array of software titles on the Software Connection website which can be accessed from the Palm.com webstore.
We build awareness of our products and brands through select Palm marketing and cooperative marketing with wireless carriers and other distributors. To do so, we employ methods such as advertising, product placements, public relations efforts, in-store promotions and merchandising and retail and online advertising. We
7
Table of Contents
engage in direct marketing through mailings, email and promotions to users in our customer database. We also receive feedback from our end users and our channel customers through market research. We use this feedback to refine our product development efforts and to develop strategies for marketing our products.
Customers
In fiscal years 2008, 2007 and 2006, our largest customers represented the following percentages of consolidated revenues, respectively:
| · | Sprint Corporation represented 41%, 24% and 14%; |
| · | Verizon Wireless represented 13%, 18% and 30%; and |
| · | AT&T, Inc. represented 11%, 14% and 11%. |
AT&T Inc., Sprint Corporation and Verizon Wireless are wireless carriers in the United States.
Customer Service and Support
For our smartphone products in the United States, our wireless carrier partners generally handle first line support. For our smartphone products outside the United States, handheld computer products and escalation support, we generally provide customer support through outsourced service providers as well as our internal customer service personnel. In addition, we offer a program in which we assist our customers through the set-up process of certain of our smartphone products. We also offer premium support services for an additional fee to our enterprise customers.
Individual customers have access to a number of self-service tools for general inquiries, technical information and troubleshooting techniques. These include the support pages on the Palm website and the help forum and Internet-based knowledge library that can be accessed through the Palm website. Also, for the first 90 days after purchase, individual customers can obtain agent-assisted help through web chat and telephone support.
We warrant that our products will be free of defect for 90 to 365 days after the date of purchase, depending on the product. In Europe we are required in some countries to provide a two-year warranty for certain defects. We contract with third parties to handle warranty repair.
Research and Development
Our products are initially conceived, designed, developed and implemented through the collaboration of our internal engineering, marketing and supply chain organizations. We focus our product design efforts on both improving our existing products and developing new products. We intend to continue to employ a customer-focused design approach to provide innovative products that respond to and anticipate customer needs for functionality, mobility, simplicity, style and ease of use.
We either create internally or license from third parties the technologies required to support product development. Our internal staff includes engineers of many disciplines, including software engineers, electrical engineers, mechanical engineers, radio specialists, quality engineers and user interface design specialists. Once a product concept is initiated and approved, we create a multi-disciplinary team to complete the design of the product and transition it into manufacturing. We often utilize original design manufacturers, or ODMs, to design, develop and manufacture our products after we have internally completed product definition. Our hardware is developed and manufactured by a limited number of ODMs.
Although hardware is the most visible aspect of our products, we provide most of the value and differentiation to our products through software development and integration of the software with the hardware. This software development is aimed at enhancing and extending the platform software and at integrating and innovating application software functionality.
8
Table of Contents
All of our devices must receive approval from relevant governmental agencies, such as the Federal Communications Commission in the United States. Our Treo and Centro smartphones are also typically required to pass individual wireless carrier certification requirements before they may be operated on a wireless carrier’s network. In addition, our devices may require certification from various standard-setting bodies around the world. We have established an internal certification team and wireless carrier certification processes, including early testing, to facilitate our ability to meet these certification and standards requirements.
Most of our internal research and development is based at our headquarters in Sunnyvale, California. We also operate research and development facilities in San Diego, California and Dublin, Ireland.
Our research and development expenses totaled $202.8 million, $191.0 million and $136.2 million in fiscal years 2008, 2007 and 2006, respectively.
Manufacturing and Supply Chain
We outsource the manufacturing of our products 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 distribution centers. Currently the majority of our products are assembled in China and Taiwan by a limited number of ODMs. We also have entered into an agreement with a third party to manufacture our products in Brazil for distribution in Brazil. Distribution centers are operated on an outsourced basis in Illinois in the United States and in Hong Kong and Ireland internationally. In some cases, our ODMs ship products directly to our wireless carrier customers’ distribution centers.
The components that make up our products are purchased from various vendors, including key suppliers such as Broadcom, LG, Marvel, Qualcomm, Samsung, Sharp and Sony. Some of our components, including radio components, power supply integrated circuits, cameras and certain discrete components, are currently supplied by sole source suppliers.
We are subject to various environmental and other regulations governing product safety, materials usage, packaging and other environmental impacts in the various countries where our products are sold. Our products are subject to laws and regulations restricting the use of certain materials and which may require us to assume responsibility for collecting, treating, recycling and disposing of our products when they have reached the end of their useful lives.
Backlog
Most wireless carriers purchase our smartphones through negotiated contracts, each of which is unique. Generally, the terms of sale include purchase commitments if a wireless carrier requires smartphones that are customized to its network. Wireless carrier purchase terms vary; however, cancellations are generally limited and may carry penalties. Typically, smaller wireless carriers purchase non-customized product through distributors.
Orders for our handheld computer products are generally placed on an as-needed basis, and products are shipped as soon as possible after receipt of an order, usually within one to four weeks. Handheld computer product orders may be cancelled or rescheduled by the customer without penalty. Consequently, we rarely carry backlog on our handheld computer products.
The backlog of firm orders on our smartphone products was $237.5 million as of May 31, 2008 compared to $184.7 million as of May 31, 2007 and $120.6 million as of May 31, 2006.
9
Table of Contents
Seasonality
We have not seen significant seasonal variations in customer demand for our Treo smartphones. By contrast, since the introduction of the consumer-oriented Centro smartphone in September 2007, we have seen evidence of seasonality with its sales strengthening in the second and fourth quarters of our fiscal year as wireless carriers stock up for the December holiday selling season and the Mother’s Day, Father’s Day and graduation selling seasons, respectively.
Our handheld computer lines have historically been affected by seasonality, with associated revenues generally sequentially higher in the second quarter of our fiscal year, as distributors and retailers purchase product in anticipation of the December holiday selling season. We also have historically experienced smaller positive effects on revenue in the first and fourth quarters of our fiscal year, as distributors and retailers purchase product in anticipation of the back-to-school and the Father’s Day and graduation selling seasons, respectively.
Intellectual Property
We rely on a combination of know-how, patents, trademarks and copyrights, as well as trade secret laws, confidentiality procedures and contractual restrictions to protect our intellectual property rights. We invest strategically in our intellectual property portfolio in order to support our continued innovation, to be able to deliver compelling products to our customers and to build the overall value of our company and brand.
We continue to work on increasing and protecting our rights in our patent portfolio. We grow our patent portfolio through internal development, as well as acquisitions from time to time. While our patents are important to our business, our business is not materially dependent on any one patent. We file domestic and foreign patent applications to support our technology position and new product development, and we have over 1,200 patent assets (patents and patent applications) worldwide. Patents typically expire 20 years from the filing date subject to adjustments by certain countries’ patent offices. Patents relating to the mobile products industry are being issued and new patent applications are being filed with increasing regularity. As a result, there are many patents and related rights that may affect our products. In addition, new and existing companies are increasingly engaging in the business of acquiring or developing patents to assert offensively against companies such as Palm. This trend increases the likelihood that we will be subject to allegations and claims of infringement. We have been named in several patent infringement lawsuits to date, some of which are described in greater detail in Item 3, Legal Proceedings. In addition, as is common in our industry, we obtain indemnification from and agree to indemnify certain third parties for alleged patent infringement.
We own, directly or indirectly, a number of trademarks, including the PALM mark and certain PALM-formative marks as well as the TREO and CENTRO marks. We have registrations or pending applications for registration for such marks in the United States and other jurisdictions. In connection with our acquisition of PalmSource’s interest in PTHC, we provided a four-year transitional license to PalmSource for certain marks containing the word or letter string “palm”, including PALM OS. This license expires in May 2009. We are working to increase and protect our rights in our trademark portfolio, which is important to our value, reputation and branding.
We also license technologies from third parties for integration into our products. We believe that the licensing of complementary technologies from third parties with specific expertise is an effective means of expanding the features and functionality of our products, allowing us to focus on our core competencies. Our most significant licenses are the Palm OS from ACCESS Systems Americas, Inc. (formerly PalmSource, Inc.) and Windows Mobile from Microsoft. We also license conduit software that allows for synchronization with Outlook, encryption technology, radio technology and a variety of other software technologies.
Consistent with our efforts to maintain the confidentiality and ownership of our trade secrets and other confidential information and to protect and build our intellectual property rights, we generally require our employees, consultants and customers, manufacturers, suppliers and other persons with whom we do business or
10
Table of Contents
may potentially do business to execute confidentiality agreements as well as invention assignment agreements, if applicable, upon commencement of a relationship with us. Such agreements typically extend for a period of time beyond termination of the relationship.
Employees
As of May 31, 2008, we had a total of 1,050 employees, of whom 104 were in supply chain, 524 were in engineering, 260 were in sales and marketing and 162 were in general and administrative roles. None of our employees are subject to a collective bargaining agreement. We consider our relationship with our employees to be good.
Fiscal Year End
Our fiscal year ends on the Friday nearest May 31. For presentation purposes, the periods have been presented as ending on May 31. Fiscal years 2008, 2007 and 2006 each contained 52 weeks.
Product Information
Palm sells products in two product lines: smartphones and handheld computers through May 31, 2008. Revenues by product line are as follows (in thousands):
| Years Ended May 31, | |||||||||
| 2008 | 2007 | 2006 | |||||||
| Revenues: |
|||||||||
| Smartphones |
$ | 1,125,581 | $ | 1,250,040 | $ | 1,088,312 | |||
| Handheld computers |
193,110 | 310,467 | 490,197 | ||||||
| $ | 1,318,691 | $ | 1,560,507 | $ | 1,578,509 | ||||
Financial Information about Segments
Palm operates in one reportable segment which develops, designs and markets mobile products as well as related add-ons and accessories (in thousands):
| Years Ended May 31, | ||||||||||
| 2008 | 2007 | 2006 | ||||||||
| Revenues |
$ | 1,318,691 | $ | 1,560,507 | $ | 1,578,509 | ||||
| Net income (loss) |
(105,419 | ) | 56,383 | 336,170 | ||||||
| May 31, | ||||||||||
| 2008 | 2007 | 2006 | ||||||||
| Total assets |
$ | 1,180,262 | $ | 1,548,002 | $ | 1,487,522 | ||||
11
Table of Contents
Financial Information about Geographic Areas
Our headquarters and most of our operations are located in the United States. We conduct our sales, marketing and customer service activities throughout the world. Geographic revenue information is based on the location of the customer. For fiscal years 2008, 2007 and 2006, no single country outside the United States accounted for 10% or more of total revenues (in thousands):
| Years Ended May 31, | |||||||||
| 2008 | 2007 | 2006 | |||||||
| Revenues: |
|||||||||
| United States |
$ | 1,043,161 | $ | 1,174,265 | $ | 1,203,918 | |||
| Other |
275,530 | 386,242 | 374,591 | ||||||
| $ | 1,318,691 | $ | 1,560,507 | $ | 1,578,509 | ||||
| May 31, | |||||||||
| 2008 | 2007 | 2006 | |||||||
| Land held for sale, property and equipment, net (in thousands): |
|||||||||
| United States |
$ | 38,638 | $ | 95,370 | $ | 81,295 | |||
| Other |
998 | 1,264 | 1,695 | ||||||
| $ | 39,636 | $ | 96,634 | $ | 82,990 | ||||
Available Information
We make available free of charge through our website, www.palm.com, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and all amendments to those reports as soon as reasonably practicable after such material is electronically filed or furnished with the Securities and Exchange Commission, or SEC. These reports may also be obtained without charge by contacting Investor Relations, Palm, Inc., 950 West Maude Avenue, Sunnyvale, California 94085, phone: 1-408-617-7626, email: investor.relations@palm.com. Our Internet website and the information contained or incorporated therein are not intended to be incorporated into this Annual Report on Form 10-K. In addition, the public may read and copy any materials we file or furnish with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549 or may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Moreover, the SEC maintains an Internet site that contains reports, proxy and information statements, and other information that we file or furnish electronically with them at http://www.sec.gov.
12
Table of Contents
You should carefully consider the risks described below and the other information in this Form 10-K. The business, results of operations or financial condition of Palm could be seriously harmed and the trading price of Palm common stock may decline due to any of these risks.
Risks Related to Our Business
Our operating results are subject to fluctuations, and if we fail to meet the expectations of securities analysts or investors, our stock price may decrease significantly.
Our operating results are difficult to forecast. Our future operating results may fluctuate significantly and may not meet our expectations or those of securities analysts or investors. If this occurs, the price of our stock will likely decline. Many factors may cause fluctuations in our operating results including, but not limited to, the following:
| · | timely introduction and market acceptance of new products and services; |
| · | loss or failure of wireless carriers or other key sales channel partners; |
| · | quality issues with our products; |
| · | competition from other smartphones or other devices; |
| · | changes in consumer, business and wireless carrier preferences for our products and services; |
| · | failure to achieve product cost and operating expense targets; |
| · | changes in and competition for consumer and business spending levels; |
| · | failure by our third-party manufacturers or suppliers to meet our quantity and quality requirements for products or product components on time; |
| · | failure to add or replace third-party manufacturers or suppliers in a timely manner; |
| · | seasonality of demand for some of our products; |
| · | changes in terms, pricing or promotional programs; |
| · | variations in product costs or the mix of products sold; |
| · | excess inventory or insufficient inventory to meet demand; |
| · | growth, decline, volatility and changing market conditions in the markets we serve; |
| · | litigation brought against us; and |
| · | changes in general economic conditions and specific market conditions. |
Any of the foregoing factors could have an adverse effect on our business, results of operations and financial condition.
If we fail to develop and introduce new products and services successfully and in a cost-effective and timely manner, we will not be able to compete effectively and our ability to generate revenues will suffer.
We operate in a highly competitive, rapidly evolving environment, and our success depends on our ability to develop and introduce new products and services that our customers and end users choose to buy. If we are unsuccessful at developing and introducing new products and services that are appealing to our customers and end users with acceptable quality, prices and terms, we will not be able to compete effectively and our ability to generate revenues will suffer. The development of new products and services is very difficult and requires high
13
Table of Contents
levels of innovation. The development process is also lengthy and costly. If we fail to accurately anticipate technological trends or our end users’ needs or preferences or are unable to complete the development of products and services in a cost-effective and timely fashion, we will be unable to introduce new products and services into the market or successfully compete with other providers.
As we introduce new or enhanced products or integrate new technology into new or existing products, we face risks including, among other things, disruption in customers’ ordering patterns, excessive levels of older product inventories, delivering sufficient supplies of new products to meet customers’ demand, possible product and technology defects and a potentially different sales and support environment. Premature announcements or leaks of new products, features or technologies may exacerbate some of these risks. Our failure to manage the transition to newer products or the integration of newer technology into new or existing products could adversely affect our business, results of operations and financial condition.
Our products may contain errors or defects, which could result in the rejection or return of our products, damage to our reputation, lost revenues, diverted development resources and increased service costs, warranty claims and litigation.
Our products are complex and must meet stringent user requirements. In addition, we warrant that our products will be free of defect for 90 to 365 days after the date of purchase, depending on the product. In Europe, we are required in some countries to provide a two-year warranty for certain defects. In addition, certain of our contracts with wireless carriers include epidemic failure clauses with low thresholds that we have in some instances exceeded. If invoked, these clauses may entitle the wireless carrier to return or obtain credits for products in inventory or to cancel outstanding purchase orders.
In addition, we must develop our hardware and software application products quickly to keep pace with the rapidly changing mobile-product market, and we have a history of frequently introducing new products. Products as sophisticated as ours are likely to contain undetected errors or defects, especially when first introduced or when new models or versions are released. Our products may not be free from errors or defects after commercial shipments have begun, which could result in the rejection of our products, damage claims, litigation and recalls and jeopardize our relationship with wireless carriers. End users may also reject or find issues with our products and have a right to return them even if the products are free from errors or defects. In either case, returns or quality issues could result in damage to our reputation, lost revenues, diverted development resources, increased customer service and support costs, additional contractual obligations to wireless carriers and warranty claims and litigation which could harm our business, results of operations and financial condition.
If we are unable to compete effectively with existing or new competitors, we could experience price reductions, reduced demand for our products and services, reduced margins and loss of market share, and our business, results of operations and financial condition would be adversely affected.
The markets for our products are highly competitive, and we expect increased competition in the future, particularly as companies from established industry segments, such as mobile handset, personal computer and consumer electronics, enter these markets or increasingly expand and market their competitive product offerings or both.
Some of our competitors or potential competitors possess capabilities developed over years of serving customers in their respective markets that might enable them to compete more effectively than we compete in certain segments. In addition, many of our competitors have significantly greater engineering, technical, manufacturing, sales, marketing and financial resources and capabilities than we do. These competitors may be able to respond more rapidly than we can to new or emerging technologies or changes in customer requirements, including introducing a greater number and variety of products than we can. They may also be in a better position financially or otherwise to acquire and integrate companies and technologies that enhance their competitive positions and limit our competitiveness. In addition, they may devote greater resources to the development, promotion and sale of their products than we do. They may have lower costs and be better able to withstand
14
Table of Contents
lower prices in order to gain market share at our expense. They may also be more diversified than we are and better able to leverage their other businesses, products and services to be able to accept lower returns in the smartphone market and gain market share. Finally, these competitors may bring with them customer loyalties, which may limit our ability to compete despite superior product offerings.
Our devices compete with a variety of mobile devices. Our principal competitors include: mobile handset and smartphone manufacturers such as Apple, Asustek, HTC, LG, Motorola, Nokia, Pantech, RIM, Samsung and Sony-Ericsson; and computing device companies such as Acer, Hewlett-Packard and Mio Technology. In addition, our products compete for a share of disposable income and business spending on consumer electronic, telecommunications and computing products such as MP3 players, iPods, media/photo viewers, digital cameras, personal media players, digital storage devices, handheld gaming devices, GPS devices and other such devices.
Some of our competitors, such as Asustek and HTC, produce smartphones as wireless-carrier-branded devices in addition to their own branded devices. As technology advances, we also expect to compete with mobile phones without branded operating systems that synchronize with personal computers, as well as ultra-mobile personal computers and laptop computers with wide area network or data cards with VoIP, and WiFi phones with VoIP.
Some competitors sell or license server, desktop and/or laptop computing products, software and/or recurring services in addition to mobile products and may choose to market their mobile products at a discounted price or give them away for free with their other products or services, which could negatively affect our ability to compete.
A number of our competitors have longer and closer relationships with the senior management of business customers who decide which products and technologies will be deployed in their business. Many competitors have larger and more established sales forces calling on wireless carriers and business customers and therefore could contact a greater number of potential customers with more frequency. Consequently, these competitors could have a better competitive position than we do, which could result in wireless carriers and business customers deciding not to choose our products and services, which would adversely impact our revenues.
Successful new product introductions or enhancements by our competitors could cause intense price competition or make our products obsolete. To remain competitive, we must continue to invest significant resources in research and development, sales and marketing and customer support. We cannot be sure that we will have sufficient resources to make these investments or that we will be able to make the technological advances necessary to be competitive. Increased competition could result in price reductions, reduced demand for our products and services, increased expenses, reduced margins and loss of market share. Failure to compete successfully against current or future competitors could harm our business, results of operations and financial condition.
We are highly dependent on wireless carriers for the success of our smartphone products.
The success of our business strategy and our smartphone products is highly dependent on our ability to establish new relationships and build on our existing relationships with domestic and international wireless carriers. We cannot assure you that we will be successful in establishing new relationships, or maintaining or advancing existing relationships with wireless carriers or that these wireless carriers will act in a manner that will promote the success of our smartphone products. Factors that are largely within the control of wireless carriers, but which are important to the success of our smartphone products, include:
| · | testing of our smartphone products on wireless carriers’ networks; |
| · | quality and coverage area of wireless voice and data services offered by the wireless carriers; |
| · | the degree to which wireless carriers facilitate the introduction of and actively market, advertise, promote, distribute and resell our smartphone products; |
15
Table of Contents
| · | the extent to which wireless carriers require specific hardware and software features on our smartphone products to be used on their networks; |
| · | timely build-out of advanced wireless carrier networks that enhance the user experience for data-centric services through higher speed and “always on” functionality; |
| · | contractual terms and conditions imposed on us by wireless carriers that, in some circumstances, could limit our ability to make similar products available through competitive wireless carriers in some market segments; |
| · | wireless carriers’ pricing requirements and subsidy programs; and |
| · | pricing and other terms and conditions of voice and data rate plans that the wireless carriers offer for use with our smartphone products. |
For example, flat data rate pricing plans offered by some wireless carriers may represent some risk to our relationship with such wireless carriers. While flat data pricing helps customer adoption of the data services offered by wireless carriers and therefore highlights the advantages of the data applications of our smartphone products, such plans may not allow our smartphones to contribute as much average revenue per user to wireless carriers as when they are priced by usage, and therefore reduces our differentiation from other, non-data devices in the view of the wireless carriers. In addition, if wireless carriers charge higher rates than consumers are willing to pay, the acceptance of our wireless solutions could be less than anticipated and our revenues and results of operations could be adversely affected.
Wireless carriers have substantial bargaining power as we enter into agreements with them. They may require contract terms that are difficult for us to satisfy and could result in higher costs to complete certification requirements and negatively impact our results of operations and financial condition. Moreover, we do not have agreements with some of the wireless carriers with whom we do business internationally and, in some cases, the agreements may be with third-party distributors and may not pass through rights to us or provide us with recourse or contact with the wireless carrier. The absence of agreements means that, with little or no notice, these wireless carriers could refuse to continue to purchase all or some of our products or change the terms under which they purchase our products. If these wireless carriers were to stop purchasing our products, we may be unable to replace the lost sales channel on a timely basis and our results of operations could be harmed.
Wireless carriers also significantly affect our ability to develop and launch products for use on their wireless networks. If we fail to address the needs of wireless carriers, identify new product and service opportunities or modify or improve our smartphone products in response to changes in technology, industry standards or wireless carrier requirements, our products could rapidly become less competitive or obsolete. If we fail to timely develop smartphone products that meet wireless carrier product planning cycles or fail to deliver sufficient quantities of products in a timely manner to wireless carriers, those wireless carriers may choose to emphasize similar products from our competitors and thereby reduce their focus on our products which would have a negative impact on our business, results of operations and financial condition.
Wireless carriers, who control most of the distribution and sale of and virtually all of the access for smartphone products, could commoditize smartphones, thereby reducing the average selling prices and margins for our smartphone products which would have a negative impact on our business, results of operations and financial condition. In addition, if wireless carriers move away from subsidizing the purchase of smartphone products, this could significantly reduce the sales or growth rate of sales of smartphone products. This could have an adverse impact on our business, revenues and results of operations.
16
Table of Contents
We could be exposed to significant fluctuations in revenue for our smartphone products based on our strategic relationships with wireless carriers.
Because of their large sales channels, wireless carriers may purchase large quantities of our products prior to launch so that the products are widely available. Reorders of products may fluctuate quarter to quarter, depending on end-user demand and inventory levels required by the wireless carriers. As we develop new strategic relationships and launch new products with wireless carriers, our smartphone products-related revenue could be subject to significant fluctuation based on the timing of wireless carrier product launches, wireless carrier inventory requirements, marketing efforts and our ability to forecast and satisfy wireless carrier and end-user demand.
We are dependent on a concentrated number of significant customers and the loss or credit failure of any of those customers could have an adverse effect on our business, results of operations and financial condition.
Our three largest customers in terms of revenue represented 65% of our revenues during fiscal year 2008 compared to 56% during fiscal year 2007 and 55% during fiscal year 2006. We determine our largest customers in terms of revenue to be those who represent 10% or more of our total revenues for the year. We expect this trend of revenue concentration with our largest customers, particularly with wireless carriers, to continue. If any significant customer discontinues its relationship with us for any reason, or reduces or postpones current or expected purchases from us, it could have an adverse impact on our business, results of operations and financial condition.
In addition, our largest customers in terms of outstanding customer accounts receivable balances accounted for 61% of our accounts receivable at the end of fiscal year 2008 compared to 63% at the end of fiscal year 2007 and 66% at the end of fiscal year 2006. We determine our largest customers in terms of outstanding customer accounts to be those who have outstanding customer accounts receivable balances at the period end of 10% or more of our total net accounts receivables. We expect this trend of significant credit concentration with our largest customers, particularly with wireless carriers, to continue, concentrating our bad debt risks and the costs of mitigating those risks. We routinely monitor the financial condition of our customers and review the credit history of each new customer.
While we believe that our allowances for doubtful accounts adequately reflect the credit risk of our customers, as well as historical trends and other economic factors, we cannot assure you that such allowances will be accurate or sufficient. If any of our significant customers defaults on its account, or if we experience significant credit expense for any reason, it could have an adverse impact on our business, results of operations and financial condition.
If our products do not meet wireless carrier and governmental or regulatory certification or other requirements, we will not be able to compete effectively and our ability to generate revenues