Palm IncorporatedPalm Incorporated

Matthew F. SoccoliShort Fund Manager – McIntire Investment Institute

October 7, 2003

Company Mission

Focus is on creating devices handheld

devices that manage and access information

rather than creating and editing documents

Simple, Wearable, Expandable, MobileSimple, Wearable, Expandable, Mobile

Brief History

1996 – Palm Pilots introduced under U.S.

Robotics

December 1997 – Palm Licenses O.S.

May 1997 – Purchased by 3ComMay 1997 – Purchased by 3Com

March 2000 – IPO / spin-off from 3Com

January 2002 – 20 million units sold

June 2003 – Handspring Merger Announced

Current Corporate Structure

The Solutions Group PalmSource

Palm Inc.

The Solutions Group

Design

Manufacturing

Marketing

PalmSource

O.S Development

Software Licenses

Revenues in Millions

Q1 - FY 2004

17.1

168.6

Palm Solutions

Group

Palm Source

Proposed Corporate Structure

Product Line

Tungsten Series

Zire Series Palm Series

New Products

Tungsten T3

Possible compatibility issues with SD

Tungsten E

Zire 21

(Post – Merger) Handspring Treo

Investment Thesis

Palm is not going out of business, But…

Palm is losing market share in a shrinking market

Financial Difficulty in Producing a ProfitFinancial Difficulty in Producing a Profit

Pending litigation can potentially cause serious financial problems

Stock price has been inflated recently by news rather than fundamental data

Palm is Losing Market Share

Pocket PC’s – that run Microsoft CE have emerged as a serious competitor

71% to 57.7% Market

Operating Systems Used By

Handhelds

Microsoft

30%

Other

20%

71% to 57.7% Market Share in US

40 % of Global Market

New users are trying Microsoft Pocket PC’s

Old Palm users are switching to Pocket PC’s

Few are switching to Palms

30%

Palm

50%

Pocket Pc’s

Palm

40%

Total of

smaller

sales

43%

Recent price cuts entice switchover

“The wave of the future”

“Most new users get Pocket PC’s”

HPQ

17%

Pocket PC’s”

Traditional Windows feel - includes Word, Excel, Outlook

Toshiba, HP, Compaq, Gateway, Dell, are a few Pocket PC manufacturers

Gateway and Dell just got into the market and chose Pocket PC platform

Handheld Market is not growing

Palm Software has been on over 30 million handhelds sold

Many people purchase them and stop using them

You can get most handhelds 1/3 of the price at You can get most handhelds 1/3 of the price at Pawn Shops

Many consider them as gadgets

Palm executives avoided questions on handheld growth on Sep 18th conference call, one did not comment, the other said it would be hard to determine if growth could be either single or possibly double digits

But suprisingly…

News came out last week that Palm

expected to see growth in Corporate

business – This only makes up 10% of

revenues.revenues.

Just off this report, in two days the stock

went up over 10%

Disruptive Technologies

Can further weaken handheld market in the

long term

PDA/Cellphones

Tablet PC’s

Blackberry – Email reading devices

Financial Troubles

Earlier in the year Palm introduced Tungsten and Zire series Palms

Zire has been the best selling handheld of all time – yet in FY03 – Q4 and in FY04 – Q1 both showed operating losses.– yet in FY03 – Q4 and in FY04 – Q1 both showed operating losses.

How can they make a profit when they don’t even after the best selling handheld was introduced

The only recent profitable quarters have been during the holiday season, yet still they produced no operating cash flows

Not Seeking to Improve Margins

Hardware 28.1%, Software 89.9% - CFO stated

they are in the target range

Handsprings margins have been shrinking and

they are also losing money – why are they buying they are also losing money – why are they buying

companies that are losing money?

Only positive cash flow is coming from issuing

new stock and diluting their shareholder’s shares

Pending Litigation

Xerox v. Palm – Over graffiti technology

used in Palms. Xerox claims patent

infringement on its Unistrokes technology.

Has been going on since 1997. All but a Has been going on since 1997. All but a

few of the most recent models use this older

graffiti technology(T3, C, E, Zire 71 + 21)

Numerous class action lawsuits – Claiming

deceiving marketing practices

Xerox v. Palm Timeline

April 97 – Started against 3com

Jan 99 – US Patent office granted request

for examination of Unistrokes validity.

They then confirmed the validity of all 16 They then confirmed the validity of all 16

claims.

June 00 – A judge narrowly interpreted the

claims and found no infringement…

Xerox v Palm (cont’d)

Oct 5, 2000 – Court of Appeals reversed the finding and sent the case back to the lower court

Dec 20, 2001 – District Court granted our motions on infringement and for finding validity thus establishing liabilityon infringement and for finding validity thus establishing liability

Palm appealed, Xerox tried to move for a trial on damages and an injunction

50 Million dollar bond required to Xerox until trial

Jan 2003 – Palm decided to stop including graffiti in new operating systems

Xerox v Palm (cont’d again)

Feb 2003 – Court of Appeals affirmed infringment on the patent and stated Xerox could get an injuction if the validity of the patent is favorably determinedpatent is favorably determined

Remand procedure – limited discovery continued through September

Hearing argument scheduled for December 10th, 2003

Why Palm will lose

They have stopped using graffiti and created new graffiti software to use in their newest brands that they plan on keeping

Palm separated Palm source from Solutions Group in January of 2002, after the rulingPalm separated Palm source from Solutions Group in January of 2002, after the ruling

They have plans on how they will handle the financial burden, palm solutions group will take a one time charge and Palm Source will have to pay royalties. If they werent losing they wouldn’t talk about this

Future Implications

Injunction could be called on all Palms that

carry Graffiti software – by the time this

happens there might not be any currently for

sale that have it.sale that have it.

Substantial Punitive Damages on the 20

million devices with palm software that

have graffiti, and future royalties

Worst Case Scenario

In Palms 10k for 2003, they stated “Results

of operations and financial condition would

be significantly harmed and we may be

INSOLVENT”rendered INSOLVENT”

Insolvent – a firm that is unable to pay

debts – on the way to bankruptcy

Recent Run up in Stock Price

The Past 3 months

Investment Risks

Handspring Merger can be successful – synergies can be created – but handspring is also losing money and has shrinking margins

Palm could win Xerox case – not very likely given actions they have taken to soften the financial Palm could win Xerox case – not very likely given actions they have taken to soften the financial blow. Even if they won it wouldn’t necessarily affect the price up

Success in the new line of products during the holiday season – going into the season, august showed disappointing results

Large cash position – 8.40 per share

Valuation

There should be a margin of safety in the

value determined through research and the

current market value

Target Share Price – (in process)Target Share Price – (in process)

WACC – 18.8% - Financed primarily

through Equity

Key Financials

Share Price (as of this morning) 21.74

Market Cap 689 M

Shares outstanding 31.1 M

Short Interest 9.40 %Short Interest 9.40 %

Cash 267 M

Cash Per Share 8.40

FY 03 Ebitda -177 M

FY 04 Predicted Loss 28.7 M

Q1 - 04 Actual Loss 21.7 M

Research Overview

Current News, Earnings Conference Calls

Interviewing Palm customers, Pocket Pc

Customers

Interviewing sales associates at Circuit City, Interviewing sales associates at Circuit City,

Staples, Office Depot

Calling Xerox IR Department

Reading Palm’s 10k’s and 10q’s – Also Xerox’s

Timeline

October 28, 2003 – Shareholders vote on

Handspring Acquisition and PalmSource

Spin-off

December 15-20, 2003 – Palm Q2 – FY04 December 15-20, 2003 – Palm Q2 – FY04

earnings report on holiday sales quarter

December 20, 2003 – Hearing on Xerox v.

Palm revisited by District Court

Recommendation

Complete valuation to determine value

Follow closely any news on Xerox litigation and Handspring merger

Short Palm at a point where a margin of safety Short Palm at a point where a margin of safety exists between the determined value and market price. Cover around a share price of 10 based on current information.

Depending on the lawsuit w/ Xerox this could change very rapidly

Palm will not go out of business anytime soon

Questions?