Palm Becomes A Smaller Stock (PALM)

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Palm Inc. (NASDAQ:PALM) announced that its recapitalization plan with the private-equity firm Elevation Partners has closed. Elevation invested $325 million in Palm, and the company will utilize these proceeds along with existing cash and $400 million of new debt to finance a $9 per share cash distribution. Palm shareholders of record as of Oct. 24, should receive the cash distribution within approximately 10 business days.

Palm shares may to look artificially lower here on the dividend ex-date and record-date.

Jon Rubinstein, former senior vice president of hardware engineering and head of the iPod division at Apple, has joined Palm as executive chairman of the board, and Fred Anderson and Roger McNamee, managing directors and co-founders of Elevation, have joined Palm’s board of directors.

Under the terms of the recapitalization plan, Elevation has purchased $325 million of a new series of convertible preferred stock. The conversion price is $8.50 per share. Elevation will own approximately 27 percent of Palm’s outstanding common stock on an as-converted basis, based on the number of shares of common stock outstanding as of August 31, 2007.

The company secured commitments for $400 million of new debt and a $30 million revolving credit facility, which will not be drawn at closing. JPMorgan and Morgan Stanley were joint bookrunners for these facilities.

This guidance does not contemplate the accounting impact of a beneficial conversion feature of the Series B Convertible Preferred Stock as a result of the stock price on Oct. 24, 2007 closing above $17.50 per share. As a result of the closing of this transaction with Elevation, Palm is providing additional Q2 fiscal year 2008 guidance for the following data:
— Total other income (expense), net, is expected to be in the range of $1.0 million to $1.5 million, which consists of:
— Interest expense, which is expected to be in the range of $3.8 million to $4.3 million;
— Interest income, which is expected to be in the range of $5.8 million to $6.3 million; and
— Other income (expense), net, which is expected to be in the range of $(0.5) million to $(0.8) million;
— Accretion of Series B Convertible Preferred Stock issuance costs to accumulated deficit is expected to be in the range of $0.1 million to $0.2 million; and
— Shares used to compute basic and diluted per common share calculations on a net loss basis are expected to be approximately 104.9 million shares. Shares used to compute basic and diluted per common share calculations on a net income basis are expected to be approximately 120.5 million shares and approximately 123.1 million shares, respectively.

If the transaction with Elevation had closed at the beginning of Q2 fiscal year 2008, the expected impact for the full quarter would have been:
— Total other income (expense), net, estimated in the range of $(5.5) million to $(6.0) million, which consists of:
— Interest expense, estimated in the range of $9.5 million to $10.0 million;
— Interest income, estimated in the range of $4.5 million to $5.0 million; and
— Other income (expense), net, estimated in the range of $(0.5) million to $ (1.0) million;
— Accretion of Series B Convertible Preferred Stock issuance costs to accumulated deficit is expected to be in the range of $0.2 million to $0.4 million; and
— Shares used to compute basic and diluted per common share calculations on a net loss basis are expected to be approximately 104.9 million shares. Shares used to compute basic and diluted per common share calculations on a net income basis are expected to be approximately 143.1 million shares and approximately 145.7 million shares, respectively.

Jon C. Ogg
October 24, 2007