Palm Lowers Guidance, Kills Acquisition

Palm Inc. Thursday announced two significant blows to its business when it
cut its revenue outlook for its fourth quarter of 2001 by 50 percent and
killed its planned purchase of mobile software specialist Extended Systems
Inc.

Palm said it now expects revenue for the fourth quarter to range between
$140 million and $160 million, compared to its
previous fourth quarter revenue outlook of $300 million to $315 million. The
company reported revenues of $350 million in the fourth quarter of fiscal
2000 and $471 million in the third quarter of fiscal 2001.

Palm Chief Executive Officer Carl Yankowski attributed part of the problem
to customers’ lagging interest in its higher-end m500 handhelds. Yankowski said the delay stalled sales of Palm’s existing
products in all regions.

This dour news comes shortly after the company, along with chief rival
Handspring Inc., said that it was slashing prices from its other products.
Specifically, Palm Monday cut its VIIx handheld $100 — from $299 to $199.
Add to that a $100 rebate once buyers sign up for the Palm.Net Internet
access service (which begins at $25 a month) and the VIIx clocks in at a low
$99. Handspring Wednesday trimmed $50 off of its VisorPhone.

In other financials, Palm said its outlook for pro forma operating loss is
now expected to range between $170 million and $190 million, compared to
previous estimates of $80 million to $85 million. As a result of Palm’s
further reshuffling, the outfit will take a charge to provide for excess
component and finished goods inventory and related costs, expected to be
$300 million.

Palm also said it has implemented a previously announced workforce reduction
in mid-April that lowered the company’s employee and contractor work force
by approximately 300 people or 15 percent. Palm expects to see $34 million
in expense savings during fiscal year 2002 from this action.

As for the Extended Systems merger, it just wasn’t meant to be, though the
parting was by mutual agreement and no termination fee was levied. In truth,
both companies agree that offering businesses a bundled solution of Palm’s
handheld devices and Extended Systems’ mobile infrastructure software will
continue to be a priority. Palm commented on the move in what has become a
stock phrase for many high-tech firms:

“The slowing economy and market conditions led both companies to conclude
that a termination of merger plans would best
serve both companies and their respective shareholders,” the firm said in a
public statement after the market closed Thursday.

The $264 million, all-stock acquisition was announced March 6 and was expected to close in June.

Palm, whose shares closed Thursday at $7.05, will report
fourth quarter and year-end results during the week of June 25.