-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, F7L9jLg9DgroE6XoMGfHPsYuCZAQQG0ODolAS1LUixLArPdxj8sWEc/Hg91G2oZX ktkmAjWPDdZHfV20MHOsFg== 0001012870-99-004620.txt : 19991214 0001012870-99-004620.hdr.sgml : 19991214 ACCESSION NUMBER: 0001012870-99-004620 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 15 FILED AS OF DATE: 19991213 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PALM INC CENTRAL INDEX KEY: 0001100389 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 943150688 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-92657 FILM NUMBER: 99773662 BUSINESS ADDRESS: STREET 1: 54000 BAYFRONT PLAZA CITY: SANTA CLARA STATE: CA ZIP: 95022-8145 BUSINESS PHONE: 4083265000 MAIL ADDRESS: STREET 1: 5400 BAYFRONT PLAZA CITY: SANTA CLARA STATE: CA ZIP: 95052-8145 S-1 1 FORM S-1 As filed with the Securities and Exchange Commission on December 13, 1999 Registration No. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------- FORM S-1 REGISTRATION STATEMENT Under The Securities Act of 1933 -------------- PALM, INC. (Exact name of Registrant as specified in its charter) -------------- Delaware 3571 94-3150688 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification Number)
5400 Bayfront Plaza Santa Clara, CA 95052-8145 (408) 326-5000 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) -------------- Carl J. Yankowski Palm, Inc. 5400 Bayfront Plaza Santa Clara, CA 95052-8145 (408) 326-5000 (Name, address, including zip code, and telephone number, including area code, of agent for service) -------------- Copies to: Larry W. Sonsini, Esq. Stephen Yu, Esq. John L. Savva, Esq. Aaron J. Alter, Esq. Palm, Inc. Steven B. Stokdyk, Esq. Katharine A. Martin, Esq. 5400 Bayfront Plaza Sullivan & Cromwell Wilson Sonsini Goodrich & Rosati Santa Clara, CA 95052-8145 1888 Century Park East Professional Corporation (408) 326-5000 Suite 2100 650 Page Mill Road Los Angeles, CA 90067-1725 Palo Alto, CA 94304 (310) 712-6600 (650) 493-9300
-------------- Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. [_] -------------- CALCULATION OF REGISTRATION FEE - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
Amount of Title of Each Class of Proposed Maximum Registration Securities to be Registered Aggregate Offering Price(1) Fee - ------------------------------------------------------------------------------ Common Stock, par value $0.001 per share.............................. $100,000,000.00 $26,400.00
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (1) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) promulgated under the Securities Act of 1933, as amended. -------------- The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effectiveness until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +The information in this prospectus is not complete and may be changed. We may + +not sell these securities until the registration statement filed with the + +Securities and Exchange Commission is effective. This prospectus is not an + +offer to sell securities and we are not soliciting offers to buy these + +securities in any state where the offer or sale is not permitted. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subject to Completion. Dated December 13, 1999. Shares Palm, Inc. [PALM, INC. LOGO APPEARS HERE] Common Stock ----------- This is an initial public offering of shares of common stock of Palm, Inc. All of the shares of common stock are being sold by Palm. Prior to this offering, there has been no public market for the common stock. Palm has applied to have the common stock quoted on the Nasdaq National Market under the symbol "PALM". See "Risk Factors" on page 7 to read about factors you should consider before buying shares of the common stock. ----------- Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense. -----------
Per Share Total --------- ----- Initial public offering price.................................. Underwriting discount.......................................... Proceeds, before expenses, to Palm.............................
To the extent that the underwriters sell more than shares of the common stock, the underwriters have the option to purchase up to an additional shares from Palm at the initial public offering price less the underwriting discount. ----------- The underwriters expect to deliver the shares against payment in New York, New York on , 2000. Goldman, Sachs & Co. Morgan Stanley Dean Witter Merrill Lynch & Co. Robertson Stephens ----------- Prospectus dated , 2000. [description of artwork to be filed by amendment] PROSPECTUS SUMMARY You should read the following summary together with the more detailed information regarding our company and the common stock being sold in this offering and our historical consolidated financial statements and notes to those statements included elsewhere in this prospectus. PALM We are the leading global provider of handheld computing devices. We develop, design and market our Palm-branded handheld devices, which currently include our Palm III, Palm V and Internet-enabled Palm VII product families. According to International Data Corporation, in 1998 we had a 68% market share of the worldwide personal companion handheld device market, which International Data Corporation defines as small, pocket-sized devices that feature pen-based input and synchronize with a personal computer. We believe our emphasis on simplicity, elegance and ease of use and our focus on consumer needs have contributed to our success to date. Our devices have also won numerous awards, including Business Week's "Design of the Decade--Gold Award" and PC Computing's Most Valuable Product award for "Best Pocket PC" in 1999. We intend to build on our global market leadership in handheld computing devices through continued innovation and focus on addressing customer needs. The Palm operating system and related software, which we refer to as our Palm platform, have been the cornerstone of our success in the handheld device market. The Palm platform combines the distinctive look, feel and ease of use of our Palm OS operating system with HotSync synchronization technology, pen- based input technology and personal information management applications such as datebook and address book. Our Palm VII product also includes web-clipping software that allows Internet content providers and users to send and receive information via the Internet in a format optimized for handheld devices. In addition to including the Palm platform in our Palm-branded devices, we license the Palm platform to manufacturers of information appliances, which we define as handheld devices that enable users to access and manage information. Most recently, Nokia and Sony agreed to license the Palm platform for use in their future products. We intend to establish our Palm platform as the leading operating system in the rapidly converging markets of handheld computing devices, information appliances, mobile phones and handheld entertainment devices. We have also established a wireless Internet access service, Palm.net, which supports the Palm VII device and generates revenue from monthly subscription fees. Palm.net subscribers can obtain wireless access to information such as real-time stock quotes, news headlines and airline flight schedules. In addition, our Palm.net service enables mobile users to access an increasing array of enterprise data and applications. We have also developed our Palm.com website, which is emerging as an important destination site for our customers, users and developer community. As part of our Internet strategy, we are expanding our Internet destination sites to provide new web-clipping applications and facilitate e-commerce. We believe that the continued adoption of handheld devices as well as our strategic focus on Palm platform licensing and Internet services present us with significant growth opportunities. We will continue our efforts to identify and respond to customer needs as handheld computing devices become more sophisticated, reach a broader customer base and become an increasingly important means of Internet access on a global basis. As of December 1, 1999, we had sold over 5 million Palm devices worldwide. As of December 1, 1999, more than 29,000 third-party developers had registered to create applications based on the Palm platform. Our revenues have increased from approximately $1 million in fiscal 1995 to $564 million in fiscal 1999. We outsource the manufacturing of all of our devices to Manufacturers' Services Limited and Flextronics. 3 OUR RELATIONSHIP WITH 3COM We are currently a wholly-owned subsidiary of 3Com Corporation. After the completion of this offering, 3Com will own approximately % of the outstanding shares of our common stock, or approximately % if the underwriters fully exercise their option to purchase additional shares. 3Com currently plans to complete its divestiture of Palm approximately six months following this offering by distributing all of the shares of Palm common stock owned by 3Com to the holders of 3Com's common stock. However, 3Com is not obligated to complete the distribution, and the distribution may not occur by the anticipated time or at all. 3Com will, in its sole discretion, determine the timing, structure and all terms of its distribution of our common stock that it owns. 3Com's distribution is subject to receiving a private letter ruling from the Internal Revenue Service that the distribution of its shares of Palm common stock to 3Com stockholders will be tax-free to the stockholders and that our separation from 3Com qualifies as a reorganization for United States federal income tax purposes. Prior to the completion of this offering, we will enter into agreements with 3Com related to the separation of our business operations from 3Com. These agreements provide for, among other things: . the transfer from 3Com to us of assets and the assumption by us of liabilities relating to our business; . the allocation of intellectual property between us and 3Com; and . various interim and ongoing relationships between us and 3Com. The agreements regarding the separation of our business operations from 3Com are described more fully in the section entitled "Arrangements Between Palm and 3Com" included elsewhere in this prospectus. The terms of these agreements, which are being negotiated in the context of a parent-subsidiary relationship, may be more or less favorable to us than if they had been negotiated with unaffiliated third parties. See "Risk Factors--Risks Related To Our Separation From 3Com." The assets and liabilities to be transferred to us are described more fully in our consolidated financial statements and notes to those statements that are also included elsewhere in this prospectus. CONCURRENT PRIVATE PLACEMENTS America Online, Inc., Motorola, Inc. and Nokia have agreed to purchase from us, in private placements that will occur concurrently with the closing of this offering, an aggregate number of shares of our common stock equal to up to 4.5% of our capital stock, which percentage is based on outstanding common stock as well as options to purchase shares which have been granted as of , 2000, but not exceeding an aggregate investment of more than $225 million. These investors will pay a per share purchase price for this common stock equal to the initial public offering price in this offering. 4 THE OFFERING Common stock offered....................... shares Common stock to be outstanding immediately after this offering....................... shares Common stock to be held by 3Com immediately after this offering....................... shares Use of proceeds............................ For payment of a dividend to 3Com, payment of other amounts due to 3Com, capital expenditures, marketing expenses, working capital and potential investments in, or acquisitions of, other businesses or technologies. Proposed Nasdaq Stock Market symbol........ PALM
This information is based on shares outstanding as of , 1999, all of which are owned by 3Com. We will declare a -for-one stock split to increase the amount of outstanding shares of our common stock to shares prior to this offering. Unless we specifically state otherwise, the information in this prospectus does not take into account the issuance of up to shares of common stock that the underwriters have the option to purchase. If the underwriters exercise in full their option to purchase additional shares, shares of common stock will be outstanding after this offering. The number of shares of our common stock to be outstanding immediately after this offering listed above does not take into account approximately shares of our common stock reserved for issuance under our stock plans, of which options to purchase shares have been granted as of , 2000 but does include an aggregate of shares to be issued to America Online, Motorola and Nokia concurrently with the closing of this offering. In addition, we will assume substantially all of the 3Com options held by our employees on the date 3Com distributes our common stock, which options will convert into options to purchase our common stock. We were incorporated in California in January 1992 as Palm Computing, Inc. In connection with this offering and our separation from 3Com, we intend to reincorporate in Delaware and change our name to Palm, Inc. We were acquired by 3Com in June 1997 as part of 3Com's acquisition of U.S. Robotics Corporation. We had been acquired by U.S. Robotics in September 1995. From June 1997 to the time of this offering, we have been operated as a wholly-owned subsidiary of 3Com. Our principal executive offices are located at 5400 Bayfront Plaza, Santa Clara, California 95052-8145, and our telephone number is (408) 326-5000. Our websites are http://www.palm.com and http://www.palm.net. The information on these websites is not a part of this prospectus. In this prospectus, "Palm," "we," "us" and "our" each refers to Palm, Inc. and its subsidiaries, and not to the underwriters or 3Com. "3Com" refers to 3Com Corporation and its subsidiaries. Palm, our logo and other trademarks of Palm mentioned in this prospectus are the property of Palm. All other trademarks or trade names referred to in this prospectus are the property of their respective owners. 5 SUMMARY CONSOLIDATED FINANCIAL DATA The following tables present our summary consolidated financial data. The data presented in these tables are from "Selected Consolidated Financial Data" and our historical consolidated financial statements and notes to those statements included elsewhere in this prospectus. You should read those sections for a further explanation of the financial data summarized here. The historical financial information may not be indicative of our future performance and does not reflect what our financial position and results of operations would have been had we operated as a separate, stand-alone entity during the periods presented.
Three Months Years Ended Ended ---------------------------------------------- ----------------- June 30, May 26, May 25, May 31, May 28, Aug. 28, Aug. 27, 1995(1) 1996(2) 1997 1998 1999 1998 1999 -------- ------- -------- -------- -------- -------- -------- (in thousands, except per share amounts) Consolidated Statements of Operations Data: Revenues................ $ 1,403 $ 7,054 $114,157 $272,137 $563,525 $116,069 $176,505 Gross profit............ 1,229 2,575 36,472 114,388 247,909 53,071 78,181 Operating income (loss)................. (2,231) (6,777) (13,513) 6,461 48,339 13,131 15,866 Net income (loss)....... (2,166) (3,062) (7,862) 4,171 29,628 8,070 9,658 Unaudited pro forma net income per share:...... Basic................. $ $ Diluted............... $ $ Shares used in computing unaudited pro forma net income per share: Basic................. Diluted............... Supplemental unaudited pro forma net income per share: Basic................. $ $ Diluted............... $ $ Shares used in computing supplemental unaudited pro forma net income per share: Basic................. Diluted...............
August 27, 1999 ----------------------- Pro Forma Actual As Adjusted(3) -------- -------------- (in thousands) Consolidated Balance Sheet Data: Cash and cash equivalents............................... $ 37,138 $ Working capital......................................... 91,074 Total assets............................................ 201,346 Stockholder's net investment............................ 113,295
- ------- Notes: (1) Our fiscal year end was June 30 prior to our acquisition by 3Com. (2) Fiscal 1996 includes only eleven months of operating results. (3) Pro forma as adjusted amounts give effect to the following actions as though these actions had been taken as of August 27, 1999: . our sale of shares of common stock in this offering at an assumed initial public offering price of $ per share and after deducting an assumed underwriting discount and estimated offering expenses payable by us; . our sale of shares of common stock to America Online, Motorola and Nokia concurrently with the closing of this offering at an assumed offering price of $ per share; . retention of most of our accounts receivable and accounts payable by 3Com at the time of our separation; . payment of a dividend to 3Com equal to its tax basis in us, which was approximately $ million at , 2000; and . repayment of an intercompany payable to 3Com, which was approximately $49 million at August 27, 1999. 6 RISK FACTORS You should carefully consider the risks described below and the other information in this prospectus before investing in our common stock. Our business could be seriously harmed by any of these risks. The trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment. Risks Related to Our Business If we fail to develop and introduce new products and services rapidly and successfully, we will not be able to compete effectively and our business will suffer. We operate in a highly competitive, quickly changing environment, and our future 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 end users, our business and operating results would be seriously harmed. The development of new products and services can be very difficult and requires high levels of innovation. The development process is also lengthy and costly. If we fail to anticipate our end users' needs and technological trends accurately or are otherwise unable to complete the development of products and services quickly, we will be unable to introduce new products and services into the market on a timely basis, if at all. For example, our most recently introduced handheld device product, the Palm VII device, took more than two years to develop. In addition, because the Palm VII device requires Internet services and applications to support it, we must also continue to develop new services to maintain and broaden its user appeal. Because the sales and marketing life cycle of our handheld devices is generally 12 to 18 months or less, we must: . continue to develop updates to our Palm platform, new handheld devices and new Internet services, or our existing products and services will quickly become obsolete; . manage the timing of new product introductions so that we minimize the impact of customers delaying purchases of existing products in anticipation of new product releases; . manage the levels of existing and older product and component inventories to minimize inventory write-offs; and . adjust the prices of our existing products in order to increase customer demand for these products. If we do not correctly anticipate demand for our products, our operating results will suffer. Historically, we have seen steady increases in demand for our products and have generally been able to increase production to meet that demand. However, the demand for our products depends on many factors and will be difficult to forecast. We expect that it will become more difficult to forecast demand as we introduce and support multiple handheld device products and as competition in the market for our products intensifies. Significant unanticipated fluctuations in demand could cause the following problems in our operations: . If demand increases beyond what we forecast, we would have to rapidly increase production at our third-party manufacturers. We would depend on suppliers to provide additional volumes of components and those suppliers might not be able to increase production rapidly enough to meet unexpected demand. Even if we are able to procure enough components, our third-party manufacturers might not be able to produce enough of our devices as fast as we need them. The inability of either our manufacturers or our suppliers to increase production rapidly enough could cause us to fail to meet customer demand. 7 . Rapid increases in production levels to meet unanticipated demand could result in higher costs for manufacturing and supply of components and other expenses. These higher costs could lower our profit margins. Further, if production is increased rapidly, manufacturing yields could decline, which may also lower our margins. . If forecasted demand does not develop, we could have excess production resulting in higher inventories of finished products and components, which would use cash and could lead to write-offs of some or all of the excess inventories. Lower than forecasted demand could also result in excess manufacturing capacity at our third-party manufacturers and failure to meet some minimum purchase commitments, each of which could result in lower margins. Our quarterly operating results are subject to fluctuations and seasonality, and if we fail to meet the expectations of securities analysts or investors, our share price may decrease significantly. Our operating results are difficult to predict. Our future quarterly operating results may fluctuate significantly and may not meet the expectations of securities analysts or investors. If this occurs, the price of our stock would likely decline. Factors that may cause fluctuations in our operating results include the following: . Seasonality. Historically, our revenues have usually been weaker in the first and third quarters of each fiscal year and have, from time to time, been lower than the preceding quarter. This weakness is due to the fact that our devices are highly consumer-oriented, and consumer buying is traditionally lower in these quarters. As our licensing revenues grow, we expect that they will contribute to the fluctuations in our quarterly results because the products offered by our licensees are also primarily consumer-oriented. In addition, we attempt to time our new product releases to coincide with relatively higher consumer spending in the second and fourth fiscal quarters, which contributes to these seasonal variations. . Increases in Operating Expenses. As we expand our operations, we expect that our operating expenses, particularly our sales, marketing and research and development costs, will continue to increase. We also expect to make significant expenditures, including using a portion of the proceeds from this offering, to expand our Internet services through increased marketing activities and investments in network expansion related to our subscription-based Internet access service. These Internet services expenditures as well as a significant portion of our sales, marketing and research and development costs are fixed, at least in the short term. If revenues decrease and we are unable to reduce those costs rapidly, our operating results would be negatively affected. In addition, we will add new fixed costs to build an independent business and administration infrastructure after we separate from 3Com. Over the next several quarters we expect expenses to grow more rapidly than revenues, which will hurt our quarterly operating results. . Product Mix. Our profit margins differ among the handheld device, Palm platform licensing and Internet services parts of our business. In addition, the product mix of our device sales affects profit margins in any particular quarter. As our business evolves and the mix of revenues from devices, licenses and services varies from quarter to quarter, our operating results will likely fluctuate. . New Product Introductions. As we introduce new products and services, the timing of these introductions will affect our quarterly operating results. We may have difficulty predicting the timing of new product and service introductions and the user acceptance of these new products and services. If products and services are introduced earlier or later than anticipated, or if user acceptance is unexpectedly high or low, our quarterly operating results may fluctuate unexpectedly. In addition, we typically increase sales and marketing expenses to support new product introductions. 8 . Use of Purchase Orders with Customers. We rely on one-time purchase orders rather than long-term contracts with our distributor customers. Because we cannot predict with certainty incoming purchase orders, decreases in orders or failure to fulfill orders may cause our operating results to fluctuate. We rely on third-party manufacturers to produce our handheld devices, and our operations could be adversely affected by our inability to control their operations. We outsource all of our manufacturing to Manufacturers' Services Limited and Flextronics. We depend on these third-party manufacturers to produce sufficient volume of our products in a timely fashion and at satisfactory quality levels. If our third-party manufacturers fail to produce quality products on time and in sufficient quantities, our reputation and results of operations would suffer. We depend on Flextronics to manufacture some of our device products at its facilities in Mexico, California and Malaysia, and the rest of our device products are manufactured by Manufacturers' Services Limited at its Utah facility. The cost, quality and availability of third-party manufacturing operations are essential to the successful production and sale of our handheld devices. Our reliance on third parties exposes us to the following risks outside our control: . unexpected increases in manufacturing costs; . interruptions in shipments if one of our manufacturers is unable to complete production; . inability to control quality of finished device products; . inability to control delivery schedules; . unpredictability of manufacturing yield; . potential lack of adequate capacity; and . potential inability to secure adequate volumes of components. We have only limited experience working with Manufacturers' Services Limited, which recently purchased 3Com's Utah facility. If we are unable to manage our relationship with Manufacturers' Services Limited successfully, our ability to manufacture our products would be harmed and our results of operations would suffer. We do not have a manufacturing agreement with Flextronics, upon whom we rely to manufacture a significant number of our device products. We presently order our products on a purchase order basis from Flextronics. The absence of a manufacturing agreement means that, with little or no notice, Flextronics could refuse to continue to manufacture all or some of the units of our devices that we require or change the terms under which it manufactures our device products. If Flextronics were to stop manufacturing our devices, we may be unable to replace the lost manufacturing capacity on a timely basis and our results of operations could be harmed. In addition, if Flextronics were to change the terms under which they manufacture for us, our manufacturing costs could increase and our profitability could suffer. We depend on our suppliers, many of which are the sole source for our components, and our production would be seriously harmed if these suppliers are not able to meet our demand and alternative sources are not available. Our products contain components, including liquid crystal displays, touch panels, memory chips and microprocessors, that are procured from a variety of suppliers. The cost, quality and availability of components are essential to the successful production and sale of our device products. In particular, some components, such as displays, power supply integrated circuits, digital signal processors, Motorola microprocessors and several radio frequency and discrete components, come from sole or single source suppliers. Alternative sources are not currently available for these single source components. If suppliers are unable to meet our demand for sole source components and if we are unable to obtain an alternative source or if the price for an alternative source is prohibitive, our ability to maintain timely and cost-effective production of our handheld computing device products 9 would be seriously harmed. In addition, because we rely on one-time purchase orders with our suppliers, we cannot predict with certainty our ability to procure components in the longer term. For example, we recently had to modify the design of our Palm VII device as a result of our inability to obtain adequate supplies of the radio crystals that our original design required because of limited supply and unexpectedly high demand from cellular telephone manufacturers. We are also aware of a current shortage in the availability of memory chips, and we have modified the design of our Palm VII device because of this shortage. If either the shortage in radio crystals or memory chips or any other key component persists or worsens, we will likely not be able to deliver sufficient quantities of our products to satisfy demand. We do not know if the Palm platform licensing and Internet services parts of our business will be able to generate significant revenue in the future, and we will continue to rely on our handheld device products as the primary source of our revenue for the foreseeable future. Our future growth and a significant portion of our future revenue depend on the commercial success of our Palm handheld devices, which comprise the primary product line that we currently offer. Palm handheld devices accounted for approximately 99% of our revenues in the three months ended August 27, 1999. We expanded our Palm platform licensing and Internet services parts of our business only recently, and these parts of our business have not yet generated a material portion of our revenues. If revenues from our device business do not grow, our other business activities will not be able to compensate for this shortfall. A significant portion of our revenues currently comes from a small number of distributors, and any decrease in revenues from these distributors could harm our business. A significant portion of our revenues comes from only a small number of distributors. Ingram Micro represented approximately 35% of our revenues in the three months ended August 27, 1999 and 24% of our revenues in fiscal 1999. Tech Data represented approximately 4% of our revenues in the three months ended August 27, 1999 and 14% of our revenues in fiscal 1999. We expect that the majority of our revenues will continue to depend on sales of our handheld devices to a small number of distributors. Any downturn in the business of these customers could seriously harm our revenues and results of operations. We rely on distributors, retailers and resellers to sell our products, and disruptions to these channels would harm our business. Because we sell a significant portion of our products to distributors, retailers and resellers, we are subject to many risks, including risks related to their inventory levels and support for our products. In particular, our distributors, retailers and resellers maintain significant levels of our products in their inventories. If distributors, retailers and resellers attempt to reduce their levels of inventory or if they do not maintain sufficient levels to meet customer demand, our sales could be negatively impacted. If we reduce the prices of our products to these customers, we may have to compensate them for the difference between the higher price they paid to buy their inventory and the new lower prices. In addition, like other manufacturers, we are exposed to the risk of product returns from distributors, either through their exercise of contractual return rights or as a result of our strategic interest in assisting distributors in balancing inventories. Our distributors, retailers and resellers also sell products offered by our competitors. If our competitors offer our distributors, retailers and resellers more favorable terms, those distributors, retailers and resellers may de- emphasize or decline to carry our products. In the future, we may not be able to retain or attract a sufficient number of qualified distributors, retailers and resellers. Further, distributors, retailers and resellers may not recommend, or continue to recommend, our products. If we are unable to maintain successful relationships with distributors, retailers and resellers or to expand our distribution channels, our business will suffer. 10 We believe our distributors, retailers and resellers are experiencing heightened competition from Internet-based suppliers that distribute directly to end-user customers. We also sell our products directly to end-user customers from our Palm.com website. These actions could cause conflict among our channels of distribution, which could seriously harm our revenues and results of operations. If we are unable to compete effectively with existing or new competitors, our resulting loss of competitive position could result in price reductions, fewer customer orders, reduced margins and loss of market share. We compete in the handheld device, operating system software and Internet services markets. The markets for these products and services are highly competitive and we expect competition to increase in the future. Some of our competitors or potential competitors have significantly greater financial, technical and marketing resources than we do. These competitors may be able to respond more rapidly than us to new or emerging technologies or changes in customer requirements. They may also devote greater resources to the development, promotion and sale of their products than we do. . Our handheld computing device products compete with a variety of smart handheld devices, including keyboard-based devices, sub-notebook computers, smart phones and two-way pagers. Our principal competitors include Casio, Compaq, Hewlett-Packard, Psion, Sharp and Palm platform licensees such as TRG and Handspring, which was formed by two of our original founders. . Our Palm platform competes primarily with operating systems such as Microsoft's Windows CE for palm-sized personal computers and Symbian's EPOC for wireless devices. . Our Internet services compete with a variety of alternative technologies and services, such as those based on different industry standards for wireless Internet access, information appliances that provide Internet connectivity and other traditional and developing methods. We expect our competitors to continue to improve the performance of their current products and services and to introduce new products, services and technologies. Successful new product introductions or enhancements by our competitors could reduce the sales and market acceptance of our products and services, cause intense price competition or make our products obsolete. To be 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, fewer customer orders, reduced margins and loss of market share. Our failure to compete successfully against current or future competitors could seriously harm our business, financial condition and results of operations. If we fail to effectively respond to competition from products introduced by licensees of our Palm platform or if our licensees fail to sell products based on the Palm platform, our results of operations may suffer as the revenues we receive from license fees may not compensate for the loss of revenues from our device products. The success of our business depends on both the sale of handheld device products and the licensing of our Palm platform. However, licensees of our Palm platform offer products that compete directly or indirectly with our handheld computing devices. For example, licensees such as Nokia, Sony or QUALCOMM may use our Palm platform in devices such as mobile phones or other similar products that can compete indirectly with our handheld devices. In addition, while we expect to receive licensing revenue from Handspring and TRG, our device products compete directly for users and distributors with their devices. If revenues from our handheld devices suffer because of competition from licensees of our Palm platform, our results of operations would suffer and our ability to implement our business model would be seriously challenged. In addition, our licensees may not be successful in selling products based on the Palm platform, which could harm our business and results of operations. 11 Our Palm platform and handheld devices may contain errors or defects, which could result in the rejection of our products and damage to our reputation, as well as lost revenues, diverted development resources and increased service costs and warranty claims. Our Palm platform and our devices are complex and must meet stringent user requirements. We must develop our software and hardware products quickly to keep pace with the rapidly changing handheld device market. Products and services as sophisticated as ours are likely to contain undetected errors or defects, especially when first introduced or when new models or versions are released. We have in the past experienced delays in releasing some models and versions of our products until problems were corrected. 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 to our reputation, lost revenues, diverted development resources and increased customer service and support costs and warranty claims. Any of these results could harm our business. If we fail to manage expansion effectively, our business, financial condition and prospects could be seriously harmed. Our ability to successfully offer our products and implement our business plan in a rapidly evolving market requires an effective planning and management process. We continue to increase the scope of our operations domestically and internationally and have grown our shipments and headcount substantially. Our handheld device shipments grew from approximately 461,000 units in fiscal 1997 to approximately 2 million units in fiscal 1999. At November 30, 1997, we had a total of approximately 220 employees and at November 26, 1999, we had a total of approximately 630 employees. In addition, we plan to continue to hire a significant number of employees this year. This growth has placed, and our anticipated growth in future operations will continue to place, a significant strain on our management systems and resources. We expect that we will need to continue to improve our financial and managerial controls, reporting systems and procedures. For example, we intend to implement an enterprise-wide supply chain management system that we anticipate will cost up to $7 million to implement. If we experience delays or cost overruns in implementing this system or if this system is not as effective as we anticipate, we could experience significant difficulties in managing our supply chain. While we are currently implementing stand-alone versions of most of the transaction processing systems historically used by 3Com, we may decide to purchase new systems in the future that more closely match our business needs and incur significant additional expenses in connection with those systems. In addition, we will need to continue to expand, train and manage our work force worldwide. Furthermore, we expect that we will be required to manage multiple relationships with various customers and other third parties. In particular, after our separation from 3Com, we will have to implement a new administrative and managerial infrastructure. Our future success depends on the implementation of this infrastructure after our separation. The market for the delivery of Internet services through handheld devices is new and rapidly evolving, and our business could suffer if this market does not develop or we fail to address this market effectively. The market for the delivery of Internet services through handheld devices is new and rapidly evolving. In addition, our Internet services strategy has been developed only recently, and we must continue to adapt it to compete in the rapidly evolving Internet services market. We only recently introduced our Palm.net service, a subscription-based wireless access service that enables Palm VII users to access web-clipped content on the Internet. Other competitors have introduced or developed, or are in the process of introducing or developing, products that facilitate the delivery of Internet services through handheld devices. We cannot assure you that individuals currently using competing products to access the Internet remotely, such as portable personal computers and wireless telephones, will widely adopt handheld devices as a means of accessing Internet services. Accordingly, it is extremely difficult to predict which products will be successful in this market or the 12 future size and growth of this market. In addition, given the limited history and rapidly evolving nature of this market, we cannot predict the price that wireless subscribers will be willing to pay for these products and services. These risks could affect our ability to support the Palm.net service on a large scale and price the service at a level that produces expected returns. Our Internet services business will suffer if our telecommunications carrier raises its rates, discontinues doing business with us or does not deliver acceptable service. The future success of our Internet services business substantially depends on the capacity, affordability, reliability and security of our telecommunications networks. Only a small number of telecommunications providers offer the network services we require. We currently rely on BellSouth to provide all of our Palm VII wireless network services pursuant to an agreement. Our agreement with BellSouth permits each party to terminate the agreement on an annual basis. If BellSouth failed to provide us with service at rates acceptable to us or at all, we may not be able to provide Internet access to our users. In addition, our Palm VII products are configured around the frequency standard used by BellSouth. If we needed to switch to another telecommunications carrier, we would have to redesign significant portions of our software and hardware to permit transmission on a different frequency and service to users of existing Palm VII products would be disrupted. If we were required to redesign these elements, our Internet services part of our business could be adversely affected. If BellSouth delivers unacceptable service, the quality of our Internet services would suffer and we would likely lose users who are dissatisfied with our service. In addition, BellSouth provides service only in the continental United States. We intend to expand our network services to support Internet services internationally, but doing so will require us to enter into new relationships with telecommunications providers abroad. Many international telecommunications providers use different standards and transmit data on different frequencies than BellSouth, which will require us to redesign significant portions of our software and hardware. Our reputation and ability to generate revenues will be harmed if demand for our Internet services exceeds our telecommunications and network capacity. We may from time to time experience increases in our Internet services usage which exceed our available telecommunications capacity and the capacity of our third-party network servers. As a result, users may be unable to register or log on to our service, may experience a general slow-down in their Internet access or may be disconnected from their sessions. Excessive user demand could also result in system failures of our third-party network servers' networks. Inaccessibility, interruptions or other limitations on the ability to access our service due to excessive user demand, or any failure of our third-party network servers to handle user traffic, would have a material adverse effect on our reputation and our revenues. We plan to expand our direct e-commerce operation, and our business and financial condition could be harmed if this operation is not successful. We may not be able to achieve any or all of the necessary components of a successful e-commerce operation. We intend to expand our Palm.com and Palm.net websites. This expansion will require additional expenditures, including the use of part of the proceeds of this offering. These expenditures are anticipated to exceed revenues from these services over the next few years. We have little experience in implementing or operating a direct e-commerce business, and if we are not successful in operating it or in successfully managing our current sales channels alongside our direct e-commerce channel, our business and financial condition could be materially harmed. Our Internet services business prospects could suffer if the Internet does not continue to grow as a medium for interactive content and services. Our future success depends in part on the continued growth and reliance by consumers and businesses on the Internet, particularly in the market for Internet services and networking of handheld computing devices. Use and growth of the Internet will depend in significant part on continued rapid 13 growth in the number of households and commercial, educational and government institutions with access to the Internet. The use and growth of the Internet will also depend on the number and quality of products and services designed for use on the Internet. Because use of the Internet as a source of information, products and services is a relatively recent phenomenon, it is difficult to predict whether the number of users drawn to the Internet will continue to increase and whether the market for commercial use of the Internet will continue to develop and expand. Internet use patterns may decline as the novelty of the medium recedes. The rapid rise in the number of Internet users and the growth of electronic commerce and applications for the Internet has placed increasing strains on the Internet's communications and transmission infrastructure. This could lead to significant deterioration in transmission speeds and the reliability of the Internet as a commercial medium and could reduce the use of the Internet by businesses and individuals. The Internet may not be able to support the demands placed upon it by this continued growth. Any failure of the Internet to support growth due to inadequate infrastructure or for any other reason would seriously limit its development as a viable source of commercial and interactive content and services. This could impair the development and acceptance of our Internet services which could in turn harm our business prospects. If the security of our websites is compromised, our reputation and business could suffer. A significant barrier to widespread use of electronic commerce sites, such as our Palm.com site, and network services sites, such as our Palm.net site, is concern for the security of confidential information transmitted over public networks. Despite our efforts to protect the integrity of our Palm.com and Palm.net sites, a party may be able to circumvent our security measures and could misappropriate proprietary information or cause interruptions in our operations and damage our reputation. Any such action could negatively affect our customers' willingness to engage in online commerce with us. We may be required to expend significant capital and other resources to protect against these security breaches or to alleviate problems caused by these breaches. Our business will suffer if we are not able to retain, hire and integrate sufficient qualified personnel. Our future success depends partly on the continued contribution of our key executive, technical, sales, marketing, manufacturing and administrative personnel. It also depends on our ability to expand, integrate and retain our management team after our separation from 3Com. Many members of our senior management have been with the business only a short time. In particular, our Chief Executive Officer has only been employed with us since December 1999 and we have only limited experience under his leadership. In addition, recruiting and retaining skilled personnel, including software and hardware engineers, is highly competitive. If we fail to retain, hire and integrate qualified employees and contractors, we will not be able to maintain and expand our business. Third parties have claimed and may claim in the future we are infringing their intellectual property, and we could suffer significant litigation or licensing expenses or be prevented from selling products if these claims are successful. In the course of our business, we frequently receive claims of infringement or otherwise become aware of potentially relevant patents or other intellectual property rights held by other parties. We evaluate the validity and applicability of these intellectual property rights, and determine in each case whether we must negotiate licenses or cross-licenses to incorporate or use the proprietary technologies in our products. Third parties may claim that we or our customers or Palm platform licensees are infringing their intellectual property rights, and we may be found to infringe those intellectual property rights and require a license to use those rights. We may be unaware of intellectual property rights of others that may cover some of our technology, products and services. 14 Moreover, in connection with future intellectual property infringement claims, we will not have the benefit of asserting counterclaims based on 3Com's intellectual property portfolio, and we will not be able to offer licenses to 3Com's intellectual property rights in order to resolve claims. 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 is now captioned: Xerox Corporation v. U.S. Robotics Corporation, U.S. Robotics Access Corp., Palm Computing, Inc. and 3Com Corporation, Civil Action No. 97-CV-6182T. The complaint alleges willful infringement of a Xerox United States patent, issued on January 21, 1997, relating to computerized interpretation of handwriting. The complaint further seeks unspecified damages and injunctive relief. Xerox has asserted that products utilizing Graffiti script recognition software made, used, offered for sale or sold in the United States, or imported into the United States since January 21, 1997, infringe its patent. On June 25, 1999, the court stayed the action pending reexamination of the patent by the United States Patent and Trademark Office. The reexamination of the patent is currently pending. In connection with our separation from 3Com, pursuant to the terms of the Indemnification and Insurance Matters Agreement, we will indemnify and hold 3Com harmless for any damages or losses which may arise out of this litigation. In particular, an adverse determination in the Xerox litigation could subject us to substantial damages and require us to indemnify our customers and licensees for damages that they may suffer. Moreover, if there is an adverse determination, a license may be necessary to continue using the Grafitti script recognition software in our Palm devices and Palm platform. A license may not be available or on terms acceptable to us. If upon an adverse determination we were unable to obtain a license on terms acceptable to us, we could be required to modify our script recognition software or license alternative script recognition software from third parties for inclusion in our Palm devices and our Palm platform. Any litigation regarding patents or other intellectual property could be costly and time-consuming, and divert our management and key personnel from our business operations. The complexity of the technology involved and the uncertainty of intellectual property litigation increase these risks. Claims of intellectual property infringement might also require us to enter into costly royalty or license agreements or indemnify our Palm platform licensees. However, we may not be able to obtain royalty or license agreements on terms acceptable to us, or at all. We also may be subject to significant damages or injunctions against development and sale of our products. We often rely on licenses of intellectual property for use in our business. We cannot assure you that these licenses will be available in the future on favorable terms or at all. In addition, our position with respect to the negotiation of licenses may deteriorate after our separation from 3Com. If third parties infringe our intellectual property, we may expend significant resources enforcing our rights or suffer competitive injury. Our success depends in large part on our proprietary technology. We rely on a combination of patents, copyrights, trademarks and trade secrets, confidentiality provisions and licensing arrangements to establish and protect our proprietary rights. If we fail to protect or to enforce our intellectual property rights successfully, our competitive position could suffer, which could harm our operating results. Our pending patent and trademark registration applications may not be allowed or competitors may challenge the validity or scope of these patent applications or trademark registrations. In addition, our patents may not provide us a significant competitive advantage. We may be required to spend significant resources to monitor and police our intellectual property rights. We may not be able to detect infringement and may lose competitive position in the market before we do so. In addition, competitors may design around our technology or develop competing technologies. Intellectual property rights may also be unavailable or limited in some foreign countries, which could make it easier for competitors to capture market share. 15 Over the last twelve months, there have been several thefts of computer equipment from us and our employees. This computer equipment has contained proprietary information. We have formulated a security plan to reduce the risk of any future thefts and have cooperated with state and federal law enforcement officials in an investigation of past incidents. We may not be successful in preventing future thefts, or in preventing those responsible for past thefts from using our technology to produce competing products. The unauthorized use of Palm technology by competitors could have a material adverse effect on our ability to sell our products in some markets. Our business is subject to economic, political and other risks associated with international sales and operations. Since we sell our products worldwide, our business is subject to risks associated with doing business internationally. We anticipate that revenue from international operations will represent an increasing portion of our total revenue. In addition, two of the facilities where our devices are manufactured are located outside the United States. Accordingly, our future results could be harmed by a variety of factors, including: . changes in foreign currency exchange rates; . changes in a specific country's or region's political or economic conditions, particularly in emerging markets; . trade protection measures and import or export licensing requirements; . potentially negative consequences from changes in tax laws; . difficulty in managing widespread sales and manufacturing operations; and . less effective protection of intellectual property. We intend to pursue strategic acquisitions and our business could be materially harmed if we fail to successfully integrate acquired businesses. We often evaluate acquisition opportunities that could provide us with additional product or services offerings or additional industry expertise. Any future acquisition could result in difficulties assimilating acquired operations and products, diversion of capital and management's attention away from other business issues and opportunities and amortization of acquired intangible assets. Integration of acquired companies may result in problems related to integration of technology and inexperienced management teams. Our management has had limited experience in assimilating acquired organizations and products into our operations. We may not successfully integrate any operations, personnel or products that we may acquire in the future. If we fail to successfully integrate acquisitions, our business could be materially harmed. Potential year 2000 problems associated with our products, our internal systems or the products of our suppliers and customers could harm our business. Many currently installed computer systems and software were written to accept and process only two digit entry codes for the year when storing dates. Beginning with the year 2000, these entry codes will need to accept four digit entries to distinguish 21st century dates from 20th century dates. As a result, computer systems and products may need to be upgraded to solve this problem to avoid incorrect or lost data. Although we believe the products we are currently offering are year 2000 ready, the first generation of our handheld device product, which is no longer being sold, does not properly display the European date format. We expect to release a downloadable software patch to fix this problem. If any of our products do not operate properly in the year 2000, we could have increased warranty costs, customer satisfaction issues, litigation or other material costs or liabilities. We have relied on 3Com to address any year 2000 readiness issues in the internal and external systems we currently use. If 3Com's year 2000 readiness preparations are insufficient, we may be required to bear the costs of upgrading or replacing any systems after our separation from 3Com. In addition, we could experience delays in our ability to manufacture and ship products and deliver services, disruptions in 16 our customer service and technical support facilities and interruptions of customer access to our online products and services. We cannot assure you that all year 2000 problems have been identified or corrected in time to prevent serious harm to us. In addition, we have relied on assurances from third parties, including our suppliers and manufacturers in the United States and abroad and our wireless telecommunications network provider, BellSouth, that they and the products and services they supply are year 2000 compliant. We have not independently verified these assurances in many cases, and any failure of these third-party products and services to be year 2000 compliant could harm us. There is a risk that our users could initiate litigation against us for damages arising from our products that are not year 2000 compliant. Year 2000 issues could harm our future results of operations, cash flows or financial condition. Risks Related to Our Separation from 3Com We currently use 3Com's operational and administrative infrastructure, and our business will suffer if we do not develop our own infrastructure quickly and cost-effectively. We currently use 3Com's systems to support our operations, including systems to manage inventory, order processing, human resources, shipping, accounting, payroll and internal computing operations. Many of these systems are proprietary to 3Com and are very complex. These systems have been modified, and are in the process of being further modified, to enable us to separately track items related to our business. These modifications, however, may result in unexpected system failures or the loss or corruption of data. We are in the process of creating our own systems to replace 3Com's systems. We may not be successful in implementing these systems and transitioning data from 3Com's systems to ours. Any failure or significant downtime in 3Com's or our own information systems could prevent us from taking customer orders, shipping products or billing customers and could harm our business. In addition, 3Com's and our information systems require the services of employees with extensive knowledge of these information systems and the business environment in which we operate. In order to successfully implement and operate our systems, we must be able to attract and retain a significant number of highly skilled employees. If we fail to attract and retain the highly skilled personnel required to implement, maintain, and operate our information systems, our business could suffer. In addition, we currently have office space in 3Com's Santa Clara campus. We have entered into arrangements with 3Com to lease these facilities under a lease that is terminable with six months notice beginning in July 2001 and expires in July 2002. After this transition period, we will need to find alternative facilities. If we fail to find replacement facilities in a timely fashion, our business will be harmed. Our stock price and business may suffer if 3Com does not complete its distribution of our common stock. 3Com currently intends that, subject to obtaining approval by the 3Com board of directors and a ruling from the Internal Revenue Service that the distribution will be tax-free to 3Com stockholders and that our separation from 3Com qualifies as a reorganization, it will distribute to its stockholders all of our common stock that it owns approximately six months after this offering, although it is not obligated to do so. This distribution may not occur by that time or at all. At the time of this offering, we will not know what the ruling from the Internal Revenue Service regarding the tax treatment of the separation and the distribution will be. If 3Com does not receive a favorable tax ruling, it is not likely to make the distribution in the expected time frame or at all. In addition, until this distribution occurs, the risks discussed below relating to 3Com's control of us and the potential business conflicts of interest between 3Com and us will continue to be relevant to our stockholders. If the distribution is delayed or not completed at all, the liquidity of our shares in the market will be severely constrained 17 unless and until 3Com elects to sell some of its significant ownership. There are no limits on these sales and the sale or potential sale by 3Com could adversely affect market prices. In addition, because of the limited liquidity until the distribution occurs, relatively small trades of our stock will have a disproportionate effect on our stock price. Also, if 3Com does not distribute its shares, we will face significant difficulty hiring and retaining key personnel, many of whom are attracted by the potential of operating our business as a fully independent entity. We will be controlled by 3Com as long as it owns a majority of our common stock, and our other stockholders will be unable to affect the outcome of stockholder voting during such time. After the completion of this offering and the private placements to America Online, Motorola and Nokia, 3Com will own approximately % of our outstanding common stock, or approximately % if the underwriters exercise in full their option to purchase additional shares. As long as 3Com owns a majority of our outstanding common stock, 3Com will continue to be able to elect our entire board of directors and to remove any director, with or without cause, without calling a special meeting. Investors in this offering will not be able to affect the outcome of any stockholder vote prior to the planned distribution of our stock to the 3Com stockholders. As a result, 3Com will control all matters affecting us, including: . the composition of our board of directors and, through it, any determination with respect to our business direction and policies, including the appointment and removal of officers; . the allocation of business opportunities that may be suitable for us and 3Com; . any determinations with respect to mergers or other business combinations; . our acquisition or disposition of assets; . our financing; . changes to the agreements providing for our separation from 3Com; . the payment of dividends on our common stock; and . determinations with respect to our tax returns. 3Com is not prohibited from selling a controlling interest in us to a third party. Our historical financial information may not be representative of our results as a separate company. The historical financial information we have included in this prospectus does not reflect what our financial position, results of operations and cash flows would have been had we been a separate, stand-alone entity during the periods presented. 3Com did not account for us, and we were not operated, as a separate, stand-alone entity for the periods presented. In addition, the historical financial information is not necessarily indicative of what our results of operations, financial position and cash flows will be in the future. We have not made adjustments to our historical financial information to reflect many significant changes that will occur in our cost structure, funding and operations as a result of our separation from 3Com, including increased costs associated with reduced economies of scale, increased marketing expenses related to building a company brand identity separate from 3Com and increased costs associated with being a publicly traded, stand-alone company. We will not be able to rely on 3Com to fund our future capital requirements, and we cannot assure you that financing from other sources will be available on favorable terms or at all. In the past, our capital needs have been satisfied by 3Com. However, following our separation, 3Com will no longer provide funds to finance our working capital or other cash requirements. We 18 cannot assure you that financing from other sources, if needed, will be available on favorable terms or at all. We believe our capital requirements will vary greatly from quarter to quarter, depending on, among other things, capital expenditures, fluctuations in our operating results, financing activities, acquisitions and investments and inventory and receivables management. We believe that the proceeds from this offering, along with our future cash flow from operations, will be sufficient to satisfy our working capital, capital expenditure and research and development requirements for the foreseeable future. However, we may require or choose to obtain additional debt or equity financing in order to finance acquisitions or other investments in our business. Future equity financings would be dilutive to the existing holders of our common stock. Future debt financings could involve restrictive covenants. We will likely not be able to obtain financing with interest rates as favorable as those that 3Com could obtain. We may have potential business conflicts of interest with 3Com with respect to our past and ongoing relationships that could harm our business operations. Conflicts of interest may arise between 3Com and us in a number of areas relating to our past and ongoing relationships, including: . labor, tax, employee benefit, indemnification and other matters arising from our separation from 3Com; . intellectual property matters; . employee retention and recruiting; . sales or distributions by 3Com of all or any portion of its ownership interest in us; . the nature, quality and pricing of transitional services 3Com has agreed to provide us; and . business opportunities that may be attractive to both 3Com and us. Nothing restricts 3Com from competing with us. We may not be able to resolve any potential conflicts, and even if we do, the resolution may be less favorable than if we were dealing with an unaffiliated party. The agreements we have entered into with 3Com may be amended upon agreement between the parties. While we are controlled by 3Com, 3Com may be able to require us to agree to amendments to these agreements that may be less favorable to us than the current terms of the agreements. Our directors and executive officers may have conflicts of interest because of their ownership of 3Com common stock. Many of our directors and executive officers have a substantial amount of their personal financial portfolios in 3Com common stock and options to purchase 3Com common stock. Their options to purchase 3Com common stock may not convert into options to purchase our common stock if the distribution does not occur. Ownership of 3Com common stock by our directors and officers after our separation from 3Com could create, or appear to create, potential conflicts of interest when directors and officers are faced with decisions that could have different implications for 3Com and us. If the transitional services being provided to us by 3Com are not sufficient to meet our needs, or if we are not able to replace these services after our agreements with 3Com expire, we will be unable to manage critical operational functions of our business. 3Com has agreed to provide transitional services to us, including services related to: . information technology systems; 19 . supply chain; . human resources administration; . product order administration; . customer service; . buildings and facilities; . treasury; and . legal, finance and accounting. Although 3Com is contractually obligated to provide us with these services, these services may not be provided at the same level as when we were part of 3Com, and we may not be able to obtain the same benefits. We will also lease and sublease office space from 3Com. These transitional service and leasing arrangements generally have a term of less than two years following the separation. After the expiration of these various arrangements, we may not be able to replace the transitional services or enter into appropriate leases in a timely manner or on terms and conditions, including cost, as favorable as those we will receive from 3Com. These agreements were made in the context of a parent-subsidiary relationship and were negotiated in the overall context of our separation from 3Com. The prices charged to us under these agreements may be lower than the prices that we may be required to pay third parties for similar services or the costs of similar services if we undertake them ourselves. Risks Related to the Securities Markets and Ownership of Our Common Stock Substantial sales of common stock may occur in connection with the distribution, which could cause our stock price to decline. 3Com currently intends to distribute the approximately shares of our common stock it owns to 3Com stockholders approximately six months after this offering. Substantially all of these shares will be eligible for immediate resale in the public market. We are unable to predict whether significant amounts of common stock will be sold in the open market in anticipation of, or following, this distribution, or by 3Com if the distribution does not occur. We are also unable to predict whether a sufficient number of buyers will be in the market at that time. Any sales of substantial amounts of common stock in the public market, or the perception that such sales might occur, whether as a result of this distribution or otherwise, could harm the market price of our common stock. Our securities have no prior market, and we cannot assure you that our stock price will not decline after the offering. Before this offering, there has not been a public market for our common stock, and an active public market for our common stock may not develop or be sustained after this offering. The market price of our common stock could be subject to significant fluctuations after this offering. Among the factors that could affect our stock price are: . quarterly variations in our operating results; . changes in revenue or earnings estimates or publication of research reports by analysts; . speculation in the press or investment community; . strategic actions by us or our competitors, such as acquisitions or restructurings; . actions by institutional stockholders or by 3Com prior to its distribution of our stock; 20 . general market conditions; and . domestic and international economic factors unrelated to our performance. The stock markets in general, and the markets for high technology stocks in particular, have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock. In particular, we cannot assure you that you will be able to resell your shares at or above the initial public offering price, which will be determined by negotiations between the representatives of the underwriters and us. Provisions in our charter documents and Delaware law may delay or prevent acquisition of us, which could decrease the value of your shares. Our certificate of incorporation and bylaws and Delaware law contain provisions that could make it harder for a third party to acquire us without the consent of our board of directors, although these provisions have little significance while we are controlled by 3Com. These provisions include a classified board of directors and limitations on actions by our stockholders by written consent. In addition, our board of directors has the right to issue preferred stock without stockholder approval, which could be used to dilute the stock ownership of a potential hostile acquirer. Delaware law also imposes some restrictions on mergers and other business combinations between us and any holder of 15% or more of our outstanding common stock. Although we believe these provisions provide for an opportunity to receive a higher bid by requiring potential acquirers to negotiate with our board of directors, these provisions apply even if the offer may be considered beneficial by some stockholders. Purchasers in this offering will experience immediate dilution in net tangible book value per share. Purchasers of our common stock in this offering and the America Online, Motorola and Nokia private placements will experience immediate dilution of $ in net tangible book value per share. 21 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS You should not rely on forward-looking statements in this prospectus. This prospectus contains forward-looking statements that involve risks and uncertainties. We use words such as "anticipates," "believes," "plans," "expects," "future," "intends," "may," "will," "should," "estimates," "predicts," "potential," "continue" and similar expressions to identify these forward-looking statements. This prospectus also contains forward-looking statements attributed to third parties relating to their estimates regarding the growth of our markets. Forward-looking statements are subject to known and unknown risks, uncertainties and other factors that may cause our actual results, as well as those of the markets we serve, levels of activity, performance, achievements and prospects to be materially different from those expressed or implied by the forward-looking statements. These risks, uncertainties and other factors include, among others, those identified in "Risk Factors" and elsewhere in this prospectus. 22 OUR SEPARATION FROM 3COM Overview On September 13, 1999, 3Com announced its plan to make Palm, a wholly-owned subsidiary, into an independent, publicly-traded company focused on the handheld device industry. Until the completion of this offering, we will continue as a wholly-owned subsidiary of 3Com. We expect that the separation of our business from 3Com, including the transfer of related assets, liabilities and intellectual property rights, will be substantially completed before the completion of this offering. Benefits of the Separation We believe that we will realize benefits from our complete separation from 3Com, including the following: Greater Strategic Focus. In addition to the Palm handheld computing business, 3Com generates significant revenue from other lines of products, including switches, hubs, remote access systems, routers, network management software, network interface cards and modems. Our focus will be on developing businesses and strategic opportunities for handheld devices. This effort will be supported by our own board of directors, management team and employees. Increased Speed and Responsiveness. As a company smaller in size than 3Com, we expect to be able to make decisions more quickly, deploy resources more rapidly and efficiently and operate with more agility than we could as a part of a larger organization. In addition, we expect to enhance our responsiveness to customers and partners. Better Incentives for Employees and Greater Accountability. We expect the motivation of our employees and the focus of our management will be strengthened by incentive compensation programs tied to the market performance of our common stock. The separation will enable us to offer our employees compensation directly linked to the performance of the Palm business, which we expect to enhance our ability to attract and retain qualified personnel. More Direct Access to Capital Markets. As a separate company, we will have more direct access to the capital markets to issue debt or equity securities and to grow through acquisitions. Separation and Transitional Arrangements We and 3Com, and, in some cases, our respective subsidiaries, will enter into agreements providing for the separation of our businesses from 3Com, including a master separation and distribution agreement. These agreements generally provide for, among other things: . the transfer from 3Com to us of assets and the assumption by us of liabilities relating to our business; . the allocation of intellectual property between us and 3Com; and . various interim and ongoing relationships between us and 3Com. The Distribution by 3Com of Our Common Stock After completion of this offering, 3Com will own approximately % of the outstanding shares of our common stock, or approximately % if the underwriters fully exercise their option to purchase additional shares. 3Com currently plans to complete its divestiture of Palm approximately 23 six months after this offering by distributing all of its shares of our common stock to the holders of 3Com's common stock. However, 3Com is not obligated to complete the distribution, and we cannot assure you as to whether or when it will occur. 3Com has advised us that it would not complete the distribution if its board of directors determines that the distribution is no longer in the best interest of 3Com and its stockholders. 3Com has further advised us that it currently expects that the principal factors that it would consider in determining whether and when to complete the distribution include: . the relative market prices of our common stock and 3Com's common stock; . the issuance by the Internal Revenue Service of a ruling that the distribution will be tax-free to 3Com stockholders and that the transaction will qualify as a reorganization for United States federal income tax purposes; . the absence of any court orders or regulations prohibiting or restricting the completion of the distribution; and . other conditions affecting our business or 3Com's business. 24 USE OF PROCEEDS We estimate that our net proceeds from this offering will be approximately $ , based on an assumed initial public offering price of $ per share and after deducting an assumed underwriting discount and estimated offering expenses payable by us. We estimate that our net proceeds from the private placements to America Online, Motorola and Nokia will be approximately $ , based on an assumed offering price of $ per share. We intend to use the proceeds of this offering and the private placements for: . payment of a dividend to 3Com approximately equal to its tax basis in Palm, which was approximately $ million at , 2000; . repayment of an intercompany payable to 3Com, which was approximately $49 million at August 27, 1999; . increased capital expenditures to support anticipated growth in operations, infrastructure for our wireless and Internet services and hardware and software for our information systems and personnel; . increased marketing expenses to establish our Palm brand; . replacing the working capital retained by 3Com and funding our increased working capital needs associated with revenue growth; and . potential investments in, or acquisitions of, other businesses or technologies. DIVIDEND POLICY We currently intend to retain any future earnings to fund the development and growth of our business. Therefore, other than the cash dividend to 3Com to be paid with a portion of the proceeds of this offering, we do not anticipate paying any cash dividends in the foreseeable future. 25 CAPITALIZATION The following table sets forth our capitalization as of August 27, 1999. Our capitalization is presented: . on an actual basis; . on a pro forma basis to give effect to the retention of most of our accounts receivable and accounts payable by 3Com at the time of our separation, as though such retention had occurred as of August 27, 1999, the payment of a dividend to 3Com equal to its tax basis in Palm, which was approximately $ million at , 2000, and the reclassification of approximately $49 million at August 27, 1999 from 3Com Corporation equity to an intercompany payable to 3Com; and . on a pro forma as adjusted basis to reflect our receipt of the estimated net proceeds from the sale of shares of common stock in this offering and our sale of shares in the private placements to America Online, Motorola and Nokia and the payment of the amounts payable to 3Com Corporation. You should read the information set forth below together with "Selected Consolidated Financial Data," our historical consolidated financial statements and the notes to those statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus.
August 27, 1999 ------------------------------ Pro Pro Forma Actual Forma As Adjusted -------- ------- ----------- (in thousands) Payable to 3Com Corporation(1)(2)............ $ -- $48,902 $ ======== ======= ===== Stockholders' equity: Preferred stock............. $ -- $ -- $ -- Common stock................ -- -- Additional paid-in capital.. -- -- 3Com Corporation equity(1)(2)............... 113,413 Accumulated other comprehensive income (loss)..................... (118) (118) (118) -------- ------- ----- Total stockholders' equity................... $113,295 $ $ ======== ======= ===== Total capitalization.... $113,295 $ $ ======== ======= =====
- -------- Notes: (1) We intend to declare a dividend payable to 3Com approximately equal to its tax basis in Palm. We intend to pay this dividend using a portion of the proceeds from this offering. (2) Intercompany payable amounts due to 3Com are included as a component of 3Com Corporation equity as no interest was charged on such balances and there was no scheduled repayment. We intend to repay our intercompany payable to 3Com, which was approximately $49 million as of August 27, 1999, using a portion of the proceeds of this offering. 26 DILUTION Our net tangible book value at August 27, 1999 was approximately $100.6 million, or $ per share. Net tangible book value per share is determined by dividing our tangible net worth, which is total tangible assets less total liabilities, by the number of shares of common stock outstanding after giving effect to the -for-one stock split immediately before this offering and the private placements. Dilution in net tangible book value per share represents the difference between the amount per share paid by purchasers of shares of our common stock in this offering and the private placements and the net tangible book value per share of our common stock immediately afterwards. After giving effect to the following: . our sale of shares of common stock in this offering at an assumed initial public offering price of $ per share and after deducting an assumed underwriting discount and estimated offering expenses payable by us; . our sale of shares of common stock to America Online, Motorola and Nokia concurrently with the closing of this offering at an assumed offering price of $ per share; . retention of most of our accounts receivable and accounts payable by 3Com at the time of our separation as though such retention had occurred as of August 27, 1999; . payment of a dividend to 3Com approximately equal to its tax basis in Palm, which was approximately $ million at , 2000; and . repayment of an intercompany payable to 3Com, which was approximately $49 million at August 27, 1999; our pro forma as adjusted net tangible book value at August 27, 1999 would have been approximately $ , or $ per share. This represents an immediate increase in net tangible book value of $ per share to our existing stockholder and an immediate dilution in net tangible book value of $ per share to new investors purchasing shares of common stock in this offering and the private placements. The following table illustrates this dilution per share: Assumed initial public offering price per share............. $ Pro forma net tangible book value per share as of August 27, 1999................................................. $ Increase in pro forma book value per share attributable to new investors (including the private placements)......... Pro forma, as adjusted, net tangible book value per share after this offering and the private placements............. ------- Dilution in pro forma net tangible book value per share to new investors (including the private placements)........... $ =======
The discussion and table above assume no exercise of options outstanding under our 1999 Stock Plan and no issuance of shares reserved for future issuance under our 1999 Employee Stock Purchase Plan. As of August 27, 1999, there were options outstanding to purchase a total of shares of common stock at a weighted average price of $ per share. To the extent that any of these options are exercised, there will be further dilution to new investors. 27 The following table sets forth, as of August 27, 1999 on the pro forma as adjusted basis described above, the differences between the number of shares of common stock purchased from us, the total price paid and average price per share paid by our existing stockholder and by the new investors in this offering and the private placements at an assumed initial public offering price of $ per share, before deducting the estimated underwriting discounts and commissions and offering expenses payable by us, and after giving effect to the -for-one stock split immediately before this offering and the private placements.
Total Average Shares Purchased Consideration Price ----------------- ------------------ Per Number Percentage Amount Percentage Share ------ ---------- ------- ---------- ------- Existing stockholder............. % $ % $ New investors (including the private placements)............. ------ ----- ------- ----- ------- Total.......................... 100.0% $ 100.0% ====== ===== ======= ===== =======
If the underwriters' option to purchase additional shares is exercised in full, the following will occur: . the number of shares of common stock held by our existing stockholder will decrease to approximately % of the total number of shares of common stock outstanding; and . the number of shares held by new public investors will be increased to or approximately % of the total number of shares of our common stock outstanding after this offering. 28 SELECTED CONSOLIDATED FINANCIAL DATA The following tables present our selected consolidated financial data. The information set forth below should be read together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our historical consolidated financial statements and notes to those statements included in this prospectus. Our consolidated statements of operations data set forth below for the years ended May 25, 1997, May 31, 1998 and May 28, 1999 and the consolidated balance sheet data as of May 31, 1998 and May 28, 1999 are derived from our audited consolidated financial statements included in this prospectus which have been audited by Deloitte & Touche LLP, independent auditors, whose report is also included in this prospectus. The consolidated statements of operations data for the year ended June 30, 1995 and the eleven month period ended May 26, 1996 and the consolidated balance sheet data as of June 30, 1995, May 26, 1996 and May 25, 1997 are derived from our unaudited consolidated financial data that is not included in this prospectus. The consolidated statements of operations data for the three months ended August 28, 1998 and August 27, 1999 and the consolidated balance sheet data as of August 27, 1999 are derived from unaudited consolidated financial statements included in this prospectus and, in the opinion of management, include all adjustments, consisting only of normal recurring accruals, that are necessary for a fair presentation of our financial position and results of operations for these periods. The historical financial information may not be indicative of our future performance and does not reflect what our financial position and results of operations would have been had we operated as a separate, stand-alone entity during the periods presented.
Three Months Years Ended Ended ------------------------------------------------ ------------------ June 30, May 26, May 25, May 31, May 28, Aug. 28, Aug. 27, 1995(1) 1996(2) 1997 1998 1999 1998 1999 -------- -------- -------- -------- -------- -------- -------- (in thousands, except per share data) Consolidated Statements of Operations Data: Revenues................ $ 1,403 $ 7,054 $114,157 $272,137 $563,525 $116,069 $176,505 Cost of revenues........ 174 4,479 77,685 157,749 315,616 62,998 98,324 ------- ------- -------- -------- -------- -------- -------- Gross profit........... 1,229 2,575 36,472 114,388 247,909 53,071 78,181 ------- ------- -------- -------- -------- -------- -------- Operating expenses: Sales and marketing.... 1,099 2,783 30,305 70,765 127,726 23,969 42,648 Research and development........... 1,384 4,716 13,442 21,863 46,027 9,738 12,507 General and administrative........ 977 1,853 6,238 15,299 23,692 6,233 7,160 Purchased in-process technology............ -- -- -- -- 2,125 -- -- ------- ------- -------- -------- -------- -------- -------- Total operating expenses............. 3,460 9,352 49,985 107,927 199,570 39,940 62,315 ------- ------- -------- -------- -------- -------- -------- Operating income (loss)................. (2,231) (6,777) (13,513) 6,461 48,339 13,131 15,866 Interest and other expense, net........... 65 81 (515) (56) (223) (25) (63) ------- ------- -------- -------- -------- -------- -------- Income (loss) before income taxes........... (2,166) (6,696) (14,028) 6,405 48,116 13,106 15,803 Income tax provision (credit)............... -- (3,634) (6,166) 2,234 18,488 5,036 6,145 ------- ------- -------- -------- -------- -------- -------- Net income (loss)....... $(2,166) $(3,062) $ (7,862) $ 4,171 $ 29,628 $ 8,070 $ 9,658 ======= ======= ======== ======== ======== ======== ======== Unaudited pro forma net income per share: Basic.................. $ $ ======== ======== Diluted................ $ $ ======== ======== Shares used in computing unaudited pro forma net income per share: Basic.................. ======== ======== Diluted................ ======== ======== Supplemental unaudited pro forma net income per share: Basic.................. $ $ ======== ======== Diluted................ $ $ ======== ======== Shares used in computing supplemental unaudited pro forma net income per share: Basic.................. ======== ======== Diluted................ ======== ======== June 30, May 26, May 25, May 31, May 28, Aug. 27, 1995(1) 1996(2) 1997 1998 1999 1999 -------- -------- -------- -------- -------- -------- (in thousands) Consolidated Balance Sheet Data: Working capital.................. $ 318 $ 4,651 $ 31,375 $ 68,971 $ 52,509 $ 91,074 Total assets..................... 2,432 9,618 45,984 115,359 152,247 201,346 Stockholder's net investment..... 627 7,218 35,657 81,292 74,527 113,295
- ------- Notes: (1)Our fiscal year end was June 30 prior to our acquisition by 3Com. (2)Fiscal 1996 includes only eleven months of operating results. 29 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of our financial condition and results of operations should be read together with our consolidated financial statements and notes to those statements included elsewhere in this prospectus. The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including those discussed below and elsewhere in this prospectus. Overview We were founded in 1992 and introduced our first handheld device in 1996. We are currently a wholly-owned subsidiary of 3Com. Our business has focused primarily on developing and selling our Palm-branded handheld devices, and as of December 1, 1999, we had sold over 5 million Palm devices worldwide. In 1999, we expanded our strategy of licensing our Palm platform and developed our wireless Internet access service to support Internet-enabled handheld devices. On September 13, 1999, 3Com announced its plan to make us an independent, publicly-traded company focused on the handheld device industry. After the completion of this offering, 3Com will own approximately % of our outstanding common stock, or approximately % if the underwriters fully exercise their option to purchase additional shares. 3Com currently intends to complete its divestiture of Palm approximately six months after this offering by distributing all of its shares of our common stock to the holders of 3Com's common stock. We have entered into various agreements related to interim and ongoing relationships with 3Com. These agreements provide for transitional services and support in the areas of information technology systems, supply chain, human resources administration, product order administration, customer service, buildings and facilities, treasury, legal and finance and accounting. Specified charges for transitional services are generally at cost plus 5%, but may increase to cost plus 10% if the services extend beyond a one-year period. The transition period varies depending on the agreement but is generally less than two years. Although the fees provided for in the agreements are intended to represent the fair market value of these services, we cannot assure you that these fees necessarily reflect the costs of obtaining the services from unrelated third parties or of our providing these services internally. However, we believe that purchasing these services from 3Com provides an efficient means of obtaining these services during the transition period. We must also negotiate new or revised agreements with various third parties as a separate, stand-alone entity. We cannot assure you that the terms we will be able to negotiate will be as favorable as those that we enjoyed as part of 3Com. In addition, as part of 3Com, we benefited from various economies of scale including shared global administrative functions, facilities and volume purchase discounts. We expect our costs will increase as a result of the loss or renegotiation of these arrangements, although the amount of the cost increase is not determinable at this time. Our Business Substantially all of our revenues to date have been generated from sales of our handheld devices and, to a lesser extent, peripherals and accessories. We have not derived material revenues to date from licensing our Palm platform or from subscriptions to our wireless Internet access service. As we expand our focus on Palm platform licensing and Internet services, we expect that an increasing portion of our revenues in future periods will come from these sources. International revenues represented 29% of our total revenues in fiscal 1999 and 31% of our total revenues for the three months ended August 27, 1999. 30 Revenues from our handheld devices consist primarily of sales to distributors, retailers and resellers and to end users who buy directly from us through our Palm.com website. We recognize revenues when the product has been shipped, risk of loss has passed to the customer and collection of the resulting receivable is deemed probable. We provide for estimated product returns, warranty, royalties and post-contract support obligations at the time of sale. We provide a 12-month limited warranty on our products. We generally grant price protection to our distributors, retailers and resellers at the time of price reductions. Revenues from licenses of the Palm platform are derived from agreements with our licensees that range from three to five years in length. Revenues from our software license agreements are recognized on a per-unit royalty basis or as specified in the agreement. Related maintenance and support revenues are recognized ratably over the term of the agreement. Revenues from Internet services consist primarily of fees paid by subscribers for our wireless Internet access service. We recognize subscription service revenues over the period during which services are provided, typically one month. The mix of our device products has a significant impact on gross margins. In the past, prices of specific models of handheld devices have declined over time. Our average selling prices across our product lines have increased moderately due to our introduction of new and higher priced products. We cannot be sure that we will continue to maintain our average selling prices in the future and we expect our ability to do so will be challenged by increased competition. If we are unable to maintain our average selling prices, our gross margins will decline. Other factors that will affect our gross margins include the product and services mix in any particular period, competitive pressures, manufacturing costs, levels of volume discounts for components and sub- assemblies and distribution costs. We also expect our gross margins to fluctuate due to changes in our product and services mix as we expand our focus on licensing the Palm platform and selling our Internet services. As the relatively low gross margin of our Internet subscription service revenues grow as a percentage of total Palm revenues, we expect our overall gross margins to decline. In the short term, we expect Internet services gross margins to be negative because we have significant fixed costs associated with providing our Internet access service. We expect that over time the growth of our licensing revenue, which we expect to continue to have a higher gross margin than our device and Internet service revenues, will contribute positively to our overall gross margins. We expect to increase our operating expenses significantly as we invest in the Palm platform and Internet services areas of our business. In addition, we expect sales and marketing expenses to increase significantly as we focus on establishing ourselves as a stand-alone entity. We also plan to increase branding activities for our devices as well as for the Palm platform and our Internet services. We expect research and development expenses to increase significantly as we focus on developing the Palm platform for our licensees in the handheld device and other markets and on building our Internet services. In addition, for a period of time before the separation from 3Com and during the transition period thereafter, we will increase general and administrative expenses as we implement our own information system infrastructure and build the corporate resources required to operate as a public company. During this transition period, we will incur duplicative costs until we can operate solely on our own infrastructure. As a result of these increased operating expenses, we expect to incur net losses and negative cash flows from operations for several quarters following this offering. Basis of Presentation Prior to June 1, 1998, our 52-53 week fiscal year ended on the Sunday nearest to May 31. Effective June 1, 1998, we changed our fiscal year to a 52-53 week fiscal year ending on the Friday nearest to May 31. Unless otherwise stated, all years and dates refer to our fiscal year and fiscal periods. 31 Our consolidated financial statements have been carved out from the consolidated financial statements of 3Com using the historical results of operations and historical bases of the assets and liabilities of the 3Com business that Palm comprises. The consolidated financial statements also include allocations to us of 3Com corporate expenses, including centralized legal, accounting, treasury, real estate, information technology, distribution, customer services, sales, marketing, engineering and other 3Com corporate services and infrastructure costs. The expense allocations have been determined on bases that 3Com and we considered to be reasonable reflections of the utilization of the services provided to us or the benefit received by us. Expenses were allocated based on relative revenues, headcount or square footage. The financial information presented in this prospectus is not indicative of our financial position, results of operations or cash flows in the future, nor is it necessarily indicative of what our financial position, results of operations or cash flows would have been had we been a separate, stand-alone entity for the periods presented. The financial information presented in this prospectus does not reflect the many significant changes that will occur in our funding and operations as a result of our becoming a stand-alone entity and this offering. Results of Operations The following table sets forth consolidated statements of operations data expressed as a percentage of revenues for the periods indicated:
Three Months Years Ended Ended ----------------------- ----------------- May 25, May 31, May 28, Aug. 28, Aug. 27, 1997 1998 1999 1998 1999 ------- ------- ------- -------- -------- Revenues............................. 100% 100% 100% 100% 100% Cost of revenues..................... 68 58 56 54 56 --- --- --- --- --- Gross profit......................... 32 42 44 46 44 --- --- --- --- --- Operating expenses: Sales and marketing................ 27 26 23 22 24 Research and development........... 12 8 8 8 7 General and administrative......... 5 5 4 5 4 Purchased in-process technology.... -- -- 1 -- -- --- --- --- --- --- Total operating expenses......... 44 39 36 35 35 --- --- --- --- --- Operating income (loss).............. (12) 3 8 11 9 Interest and other expense, net...... -- -- -- -- -- --- --- --- --- --- Income (loss) before income taxes.... (12) 3 8 11 9 Income tax provision (credit)........ (5) 1 3 4 4 --- --- --- --- --- Net income (loss).................... (7)% 2% 5% 7% 5% === === === === ===
Three Months Ended August 27, 1999 and August 28, 1998 Revenues Revenues in the three months ended August 27, 1999 and August 28, 1998 consisted almost entirely of revenues from sales of our handheld device products. Revenues were $176.5 million in the three months ended August 27, 1999, a 52% increase over revenues of $116.1 million in the three months ended August 28, 1998. The increase in revenues resulted from increased demand for our handheld devices, which reflects the growing market adoption of our products. Average selling prices over this period remained relatively constant. International revenues have become an increasing percentage of our total revenues, increasing to 31% of total revenues in the three months 32 ended August 27, 1999 from 21% in the three months ended August 28, 1998. As we continue to expand the number of international markets we serve, we expect our international business to become an increasing percentage of our overall business. Gross Margin Gross margin is the excess of revenues over cost of revenues expressed as a percentage of revenues. Cost of revenues includes product manufacturing, warranty and technical support costs and, beginning in the three months ended August 27, 1999, costs related to our wireless Internet service resulting from the introduction of our Palm VII product. Gross margin was 44% of revenues in the three months ended August 27, 1999, a two percentage point decline from a gross margin of 46% of revenues in the three months ended August 28, 1998. The decline in gross margin in the three months ended August 27, 1999 was a result of cost of revenues including significant fixed costs related to our wireless Internet service, which we expect to continue to incur. Sales and Marketing Sales and marketing expenses consist primarily of employee compensation and commissions, advertising, promotional materials, conferences, meetings and marketing development. Sales and marketing expenses were $42.6 million in the three months ended August 27, 1999, a 78% increase over expenses of $24.0 million in the three months ended August 28, 1998. Sales and marketing expenses represented 24% of revenues in the three months ended August 27, 1999 compared to 22% in the three months ended August 28, 1998. These expenses increased due to additional spending on demand generation activities, such as point of purchase displays for retail sales channels and advertising promotional materials, as we prepared to launch the Palm Vx device and extend the launch of the Palm VII device nationwide in the second quarter of fiscal 2000. Research and Development Research and development expenses consist primarily of employee compensation and related costs associated with our product development efforts, including third-party consulting and prototyping costs. Research and development expenses were $12.5 million in the three months ended August 27, 1999, a 29% increase over expenses of $9.7 million in the three months ended August 28, 1998. Research and development expenses represented 7% of revenues in the three months ended August 27, 1999 compared to 8% in the three months ended August 28, 1998. The increase in research and development spending from period to period was primarily a result of increased personnel and related costs associated with a larger research and development organization that is designing new handheld devices as well as developing new releases of the Palm platform. Increased spending in the later period also resulted, to a lesser extent, from design and prototype expenses incurred in connection with new handheld devices that are currently under development. General and Administrative General and administrative expenses consist primarily of employee compensation, professional and contractor fees and provisions for doubtful accounts receivable. General and administrative expenses were $7.2 million in the three months ended August 27, 1999, an increase of 16% over expenses of $6.2 million in the three months ended August 28, 1998. The increase in expenses is due to increased infrastructure costs as a result of our continued growth. As a percentage of revenues, general and administrative expenses decreased to 4% in the three months ended August 27, 1999 from 5% in the three months ended August 28, 1998. The decrease as a percentage of revenues was the result of expenses, primarily personnel related, growing at a slower rate than revenues. We expect general and administrative expenses to increase in dollar amount and as a 33 percentage of revenues in future periods as we continue to build our infrastructure to support operating as a stand-alone, publicly-held company. Income Tax Provision Our operating results historically have been included in 3Com's consolidated United States federal and state income tax returns. The provision for income taxes in our consolidated financial statements has been determined on a separate return basis. Our effective tax rate in the three months ended August 27, 1999 was 39% compared to 38% in the three months ended August 28, 1998. This rate is based on estimates of our income before taxes for federal and state tax jurisdictions. As foreign subsidiaries are established in the future, our mix of income before taxes in the various tax jurisdictions could cause the effective tax rate to fluctuate. Our tax liability for periods prior to the date of 3Com's distribution will be determined in accordance with our tax sharing agreement with 3Com. Years Ended May 28, 1999, May 31, 1998 and May 25, 1997 Revenues Revenues from handheld devices were $563.5 million in fiscal 1999, an increase of 107% over fiscal 1998. Revenues in fiscal 1998 were $272.1 million, an increase of 138% over revenues of $114.2 million in fiscal 1997. The growth in revenues in both years was primarily due to increasing unit sales as a result of increasing demand for our handheld devices. We have increased demand by regularly adding new differentiated products to our product line. We added the Palm IIIx, Palm V and Palm VII devices to our product line in fiscal 1999. We introduced the Palm III device late in fiscal 1998. We introduced the PalmPilot Professional and PalmPilot Personal devices in late fiscal 1997. Declining prices of existing products over the three-year period have been offset by introducing an increasingly broad range of new products with additional features such as increased memory, backlit screens, higher resolution screens, sleeker styling, thinner and lighter form factor, and wireless Internet capability. As a result, average selling prices have increased moderately, although we do not expect this trend to continue in future years. Gross Margin Gross margin was 44% in fiscal 1999, a two percentage point increase over fiscal 1998. Gross margin was 42% in fiscal 1998, a 10 percentage point increase over gross margin of 32% in fiscal 1997. The improvement in gross margin in fiscal 1999 reflects increased sales of higher margin Palm IIIx and Palm V products, as well as reduced manufacturing costs due to better pricing that we were able to obtain from our component suppliers and contract manufacturers. The improvement in gross margin in fiscal 1998 reflects product cost improvements through engineering design changes, significant volume- related cost reductions from component suppliers and contract manufacturers and reduced period costs relative to fiscal 1997, which had higher than normal period costs as a result of establishing manufacturing operations and introducing new products. Sales and Marketing Sales and marketing expenses were $127.7 million in fiscal 1999, an 80% increase over fiscal 1998. Sales and marketing expenses were $70.8 million in fiscal 1998, a 134% increase over expenses of $30.3 million in fiscal 1997. Sales and marketing expenses comprised 23% of revenues in fiscal 1999 as compared to 26% of revenues in fiscal 1998 and 27% in fiscal 1997. Due to the slower growth in our sales organization in fiscal 1999 and the continued rapid growth in our revenues, sales and marketing expenses as a percentage of revenues declined by three percentage points in fiscal 1999 compared to fiscal 1998. The absolute dollar increase in sales and marketing 34 expenses in fiscal 1999 resulted primarily from increased advertising, including expenditures on our "Simply Palm" national advertising campaign, and increased product introduction activities associated with the launches of our Palm IIIe, Palm IIIx, Palm V and Palm VII handheld devices. These launch activities included increased personnel-related expenses associated with increasing the size of our marketing organization, increased trade show activities and related travel expenses, point of sale displays, sales collateral and marketing development. The absolute dollar increase in sales and marketing expenses in fiscal 1998 was primarily the result of the expansion of our sales organization into Europe, continued growth of our sales and marketing organization in the United States and our first international product launch for the Palm III handheld devices at the CBIT technology show in Germany in March 1998. Research and Development Research and development expenses were $46.0 million in fiscal 1999, a 110% increase over fiscal 1998. Research and development expenses were $21.9 million in fiscal 1998, a 63% increase over expenses of $13.4 million in fiscal 1997. The absolute dollar increase in research and development expenses resulted primarily from increased personnel-related expenses associated with expanding the size of our engineering organization and increased expenses related to contractors, consultants, prototyping and project materials. Research and development expenses as a percentage of revenues were 8% in fiscal 1999 compared to 8% in fiscal 1998 and 12% in fiscal 1997. The decrease in research and development expenses as a percentage of revenues from fiscal 1997 to fiscal 1998 resulted from economies of scale. During fiscal 1999 and fiscal 1998 we supported the development of two new families of handheld products, the Palm V and Palm VII product families, and two new additions to the Palm III family, the Palm IIIx and the Palm IIIe. In addition, we incurred significant engineering costs to develop our wireless Internet access service that supports our wireless Palm VII device. In fiscal 1999, we also added engineering staff in order to begin development programs for two new releases of our platform software as well as future handheld devices. General and Administrative General and administrative expenses were $23.7 million in fiscal 1999, a 55% increase over fiscal 1998. General and administrative expenses were $15.3 million in fiscal 1998, an increase of 147% over expenses of $6.2 million in fiscal 1997. General and administrative expenses as a percentage of revenues were 4% in fiscal 1999 compared to 5% in fiscal 1998 and fiscal 1997. The absolute dollar increases in general and administrative expenses resulted primarily from increased personnel-related expenses and shared infrastructure costs with 3Com to support the growth of our business. In addition, general and administrative expenses were higher in fiscal 1998 compared to fiscal 1997 as a result of an increased provision for doubtful accounts receivable. Purchased In-Process Technology We acquired Smartcode Technologie SARL on February 8, 1999 for $17.4 million in cash, including approximately $200,000 in costs directly related to the acquisition. Approximately $2.1 million of the purchase price represented purchased in-process technology that had not yet reached technological feasibility, had no alternative future use and was charged to operations in the third quarter of fiscal 1999. Income Tax Provision Our effective tax rate was 38% in fiscal 1999 and 35% in fiscal 1998, and in fiscal 1997 we recorded a tax credit. The primary reasons for the fluctuation in our tax rate are less research and development credit being available in fiscal 1999 than in fiscal 1998 and our net loss in fiscal 1997. 35 Quarterly Results of Operations The following tables present our operating results for each of the nine fiscal quarters in the period ended August 27, 1999, in dollars and as a percentage of revenues. The information for each of these quarters is unaudited and has been prepared on the same basis as the audited consolidated financial statements included in this prospectus. In the opinion of management, all necessary adjustments, which consist only of normal and recurring accruals, have been included to fairly present the unaudited quarterly results. This data should be read together with our consolidated financial statements and the notes to those statements included in this prospectus. The historical financial information may not be indicative of our future performance and does not reflect what our financial position and results of operations would have been had we operated as a separate, stand-alone entity during the periods presented.
Three Months Ended --------------------------------------------------------------------------------------- Aug. 31, Nov. 30, Mar. 1, May 31, Aug. 28, Nov. 27, Feb. 26, May 28, Aug. 27, 1997 1997 1998 1998 1998 1998 1999 1999 1999 -------- -------- ------- ------- -------- -------- -------- -------- -------- (in thousands) Consolidated Statements of Operations Data: Revenues................ $51,675 $69,997 $65,766 $84,699 $116,069 $147,233 $125,889 $174,334 $176,505 Cost of revenues........ 29,906 42,115 37,392 48,336 62,998 84,289 67,583 100,746 98,324 ------- ------- ------- ------- -------- -------- -------- -------- -------- Gross profit............ 21,769 27,882 28,374 36,363 53,071 62,944 58,306 73,588 78,181 ------- ------- ------- ------- -------- -------- -------- -------- -------- Operating expenses: Sales and marketing.... 11,314 20,286 17,335 21,830 23,969 33,893 28,725 41,139 42,648 Research and development........... 4,538 5,170 5,209 6,946 9,738 10,722 10,989 14,578 12,507 General and administrative........ 2,470 3,290 3,181 6,358 6,233 5,071 5,739 6,649 7,160 Purchased in-process technology............ -- -- -- -- -- -- 2,125 -- -- ------- ------- ------- ------- -------- -------- -------- -------- -------- Total operating expenses.............. 18,322 28,746 25,725 35,134 39,940 49,686 47,578 62,366 62,315 ------- ------- ------- ------- -------- -------- -------- -------- -------- Operating income (loss)................. 3,447 (864) 2,649 1,229 13,131 13,258 10,728 11,222 15,866 Interest and other expense, net........... (35) (44) (5) 28 (25) (75) (15) (108) (63) ------- ------- ------- ------- -------- -------- -------- -------- -------- Income (loss) before income taxes........... 3,412 (908) 2,644 1,257 13,106 13,183 10,713 11,114 15,803 Income tax provision (credit)............... 1,190 (317) 922 439 5,036 5,066 4,116 4,270 6,145 ------- ------- ------- ------- -------- -------- -------- -------- -------- Net income (loss)....... $ 2,222 $ (591) $ 1,722 $ 818 $ 8,070 $ 8,117 $ 6,597 $ 6,844 $ 9,658 ======= ======= ======= ======= ======== ======== ======== ======== ======== As a Percentage of Revenues: Revenues................ 100% 100% 100% 100% 100% 100% 100% 100% 100% Cost of revenues........ 58 60 57 57 54 57 54 58 56 ------- ------- ------- ------- -------- -------- -------- -------- -------- Gross profit............ 42 40 43 43 46 43 46 42 44 ------- ------- ------- ------- -------- -------- -------- -------- -------- Operating expenses: Sales and marketing.... 22 29 26 26 22 23 23 24 24 Research and development........... 9 7 8 8 8 7 9 8 7 General and administrative........ 5 5 5 7 5 4 4 4 4 Purchased in-process technology............ -- -- -- -- -- -- 2 -- -- ------- ------- ------- ------- -------- -------- -------- -------- -------- Total operating expenses.............. 36 41 39 41 35 34 38 36 35 ------- ------- ------- ------- -------- -------- -------- -------- -------- Operating income (loss)................. 6 (1) 4 2 11 9 8 6 9 Interest and other expense, net........... -- -- -- -- -- -- -- -- -- ------- ------- ------- ------- -------- -------- -------- -------- -------- Income (loss) before income taxes........... 6 (1) 4 2 11 9 8 6 9 Income tax provision (credit)............... 2 -- 1 1 4 3 3 2 4 ------- ------- ------- ------- -------- -------- -------- -------- -------- Net income (loss)....... 4% (1)% 3% 1% 7% 6% 5% 4% 5% ======= ======= ======= ======= ======== ======== ======== ======== ========
36 We have experienced seasonal variations in our operating results. Historically, our revenues have been weaker in the first and third fiscal quarters and have often been lower than the preceding quarter. This seasonal variation is due to the fact that our products are highly consumer-oriented, and consumer buying patterns traditionally reflect reduced purchases in those quarters. As our licensing revenues grow, we expect that they will contribute to the fluctuations in our quarterly results because the products offered by our licensees are also primarily consumer-oriented. In addition, we attempt to time our new product releases to coincide with relatively higher consumer spending in the second and fourth fiscal quarters, which contributes to these seasonal variations. In the second quarter of fiscal 1998, our gross margin declined compared to the prior and subsequent quarters primarily due to price reductions. Sales and marketing expenses increased in this same quarter as a result of costs related to our first third-party developer conference and start-up costs incurred for setting up our international sales and marketing organization. In addition, sales and marketing expenses increased after the first quarter of fiscal 1998 in preparation for the worldwide launch of the Palm III product family in the fourth quarter of fiscal 1998. In the fourth quarter of fiscal 1998, our general and administrative expenses were higher due to increased provisions for doubtful accounts receivable identified during the quarter. In the first and third quarters of fiscal 1999, our gross margin improved due to the mix of new products with higher gross margins consisting of the Palm III, Palm IIIx, and Palm V devices. Research and development expenses and general and administrative expenses decreased as a percentage of revenues in the second quarter of fiscal 1999 compared to the prior and subsequent quarters as a result of seasonally strong second quarter revenues and a lower provision for doubtful accounts receivable than in the first quarter. In the third quarter of fiscal 1999, we incurred a one-time charge of $2.1 million for purchased in-process technology as a result of the Smartcode acquisition. Liquidity and Capital Resources Historically, 3Com has managed cash on a centralized basis. Cash receipts associated with our business have been transferred to 3Com on a periodic basis and 3Com has provided funds to cover our disbursements. Accordingly, we have reported no cash or cash equivalents at May 31, 1998 and May 25, 1997. At May 28, 1999, we reported cash of $478,000 acquired in the Smartcode acquisition and at August 27, 1999, we reported cash of $37.1 million as a result of a transfer from 3Com. In accordance with our separation agreement, 3Com will transfer to us the 3Com-owned assets and liabilities which relate to our business prior to the separation date, except for most of our accounts receivable and accounts payable. We will receive the net proceeds of the offering and the private placements to America Online, Motorola and Nokia and will pay a dividend to 3Com approximately equal to its tax basis in us, which was approximately $ million at , 2000. In addition, we will make a payment to 3Com of an intercompany payable, which was approximately $49 million as of August 27, 1999. We anticipate that we will use some of the proceeds from the offering and the private placements to America Online, Motorola and Nokia to replace the working capital retained by 3Com and fund our increased working capital needs associated with revenue growth. Cash provided from operating activities was $10.1 million for the three months ended August 27, 1999. Cash provided by operating activities was $59.1 million in fiscal 1999, cash used in operating activities was $32.6 million in fiscal 1998 and $34.8 million in fiscal 1997. Cash provided by operating activities in fiscal 1999 resulted primarily from net income adjusted for non- cash charges for depreciation and amortization and changes in working capital. Cash used in operating activities in fiscal 1998 resulted primarily from an increase in accounts receivable which more than offset net income, and adjustments for non-cash charges and other working capital items. Cash used in operating activities in fiscal 1997 resulted primarily from our net loss as well as increases in accounts receivable and inventories. 37 We had capital expenditures of $2.3 million in the three months ended August 27, 1999, $5.3 million in fiscal 1999, $8.8 million in fiscal 1998 and $2.5 million in fiscal 1997. In addition, in fiscal 1999, we expended $16.8 million, net of cash acquired, for the acquisition of Smartcode. Our future capital requirements will depend on a number of factors, including the timing and rate of the expansion of our business. We anticipate a substantial increase in our capital expenditures to support anticipated growth in operations, infrastructure for our wireless and Internet services plus hardware and software for our information systems and personnel. We believe that our cash, cash equivalents and proceeds from this offering and the private placements to America Online, Motorola and Nokia will provide sufficient capital to fund our operations for the foreseeable future. We cannot assure you, however, that the underlying assumed levels of revenues and expenses will prove to be accurate. We may need to raise additional funds through public or private financings or other arrangements in order to: . support more rapid expansion of our business than we anticipate; . develop and introduce new or enhanced products or services; . respond to competitive pressures; . invest in or acquire businesses or technologies; or . respond to unanticipated requirements or developments. We cannot be certain that financing will be available to us when we need it on favorable terms or at all. If additional funds are raised through the issuance of equity securities, dilution to existing stockholders may result. If insufficient funds are available, we may not be able to introduce new products and services, expand the development of our Palm platform and our Internet services or compete effectively in any of our markets, any of which could materially harm our business, financial condition and results of operations. Quantitative and Qualitative Disclosures About Market Risk Market Risk Disclosures The following discussion about market risk involves forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. We are exposed to market risk related to changes in interest rates and foreign currency exchange rates. We do not use derivative financial instruments for speculative or trading purposes. Interest Rate Sensitivity As of August 27, 1999, we had cash and cash equivalents of $37.1 million which consisted of highly liquid money market instruments with maturities less than 90 days. Because of the short maturities of these instruments, a sudden change in market interest rates would not have a material impact on the fair value of the portfolio. We would not expect our operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest rates on our portfolio. Foreign Currency Exchange Risk Historically, our exposure to exchange rate risk has been managed on an enterprise-wide basis as part of 3Com's risk management strategy. This strategy has utilized foreign exchange forward and option contracts to hedge certain balance sheet exposures and intercompany balances against future movements in foreign exchange rates. Gains and losses on the forward and option contracts are largely offset by gains and losses on the underlying exposure and consequently a sudden or significant change in foreign exchange rates would not have a material impact on future net income or cash flows. We are currently evaluating our exchange rate risk management strategy. We do not currently and do not intend in the future to utilize derivative financial instruments for trading purposes. 38 Equity Security Price Risk We do not own any equity investments. Therefore, we do not currently have any direct equity price risk. Effects of Recent Accounting Pronouncements In June 1998 and June 1999, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards, or SFAS, 133, "Accounting for Derivative Instruments and Hedging Activities" and SFAS 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133." These statements require companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. SFAS 133 will be effective for our fiscal year ending May 31, 2002. We believe that adoption of these statements will not have a significant impact on our financial results. In March 1998, the American Institute of Certified Public Accountants issued Statement of Position No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." Statement of Position No. 98-1 requires that entities capitalize costs related to internal-use software once certain criteria have been met. We adopted Statement of Position 98-1 in our first quarter of fiscal 2000. The adoption of this statement did not have a significant impact on our financial results. Year 2000 Compliance Many computer systems and software programs were written to accept and process only two digit entry codes for the year when storing dates. Beginning with the year 2000 these entry codes will need to accept four digit entries to distinguish 21st century dates from the 20th century dates. As a result, computer systems and software programs may need to be updated to solve this problem and avoid incorrect or lost data. We face risks associated with the year 2000 issue. Our operations could be adversely affected if systems do not correctly recognize date information when the year changes to 2000. We face risks primarily in the following areas: . systems used by us and 3Com to run our business including information systems, equipment and facilities; . systems used by our and 3Com's suppliers; and . potential warranty or other claims from our customers. We have relied on 3Com to address any year 2000 readiness issues in the internal and external systems we currently use. If 3Com's year 2000 readiness preparations are insufficient, we may be required to bear the costs of upgrading or replacing any systems after our separation from 3Com. We continue to evaluate and mitigate our exposure in these areas where appropriate. We intend for some of our disclosures and announcements concerning our products and year 2000 programs, including those in this prospectus, to constitute "Year 2000 Readiness Disclosures" as defined in the recently enacted Year 2000 Information and Readiness Disclosure Act. We cannot be certain that year 2000 issues will not have a material adverse impact on us. State of Readiness and Risks We have identified four key exposure internal areas with respect to the year 2000 issue, namely: key transaction processing applications, equipment and facilities, products and key suppliers. Key transaction processing applications. Key transaction processing applications include those used to run our business, finance, order processing and distribution operations. 3Com has 39 completed its evaluation of these applications for year 2000 readiness and has been upgrading or replacing systems, where necessary. If we or 3Com identify significant new non-compliance issues, or if we encounter unexpected difficulties in areas previously considered to be year 2000 ready, our ability to conduct our business or record transactions could be disrupted, which could adversely affect our results of operations or financial condition. Equipment and facilities. We have evaluated year 2000 readiness of our equipment and facilities. We have contacted our key suppliers to ascertain year 2000 compliance of our critical equipment. We expect our critical equipment to be ready for year 2000. If our year 2000 assessment is incorrect, our design, production and shipping capabilities could be disrupted, which could adversely affect our results of operations or financial condition. Products. We have conducted an extensive evaluation of our currently available products. We believe that the products we are currently offering are year 2000 ready. However, the first generation of our handheld device product, which is no longer being sold, does not properly display the European date format. We expect to release a downloadable software patch to fix this problem. If any of our products do not operate properly in the year 2000, we could have increased warranty costs, customer satisfaction issues, litigation or other material costs and liabilities, which could adversely affect our results of operations or financial condition. Key suppliers. We have contacted our critical suppliers of products and services to determine that the suppliers' operations and the products and services they provide are year 2000 ready. Our third-party manufacturers advised us that their manufacturing operations are or will be year 2000 compliant by December 31, 1999. Confirmation of the continued year 2000 readiness of these key suppliers will continue throughout the remainder of 1999. If key suppliers fail to adequately address the year 2000 issue for the products or services they provide to us, critical materials, products and services may not be delivered in a timely manner, which could adversely affect our results of operations or financial condition. Most Reasonably Likely Worst-Case Scenario We believe that our most reasonably likely worst-case year 2000 scenario would relate to problems with the systems and services of third parties rather than with our internal systems or products. We believe the risks are greatest with infrastructure services such as electricity supply and water and sewer service, telecommunications, transportation and distribution channels and critical suppliers of materials and services. Our operations are conducted in a variety of domestic and foreign facilities. Each location relies on local private and governmental suppliers for utilities, telephone, and other necessary services and supplies. For example, failure in the electricity grid or disruption to the continuous supply of power would be a worst-case scenario that would completely shut down the affected facilities. Widespread electrical failures could also adversely affect the delivery of water and sewer services, and hinder the transportation of employees to and from the workplace. We cannot identify all possible disruption scenarios. We are preparing contingency plans specifying our actions if failures occur in key internal systems and/or critical third party systems and services. The process includes identifying and prioritizing risks, assessing the business impact of those risks, evaluating risk mitigation alternatives, and preparing written contingency plans for those failures with the greatest business risk to us. Contingency plans for critical business operations are expected to be in place by the end of the year and these plans will be validated and modified as needed. Contingency plans will continue to be refined through the end of 1999 as we learn more about the preparations and potential exposure of third parties to year 2000 disruptions. 40 Costs to Address Year 2000 Issues Although we currently do not expect future year 2000 compliance costs to be material, the costs could include: . hardware and software upgrades or replacements primarily related to desktop systems and telephone equipment; . consultant and contractor fees to assist in assessments and to perform remediation and integration testing; . increased staffing in our customer service area to address the expected increase in support calls during the year 2000 transition; and . a contingency for potential unexpected costs associated with replacing or repairing systems previously considered to be year 2000 ready. If we identify unexpected problems relating to the year 2000 issue, we may incur additional costs in identifying and responding to the problems. 41 BUSINESS Introduction We are the leading global provider of handheld computing devices. We believe that we have achieved our leadership position by focusing on customer needs and emphasizing simplicity and ease of use in design and engineering. We design, develop and market our Palm-branded handheld devices, which currently include our Palm III, Palm V and Internet-enabled Palm VII families. According to International Data Corporation, in 1998 we had a 68% market share of the worldwide personal companion handheld device market. We believe that the success of our devices is attributable to our innovative product designs, our Palm platform, our technology leadership and the strength of the Palm brand. We are building on these strengths to expand our business by licensing the Palm platform to other device and information appliance manufacturers. In addition, we are expanding our wireless and Internet offerings through Palm.net, our subscription-based wireless access service, and Palm.com, our Internet destination site. As the functionalities of handheld computing devices, information appliances, mobile phones and handheld entertainment devices converge, we believe that we are well-positioned to establish the Palm platform as an industry standard. The rapid proliferation of our devices based on our Palm platform has led to the emergence of a community of developers who create applications for the Palm platform as well as peripherals and accessories that increase the functionality of Palm platform-based devices. These developers have created over 4,500 applications for Palm devices to date, enhancing the functionality and usefulness of products based on the Palm platform. We believe the Palm platform is attractive to our licensees because it has been widely adopted by end users and has broad third-party development support. This adoption further drives an increase in the size of the Palm platform user base. We refer to this reinforcing community of users, developers and licensees as the Palm economy. Industry Overview As professionals have become increasingly mobile, often spending long periods of time away from traditional work settings, they have sought out tools to access and manage critical personal and professional information. Traditionally, these professionals used paper-based organizers and, later, stand-alone electronic pocket organizers or portable computers to accomplish these tasks. These early tools met with mixed success and often were slow, large, expensive and difficult to use and offered limited functionality. The introduction of Palm's first device ushered in a new generation of handheld devices that offered users a combination of simplicity and functionality. Innovations in design, synchronization technology, user interface, programmability, functionality and battery power management transformed these devices into convenient productivity tools. These enhancements significantly accelerated user demand. According to International Data Corporation, annual worldwide sales of personal companions will increase from approximately one million units in 1997 to an estimated 14 million units in 2003. We believe that further market growth will be driven by continued innovation, increased wireless data connectivity and the emergence of new usage patterns driven by Internet content and enterprise data. We believe that continued technological innovations that address end-user needs are an important component of industry growth. Technological advances have led to significant reductions in size and weight, as well as improvements in battery life, reliability and storage capacity, of handheld devices. Third party developers, who create software applications and complementary hardware peripherals and accessories, supplement manufacturers' innovations and allow users to customize and enhance their devices. These feature enhancements and performance improvements, driven by both manufacturers and third party developers, continue to attract new users and encourage device upgrades. 42 The emergence of technologies enabling wireless access to the Internet and enterprise data is again transforming the handheld device industry. The Internet has become an important way for consumers and professionals to access personal and business information, download new applications and access new services. We believe that wireless access to Internet content and enterprise data will make handheld computing devices increasingly valuable to users. This value proposition is driving a variety of handheld information appliance makers to add Internet connectivity features to products such as mobile phones. As handheld devices are adopted in greater numbers and handheld device applications become increasingly integrated into other handheld information appliances, an opportunity exists for operating system developers to extend their platforms for use on other handheld devices. We believe that the extension of an operating system to a diverse set of handheld information appliances, including mobile phones, increases the utility of all devices that use the operating system and expands the scope and potential market for both operating system developers and device manufacturers. Business Summary In 1996, we introduced our first handheld device product, based on our innovative Palm platform, and quickly established global market leadership in the handheld device industry. Our revenues have grown from approximately $1 million in fiscal 1995 to $564 million in fiscal 1999. Our international business accounted for 29% of revenues in fiscal 1999. We believe that our users associate the Palm brand with high-quality products that offer a combination of portability, connectivity, simplicity and style. By capitalizing on the market-leading position of our handheld devices in domestic and international markets and on our Palm platform and emerging Internet services and applications, we believe we can extend our leadership in this evolving industry. Handheld Devices. We currently have three families of handheld devices, the Palm III, Palm V and Palm VII product families, each of which is based on the Palm platform. We develop our handheld devices by focusing on customer needs. While all Palm devices are designed to offer a combination of utility, simplicity, wearability and mobility, we have further differentiated individual products to appeal to specific market segments. For example, to appeal to users who place the most value on wearability, we introduced the Palm V product, which combines the traditional functionality of our products with a sleek, compact and light-weight form factor. In fiscal 1999, the Palm V product family became our largest product line measured in terms of revenues. Similarly, to appeal to mobile professionals and enterprise customers that want to provide their employees with convenient remote access to enterprise data, we introduced the Palm VII product, which combines connectivity and mobility. Customers buying our devices receive a Palm handheld device, a cradle to connect the device to a personal computer and personal information management and synchronization software which runs on a personal computer and serves as a conduit between the device and other personal computer applications. Palm Platform. The Palm platform combines the distinctive look, feel and ease of use of our Palm OS operating system with our HotSync synchronization technology, pen-based input technology, personal information management applications such as address book and datebook, and, in our Palm VII product, web-clipping software that allows content providers and users to send and receive Internet data in a handheld device format. We also make development tools available for our developer community, and we share select parts of the Palm OS operating system source code in order to enable developers to optimize the interface of their applications with the Palm platform. As a result, the Palm OS operating system has emerged as a highly flexible, efficient operating system. In addition to including the Palm platform in our Palm-branded devices, we have expanded our strategy of licensing the platform to device and information appliance manufacturers. In October 43 1999, we announced a non-exclusive agreement with Nokia, the world's leading provider of mobile phones, to integrate the Palm platform into several of Nokia's mobile phone products. We believe this agreement represents a significant endorsement of the Palm platform for the worldwide wireless phone market. Similarly, in November 1999 we entered into an agreement with Sony to license and develop the Palm platform for use in future Sony products. We believe that the potential of these and other new markets represents a significant growth opportunity for us and our developer community. Internet Services and Applications. The Internet allows enhanced contact with our users by allowing us to offer products and services directly to our users and by creating an online destination where users, resellers and developers can participate in the Palm economy. We offer users of our Palm VII device a new way to access and navigate the Internet through our web-clipping software, which allows users to download specific information from the Internet. To support the wireless connectivity of our Palm VII device, we offer Palm.net which is a monthly fee, subscription-based Internet access service. In addition, we have developed a website that is also called Palm.net, an Internet destination where content providers and third party developers can post web- clipping applications for users to download. We have also developed our Palm.com website, which is emerging as an important destination site for our customers, users and developer community. These Internet services and applications increase the functionality of our products, provide us with expanded opportunities for product sales, advertising and transaction revenue and keep us at the forefront of technology and innovation in our rapidly changing markets. The Palm Economy. Our broad user base has attracted a large community of third-party developers that create software applications and peripherals that increase the performance and functionality of Palm devices. As of December 1, 1999, more than 29,000 developers had registered to use Palm developer tools to create software applications for the Palm platform. In addition, we distribute approximately 80 peripherals and accessories developed by us and third parties ranging from wireless modems to keyboards to leather cases. This expanding Palm economy has, in turn, encouraged licensees to integrate the Palm platform with new handheld information appliances providing new opportunities to grow the Palm economy. The Internet is further expanding the Palm economy by attracting new users and by encouraging developers to create Internet-specific applications. We believe that the Palm economy creates opportunities for all participants by continually extending the functionality and market appeal of both existing and next-generation Palm-branded products and products based on the Palm platform. Strategy Our objective is to increase our handheld device market leadership and establish our Palm platform as the industry standard operating system for the next generation of handheld computing devices, mobile information appliances, mobile phones and handheld devices for entertainment such as games and music. In addition, we plan to further develop our Internet services and expand our enterprise sales. The key elements of our strategy to achieve these objectives are to: Extend Market Leadership through Continued Dedication to the Palm Design Philosophy. Our design philosophy carefully balances elegant form with simple and useful functions. We intend to continue to increase the size of the handheld device market by extending this philosophy to products targeted at new market segments. We have recently accelerated our market segmentation activities by identifying specific user needs across consumer, mobile professional and enterprise markets and by introducing new versions of our handheld devices that combine features tailored to address these specific needs. For example, we introduced both an entry-level Palm IIIe product for price-sensitive consumers and the Palm V product for consumers seeking a slimmer, sleeker Palm device. Underlying our design philosophy is a fundamental commitment to innovation. We have been first to market with a number of innovative technologies that we have incorporated into our products ranging from our first Palm device to our recently introduced Palm VII product. We believe that continuing product and technology innovation will be important to our overall success. 44 Accelerate Adoption of Palm Products and Services in the Enterprise Market. We believe the enterprise market represents a significant opportunity for Palm. Most Palm devices are used in professional environments but have historically been purchased by users on an individual basis rather than by corporations or institutions for enterprise-wide deployment. With the recent introduction of wireless-enabled devices, the development of enterprise customer support programs and the addition of a direct enterprise salesforce, we are beginning to see increased adoption of Palm devices by our enterprise customers. For example, Cedars-Sinai Medical Center is deploying Palm VII devices to manage patient information. To accelerate the adoption of our devices by enterprises, we have established relationships with enterprise software vendors such as Oracle, PeopleSoft, Remedy and SAP to develop applications that provide access to enterprise databases using devices based on the Palm platform. Additionally, we are developing synchronization features and network security capabilities tailored to enterprise networks and computer servers and working with third party developers to design enterprise-specific software applications. License the Palm Platform to Establish a Standard, Open Operating System for Information Appliances. We intend to further expand the use of the Palm platform in a wide variety of handheld devices and information appliances. This strategy involves licensing the Palm platform to other handheld device manufacturers such as Sony and to manufacturers of other information appliances that are looking to incorporate an operating system that is widely adopted by consumers and has broad third-party developer support. We plan to continue to pursue licensing agreements with wireless telephone companies such as Nokia and QUALCOMM as well as providers of other mobile information appliances. Continue to Develop Products and Services that Leverage Wireless Connectivity and the Internet. The introduction of the Palm VII product represents the first step in our rollout of wireless Internet-enabled devices. Our Internet services strategy has four complementary components. First, through strategic relationships we plan to expand the geographic coverage of our Palm.net wireless access service on a global basis. Second, we intend to develop hardware and software solutions to enable previous generations of Palm products to access Palm.net. Third, we intend to enhance the wireless functionality of our Palm.net service to increase its utility for enterprise and carrier applications. Finally, we believe that the proliferation of wireless devices that link to the Internet will enable us to leverage our Internet properties. In this regard, we believe that Palm may be particularly well-positioned to build an Internet access portal around our Palm.net and Palm.com properties. For example, in addition to providing access for Palm devices through Palm.net, we plan to make content, such as Internet calendaring and information management, available through the Palm.net site. Expand International Business. We intend to continue to expand our international business. For the first three months of fiscal 2000, revenues outside the United States accounted for 31% of our total revenues compared to 21% for the first three months of fiscal 1999. With the help of the Palm developer community, we have introduced localized versions of Palm devices in five languages. According to International Data Corporation, we had a 72% market share of the personal companion market in Europe and 59% market share in Asia in 1998. We plan to build on this success by expanding our international product offerings, introducing additional local-language versions of the Palm platform and broadening our distribution channels overseas. Support the Palm Economy. As the community of users, licensees and hardware and software developers for Palm products has grown, we have expanded our efforts to support the Palm 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 conferences that allow us to give direction regarding product and strategy trends. In addition, we expect to make strategic investments in new companies or make acquisitions that we believe will support or expand the Palm economy. We may also selectively develop applications designed to 45 increase the functionality of Palm-based devices and support expansion of the Palm economy. We expect to continue these efforts to support the Palm economy to stimulate overall demand for products based on the Palm platform. Products and Services Handheld Devices. Each of our handheld devices is designed with the Palm philosophy of providing the user with a simple, elegant and useful productivity tool. People use our handheld devices for many different purposes, including managing both personal information and enterprise data and accessing e-mail and content from the Internet. Users can also customize their devices by adding a wide range of applications, peripherals and accessories. We have developed each of our three current product families to address specific customer needs. The Palm III product family combines the small form factor, seamless desktop synchronization, ease of use and fast data access that have been the hallmark of our handheld devices. The Palm IIIe device is our most affordable, entry- level product. The Palm IIIe special edition product, the newest addition to this family, combines the traditional features of the Palm III device with a new, translucent enclosure and is targeted at the student market. The Palm IIIx device allows users to upgrade both memory and operating system and includes application software such as enhanced links to Microsoft Outlook. The Palm V product family emphasizes wearability, combining all of the functions of the Palm III product family with a sleek and stylish form-factor featuring an anodized aluminum case. It also features advanced display technology and a rechargeable battery. The Palm Vx device, introduced in the fall of 1999, has additional pre-bundled software and more memory than the Palm V device. The Palm VII, which integrates wireless communications functionality, is the first device in our newest product family. The Palm VII device builds on the features of our other product families by adding wireless access to Internet content, enterprise data, e-mail, messaging and e-commerce services such as online shopping, auctions and stock trading. The Palm VII device incorporates our web-clipping technology, which presents Internet content and enterprise data in a format optimized for handheld devices. We believe the wireless connectivity of the Palm VII device makes it particularly well-suited for the enterprise market as it allows mobile employees to access enterprise data remotely. In order for users of the Palm VII device to access Internet content, they currently must subscribe to our Palm.net access service. As part of our enterprise market strategy, we have entered into an agreement with Oracle to bundle OracleLite with our developer kit. This bundled product allows mobile customers in the enterprise market to use a Palm device to gain access to enterprise databases while working remotely. Similarly, we support efforts by companies such as PeopleSoft, Remedy and SAP to enable enterprise users to access their database information with Palm devices. We are also developing the Palm Ethernet Cradle for enterprise customers. This product allows Palm device users to connect directly to an enterprise's local area network from various locations throughout the enterprise. The Palm Ethernet Cradle is scheduled to be available in February 2000. We also market and resell peripherals and accessories such as modems, leather cases, colored flip covers and other fashion accessories for our products. Palm Platform. Our Palm platform, which integrates a number of components around the Palm OS operating system, is the foundation for Palm devices as well as for devices manufactured by our licensees. Our objective is to establish the Palm platform as the industry standard for handheld computing devices and other information appliances. The Palm platform consists of several components: . the Palm OS operating system; 46 . the Palm user interface, which enables users to interact with the Palm device, and application programming interfaces, which allow developers to write applications that run on devices based on the Palm platform; . standard personal information management applications, including datebook, address book, to-do list, memo pad, calculator and expense management functions; . development tools, including developer kits that enable third party developers to develop applications and licensee kits with hardware reference designs that enable licensees to design devices around the Palm OS operating system; . HotSync data synchronization technology, which enables a handheld device to synchronize information with personal computers or enterprise databases; . Graffiti script recognition technology, which enables users to input script data directly through our pen-based user interface; and . Web-clipping software, which allows content providers to present and users to receive Internet or enterprise data in a format optimized for handheld computing devices. The Palm platform has been optimized for handheld devices where instant access to information, low power consumption and wireless capabilities are important. These attributes have important benefits for Palm, our developers and our licensees. 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 helped us to design the Palm V with its slim form factor and will allow our licensees, such as Nokia and Sony, to design products that allocate more processing resources to new 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 the device. The Palm platform provides application developers with significant design flexibility. The combination of simpler application programming interfaces and a modular code architecture enables developers to quickly and easily learn to program for the Palm platform. In addition, we share select parts of our source code to enable developers to optimize the interface of their applications with the Palm platform. The modular architecture of our Palm platform also provides benefits for our licensees. We design separations between our software layers and the underlying basic code, or kernel, and the hardware reference design specific to our Palm devices. This separation breaks the Palm platform into easily configurable components, promoting innovation and broadening its appeal to manufacturers of different information appliances. This separation allows components of the Palm platform to be modified and replaced to allow the Palm OS operating system to run on a variety of handheld hardware devices. Significant market acceptance of Palm platform-based devices is attracting an increasing number of licensees. In October 1998, Symbol Technologies introduced the first device based on the Palm platform incorporating bar code scanning capabilities. Symbol has since introduced other products incorporating wireless local area network access and rugged packaging. These products are targeted as vertical solutions for retail, transportation, parcel and postal delivery, manufacturing and healthcare. Other licensees of the Palm platform include QUALCOMM, a maker of digital mobile phones, which has introduced its pdQ digital smart phone combining the functionality of the Palm handheld device with a mobile phone, and Handspring, a maker of handheld devices branded as Visor which are targeted at consumers. 47 Internet Services and Applications. We have developed two groups of products and services to address the opportunities created by the emergence of the Internet: Palm.net and Palm.com. In 1999, we introduced Palm.net, a subscription-based wireless access service that enables Palm users to access web-clipped content on the Internet. We currently offer pre-paid access packages from $9.99 to $39.99 per month and charge additional amounts for network usage in excess of the pre-paid package. The Palm VII device currently comes with nine pre-installed web-clipping applications. In addition, users receive a CD-ROM which contains an additional 14 web-clipping applications that can be installed on the device. Palm.net is also the name of Palm's web-clipping destination site, which offers links to more than 150 additional sites that users can download to their devices as well as customer support, technical support, coverage maps and account information. For example, Palm VII users can access Fidelity.com or E*Trade to get real-time stock quotes, UPS.com to monitor package delivery, ESPN.com to check sports scores, WSJ.com to get news or business headlines and Travelocity to check airline flight times and delays. Palm.net also serves as a resource for both content publishers and third party developers. Content publishers can post links to their own websites that are web-clipping enabled. In addition, developers can post applications on Palm.net for use on wireless-enabled Palm devices. As wireless and Internet technologies advance, we intend to expand the geographical coverage of the Palm.net network, which currently covers over 260 metropolitan areas in the United States, and expand the content and application offerings available through Palm.net. Palm.com was established as a means to increase our contact with our end users, customers and third-party developers. Visitors to Palm.com can purchase Palm devices, accessories and peripherals as well as download Palm software upgrades and link to third-party software. They can also find product and customer support information and explore links to other Palm-related websites. Palm.com also offers important support resources for developers. Developers can use Palm.com to register with Palm, obtain access to software development tools and obtain technical support. Strategic Alliances Beginning in 1999, we expanded our strategy of licensing the Palm platform to manufacturers of other handheld information appliances and working with other companies to expand the use of applications running on the Palm platform. We recently announced the following strategic alliances: Nokia. In October 1999, we entered into a licensing and joint development agreement with Nokia to create a new pen-based mobile phone platform that integrates telephony and data applications with personal information management applications. The agreement provides that the jointly developed mobile phone platform will integrate the user and application interface components of the Palm platform with know-how supplied by Nokia, with the intention that applications currently available for the Palm platform will be supported by the new platform. Pursuant to the agreement, Nokia has a non-exclusive royalty- bearing license to use the jointly developed platform. Concurrent with this offering, Nokia has agreed to purchase shares of common stock equal to the lesser of $80 million or 1 1/2% of the Company's capital stock, which percentage is based on outstanding common stock as well as options to purchase shares which have been granted as of ,2000. Sony. In November 1999, we entered into a licensing and joint development agreement with Sony Corporation to enable Sony to create new handheld consumer electronics products with next generation audio-visual functionality. Pursuant to the agreement, we will develop extensions to the Palm platform that incorporate Sony's Memory Stick application programming interface technology for use in the new devices. The agreement also provides us with the right to license the Memory Stick technology as incorporated in the Palm platform to third parties. 48 Sun Microsystems. In June 1999, we jointly announced with Sun Microsystems our intention to integrate Sun's Java technology with the Palm platform. In addition, we jointly announced with Sun in October 1999 the availability of Sun's consulting services to help deliver enterprise applications and capabilities for handheld devices based on the Palm platform through the newly formed Sun.Com Consulting practice. America Online. In December 1999, we entered into a non-binding memorandum of understanding with America Online pursuant to which the parties intend to establish a strategic relationship aimed at offering mobile consumer Internet services for Palm platform-based handheld device users. The memorandum is non- binding and there can be no assurance that the parties will be able to enter into a definitive, binding agreement regarding this relationship. Additionally, concurrent with this offering, America Online has agreed to purchase shares of common stock equal to the lesser of $80 million or 1 1/2% of our capital stock, which percentage is based on outstanding common stock as well as options to purchase shares which have been granted as of , 2000. Motorola. In December 1999, we entered into a non-binding memorandum of understanding with Motorola pursuant to which the parties intend to conclude a definitive license agreement in which Motorola will license the Palm OS operating system software to develop wireless products. In addition, the parties intend to conclude development and license agreements pursuant to which the capabilities of the Palm OS operating system software would be expanded so that Motorola could develop new categories of products and enter new markets. The memorandum is non-binding and there can be no assurance that the parties will be able to enter into a definitive, binding agreement regarding this relationship. Additionally, concurrent with this offering, Motorola has agreed to purchase shares of common stock equal to the lesser of $65 million or 1 1/2% of the Company's capital stock, which percentage is based on outstanding common stock as well as options to purchase shares which have been granted as of , 2000. Developer Community The combination of our large user base and the open architecture of the Palm platform has attracted a large and growing community of third party developers who create software applications, peripherals and accessories for Palm devices and Palm platform-based products. The diverse offerings from this third-party developer community in turn broaden the user appeal of our devices and other products based on the Palm platform. As of December 1, 1999, more than 29,000 developers had registered to create applications for the Palm platform. In addition, over 4,500 applications are currently available in a broad range of categories, including contact and schedule management, e-mail and Internet communications, sales force and field automation, personal productivity, groupware, financial management and games. Developers of several major applications, such as IBM's Lotus Organizer, Symantec's ACT! and QUALCOMM's Eudora Internet e-mail software, have enabled these applications to be synchronized with our devices. We have hosted three developer conferences with attendance growing from approximately 380 in 1997 to 2,000 in 1999 and have begun hosting these conferences internationally in Tokyo, London and Munich. Sales and Marketing We sell to our end users primarily through distributors, retailers and resellers. In the United States, we currently sell directly to six distributors, 14 retailers and eight regional resellers. We also use our dedicated enterprise sales force to market Palm products directly to enterprises which then purchase devices through one of our other sales channels. We also sell directly to consumers through our Palm.com website. In the United States, distributors represent our largest sales channel. These distributors generally sell to retailers on a national basis and include large distributors targeting Internet retailers 49 such as Buy.com. The retail channel is our second largest United States distribution channel and encompasses office supply and consumer electronics retailers and catalog and mail order companies. Retailers primarily sell Palm devices to individuals, small businesses, small offices and home offices. This channel is currently our fastest growing area of distribution. In Europe and the Pacific Rim, we currently sell our product exclusively through distributors. We have approximately 111 international distributors, of which approximately 88 are in Europe and 23 are in the Pacific Rim. In addition, 3Com currently resells our products into the Canadian and Latin American markets. We believe there is a significant opportunity to expand the Palm economy by selling device products through third parties such as IBM and Franklin Covey that sell customized versions of our products under their own brand. We believe by developing specialized and customized products that are re-branded and re- sold by these third parties, we can quickly and cost effectively enter new geographic and specialized vertical markets, or expand our penetration into existing markets such as the enterprise. Our strategy is to select established enterprise companies that have significant market presence or access to new markets that can be more efficiently developed and managed by these third parties than by us. For example, IBM sells Palm-based products in the enterprise market branded as the IBM WorkPad PC Companion in the United States, Europe, Japan, Latin America and Asia. We have entered into a relationship with Franklin Covey to provide a series of devices based on the Palm III, V and VII products sold to both the consumer and enterprise markets based on its popular time and life management planning concepts. We jointly developed with Supra, the largest provider of lock boxes for the real-estate industry, an electronic key embedded in Palm devices for accessing their lock boxes and specialized realtor productivity software. 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 extensive feedback from our end users, the third-party developer community and our channel customers through market research. We use this feedback to continually refine our product development as well as the position and assortment of our products in our sales channels. Customer Service and Support We believe that customer service and technical support are essential parts of the sales process in our industry. In order to provide high levels of customer service, senior management and assigned account managers work closely with our distributor, retailer, reseller and enterprise customers. We believe these relationships enable us to improve customer satisfaction and develop products to meet specific customer needs. For our enterprise customers we provide a variety of support offerings including a training program for the enterprise help-desk, website, e-mail and telephone troubleshooting, as well as a program to provide refurbished units to enterprises needing replacement devices. Individual consumers also have access to website, e-mail and telephone support. We outsource our customer service, technical support and product repairs to regionally-based third parties. Product Development and Technology Our engineering department consists of a device design group and a separate Palm platform team. Our product development efforts are focused on both improving the functionality of our existing products and developing new products. We believe the industrial 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 utility, simplicity, wearability, mobility, style and ease of use of our products and services. 50 To identify and develop technologies for the next generations of Palm devices, we use parallel development teams to avoid schedule dependency 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 to coincide with the summer and winter selling seasons and introducing new generation products approximately every 12 months. In addition, our Palm platform software engineering group works both on refining the Palm platform for our Palm-branded devices and on coordinating development efforts with our licensees. We have four design centers, each of which focuses on different aspects of our products, such as wireless connectivity, flexibility and wearability. For example, our design center in Bellevue, Washington developed the technology that enabled the wireless connectivity of the Palm VII product, and our design center in Santa Clara, California was responsible for the improvements in wearability of the Palm V product. We have additional design centers in Rolling Meadows, Illinois and Montpellier, France. We believe that our success will depend, in part, on our ability to develop and introduce new products and enhancements to our existing products. In the past we have made, and intend to continue to make, significant investments in research and development. Our research and development expenditures totaled approximately $46.0 million in fiscal 1999, $21.9 million in fiscal 1998 and $13.4 million in fiscal 1997. As of November 26, 1999, we had 250 people engaged in research and development activities. Manufacturing and Supply Chain We currently outsource all of our manufacturing operations to Manufacturers' Services Limited and Flextronics. This outsourcing extends from prototyping to volume manufacturing and includes activities such as material procurement, final assembly, test, quality control and shipment to our customers. Manufacturers' Services Limited currently assembles Palm devices for us at its Utah facility which it recently purchased from 3Com. Flextronics currently assembles Palm devices at its facilities in Mexico, California and Malaysia. Our outsourced manufacturing strategy allows us to: . minimize our capital expenditures; . conserve the working capital that would be required to fund inventory; . adjust to manufacturing volumes quickly to meet changes in demand; and . operate without dedicating any space to manufacturing operations. We believe that additional assembly line efficiencies are realized due to our product architecture and our commitment to process design. Although we generally use standard components for our products and try to maintain alternative sources of supply, some key components, such as the Motorola microprocessors we use, are purchased from sole or single source suppliers for which alternative sources are not currently available in the quantities and at the prices we require. The components that make up our devices are supplied by a number of vendors such as Epson, Samsung, Sharp and Philips, who each supply liquid crystal display panels, AMD, Fujitsu and Toshiba, who each supply DRAM memory chips, and Motorola, the supplier of our microprocessor. Competition We compete in the handheld device, operating system and Internet services markets. The markets for these products and services are highly competitive. Some of our competitors or potential competitors have significantly greater financial, technical and marketing resources than we do. These competitors may be able to respond more rapidly than us to new or emerging technologies or 51 changes in customer requirements. They may also devote greater resources to the development, promotion and sale of their products than we do. Our devices compete with a variety of handheld devices, including pen- and keyboard-based devices, mobile phones and subnotebook personal computers. Our principal competitors include Casio, Compaq, Hewlett-Packard, Psion and Sharp as well as licensees of our Palm platform such as Handspring and TRG. We believe the principal competitive factors impacting the market for our handheld devices are functionality, features, operating system performance, styling, availability, brand and price. Our Palm platform competes primarily with operating systems such as Microsoft's Windows CE 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 of the operating system, number and quality of third-party applications available for use on the operating system, architecture of the operating system and relative ease of developing compatible applications. In our licensing activities, our Palm platform also competes with the proprietary operating systems of our potential licensees. While it currently has no directly analogous competitors, the Palm VII device and our wireless Internet access service compete with a variety of alternative technologies and services. Mobile phone manufacturers and service providers including Nokia, Motorola and Sprint have recently introduced mobile phones which offer Internet connectivity. We expect that the trend toward integrating Internet connectivity into a diverse set of devices will continue to accelerate as industry standards emerge. Our subscription-model access business also competes indirectly with other providers of Internet access, ranging from dedicated Internet service providers such as America Online and Earthlink to local phone companies. In addition, although we currently supply Internet access to Palm VII subscribers through our Palm.net service, competing Internet access solutions may be developed to enable connectivity through wireless- enabled Palm devices outside our Palm.net service. Intellectual Property Our software, hardware and operations rely on and benefit from an extensive portfolio of intellectual property. We currently have 10 United States patents issued for our technology and we have 52 United States patent applications pending. We also have 27 foreign patent applications pending. We own a number of trademarks, including Palm, Palm III, Palm V, Palm VII, Palm OS, Palm Computing, PalmSource, HotSync, Graffiti, Simply Palm and Palm.net. We are currently engaged in litigation against other parties to enforce our rights to these trademarks, 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. In addition to our Palm platform, we also license development applications to third-party developers of compatible products, services and applications to increase the functionality of devices based on the Palm platform. In addition, we have licensed software that enables numerous website hosts, including ABC News, Bank of America, Dow Jones, ESPN, E*Trade, Fidelity.com, Fodor's, MasterCard, Merriam-Webster, MovieFone, Starbucks, TheStreet.com, UPS, USA Today, VISA, The Weather Channel and Yahoo!, to make their websites accessible by devices based on the Palm platform using our web-clipping technology. 52 We rely on a combination of patent, trademark, copyright and trade secret laws and restrictions on disclosure to protect our intellectual property rights. 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. Orders are generally placed by our customers on an as-needed basis and products are usually shipped within one to four weeks after receipt of an order. Orders generally may be canceled or rescheduled by the customer without significant penalty. Accordingly, backlog as of any particular date is not necessarily indicative of our future revenues. Employees As of November 26, 1999, we had a total of approximately 632 employees, of which approximately 67 were in supply chain and service and support, 250 were in engineering, 254 were in sales and marketing and 61 were in general and administrative activities. Our future performance depends, in significant part, upon our ability to attract new personnel and retain existing personnel in key areas including engineering, technical support and sales. Competition for personnel is intense, especially in the San Francisco Bay Area where we are headquartered, and we cannot be sure that we will be successful in attracting or retaining personnel in the future. None of our employees is subject to a collective bargaining agreement. We consider our relationship with our employees to be good. Facilities We occupy approximately 160,000 square feet of leased space in Santa Clara, California. The lease of this facility is terminable with six-months notice beginning in July 2001 and expires in July 2002. In addition to our principal office space in Santa Clara, California, we also lease research and development facilities in Bellevue, Washington, Rolling Meadows, Illinois and Montpellier, France and sales and support offices internationally in Winnersh, United Kingdom and La Defense, France. We believe that existing facilities are adequate for our needs through calendar year 2000 and are currently in the process of locating additional space to meet our expected requirements thereafter. If we require additional space, we believe that we will be able to secure such space on commercially reasonable terms without undue operational disruption. 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 is now captioned: Xerox Corporation v. U.S. Robotics Corporation, U.S. Robotics Access Corp., Palm Computing, Inc. and 3Com Corporation, Civil Action No. 97-CV-6182T. The complaint alleges willful infringement of a Xerox United States patent, issued on January 21, 1997, relating to computerized interpretation of handwriting. The complaint further seeks unspecified damages and injunctive relief. Xerox has asserted that products utilizing Graffiti script recognition software made, used, offered for sale or sold in the United States, or imported into the United States since January 21, 1997 infringe its patent. On June 25, 1999, the Court stayed the action pending reexamination of the patent by the United States Patent and Trademark Office. The reexamination of the patent is currently pending. In connection with our separation from 3Com, pursuant to the terms of the Indemnification and Insurance Matters Agreement, we will indemnify and hold 3Com harmless for any damages or losses which may arise out of this litigation. In particular, an adverse determination in the Xerox litigation could subject us to substantial damages and require us to indemnify our 53 customers and licensees for damages that they may suffer. Moreover, if there is an adverse determination, a license may be necessary to continue using the Grafitti script recognition software in our Palm devices and Palm platform. A license may not be available or on terms acceptable to us. If upon an adverse determination we were unable to obtain a license on terms acceptable to us, we could be required to modify our script recognition software or license alternative script recognition software from third parties for inclusion in our Palm devices and our Palm platform. On July 22, 1999, we filed a copyright infringement action against Olivetti and CompanionLink in the United States District Court for the Northern District of California and obtained a preliminiary injunction against further distribution, sale, import or export of Olivetti Office USA's "Royal daVinci" handheld device and the daVinci OS Software Development Kit, distributed by CompanionLink Software, Inc. The injunction is to remain in effect pending the outcome of the lawsuit. We also initiated a copyright infringement action in Hong Kong on July 21, 1999, against EchoLink Design Ltd., the company responsible for developing the operating system software contained in the daVinci products. The High Court of the Hong Kong Special Administrative Region issued an order the same day restraining EchoLink from further copying, distribution, sale, import or export of Palm OS operating system source code or EchoLink's "NEXUS OS" source code, which we maintain infringes our copyrights. 54 MANAGEMENT Directors, Executive Officers and Key Employees Set forth below is information concerning our directors and executive officers and their ages as of October 31, 1999.
Name Age Position ---- --- -------- Directors and Executive Officers: Carl J. Yankowski....... 51 Chief Executive Officer and Director Eric A. Benhamou........ 44 Director James L. Barksdale...... 56 Director Gordon A. Campbell...... 55 Director Susan G. Swenson........ 51 Director Alan J. Kessler......... 42 President Judy Bruner............. 41 Senior Vice President and Chief Financial Officer Stephen Yu.............. 34 Vice President, General Counsel and Secretary Key Employees: Mark Bercow............. 38 Vice President, Strategic Alliances & Platform Development Gregory S. Rhine........ 41 Vice President, Worldwide Sales Peng K. Lim............. 36 Vice President, Worldwide Product Engineering Daniel S. Keller........ 43 Vice President, Platform Engineering Dinesh Raghavan......... 45 Vice President, Global Supply Chain Operations Charles Yort............ 40 Vice President, Enterprise Byron Connell........... 39 Vice President, Product Marketing Robert Harvey........... 47 Senior Director, Palm.net Services Douglas Haslam.......... 49 Director, Human Resources David de Valk........... 30 Director, Global Service and Support
Carl J. Yankowski has been our Chief Executive Officer and one of our directors since December 1999. From September 1998 to December 1999, Mr. Yankowski was Executive Vice President of Reebok International Ltd. and President and Chief Executive Officer of the Reebok Division. From November 1993 to January 1998, Mr. Yankowski was President and Chief Operating Officer of Sony Electronics Inc., a subsidiary of the Sony Corporation. Mr. Yankowski holds a Bachelor of Science degree in electrical engineering from the Massachusetts Institute of Technology as well as a Bachelor of Science degree in management which he earned concurrently from MIT's Sloan School of Management. Mr. Yankowski also serves as a director of Safeguard Scientifics and Avidyne, Inc., and he is a member of the board of advisors of Boston College Business School. Eric A. Benhamou has served as one of our directors since September 1999. Mr. Benhamou has been 3Com's Chief Executive Officer since September 1990 and also served as 3Com's President from April 1990 through August 1998. Mr. Benhamou has been 3Com's Chairman of the Board of Directors since July 1994. Mr. Benhamou served as 3Com's Chief Operating Officer from April 1990 through September 1990. From October 1987 through April 1990, Mr. Benhamou held various general management positions within 3Com. Mr. Benhamou also serves as Chairman of the Board of Cypress Semiconductor, Inc. and as a director of Legato Systems, Inc. Mr. Benhamou is a member of President Clinton's Information Technology Advisory Council. James L. Barksdale has served as one of our directors since September 1999. Mr. Barksdale has been a managing partner at The Barksdale Group since he founded it in April 1999. Prior to that, he served as President, Chief Executive Officer and a director of Netscape Communications Corporation, an Internet browser company, from January 1995 to April 1999. Previously, 55 Mr. Barksdale had been President and Chief Executive Officer of AT&T Wireless Services since September 1994. From 1992 to September 1994, Mr. Barksdale had been employed as President and Chief Operating Officer of McCaw Cellular Communications, Inc., and from 1979 to 1992 by Federal Express Corporation. Mr. Barksdale also serves as a director of Robert Mondavi Corporation, Sun Microsystems, Inc., America Online, Inc., Liberate Technologies, Homegrocer.com, Inc. and Respond.com, Inc. Gordon A. Campbell has served as one of our directors since September 1999. Mr. Campbell is the founder and, since 1993, has been President and Chairman of the Board of Techfarm, Inc., a company formed to launch technology-based start- up companies. Mr. Campbell was the founder of CHIPS and Technologies, Inc., a company that designs and distributes very large scale integrated circuit products, and served as its President and Chief Executive Officer from December 1984 until November 1993, and as its Chairman of the Board from December 1984 until November 1995. Mr. Campbell also serves as a director of Bell Microproducts, Inc., Chairman of the Board of 3D/Fx Interactive Inc. and Chairman of the Board of Cobalt Networks, Inc. Susan G. Swenson has served as one of our directors since October 1999. Ms. Swenson is President and Chief Operating Officer of Leap Wireless International, Inc. and Chief Executive Officer of Cricket Communications, Inc. since July 1999. Ms. Swenson has also been a director of Leap since July 1999. From March 1994 to July 1999, Ms. Swenson served as President and Chief Executive Officer for Cellular One, a joint venture between AirTouch/Vodafone and AT&T Wireless. Ms. Swenson is also a director of Wells Fargo Bank, General Magic and Working Assets. Alan J. Kessler has been President of Palm since June 1999. From April 1998 to June 1999, Mr. Kessler was Senior Vice President of Global Customer Service for 3Com. From July 1997 to April 1998, Mr. Kessler was Senior Vice President of Worldwide Enterprise Sales and Service for 3Com. From October 1985 to July 1997, Mr. Kessler held a variety of sales and marketing management positions at 3Com, including Vice President of 3Com's North America System Sales, Vice President and General Manager of 3Com's Internetworking Product Group and a Director of Marketing with responsibility for key network communication product lines. Mr. Kessler holds a Master of Business Administration degree from the University of California, Berkeley and a Bachelor of Science degree in business, with honors, from San Jose State University. Judy Bruner has served as Senior Vice President and Chief Financial Officer of Palm since September 1999. From April 1998 to September 1999, Ms. Bruner was Vice President and Corporate Controller at 3Com. From October 1996 to April 1998, Ms. Bruner was the Vice President, Finance for 3Com's Enterprise Systems Business Unit. 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 most recently 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. Stephen Yu has served as Vice President, General Counsel and Secretary since September 1999. From November 1994 to September 1999, Mr. Yu held various positions within the 3Com legal department, most recently serving as 3Com's Legal Director, Business Development and West Coast Product Operations. From September 1990 to November 1994, Mr. Yu was an associate attorney with Gray Cary Ware & Freidenrich, a law firm located in Palo Alto, California. Mr. Yu received a Juris Doctor degree cum laude from Georgetown University Law Center and a Bachelor of Science degree in electrical engineering from Purdue University. 56 Mark Bercow has been Palm's Vice President, Strategic Alliances and Platform Development since July 1997. Prior to joining Palm, from January 1997 to July 1997, he was Director of Marketing for the Cable Access Products Division of 3Com. From September 1995 to September 1996, Mr. Bercow was Vice President, Marketing and Business Development at FirstFloor Software, Inc. From September 1994 to September 1995 he was the General Manager of the David Systems subsidiary of Chipcom Corporation and from September 1993 to September 1994, he was Acting Vice President, Marketing at Chipcom Corporation. Prior to joining Chipcom, Mr. Bercow was Group Manager, Marketing at Sun Microsystems, Inc. He holds a Bachelor of Science degree in business administration from California State University, Northridge. Gregory S. Rhine has served as Palm's Vice President of Worldwide Sales since June 1999. From October 1997 to May 1999, Mr. Rhine served as Vice President and General Manager for VeriFone, Inc., a division of Hewlett-Packard Company. From January 1997 to September 1997, Mr. Rhine was Vice President of American Channel Development and Sales at Apple. From May 1988 to December 1996, Mr. Rhine held a variety of sales and management positions at Apple, including Senior Director U.S. Distribution Sales, Director, Value Added Reseller (VAR) sales, and Regional Sales Manager. Prior to Apple, from July 1979 to April 1988, Mr. Rhine worked for Olin Corporation in various areas of responsibility including business development and marketing. Mr. Rhine holds a degree in Business Administration from the University of Missouri and has completed graduate work at West Coast University and executive management programs at The Kellogg School of Business in Evanston, Illinois. Peng K. Lim has served as Vice President, Worldwide Product Engineering of Palm since April 1999. From June 1997 to March 1999, Mr. Lim served as Vice President, Engineering at Fujitsu Personal Systems Inc. From July 1996 to June 1997, he was Engineering Platform Director for Texas Instruments Incorporated. Mr. Lim was Director of Engineering for Zenith Data Systems Corporation from September 1993 to June 1996. Prior to that, Mr. Lim was Director of Engineering at Dauphin Technology, Inc. Mr. Lim received his Bachelor of Science degree and Master of Science degree in electrical engineering from University of Windsor in Canada and Master of Engineering Management from Northwestern University. Mr. Lim completed the executive management program at Stanford University. Daniel S. Keller has been Palm's Vice President of Platform Engineering since August 1999. From June 1998 to July 1999, Mr. Keller was Director, Product Engineering and from November 1997 to May 1998, he was Director, Corporate Solutions Engineering. Prior to joining Palm, from April 1996 to September 1997, Mr. Keller was Vice President of Product Development for Power Agent, Inc., an Internet company creating a large-scale, Internet system for bringing buyers and sellers together. From November 1991 to March 1996 he was Director of Development System Products at Taligent, Inc. From November 1980 to October 1991, Mr. Keller was at Apple Computer, Inc., where he held various positions in the development of Apple's system software, graphical human interface, development systems, and Japanese products. Prior to Apple, from June 1978 to October 1980, he worked in operating system engineering at Hewlett-Packard Company. Mr. Keller received his Bachelor of Science degree in Computer Engineering with high honors from the University of California, San Diego. Dinesh Raghavan joined Palm in October 1998 as Vice President, Global Supply Chain Operations. Prior to joining Palm, from May 1997 to September 1998. Mr. Raghavan held the position of Director of Manufacturing Operations for the European Paging Subscriber Division of Motorola, Inc. based in Dublin, Ireland. From August 1977 to April 1997, Mr. Raghavan held various positions of increasing responsibility in development engineering and manufacturing management with Motorola. He holds a Bachelor of Technology degree in electrical engineering from the Indian Institute of Technology in Kanpur, India and a Masters in Business Administration degree from Nova University in Fort Lauderdale, Florida. 57 Charles Yort has been Vice President, Enterprise for Palm since November 1999. From September 1998 to November 1999, Mr. Yort was the Senior Director of Palm Computing's enterprise sales team. Prior to joining Palm, from December 1996 to August 1998, Mr. Yort was the Director of Small Business Operations for 3Com. From September 1995 to November 1996, Mr. Yort was Director of Market Development for 3Com. Prior to joining 3Com, from June 1993 to August 1995, Mr. Yort was Marketing Manager for the PC Division of Inmac Corporation, a reseller of computer related products. From August 1981 to June 1993, Mr. Yort worked in various marketing, business development and engineering roles for Hewlett- Packard Company. Mr. Yort holds a Masters in Business Administration degree from Stanford University's Graduate School of Business, with concentrations in Strategic Management and Finance. He earned a Bachelor of Science in Engineering and Bachelor of Arts in Economics from Princeton University. Byron Connell has been Vice President, Marketing since July 1999. From September 1998 to December 1999, Mr. Connell was Senior Director of Product Marketing for Palm and from July 1997 to August 1998, he was Director of Product Marketing. From December 1994 to July 1997, Mr. Connell was the Group Manager of Product Marketing for the Home Products Division of Hewlett- Packard Company. From February 1993 to December 1994, Mr. Connell was the Group Manager of Customer Requirements for Apple Computer, Inc. and from July 1988 to January 1993, he worked in a variety of sales, channel, and marketing management positions for Apple Computer, Inc. Mr. Connell holds a Bachelor of Science degree in Business Administration from the University of Southern California and a Master of Management degree in marketing, international business and management policy from the J.L. Kellogg Graduate School of Management at Northwestern University. As an international exchange student, Mr. Connell also studied at the Rotterdam School of Management Master of Business Administration program at Erasmus University, Netherlands. Robert Harvey has served as Director, Palm.net since December 1997. From November 1983 to November 1997, Mr. Harvey held a variety of manufacturing and operations positions at Apple Computer, Inc., including Director of Mobile Computing Operations from May 1995 to November 1997. From October 1973 to October 1983, Mr. Harvey worked with the Palo Alto Police Department, most recently serving as Captain, Uniform Division. Mr. Harvey holds a Bachelor of Science degree in Sociology from the University of Santa Clara and a Masters of Public Administration from California State University, Hayward. Doug Haslam has been Director, Human Resources for Palm since January 1997. From January to December 1996, Mr. Haslam led Human Resources for the DDS Division of Xerox Corporation. From September 1991 to September 1995, Mr. Haslam was Director, Human Resources for Kenetech Windpower Corporation, and from January 1988 to September 1991, he was Principal of his own Human Resources consulting practice. From January 1985 to January 1988, Mr. Haslam was Director, Human Resources for EOS, Inc., and from April 1981 to January 1985, he was Human Resources Manager for EOS, Inc. He has a Bachelor of Arts degree in Political Science from Ohio University and a Masters in Public Administration degree from University of California, Los Angeles. David de Valk has been Director of Customer Service since October 1999. From September 1998 to October 1999, Mr. de Valk served as Director, e-Business Strategy and Architecture for 3Com Global Customer Service. From June 1997 to September 1998, Mr. de Valk held several senior service positions in 3Com Global Customer Service, most recently Director, Network Solutions Services. From September 1991 to June 1997, Mr. de Valk worked in various Technical Support positions including Manager, Applications Engineering for U.S. Robotics Corporation. Mr. de Valk attended Eureka College. 58 Board Structure and Compensation Our board of directors is divided into three classes serving staggered three- year terms. Mr. Yankowski's initial term will expire in 2000. Mr. Campbell's and Ms. Swenson's initial terms will expire in 2001. Messrs. Benhamou's and Barksdale's initial terms will expire in 2002. Non-employee directors will be paid an annual retainer equal to $20,000 and be eligible for stock option grants under the Director Plan at such times and in such amounts as are set forth in the Director Plan. Audit Committee Mr. Campbell and Ms. Swenson are members of our audit committee. Our audit committee reviews our auditing, accounting, financial reporting and internal control functions and makes recommendations to the board of directors for the selection of independent accountants. In addition, the committee monitors the quality of our accounting principles and financial reporting, our compliance with foreign trade regulations as well as the independence of and the non-audit services provided by our independent accountants. In discharging its duties, the audit committee: . reviews and approves the scope of the annual audit and the independent accountant's fees; . meets independently with our internal auditing staff, our independent accountants and our senior management; and . reviews the general scope of our accounting, financial reporting, annual audit and internal audit program, matters relating to internal control systems as well as the results of the annual audit. Compensation Committee Messrs. Barksdale and Campbell are members of our compensation committee. Our compensation committee determines, approves and reports to the board on all elements of compensation for our elected officers including targeted total cash compensation and long-term equity based incentives. Stock Ownership of Directors and Executive Officers All of our common stock is currently owned by 3Com, and thus none of our officers, directors or director nominees own any of our common stock. To the extent our directors and officers own shares of 3Com common stock at the time of the distribution, they will participate in the distribution on the same terms as other holders of 3Com common stock. 59 The following table sets forth the number of shares of 3Com common stock beneficially owned on October 31, 1999 by each director, each of the executive officers named in the Summary Compensation Table in the "--Executive Compensation" section below, and all of our directors, director nominees and executive officers as a group. Except as otherwise noted, the individual director or executive officer or their family members had sole voting and investment power with respect to such securities. The total number of shares of 3Com common stock outstanding as of October 31, 1999 was 341,225,466.
Shares of 3Com Beneficially Owned -------------------- --- Name of Beneficial Owner Number Percentage ------------------------ --------- ---------- Carl J. Yankowski.................................. -- * Eric A. Benhamou(1)................................ 1,788,817 * James L. Barksdale(2).............................. 120,000 * Gordon A. Campbell(3).............................. 52,875 * Susan G. Swenson................................... -- * Alan J. Kessler(4)................................. 179,716 * Judy Bruner(5)..................................... 76,402 * Stephen Yu(6)...................................... 10,903 * All directors and executive officers as a group.... 2,228,713 *
- -------- * Represents holdings of less than one percent. (1) Includes 1,377,505 shares issuable upon the exercise of options exercisable within 60 days of October 31, 1999. (2) Includes 60,000 shares issuable upon the exercise of options exercisable within 60 days of October 31, 1999 and 60,000 shares are held by Mr. Barksdale and his spouse. (3) Includes 52,875 shares issuable upon the exercise of options exercisable within 60 days of October 31, 1999. (4) Includes 179,716 shares issuable upon the exercise of options exercisable within 60 days of October 31, 1999. (5) Includes 74,381 shares issuable upon the exercise of options exercisable within 60 days of October 31, 1999. (6) Includes 10,164 shares issuable upon the exercise of options exercisable within 60 days of October 31, 1999. 60 Executive Compensation The following table sets forth compensation information for the chief executive officer and the three other executive officers of Palm who, based on salary and bonus compensation from 3Com and its subsidiaries, were the most highly compensated for the year ended May 28, 1999. All information set forth in this table reflects compensation earned by these individuals for services with 3Com and its subsidiaries for the fiscal year ended May 28, 1999. Summary Compensation Table
Long-Term Compensation Annual ------------ Compensation Awards ---------------- ------------ Securities All Other Bonus Underlying Compensation Name and Principal Position Salary($) ($)(1) Options(#) ($)(2) --------------------------- --------- ------ ------------ ------------ Eric A. Benhamou, Chief Executive Officer and Director(3)........... 750,000 -- 273,425 12,092 Alan J. Kessler, President......... 400,000 -- 83,500 10,466 Judy Bruner, Senior Vice President and Chief Financial Officer....... 204,967 16,504 35,000 5,480 Stephen Yu, Vice President, General Counsel and Secretary............. 130,242 7,946 10,950 3,564
- -------- (1) The amounts shown in this column reflect payments made under 3Com's company-wide profit-sharing plan. 3Com distributed these amounts at six- month intervals to all employees worldwide, other than those who are paid commissions, including executive officers, with the individual payments determined pro rata based on salary level. (2) All other compensation includes group term life insurance premiums, payments made to reimburse a spouse's travel costs to 3Com events and 401(k) matching payments. (3) Mr. Benhamou ceased serving as our Chief Executive Officer in December 1999. Grants of Stock Options The following table shows all grants of options to acquire shares of 3Com common stock to the executive officers named in the Summary Compensation Table in the fiscal year ended May 28, 1999.
Potential Realizable Value at Assumed % of Total Annual Rates of Stock Number of Options Granted Appreciation for Securities to 3Com Exercise or Option Term(4) Underlying Options Employees in Base Price Expiration --------------------- Name Granted(#)(1) Fiscal Year(2) ($/Sh)(3) Date 5%($) 10%($) - ---- ------------------ --------------- ----------- ---------- ---------- ---------- Eric A. Benhamou........ 175,000 * 24.0000 6/1/08 $2,641,357 $6,693,718 54,675 * 25.5000 9/1/08 876,813 2,222,016 43,750 * 38.6875 11/30/08 1,064,453 2,697,534 Alan J. Kessler......... 52,500 * 24.0000 6/1/08 792,407 2,008,116 17,875 * 25.5000 9/1/08 286,658 726,448 13,125 * 38.6875 11/30/08 319,336 809,260 Judy Bruner............. 20,000 * 28.0625 7/22/08 352,967 894,488 8,000 * 20.4375 4/19/09 102,824 260,577 4,000 * 20.4375 4/19/09 51,412 130,288 Stephen Yu.............. 6,000 * 28.0625 7/22/08 105,890 268,346 4,000 * 20.4375 4/19/09 51,412 130,288 950 * 28.5000 5/19/09 17,027 43,151
- -------- *Less than one percent. 61 (1) All of the above options are subject to the terms of 3Com's 1983 Stock Option Plan or 1994 Stock Option Plan and are exercisable only as they vest. The options granted to each executive officer vest and become exercisable in equal annual increments over a four year period provided the optionee continues to be employed by us. (2) Based on a total of 18,938,977 shares granted to all 3Com employees in fiscal 1999. (3) All options were granted at an exercise price equal to the fair market value of 3Com's common stock on the date of grant. (4) Potential realizable values are net of exercise price, but before deduction of taxes associated with exercise. These amounts represent certain assumed rates of appreciation only, based on the Securities and Exchange Commission rules, and do not represent our estimate of future stock prices. No gain to an optionee is possible without an increase in stock price, which will benefit all stockholders commensurately. A zero percent gain in stock price will result in zero dollars for the optionee. Actual realizable values, if any, on stock option exercises are dependent on the future performance of our common stock, overall market conditions and the option holders' continued employment through the vesting period. Exercises of Stock Options The following table shows aggregate exercises of options to purchase 3Com common stock in the fiscal year ended May 28, 1999 by the executive officers named in the Summary Compensation Table in the "--Executive Compensation" section above.
Number of Securities Value of Unexercised In- Underlying Unexercised The-Money Options at Shares Options at Fiscal Year-End(#) Fiscal Year-End ($)(1) Acquired on Value -------------------------------- ------------------------- Name Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable ---- ----------- ----------- ----------- --------------- ----------- ------------- Eric A. Benhamou........ 200,000 $8,625,498 1,162,398 516,175 $15,530,295 $678,786 Alan J. Kessler......... 30,000 810,894 98,840 187,500 -- 206,305 Judy Bruner............. 10,000 185,625 63,151 51,585 433,874 302,344 Stephen Yu.............. 3,200 79,400 7,186 16,679 20,438 81,750
- -------- (1) Based on fair market value of $27.3125 per share as of May 28, 1999, the closing sale price of 3Com's common stock on that date as reported by the Nasdaq National Market System. Employment Arrangements Mr. Yankowski serves as our Chief Executive Officer and as a director. Under the terms of his employment, Mr. Yankowski's annual base compensation is $600,000 and he is eligible for a target cash bonus of $600,000 per year. In addition, subject to board approval, Mr. Yankowski will receive an employee stock option grant equivalent in value to $48 million based on the price per share in this offering or no more than 2% of the shares outstanding at the time of this offering. This option will vest 25% per year over a period of four years and is subject to the terms and conditions of the 1999 Stock Plan. In the event that Mr. Yankowski is terminated for any reason other than cause during the first two years of his employment, he is entitled to receive continued salary payments and continued vesting of his stock option for a two-year period if the termination occurs within the first six months of his employment, an 18- month period if the termination occurs within the second six months, or a 12- month period if the termination occurs within the second year. Pursuant to a management retention agreement, Mr. Yankowski is entitled to severance benefits in the event that, within 24 months following a change of control, his employment is terminated involuntarily other than for cause, death or disability or by Mr. Yankowski voluntarily for good reason. These severance benefits include a severance payment of 200% of his salary and target bonus, continued employee benefits, pro-rated bonus payment, and full acceleration of vesting on Mr. Yankowski's stock options. 62 Treatment of 3Com Options We intend to assume substantially all of the 3Com options held by our employees on the distribution date. As of October 31, 1999, our employees held options to purchase 2,610,815 shares of 3Com common stock at a weighted average exercise price per share of $28.02. The price of 3Com common stock on that date was $29.00. These assumed options are expected to convert at the distribution into options to purchase our common stock. The number of shares and the exercise price of 3Com options that convert into our options are expected to be adjusted using a conversion formula. The conversion formula is expected to be based on the opening per share price of our common stock on the first trading day after the distribution relative to the closing per share price of 3Com common stock on the last trading day before the distribution. The resulting options are expected to maintain the original vesting provisions and option periods. Treatment of 3Com Restricted Stock Under the 3Com Restricted Stock Plan, some of our key employees were granted restricted stock awards. As of October 31, 1999, our employees held 24,000 unvested 3Com restricted shares. The unvested 3Com restricted shares held by our employees are expected to be forfeited on the distribution. We intend to provide our employees who forfeit 3Com restricted shares with replacement restricted shares of our common stock granted at the time of the distribution. The replacement restricted shares are expected to have substantially the same vesting provisions as the forfeited 3Com restricted shares. Incentive Plans 1999 Stock Plan Our board of directors adopted the 1999 Stock Plan, referred to as the "1999 Plan," in November 1999, and our stockholder initially approved our 1999 Plan in November 1999. Our 1999 Plan provides for the grant of incentive stock options to our employees, and for the grant of nonstatutory stock options and stock purchase rights to our employees, directors and consultants. Number of Shares of Common Stock Available under the 1999 Plan. As of , 1999, a total of shares of our common stock were reserved for issuance pursuant to the 1999 Plan. No options to acquire shares of our common stock were issued and outstanding as of that date. Our 1999 Plan provides for annual increases in the number of shares available for issuance on the first day of each fiscal year, beginning with our 2001 fiscal year, equal to the lesser of 5% of our outstanding shares of common stock on that date, shares or a lesser amount determined by our board. Administration of the 1999 Plan. Our board of directors or a committee of our board administers the 1999 Plan. In the case of options intended to qualify as "performance-based compensation" within the meaning of Section 162(m) of the Code, the committee will consist of two or more "outside directors" within the meaning of Section 162(m) of the Code. The administrator has the power to determine the terms of the options or stock purchase rights granted, including the exercise price, the number of shares subject to each option or stock purchase right, the exercisability of the options and the form of consideration payable upon exercise. Options. The administrator determines the exercise price of options granted under the 1999 Plan, but with respect to nonstatutory stock options intended to qualify as "performance-based compensation" within the meaning of Section 162(m) of the Code and all incentive stock options, the exercise price must at least be equal to the fair market value of our common stock on the grant date. The term of an incentive stock option may not exceed ten years, except that with respect to any participant who owns 10% of the voting power of all classes of our outstanding capital stock, the term 63 must not exceed five years and the exercise price must at least equal 110% of the fair market value on the grant date. The administrator determines the term of all other options. No optionee may be granted an option to purchase more than shares in any fiscal year, except that in connection with his or her initial service, an optionee may be granted an additional option to purchase up to shares. After termination of one of our employees, directors or consultants, he or she may exercise his or her option for the period of time stated in the option agreement. Generally, if termination is due to death or disability, the option will remain exercisable for 12 months. In all other cases, the option will generally remain exercisable for 3 months. However, an option may never be exercised later than the expiration of its term. Stock Purchase Rights. The administrator determines the exercise price of stock purchase rights granted under our 1999 Plan. Unless the administrator determines otherwise, the restricted stock purchase agreement will grant us a repurchase option that we may exercise upon the voluntary or involuntary termination of the purchaser's service with us for any reason, including death or disability. The purchase price for shares we repurchase will generally be the original price paid by the purchaser and may be paid by cancellation of any indebtedness of the purchaser to us. The administrator determines the rate at which our repurchase option will lapse. Transferability of Options and Stock Purchase Rights. Our 1999 Plan generally doesn't allow for the transfer of options or stock purchase rights and only the optionee may exercise an option or stock purchase right during his or her lifetime. Adjustments upon Merger or Asset Sale. Our 1999 Plan provides that in the event of our merger with or into another corporation or a sale of substantially all of our assets, the successor corporation will assume or substitute an equivalent award for each option or stock purchase right. If following such an assumption or substitution, the holder of an option or stock purchase right is terminated without cause, then the vesting and exercisability of 50% of the then unvested shares subject to his or her option or stock purchase right shall accelerate. If the outstanding options or stock purchase rights are not assumed or substituted for in connection with a merger or sale of assets, the administrator will provide notice to the optionee that he or she has the right to exercise the option or stock purchase right as to all of the shares subject to the option or stock purchase right, including shares which would not otherwise be exercisable, for a period of 15 days from the date of the notice. The option or stock purchase right will terminate upon the expiration of the 15-day period. Amendment and Termination of our 1999 Plan. Our 1999 Plan will automatically terminate in 2009, unless we terminate it sooner. In addition, our board of directors has the authority to amend, suspend or terminate the 1999 Plan, provided it does not adversely affect any option previously granted under our 1999 Plan. 1999 Employee Stock Purchase Plan Concurrently with this offering, we intend to establish an Employee Stock Purchase Plan, referred to as the "Purchase Plan." Number of Shares of Common Stock Available under the Purchase Plan. A total of shares of our common stock will be made available for sale. In addition, our Purchase Plan provides for annual increases in the number of shares available for issuance on the first day of each fiscal year, beginning with our 2001 fiscal year, equal to the lesser of 2% of the outstanding shares of our common stock on the first day of the fiscal year, shares, or a lesser amount as may be determined by our board of directors. 64 Administration of the Purchase Plan. Our board of directors or a committee of our board administers the Purchase Plan. Our board of directors or its committee has full and exclusive authority to interpret the terms of the Purchase Plan and determine eligibility. Eligibility to Participate. All of our employees are eligible to participate if they are customarily employed by us or any participating subsidiary for at least 20 hours per week and more than five months in any calendar year. However, an employee may not be granted an option to purchase stock under the Purchase Plan if: . immediately after grant the employee owns stock possessing 5% or more of the total combined voting power or value of all classes of our capital stock, or . the employee's rights to purchase stock under all of our employee stock purchase plans accrues at a rate that exceeds $25,000 worth of stock for each calendar year. Offering Periods and Contributions. Our Purchase Plan is intended to qualify under Section 423 of the Code and contains consecutive and overlapping 24-month offering periods. Each offering period includes four 6-month purchase periods. The offering periods generally start on the first trading day on or after April 1 and October 1 of each year, except for the first such offering period which will commence on the first trading day on or after the effective date of this offering and will end on the last trading day on or before March 31, 2002. Our Purchase Plan permits participants to purchase common stock through payroll deductions of up to 10% of their eligible compensation, which includes a participant's base salary, and commission but excludes all other compensation paid to the participant. A participant may purchase a maximum of shares during a 6-month purchase period. Purchase of Shares. Amounts deducted and accumulated by the participant are used to purchase shares of our common stock at the end of each six-month purchase period. The price is 85% of the lower of the fair market value of our common stock at either the beginning or end of an offering period. If the fair market value at the end of a purchase period is less than the fair market value at the beginning of the offering period, participants will be withdrawn from the current offering period following their purchase of shares on the purchase date and will be automatically re-enrolled in a new offering period. Participants may end their participation at any time during an offering period, and will be paid their payroll deductions to date. Participation ends automatically upon termination of employment with us. Transferability of Rights. A participant may not transfer rights granted under the Purchase Plan other than by will, the laws of descent and distribution or designation of a beneficiary as provided under the Purchase Plan. Adjustments upon Merger or Asset Sale. In the event of our merger with or into another corporation or a sale of all or substantially all of our assets, a successor corporation may assume or substitute for each outstanding option. If the successor corporation refuses to assume or substitute for the outstanding options, the offering periods then in progress will be shortened, and a new exercise date will be set prior to the merger or sale of assets. Amendment and Termination of the Purchase Plan. Our Purchase Plan will terminate in 2009. However, our board of directors has the authority to amend or earlier terminate our Purchase Plan, except that, subject to exceptions described in the Purchase Plan, no such action may adversely affect any outstanding rights to purchase stock under our Purchase Plan. 1999 Director Option Plan Our board of directors adopted the 1999 Director Option Plan, referred to as the "Director Plan", in November 1999, and our stockholder initially approved the Director Plan in November 1999. The 65 Director Plan provides for the periodic grant of nonstatutory stock options to our non-employee directors. Number of Shares Available under the Director Plan. As of , 1999, a total of shares were reserved for issuance under the Director Plan. No options to acquire shares were issued and outstanding as of this date. Our Director Plan provides for annual increases in the number of shares of common stock available for issuance on the first day of each fiscal year, beginning with our 2001 fiscal year, equal to shares or a lesser amount determined by our board. Options. All grants of options to our non-employee directors under the Director Plan are automatic. We will grant each non-employee director an option to purchase shares upon the later of the effective date of the Director Plan and the date when such person first becomes a non-employee director, except for those directors who became non-employee directors by ceasing to be employee directors. In addition, all non-employee directors who have served for at least 6 months receive an option to purchase shares on the date of each annual meeting of our stockholders at which the non-employee director is re-elected to our board of directors. All options granted under our Director Plan have a term of ten years and an exercise price equal to the fair market value of our common stock on the date of grant. Each share option becomes exercisable as to 33% of the shares subject to the option on each anniversary of the date of grant, and each share option, becomes exercisable as to 100% of the shares subject to the option on the first anniversary of the date of grant, provided in each case the non-employee director remains a director on those dates. After termination as a non-employee director, an optionee must exercise his or her option at the time set forth in his or her option agreement. If termination is due to death or disability, the option will generally remain exercisable for 12 months. In all other cases, the option will generally remain exercisable for a period of 3 months. However, an option may never be exercised later than the expiration of its term. Transferability of Options. A non-employee director may not transfer options granted to him or her under our Director Plan other than by will or the laws of descent and distribution. Only the non-employee director may exercise his or her options during his or her lifetime. Adjustments upon Change of Control. In the event of our merger with or into another corporation in which our stockholders before such transaction do not continue to hold at least 50% of the successor or resulting entity, a sale of substantially all of our assets and other transactions set forth in the Director Plan, the exercisability of each option granted under the Director Plan shall accelerate as to all of the shares subject to the option. The option will terminate following the change of control transaction. Amendment and Termination of the Director Plan. Unless terminated sooner, our Director Plan will automatically terminate in 2009. Our board of directors has the authority to amend, alter, suspend, or discontinue the Director Plan, but none of those actions may adversely affect any grant made under the Director Plan. 66 ARRANGEMENTS BETWEEN PALM AND 3COM We have provided below a summary description of the executed master separation and distribution agreement, along with the key related agreements, which we expect to be executed prior to the completion of this offering. This description, which summarizes the material terms of the agreements, is not complete. You should read the full text of these agreements, which have been filed with the Securities and Exchange Commission as exhibits to the registration statement of which this prospectus is a part. Master Separation and Distribution Agreement The master separation and distribution agreement contains the key provisions relating to our separation from 3Com, this offering and the distribution of our shares to 3Com stockholders. The Separation. The separation is scheduled to occur on or around February 26, 2000. The separation agreement will provide for the transfer to us of assets and liabilities from 3Com related to our business as described in this prospectus, effective on the separation date. The various ancillary agreements that are exhibits to the separation agreement and which detail the separation and various interim and ongoing relationships between 3Com and us following the separation date include: . a general assignment and assumption agreement; . technology, patent, and trademark ownership and license agreements; . an employee matters agreement; . a tax sharing agreement; . a transitional services agreement . a real estate matters agreement; . a confidential disclosure agreement; and . an indemnification and insurance matters agreement. To the extent that the terms of any of these ancillary agreements conflict with the separation agreement, the terms of these agreements will govern. These agreements are described more fully below. The Initial Public Offering. Under the terms of the separation agreement 3Com will own at least % of our outstanding common stock following this offering and the private placements to America Online, Motorola and Nokia. We are obligated to use our reasonable commercial efforts to satisfy the following conditions to the consummation of this offering, any of which may be waived by 3Com: . the registration statement containing this prospectus must be effective; . United States securities and blue sky laws must be satisfied; . our common stock must be listed on the New York Stock Exchange or the Nasdaq Stock Market; . all our obligations under the underwriting agreement must be met or waived by the underwriters; . 3Com must own at least % of our stock and must be satisfied that the distribution will be tax-free to its United States stockholders; . no legal restraints must exist preventing the separation or this offering; 67 . the separation must have occurred; and . the separation agreement must not have been terminated. The Distribution. 3Com intends to, following consummation of this offering, distribute by December 1, 2000 the remaining shares of our common stock that 3Com holds to 3Com stockholders on a pro rata basis. We will prepare an information statement with 3Com and send it to 3Com stockholders before the distribution becomes effective. The information statement will inform the stockholders of the distribution and its specifics. 3Com may, in its sole discretion, change the distribution date. 3Com intends to consummate the distribution only if the following conditions are met, any of which may be waived by 3Com: . the Internal Revenue Service must issue a ruling that the distribution of Palm common stock will be tax-free to 3Com stockholders and that the transaction will qualify as a reorganization for United States federal income tax purposes; . all required government approvals must be in effect; . no legal restraints must exist preventing this distribution; and . nothing must have happened in the intervening time between this offering and the distribution that makes the distribution harmful to 3Com or its stockholders. Covenants Between 3Com and Palm. In addition to signing documents that transfer control and ownership of various assets and liabilities of 3Com relating to our business, we have agreed with 3Com to enter into additional transitional service agreements, exchange information, engage in auditing practices and resolve disputes in particular ways. Additional Transitional Service Agreements. 3Com and we will enter into transitional service agreements covering the provision of various transitional services, including financial, legal, accounting, customer service, human resources administration, supply chain, product order administration, facilities and information technology services by 3Com to us. These services will generally be provided for a fee equal to direct and indirect costs of providing the services plus 5%. The transitional service agreements will generally have a term of one year or less from the date of separation. Information Exchange. Both 3Com and we have agreed to share information with each other, for a variety of purposes, unless the sharing would be commercially detrimental. In furtherance of this, both 3Com and we have agreed as follows: . Each party has agreed to maintain adequate internal accounting to allow the other party to satisfy its own reporting obligations and prepare its own financial statements. . Each party will retain records beneficial to the other party for a specified period of time. If the records are going to be destroyed, the destroying party will give the other party an opportunity to retrieve all relevant information from the records, unless the records are destroyed in accordance with adopted record retention policies. . Each party will use commercially reasonable efforts to provide the other party with directors, officers, employees, other personnel and agents who may be used as witnesses in and books, records and other documents which may reasonably be required in connection with legal, administrative or other proceedings. Auditing Practices. So long as 3Com is required to consolidate our results of operations and financial position, we have agreed to: . not select a different independent accounting firm from that used by 3Com without 3Com's consent; 68 . use reasonable commercial efforts to enable our auditors to date their opinion on our audited annual financial statements on the same date as 3Com's auditors date their opinion on 3Com's financial statements; . exchange all relevant information needed to prepare financial statements; . grant each other's internal auditors access to each other's records; and . notify each other of any change in accounting principles. Dispute Resolution. If problems arise between us and 3Com, we have agreed to the following procedures: . The parties will make a good faith effort to first resolve the dispute through negotiation. . If negotiations fail, the parties agree to attempt to resolve the dispute through non-binding mediation. . If mediation fails, the parties can resort to binding arbitration. In addition, nothing prevents either party acting in good faith from initiating litigation at any time if failure to do so would cause serious and irreparable injury to one of the parties or to others. No Representations and Warranties. Neither party is making any promises to the other regarding: . the value of any asset that 3Com is transferring; . whether there is a lien or encumbrance on any asset 3Com is transferring; or . the legal sufficiency of any conveyance of title to any asset 3Com is transferring. No Solicitation. Each party has agreed not to directly solicit or recruit employees of the other party without the other party's consent for two years after the distribution date. However, this prohibition does not apply to general recruitment efforts carried out through public or general solicitation or where the solicitation is employee-initiated. Expenses. All of the costs and expenses related to this offering as well as the costs and expenses related to the separation and distribution will be allocated between us and 3Com. We will each bear our own internal costs incurred in consummating these transactions. Termination of the Agreement. 3Com in its sole discretion can terminate the separation agreement and all ancillary agreements and abandon the distribution at any time prior to the closing of this offering. Both 3Com and Palm must agree to terminate the separation agreement and all ancillary agreements at any time between the closing of this offering and the distribution. General Assignment and Assumption Agreement The general assignment and assumption agreement identifies the assets 3Com will transfer to us and the liabilities we will assume from 3Com in the separation. The agreement also describes when and how these transfers and assumptions will occur. Asset Transfer. Effective on the separation date, 3Com will transfer the following assets to us, to the extent that the assets were, prior to the separation date, 3Com assets and except as provided in an ancillary agreement or other agreement: . assets reflected on our balance sheet as of August 27, 1999, minus any assets disposed of after August 27, 1999; . written off, expensed or fully depreciated assets that would have appeared on our balance sheet as of August 27, 1999, if we had not written off, expensed or fully depreciated them; 69 . assets that 3Com acquired after August 27, 1999, that would have appeared in our financial statements as of the separation date if we prepared such financial statements using the same principles we used in preparing our balance sheet dated August 27, 1999; . assets that our business primarily uses as of the separation date but are not reflected in our balance sheet as of August 27, 1999 due to mistake or omission; . contingent gains related primarily to our business; . contracts that relate primarily to our business entered into in our name; . specified rights under existing insurance policies; and . other specified assets. Excluded Assets. The general assignment and assumption agreement also provides that 3Com will not transfer selected assets to us, including most accounts receivable. Assumption of Liabilities. Effective on the separation date, we will assume the following liabilities from 3Com, to the extent that the liabilities were, prior to the separation date, 3Com liabilities and except as provided in an ancillary or other agreement: . liabilities reflected as liabilities on our balance sheet as of August 27, 1999, minus any liabilities that were discharged after such date of the balance sheet; . liabilities of 3Com that arise after August 27, 1999 that would have appeared in our financial statements as of the separation date if we prepared such financial statements using the same principles we used in preparing our balance sheet dated August 27, 1999; . liabilities that are primarily related primarily of our business at the separation date but are not reflected in our balance sheet as of August 27, 1999 due to mistake or omission; . contingent liabilities primarily related to our business; . liabilities other than taxes primarily resulting from the operation of our business, or resulting from any asset that 3Com transferred to us; . liabilities arising out of specified terminated, divested or discontinued businesses and operations; and . other specified liabilities. Excluded Liabilities. The general assignment and assumption agreement also provides that we will not assume specified liabilities, including: . most accounts payable; . any liabilities that would otherwise be allocated to us but which are covered by 3Com's insurance policies, unless we are a named insured under such policies; and . other specified liabilities. The Non-United States Plan. The transfer of international assets and assumption of international liabilities will be accomplished through agreements entered into between international subsidiaries. The agreement acknowledges that circumstances in jurisdictions outside of the United States may require the timing of the international separation to be delayed past the separation date. Delayed Transfers. If it is not practicable to transfer specified assets and liabilities on the separation date, the agreement provides that these assets and liabilities will be transferred after the separation date. 70 Terms of Other Ancillary Agreements Govern. If another ancillary agreement expressly provides for the transfer of an asset or an assumption of a liability, the terms of the other ancillary agreement will determine the manner of the transfer and assumption. Obtaining Approvals and Consents. The parties agree to use all reasonable efforts to obtain any required consents, substitutions or amendments required to novate or assign all rights and obligations under any contracts that will be transferred in the separation. Nonrecurring Costs and Expenses. Any nonrecurring costs and expenses that are not allocated in the separation agreement or any other ancillary agreement shall be the responsibility of the party that incurs the costs and expenses. Master Technology Ownership and License Agreement The master technology ownership and license agreement, or the master technology agreement, allocates rights in technology other than patents, patent applications and invention disclosures. In the master technology agreement, 3Com will confirm that we own all technology developed by us and, to the extent that any technology is registered in 3Com's name or 3Com otherwise has any ownership rights in that technology, 3Com will assign it to us. In addition, specified manufacturing technology will be jointly owned. 3Com will not restrict our right to use the assigned or jointly owned technology. We will commit to license our operating system to 3Com on favorable terms pursuant to a separate agreement that we will negotiate. In the event of an acquisition of either party, the acquired party may assign the master technology agreement, except that 3Com may not assign the commitment to license the operating system. Master Patent Ownership and License Agreement The master patent ownership and license agreement, or the master patent agreement, allocates rights relating to patents, patent applications and invention disclosures. In the master patent agreement, 3Com will confirm that we own patents, patent applications and invention disclosures which were developed by us and, to the extent that any of these patents or patent applications are recorded in 3Com's name, 3Com will assign them to us. The specific patents, patent applications and invention disclosures being assigned are identified in a database. 3Com will not restrict our rights to practice the assigned patents. 3Com will retain ownership of jointly developed patents, patent applications and invention disclosures, but will grant us a license to jointly developed patents, patent applications and invention disclosures that have resulted or in the future result from our joint development with 3Com in the wireless connectivity area. The license is non-exclusive and royalty-free and will permit us to make, have made, use, lease, sell, offer for sale, and import current and future Palm products and services. The license continues for the life of the licensed patents. 3Com will not be restricted from licensing these wireless connectivity patents for defensive purposes, but for purposes other than for defensive purposes, 3Com will be restricted from licensing these wireless connectivity patents in the field of lightweight handheld mobile computing devices and operating systems for such devices. In addition, each party will covenant not to sue the other party or the other party's customers or suppliers for infringement of its patents that exist as of the separation date or that are based on applications or invention disclosures that exist as of the separation date. The products and services that are covered by the covenant are the products and services of each party's business as it exists as of the separation date. In the event of an acquisition of either party, the acquired party may assign the master patent agreement except that the licenses and covenants not to sue may not be assigned. In addition, in the event a sale of a subsidiary or business unit of either party, the licenses and covenants not to sue may not be assigned. However, the non-acquired party is obligated to enter into licenses or 71 covenants not to sue, as applicable, with a transferee acquiring a party or a subsidiary or business unit of a party, subject to certain reductions in the scope of the licenses and covenants not to sue and subject to the agreement of the acquiring party to grant a license or covenant not to sue back to the non- acquired party. The master patent agreement will also provide that 3Com and we will assist each other in specified ways for a period of five years after the separation date in the event either party is subject to patent litigation. Master Trademark Ownership and License Agreement The master trademark ownership and license agreement, or the master trademark agreement, will allocate rights relating to trademarks, service marks and trade names. In the master trademark agreement, 3Com will confirm that we own our trademarks, service marks and trade names that we use in connection with our business and, to the extent that any of our marks are registered in 3Com's name or 3Com otherwise has any rights in those marks, 3Com will assign them to us. In addition, 3Com will grant us a royalty-free license to mark our existing products with, and advertise and promote these products using, specified 3Com trademarks. The term of this license is two years after the separation date. We may allow authorized dealers to use the trademarks in the advertisement and promotion of our existing products. During the first two years from the separation date, 3Com will agree not to license the trademarks it licenses to us to third parties for use in connection with products or services that compete with our products shipping as of the distribution date, other than any licenses that may have previously been granted. 3Com may terminate the license under the master trademark agreement only with regard to products that fail to meet required quality standards, subject to a notice and cure period. Employee Matters Agreement We will enter into an employee matters agreement with 3Com to allocate assets, liabilities, and responsibilities relating to current and former employees of Palm and their participation in the benefits plans, including stock plans, that 3Com currently sponsors and maintains. All eligible Palm employees will continue to participate in the 3Com benefits plans on comparable terms and conditions to those for 3Com employees until the distribution date or until we establish benefit plans for our employees, or elect not to establish comparable plans, if it is not legally or financially practical. We intend to establish our own benefit program no later than the time of the distribution. Once we establish our own benefits plans, we may modify or terminate each plan in accordance with the terms of that plan and our policies. No Palm benefit plan will provide benefits that overlap benefits under the corresponding 3Com benefit plan at the time of the distribution. Each Palm benefit plan will provide that all service, compensation and other benefit determinations that, as of the distribution, were recognized under the corresponding 3Com benefits plan will be taken into account under that Palm benefit plan. Assets relating to the employee liabilities will be transferred to Palm or the related Palm plans and trusts from trusts and other funding vehicles associated with 3Com's benefits plans. Options. We will establish a replacement stock plan for eligible Palm employees on or before the distribution. We will assume all 3Com options held by Palm employees. These options will convert at the distribution into options to purchase our common stock. The number of shares and the exercise price of 3Com options that convert into Palm options will be adjusted using a conversion formula. The conversion formula will be based on the opening per-share price of our common stock on the first trading day after the distribution relative to the closing per-share price of 3Com common stock on the last trading day before the distribution. The resulting Palm options will maintain the original vesting provisions and option period. 72 Restricted Stock. On or before the distribution, 3Com restricted stock granted under incentive stock plans and held by Palm employees is expected to be forfeited. Each Palm employee who forfeits 3Com restricted stock will receive Palm restricted stock in replacement of his or her forfeited 3Com restricted stock. Stock Purchase Plan. We anticipate that Palm employees will continue to participate in the 3Com stock purchase plan through the date of this offering. After that time, we will sponsor a stock purchase plan for the benefit of Palm employees that is comparable to the 3Com stock purchase plan. Tax Sharing Agreement We will enter into a tax sharing agreement with 3Com that will allocate responsibilities for tax matters between Palm and 3Com. The agreement will require us to pay 3Com for the incremental tax costs of our inclusion in consolidated, combined or unitary tax returns with affiliated corporations. In determining these incremental costs, the agreement will take into account not only the group's incremental tax payments to the Internal Revenue Service or other taxing authorities, but also the incremental use of tax losses of affiliates to offset our taxable income, and the incremental use of tax credits of affiliates to offset the tax on our income. The agreement will also provide for compensation or reimbursement as appropriate to reflect redeterminations of our tax liability for periods during which we joined in filing consolidated, combined or unitary tax returns. The tax sharing agreement also requires us to indemnify 3Com for certain taxes and similar obligations, including: . sales taxes on the sale of products purchased from us by 3Com before the distribution; . customs duties or harbor maintenance fees on products exported or imported by 3Com on our behalf; . the additional taxes that would result if an acquisition of a controlling interest in our stock after the distribution causes the distribution not to qualify for tax-free treatment to 3Com; and . any taxes resulting from transactions undertaken in preparation for the distribution. Our indemnity obligations include any interest and penalties on taxes, duties or fees for which we must indemnify 3Com. Each member of a consolidated group for United States federal income tax purposes is jointly and severally liable for the group's federal income tax liability. Accordingly, we could be required to pay a deficiency in the group's federal income tax liability for a period during which we were a member of the group even if the tax sharing agreement allocates that liability to 3Com or another member. The tax sharing agreement will also assign responsibilities for administrative matters such as the filing of returns, payment of taxes due, retention of records and conduct of audits, examinations or similar proceedings. Master Transitional Services Agreement The master transitional services agreement governs the provision of transitional services by 3Com and us to each other, on an interim basis, until one year after the separation date, unless extended for specific services or otherwise indicated in the agreement. The services include data processing and telecommunications services, such as voice telecommunications and data transmission, and information technology support services, for functions including accounting, financial management, tax, payroll, stockholder and public relations, legal, procurement, and other administrative functions. Services are generally cost plus 5%, but may increase to cost plus 10% if the services extend beyond the one year period. The master transitional services agreement also will cover the provision of additional transitional services identified from time to time after the separation date that were inadvertently or unintentionally omitted from the specified services, or that are essential to effectuate an orderly transition under the separation agreement, so long as the provision of such services would not significantly disrupt 3Com's operations or significantly increase the scope of its responsibility under the agreement. 73 Real Estate Matters Agreement The real estate matters agreement addresses real estate matters relating to the 3Com leased and owned properties that 3Com will transfer to or share with us. The agreement describes the manner in which 3Com will transfer to or share with us various leased and owned properties, including the following types of transactions: . leases to us of portions of specified properties that 3Com owns; . assignments to us of 3Com's leases for specified leased properties; . subleases to us of portions of specified properties leased by 3Com; and . short term licenses between 3Com and us permitting short term occupancy of selected leased and owned sites. The real estate matters agreement includes a description of each property to be transferred to or shared with us for each type of transaction. The standard forms of the proposed transfer documents, such as lease, sublease and license, are contained in schedules. The real estate matters agreement also requires both parties to use reasonable efforts to obtain any landlord consents required for the proposed transfers of leased sites, including 3Com paying commercially reasonable consent fees, if required by the landlords, and us agreeing to provide the security required under the applicable leases. The real estate matters agreement further provides that we will be required to accept the transfer of all sites allocated to us, even if a site has been damaged by a casualty before the separation date. Transfers with respect to leased sites where the underlying lease is terminated due to casualty or action by the landlord prior to the separation date will not be made, and neither party will have any liability related thereto. The real estate matters agreement also gives the parties the right to change the allocation and terms of specified sites by mutual agreement based on changes in the requirements of the parties. The real estate matters agreement provides that all reasonable costs required to effect the transfers, including landlord consent fees and landlord attorneys' fees, will be paid by 3Com. Master Confidential Disclosure Agreement The master confidential disclosure agreement provides that both parties agree not to disclose confidential information of the other party except in specific circumstances. 3Com and we also agree not to use this information in violation of any use restrictions in one of the other written agreements between us. Indemnification and Insurance Matters Agreement General Release of Pre-Separation Claims. Effective as of the separation date, subject to specified exceptions, we will release 3Com and its affiliates, agents, successors and assigns, and 3Com will release us, and our affiliates, agents, successors and assigns, from any liabilities arising from events occurring on or before the separation date, including events occurring in connection with the activities to implement the separation, this offering and the distribution. This provision will not impair a party from enforcing the separation agreement, any ancillary agreement or any arrangement specified in any of these agreements. Indemnification. The indemnification and insurance matters agreement also contains provisions governing indemnification. In general, we have agreed to indemnify 3Com and its affiliates, agents, successors and assigns from all liabilities arising from: . our business, any of our liabilities or any of our contracts; and . any breach by us of the separation agreement or any ancillary agreement. 74 3Com has agreed to indemnify us and our affiliates, agents, successors and assigns from all liabilities arising from: . 3Com's business other than the Palm business; and . any breach by 3Com of the separation agreement or any ancillary agreement. These indemnification provisions do not apply to amounts collected from insurance. The agreement also contains provisions governing notice and indemnification procedures. Liability Arising From This Prospectus. We will bear any liability arising from any untrue statement of a material fact or any omission of a material fact in this prospectus. Insurance Matters. The agreement also contains provisions governing our insurance coverage from the separation date until the distribution date. In general, we agree to reimburse 3Com for premium expenses related to insurance coverage during this period. Prior to the distribution, 3Com will maintain insurance policies on our behalf. We will work with 3Com to secure additional insurance if desired and cost effective. Environmental Matters. 3Com has agreed to indemnity us and our affiliates, agents, successors and assigns from all liabilities arising from environmental conditions existing as of the separation date at facilities transferred to us, or which arise out of operations occurring before the separation date at these facilities. Further, 3Com has agreed to indemnify us and our affiliates, agents, successors and assigns from all liabilities arising from environmental conditions caused by operations occurring at any time, whether before or after the separation date, at any 3Com facility. We have agreed to indemnify 3Com and its affiliates, agents, successors and assigns from all liabilities arising from environmental conditions caused by operations after the separation date at any of the facilities transferred to us, and from environmental conditions at our facilities arising from an event that occurs on or after the separation date. Each party will be responsible for all liabilities associated with any environmental contamination caused by that party post-separation. Assignment. The indemnification and insurance matters agreement is not assignable by either party without prior written consent. 75 PRINCIPAL STOCKHOLDER Prior to this offering and the private placements to America Online, Motorola and Nokia, all of the outstanding shares of our common stock will be owned by 3Com. After this offering and the private placements to America Online, Motorola and Nokia, 3Com will own about %, or about % if the underwriters fully exercise their option to purchase additional shares of our outstanding common stock. Except for 3Com, we are not aware of any person or group that will beneficially own more than 5% of the outstanding shares of our common stock following this offering. 76 DESCRIPTION OF CAPITAL STOCK General Upon the completion of this offering and the private placements to America Online, Motorola and Nokia, we will be authorized to issue shares of common stock, $0.001 par value, and shares of undesignated preferred stock, $0.001 par value. The following description of our capital stock is subject to our certificate of incorporation and bylaws, which are included as exhibits to the registration statement of which this prospectus forms a part, and by the provisions of applicable Delaware law. Common Stock Prior to this offering and the private placements to America Online, Motorola and Nokia, there were shares of common stock outstanding, all of which were held of record by 3Com. The holders of our common stock are entitled to one vote per share on all matters to be voted upon by the stockholders. Subject to preferences that may be applicable to any outstanding preferred stock, the holders of our common stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by our board of directors out of funds legally available for that purpose. See "Dividend Policy." In the event of our liquidation, dissolution or winding up, the holders of our common stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to prior distribution rights of preferred stock, if any, then outstanding. The holders of our common stock have no preemptive or conversion rights or other subscription rights. There are no redemption or sinking fund provisions applicable to our common stock. Preferred Stock Our board of directors has the authority, without action by the stockholders, to designate and issue preferred stock in one or more series and to designate the rights, preferences and privileges of each series, which may be greater than the rights of our common stock. It is not possible to state the actual effect of the issuance of any shares of preferred stock upon the rights of holders of our common stock until our board of directors determines the specific rights of the holders of the preferred stock. However, the effects might include, among other things: . restricting dividends on our common stock; . diluting the voting power of our common stock; . impairing the liquidation rights of our common stock; or . delaying or preventing a change in control of us without further action by the stockholders. At the closing of this offering and the private placements to America Online, Motorola and Nokia, no shares of preferred stock will be outstanding, and we have no present plans to issue any shares of preferred stock. Anti-Takeover Effects of Our Certificate and Bylaws and Delaware Law Some provisions of Delaware law and our certificate of incorporation and bylaws could make the following more difficult: . acquisition of us by means of a tender offer; . acquisition of us by means of a proxy contest or otherwise; or . removal of our incumbent officers and directors. These provisions, summarized below, are expected to discourage coercive takeover practices and inadequate takeover bids. These provisions are also designed to encourage persons seeking to 77 acquire control of us to first negotiate with our board of directors. We believe that the benefits of increased protection give us the potential ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure us and outweigh the disadvantages of discouraging those proposals because negotiation of those proposals could result in an improvement of their terms. Election and Removal of Directors. Our board of directors is divided into three classes. The directors in each class will serve for a three-year term, one class being elected each year by our stockholders. See "Management-- Directors and Executive Officers." This system of electing and removing directors may discourage a third party from making a tender offer or otherwise attempting to obtain control of us because it generally makes it more difficult for stockholders to replace a majority of the directors. Stockholder Meetings. Under our bylaws, only our board of directors, the chairman of our board of directors, and until 3Com owns less than 50% of our common stock, 3Com, may call special meetings of stockholders. Requirements for Advance Notification of Stockholder Nominations and Proposals. Our bylaws establish advance notice procedures with respect to stockholder proposals and the nomination of candidates for election as directors, other than nominations made by or at the direction of our board of directors or a committee of our board of directors. Delaware Anti-Takeover Law. We are subject to Section 203 of the Delaware General Corporation Law, an anti-takeover law. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years following the date the person became an interested stockholder, unless the "business combination" or the transaction in which the person became an interested stockholder is approved in a prescribed manner. Generally, a "business combination" includes a merger, asset or stock sale, or other transaction resulting in a financial benefit to the interested stockholder. Generally, an "interested stockholder" is a person who, together with affiliates and associates, owns or within three years prior to the determination of interested stockholder status, did own, 15% or more of a corporation's voting stock. The existence of this provision may have an anti- takeover effect with respect to transactions not approved in advance by the board of directors, including discouraging attempts that might result in a premium over the market price for the shares of common stock held by stockholders. 3Com is an "interested stockholder" for this purpose. Elimination of Stockholder Action By Written Consent. Our certificate of incorporation eliminates the right of stockholders other than 3Com to act by written consent without a meeting. 3Com will lose this right once it owns less than 50% of our common stock. Elimination of Cumulative Voting. Our certificate of incorporation and bylaws do not provide for cumulative voting in the election of directors. Undesignated Preferred Stock. The authorization of undesignated preferred stock makes it possible for our board of directors to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to change control of us. These and other provisions may have the effect of deferring hostile takeovers or delaying changes in control or management of us. Amendment of Charter Provisions. The amendment of any of the above provisions would require approval by holders of at least 80% of our outstanding common stock. Transfer Agent and Registrar The transfer agent and registrar for our common stock is EquiServe. 78 UNDERWRITING Palm and the underwriters named below (the "Underwriters") have entered into an underwriting agreement with respect to the shares being offered. Subject to some conditions, each Underwriter has severally agreed to purchase the number of shares indicated in the following table. Goldman, Sachs & Co., Morgan Stanley & Co. Incorporated, Merrill Lynch, Pierce, Fenner & Smith Incorporated, and BancBoston Robertson Stephens Inc. are the representatives of the Underwriters.
Underwriters Number of Shares ------------ ---------------- Goldman, Sachs & Co......................................... Morgan Stanley & Co. Incorporated........................... Merrill Lynch, Pierce, Fenner & Smith Incorporated.......... BancBoston Robertson Stephens Inc........................... ------------- Total..................................................... =============
If the Underwriters sell more shares than the total number set forth in the table above, the Underwriters have an option to buy up to an additional shares from Palm to cover such sales. They may exercise that option for 30 days. If any shares are purchased pursuant to this option, the Underwriters will severally purchase shares in approximately the same proportion as set forth in the table above. The following tables show the per share and total underwriting discounts and commissions to be paid to the Underwriters by Palm. Such amounts are shown assuming both no exercise and full exercise of the Underwriters' option to purchase additional shares.
Paid by the Company ------------------------- No Exercise Full Exercise ----------- ------------- Per Share.......................................... $ $ Total.............................................. $ $
Shares sold by the Underwriters to the public will initially be offered at the initial public offering price set forth on the cover of this prospectus. Any shares sold by the Underwriters to securities dealers may be sold at a discount of up to $ per share from the initial public offering price. Any such securities dealers may resell any shares purchased from the Underwriters to selected other brokers or dealers at a discount of up to $ per share from the initial public offering price. If all the shares are not sold at the initial offering price, the representatives may change the offering price and the other selling terms. Palm, 3Com and Palm's directors and officers have agreed with the Underwriters not to dispose of or hedge any of their common stock or securities convertible into or exchangeable for shares of common stock during the period from the date of this prospectus continuing through the date 180 days after the date of this prospectus, except with the prior written consent of the representatives. This agreement does not apply to any grants under Palm's existing employee benefit plans. See "Shares Eligible For Future Sale" for a discussion of transfer restrictions. America Online, Motorola and Nokia have agreed with Palm, for the benefit of the Underwriters, not to dispose of or hedge any of their common stock during the period from the date of the consummation of this offering continuing through the date 180 days after the date of this prospectus. 79 Prior to the offering, there has been no public market for the shares. The initial public offering price will be negotiated among Palm and the representatives. Among the factors to be considered in determining the initial public offering price of the shares, in addition to prevailing market conditions, will be Palm's historical performance, estimates of the business potential and earnings prospects of Palm, an assessment of Palm's management and the consideration of the above factors in relation to market valuation of companies in related businesses. At our request, the Underwriters have reserved up to six percent of the shares of common stock to be issued by Palm and offered in this offering for sale, at the initial public offering price, to persons with preexisting strategic or other relationships with Palm. The number of shares available for sale to the general public will be reduced to the extent that such persons purchase such reserved shares. Any reserved shares which are not so purchased will be offered by the Underwriters to the general public on the same basis as the other shares of common stock offered by this prospectus. We have applied to have our common stock quoted on the Nasdaq National Market under the symbol "PALM". In connection with the offering, the Underwriters may purchase and sell shares of common stock in the open market. These transactions may include short sales, stabilizing transactions and purchases to cover positions created by short sales. Short sales involve the sale by the Underwriters of a greater number of shares than they are required to purchase in the offering. Stabilizing transactions consist of bids or purchases made for the purpose of preventing or retarding a decline in the market price of the common stock while the offering is in progress. The Underwriters also may impose a penalty bid. This occurs when a particular Underwriter repays to the Underwriters a portion of the underwriting discount received by it because the representatives have repurchased shares sold by or for the account of such Underwriter in stabilizing or short covering transactions. These activities by the Underwriters may stabilize, maintain or otherwise affect the market price of the common stock. As a result, the price of the common stock may be higher than the price that otherwise might exist in the open market. If these activities are commenced, they may be discontinued by the Underwriters at any time. These transactions may be effected on the Nasdaq National Market, in the over-the-counter market or otherwise. The Underwriters do not expect sales to discretionary accounts to exceed five percent of the total number of shares offered. Palm estimates that its share of the total expenses of the offering, excluding underwriting discounts and commissions, will be approximately $ . Palm has agreed to indemnify the several Underwriters against specified liabilities, including liabilities under the Securities Act of 1933. 80 SHARES ELIGIBLE FOR FUTURE SALE All of the shares of our common stock sold in this offering will be freely tradable without restriction under the Securities Act, except for any shares which be may acquired by an affiliate of Palm, as that term is defined in Rule 144 under the Securities Act. Persons who may be deemed to be affiliates generally include individuals or entities that control, are controlled by, or are under common control with, Palm and may include directors and officers of Palm as well as significant stockholders of Palm, if any. 3Com currently plans to complete its divestiture of Palm approximately six months following this offering by distributing all of the shares of Palm common stock owned by 3Com to the holders of 3Com's common stock. Shares of our common stock distributed to 3Com stockholders in the distribution generally will be freely transferable, except for shares of common stock received by persons who may be deemed to be affiliates. Persons who are affiliates will be permitted to sell the shares of common stock that are issued in this offering or that they receive in the distribution only through registration under the Securities Act, or under an exemption from registration, such as the one provided by Rule 144. The shares of our common stock held by 3Com before distribution and the shares of our common stock purchased in the America Online, Motorola and Nokia private placements are deemed "restricted securities" as defined in Rule 144, and may not be sold other than through registration under the Securities Act or under an exemption from registration, such as the one provided by Rule 144. 3Com, our directors and officers and we have agreed not to offer or sell any shares of our common stock, subject to exceptions, for a period of 180 days after the date of this prospectus, without the prior written consent of the underwriters. America Online, Motorola and Nokia have agreed with Palm not to dispose of or hedge any of their common stock during the period from the date of this prospectus continuing through the date 180 days after the date of this prospectus. We will grant shares of our common stock pursuant to the 1999 Stock Plan subject to restrictions. See "Management--Incentive Plans--1999 Stock Plan." We currently expect to file a registration statement under the Securities Act to register shares reserved for issuance under the 1999 Stock Plan and 1999 Employee Stock Purchase Plan. Shares issued pursuant to awards after the effective date of the registration statement, other than shares issued to affiliates, generally will be freely tradable without further registration under the Securities Act. Shares issued pursuant to any vested and exercisable options of 3Com converted into our options will also be freely tradable without registration under the Securities Act after the effective date of the registration statement. See "Management--Treatment of 3Com Options." VALIDITY OF COMMON STOCK The validity of the common stock offered hereby and other legal matters will be passed upon for us by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California. The validity of the common stock offered hereby will be passed upon for the underwriters by Sullivan & Cromwell, Los Angeles, California. EXPERTS The consolidated financial statements as of May 31, 1998 and May 28, 1999 and for each of the three years in the period ended May 28, 1999 included in this prospectus and the related financial statement schedule included elsewhere in the registration statement have been audited by Deloitte & Touche LLP, independent auditors, as stated in their reports appearing herein and elsewhere in the registration statement, and are included in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing. 81 WHERE YOU CAN FIND MORE INFORMATION We have filed with the Securities and Exchange Commission, Washington, D.C. 20549, a registration statement on Form S-1 under the Securities Act with respect to the common stock offered hereby. This prospectus does not contain all of the information set forth in the registration statement and the exhibits and schedules to the registration statement. Some items are omitted in accordance with the rules and regulations of the SEC. For further information about Palm and its common stock, reference is made to the registration statement and the exhibits and any schedules to the registration statement. Statements contained in this prospectus as to the contents of any contract or other document referred to are not necessarily complete and in each instance, if the contract or document is filed as an exhibit, reference is made to the copy of the contract or other documents filed as an exhibit to the registration statement, each statement being qualified in all respects by such reference. A copy of the registration statement, including the exhibits and schedules to the registration statement, may be read and copied at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1- 800-SEC-0330. In addition, the SEC maintains an Internet site at http://www.sec.gov, from which interested persons can electronically access the registration statement, including the exhibits and any schedules to the registration statement. As a result of this offering, we will become subject to the full informational requirements of the Securities Exchange Act of 1934, as amended. We will fulfill our obligations with respect to those requirements by filing periodic reports and other information with the SEC. We intend to furnish our stockholders with annual reports containing consolidated financial statements certified by an independent public accounting firm. We also maintain Internet sites at http://www.palm.net and http://www.palm.com. Our websites and the information contained therein or connected thereto shall not be deemed to be incorporated into this prospectus or the registration statement of which it forms a part. 82 PALM, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ---- Audited Consolidated Financial Statements: Independent Auditors' Report............................................ F-2 Consolidated Balance Sheets at May 31, 1998, May 28, 1999, and August 27, 1999 (unaudited)................................................... F-3 Consolidated Statements of Operations for the Years Ended May 25, 1997, May 31, 1998, May 28, 1999 and Three Months Ended August 28, 1998 and August 27, 1999 (unaudited)............................................ F-4 Consolidated Statements of Stockholder's Net Investment for the Years Ended May 25, 1997, May 31, 1998, May 28, 1999 and Three Months ended August 27, 1999 (unaudited)............................................ F-5 Consolidated Statements of Cash Flows for the Years Ended May 25, 1997, May 31, 1998, May 28, 1999 and Three Months Ended August 28, 1998 and August 27, 1999 (unaudited)............................................ F-6 Notes to Consolidated Financial Statements.............................. F-7
F-1 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholder of Palm, Inc.: We have audited the consolidated balance sheets of Palm, Inc. and its subsidiary ("Palm" or "the Company") as of May 31, 1998 and May 28, 1999, and the related consolidated statements of operations, stockholder's net investment, and cash flows for each of the three years in the period ended May 28, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Palm, Inc. and its subsidiary at May 31, 1998 and May 28, 1999, and the results of their operations and their cash flows for each of the three years in the period ended May 28, 1999 in conformity with generally accepted accounting principles. San Jose, California November 29, 1999 (November 30, 1999 as to the first paragraph and , 2000 as to the second paragraph of Note 15) --------------- The accompanying consolidated financial statements included herein reflect the reincorporation of the Company in Delaware and prior to the initial public offering will reflect a stock split of Palm's common stock as described in Note 15 to the consolidated financial statements. The above opinion is in the form that will be signed by Deloitte & Touche LLP upon the effectiveness of such events assuming that from November 29, 1999 to the effective date of such events, no other events shall have occurred that would affect the accompanying consolidated financial statements or notes thereto. DELOITTE & TOUCHE LLP San Jose, California November 29, 1999 F-2 PALM, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except par and share amounts)
Pro Forma May 31, May 28, August 27, August 27, 1998 1999 1999 1999 -------- -------- ----------- ----------- (Unaudited) (Unaudited) ASSETS Current assets: Cash and cash equivalents......... $ -- $ 478 $ 37,138 $ Accounts receivable, net of allowance for doubtful accounts of $4,451, $3,817 and $3,287..... 80,985 95,839 86,216 Inventories....................... 13,769 12,186 31,230 Deferred income taxes............. 8,092 20,688 23,412 Prepaids and other................ 192 1,038 1,129 -------- -------- -------- ---- Total current assets............ 103,038 130,229 179,125 Property and equipment, net......... 9,121 8,136 9,160 Goodwill, intangibles and other assets............................. 175 13,829 13,009 Deferred income taxes............... 3,025 53 52 -------- -------- -------- ---- Total assets.................. $115,359 $152,247 $201,346 $ ======== ======== ======== ==== LIABILITIES AND STOCKHOLDER'S NET INVESTMENT Current liabilities: Accounts payable.................. $ 15,792 $ 35,577 $ 51,095 $ Payable to 3Com Corporation....... -- -- -- Other accrued liabilities......... 18,275 40,793 35,838 Notes payable..................... -- 1,350 1,118 -------- -------- -------- ---- Total current liabilities....... 34,067 77,720 88,051 -------- -------- -------- ---- Commitments and contingencies (Notes 7 and 13) Stockholder's net investment: Preferred stock, par value, shares authorized pro forma; none outstanding pro forma............................ -- -- -- -- Common stock, par value, shares authorized pro forma; shares outstanding pro forma............ -- -- -- -- 3Com Corporation equity........... 81,292 74,660 113,413 Accumulated other comprehensive income (loss).................... -- (133) (118) -------- -------- -------- ---- Total stockholder's net investment..................... 81,292 74,527 113,295 -------- -------- -------- ---- Total liabilities and stockholder's net investment................... $115,359 $152,247 $201,346 $ ======== ======== ======== ====
See notes to consolidated financial statements. F-3 PALM, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts)
Years Ended Three Months Ended ---------------------------- --------------------- May 25, May 31, May 28, August 28, August 27, 1997 1998 1999 1998 1999 -------- -------- -------- ---------- ---------- (Unaudited) Revenues.................. $114,157 $272,137 $563,525 $116,069 $176,505 Cost of revenues.......... 77,685 157,749 315,616 62,998 98,324 -------- -------- -------- -------- -------- Gross profit............ 36,472 114,388 247,909 53,071 78,181 -------- -------- -------- -------- -------- Operating expenses: Sales and marketing..... 30,305 70,765 127,726 23,969 42,648 Research and development............ 13,442 21,863 46,027 9,738 12,507 General and administrative......... 6,238 15,299 23,692 6,233 7,160 Purchased in-process technology............. -- -- 2,125 -- -- -------- -------- -------- -------- -------- Total operating expenses............. 49,985 107,927 199,570 39,940 62,315 -------- -------- -------- -------- -------- Operating income (loss)... (13,513) 6,461 48,339 13,131 15,866 Interest and other expense, net............. (515) (56) (223) (25) (63) -------- -------- -------- -------- -------- Income (loss) before income taxes............. (14,028) 6,405 48,116 13,106 15,803 Income tax provision (credit)................. (6,166) 2,234 18,488 5,036 6,145 -------- -------- -------- -------- -------- Net income (loss)......... $ (7,862) $ 4,171 $ 29,628 $ 8,070 $ 9,658 ======== ======== ======== ======== ======== Unaudited pro forma net income per share: Basic................... $ $ ======== ======== Diluted................. $ $ ======== ======== Shares used in computing unaudited pro forma net income per share amounts: Basic................... ======== ======== Diluted................. ======== ======== Supplemental unaudited pro forma net income per share: Basic................... $ $ ======== ======== Diluted................. $ $ ======== ======== Shares used in computing supplemental unaudited pro forma net income per share amounts: Basic................... ======== ======== Diluted................. ======== ========
See notes to consolidated financial statements. F-4 PALM, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDER'S NET INVESTMENT (In thousands)
Accumulated 3Com Other Corporation Comprehensive Equity Income (Loss) Total ----------- ------------- -------- Balances, May 27, 1996...................... $ 7,218 $ -- $ 7,218 Net loss.................................... (7,862) -- (7,862) Net transfers from 3Com Corporation......... 36,301 -- 36,301 -------- ----- -------- Balances, May 25, 1997...................... 35,657 -- 35,657 Net income.................................. 4,171 -- 4,171 Net transfers from 3Com Corporation......... 41,464 -- 41,464 -------- ----- -------- Balances, May 31, 1998...................... 81,292 -- 81,292 Components of comprehensive income: Net income................................ 29,628 -- 29,628 Accumulated translation adjustments....... -- (133) (133) -------- Total comprehensive income.............. 29,495 Net transfers to 3Com Corporation........... (36,260) -- (36,260) -------- ----- -------- Balances, May 28, 1999...................... 74,660 (133) 74,527 Components of comprehensive income: Net income*............................... 9,658 -- 9,658 Accumulated translation adjustments*...... -- 15 15 -------- Total comprehensive income*............. 9,673 Net transfers from 3Com Corporation*........ 29,095 -- 29,095 -------- ----- -------- Balances, August 27, 1999*.................. $113,413 $(118) $113,295 ======== ===== ========
- -------- * Unaudited See notes to consolidated financial statements. F-5 PALM, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Years Ended Three Months Ended ---------------------------- --------------------- May 25, May 31, May 28, August 28, August 27, 1997 1998 1999 1998 1999 -------- -------- -------- ---------- ---------- (Unaudited) Cash flows from operating activities: Net income (loss)......... $ (7,862) $ 4,171 $ 29,628 $ 8,070 $ 9,658 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization............ 685 2,029 4,565 615 2,085 Loss on disposal of property and equipment.. 36 145 2,567 889 -- Deferred income taxes.... (3,344) (5,361) (8,880) (2,406) (2,723) Purchased in-process technology.............. -- -- 2,125 -- -- Changes in assets and liabilities: Accounts receivable..... (18,842) (56,783) (13,307) (5,862) 9,623 Inventories............. (13,269) (397) 1,650 5,072 (19,044) Prepaids and other...... (142) (176) (805) (378) (91) Accounts payable........ 4,710 10,874 19,437 (5,864) 15,518 Other accrued liabilities............ 3,217 12,854 22,133 1,784 (4,955) -------- -------- -------- ------- -------- Net cash provided by (used in) operating activities............ (34,811) (32,644) 59,113 1,920 10,071 -------- -------- -------- ------- -------- Cash flows from investing activities: Purchases of property and equipment................ (2,543) (8,833) (5,347) (1,284) (2,289) Business acquired in purchase transaction, net of cash acquired......... -- -- (16,831) -- -- Other, net................ 27 -- 97 -- -- -------- -------- -------- ------- -------- Net cash used in investing activities.. (2,516) (8,833) (22,081) (1,284) (2,289) -------- -------- -------- ------- -------- Cash flows from financing activities: Net transfers (to) from 3Com Corporation......... 36,301 41,464 (36,260) (636) 29,095 Other, net................ -- 13 (294) -- (217) -------- -------- -------- ------- -------- Net cash provided by (used in) financing activities............ 36,301 41,477 (36,554) (636) 28,878 -------- -------- -------- ------- -------- Change in cash and equivalents............... (1,026) -- 478 -- 36,660 Cash and equivalents, beginning of period....... 1,026 -- -- -- 478 -------- -------- -------- ------- -------- Cash and equivalents, end of period................. $ -- $ -- $ 478 $ -- $ 37,138 ======== ======== ======== ======= ======== Other cash flow information: Interest paid............. $ -- $ -- $ 10 $ -- $ 9 ======== ======== ======== ======= ======== Notes payable assumed in purchase transaction..... $ -- $ -- $ 1,481 $ -- $ -- ======== ======== ======== ======= ========
See notes to consolidated financial statements. F-6 PALM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended May 25, 1997, May 31, 1998 and May 28, 1999 and Three Months Ended August 28, 1998 and August 27, 1999 1. Background and Basis of Presentation On September 13, 1999, 3Com Corporation ("3Com") announced its plan to create an independent publicly-traded company, Palm, Inc. ("Palm" or "the Company"), comprised of 3Com's handheld computing business. After completion of Palm's initial public offering, 3Com will own at least 80.1% of Palm's outstanding common stock. 3Com currently intends, subject to the satisfactory resolution of certain conditions, to distribute all of the shares of Palm's common stock that 3Com owns to 3Com's stockholders approximately six months ("the distribution date") after Palm's initial public offering. Palm develops, markets and sells a family of handheld computing device products, licenses the Palm operating system to other device and information appliance manufacturers and offers a wireless Internet access service. Palm Computing, Inc. was originally incorporated in California in 1992 and was acquired by U.S. Robotics Corporation (USR) in a pooling of interests transaction in September 1995. Subsequent to 3Com's acquisition of USR in a pooling of interests transaction in June 1997, Palm Computing, Inc. became a wholly-owned subsidiary of 3Com. The accompanying consolidated financial statements report the operations that comprised the handheld computing business of 3Com, including Palm Computing, Inc. 3Com and Palm have entered into a Master Separation and Distribution Agreement (see Note 14 to the consolidated financial statements). In accordance with our separation agreement, 3Com will transfer to us the 3Com-owned assets and liabilities which relate to our business prior to the date of our separation from 3Com ("the separation date"), except for most of our accounts receivable and accounts payable. The consolidated financial statements of Palm reflect the historical results of operations and cash flows of the handheld computing business of 3Com during each respective period. The consolidated financial statements have been prepared using 3Com's historical bases in the assets and liabilities and the historical results of operations of Palm. Changes in stockholder's net investment represent 3Com's transfer of its net investment in Palm, after giving effect to the net income (loss) of Palm plus net cash transfers and other transfers to and from 3Com. The consolidated financial statements include allocations of certain 3Com expenses, including centralized legal, accounting, treasury, real estate, information technology, distribution, customer service, sales, marketing, engineering, and other 3Com corporate services and infrastructure costs. The expense allocations have been determined on the bases that 3Com and Palm considered to be reasonable reflections of the utilization of services provided or the benefit received by Palm. However, the financial information included herein may not reflect the consolidated financial position, operating results, changes in stockholder's net investment and cash flows of Palm in the future or what they would have been had Palm been a separate, stand-alone entity during the periods presented. 2. Significant Accounting Policies Fiscal Year Prior to June 1, 1998, our 52-53 week fiscal year ended on the Sunday nearest to May 31. Effective June 1, 1998, we changed our fiscal year to a 52-53 week fiscal year ending on the Friday F-7 PALM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended May 25, 1997, May 31, 1998 and May 28, 1999 and Three Months Ended August 28, 1998 and August 27, 1999 nearest to May 31. These changes did not have a significant effect on our consolidated financial statements. Fiscal 1997, 1998 and 1999 contained 52 weeks, whereas fiscal 2000 will contain 53 weeks. For fiscal 2000, the first three quarters will contain 13 weeks, whereas the fourth quarter will contain 14 weeks. Use of Estimates in the Preparation of Consolidated Financial Statements The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates. Interim Financial Information The financial information as of August 27, 1999 and for the three months ended August 28, 1998 and August 27, 1999 is unaudited and includes all adjustments, consisting only of normal and recurring accruals, that management considers necessary for a fair presentation of its consolidated financial position, operating results and cash flows. Results for the three months ended August 27, 1999 are not necessarily indicative of results to be expected for the full fiscal year 2000 or for any future period. Principles of Consolidation The consolidated financial statements include the accounts of Palm and its subsidiary. All significant intercompany balances and transactions are eliminated in consolidation. Cash and Cash Equivalents Cash equivalents are highly liquid debt investments acquired with a remaining maturity of three months or less. Historically, 3Com has managed cash and cash equivalents on a centralized basis. Cash receipts associated with Palm's business have been transferred to 3Com on a periodic basis and 3Com has funded Palm's disbursements. Concentration of Credit Risk Financial instruments which potentially subject Palm to concentrations of credit risk consist principally of accounts receivable. Palm sells the majority of its products through distributors, retailers and resellers. Credit risk with respect to accounts receivable is generally diversified due to the number of entities comprising Palm's customer base and their dispersion across different geographies. Palm generally sells on open account and performs periodic credit evaluations of its customers' financial condition. F-8 PALM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended May 25, 1997, May 31, 1998 and May 28, 1999 and Three Months Ended August 28, 1998 and August 27, 1999 The following individual customers accounted for 10% or more of total revenue:
Years Ended Three Months Ended ----------------------- --------------------- May 25, May 31, May 28, August 28, August 27, 1997 1998 1999 1998 1999 ------- ------- ------- ---------- ---------- (Unaudited) Company A......................... 28% 22% 24% 23% 35% Company B......................... -- -- 14% 12% -- Company C......................... 11% -- -- -- --
The following individual customers accounted for 10% or more of total accounts receivable:
May 31, May 28, August 27, 1998 1999 1999 ------- ------- ----------- (Unaudited) Company A........................................... 28% 24% 37% Company B........................................... -- 17% -- Company C........................................... -- -- --
Inventories Inventories are stated at the lower of standard cost (which approximates first-in, first-out cost) or market. Property and Equipment Property and equipment are stated at cost. Depreciation and amortization are computed over the shorter of the estimated useful lives, lease or license terms on a straight-line basis--generally three to five years. Long-Lived Assets Palm evaluates the carrying value of long-lived assets, including goodwill, whenever events or changes in circumstances indicate that the carrying value of the asset may be impaired. An impairment loss is recognized when estimated future cash flows expected to result from the use of the asset, including disposition, is less than the carrying value of the asset. Purchased technology and goodwill are included in other assets and are amortized over their estimated useful lives, generally two to six years. Software Development Costs Costs for the development of new software and substantial enhancements to existing software are expensed as incurred until technological feasibility has been established, at which time any additional development costs would be capitalized in accordance with Statement of Financial Accounting Standards (SFAS) No. 86, Computer Software To Be Sold, Leased, or Otherwise Marketed. We believe our current process for developing software is essentially completed concurrently with the establishment of technological feasibility; accordingly, no costs have been capitalized to date. F-9 PALM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended May 25, 1997, May 31, 1998 and May 28, 1999 and Three Months Ended August 28, 1998 and August 27, 1999 3Com Corporation Equity 3Com Corporation equity represents 3Com's net investment in and advances to Palm. No intercompany interest income or expense has been allocated to, or included in, the accompanying financial statements. Revenue Recognition Revenue is recognized when earned. Revenue from product sales is recorded when related products are shipped, risk of loss has passed to the customer and collection of the resulting receivable is deemed probable. In fiscal 1997, 1998 and 1999 and for the three months ended August 28, 1998 and August 27, 1999 (unaudited), product sales accounted for substantially all of our revenue. Revenues from software license agreements are recognized on a per-unit royalty basis or as specified in the agreement in accordance with applicable accounting guidance, including American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) 97-2, Software Revenue Recognition, and SOP 98-9, Modification of SOP 97-2, with Respect to Certain Transactions. Related maintenance and support revenue is recognized ratably over the term of the agreement. Revenue from subscriptions to our wireless Internet access service is recognized over the service period. Provisions are recorded at the time of sale for estimated product returns, warranty, royalties and post-contract support obligations. Provisions for price protection are recorded at the time a price reduction decision is made. Palm provides a 12-month limited warranty for its products. Advertising Advertising costs are expensed as incurred. Cooperative advertising and marketing development obligations for channel customers are expensed at the time the related revenue is recognized. Income Taxes Palm's operating results historically have been included in 3Com's consolidated U.S. and state income tax returns and in tax returns of certain 3Com foreign subsidiaries. The provision for income taxes in Palm's consolidated financial statements has been determined on a separate-return basis. Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts. Foreign Currency Translation The majority of Palm's revenue is denominated in U.S. dollars. For foreign operations with the local currency as the functional currency, assets and liabilities are translated at year-end exchange rates, and statements of operations are translated at the average exchange rates during the year. Gains or losses resulting from foreign currency translation are included as a component of other comprehensive income (loss). For Palm entities with the U.S. dollar as the functional currency, foreign currency denominated assets and liabilities are translated at the year-end exchange rates except for inventories, prepaid F-10 PALM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended May 25, 1997, May 31, 1998 and May 28, 1999 and Three Months Ended August 28, 1998 and August 27, 1999 expenses, and property and equipment, which are translated at historical exchange rates. Gains or losses resulting from foreign currency translation are included in interest and other expense, net in the consolidated statements of operations and were not significant for any period presented. Stock-Based Compensation Palm accounts for employee stock plans under the intrinsic value method prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. Earnings Per Share Historical Earnings Per Share The historical capital structure of Palm Computing, Inc. is not representative of the future capital structure of Palm. In addition, the accompanying consolidated financial statements report the operations that comprised the 3Com handheld computing business, which included operations in addition to Palm Computing, Inc. and its subsidiary. Accordingly, the historical net income (loss) per share and weighted average number of common shares outstanding are not shown for any of the periods presented. Unaudited Pro Forma Net Income Per Share All of the outstanding Palm common stock is owned by 3Com. As discussed in Note 15 to the consolidated financial statements, Palm effected a stock split resulting in common shares outstanding prior to the initial public offering. Unaudited pro forma basic net income per share amounts are computed by dividing the net income for the period by the pro forma common shares outstanding of shares after giving effect to such stock split. Unaudited pro forma diluted net income per share amounts are computed by also including the estimated effect of dilutive stock options, which totaled shares for the year ended May 28, 1999 and shares for the three months ended August 27, 1999. The effect of dilutive stock options was computed using the treasury stock method assuming an initial public offering price of $ per share. The estimated number of dilutive stock options assumes that all of the outstanding 3Com stock options held by Palm employees are converted into Palm stock options. The actual number of 3Com stock options to be converted into Palm stock options will not be determined until the individual employee options are converted into Palm stock options at the distribution date. See Note 8 to the consolidated financial statements for a description of how 3Com stock options will be converted into Palm stock options. Supplemental Unaudited Pro Forma Net Income Per Share As discussed in Note 15 to the consolidated financial statements, Palm declared a dividend equal to 3Com's tax basis in Palm in the amount of $ million and intends to pay such dividend to 3Com using a portion of the proceeds from the initial public offering. Supplemental unaudited pro forma basic net income per share amounts include the effect of such dividend and are calculated using pro forma common shares outstanding of shares plus the shares of common stock whose proceeds will be used to pay the dividend, assuming an initial public offering price of $ per share, reduced by estimated per share offering costs. Supplemental unaudited pro forma diluted net income per share has been computed by also including the estimated dilutive effect of stock options. F-11 PALM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended May 25, 1997, May 31, 1998 and May 28, 1999 and Three Months Ended August 28, 1998 and August 27, 1999 Unaudited Pro Forma Balance Sheet The unaudited pro forma balance sheet as of August 27, 1999 gives retroactive effect to the dividend discussed in Note 15 to the consolidated financial statements, as though it had been declared as of that date. The unaudited pro forma balance sheet also gives effect to the authorizations of preferred and common stock and the stock split to increase the outstanding amount of our common stock as discussed in Note 15, the reclassification of approximately $49 million from 3Com Corporation equity to an intercompany payable to 3Com at August 27, 1999 which we intend to repay using a portion of the proceeds from the initial public offering, as well as the retention of most of our accounts receivable and accounts payable by 3Com at the time of our separation, as described in Note 14 to the consolidated financial statements, as though such retention had occurred as of August 27, 1999. Comprehensive Income (Loss) On June 1, 1998, we adopted SFAS No. 130, "Reporting Comprehensive Income," which establishes standards for reporting and displaying comprehensive income. Accumulated other comprehensive income (loss) presented in the accompanying consolidated balance sheets consists of accumulated foreign translation adjustments. Effects of Recent Accounting Pronouncements In June 1998 and June 1999, the Financial Accounting Standards Board (FASB) issued SFAS 133, Accounting for Derivative Instruments and Hedging Activities and SFAS 137, Accounting for Derivative Instruments and Hedging Activities- Deferral of the Effective Date of FASB Statement No. 133. These statements require companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. SFAS 133 will be effective for Palm's fiscal year ending May 31, 2002. We believe that the adoption of these statements will not have a significant impact on our financial results. In March 1998, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position ("SOP") No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. SOP No. 98-1 requires that entities capitalize certain costs related to internal-use software once certain criteria have been met. We adopted SOP 98-1 in the first quarter of fiscal 2000. The adoption of this statement did not have a significant impact on our financial results. 3. Business Combination The acquisition of Smartcode Technologie SARL ("Smartcode") on February 8, 1999 was accounted for as a purchase, and the consolidated statements of operations include the operating results of the acquired company from the acquisition date. Acquired assets and liabilities were recorded at their estimated fair values at the date of acquisition, and the aggregate purchase price plus costs directly attributable to the completion of the acquisition have been allocated to the assets and liabilities acquired. No significant adjustments were required to conform the accounting policies of the acquired company. Palm acquired Smartcode for an aggregate purchase price of $17.4 million in cash including $200,000 of costs directly attributable to the completion of the acquisition. Approximately $2.1 million of F-12 PALM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended May 25, 1997, May 31, 1998 and May 28, 1999 and Three Months Ended August 28, 1998 and August 27, 1999 the total purchase price represented purchased in-process technology that had not yet reached technological feasibility, had no alternative future use and was charged to operations in the third quarter of fiscal 1999. This purchase resulted in approximately $14.4 million of goodwill and other intangible assets that are being amortized over their estimated useful lives. Smartcode was a provider of wireless data communications and Internet access software technology and is based in France. Unaudited pro forma statement of operations information has not been presented because the effect of this acquisition was not material. 4. Inventories Inventories consist of the following (in thousands):
May 31, May 28, August 27, 1998 1999 1999 ------- ------- ----------- (Unaudited) Finished goods...................................... $ 8,809 $ 5,900 $22,439 Work in process..................................... 1,089 4,011 8,651 Purchased components................................ 3,871 2,275 140 ------- ------- ------- Total............................................. $13,769 $12,186 $31,230 ======= ======= =======
5. Property and Equipment, Net Property and equipment, net consists of the following (in thousands):
May 31, May 28, August 27, 1998 1999 1999 ------- ------- ----------- (Unaudited) Equipment......................................... $ 7,945 $11,971 $13,995 Leasehold improvements............................ 4,372 1,398 1,576 Furniture and fixtures............................ 60 685 786 ------- ------- ------- Total........................................... 12,377 14,054 16,357 Accumulated depreciation and amortization......... (3,256) (5,918) (7,197) ------- ------- ------- Property and equipment, net..................... $ 9,121 $ 8,136 $ 9,160 ======= ======= =======
6. Other Accrued Liabilities Other accrued liabilities consist of the following (in thousands):
May 31, May 28, August 27, 1998 1999 1999 ------- ------- ----------- (Unaudited) Accrued payroll and related expenses.............. $ 3,217 $ 4,871 $ 5,097 Accrued product warranty.......................... 4,112 11,329 12,097 Accrued cooperative advertising and marketing development expenses............................. 3,403 7,195 6,881 Accrued price protection.......................... 224 6,994 1,642 Deferred revenue.................................. 3,845 948 1,918 Other............................................. 3,474 9,456 8,203 ------- ------- ------- Other accrued liabilities....................... $18,275 $40,793 $35,838 ======= ======= =======
F-13 PALM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended May 25, 1997, May 31, 1998 and May 28, 1999 and Three Months Ended August 28, 1998 and August 27, 1999 7. Borrowing Arrangements and Commitments Certain of our facilities are leased from third parties under operating leases. Leases expire at various dates from November 1999 through May 2005, and certain facility leases have renewal options with rentals based upon changes in the Consumer Price Index or the fair market rental value of the property. At the separation date, Palm intends to lease certain facilities from 3Com for up to 29 months with annual increases of approximately 3%. See Note 14 to the consolidated financial statements for further discussion of the Real Estate Matters Agreement between Palm and 3Com. Future operating lease commitments are as follows (in thousands):
Third Fiscal Year Parties 3Com ----------- ------- ------- 2000...................................................... $ 820 $ 2,170 2001...................................................... 856 9,532 2002...................................................... 775 10,596 2003...................................................... 794 1,804 2004...................................................... 813 -- Thereafter................................................ 509 -- ------ ------- Total................................................... $4,567 $24,102 ====== =======
Rent expense was $2.7 million, $2.3 million, and $3.0 million for fiscal 1997, 1998 and 1999. As of May 28, 1999, Palm had $1.4 million of debt acquired in the Smartcode acquisition, and the interest rate on these obligations ranged from approximately 6% to 9%. These obligations were repaid during the second quarter of fiscal 2000. On November 27, 1999, 3Com sold to a third party the manufacturing plant that produces the majority of Palm's products. Concurrently, Palm entered into a two-year supply agreement with the buyer of the manufacturing plant which commits Palm to purchase a minimum of 450,000 units of Palm products per quarter. Any overage in purchase of products of no more than 20% that occurs during any quarter may be credited towards the subsequent quarterly period commitment. Any deficit in purchase of products of no more than 20% in any quarter may be made up in the next quarter to the extent there is not a deficit in such subsequent quarter. Failure by Palm to meet the minimum commitment is subject to a 90-day notice and cure period. In addition, any failure of the manufacturer to make the minimum commitment available to Palm in accordance with Palm's orders in any quarter relieves Palm of its obligation to reach its minimum commitment in such quarter to the extent of the manufacturer's shortfall. Palm purchases product components from a vendor with which 3Com has agreed to certain minimum purchase goals over a five-year period. 3Com's agreement with the vendor provides for an incremental payment to be made to the vendor by 3Com for any calendar year in which the minimum purchase goal is not met. In connection with their separation, 3Com and Palm have agreed that Palm will assume responsibility for 25% of the minimum purchase goal and 3Com will retain responsibility for the remainder. In the event that Palm does not purchase its share of the minimum annual purchase goal from the vendor in any of the five calendar years, Palm will make an incremental payment to 3Com for the applicable calendar year. In the event that Palm purchases none of its F-14 PALM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended May 25, 1997, May 31, 1998 and May 28, 1999 and Three Months Ended August 28, 1998 and August 27, 1999 share of the minimum annual purchase goal in each year, it would be required to make payments up to a maximum of the following payments: $1.3 million for 1999, $1.9 million for 2000, $2.8 million for 2001, $3.7 million for 2002 and $4.9 million for 2003. The aggregate of such incremental payments in no event will exceed $14.6 million. 8. Employee Stock Plans Employee Stock Purchase Plan Under the 3Com employee stock purchase plan, eligible Palm employees have generally been able to contribute up to 10% of their compensation, as defined, to the purchase of shares of 3Com's common stock at a price of 85% of the lower of the fair market value as of the beginning or the end of the offering period. Effective on or before the initial public offering of Palm common stock, Palm intends to sponsor an employee stock purchase plan which is comparable to the 3Com plan. Employee Stock Option Plans 3Com has stock option plans under which Palm employees and directors may be granted options to purchase common stock. Options are generally granted at not less than the fair market value at grant date, vest over a two- to five-year period and expire five to ten years after the grant date. Prior to the distribution date, Palm intends to establish a stock option plan for eligible Palm employees. 3Com options held by Palm employees are expected to be converted into Palm stock options at the distribution date. The number of shares and the exercise price of the 3Com options that convert into Palm options will be adjusted using a conversion formula. The conversion of 3Com options into Palm options will be done in such a manner that (1) the aggregate intrinsic value of the options immediately before and after the exchange are the same, (2) the ratio of the exercise price per option to the market value per share is not reduced, and (3) the vesting provisions and option period of the replacement Palm options are the same as the original vesting terms and option period of the 3Com options. It is currently unknown how many 3Com options held by Palm employees will be converted into Palm options. Restricted Stock Plan 3Com has a restricted stock plan, under which shares of common stock are reserved for issuance at no cost to key employees. Compensation expense, equal to the fair market value on the date of the grant, is recognized as the granted shares vest over a one- to four-year period. Certain Palm employees participate in the 3Com restricted stock plan and the unvested portion of their grants will be forfeited at the distribution date. Each Palm employee who forfeits 3Com restricted stock will receive Palm restricted stock. Director Stock Plan 3Com has a director stock plan, under which shares of common stock are issued to members of its Board of Directors at an exercise price equal to the fair market value on the date of grant and have historically vested over 24-month increments. Grants made after July 21, 1999 were fully vested at the grant date. Effective on or before the initial public offering of Palm common stock, Palm also intends to F-15 PALM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended May 25, 1997, May 31, 1998 and May 28, 1999 and Three Months Ended August 28, 1998 and August 27, 1999 sponsor a director option plan. For 3Com board members who resign from the 3Com board and join the Palm Board of Directors, their unvested 3Com options will expire 90 days after resignation. Accounting for Stock-Based Compensation As permitted under SFAS 123, Palm has elected to follow APB 25 and related interpretations in accounting for stock-based awards to employees. Under APB 25, Palm generally recognizes no compensation expense with respect to such awards. Pro forma information regarding net income (loss) and earnings per share is required by SFAS 123. This information is required to be determined as if Palm had accounted for stock-based awards to its employees, including employee stock options and shares issued under the Employee Stock Purchase Plan, collectively called "options", granted subsequent to May 31, 1995 under the fair value method of that Statement. The fair value of the options granted in fiscal 1997, 1998 and 1999 reported below has been estimated at the date of grant using the Black-Scholes option pricing model with the following assumptions:
Employee Stock Employee Stock Option Plans Purchase Plan ---------------- ---------------- 1997 1998 1999 1997 1998 1999 ---- ---- ---- ---- ---- ---- Risk-free interest rate..................... 6.1% 5.5% 5.3% 5.4% 5.5% 4.9% Volatility.................................. 54.0% 56.0% 62.0% 54.0% 56.0% 62.0% Dividend yield.............................. 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
As of May 25, 1997, the expected life of options under the Employee Stock Option Plan was estimated at approximately one year after the vesting date for directors and nondirectors. As of May 31, 1998, the expected lives of options under the Employee Stock Option Plan were estimated at approximately three years after the vesting date for directors and approximately one year after the vesting date for nondirectors. As of May 28, 1999, the expected lives of options under the Employee Stock Option Plan were estimated at three and one- half years after the vesting date for directors and approximately two years after the vesting date for nondirectors. As of May 25, 1997, May 31, 1998 and May 28, 1999, the expected life of options under the Employee Stock Purchase Plan was estimated at six months. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. The weighted average estimated fair value of 3Com employee stock options granted during fiscal 1997, 1998 and 1999 was $22.61, $13.30 and $15.53 per share, respectively. The weighted average estimated fair value of shares granted under the Employee Stock Purchase Plan during fiscal 1997, 1998 and 1999 was $11.24, $12.47 and $9.02 per share, respectively. Because 3Com options held by Palm employees and directors have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in the opinion of management, the existing models do not necessarily provide a reliable single measure of the fair value of these options. F-16 PALM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended May 25, 1997, May 31, 1998 and May 28, 1999 and Three Months Ended August 28, 1998 and August 27, 1999 For purposes of pro forma disclosures under SFAS 123, the estimated fair value of the options is assumed to be amortized to expense over the options' vesting period. Pro forma information related to the 3Com options held by Palm employees and directors follows (in thousands, except per share amounts):
Years Ended --------------------------- May 25, May 31, May 28, 1997 1998 1999 -------- -------- ------- Net income (loss): As reported...................................... $ (7,862) $ 4,171 $29,628 Pro forma........................................ $(22,162) $(10,235) $15,664 Net income (loss) per share: As reported...................................... $ $ $ Pro forma........................................ $ $ $ As reported--diluted............................. $ $ $ Pro forma--diluted............................... $ $ $
The effects on pro forma disclosures of applying SFAS 123 are not likely to be representative of the effects on pro forma disclosures of future years. Because SFAS 123 is applicable only to options granted subsequent to May 31, 1995, the full effect on pro forma net income and earnings per share was not reflected for periods prior to fiscal 1999. 9. Financial Instruments The following summary disclosures are made in accordance with the provisions of SFAS No. 107, Disclosures About Fair Value of Financial Instruments, which requires the disclosure of fair value information about both on- and off- balance sheet financial instruments where it is practicable to estimate the value. Fair value is defined in SFAS 107 as the amount at which an instrument could be exchanged in a current transaction between willing parties, rather than in a forced or liquidation sale, which is not Palm's intent. Because SFAS 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements, any aggregation of the fair value amounts presented would not represent the underlying value to Palm. Financial instruments consist of cash and cash equivalents and notes payable. The estimated fair value of cash and cash equivalents as of May 28, 1999 and August 27, 1999 (unaudited) approximates the carrying amount. The difference between the fair value of the notes payable and their carrying value is not significant based on current market rates. F-17 PALM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended May 25, 1997, May 31, 1998 and May 28, 1999 and Three Months Ended August 28, 1998 and August 27, 1999 10. Income Taxes The provision (credit) for income taxes consists of (in thousands):
Years Ended ------------------------- May 25, May 31, May 28, 1997 1998 1999 ------- ------- ------- Current: Federal............................................ $(2,125) $ 6,421 $22,938 State.............................................. (697) 1,173 5,174 ------- ------- ------- Total current.................................... (2,822) 7,594 28,112 ------- ------- ------- Deferred: Federal............................................ (2,679) (4,526) (7,825) State.............................................. (665) (834) (1,799) ------- ------- ------- Total deferred................................... (3,344) (5,360) (9,624) ------- ------- ------- Total................................................ $(6,166) $ 2,234 $18,488 ======= ======= =======
The components of net deferred tax assets consist of (in thousands):
May 31, May 28, 1998 1999 ------- ------- Deferred tax assets: Reserves not recognized for tax purposes..................... $ 7,828 $18,352 Tax credit carryforwards..................................... 2,966 2,024 Other........................................................ 323 365 ------- ------- Deferred tax assets........................................ $11,117 $20,741 ======= =======
The provision (credit) for income taxes differs from the amount computed by applying the federal statutory income tax rate to income (loss) before income taxes as follows:
Years Ended ------------------------ May 25, May 31, May 28, 1997 1998 1999 ------- ------- ------- Tax computed at federal statutory rate................. (35.0)% 35.0% 35.0% State income taxes, net of federal effect.............. (6.3) 3.4 4.5 Research tax credits................................... (2.7) (4.7) (1.2) Other.................................................. -- 1.2 0.1 ----- ---- ---- Total................................................ (44.0)% 34.9% 38.4% ===== ==== ====
Palm has federal research credit carryforwards of approximately $2 million available as a result of its consolidated federal tax filing with 3Com. These carryforwards expire through the year 2014. See Note 14 to the consolidated financial statements for discussion of the Tax Sharing Agreement between Palm and 3Com. F-18 PALM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended May 25, 1997, May 31, 1998 and May 28, 1999 and Three Months Ended August 28, 1998 and August 27, 1999 11. Business Segment Information Palm operates in one reportable segment, handheld computing. Geographic Information 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 end customer. Geographic long-lived assets information is based on the physical location of the assets at the end of each period. Revenues from unaffiliated customers and long-lived assets by geographic region are as follows (in thousands):
Years Ended Three Months Ended -------------------------- --------------------- May 25, May 31, May 28, August 28, August 27, 1997 1998 1999 1998 1999 -------- -------- -------- ---------- ---------- (Unaudited) Revenues: United States................ $ 96,280 $198,630 $400,168 $ 91,462 $121,480 Other........................ 17,877 73,507 163,357 24,607 55,025 -------- -------- -------- -------- -------- Total...................... $114,157 $272,137 $563,525 $116,069 $176,505 ======== ======== ======== ======== ========
For fiscal 1997, 1998, 1999 and the three months ended August 28, 1998 and August 27, 1999 (unaudited) no single country outside the United States accounted for 10% or more of total revenues.
May 31, May 28, August 27, 1998 1999 1999 ------- ------- ----------- (Unaudited) Long-lived assets: United States..................................... $8,231 $7,247 $8,031 United Kingdom.................................... 827 811 1,017 Other............................................. 63 78 112 ------ ------ ------ Total........................................... $9,121 $8,136 $9,160 ====== ====== ======
At May 31, 1998, May 28, 1999 and August 27, 1999 (unaudited), no other individual country had long-lived assets of 10% or more of total long-lived assets. 12. Employee Benefit Plan 401(k) Plan Palm's eligible U.S. employees may participate in a plan known as the 3Com 401(k) Plan ("the Plan") which was adopted to provide retirement benefits to its employees. As allowed under Section 401(k) of the Internal Revenue Code, the Plan provides tax-deferred salary deductions for eligible employees. Participants may elect to contribute from 1% to 22% of their annual compensation to the Plan each calendar year, limited to a maximum annual amount as set periodically by the Internal Revenue Service. In addition, the Plan provides for company matching contributions as determined by F-19 PALM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended May 25, 1997, May 31, 1998 and May 28, 1999 and Three Months Ended August 28, 1998 and August 27, 1999 the Board of Directors. 3Com matches 50% for each dollar on the first 6% of target income contributed by the employee. Employees become vested in 3Com matching contributions according to a three year vesting schedule based on initial date of hire. Palm's expense related to matching contributions to the 401(k) was $171,000 in fiscal 1997, $178,000 in fiscal 1998 and $508,000 in fiscal 1999. On or about the distribution date, Palm intends to establish a separate 401(k) plan for its employees. 13. Litigation We are a party to lawsuits in the normal course of our business. Litigation in general, and intellectual property and securities litigation in particular, can be expensive and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict. We believe that we have defenses to the case set forth below and are vigorously contesting this matter. An unfavorable resolution of this lawsuit could adversely affect our business, results of operations or financial condition. 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 is now captioned: Xerox Corporation v. U.S. Robotics Corporation, U.S. Robotics Access Corp, Palm Computing, Inc. and 3Com Corporation, Civil Action No. 97-CV-6182T. The complaint alleges willful infringement of a United States patent relating to computerized interpretation of handwriting. The complaint further seeks unspecified damages and injunctive relief. Xerox has asserted that products utilizing Graffiti script recognition software made, used, offered for sale or sold in the United States, or imported into the United States since January 21, 1997, infringe its patent. On June 25, 1999, the court stayed the action pending reexamination of the patent by the United States Patent and Trademark Office. The reexamination of the patent is currently pending. In connection with our separation from 3Com, pursuant to the terms of the Indemnification and Insurance Matters Agreement, Palm will indemnify and hold 3Com harmless for any damages or losses which may arise out of this litigation. In particular, an adverse determination in the Xerox litigation could subject Palm to substantial damages and require it to indemnify its customers and licensees for damages that they may suffer. Moreover, if there is an adverse determination, a license may be necessary to continue using the Grafitti script recognition software in Palm devices and the Palm platform. A license may not be available or on terms acceptable to Palm. If upon an adverse determination Palm was unable to obtain a license on terms acceptable to it, it could be required to modify its script recognition software or license alternative script recognition software from third parties for inclusion in Palm devices and the Palm platform. We also file suits against others to protect our intellectual property, such as the matters described below. On July 22, 1999, Palm filed a copyright infringement action against Olivetti and CompanionLink in the United States District Court for the Northern District of California and obtained a preliminary injunction against further distribution, sale, import or export of Olivetti Office USA's "Royal daVinci" handheld device and the daVinci OS Software Development Kit, distributed by CompanionLink Software, Inc. The injunction is to remain in effect pending the outcome of the lawsuit. Palm also initiated a copyright infringement action in Hong Kong on July 21, 1999, against EchoLink Design F-20 PALM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended May 25, 1997, May 31, 1998 and May 28, 1999 and Three Months Ended August 28, 1998 and August 27, 1999 Ltd., the company responsible for developing the operating system software contained in the daVinci products. The High Court of the Hong Kong Special Administrative Region issued an order the same day restraining EchoLink from further copying, distribution, sale, import or export of Palm OS operating system source code or EchoLink's "NEXUS OS" source code, which Palm maintains infringes its copyrights. 14. Transactions with 3Com Corporation Palm's costs and expenses include allocations from 3Com for centralized legal, accounting treasury, real estate, information technology, distribution, customer service, sales, marketing, engineering, and other 3Com corporate services and infrastructure costs. These allocations have been determined on bases that 3Com and Palm considered to be reasonable reflections of the utilization of services provided or the benefit received by Palm. The allocation methods include relative revenues, headcount or square footage. Allocated costs included in the accompanying consolidated statements of operations follow (in thousands).
Years Ended Three Months Ended ----------------------- --------------------- May 25, May 31, May 28, August 28, August 27, 1997 1998 1999 1998 1999 ------- ------- ------- ---------- ---------- (Unaudited) Cost of revenues................. $4,374 $3,694 $ 9,238 $1,770 $2,920 Sales and marketing.............. 1,144 7,023 16,625 3,100 5,446 Research and development......... 1,573 845 3,437 528 1,647 General and administrative....... 2,574 5,212 14,085 2,485 3,952 Other income and expense, net.... 523 25 218 25 63
Historically, Palm has outsourced all of its product manufacturing to 3Com and other third parties. For purposes of governing certain of the ongoing relationships between Palm and 3Com at and after the separation date and to provide for an orderly transition, Palm and 3Com have entered or will enter into various agreements. A brief description of each of the agreements follows. Master Separation and Distribution Agreement The Master Separation and Distribution Agreement contains the key provisions relating to the separation, initial public offering and the distribution. The agreement lists the documents and items that the parties must deliver in order to accomplish the transfer of assets and liabilities from 3Com to Palm, effective on the separation date. The agreement also contains conditions that must occur prior to the initial public offering and the distribution. The parties also entered into both short-term and long-term covenants, including covenants to enter into transitional services agreements, exchange information, engage in certain auditing practices and resolve disputes in particular ways. General Assignment and Assumption Agreement The General Assignment and Assumption Agreement identifies the assets that 3Com will transfer to Palm and the liabilities that Palm will assume from 3Com in the separation. The agreement also describes when and how these transfers and assumptions will occur. In general, the F-21 PALM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended May 25, 1997, May 31, 1998 and May 28, 1999 and Three Months Ended August 28, 1998 and August 27, 1999 assets that will be transferred and the liabilities that will be assumed are included in those that appear on the consolidated balance sheet, after adjustment for certain assets and liabilities that will be retained by 3Com, such as most of our accounts receivable and accounts payable, and for activity that occurs between the balance sheet date and the separation date. Intellectual Property Agreements The Master Technology Ownership and License Agreement, the Master Patent Ownership and License Agreement, the Master Trademark Ownership and License Agreement and the Master Confidential Disclosure Agreement together are referred to as the Intellectual Property Agreements. Under the Intellectual Property Agreements, 3Com will confirm that Palm owns or will transfer to Palm its rights in specified patents, patent applications, invention disclosures, specified trademarks and other intellectual property related to Palm's current business and research and development efforts. Neither 3Com nor Palm will sue the other for claims of infringement related to existing patents. 3Com will grant a license to Palm under certain patents owned by 3Com which were jointly developed with Palm. Palm will commit to license its operating system to 3Com on favorable terms pursuant to a separate agreement that the two parties will negotiate. Both 3Com and Palm have agreed not to disclose confidential information of the other party except in specific circumstances. Employee Matters Agreement The Employee Matters Agreement outlines how 3Com and Palm plan to allocate assets, liabilities and responsibilities relating to current and former employees of Palm and their participation in the benefits plans, including stock plans, that 3Com currently sponsors and maintains. The agreement also contains provisions describing some of Palm's employee benefit and employee stock plans. All eligible Palm employees will continue to participate in the 3Com benefits plans on comparable terms and conditions to those for 3Com employees until the distribution date or until Palm establishes benefit plans for its employees, or elects not to establish comparable plans if it is not legally or financially practical. Palm intends to establish its own benefit program no later than the time of the distribution. Once Palm establishes its own benefits plans, it may modify or terminate each plan in accordance with the terms of that plan and its policies. No Palm benefit plan will provide benefits that overlap benefits under the corresponding 3Com benefit plan at the time of the distribution. Each Palm benefit plan will provide that all service, compensation and other benefit determinations that, as of the distribution, were recognized under the corresponding 3Com benefits plan will be taken into account under that Palm benefit plan. Following the date of 3Com's distribution of its Palm common stock to its stockholders, Palm will be under no obligation to maintain these plans in the form in which they were established or at all. The transfer to Palm of employees at certain of 3Com's international operations, and of certain employee benefit plans, may not take place until Palm receives consents or approvals or has satisfied other applicable requirements. F-22 PALM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended May 25, 1997, May 31, 1998 and May 28, 1999 and Three Months Ended August 28, 1998 and August 27, 1999 Tax Sharing Agreement The Tax Sharing Agreement allocates 3Com's and Palm's responsibilities for certain tax matters. The agreement requires Palm to pay 3Com for the incremental tax costs of Palm's inclusion in consolidated, combined or unitary tax returns with affiliated corporations. In determining these incremental costs, the agreement takes into account not only the group's incremental tax payments to the Internal Revenue Service or other taxing authorities, but also the incremental use of tax losses of affiliates to offset Palm's taxable income, and the incremental use of tax credits of affiliates to offset the tax on Palm's income. The agreement also provides for compensation or reimbursement as appropriate to reflect redeterminations of Palm's tax liability for periods during which Palm joined in filing consolidated, combined or unitary tax returns. The tax sharing agreement also requires Palm to indemnify 3Com for certain taxes and similar obligations, including (a) sales taxes on the sale of products purchased by 3Com from Palm before the distribution, (b) customs duties or harbor maintenance fees on products exported or imported by 3Com on behalf of Palm, (c) the additional taxes that would result if an acquisition of a controlling interest in Palm's stock after the distribution causes the distribution not to qualify for tax-free treatment to 3Com, and (d) any taxes resulting from transactions undertaken in preparation for the distribution. Palm's indemnity obligations include any interest and penalties on taxes, duties or fees for which Palm must indemnify 3Com. Each member of a consolidated group for U.S. federal income tax purposes is jointly and severally liable for the group's federal income tax liability. Accordingly, Palm could be required to pay a deficiency in the group's federal income tax liability for a period during which Palm was a member of the group even if the Tax Sharing Agreement allocates that liability to 3Com or another member. The agreement also assigns responsibilities for certain administrative matters such as the filing of returns, payment of taxes due, retention of records, and the conduct of audits, examinations or similar proceedings. Master Transitional Services Agreement The Master Transitional Services Agreement governs the provision of information technology services by 3Com and Palm to each other, on an interim basis, for one year from the date of separation, unless extended for specific services or otherwise indicated in the agreement. The services include data processing and telecommunications services, such as voice telecommunications and data transmission, and information technology support services, for functions including accounting, financial management, tax, payroll, stockholder and public relations, legal, procurement, and other administrative functions. Specified charges for such services are generally intended to allow the providing company to recover the direct and indirect costs of providing the services, plus 5% for one year, and plus 10% for an extension of the agreements beyond one year. The Master Transitional Services Agreement also will cover the provision of certain additional transitional services identified from time to time after the separation date that were inadvertently or unintentionally omitted from the specified services, or that are essential to effectuate an orderly transition under the separation agreement, so long as the provision of such services would not significantly disrupt 3Com's operations or significantly increase the scope of its responsibility under the agreement. F-23 PALM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended May 25, 1997, May 31, 1998 and May 28, 1999 and Three Months Ended August 28, 1998 and August 27, 1999 In addition, the Master Transitional Services Agreement will provide for the replication of some computer systems, including hardware, software, data storage or maintenance and support components. Generally, the party needing the replicated system will bear the costs and expenses of replication. Generally, the party purchasing new hardware or licensing new software will bear the costs and expenses of purchasing the new hardware or obtaining the new software licenses. Real Estate Matters Agreement The Real Estate Matters Agreement addresses real estate matters relating to the 3Com leased and owned properties that 3Com will transfer to or share with Palm. The agreement describes the manner in which 3Com will transfer to or share with Palm various leased and owned properties. The Real Estate Matters Agreement provides that Palm will be required to accept the transfer of all sites allocated to Palm, even if a site has been damaged by a casualty before the separation date. The Real Estate Matters Agreement also provides that all reasonable costs required to effect the transfers, including landlord consent fees and landlord attorneys' fees will be paid by 3Com. Indemnification and Insurance Matters Agreement Effective as of the separation date, subject to specified expections, Palm and 3Com will each release the other from any liabilities arising from events occurring on or before the separation date, including events occurring in connection with the activities to implement the separation, the initial public offering and the distribution. The agreement also contains provisions governing indemnification. In general, Palm and 3Com will each indemnify the other from all liabilities arising from their respective businesses or contracts, as well as liabilities arising from a breach of the separation agreement or any ancillary agreement. In addition, 3Com and Palm will each indemnify the other against liability for specified environmental conditions. Palm will reimburse 3Com for the cost of any insurance coverage from the separation date to the distribution date. 15. Subsequent Events On November 30, 1999, Palm's Board of Directors and sole stockholder approved the following: . The 1999 Stock Plan. The 1999 Stock Plan becomes effective upon the closing of the initial public offering. A total of shares will be reserved for issuance under the 1999 Plan. In addition, the number of shares reserved under the plan will automatically increase on the first day of each fiscal year, beginning with our fiscal year 2001, in an amount equal to the lesser of (a) shares, or (b) 5% of the shares outstanding on the first day of the fiscal year, or (c) a lesser amount determined by Palm's Board of Directors. The 1999 Stock Plan provides for issuance of incentive stock options, nonstatutory stock options and stock purchase rights to employees, directors and consultants. . The 1999 Director Option Plan. The 1999 Director Option Plan becomes effective upon the closing of the initial public offering. Under the 1999 Director Option Plan, a total of shares of common stock will be reserved for the grant of nonstatutory stock options to non-employee directors of Palm. In addition, the number of shares reserved under this plan will automatically increase on the first day of each fiscal year, beginning in fiscal year 2001, in an amount equal to shares or a lesser amount determined by Palm's Board of Directors. The initial options granted under the 1999 Director Option Plan shall vest over three years and any subsequent annual stock option grants will vest over one year and expire ten years from the date of grant. F-24 PALM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended May 25, 1997, May 31, 1998 and May 28, 1999 and Three Months Ended August 28, 1998 and August 27, 1999 . The 1999 Employee Stock Purchase Plan. The 1999 Employee Stock Purchase Plan becomes effective upon the closing of the initial public offering. Under the Purchase Plan, eligible employees may purchase common stock through payroll deductions, which may not exceed 10% of any employee's compensation nor more than shares in any one purchase period. A total of shares of common stock will be reserved for issuance under the 1999 Employee Stock Purchase Plan. The number of shares reserved for issuance under the 1999 Employee Stock Purchase Plan will automatically increase annually, beginning with our fiscal year 2001, by an amount equal to the lesser of (a) shares, or (b) 2% of the common shares outstanding on the first day of the fiscal year, or (c) another amount as may be determined by Palm's Board of Directors. On , 2000, Palm's Board of Directors and sole stockholder approved the following: . The reincorporation of Palm Computing, Inc. in the state of Delaware as Palm, Inc. . An increase in the authorized number of shares of common stock to shares and creation of newly undesignated preferred stock totaling shares, contingent upon the approval of the reincorporation of Palm in Delaware and the closing of the initial public offering. . A -for-one stock split of the outstanding shares of common stock. The stock split was effected on , 2000. All shares and per share amounts in these financial statements have been adjusted to give effect to the stock split. . The payment of a dividend of $ million to 3Com. * * * * * F-25 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- No dealer, salesperson or other person is authorized to give any information or to represent anything not contained in this prospectus. You must not rely on any unauthorized information or representations. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date. -------------- TABLE OF CONTENTS
Page ---- Prospectus Summary....................................................... 3 Risk Factors............................................................. 7 Our Separation From 3Com................................................. 23 Special Note Regarding Forward-Looking Statements........................ 22 Use of Proceeds.......................................................... 25 Dividend Policy.......................................................... 25 Capitalization........................................................... 26 Dilution................................................................. 27 Selected Consolidated Financial Data..................................... 29 Management's Discussion and Analysis of Financial Condition and Results of Operations .......................................................... 30 Business................................................................. 42 Management............................................................... 55 Arrangements Between Palm and 3Com....................................... 67 Principal Stockholders................................................... 76 Description of Capital Stock ............................................ 77 Underwriting............................................................. 79 Shares Eligible for Future Sale.......................................... 81 Validity of Common Stock................................................. 81 Experts.................................................................. 81 Where You Can Find More Information...................................... 82 Index to Consolidated Financial Statements............................... F-1
-------------- Through and including , 2000 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer's obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Shares Palm, Inc. Common Stock -------------- [LOGO] [PALM, INC. LOGO APPEARS HERE] -------------- Goldman, Sachs & Co. Morgan Stanley Dean Witter Merrill Lynch & Co. Robertson Stephens Representatives of the Underwriters - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable in connection with the sale and distribution of the securities being registered. All amounts are estimated except the Securities and Exchange Commission registration fee and the registration fee. Palm has agreed to pay these costs and expenses.
Item Amount ---- ------- Securities and Exchange Commission registration fee................. $26,400 NASD registration fee............................................... 10,500 Nasdaq Stock Market original and continued listing fees............. * Blue Sky qualification fees and expenses............................ 12,000 Legal fees and expenses............................................. * Accounting fees and expenses........................................ * Transfer agent and registrar fees................................... * Printing and engraving expenses..................................... * Miscellaneous expenses.............................................. * ------- Total............................................................. $ =======
- -------- *To be filed by amendment. Item 14. Indemnification of Directors and Officers Palm is incorporated under the laws of the State of Delaware. Section 145 ("Section 145") of the General Corporation Law of the State of Delaware, as the same exists or may hereafter be amended (the "General Corporation Law"), inter alia, provides that a Delaware corporation may indemnify any persons who were, are or are threatened to be made, parties to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of such corporation), by reason of the fact that such person is or was an officer, director, employee or agent of such corporation, or is or was serving at the request of such corporation as a director, officer, employee or agent of another corporation or enterprise. The indemnity may include expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding, provided such person acted in good faith and in a manner he reasonably believed to be in or not opposed to the corporation's best interests and, with respect to any criminal action or proceeding, had no reasonable cause to believe that his conduct was illegal. Section 145 further authorizes a corporation to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or enterprise, against any liability asserted against him and incurred by him in any such capacity, arising out of his status as such, whether or not the corporation would otherwise have the power to indemnify him under Section 145. Palm's Certificate of Incorporation and Bylaws provide for the indemnification of officers and directors to the fullest extent permitted by the General Corporation Law. All of Palm's directors and officers will be covered by insurance policies maintained by Palm against specified liabilities for actions taken in their capacities as such, including liabilities under the Securities Act of 1933, as amended. In addition, Palm has entered into indemnity agreements with its directors and executive officers (a form of which is filed as Exhibit 10.9 to this Registration Statement) that obligate Palm to indemnify such directors and executive officers to the fullest extent permitted by the General Corporation Law. II-1 Item 15. Exhibits and Financial Statement Schedules (a) Exhibits.
Exhibit Number Description ------- ----------- 1.1* Form of Underwriting Agreement. 2.1 Master Separation and Distribution Agreement between 3Com and the registrant effective as of December 13, 1999. 2.2 Form of General Assignment and Assumption Agreement between 3Com and the registrant. 2.3 Form of Master Technology Ownership and License Agreement between 3Com and the registrant. 2.4 Form of Master Patent Ownership and License Agreement between 3Com and the registrant. 2.5 Form of Master Trademark Ownership and License Agreement between 3Com and the registrant. 2.6 Form of Employee Matters Agreement between 3Com and the registrant. 2.7 Form of Tax Sharing Agreement between 3Com and the registrant. 2.8 Form of Master Transitional Services Agreement between 3Com and the registrant. 2.9 Form of Real Estate Matters Agreement between 3Com and the registrant. 2.10 Form of Master Confidential Disclosure Agreement between 3Com and the registrant. 2.11 Form of Indemnification and Insurance Matters Agreement between 3Com and the registrant. 2.12 Form of Non-U.S. Plan. 3.1* Certificate of Incorporation. 3.2* Bylaws. 5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation. 10.1* 1999 Stock Plan. 10.2* 1999 Stock Plan Agreements. 10.3* 1999 Employee Stock Purchase Plan. 10.4* 1999 Employee Stock Purchase Plan Agreements. 10.5* 1999 Director Option Plan. 10.6* 1999 Director Option Plan Agreements. 10.7 Management Retention Agreement dated as of December 1, 1999 by and between Carl J. Yankowski and the registrant. 10.8* Form of Indemnification Agreement entered into by the registrant with each of its directors and executive officers. 10.9* RAM Mobile Data USA Limited Partnership Value Added Reseller Agreement between RAM Mobile Data USA Limited Partnership and the registrant. 10.10* Supply Agreement between Manufacturers' Services Salt Lake City Operations, Inc. and the registrant. 10.11* Common Stock Purchase Agreement between America Online and the registrant. 10.12* Common Stock Purchase Agreement between Motorola and the registrant. 10.13* Common Stock Purchase Agreement Between Nokia and the registrant. 21.1* Subsidiaries of Palm. 23.1* Independent Auditors' Consent and Report on Schedule 23.2* Consent of Wilson Sonsini Goodrich & Rosati (included in Exhibit 5.1). 24.1 Power of Attorney (contained on page II-4). 27.1 Financial Data Schedule.
- -------- * To be filed by amendment. II-2 (b)Financial Statement Schedules. Valuation and Qualifying Accounts and Reserves........................... S-1
Item 16. Undertakings The Registrant hereby undertakes to provide the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as the indemnification for liabilities arising under the Securities Act of 1933 may be permitted as to directors, officers and controlling persons of the Registrant pursuant to the provisions described in Item 14, or otherwise, the Registrant has been advised that in the opinion of the SEC, such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payments by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes that: (1) for purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective; and (2) for the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and this offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Santa Clara, State of California, on December 13, 1999. /s/ Carl J. Yankowski _____________________________________ Carl J. Yankowski Chief Executive Officer and Director POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Carl J. Yankowski, Judy Bruner and Stephen Yu, and each of them, his or her attorneys-in-fact, each with the power of substitution, for him or her in any and all capacities, to sign any and all amendments to this Registration Statement (including post-effective statements), and to sign any registration statement for the same offering covered by this Registration Statement that is to be effective upon filing pursuant to Rule 462(b) promulgated under the Securities Act of 1933, as amended, and all post-effective amendments thereto, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that such attorneys-in-fact, or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. This Power of Attorney may be signed in several counterparts.
Signature Title Date --------- ----- ---- /s/ Carl J. Yankowski Chief Executive Officer and December 13, 1999 ______________________________________ Director (Principal Carl J. Yankowski Executive Officer) /s/ Judy Bruner Senior Vice President and December 13, 1999 ______________________________________ Chief Financial Officer Judy Bruner (Principal Financial and Accounting Officer) /s/ Eric A. Benhamou Director December 13, 1999 ______________________________________ Eric A. Benhamou /s/ James L. Barksdale Director December 13, 1999 ______________________________________ James L. Barksdale /s/ Gordon A. Campbell Director December 13, 1999 ______________________________________ Gordon A. Campbell /s/ Susan G. Swenson Director December 13, 1999 ______________________________________ Susan G. Swenson
II-4 PALM, INC. VALUATION AND QUALIFYING ACCOUNTS AND RESERVES Years Ended May 25, 1997, May 31, 1998 and May 28, 1999 (In thousands)
Additions Balance at Charged to Balance at Beginning Costs and End of Description of Period Expenses Deductions Period ----------- ---------- ---------- ---------- ---------- Year ended May 25, 1997: Allowance for doubtful accounts... $ 39 $ 567 $ (5) $ 601 Product return reserve............ 651 10,637 (4,042) 7,246 Accrued product warranty.......... 58 5,507 (3,912) 1,653 Year ended May 31, 1998: Allowance for doubtful accounts... $ 601 $3,893 $ (43) $ 4,451 Product return reserve............ 7,246 8,982 (10,576) 5,652 Accrued product warranty.......... 1,653 17,527 (15,068) 4,112 Year ended May 28, 1999: Allowance for doubtful accounts... $4,451 $4,271 $ (4,905) $ 3,817 Product return reserve............ 5,652 24,145 (12,254) 17,543 Accrued product warranty.......... 4,112 25,949 (18,732) 11,329
S-1 INDEX OF EXHIBITS
Exhibit Number Description ------- ----------- 1.1* Form of Underwriting Agreement. 2.1 Master Separation and Distribution Agreement between 3Com and the registrant effective as of December 13, 1999. 2.2 Form of General Assignment and Assumption Agreement between 3Com and the registrant. 2.3 Form of Master Technology Ownership and License Agreement between 3Com and the registrant. 2.4 Form of Master Patent Ownership and License Agreement between 3Com and the registrant. 2.5 Form of Master Trademark Ownership and License Agreement between 3Com and the registrant. 2.6 Form of Employee Matters Agreement between 3Com and the registrant. 2.7 Form of Tax Sharing Agreement between 3Com and the registrant. 2.8 Form of Master Transitional Services Agreement between 3Com and the registrant. 2.9 Form of Real Estate Matters Agreement between 3Com and the registrant. 2.10 Form of Master Confidential Disclosure Agreement between 3Com and the registrant. 2.11 Form of Indemnification and Insurance Matters Agreement between 3Com and the registrant. 2.12 Form of Non-U.S. Plan. 3.1* Certificate of Incorporation. 3.2* Bylaws. 5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation. 10.1* 1999 Stock Plan. 10.2* 1999 Stock Plan Agreements. 10.3* 1999 Employee Stock Purchase Plan. 10.4* 1999 Employee Stock Purchase Plan Agreements. 10.5* 1999 Director Option Plan. 10.6* 1999 Director Option Plan Agreements. 10.7 Management Retention Agreement dated as of December 1, 1999 by and between Carl J. Yankowski and the registrant. 10.8* Form of Indemnification Agreement entered into by the registrant with each of its directors and executive officers. 10.9* RAM Mobile Data USA Limited Partnership Value Added Reseller Agreement between RAM Mobile Data USA Limited Partnership and the registrant. 10.10* Supply Agreement between Manufacturers' Services Salt Lake City Operations, Inc. and the registrant. 10.11* Common Stock Purchase Agreement between America Online and the registrant. 10.12* Common Stock Purchase Agreement between Motorola and the registrant. 10.13* Common Stock Purchase Agreement Between Nokia and the registrant. 21.1* Subsidiaries of Palm. 23.1* Independent Auditors' Consent and Report on Schedule 23.2* Consent of Wilson Sonsini Goodrich & Rosati (included in Exhibit 5.1). 24.1 Power of Attorney (contained on page II-4). 27.1 Financial Data Schedule.
- -------- * To be filed by amendment. EX-2.1 2 MASTER SEPARATION & DISTRIBUTION AGREEMENT Exhibit 2.1 Master Separation and Distribution Agreement Between 3Com Corporation and Palm Computing, Inc. Effective as of December 13, 1999 TABLE OF CONTENTS
Page ---- ARTICLE I SEPARATION................................................................. 2 Section 1.1 Separation Date................................................. 2 Section 1.2 Closing of Transactions......................................... 2 Section 1.3 Exchange of Secretary's Certificates............................ 2 ARTICLE II DOCUMENTS AND ITEMS TO BE DELIVERED ON THE SEPARATION DATE................ 2 Section 2.1 Documents to Be Delivered by 3Com............................... 2 Section 2.2 Documents to Be Delivered by Palm............................... 3 ARTICLE III THE IPO AND ACTIONS PENDING THE IPO...................................... 3 Section 3.1 Transactions Prior to the IPO................................... 3 Section 3.2 Cooperation..................................................... 4 Section 3.3 Conditions Precedent to Consummation of the IPO................. 4 ARTICLE IV THE DISTRIBUTION.......................................................... 5 Section 4.1 The Distribution................................................ 5 Section 4.2 Actions Prior to the Distribution............................... 6 Section 4.3 Sole Discretion of 3Com......................................... 6 Section 4.4 Conditions Precedent to Distribution............................ 6 Section 4.5 Fractional Shares............................................... 7 ARTICLE V COVENANTS AND OTHER MATTERS................................................ 8 Section 5.1 Other Agreements................................................ 8 Section 5.2 Further Instruments............................................. 8 Section 5.3 Additional Transitional Services Agreements..................... 8 Section 5.4 Agreement for Exchange of Information........................... 8 Section 5.5 Auditors and Audits; Annual and Quarterly Statements and Accounting...................................................... 10 Section 5.6 Consistency with Past Practices................................. 12 Section 5.7 Payment of Expenses............................................. 12 Section 5.8 Foreign Subsidiaries............................................ 12 Section 5.9 Dispute Resolution.............................................. 12 Section 5.10 Governmental Approvals.......................................... 13 Section 5.11 No Representation or Warranty................................... 13 Section 5.12 Non-Solicitation of Employees................................... 14 Section 5.13 Employee Agreements............................................. 14 Section 5.14 Cooperation in Obtaining New Agreements......................... 15 Section 5.15 Property Damage to Palm Assets Prior to the Separation Date..... 16 ARTICLE VI MISCELLANEOUS............................................................. 16 Section 6.1 Limitation of Liability......................................... 16 Section 6.2 Entire Agreement................................................ 16
Section 6.3 Governing Law................................................... 17 Section 6.4 Termination..................................................... 17 Section 6.5 Notices......................................................... 17 Section 6.6 Counterparts.................................................... 17 Section 6.7 Binding Effect; Assignment...................................... 17 Section 6.8 Severability.................................................... 18 Section 6.9 Failure or Indulgence Not Waiver; Remedies Cumulative........... 18 Section 6.10 Amendment....................................................... 18 Section 6.11 Authority....................................................... 18 Section 6.12 Interpretation.................................................. 18 Section 6.13 Conflicting Agreements.......................................... 19 ARTICLE VII DEFINITIONS.............................................................. 19 Section 7.1 Affiliated Company.............................................. 19 Section 7.2 Governmental Approvals.......................................... 19 Section 7.3 Governmental Authority.......................................... 19 Section 7.4 Information..................................................... 19 Section 7.5 IPO Closing Date................................................ 19 Section 7.6 Palm Assets..................................................... 19 Section 7.7 Palm Group...................................................... 19 Section 7.8 Palm's Auditors................................................. 19 Section 7.9 Person.......................................................... 20 Section 7.10 Record Date..................................................... 20 Section 7.11 Subsidiary...................................................... 20 Section 7.12 3Com Group...................................................... 20 Section 7.13 3Com's Auditors................................................. 20
MASTER SEPARATION AND DISTRIBUTION AGREEMENT This Master Separation and Distribution Agreement (this "Agreement") is entered into as of December 13, 1999, between 3Com Corporation ("3Com"), a Delaware corporation, and Palm Computing, Inc. ("Palm"), a California corporation. Capitalized terms used herein and not otherwise defined shall have the meanings ascribed to such terms in Article VII hereof. RECITALS WHEREAS, 3Com currently owns all of the issued and outstanding common stock of Palm; WHEREAS, Palm is engaged in the handheld computing business and related businesses as described in the IPO Registration Statement (the "Palm Business"); WHEREAS, the Boards of Directors of 3Com and Palm have each determined that it would be appropriate and desirable for 3Com to contribute and transfer to Palm, and for Palm to receive and assume, directly or indirectly, assets and liabilities currently held by 3Com and associated with the Palm Business (the "Separation"); WHEREAS, 3Com and Palm currently contemplate that, following the contribution and assumption of assets and liabilities, Palm will make an initial public offering ("IPO") of an amount of its common stock pursuant to a registration statement on Form S-1 pursuant to the Securities Act of 1933, as amended (the "IPO Registration Statement"), that will reduce 3Com's ownership of Palm to not less than 80.1%; WHEREAS, 3Com and Palm currently contemplate that in conjunction with the IPO, Palm will reincorporate from the State of California to the State of Delaware, and will change its name to Palm, Inc.; WHEREAS, 3Com currently contemplates that, several months following such IPO, 3Com will distribute, pro rata, to the holders of its common stock, $0.001 par value, all of the shares of Palm common stock owned by 3Com (the "Distribution"); WHEREAS, 3Com and Palm intend that the Separation and the Distribution will qualify as a tax-free reorganization under Sections 368(a)(1)(D) and 355 of the Internal Revenue Code of 1986, as amended (the "Code"), and that this Agreement is intended to be, and is hereby adopted as, a plan of reorganization under Section 368 of the Code; and WHEREAS, the parties intend in this Agreement, including the Exhibits hereto, to set forth the principal arrangements between them regarding the separation of the Palm Business. NOW, THEREFORE, in consideration of the foregoing and the covenants and agreements set forth below, the parties hereto agree as follows: ARTICLE I SEPARATION Section 1.1 Separation Date. Unless otherwise provided in this Agreement, or in any agreement to be executed in connection with this Agreement, the effective time and date of each transfer of property, assumption of liability, license, undertaking, or agreement in connection with the Separation shall be 12:01 a.m., Pacific Time, February 26, 2000 or such other date as may be fixed by the Board of Directors of 3Com (the "Separation Date"). Section 1.2 Closing of Transactions. Unless otherwise provided herein, the closing of the transactions contemplated in Article II shall occur by the lodging of each of the executed instruments of transfer, assumptions of liability, undertakings, agreements, instruments or other documents executed or to be executed with Wilson Sonsini Goodrich & Rosati ("WSGR"), 650 Page Mill Road, Palo Alto, California 94304, to be held in escrow for delivery as provided in Section 1.3. Section 1.3 Exchange of Secretary's Certificates. Upon receipt of a certificate of the Secretary or an Assistant Secretary of 3Com in the form attached to this Agreement as Exhibit A, WSGR shall deliver to Palm on behalf of 3Com all of the items required to be delivered by 3Com hereunder pursuant to Section 2.1 and each such item shall be deemed to be delivered to Palm as of the Separation Date upon delivery of such certificate. Upon receipt of a certificate of the Secretary or an Assistant Secretary of Palm in the form attached to this Agreement as Exhibit B, WSGR shall deliver to 3Com on behalf of Palm all of the items required to be delivered by Palm pursuant to Section 2.2 hereunder and each such item shall be deemed to be delivered to 3Com as of the Separation Date upon receipt of such certificate. ARTICLE II DOCUMENTS AND ITEMS TO BE DELIVERED ON THE SEPARATION DATE Section 2.1 Documents to Be Delivered by 3Com. On the Separation Date or such other date as agreed in connection with the Non-US Plan (as defined in Section 5.8), 3Com will deliver, or will cause its appropriate Subsidiaries to deliver, to Palm all of the following items and agreements (collectively, together with all agreements and documents contemplated by such agreements, the "Ancillary Agreements"): (a) A duly executed General Assignment and Assumption Agreement (the "Assignment Agreement") substantially in the form attached hereto as Exhibit C; (b) A duly executed Master Technology Ownership and License Agreement substantially in the form attached hereto as Exhibit D-1, a duly executed Master Patent Ownership and License Agreement substantially in the form attached hereto as Exhibit D-2 and a duly executed Master Trademark Ownership and License Agreement substantially in the form attached as Exhibit D-3; -2- (c) A duly executed Employee Matters Agreement substantially in the form attached hereto as Exhibit E; (d) A duly executed Tax Sharing Agreement substantially in the form attached hereto as Exhibit F; (e) A duly executed Master Transitional Services Agreement substantially in the form attached hereto as Exhibit G; (f) A duly executed Real Estate Matters Agreement substantially in the form attached hereto as Exhibit H; (g) A duly executed Master Confidential Disclosure Agreement substantially in the form attached hereto as Exhibit I; (h) A duly executed Indemnification and Insurance Matters Agreement substantially in the form attached hereto as Exhibit J; (i) A plan of Reorganization of Operations Outside the US, as described in Exhibit K; (j) Resignations of each person who is an officer or director of 3Com or its Subsidiaries, immediately prior to the Separation Date, and who will be employees of Palm from and after the Separation Date; and (k) Such other agreements, documents or instruments as the parties may agree are necessary or desirable in order to achieve the purposes hereof. Section 2.2 Documents to Be Delivered by Palm. As of the Separation Date, Palm will deliver to 3Com all of the following: (a) In each case where Palm is a party to any agreement or instrument referred to in Section 2.1, a duly executed counterpart of such agreement or instrument; and (b) Resignations of each person who is an officer or director of Palm, immediately prior to the Separation Date, and who will be an employee of 3Com from and after the Separation Date. ARTICLE III THE IPO AND ACTIONS PENDING THE IPO Section 3.1 Transactions Prior to the IPO. Subject to the conditions specified in Section 3.3, 3Com and Palm shall use their reasonable commercial efforts to consummate the IPO. Such efforts shall include, but not necessarily be limited to, those specified in this Section 3.1 -3- (a) Registration Statement. Palm shall file the IPO Registration Statement, and such amendments or supplements thereto as may be necessary in order to cause the same to become and remain effective as required by law or by the managing underwriters for the IPO (the "Underwriters"), including, but not limited to, filing such amendments to the IPO Registration Statement as may be required by the underwriting agreement to be entered into between Palm and the Underwriters (the "Underwriting Agreement"), the Securities and Exchange Commission (the "Commission") or federal, state or foreign securities laws. 3Com and Palm shall also cooperate in preparing, filing with the Securities and Exchange Commission and causing to become effective a registration statement registering the common stock of Palm under the Securities and Exchange Act of 1934, as amended (the "Exchange Act"), and any registration statements or amendments thereof which are required to reflect the establishment of, or amendments to, any employee benefit and other plans necessary or appropriate in connection with the IPO, the Separation, the Distribution or the other transactions contemplated by this Agreement. (b) Underwriting Agreement. Palm shall enter into the Underwriting Agreement, in form and substance reasonably satisfactory to Palm, and shall comply with its obligations thereunder. (c) Nasdaq Listing. Palm shall prepare, file and use reasonable commercial efforts to seek to make effective, an application for listing of the common stock of Palm issued in the IPO on the Nasdaq National Market ("Nasdaq"), subject to official notice of issuance. Section 3.2 Cooperation. Palm shall consult with, and cooperate in all respects with, 3Com in connection with the pricing of the common stock of Palm to be offered in the IPO and shall, at 3Com's direction, promptly take any and all actions necessary or desirable to consummate the IPO as contemplated by the IPO Registration Statement and the Underwriting Agreement. Section 3.3 Conditions Precedent to Consummation of the IPO. The IPO closing is currently scheduled to occur on or before June 2, 2000 (the "IPO Closing Date"). The obligations of the parties to use their reasonable commercial efforts to consummate the IPO shall be conditioned on the satisfaction of the following conditions: (a) Registration Statement. The IPO Registration Statement shall have been filed and declared effective by the Commission, and there shall be no stop-order in effect with respect thereto. (b) Blue Sky. The actions and filings with regard to state securities and blue sky laws of the United States (and any comparable laws under any foreign jurisdictions) shall have been taken and, where applicable, have become effective or been accepted. (c) Nasdaq Listing. The common stock of Palm to be issued in the IPO shall have been accepted for listing on the Nasdaq, on official notice of issuance. (d) Underwriting Agreement. Palm shall have entered into the Underwriting Agreement and all conditions to the obligations of Palm and the Underwriters shall have been satisfied or waived. -4- (e) Common Stock Ownership. 3Com shall be satisfied in its sole discretion that it will own at least 80.1% of the outstanding common stock of Palm following the IPO. All other conditions to permit the Distribution to qualify as a tax-free distribution to 3Com, Palm and 3Com's stockholders shall, to the extent applicable as of the time of the IPO, be satisfied. There shall be no event or condition that is likely to cause any of such conditions not to be satisfied as of the time of the Distribution or thereafter. (f) No Legal Restraints. No order, injunction or decree issued by any court or agency of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the Separation or the IPO or any of the other transactions contemplated by this Agreement shall be in effect. (g) Separation. The Separation shall have become effective by execution of this Agreement and the Ancillary Agreements. (h) Other Actions. Such other actions as the parties hereto may, based upon the advice of counsel, reasonably request to be taken prior to the IPO in order to assure the successful completion of the IPO shall have been taken. (i) No Termination. This Agreement shall not have been terminated. ARTICLE IV THE DISTRIBUTION Section 4.1 The Distribution. (a) Delivery of Shares for Distribution. Subject to Section 4.4 hereof, on or prior to the date the Distribution is effective (the "Distribution Date"), 3Com will deliver to the distribution agent (the "Distribution Agent") to be appointed by 3Com to distribute to the stockholders of 3Com the shares of common stock of Palm held by 3Com pursuant to the Distribution for the benefit of holders of record of common stock of 3Com on the Record Date, a single stock certificate, endorsed by 3Com, representing all of the outstanding shares of common stock of Palm then owned by 3Com, and shall cause the transfer agent for the shares of common stock of 3Com to instruct the Distribution Agent to distribute on the Distribution Date the appropriate number of such shares of common stock of Palm to each such holder or designated transferee or transferees of such holder. (b) Shares Received. Subject to Sections 4.4 and 4.5, each holder of common stock of 3Com on the Record Date (or such holder's designated transferee or transferees) will be entitled to receive in the Distribution a number of shares of common stock of Palm equal to the number of shares of common stock of 3Com held by such holder on the Record Date multiplied by a fraction the numerator of which is the number of shares of common stock of Palm beneficially owned by 3Com on the Record Date and the denominator of which is the number of shares of common stock of 3Com outstanding on the Record Date. -5- (c) Obligation to Provide Information. Palm and 3Com, as the case may be, will provide to the Distribution Agent all share certificates and any information required in order to complete the Distribution on the basis specified above. Section 4.2 Actions Prior to the Distribution. (a) Information Statement. 3Com and Palm shall prepare and mail, prior to the Distribution Date, to the holders of common stock of 3Com, such information concerning Palm and the Distribution and such other matters as 3Com shall reasonably determine are necessary and as may be required by law. 3Com and Palm will prepare, and Palm will, to the extent required under applicable law, file with the Commission any such documentation which 3Com and Palm determine is necessary or desirable to effectuate the Distribution, and 3Com and Palm shall each use its reasonable commercial efforts to obtain all necessary approvals from the Commission with respect thereto as soon as practicable. (b) Blue Sky. 3Com and Palm shall take all such actions as may be necessary or appropriate under the securities or blue sky laws of the United States (and any comparable laws under any foreign jurisdiction) in connection with the Distribution. (c) Nasdaq Listing. Palm shall prepare and file, and shall use its reasonable commercial efforts to have approved, an application for the additional listing of the common stock of Palm to be distributed in the Distribution on the Nasdaq, subject to official notice of distribution. (d) Conditions. 3Com and Palm shall take all reasonable steps necessary and appropriate to cause the conditions set forth in Section 4.4 to be satisfied and to effect the Distribution on the Distribution Date. Section 4.3 Sole Discretion of 3Com. 3Com currently intends, following the consummation of the IPO, to complete the Distribution by December 1, 2000. 3Com shall, in its sole and absolute discretion, determine the date of the consummation of the Distribution and all terms of the Distribution, including, without limitation, the form, structure and terms of any transaction(s) and/or offering(s) to effect the Distribution and the timing of and conditions to the consummation of the Distribution. In addition, 3Com may at any time and from time to time until the completion of the Distribution, modify or change the terms of the Distribution, including, without limitation, by accelerating or delaying the timing of the consummation of all or part of the Distribution. Palm shall cooperate with 3Com in all respects to accomplish the Distribution and shall, at 3Com's direction, promptly take any and all actions necessary or desirable to effect the Distribution, including, without limitation, the registration under the Securities Act of the common stock of Palm on an appropriate registration form or forms to be designated by 3Com. 3Com shall select any investment banker(s) and manager(s) in connection with the Distribution, as well as any financial printer, solicitation and/or exchange agent and outside counsel for 3Com; provided, however, that nothing herein shall prohibit Palm from engaging (at its own expense) its own financial, legal, accounting and other advisors in connection with the Distribution. Section 4.4 Conditions Precedent to Distribution. The following are conditions that must take place prior to the consummation of the Distribution. The conditions are for the sole benefit of -6- 3Com and shall not give rise to or create any duty on the part of 3Com or the 3Com Board of Directors to waive or not waive any such condition. (a) IRS Ruling. 3Com shall have obtained a private letter ruling from the Internal Revenue Service in form and substance satisfactory to 3Com (in its sole discretion), and such ruling shall remain in effect as of the Distribution Date, to the effect that (i) the transfer by the 3Com Group to the Palm Group of the property, subject to liabilities, held by 3Com of the Palm Business, and Palm's assumption of liabilities held by 3Com related to the Palm Business, followed by the distribution by 3Com of all of its Palm stock to the stockholders of 3Com, will qualify as a reorganization under Sections 368(a)(1)(D) and 355 of the Code; (ii) no gain or loss will be recognized by 3Com on its transfer of property of the Palm Business to Palm; (iii) no gain or loss will be recognized by Palm on its receipt of property of the Palm Business from 3Com; and (iv) no gain or loss will be recognized by (and no amount will otherwise be included in the income of) the stockholders of 3Com upon their receipt of Palm common stock pursuant to the Distribution. (b) Government Approvals. Any material governmental approvals and consents necessary to consummate the Distribution shall have been obtained and be in full force and effect; (c) No Legal Restraints. No order, injunction or decree issued by any court or agency of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the Distribution shall be in effect and no other event outside the control of 3Com shall have occurred or failed to occur that prevents the consummation of the Distribution; and (d) No Material Adverse Effect. No other events or developments shall have occurred subsequent to the IPO Closing Date that, in the judgment of the Board of Directors of 3Com, would result in the Distribution having a material adverse effect on 3Com or on the stockholders of 3Com. Section 4.5 Fractional Shares. As soon as practicable after the Distribution Date, 3Com shall direct the Distribution Agent to determine the number of whole shares and fractional shares of common stock of Palm allocable to each holder of record or beneficial owner of common stock of 3Com as of the Record Date, to aggregate all such fractional shares and sell the whole shares obtained thereby at the direction of 3Com, in open market transactions, at then prevailing trading prices, and to cause to be distributed to each such holder or for the benefit of each such beneficial owner to which a fractional share shall be allocable such holder's or owner's ratable share of the proceeds of such sale, after making appropriate deductions of the amount required to be withheld for federal income tax purposes and after deducting an amount equal to all brokerage charges, commissions and transfer taxes attributed to such sale. 3Com and the Distribution Agent shall use their reasonable commercial efforts to aggregate the shares of common stock of 3Com that may be held by any beneficial owner thereof through more than one account in determining the fractional share allocable to such beneficial owner. -7- ARTICLE V COVENANTS AND OTHER MATTERS Section 5.1 Other Agreements. 3Com and Palm agree to execute or cause to be executed by the appropriate parties and deliver, as appropriate, such other agreements, instruments and other documents as may be necessary or desirable in order to effect the purposes of this Agreement and the Ancillary Agreements. Section 5.2 Further Instruments. At the request of Palm, and without further consideration, 3Com will execute and deliver, and will cause its applicable Subsidiaries to execute and deliver, to Palm and its Subsidiaries such other instruments of transfer, conveyance, assignment, substitution and confirmation and take such action as Palm may reasonably deem necessary or desirable in order more effectively to transfer, convey and assign to Palm and its Subsidiaries and confirm Palm's and its Subsidiaries' title to all of the assets, rights and other things of value contemplated to be transferred to Palm and its Subsidiaries pursuant to this Agreement, the Ancillary Agreements, and any documents referred to therein, to put Palm and its Subsidiaries in actual possession and operating control thereof and to permit Palm and its Subsidiaries to exercise all rights with respect thereto (including, without limitation, rights under contracts and other arrangements as to which the consent of any third party to the transfer thereof shall not have previously been obtained). At the request of 3Com and without further consideration, Palm will execute and deliver, and will cause its applicable Subsidiaries to execute and deliver, to 3Com and its Subsidiaries all instruments, assumptions, novations, undertakings, substitutions or other documents and take such other action as 3Com may reasonably deem necessary or desirable in order to have Palm fully and unconditionally assume and discharge the liabilities contemplated to be assumed by Palm under this Agreement or any document in connection herewith and to relieve the 3Com Group of any liability or obligation with respect thereto and evidence the same to third parties. Neither 3Com nor Palm shall be obligated, in connection with the foregoing, to expend money other than reasonable out-of- pocket expenses, attorneys' fees and recording or similar fees. Furthermore, each party, at the request of the other party hereto, shall execute and deliver such other instruments and do and perform such other acts and things as may be necessary or desirable for effecting completely the consummation of the transactions contemplated hereby. Section 5.3 Additional Transitional Services Agreements. 3Com and its Subsidiaries and Palm and its Subsidiaries will enter into transitional services agreements covering the provision of various transitional services, including financial, accounting, real estate and site services, sales, customer support, human resources, supply chain services and information technology services by 3Com (and its Subsidiaries) to Palm (and its Subsidiaries) or, in certain circumstances, vice versa. Such services will generally be provided for a fee equal to the direct costs and indirect costs of providing such services plus five percent (5.0%). The transitional services agreements will generally provide for a term of one year or less. However, some transitional services agreements may be extended beyond the initial one year term, in which case the fee for such services shall, generally, be increased to the direct costs and indirect costs of providing such services plus ten percent (10.0%). Section 5.4 Agreement for Exchange of Information. -8- (a) Generally. Each of 3Com and Palm agrees to provide, or cause to be provided, to each other, at any time before or after the Distribution Date, as soon as reasonably practicable after written request therefor, any Information in the possession or under the control of such party that the requesting party reasonably needs (i) to comply with reporting, disclosure, filing or other requirements imposed on the requesting party (including under applicable securities laws) by a Governmental Authority having jurisdiction over the requesting party, (ii) for use in any other judicial, regulatory, administrative or other proceeding or in order to satisfy audit, accounting, claims, regulatory, litigation or other similar requirements, (iii) to comply with its obligations under this Agreement or any Ancillary Agreement or (iv) in connection with the ongoing businesses of 3Com or Palm, as the case may be; provided, however, that in the event that any party determines that any such provision of Information could be commercially detrimental, violate any law or agreement, or waive any attorney-client privilege, the parties shall take all reasonable measures to permit the compliance with such obligations in a manner that avoids any such harm or consequence. (b) Internal Accounting Controls; Financial Information. After the Separation Date, (i) each party shall maintain in effect at its own cost and expense adequate systems and controls for its business to the extent necessary to enable the other party to satisfy its reporting, accounting, audit and other obligations, and (ii) each party shall provide, or cause to be provided, to the other party and its Subsidiaries in such form as such requesting party shall request, at no charge to the requesting party, all financial and other data and information as the requesting party determines necessary or advisable in order to prepare its financial statements and reports or filings with any Governmental Authority. (c) Ownership of Information. Any Information owned by a party that is provided to a requesting party pursuant to this Section 5.4 shall be deemed to remain the property of the providing party. Unless specifically set forth herein, nothing contained in this Agreement shall be construed as granting or conferring rights of license or otherwise in any such Information. (d) Record Retention. To facilitate the possible exchange of Information pursuant to this Section 5.4 and other provisions of this Agreement after the Distribution Date, each party agrees to use its reasonable commercial efforts to retain all Information in its respective possession or control on the Distribution Date substantially in accordance with the policies of 3Com as in effect on the Separation Date. However, except as set forth in the Tax Sharing Agreement, at any time after the Distribution Date, each party may amend its respective record retention policies at such party's discretion; provided, however, that if a party desires to effect the amendment within three (3) years after the Distribution Date, the amending party must give thirty (30) days prior written notice of such change in the policy to the other party to this Agreement. (i) No party will destroy, or permit any of its Subsidiaries to destroy, any Information that exists on the Separation Date (other than Information that is permitted to be destroyed under the current record retention policies of 3Com) and that falls under the categories listed in Section 5.4(a), without first using its reasonable commercial efforts to notify the other party of the proposed destruction and giving the other party the opportunity to take possession of such Information prior to such destruction. -9- (e) Limitation of Liability. No party shall have any liability to any other party in the event that any Information exchanged or provided pursuant to this Section 5.4 is found to be inaccurate, in the absence of gross negligence or willful misconduct by the party providing such Information. No party shall have any liability to any other party if any Information is destroyed or lost after reasonable commercial efforts by such party to comply with the provisions of Section 5.4(d). (f) Other Agreements Providing for Exchange of Information. The rights and obligations granted under this Section 5.4 are subject to any specific limitations, qualifications or additional provisions on the sharing, exchange or confidential treatment of Information set forth in this Agreement and any Ancillary Agreement. (g) Production of Witnesses; Records; Cooperation. After the Distribution Date, except in the case of a legal or other proceeding by one party against another party (which shall be governed by such discovery rules as may be applicable under Section 5.9 or otherwise), each party hereto shall use its reasonable commercial efforts to make available to each other party, upon written request, the former, current and future directors, officers, employees, other personnel and agents of such party as witnesses and any books, records or other documents within its control or which it otherwise has the ability to make available, to the extent that any such person (giving consideration to business demands of such directors, officers, employees, other personnel and agents) or books, records or other documents may reasonably be required in connection with any legal, administrative or other proceeding in which the requesting party may from time to time be involved, regardless of whether such legal, administrative or other proceeding is a matter with respect to which indemnification may be sought hereunder. The requesting party shall bear all costs and expenses in connection therewith. Section 5.5 Auditors and Audits; Annual and Quarterly Statements and Accounting. Each party agrees that, for so long as 3Com is required in accordance with United States generally accepted accounting principles to consolidate Palm's results of operations and financial position: (a) Selection of Auditors. Palm shall not select a different accounting firm from that used by 3Com to serve as its (and its Subsidiaries') independent certified public accountants ("Palm's Auditors") for purposes of providing an opinion on its consolidated financial statements without 3Com's prior written consent (which shall not be unreasonably withheld). (b) Date of Auditors' Opinion and Quarterly Reviews. Palm shall use its reasonable commercial efforts to enable the Palm Auditors to complete their audit such that they will date their opinion on Palm's audited annual financial statements on the same date that 3Com's independent certified public accountants ("3Com's Auditors") date their opinion on 3Com's audited annual financial statements, and to enable 3Com to meet its timetable for the printing, filing and public dissemination of 3Com's annual financial statements. Palm shall use its reasonable commercial efforts to enable the Palm Auditors to complete their quarterly review procedures such that they will provide clearance on Palm's quarterly financial statements on the same date that 3Com's Auditors provide clearance on 3Com's quarterly financial statements. -10- (c) Annual and Quarterly Financial Statements. Palm shall provide to 3Com on a timely basis all Information that 3Com reasonably requires to meet its schedule for the preparation, printing, filing, and public dissemination of 3Com's annual and quarterly financial statements. Without limiting the generality of the foregoing, Palm will provide all required financial Information with respect to Palm and its Subsidiaries to Palm's Auditors in a sufficient and reasonable time and in sufficient detail to permit Palm's Auditors to take all steps and perform all reviews necessary to provide sufficient assistance to 3Com's Auditors with respect to financial Information to be included or contained in 3Com's annual and quarterly financial statements. Similarly, 3Com shall provide to Palm on a timely basis all financial Information that Palm reasonably requires to meet its schedule for the preparation, printing, filing, and public dissemination of Palm's annual and quarterly financial statements. Without limiting the generality of the foregoing, 3Com will provide all required financial Information with respect to 3Com and its Subsidiaries to 3Com's Auditors in a sufficient and reasonable time and in sufficient detail to permit 3Com's Auditors to take all steps and perform all reviews necessary to provide sufficient assistance to Palm's Auditors with respect to Information to be included or contained in Palm's annual and quarterly financial statements. (d) Identity of Personnel Performing the Annual Audit and Quarterly Reviews. Palm shall authorize Palm's Auditors to make available to 3Com's Auditors both the personnel who performed or will perform the annual audits and quarterly reviews of Palm and work papers related to the annual audits and quarterly reviews of Palm, in all cases within a reasonable time prior to Palm's Auditors' opinion date, so that 3Com's Auditors are able to perform the procedures they consider necessary to take responsibility for the work of Palm's Auditors as it relates to 3Com's Auditors' report on 3Com's financial statements, all within sufficient time to enable 3Com to meet its timetable for the printing, filing and public dissemination of 3Com's annual and quarterly statements. Similarly, 3Com shall authorize 3Com's Auditors to make available to Palm's Auditors both the personnel who performed or will perform the annual audits and quarterly reviews of 3Com and work papers related to the annual audits and quarterly reviews of 3Com, in all cases within a reasonable time prior to 3Com's Auditors' opinion date, so that Palm's Auditors are able to perform the procedures they consider necessary to take responsibility for the work of 3Com's Auditors as it relates to Palm's Auditors' report on Palm's statements, all within sufficient time to enable Palm to meet its timetable for the printing, filing and public dissemination of Palm's annual and quarterly financial statements. (e) Access to Books and Records. Palm shall provide 3Com's internal auditors and their designees access to Palm's and its Subsidiaries' books and records so that 3Com may conduct reasonable audits relating to the financial statements provided by Palm pursuant hereto as well as to the internal accounting controls and operations of Palm and its Subsidiaries. Similarly, 3Com shall provide Palm's internal auditors and their designees access to 3Com's and its Subsidiaries' books and records so that Palm may conduct reasonable audits relating to the financial statements provided by 3Com pursuant hereto as well as to the internal accounting controls and operations of 3Com and its Subsidiaries (f) Notice of Change in Accounting Principles. Palm shall give 3Com as much prior notice as reasonably practical of any proposed determination of, or any significant changes in, its accounting estimates or accounting principles from those in effect on the Separation Date. Palm will consult with 3Com and, if requested by 3Com, Palm will consult with 3Com's independent public -11- accountants with respect thereto. 3Com shall give Palm as much prior notice as reasonably practical of any proposed determination of, or any significant changes in, its accounting estimates or accounting principles from those in effect on the Separation Date. (g) Conflict with Third-Party Agreements. Nothing in Sections 5.4 and 5.5 shall require Palm to violate any agreement with any third party regarding the confidentiality of confidential and proprietary information relating to that third party or its business; provided, however, that in the event that Palm is required under Sections 5.4 and 5.5 to disclose any such Information, Palm shall use all commercially reasonable efforts to seek to obtain such third party's consent to the disclosure of such information. Section 5.6 Consistency with Past Practices. At all times, 3Com and Palm will conduct the Palm Business before the Separation Date in the ordinary course, consistent with past practices. Section 5.7 Payment of Expenses. Except as otherwise provided in this Agreement, the Ancillary Agreements or any other agreement between the parties relating to the Separation, the IPO or the Distribution, all costs and expenses of the parties hereto in connection with the Separation, the IPO (including underwriting discounts and commissions) and the Distribution and costs and expenses of the parties hereto in connection with the Separation shall be allocated between Palm and 3Com. Palm and 3Com shall each be responsible for their own internal fees, costs and expenses incurred in connection with the Separation, the IPO and the Distribution. Section 5.8 Foreign Subsidiaries. 3Com and Palm shall cause each of their foreign subsidiaries to execute such local transfer agreements, assignments, assumptions, novations and other documents as shall be necessary to carry out the plan described in Exhibit K (the "Non-US Plan") hereto to effect the purposes of this Agreement with respect to their respective operations outside the United States. Section 5.9 Dispute Resolution. (a) If a dispute, controversy or claim ("Dispute") arises between the parties relating to the interpretation or performance of this Agreement or the Ancillary Agreements, or the grounds for the termination hereof, appropriate senior executives (e.g. director or V.P. level) of each party who shall have the authority to resolve the matter shall meet to attempt in good faith to negotiate a resolution of the Dispute prior to pursuing other available remedies. The initial meeting between the appropriate senior executives shall be referred to herein as the "Dispute Resolution Commencement Date." Discussions and correspondence relating to trying to resolve such Dispute shall be treated as confidential information developed for the purpose of settlement and shall be exempt from discovery or production and shall not be admissible. If the senior executives are unable to resolve the Dispute within thirty (30) days from the Dispute Resolution Commencement Date, and either party wishes to pursue its rights relating to such Dispute, then the Dispute will be mediated by a mutually acceptable mediator appointed pursuant to the mediation rules of JAMS/Endispute within thirty (30) days after written notice by one party to the other demanding non-binding mediation. Neither party may unreasonably withhold consent to the selection of a mediator or the location of the mediation. Both parties will share the costs of the mediation equally, except that each party shall bear its own costs -12- and expenses, including attorney's fees, witness fees, travel expenses, and preparation costs. The parties may also agree to replace mediation with some other form of non-binding or binding ADR. (b) Any Dispute which the parties cannot resolve through mediation within ninety (90) days of the Dispute Resolution Commencement Date, unless otherwise mutually agreed, shall be submitted to final and binding arbitration under the then current Commercial Arbitration Rules of the American Arbitration Association ("AAA"), by three (3) arbitrators in Santa Clara County, California. Such arbitrators shall be selected by the mutual agreement of the parties or, failing such agreement, shall be selected according to the aforesaid AAA rules. The arbitrators will be instructed to prepare and deliver a written, reasoned opinion stating their decision within thirty (30) days of the completion of the arbitration. The prevailing party in such arbitration shall be entitled to expenses, including costs and reasonable attorneys' and other professional fees, incurred in connection with the arbitration (but excluding any costs and fees associated with prior negotiation or mediation). The decision of the arbitrator shall be final and non-appealable and may be enforced in any court of competent jurisdiction. The use of any ADR procedures will not be construed under the doctrine of laches, waiver or estoppel to adversely affect the rights of either party. (c) Any Dispute regarding the following is not required to be negotiated, mediated or arbitrated prior to seeking relief from a court of competent jurisdiction: breach of any obligation of confidentiality; infringement, misappropriation, or misuse of any intellectual property right; any other claim where interim relief from the court is sought to prevent serious and irreparable injury to one of the parties or to others. However, the parties to the Dispute shall make a good faith effort to negotiate and mediate such Dispute, according to the above procedures, while such court action is pending. (d) Continuity of Service and Performance. Unless otherwise agreed in writing, the parties will continue to provide service and honor all other commitments under this Agreement and each Ancillary Agreement during the course of dispute resolution pursuant to the provisions of this Section 5.9 with respect to all matters not subject to such dispute, controversy or claim. Section 5.10 Governmental Approvals. To the extent that the Separation requires any Governmental Approvals, the parties will use their reasonable commercial efforts to obtain any such Governmental Approvals. Section 5.11 No Representation or Warranty. 3Com does not, in this Agreement or any other agreement, instrument or document contemplated by this Agreement, make any representation as to, warranty of or covenant with respect to: (a) the value of any asset or thing of value to be transferred to Palm; (b) the freedom from encumbrance of any asset or thing of value to be transferred to Palm; (c) the absence of defenses or freedom from counterclaims with respect to any claim to be transferred to Palm; or -13- (d) the legal sufficiency of any assignment, document or instrument delivered hereunder to convey title to any asset or thing of value upon its execution, deliver and filing. Except as may expressly be set forth herein or in any Ancillary Agreement, all assets to be transferred to Palm shall be transferred "AS IS, WHERE IS" and Palm shall bear the economic and legal risk that any conveyance shall prove to be insufficient to vest in Palm good and marketable title, free and clear of any lien, claim, equity or other encumbrance. Section 5.12 Non-Solicitation of Employees. 3Com and Palm each agree not to solicit or recruit, without the other party's express written consent, the other party's employees for a period of two (2) years following the Distribution Date. To the extent this prohibition is waived, any recruitment efforts by either 3Com or Palm during the period of one (1) year after the Distribution Date shall be coordinated with each party's Senior Vice President of Human Resources or his or her designate and appropriate management. Notwithstanding the foregoing, this prohibition on solicitation does not apply to actions taken by a party either: (a) solely as a result of an employee's affirmative response to a general recruitment effort carried out through a public solicitation or general solicitation, or (b) as a result of an employee's initiative. Section 5.13 Employee Agreements. Definition. As used in this Section 5.13, "Employee Agreement" means the Conflicts, Confidential Information and Assignment of Inventions Agreement and corresponding agreements in foreign countries executed by each 3Com employee. (a) Survival of 3Com Employee Agreement Obligations and 3Com's Common Law Rights. The 3Com Employee Agreements of all former 3Com employees transferred to Palm as of the Distribution Date shall remain in full force and effect according to their terms; provided, however, that none of the following acts committed by former 3Com employees within the scope of their Palm employment shall constitute a breach of such 3Com Employee Agreements: (i) the use or disclosure of Confidential Information (as that term is defined in the former 3Com employee's 3Com Employee Agreement) for or on behalf of Palm, if such disclosure is consistent with the rights granted to Palm and restrictions imposed on Palm under this Agreement, any Ancillary Agreement or any other agreement between the parties; (ii) the disclosure and assignment to Palm of rights in proprietary developments authored or conceived by the former 3Com employee after the Separation Date and resulting from the use of, or based upon intellectual property (whether patented or not) which is retained by 3Com; provided, however, that in no event shall such disclosure and assignment be regarded as assigning the underlying intellectual property to Palm; (iii) the rendering of any services, directly or indirectly, to Palm to the extent such services are consistent with the assignment or license of rights granted to Palm and the restrictions imposed on Palm under this Agreement, any Ancillary Agreement or any other agreement between the parties; and (iv) solicitation of the employees of one party by the other party prior to the Distribution Date (so long as such solicitation does not violate Section 5.12 hereof). Further, 3Com retains any rights it has under statute or common law with respect to actions by its former employees to the extent such actions are inconsistent with the rights granted to Palm and restrictions imposed on Palm under this Agreement, any Ancillary Agreement or any other agreement between the parties. -14- (b) Assignment, Cooperation for Compliance and Enforcement. (i) 3Com retains all rights under the 3Com Employee Agreements of all former 3Com employees necessary to permit 3Com to protect the rights and interests of 3Com, but hereby transfers and assigns to Palm its rights under the 3Com Employee Agreements of all former 3Com employees to the extent required to permit Palm to enjoin, restrain, recover damages from or obtain specific performance of the 3Com Employee Agreements or obtain other remedies against any employee who breaches his/her 3Com Employee Agreement. (ii) 3Com and Palm agree, at their own respective cost and expense, to use their reasonable efforts to cooperate as follows: (A) Palm shall advise 3Com of: (1) any violation(s) of the 3Com Employee Agreement by former 3Com employees, and (2) any violation(s) of the Palm Employee Agreement which affect 3Com's rights; and (B) 3Com shall advise Palm of any violations of the 3Com Employee Agreement by current or former 3Com employees which affect Palm's rights; provided, however, that the foregoing obligations shall only apply to violations which become known to an attorney within the legal department of the party obligated to provide notice thereof. (iii) 3Com and Palm each may separately enforce the 3Com Employee Agreements of former 3Com employees to the extent necessary to reasonably protect their respective interests, provided, however, that (i) Palm shall not commence any legal action relating thereto without first consulting with 3Com's General Counsel or his/her designee and (ii) 3Com shall not commence any legal action relating thereto against any former 3Com employee who is at the time an Palm employee without first consulting with Palm's General Counsel or his/her designee. If either party, in seeking to enforce any 3Com Employee Agreement, notifies the other party that it requires, or desires, such party to join in such action, then the other party shall do so. In addition, if either party commences or becomes a party to any action to enforce a 3Com Employee Agreement of a former 3Com employee, the other party shall, whether or not it becomes a party to the action, cooperate with the other party by making available its files and employees who have information or knowledge relevant to the dispute, subject to appropriate measures to protect the confidentiality of any proprietary or confidential information that may be disclosed in the course of such cooperation or action and subject to any relevant privacy laws and regulations. Any such action shall be conducted at the expense of the party bringing the action and the parties shall agree on a case by case basis on compensation, if any, of the other party for the value of the time of such other party's employees as reasonably required in connection with the action. (iv) 3Com and Palm understand and acknowledge that matters relating to the making, performance, enforcement, assignment and termination of employee agreements are typically governed by the laws and regulations of the national, federal, state or local governmental unit where an employee resides, or where an employee's services are rendered, and that such laws and regulations may supersede or limit the applicability or enforceability of this Section 5.13. In such circumstances, 3Com and Palm agree to take action with respect to the employee agreements that best accomplishes the parties' objectives as set forth in this Section 5.13 and that is consistent with applicable law. Section 5.14 Cooperation in Obtaining New Agreements. 3Com understands that, prior to the Separation Date, Palm has derived benefits under certain agreements and relationships between -15- 3Com and third parties, which agreements and relationships are not being assigned or transferred to Palm in connection with the Separation. Upon the request of Palm, 3Com agrees to make introductions of appropriate Palm personnel to 3Com's contacts at such third parties, and agrees to provide reasonable assistance to Palm, at 3Com's own expense, so that Palm may enter into agreements or relationships with such third parties under substantially equivalent terms and conditions, including financial terms and conditions, that apply to 3Com. Such assistance may include, but is not limited to, (i) requesting and encouraging such third parties to enter into such agreements or relationships with Palm, (ii) attending meetings and negotiating sessions with Palm and such third parties, and (iii) participating in buying consortiums with Palm. 3Com also understands that certain agreements between 3Com and third parties which are being assigned to Palm in connection with the Separation may require the consent of the applicable third party. 3Com shall assist Palm in seeking and obtaining the consent of such third parties to such assignment. The parties expect that the activities contemplated by this Section 5.14 will be substantially completed by the Distribution Date, but in no event will 3Com have any obligations hereunder after the first anniversary of the Distribution Date. Section 5.15 Property Damage to Palm Assets Prior to the Separation Date. In the event of any property damage, other than ordinary wear and tear, to any Palm Assets held by 3Com which occurs prior to the Separation Date, 3Com shall repair or otherwise address such damage in the ordinary course of business consistent with past practices; provided, however, that nothing in this clause shall restrict 3Com from disposing of any Assets in the ordinary course of business consistent with past practices. ARTICLE VI MISCELLANEOUS Section 6.1 Limitation of Liability. IN NO EVENT SHALL ANY MEMBER OF THE 3COM GROUP OR PALM GROUP BE LIABLE TO ANY OTHER MEMBER OF THE 3COM GROUP OR PALM GROUP FOR ANY SPECIAL, CONSEQUENTIAL, INDIRECT, INCIDENTAL OR PUNITIVE DAMAGES OR LOST PROFITS, HOWEVER CAUSED AND ON ANY THEORY OF LIABILITY (INCLUDING NEGLIGENCE) ARISING IN ANY WAY OUT OF THIS AGREEMENT, WHETHER OR NOT SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES; PROVIDED, HOWEVER, THAT THE FOREGOING LIMITATIONS SHALL NOT LIMIT EACH PARTY'S INDEMNIFICATION OBLIGATIONS FOR LIABILITIES AS SET FORTH IN THE INDEMNIFICATION AND INSURANCE MATTERS AGREEMENT. Section 6.2 Entire Agreement. This Agreement, the Ancillary Agreements and the Exhibits and Schedules referenced or attached hereto and thereto, constitute the entire agreement between the parties with respect to the subject matter hereof and thereof and shall supersede all prior written and oral and all contemporaneous oral agreements and understandings with respect to the subject matter hereof and thereof. -16- Section 6.3 Governing Law. This Agreement shall be construed in accordance with and all Disputes hereunder shall be governed by the laws of the State of California, excluding its conflict of law rules and the United Nations Convention on Contracts for the International Sale of Goods. The Superior Court of Santa Clara County and/or the United States District Court for the Northern District of California shall have jurisdiction and venue over all Disputes between the parties that are permitted to be brought in a court of law pursuant to Section 5.9 above. Section 6.4 Termination. This Agreement and all Ancillary Agreements may be terminated and the Distribution abandoned at any time prior to the IPO Closing Date by and in the sole discretion of 3Com without the approval of Palm. This Agreement may be terminated at any time after the IPO Closing Date and before the Distribution Date by mutual consent of 3Com and Palm. In the event of termination pursuant to this Section 6.4, no party shall have any liability of any kind to the other party. Section 6.5 Notices. Notices, offers, requests or other communications required or permitted to be given by either party pursuant to the terms of this Agreement shall be given in writing to the respective parties to the following addresses: if to 3Com : 3Com Corporation 5400 Bayfront Plaza Santa Clara, California 95052 Attention: General Counsel Fax: (408) 326-6434 if to Palm: Palm Computing, Inc. 5400 Bayfront Plaza Santa Clara, California 95052 Attention: General Counsel Fax: (408) 326-6434 or to such other address as the party to whom notice is given may have previously furnished to the other in writing as provided herein. Any notice involving non-performance, termination, or renewal shall be sent by hand delivery, recognized overnight courier or, within the United States, may also be sent via certified mail, return receipt requested. All other notices may also be sent by fax, confirmed by first class mail. All notices shall be deemed to have been given and received on the earlier of actual delivery or three (3) days from the date of postmark. Section 6.6 Counterparts. This Agreement, including the Ancillary Agreement and the Exhibits and Schedules hereto and thereto and the other documents referred to herein or therein, may be executed in counterparts, each of which shall be deemed to be an original but all of which shall constitute one and the same agreement. Section 6.7 Binding Effect; Assignment. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective legal representatives and successors, and -17- nothing in this Agreement, express or implied, is intended to confer upon any other Person any rights or remedies of any nature whatsoever under or by reason of this Agreement. This Agreement may be enforced separately by each member of the 3Com Group and each member of the Palm Group. Neither party may assign this Agreement or any rights or obligations hereunder, without the prior written consent of the other party, and any such assignment shall be void; provided, however, either party may assign this Agreement to a successor entity in conjunction with such party's reincorporation. Section 6.8 Severability. If any term or other provision of this Agreement or the Exhibits or Schedules attached hereto is determined by a court, administrative agency or arbitrator to be invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to either party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that transactions contemplated hereby are fulfilled to the fullest extent possible. Section 6.9 Failure or Indulgence Not Waiver; Remedies Cumulative. No failure or delay on the part of either party hereto in the exercise of any right hereunder shall impair such right or be construed to be a waiver of, or acquiescence in, any breach of any representation, warranty or agreement herein, nor shall any single or partial exercise of any such right preclude other or further exercise thereof or of any other right. All rights and remedies existing under this Agreement or the Exhibits or Schedules attached hereto are cumulative to, and not exclusive of, any rights or remedies otherwise available. Section 6.10 Amendment. No change or amendment will be made to this Agreement or the Exhibits or Schedules attached hereto except by an instrument in writing signed on behalf of each of the parties to such agreement. Section 6.11 Authority. Each of the parties hereto represents to the other that (a) it has the corporate or other requisite power and authority to execute, deliver and perform this Agreement, (b) the execution, delivery and performance of this Agreement by it have been duly authorized by all necessary corporate or other actions, (c) it has duly and validly executed and delivered this Agreement, and (d) this Agreement is a legal, valid and binding obligation, enforceable against it in accordance with its terms subject to applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally and general equity principles. Section 6.12 Interpretation. The headings contained in this Agreement, in any Exhibit or Schedule hereto and in the table of contents to this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Any capitalized term used in any Exhibit or Schedule but not otherwise defined therein, shall have the meaning assigned to such term in this Agreement. When a reference is made in this Agreement to an Article or a Section, Exhibit or Schedule, such reference shall be to an Article or Section of, or an Exhibit or Schedule to, this Agreement unless otherwise indicated. -18- Section 6.13 Conflicting Agreements. In the event of conflict between this Agreement and any Ancillary Agreement or other agreement executed in connection herewith, the provisions of such other agreement shall prevail. ARTICLE VII DEFINITIONS Section 7.1 Affiliated Company. "Affiliated Company" of any Person means any entity that controls, is controlled by, or is under common control with such Person. As used herein, "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such entity, whether through ownership of voting securities or other interests, by contract or otherwise. Section 7.2 Governmental Approvals. "Governmental Approvals" means any notices, reports or other filings to be made, or any consents, registrations, approvals, permits or authorizations to be obtained from, any Governmental Authority. Section 7.3 Governmental Authority. "Governmental Authority" shall mean any federal, state, local, foreign or international court, government, department, commission, board, bureau, agency, official or other regulatory, administrative or governmental authority. Section 7.4 Information. "Information" means information, whether or not patentable or copyrightable, in written, oral, electronic or other tangible or intangible forms, stored in any medium, including studies, reports, records, books, contracts, instruments, surveys, discoveries, ideas, concepts, know-how, techniques, designs, specifications, drawings, blueprints, diagrams, models, prototypes, samples, flow charts, data, computer data, disks, diskettes, tapes, computer programs or other software, marketing plans, customer names, communications by or to attorneys (including attorney-client privileged communications), memos and other materials prepared by attorneys or under their direction (including attorney work product), and other technical, financial, employee or business information or data. Section 7.5 IPO Closing Date. "IPO Closing Date" has the meaning set forth in the Section 3.3 hereof. Section 7.6 Palm Assets. "Palm Assets" has the meaning set forth in Section 1.2 of the Assignment Agreement. Section 7.7 Palm Group. "Palm Group" means Palm, each Subsidiary and Affiliated Company of Palm immediately after the Separation Date or that is contemplated to be a Subsidiary or Affiliated Company of Palm pursuant to the Non-US Plan and each Person that becomes a Subsidiary or Affiliate Company of Palm after the Separation Date. Section 7.8 Palm's Auditors. "Palm's Auditors" means Palm's independent certified public accountants. -19- Section 7.9 Person. "Person" means an individual, a partnership, a corporation, a limited liability company, an association, a joint stock company, a trust, a joint venture, an unincorporated organization and a governmental entity or any department, agency or political subdivision thereof. Section 7.10 Record Date. "Record Date" means the close of business on the date to be determined by the Board of Directors of 3Com as the record date for determining the stockholders of 3Com entitled to receive shares of common stock of Palm in the Distribution. Section 7.11 Subsidiary. "Subsidiary" of any Person means a corporation or other organization whether incorporated or unincorporated of which at least a majority of the securities or interests having by the terms thereof ordinary voting power to elect at least a majority of the board of directors or others performing similar functions with respect to such corporation or other organization is directly or indirectly owned or controlled by such Person or by any one or more of its Subsidiaries, or by such Person and one or more of its Subsidiaries; provided, however, that no Person that is not directly or indirectly wholly-owned by any other Person shall be a Subsidiary of such other Person unless such other Person controls, or has the right, power or ability to control, that Person. Section 7.12 3Com Group. "3Com Group" means 3Com, each Subsidiary and Affiliated Company of 3Com (other than any member of the Palm Group) immediately after the Separation Date, after giving effect to the Non-US Plan and each Person that becomes a Subsidiary or Affiliate Company of 3Com after the Separation Date. Section 7.13 3Com's Auditors. "3Com's Auditors" means 3Com's independent certified public accountants. -20- WHEREFORE, the parties have signed this Master Separation and Distribution Agreement effective as of the date first set forth above. 3COM CORPORATION PALM COMPUTING, INC. By: /s/ Eric A. Benhamou By: /s/ Judy Bruner -------------------------- ----------------------------------- Name: Eric A. Benhamou Name: Judy Bruner ------------------------ --------------------------------- Title: Chairman and CEO Title: Senior Vice President and CFO ----------------------- -------------------------------- EXHIBITS Exhibit A Certificate of Secretary of 3Com Exhibit B Certificate of Secretary of Palm Exhibit C General Assignment and Assumption Agreement Exhibit D-1 Master Technology Ownership and License Agreement Exhibit D-2 Master Patent Ownership and License Agreement Exhibit D-3 Master Trademark Ownership and License Agreement Exhibit E Employee Matters Agreement Exhibit F Tax Sharing Agreement Exhibit G Master Transitional Services Agreement Exhibit H Real Estate Matters Agreement Exhibit I Master Confidential Disclosure Agreement Exhibit J Indemnification and Insurance Matters Agreement Exhibit K Reorganization of Operations Outside the US (the Non-US Plan) EXHIBIT A CERTIFICATE OF SECRETARY OF 3COM SECRETARY'S CERTIFICATE I, ____________________, Secretary of 3Com Corporation, a corporation organized and existing under the laws of the State of Delaware (the "Company"), DO HEREBY CERTIFY that attached hereto are true and correct copies of certain resolutions adopted in a telephone meeting of the 3Com Corporation Board of Directors on _________, 1999, which resolutions have not been amended, modified, rescinded and remain in full force and effect on the date hereof. IN WITNESS WHEREOF, I have hereunder set my hand and affixed the seal of 3Com Corporation this __________________ day of ___________, 1999. ___________________________________ ________________________, Secretary EXHIBIT B CERTIFICATE OF SECRETARY OF PALM SECRETARY'S CERTIFICATE I, ____________________, Secretary of Palm Computing, Inc., a corporation organized and existing under the laws of the State of California (the "Company"), DO HEREBY CERTIFY that attached hereto are true and correct copies of certain resolutions adopted in a meeting of the Palm Computing, Inc. Board of Directors on __________, 1999, which resolutions have not been amended, modified, rescinded and remain in full force and effect on the date hereof. IN WITNESS WHEREOF, I have hereunder set my hand and affixed the seal of Palm Computing, Inc. this __________________ day of ___________, 1999. ___________________________________ ________________________, Secretary EXHIBIT C GENERAL ASSIGNMENT AND ASSUMPTION AGREEMENT EXHIBIT D-1 MASTER TECHNOLOGY OWNERSHIP AND LICENSE AGREEMENT EXHIBIT D-2 MASTER PATENT OWNERSHIP AND LICENSE AGREEMENT EXHIBIT D-3 MASTER TRADEMARK OWNERSHIP AND LICENSE AGREEMENT EXHIBIT E EMPLOYEE MATTERS AGREEMENT EXHIBIT F TAX SHARING AGREEMENT EXHIBIT G MASTER TRANSITIONAL SERVICES AGREEMENT EXHIBIT H REAL ESTATE MATTERS AGREEMENT EXHIBIT I MASTER CONFIDENTIAL DISCLOSURE AGREEMENT EXHIBIT J INDEMNIFICATION AND INSURANCE MATTERS AGREEMENT EXHIBIT K REORGANIZATION OF OPERATIONS OUTSIDE THE US (THE NON-US PLAN) EX-2.2 3 FORM OF GENERAL ASSIGNMENT & ASSUMPTION AGREEMENT EXHIBIT 2.2 General Assignment and Assumption Agreement between 3COM CORPORATION and PALM, INC. ______________, 2000 TABLE OF CONTENTS
Page ---- ARTICLE I CONTRIBUTION AND ASSUMPTION........................................ 1 Section 1.1 Contribution of Assets and Assumption of Liabilities.... 1 Section 1.2 Palm Assets............................................. 2 Section 1.3 Palm Liabilities........................................ 3 Section 1.4 The Non-US Plan......................................... 5 Section 1.5 Methods of Transfer and Assumption...................... 5 Section 1.6 Governmental Approvals and Consents..................... 6 Section 1.7 Nonrecurring Costs and Expenses......................... 7 Section 1.8 Novation of Assumed Palm Liabilities.................... 7 ARTICLE II LITIGATION........................................................ 8 Section 2.1 Allocation.............................................. 8 Section 2.2 Cooperation............................................. 8 ARTICLE III MISCELLANEOUS.................................................... 9 Section 3.1 Entire Agreement........................................ 9 Section 3.2 Governing Law........................................... 9 Section 3.3 Notices................................................. 9 Section 3.4 Parties in Interest..................................... 9 Section 3.5 Counterparts............................................ 10 Section 3.6 Assignment.............................................. 10 Section 3.7 Severability............................................ 10 Section 3.8 Failure or Indulgence Not Waiver; Remedies Cumulative... 10 Section 3.9 Amendment............................................... 10 Section 3.10 Authority............................................... 10 Section 3.11 Interpretation.......................................... 10 Section 3.12 Conflicting Agreements.................................. 11 ARTICLE IV DEFINITIONS....................................................... 11 Section 4.1 3Com Group.............................................. 11 Section 4.2 Action.................................................. 11 Section 4.3 Affiliated Company...................................... 11 Section 4.4 Ancillary Agreement..................................... 11 Section 4.5 Assets.................................................. 11 Section 4.6 Contracts............................................... 13 Section 4.7 Delayed Transfer Assets................................. 13 Section 4.8 Distribution............................................ 13 Section 4.9 Distribution Date....................................... 13 Section 4.10 Governmental Approvals.................................. 13 Section 4.11 Governmental Authority.................................. 13
-i- TABLE OF CONTENTS (continued)
Page ---- Section 4.12 Indemnification and Insurance Matters Agreement......... 13 Section 4.13 Insurance Policies...................................... 13 Section 4.14 Insured Palm Liabilities................................ 13 Section 4.15 Intellectual Property................................... 14 Section 4.16 IPO Registration Statement.............................. 14 Section 4.17 Liabilities............................................. 14 Section 4.18 Local Transfer Agreements............................... 14 Section 4.19 Non-US Plan............................................. 14 Section 4.20 OFLs.................................................... 14 Section 4.21 Palm Balance Sheet...................................... 15 Section 4.22 Palm Business........................................... 15 Section 4.23 Palm Contingent Gain.................................... 15 Section 4.24 Palm Contingent Liability............................... 16 Section 4.25 Palm Contracts.......................................... 16 Section 4.26 Palm Group.............................................. 17 Section 4.27 Palm Pro Forma Balance Sheet............................ 17 Section 4.28 Person.................................................. 17 Section 4.29 Retained Payables....................................... 17 Section 4.30 Retained Receivables.................................... 17 Section 4.31 Security Interest....................................... 17 Section 4.32 Separation.............................................. 18 Section 4.33 Separation Agreement.................................... 18 Section 4.34 Separation Date......................................... 18 Section 4.35 Subsidiary.............................................. 18 Section 4.36 Taxes................................................... 18
-ii- GENERAL ASSIGNMENT AND ASSUMPTION AGREEMENT This General Assignment and Assumption Agreement (this "Agreement") is entered into on _________, 2000 between 3Com Corporation, a Delaware corporation ("3Com"), and Palm, Inc., a Delaware corporation ("Palm"). Capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed to such terms in Article IV hereof. RECITALS WHEREAS, 3Com hereby and by certain other instruments of even date herewith transfers or will transfer to Palm effective as of the Separation Date, certain assets of the Palm Business owned by 3Com in accordance with the Master Separation and Distribution Agreement dated as of December ___, 1999 between the 3Com and Palm Computing, Inc., a California company (the "Separation Agreement"). WHEREAS, it is further intended between the parties that Palm assume certain of the liabilities related to the Palm Business currently owed by 3Com, as provided in this Agreement, the Separation Agreement or the other agreements and instruments provided for in the Separation Agreement. NOW, THEREFORE, in consideration of the foregoing and the covenants and agreements set forth below, the parties hereto agree as follows: ARTICLE I CONTRIBUTION AND ASSUMPTION Section 1.1 Contribution of Assets and Assumption of Liabilities. (a) Transfer of Assets. Effective on the Separation Date, 3Com hereby assigns, transfers, conveys and delivers (or will cause any applicable Subsidiary to assign, transfer, convey and deliver) to Palm, or, pursuant to Section 1.4, to any applicable Palm Subsidiary, and Palm hereby accepts from 3Com, or applicable 3Com Subsidiary, and agrees to cause its applicable Palm Subsidiary to accept, all of 3Com's and its applicable Subsidiaries' respective right, title and interest in Palm Assets, other than the Delayed Transfer Assets; provided, however, that any Palm Assets that are specifically assigned or transferred pursuant to another Ancillary Agreement shall not be assigned or transferred pursuant to this Section 1.1(a). (b) Assumption of Liabilities. Effective on the Separation Date, Palm hereby assumes and agrees faithfully to perform and fulfill (or will cause any applicable Subsidiary to assume, perform and fulfill), all the Palm Liabilities owed by 3Com, other than the Delayed Transfer Liabilities, in accordance with their respective terms. Thereafter, Palm shall be responsible (or will cause any applicable Subsidiary to be responsible) for all Palm Liabilities held by 3Com, regardless of when or where such Liabilities arose or arise, or whether the facts on which they are based occurred prior to, on or after the date hereof, regardless of where or against whom such Liabilities are asserted or determined (including any Palm Liabilities arising out of claims made by 3Com's or Palm's respective directors, officers, consultants, independent contractors, employees or agents against any member of the 3Com Group or the Palm Group) or whether asserted or determined prior to the date hereof, and regardless of whether arising from or alleged to arise from negligence, recklessness, violation of law, fraud or misrepresentation by any member of the 3Com Group or the Palm Group or any of their respective directors, officers, employees or agents. (c) Delayed Transfer Assets and Liabilities. Each of the parties hereto agrees that the Delayed Transfer Assets will be assigned, transferred, conveyed and delivered, and the Delayed Transfer Liabilities will be assumed, in accordance with the terms of the agreements that provide for such assignment, transfer, conveyance and delivery, or such assumption, after the date of this Agreement or as otherwise set forth on Schedule 1.1(c). Following such assignment, transfer, conveyance and delivery of any Delayed Transfer Asset, or the assumption of any Delayed Transfer Liability, the applicable Delayed Transfer Asset or Delayed Transfer Liability shall be treated for all purposes of this Agreement and the other Ancillary Agreements as a Palm Asset or as a Palm Liability, as the case may be. (d) Misallocated Assets. In the event that at any time or from time to time (whether prior to, on or after the Separation Date), any party hereto (or any member of such party's respective Group), shall receive or otherwise possess any Asset that is allocated to any other Person pursuant to this Agreement or any Ancillary Agreement, such party shall promptly transfer, or cause to be transferred, such Asset to the Person so entitled thereto. Prior to any such transfer, the Person receiving or possessing such Asset shall hold such Asset in trust for any such other Person. Section 1.2 Palm Assets. (a) Included Assets. For purposes of this Agreement, "Palm Assets" shall mean (without duplication) the following Assets, except as otherwise provided for in any other Ancillary Agreement or other express agreement of the parties: (i) all Assets reflected in the Palm Balance Sheet, subject to any dispositions of such Assets subsequent to the date of the Palm Balance Sheet; (ii) all Assets that have been written off, expensed or fully depreciated that, had they not been written off, expensed or fully depreciated, would have been reflected in the Palm Balance Sheet in accordance with the principles and accounting policies under which the Palm Balance Sheet was prepared; (iii) all Assets acquired by 3Com or its Subsidiaries after the date of the Palm Balance Sheet that would be reflected in the consolidated balance sheet of Palm as of the Separation Date if such consolidated balance sheet was prepared using the same principles and accounting policies under which the Palm Balance Sheet was prepared, including any business transaction -2- processing that may occur on 3Com systems on behalf of Palm during the period between separation date to initialization of the processing systems required by Palm; (iv) all Assets that are used primarily by the Palm Business at the Separation Date but are not reflected in the Palm Balance Sheet due to mistake or omission; provided, however, that no Asset shall be a Palm Asset requiring any transfer by 3Com unless Palm or its Subsidiaries have, on or before the first anniversary of the Distribution Date, given 3Com or its Subsidiaries notice that such Asset is a Palm Asset; (v) all Palm Contingent Gains; (vi) all Palm Contracts; (vii) to the extent permitted by law and subject to the Indemnification and Insurance Matters Agreement, all rights of any member of the Palm Group under any of 3Com's Insurance Policies or other insurance policies issued by Persons unaffiliated with 3Com; and (viii) all Assets that are expressly contemplated by this Agreement, the Separation Agreement or any other Ancillary Agreement (or Schedule 1.2(a)(xii) or any other Schedule hereto or thereto) as Assets to be transferred to Palm or any other member of the Palm Group. (b) Excluded Assets. For the purposes of this Agreement, "Excluded Assets" shall mean: (i) the Assets listed or described on Schedule 1.2(b)(i); (ii) the Retained Receivables; and (iii) any Assets that are expressly contemplated by the Separation Agreement, this Agreement or any other Ancillary Agreement (or the Schedules hereto or thereto) as Assets to be retained by 3Com or any other member of the 3Com Group. Section 1.3 Palm Liabilities. (a) Included Liabilities. For the purposes of this Agreement, "Palm Liabilities" shall mean (without duplication) the following Liabilities, except as otherwise provided for in any other Ancillary Agreement or other express agreement of the parties: (i) all Liabilities reflected in the Palm Balance Sheet, subject to any discharge of such Liabilities subsequent to the date of the Palm Balance Sheet; (ii) all Liabilities of 3Com or its Subsidiaries that arise after the date of the Palm Balance Sheet that would be reflected in the consolidated balance sheet of Palm as of the Separation Date if such consolidated balance sheet was prepared using the same principles and accounting policies under which the Palm Balance Sheet was prepared; -3- (iii) all Liabilities that are related primarily to the Palm Business at the Separation Date but are not reflected in the Palm Balance Sheet due to mistake or unintentional omission; provided, however, that no Liability shall be considered as a Palm Liability unless 3Com or its Subsidiaries, on or before the first anniversary of the Distribution Date, has given Palm or its Subsidiaries notice that such Liability is a Palm Liability; (iv) all Palm Contingent Liabilities; (v) all Liabilities (other than Liabilities for Taxes), whether arising before, on or after the Separation Date, primarily relating to, arising out of or resulting from: (1) the operation of the Palm Business, as conducted at any time prior to, on or after the Separation Date (including any Liability relating to, arising out of or resulting from any act or failure to act by any director, officer, employee, agent or representative (whether or not such act or failure to act is or was within such Person's authority)); (2) the operation of any business conducted by any member of the Palm Group at any time after the Separation Date (including any Liability relating to, arising out of or resulting from any act or failure to act by any director, officer, employee, agent or representative (whether or not such act or failure to act is or was within such Person's authority)); or (3) any Palm Assets; (vi) all Liabilities relating to, arising out of or resulting from any of the terminated, divested or discontinued businesses and operations listed or described on Schedule 1.3(a)(vi); and (vii) all Liabilities that are expressly contemplated by this Agreement, Schedule 1.3(a)(vii), the Separation Agreement or any other Ancillary Agreement (or the Schedules hereto or thereto) as Liabilities to be assumed by Palm or any member of the Palm Group, and all agreements, obligations and Liabilities of any member of the Palm Group under this Agreement or any of the Ancillary Agreements. Notwithstanding the foregoing, any Liabilities of any Subsidiaries of 3Com listed on Schedule 2.1(b) of the Separation Agreement shall not be assumed pursuant to Section 1.2(a), and the Palm Liabilities shall not include the Excluded Liabilities referred to in Section 1.3(b) below. (b) Excluded Liabilities. For the purposes of this Agreement, "Excluded Liabilities" shall mean: (i) all Liabilities listed or described in Schedule 1.3(b)(i); (ii) the Retained Payables; -4- (iii) all Insured Palm Liabilities; (iv) all Liabilities that are expressly contemplated by this Agreement, the Separation Agreement or any other Ancillary Agreement (or the Schedules hereto or thereto) as Liabilities to be retained or assumed by 3Com or any other member of the 3Com Group, and all agreements and obligations of any member of the 3Com Group under the Separation Agreement, this Agreement or any other Ancillary Agreement. Section 1.4 The Non-US Plan. Each of 3Com and Palm shall take, and shall cause each member of its respective Group to take, such action as reasonably necessary to consummate the transactions contemplated by the Non-US Plan (whether prior to, on or after the Separation Date). Notwithstanding anything in this Agreement, the Separation Agreement or in any other Ancillary Agreement to the contrary, no party to a Local Transfer Agreement shall be entitled to receive or retain any Asset unless such party shall have paid any consideration contemplated to be paid in connection therewith pursuant to the Non-US Plan. Section 1.5 Methods of Transfer and Assumption. (a) Terms of Other Ancillary Agreements Govern. The parties shall enter into the other Ancillary Agreements, on or about the date of this Agreement. To the extent that the transfer of any Palm Asset or the assumption of any Palm Liability is expressly provided for by the terms of any other Ancillary Agreement, the terms of such other Ancillary Agreement shall effect, and determine the manner of, the transfer or assumption. It is the intent of the parties that pursuant to Sections 1.1, 1.2 and 1.3, the transfer and assumption of all other Palm Assets and Palm Liabilities, other than Delayed Transfer Assets and Delayed Transfer Liabilities, shall be made effective as of the Separation Date; provided, however, that circumstances in various jurisdictions outside the United States may require the transfer of certain Assets and the assumption of certain Liabilities to occur in such other manner and at such other time as the parties shall agree, as provided in Section 1.4 hereof. (b) Mistaken Assignments and Assumptions. In addition to those transfers and assumptions accurately identified and designated by the parties to take place but which the parties are not able to effect prior to the Separation Date, there may exist (i) Assets that the parties discover were, contrary to the agreements between the parties, by mistake or omission, transferred to Palm or (ii) Liabilities that the parties discover were, contrary to the agreements between the parties, by mistake or omission, assumed by Palm. The parties shall cooperate in good faith to effect the transfer or re-transfer of such Assets, and/or the assumption or re-assumption of such Liabilities, to or by the appropriate party and shall not use the determination that remedial actions need to be taken to alter the original intent of the parties hereto with respect to the Assets to be transferred to or Liabilities to be assumed by Palm. Each party shall reimburse the other or make other financial adjustments (e.g., without limitation, cash reserves) or other adjustments to remedy any mistakes or omissions relating to any of the Assets transferred hereby or any of the Liabilities assumed hereby. -5- (c) Documents Relating to Other Transfers of Assets and Assumption of Liabilities. In furtherance of the assignment, transfer and conveyance of Palm Assets and the assumption of Palm Liabilities set forth in Sections 1.5(a) and (b) and certain other Ancillary Agreements, simultaneously with the execution and delivery hereof or as promptly as practicable thereafter, (i) 3Com shall execute and deliver, and shall cause its Subsidiaries in accordance with Local Transfer Agreements to execute and deliver, such bills of sale, stock powers, certificates of title, assignments of contracts and other instruments of transfer, conveyance and assignment as and to the extent necessary to evidence the transfer, conveyance and assignment of all of 3Com's and its Subsidiaries' right, title and interest in and to the Palm Assets to Palm and (ii) Palm shall execute and deliver to 3Com and its Subsidiaries such assumptions of contracts and other instruments of assumption as and to the extent necessary to evidence the valid and effective assumption of the Palm Liabilities by Palm. Section 1.6 Governmental Approvals and Consents. (a) Transfer In Violation of Laws. If and to the extent that the valid, complete and perfected transfer assignment or novation to the Palm Group of any Palm Assets and Palm Liabilities (or from the Palm Group of any Non-Palm Assets) would be a violation of applicable laws or require any Consent or Governmental Approval in connection with the Separation, the IPO or the Distribution, then, unless 3Com shall otherwise determine, the transfer, assignment or novation to or from the Palm Group, as the case may be, of such Palm Assets or Non-Palm Assets, respectively, shall be automatically deemed deferred and any such purported transfer, assignment or novation shall be null and void until such time as all legal impediments are removed and/or such Consents or Governmental Approvals have been obtained. Notwithstanding the foregoing, such Asset shall still be considered a Palm Asset for purposes of determining whether any Liability is a Palm Liability; provided, however, that if such covenants or Governmental Approvals have not been obtained within six months of the Distribution Date, the parties will use their reasonable commercial efforts to achieve an alternative solution in accordance with the parties' intentions. (b) Transfers Not Consummated Prior to Separation Date. If the transfer, assignment or novation of any Assets intended to be transferred or assigned hereunder, including pursuant to the Non-US Plan, is not consummated prior to or on the Separation Date, whether as a result of the provisions of Section 1.6(a) or for any other reason, then the Person retaining such Asset shall thereafter hold such Asset for the use and benefit, insofar as reasonably possible, of the Person entitled thereto (at the expense of the Person entitled thereto). In addition, the Person retaining such Asset shall take such other actions as may be reasonably requested by the Person to whom such Asset is to be transferred in order to place such Person, insofar as reasonably possible, in the same position as if such Asset had been transferred as contemplated hereby and so that all the benefits and burdens relating to such Palm Assets (or such Non-Palm Assets, as the case may be), including possession, use, risk of loss, potential for gain, and dominion, control and command over such Assets, are to inure from and after the Separation Date to the Palm Group (or the 3Com Group, as the case may be). If and when the Consents and/or Governmental Approvals, the absence of which caused the deferral of transfer of any Asset pursuant to Section 1.6(a), are obtained, the transfer of -6- the applicable Asset shall be effected in accordance with the terms of this Agreement and/or such other applicable Ancillary Agreement. (c) Expenses. The Person retaining an Asset due to the deferral of the transfer of such Asset shall not be obligated, in connection with the foregoing, to expend any money unless the necessary funds are advanced by the Person entitled to the Asset, other than reasonable out-of-pocket expenses, attorneys' fees and recording or similar fees, all of which shall be promptly reimbursed by the Person entitled to such Asset. Section 1.7 Nonrecurring Costs and Expenses. Notwithstanding anything herein to the contrary, any nonrecurring costs and expenses incurred by the parties hereto to effect the transactions contemplated hereby which are not allocated pursuant to the terms of the Separation Agreement, this Agreement or any other Ancillary Agreement shall be the responsibility of the party which incurs such costs and expenses. Section 1.8 Novation of Assumed Palm Liabilities. (a) Reasonable Commercial Efforts. Each of 3Com and Palm, at the request of the other, shall use its reasonable commercial efforts to obtain, or to cause to be obtained, any consent, substitution, approval or amendment required to novate (including with respect to any federal government contract) or assign all rights and obligations under agreements, leases, licenses and other obligations or Liabilities (including Palm OFLs) of any nature whatsoever that constitute Palm Liabilities or to obtain in writing the unconditional release of all parties to such arrangements other than any member of the Palm Group, so that, in any such case, Palm and its Subsidiaries will be solely responsible for such Liabilities; provided, however, that neither 3Com, Palm nor their Subsidiaries shall be obligated to pay any consideration therefor to any third party from whom such consents, approvals, substitutions and amendments are requested. (b) Inability to Obtain Novation. If 3Com or Palm is unable to obtain, or to cause to be obtained, any such required consent, approval, release, substitution or amendment, the applicable member of the 3Com Group shall continue to be bound by such agreements, leases, licenses and other obligations and, unless not permitted by law or the terms thereof (except to the extent expressly set forth in this Agreement, the Separation Agreement or any other Ancillary Agreement), Palm shall, as agent or subcontractor for 3Com or such other Person, as the case may be, pay, perform and discharge fully, or cause to be paid, transferred or discharged all the obligations or other Liabilities of 3Com or such other Person, as the case may be, thereunder from and after the date hereof. 3Com shall, without further consideration, pay and remit, or cause to be paid or remitted, to Palm or its appropriate Subsidiary promptly all money, rights and other consideration received by it or any member of its respective Group in respect of such performance (unless any such consideration is an Excluded Asset). If and when any such consent, approval, release, substitution or amendment shall be obtained or such agreement, lease, license or other rights or obligations shall otherwise become assignable or able to be novated, 3Com shall thereafter assign, or cause to be assigned, all its rights, obligations and other Liabilities thereunder or any rights or obligations of any -7- member of its respective Group to Palm without payment of further consideration and Palm shall, without the payment of any further consideration, assume such rights and obligations. ARTICLE II LITIGATION Section 2.1 Allocation. (a) Litigation to Be Transferred to Palm. Notwithstanding any contrary provisions in the Indemnification and Insurance Matters Agreement, on the Separation Date, the responsibilities for management of the litigation identified in a litigation disclosure letter (the "Litigation Disclosure Letter"), which will be delivered by 3Com to Palm on the Separation Date, shall be transferred in their entirety from 3Com and its Subsidiaries to Palm and its Subsidiaries. As of the Separation Date and thereafter, Palm shall manage the defense of such litigation and shall cause its applicable Subsidiaries to do the same. 3Com and its Subsidiaries must first obtain the prior consent of Palm or its applicable Subsidiary for any action taken subsequent to the Separation Date in connection with the litigation identified in the Litigation Disclosure Letter, which consent cannot be unreasonably withheld or delayed. All other matters relating to such litigation, including but not limited to indemnification for such claims, shall be governed by the provisions of the Indemnification and Insurance Matters Agreement. (b) Litigation to be Defended by 3Com at Palm's Expense. Notwithstanding any contrary provisions in the Indemnification and Insurance Matters Agreement, 3Com shall defend, and shall cause its applicable Subsidiaries to defend, the litigation identified in the Litigation Disclosure Letter that is not delivered by 3Com to Palm on the Separation Date. All other matters relating to such litigation, including but not limited to indemnification for such claims, shall be governed by the provisions of the Indemnification and Insurance Matters Agreement . Section 2.2 Cooperation. 3Com and Palm and their respective Subsidiaries shall cooperate with each other in the defense of any litigation covered under this Article II and afford to each other reasonable access upon reasonable advance notice to witnesses and Information (other than Information protected from disclosure by applicable privileges) that is reasonably required to defend this litigation (as "Information" is defined pursuant to Section 5.4 of the Separation Agreement). The foregoing agreement to cooperate includes, but is not limited to, an obligation to provide access to qualified assistance to provide information, witnesses and documents to respond to discovery requests in specific lawsuits. In such cases, cooperation shall be timely so that the party responding to discovery may meet all court-imposed deadlines. The party requesting information shall reimburse the party providing information consistent with the terms of Section 5.4 of the Separation Agreement. The obligations set forth in this paragraph are more clearly defined in Section 5.4 of the Separation Agreement. -8- ARTICLE III MISCELLANEOUS Section 3.1 Entire Agreement. This Agreement, the Separation Agreement, the other Ancillary Agreements and the Exhibits and Schedules referenced or attached hereto and thereto, constitutes the entire agreement between the parties with respect to the subject matter hereof and shall supersede all prior written and oral and all contemporaneous oral agreements and understandings with respect to the subject matter hereof. Section 3.2 Governing Law. This Agreement shall be construed in accordance with and all Disputes hereunder shall be governed by the laws of the State of California, excluding its conflict of law rules and the United Nations Convention on Contracts for the International Sale of Goods. The Superior Court of Santa Clara County and/or the United States District Court for the Northern District of California shall have jurisdiction and venue over all Disputes between the parties that are permitted to be brought in a court of law pursuant to Section 5.9 of the Separation Agreement. Section 3.3 Notices. Notices, offers, requests or other communications required or permitted to be given by either party pursuant to the terms of this Agreement shall be given in writing to the respective parties to the following addresses: if to 3Com: 3Com Corporation 5400 Bayfront Plaza Santa Clara, California 95052 Attention: General Counsel Fax: (408) 326-6434 if to Palm: Palm, Inc. 5400 Bayfront Plaza Santa Clara, California 95052 Attention: General Counsel Fax: (408) 326-6434 or to such other address as the party to whom notice is given may have previously furnished to the other in writing as provided herein. Any notice involving non-performance, termination, or renewal shall be sent by hand delivery, recognized overnight courier or, within the United States, may also be sent via certified mail, return receipt requested. All other notices may also be sent by fax, confirmed by first class mail. All notices shall be deemed to have been given and received on the earlier of actual delivery or three (3) days from the date of postmark. Section 3.4 Parties in Interest. This Agreement, including the Exhibits and Schedules hereto, and the other documents referred to herein, shall be binding upon and inure solely to the -9- benefit of each party hereto and their legal representatives and successors, and nothing in this Agreement, express or implied, is intended to confer upon any other Person any rights or remedies of any nature whatsoever under or by reason of this Agreement. Section 3.5 Counterparts. This Agreement, including the Exhibits and Schedules hereto, and the other documents referred to herein, may be executed in counterparts, each of which shall be deemed to be an original but all of which shall constitute one and the same agreement. Section 3.6 Assignment. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective legal representatives and successors. This Agreement may not be assigned by any party hereto, without the other party's express written consent. Section 3.7 Severability. If any term or other provision of this Agreement or the Exhibits or Schedules attached hereto is determined by a nonappealable decision by a court, administrative agency or arbitrator to be invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that transactions contemplated hereby are fulfilled to the fullest extent possible. Section 3.8 Failure or Indulgence Not Waiver; Remedies Cumulative. No failure or delay on the part of any party hereto in the exercise of any right hereunder shall impair such right or be construed to be a waiver of, or acquiescence in, any breach of any representation, warranty or agreement herein, nor shall any single or partial exercise of any such right preclude other or further exercise thereof or of any other right. All rights and remedies existing under this Agreement or the Schedules or Exhibits attached hereto are cumulative to, and not exclusive of, any rights or remedies otherwise available. Section 3.9 Amendment. No change or amendment will be made to this Agreement except by an instrument in writing signed on behalf of each of the parties to such agreement. Section 3.10 Authority. Each of the parties hereto represents to the other that (a) it has the corporate or other requisite power and authority to execute, deliver and perform this Agreement, (b) the execution, delivery and performance of this Agreement by it have been duly authorized by all necessary corporate or other action, (c) it has duly and validly executed and delivered this Agreement, and (d) this Agreement is a legal, valid and binding obligation, enforceable against it in accordance with its terms subject to applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally and general equity principles. Section 3.11 Interpretation. The headings contained in this Agreement, in any Exhibit or Schedule hereto and in the table of contents to this Agreement are for reference purposes only and -10- shall not affect in any way the meaning or interpretation of this Agreement. Any capitalized term used in any Schedule or Exhibit but not otherwise defined therein, shall have the meaning assigned to such term in this Agreement. When a reference is made in this Agreement to an Article or a Section, Exhibit or Schedule, such reference shall be to an Article or Section of, or an Exhibit or Schedule to, this Agreement unless otherwise indicated. Section 3.12 Conflicting Agreements. In the event of conflict between this Agreement and any other Ancillary Agreement or other agreement executed in connection herewith, the provisions of such other agreement shall prevail (other than (i) as otherwise provided herein and (ii) the Separation Agreement). ARTICLE IV DEFINITIONS Section 4.1 3Com Group. "3Com Group" means 3Com, each Subsidiary and Affiliated Company of 3Com (other than any member of the Palm Group) immediately after the Separation Date, after giving effect to the Non-US Plan and each Person that becomes a Subsidiary or Affiliate Company of 3Com after the Separation Date. Section 4.2 Action. "Action" means any demand, action, suit, countersuit, arbitration, inquiry, proceeding or investigation by or before any federal, state, local, foreign or international governmental authority or any arbitration or mediation tribunal. Section 4.3 Affiliated Company. "Affiliated Company" of any Person means a Person that controls, is controlled by, or is under common control with such Person. As used herein, "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such entity, whether through ownership of voting securities or other interests, by contract or otherwise. Section 4.4 Ancillary Agreement. "Ancillary Agreement" has the meaning set forth in Section 2.1 of the Separation Agreement. Section 4.5 Assets. "Assets" means assets, properties and rights (including goodwill), wherever located (including in the possession of vendors or other third parties or elsewhere), whether real, personal or mixed, tangible, intangible or contingent, in each case whether or not recorded or reflected or required to be recorded or reflected on the books and records or financial statements of any Person, including the following: (i) all accounting and other books, records and files whether in paper, microfilm, microfiche, computer tape or disc, magnetic tape or any other form; (ii) all apparatus, computers and other electronic data processing equipment, , automobiles, trucks, aircraft, rolling stock, vessels, motor vehicles and other transportation -11- equipment, special and general tools, test devices, prototypes and models and other tangible personal property, but excluding fixtures, machinery, equipment, furniture and office equipment; (iii) all inventories of materials, parts, raw materials, supplies, work-in-process and finished goods and products; (iv) all interests in real property of whatever nature, including easements, whether as owner, mortgagee or holder of a Security Interest, lessor, sublessor, lessee, sublessee or otherwise; (vi) all interests in any capital stock or other equity interests of any Subsidiary or any other Person; all bonds, notes, debentures or other securities issued by any Subsidiary or any other Person; all loans, advances or other extensions of credit or capital contributions to any Subsidiary or any other Person; and all other investments in securities of any Person; (vii) all license agreements, leases of personal property, open purchase orders for raw materials, supplies, parts or services, unfilled orders for the manufacture and sale of products and other contracts, agreements or commitments; (vii) all deposits, letters of credit and performance and surety bonds; (viii) all written technical information, data, specifications, research and development information, engineering drawings, operating and maintenance manuals, and materials and analyses prepared by consultants and other third parties; (ix) all Intellectual Property and licenses from third Persons granting the right to use any Intellectual Property; (x) all computer applications, programs and other software, including operating software, network software, firmware, middleware, design software, design tools, systems documentation and instructions; (xi) all cost information, sales and pricing data, customer prospect lists, supplier records, customer and supplier lists, customer and vendor data, correspondence and lists, product literature, artwork, design, development and manufacturing files, vendor and customer drawings, formulations and specifications, quality records and reports and other books, records, studies, surveys, reports, plans and documents; (xii) all prepaid expenses, trade accounts and other accounts and notes receivables; (xiii) all rights under contracts or agreements, all claims or rights against any Person arising from the ownership of any Asset, all rights in connection with any bids or offers and all claims, choses in action or similar rights, whether accrued or contingent; -12- (xiv) all rights under insurance policies and all rights in the nature of insurance, indemnification or contribution; (xv) all licenses (including radio and similar licenses), permits, approvals and authorizations which have been issued by any Governmental Authority; (xvi) cash or cash equivalents, bank accounts, lock boxes and other deposit arrangements; and (xvi) interest rate, currency, commodity or other swap, collar, cap or other hedging or similar agreements or arrangements. Section 4.6 Contracts. "Contracts" means any contract, agreement, lease, license, sales order, purchase order, instrument or other commitment that is binding on any Person or any part of its property under applicable law. Section 4.7 Delayed Transfer Assets. "Delayed Transfer Assets" means any Palm Assets that are expressly provided in this Agreement, the Separation Agreement or any other Ancillary Agreement to be transferred after the date of this Agreement. Section 4.8 Distribution. "Distribution" means 3Com's pro rata distribution to the holders of its common stock, $0.001 par value, following the IPO as provided in the Separation Agreement, of all of the shares of Palm common stock owned by 3Com. Section 4.9 Distribution Date. "Distribution Date" has the meaning set forth in Section 4.1 of the Separation Agreement. Section 4.10 Governmental Approvals. "Governmental Approvals" means any notices, reports or other filings to be made, or any consents, registrations, approvals, permits or authorizations to be obtained from, any Governmental Authority. Section 4.11 Governmental Authority. "Governmental Authority" means any federal, state, local, foreign or international court, government, department, commission, board, bureau, agency, official or other regulatory, administrative or governmental authority. Section 4.12 Indemnification and Insurance Matters Agreement. "Indemnification and Insurance Matters Agreement" means the Indemnification and Insurance Matters Agreement attached as Exhibit J to the Separation Agreement. Section 4.13 Insurance Policies. "Insurance Policies" means insurance policies pursuant to which a Person makes a true risk transfer to an insurer. Section 4.14 Insured Palm Liabilities. "Insured Palm Liabilities" means any Palm Liability to the extent that (i) it is covered under the terms of 3Com's Insurance Policies in effect -13- prior to the Distribution Date and (ii) Palm is not a named insured under, or otherwise entitled to the benefits of, such Insurance Policies. Section 4.15 Intellectual Property. "Intellectual Property" means all domestic and foreign patents and patent applications, together with any continuations, continuations-in-part or divisional applications thereof, and all patents issuing thereon (including reissues, renewals and re-examinations of the foregoing); design patents, invention disclosures; mask works; copyrights, and copyright applications and registrations; Web addresses, trademarks, service marks, trade names, and trade dress, in each case together with any applications and registrations therefor and all appurtenant goodwill relating thereto; trade secrets, commercial and technical information, know-how, proprietary or confidential information, including engineering, production and other designs, notebooks, processes, drawings, specifications, formulae, and technology; computer and electronic data processing programs and software (object and source code), data bases and documentation thereof; inventions (whether patented or not); utility models; registered designs, certificates of invention and all other intellectual property under the laws of any country throughout the world. Section 4.16 IPO Registration Statement. "IPO Registration Statement" means the registration statement on Form S-1 pursuant to the Securities Act of 1933, as amended, to be filed with the Securities and Exchange Commission registering the shares of common stock of Palm to be issued in the initial public offering, together with all amendments thereto. Section 4.17 Liabilities. "Liabilities" means all debts, liabilities, guarantees, assurances, commitments and obligations, whether fixed, contingent or absolute, asserted or unasserted, matured or unmatured, liquidated or unliquidated, accrued or not accrued, known or unknown, due or to become due, whenever or however arising (including, without limitation, whether arising out of any Contract or tort based on negligence or strict liability) and whether or not the same would be required by generally accepted principles and accounting policies to be reflected in financial statements or disclosed in the notes thereto. Section 4.18 Local Transfer Agreements. "Local Transfer Agreements" means the agreements necessary to effect the Non-US Plan (as defined in the Separation Agreement). Section 4.19 Non-US Plan. "Non-US Plan" has the meaning set forth in Section 5.8 of the Separation Agreement. Section 4.20 OFLs. "OFLs" mean all liabilities, obligations, contingencies, instruments and other Liabilities of any member of the 3Com Group of a financial nature with third parties existing on the date hereof or entered into or established between the date hereof and the Separation Date, including any of the following: (i) foreign exchange contracts; (ii) letters of credit; -14- (iii) guarantees of third party loans to customers; (iv) surety bonds (excluding surety for workers' compensation self-insurance); (v) interest support agreements on third party loans to customers; (vi) performance bonds or guarantees issued by third parties; (vii) swaps or other derivatives contracts; and (viii) recourse arrangements on the sale of receivables or notes. Section 4.21 Palm Balance Sheet. "Palm Balance Sheet" means the audited consolidated balance sheet (including the notes thereto) of the Palm Business as of August 27, 1999, that is included in the IPO Registration Statement. Section 4.22 Palm Business. "Palm Business" means the business and operations of the business of Palm as described in the IPO Registration Statement and, except as otherwise expressly provided herein, any terminated, divested or discontinued businesses or operations that at the time of termination, divestiture or discontinuation primarily related to the Palm Business as then conducted. Section 4.23 Palm Contingent Gain. "Palm Contingent Gain" means any claim or other right of a member of the 3Com Group or the Palm Group that primarily relates to the Palm Business, whenever arising, against any Person other than a member of the 3Com Group or the Palm Group, if and to the extent that (i) such claim or right arises out of the events, acts or omissions occurring as of the Separation Date (based on then existing law) and (ii) the existence or scope of the obligation of such other Person as of the Separation Date was not acknowledged, fixed or determined in any material respect, due to a dispute or other uncertainty as of the Separation Date or as a result of the failure of such claim or other right to have been discovered or asserted as of the Separation Date. A claim or right meeting the foregoing definition shall be considered a Palm Contingent Gain regardless of whether there was any Action pending, threatened or contemplated as of the Separation Date with respect thereto. In the case of any claim or right a portion of which arises out of events, acts or omissions occurring prior to the Separation Date and a portion of which arises out of events, acts or omissions occurring on or after the Separation Date, only that portion that arises out of events, acts or omissions occurring prior to the Separation Date shall be considered a Palm Contingent Gain. For purposes of the foregoing, a claim or right shall be deemed to have accrued as of the Separation Date if all the elements of the claim necessary for its assertion shall have occurred on or prior to the Separation Date, such that the claim or right, were it asserted in an Action on or prior to the Separation Date, would not be dismissed by a court on ripeness or similar grounds. Notwithstanding the foregoing, none of (i) any Insurance Proceeds, (ii) any Excluded Assets, (iii) any reversal of any litigation or other reserve, or (iv) any matters relating to Taxes (which are governed by the Tax Sharing Agreement) shall be deemed to be a Palm Contingent Gain. -15- Section 4.24 Palm Contingent Liability. "Palm Contingent Liability" means any Liability, other than Liabilities for Taxes (which are governed by the Tax Sharing Agreement), of a member of the 3Com Group or the Palm Group that primarily relates to the Palm Business, whenever arising, to any Person other than a member of the 3Com Group or the Palm Group, if and to the extent that (i) such Liability arises out of the events, acts or omissions occurring as of the Separation Date and (ii) the existence or scope of the obligation of a member of the 3Com Group or the Palm Group as of the Separation Date with respect to such Liability was not acknowledged, fixed or determined in any material respect, due to a dispute or other uncertainty as of the Separation Date or as a result of the failure of such Liability to have been discovered or asserted as of the Separation Date (it being understood that the existence of a litigation or other reserve with respect to any Liability shall not be sufficient for such Liability to be considered acknowledged, fixed or determined). In the case of any Liability a portion of which arises out of events, acts or omissions occurring prior to the Separation Date and a portion of which arises out of events, acts or omissions occurring on or after the Separation Date, only that portion that arises out of events, acts or omissions occurring prior to the Separation Date shall be considered a Palm Contingent Liability. For purposes of the foregoing, a Liability shall be deemed to have arisen out of events, acts or omissions occurring prior to the Separation Date if all the elements necessary for the assertion of a claim with respect to such Liability shall have occurred on or prior to the Separation Date, such that the claim, were it asserted in an Action on or prior to the Separation Date, would not be dismissed by a court on ripeness or similar grounds. For purposes of clarification of the foregoing, the parties agree that no Liability relating to, arising out of or resulting from any obligation of any Person to perform the executory portion of any contract or agreement existing as of the Separation Date, or to satisfy any obligation accrued under any Plan (as defined in the Employee Matters Agreement) as of the Separation Date, shall deemed to be a Palm Contingent Liability. For purposes of determining whether a claim relating to the Year 2000 problem is a Palm Contingent Liability, claims relating to products shipped prior to the Separation Date shall be deemed to have arisen prior to the Separation Date. Section 4.25 Palm Contracts. "Palm Contracts" means the following contracts and agreements to which 3Com is a party or by which it or any of its Assets is bound, whether or not in writing, except for any such contract or agreement that is contemplated to be retained by 3Com or any member of the 3Com Group pursuant to any provision of this Agreement or any other Ancillary Agreement: (i) any contract or agreement entered into in the name of, or expressly on behalf of, any division or business unit of Palm; (ii) any contract or agreement that relates primarily to the Palm Business; (iii) any contract or agreement that is otherwise expressly contemplated pursuant to this Agreement, the Separation Agreement or any of the other Ancillary Agreements to be assigned to Palm; -16- (iv) any guarantee, indemnity, representation, warranty or other Liability of any member of the Palm Group or the 3Com Group in respect of any other Palm Contract, any Palm Liability or the Palm Business (including guarantees of financing incurred by customers or other third parties in connection with purchases of products or services from the Palm Business); and (v) any Palm OFL. Section 4.26 Palm Group. "Palm Group" means Palm, each Subsidiary and Affiliated Company of Palm immediately after the Separation Date or that is contemplated to be a Subsidiary or Affiliated Company of Palm pursuant to the Non-US Plan and each Person that becomes a Subsidiary or Affiliate Company of Palm after the Separation Date. Section 4.27 Palm Pro Forma Balance Sheet. "Palm Pro Forma Balance Sheet" means the unaudited pro forma condensed consolidated balance sheet appearing in the IPO Registration Statement. Section 4.28 Person. "Person" means an individual, a partnership, a corporation, a limited liability company, an association, a joint stock company, a trust, a joint venture, an unincorporated organization and a governmental entity or any department, agency or political subdivision thereof. Section 4.29 Retained Payables. "Retained Payables" means (i) all accounts payable and other obligations of payment for goods or services purchased, leased or otherwise received in the conduct of the Palm Business that as of the Separation Date are payable to a third Person by 3Com or any of 3Com's Subsidiaries, whether past due, due or to become due, including any interest, sales or use taxes, finance charges, late or returned check charges and other obligations of 3Com or any of 3Com's Subsidiaries with respect thereto, and any obligations related to any of the foregoing and (ii) all employee compensation Liabilities and other miscellaneous Liabilities for which an adjustment is made in the Palm Pro Forma Balance Sheet. Section 4.30 Retained Receivables. "Retained Receivables" means (i) all accounts receivable and other rights to payment for goods or services sold, leased or otherwise provided in the conduct of the Palm Business that as of the Separation Date are payable by a third Person to 3Com or any of 3Com's Subsidiaries, whether past due, due or to become due, including any interest, sales or use taxes, finance charges, late or returned check charges and other obligations of the account debtor with respect thereto, and any proceeds of any of the foregoing and (ii) all other miscellaneous Assets for which an adjustment is made in the Palm Pro Forma Balance Sheet. Section 4.31 Security Interest. "Security Interest" means any mortgage, security interest, pledge, lien, charge, claim, option, right to acquire, voting or other restriction, right-of-way, covenant, condition, easement, encroachment, restriction on transfer, or other encumbrance of any nature whatsoever. -17- Section 4.32 Separation. "Separation" means the transfer and contribution from 3Com to Palm, and Palm's receipt and assumption of, directly or indirectly, substantially all of the Assets and Liabilities currently associated with the Palm Business and the stock, investments or similar interests currently held by 3Com in subsidiaries and other entities that conduct such business. Section 4.33 Separation Agreement. "Separation Agreement" means the Master Separation and Distribution Agreement dated as of December ___, 1999, of which this is an Exhibit thereto. Section 4.34 Separation Date. "Separation Date" means the effective date and time of each transfer of property, assumption of liability, license, undertaking, or agreement in connection with the Separation, which shall be 12:01 a.m., Pacific Time, February 26, 2000, or such date as may be fixed by the Board of Directors of 3Com. Section 4.35 Subsidiary. "Subsidiary" of any Person means any corporation or other organization whether incorporated or unincorporated of which at least a majority of the securities or interest having by the terms thereof ordinary voting power to elect at least a majority of the board of directors or others performing similar functions with respect to such corporation or other organization is directly or indirectly owned or controlled by such Person or by any one or more of its Subsidiaries, or by such Person and one or more of its Subsidiaries; provided, however that no Person that is not directly or indirectly wholly owned by any other Person shall be a Subsidiary of such other Person unless such other Person controls, or has the right, power or ability to control, that Person . Section 4.36 Taxes. "Taxes" has the meaning set forth in the Tax Sharing Agreement. [SIGNATURES ON FOLLOWING PAGE] -18- IN WITNESS WHEREOF, each of the parties has caused this General Assignment and Assumption Agreement to be executed on its behalf by its officers thereunto duly authorized on the day and year first above written. 3COM CORPORATION PALM, INC. By:________________________________ By:_____________________________________ Name:______________________________ Name:___________________________________ Title:_____________________________ Title:__________________________________ -19- SCHEDULES Schedule 1.1(c) Delayed Transfer Assets and Liabilities Schedule 1.2(a)(xii) Specific Palm Assets to be Transferred Schedule 1.2(b)(i) Excluded Assets Schedule 1.3(a)(vi) Divested Businesses Which Contain Liabilities to be Transferred to Palm Schedule 1.3(a)(vii) Specific Palm Liabilities Schedule 1.3(b)(i) Excluded Liabilities Schedule 1.1(c) Delayed Transfer Assets and Liabilities -21- Schedule 1.2(a)(xii) Specific Palm Assets to be Transferred -22- Schedule 1.2(b)(i) Excluded Assets -23- Schedule 1.3(a)(vi) Divested Businesses Which Contain Liabilities to be Transferred to Palm -24- Schedule 1.3(a)(vii) Specific Palm Liabilities -25- Schedule 1.3(b)(i) Excluded Liabilities -26- EX-2.3 4 FORM OF MASTER TECH OWNERSHIP & LICENSE AGREEMENT EXHIBIT 2.3 3COM/PALM CONFIDENTIAL DRAFT - WSGR 12/01/1999 MASTER TECHNOLOGY OWNERSHIP AND LICENSE AGREEMENT between 3COM CORPORATION and PALM, INC. Effective as of ________, 2000 3COM/PALM CONFIDENTIAL DRAFT - WSGR 12/01/1999 MASTER TECHNOLOGY OWNERSHIP AND LICENSE AGREEMENT TABLE OF CONTENTS
Page ---- ARTICLE 1 DEFINITIONS............................................. 1 1.1 ANCILLARY AGREEMENTS................................... 1 1.2 COPYRIGHTS............................................. 1 1.3 DATABASE RIGHTS........................................ 2 1.4 DISTRIBUTION DATE...................................... 2 1.5 GALAHAD PROJECT........................................ 2 1.6 GENERAL ASSIGNMENT AND ASSUMPTION AGREEMENT............ 2 1.7 INVENTION DISCLOSURE................................... 2 1.8 IPO REGISTRATION STATEMENT............................. 2 1.9 JOINT TECHNOLOGY....................................... 2 1.10 MASK WORK RIGHTS....................................... 2 1.11 MASTER CONFIDENTIAL DISCLOSURE AGREEMENT............... 3 1.12 MASTER PATENT OWNERSHIP AND ASSIGNMENT AGREEMENT....... 3 1.13 MASTER SEPARATION AND DISTRIBUTION AGREEMENT........... 3 1.14 PALM BUSINESS.......................................... 3 1.15 PALM COMPUTING PLATFORM................................ 3 1.16 PALM OS................................................ 3 1.17 PALM PRODUCTS DATABASE................................. 3 1.18 PALM TECHNOLOGY........................................ 3 1.19 PALM TECHNOLOGY DATABASE............................... 4 1.20 PATENTS................................................ 4 1.21 PERSON................................................. 4 1.22 SELL................................................... 4 1.23 SEPARATION DATE........................................ 4 1.24 SUBSIDIARY............................................. 4 1.25 TDC.................................................... 4 1.26 TECHNOLOGY............................................. 5 1.27 THIRD PARTY............................................ 5 ARTICLE 2 OWNERSHIP............................................... 5 2.1 OWNERSHIP OF PALM TECHNOLOGY........................... 5 2.2 JOINT TECHNOLOGY....................................... 6 2.3 PRIOR GRANTS........................................... 6 2.4 ASSIGNMENT DISCLAIMER.................................. 7
-i- 3COM/PALM CONFIDENTIAL DRAFT - WSGR 12/01/1999 TABLE OF CONTENTS (continued)
Page ---- ARTICLE 3 LICENSES AND RIGHTS..................................... 7 3.1 PALM COMPUTING PLATFORM................................ 7 3.2 GALAHAD PROJECT AND TDC................................ 7 3.3 RIGHTS TO JOINT TECHNOLOGY............................. 8 3.4 NO PATENT LICENSES..................................... 9 3.5 THIRD PARTY TECHNOLOGY................................. 9 ARTICLE 4 CONFIDENTIALITY......................................... 9 ARTICLE 5 NO TERMINATION.......................................... 9 ARTICLE 6 DISPUTE RESOLUTION...................................... 9 6.1 MEDIATION.............................................. 9 6.2 ARBITRATION............................................ 10 6.3 COURT ACTION........................................... 10 6.4 CONTINUITY OF SERVICE AND PERFORMANCE.................. 11 ARTICLE 7 LIMITATION OF LIABILITY................................. 11 ARTICLE 8 MISCELLANEOUS PROVISIONS................................ 11 8.1 DISCLAIMER............................................. 11 8.2 NO IMPLIED LICENSES.................................... 12 8.3 INFRINGEMENT SUITS..................................... 12 8.4 NO OTHER OBLIGATIONS................................... 12 8.5 ENTIRE AGREEMENT....................................... 12 8.6 GOVERNING LAW.......................................... 13 8.7 DESCRIPTIVE HEADINGS................................... 13 8.8 NOTICES................................................ 13 8.9 NONASSIGNABILITY....................................... 14 8.10 SEVERABILITY........................................... 14 8.11 FAILURE OR INDULGENCE NOT WAIVER; REMEDIES CUMULATIVE.. 14 8.12 AMENDMENT.............................................. 14 8.13 COUNTERPARTS........................................... 15
-ii- MASTER TECHNOLOGY OWNERSHIP AND LICENSE AGREEMENT This Master Technology Ownership and License Agreement (the "Agreement") is effective as of ________, 2000 (the "Effective Date"), between 3Com Corporation, a Delaware corporation ("3Com"), having an office at 5400 Bayfront Plaza, Santa Clara, California, 95052 and Palm, Inc., a Delaware corporation ("Palm"), having an office at 5400 Bayfront Plaza, Santa Clara, California, 95052. WHEREAS, the Board of Directors of 3Com has determined that it is in the best interest of 3Com and its stockholders to separate 3Com's existing businesses into two independent businesses; WHEREAS, as part of the foregoing, 3Com and Palm's predecessor, Palm Computing, Inc., a California Corporation, have entered into a Master Separation and Distribution Agreement (as defined below), which provides, among other things, for the separation of certain Palm assets and Palm liabilities, the initial public offering of Palm stock, the distribution of such stock and the execution and delivery of certain other agreements in order to facilitate and provide for the foregoing; and WHEREAS, also as part of the foregoing, the parties desire to confirm Palm's ownership or joint ownership of certain technology. NOW, THEREFORE, in consideration of the mutual promises of the parties, and of good and valuable consideration, it is agreed by and between the parties as follows: ARTICLE 1 DEFINITIONS For the purpose of this Agreement the following capitalized terms are defined in this Article 1 and shall have the meaning specified herein: 1.1 ANCILLARY AGREEMENTS. "Ancillary Agreements" shall have the meaning set forth in the Master Separation and Distribution Agreement. 1.2 COPYRIGHTS. "Copyrights" mean (i) any copyright in any original works of authorship fixed in any tangible medium of expression as set forth in 17 U.S.C. Section 101 et. seq., whether registered or unregistered, including any applications for registration thereof, (ii) any corresponding foreign copyrights under the laws of any jurisdiction, in each case, whether registered or unregistered, and any applications for registration thereof, and (iii) moral rights under the laws of any jurisdiction. 1.3 DATABASE RIGHTS. "Database Rights" means any rights in databases under the laws of the United States or any other jurisdiction, whether registered or unregistered, and any applications for registration thereof. 1.4 DISTRIBUTION DATE. "Distribution Date" shall have the meaning set forth in the Master Separation and Distribution Agreement. 1.5 GALAHAD PROJECT. "Galahad Project" means the development effort within 3Com's Wireless Connectivity Division (WCD) currently known internally as the Galahad Project. 1.6 GENERAL ASSIGNMENT AND ASSUMPTION AGREEMENT. "General Assignment and Assumption Agreement" means the General Assignment and Assumption Agreement between the parties. 1.7 INVENTION DISCLOSURE. "Invention Disclosure" means a disclosure of an invention (i) written for the purpose of allowing legal and business people to determine whether to file a Patent application with respect to such invention and (ii) recorded with a control number in the owning party's records. 1.8 IPO REGISTRATION STATEMENT. "IPO Registration Statement" means the registration statement on Form S-1 pursuant to the Securities Act of 1933, as amended, to be filed with the Securities and Exchange Commission registering the shares of common stock of Palm to be issued in the initial public offering, together with all amendments thereto. 1.9 JOINT TECHNOLOGY. "Joint Technology" means the manufacturing Technology indicated to be jointly owned in the Palm Technology Database, and Technology which has been jointly developed by the parties prior to the Separation Date that is incorporated into Current Palm Products (as defined in the Master Patent Ownership and Assignment Agreement); provided, however, that Joint Technology shall not include any Technology developed under the Galahad Project or work done by TDC, except as otherwise agreed by the parties in writing. 1.10 MASK WORK RIGHTS. "Mask Work Rights" means (i) any rights in mask works, as defined in 17 U.S.C. Section 901, whether registered or unregistered, including applications for registration thereof, and (ii) any foreign rights in semiconductor topologies under the laws of any jurisdiction, whether registered or unregistered, including applications for registration thereof. 1.11 MASTER CONFIDENTIAL DISCLOSURE AGREEMENT. "Master Confidential Disclosure Agreement" means the Master Confidential Disclosure Agreement between 3Com and Palm. 1.12 MASTER PATENT OWNERSHIP AND ASSIGNMENT AGREEMENT. "Master Patent Ownership and Assignment Agreement" means the Master Patent Ownership and Assignment Agreement between 3Com and Palm. 2 1.13 MASTER SEPARATION AND DISTRIBUTION AGREEMENT. "Master Separation and Distribution Agreement" means the Master Separation and Distribution Agreement between 3Com and Palm. 1.14 PALM BUSINESS. "Palm Business" means the business and operations of Palm as described in the IPO Registration Statement. 1.15 PALM COMPUTING PLATFORM. "Palm Computing Platform" means the Palm OS and other related software and hardware technology and documentation generally licensed by Palm to third party developers of handheld computing or communication products. 1.16 PALM OS. "Palm OS" means the Palm operating system software files and build tools. 1.17 PALM PRODUCTS DATABASE. "Palm Products Database" means the mutually agreed Palm Products Database as of the Separation Date, as it may be updated by the parties upon mutual agreement (signed by authorized officers) of the parties to add Palm products as of the Separation Date. 1.18 PALM TECHNOLOGY. "Palm Technology" means (i) all Technology developed solely by Palm or Subsidiaries of Palm or by its subcontractors for Palm or its Subsidiaries, (ii) all Technology for which the direct costs were solely paid for by Palm, (iii) the Palm Computing Platform, (iv) the manufacturing technology that is indicated as to be owned by Palm in the Palm Technology Database, and (v) all Technology developed or being developed solely by the Palm Business as of the Separation Date. For the avoidance of doubt, the parties agree that 3Com owns all right, title and interest in and to any Technology that may have been jointly developed by the parties in the Galahad Project and any projects with the TDC and any Technology either developed solely by 3Com or for which the direct costs were solely paid for by 3Com. 1.19 PALM TECHNOLOGY DATABASE. "Palm Technology Database" means the mutually agreed Palm Technology Database as of the Separation Date, as it may be updated by the parties upon mutual agreement (signed by authorized officers) of the parties to add Palm Technology as of the Separation Date. 1.20 PATENTS. "Patents" means patents, utility models, design patents, design registrations, certificates of invention and other governmental grants for the protection of inventions or industrial designs anywhere in the world and all reissues, renewals, re-examinations and extensions of any of the foregoing. 1.21 PERSON. "Person" means an individual, a partnership, a corporation, a limited liability company, an association, a joint stock company, a trust, a joint venture, an unincorporated organization, and a governmental entity or any department, agency or political subdivision thereof. 3 1.22 SELL. To "Sell" a product means to sell, transfer, lease or otherwise dispose of a product. "Sale" and "Sold" have the corollary meanings ascribed thereto. 1.23 SEPARATION DATE. "Separation Date" means 12:01 a.m., Pacific Time, February 26, 2000, or such other date as may be fixed by the Board of Directors of 3Com. 1.24 SUBSIDIARY. "Subsidiary" of any Person means a corporation or other organization, whether incorporated or unincorporated, of which at least a majority of the securities or interests having by the terms thereof ordinary voting power to elect at least a majority of the board of directors or others performing similar functions with respect to such corporation or other organization is directly or indirectly owned or controlled by such Person or by any one or more of its Subsidiaries, or by such Person and one or more of its Subsidiaries; provided, however, that no Person that is not directly or indirectly wholly-owned by any other Person shall be a Subsidiary of such other Person unless such other Person controls, or has the right, power or ability to control, that Person. For purposes of this Agreement, Palm shall be deemed not to be a subsidiary of 3Com. 1.25 TDC. "TDC" means the 3Com Technology Development Center. 1.26 TECHNOLOGY. "Technology" means technological models, algorithms, manufacturing processes, design processes, behavioral models, logic diagrams, schematics, test vectors, know-how, computer and electronic data processing and other apparatus programs and software (object code and source code), databases and documentation thereof, trade secrets, technical information, specifications, drawings, records, documentation, works of authorship or other creative works, websites, ideas, knowledge, data or the like. The term Technology includes Copyrights, Database Rights, Mask Work Rights, trade secrets and any other intellectual property right, but expressly does not include (i) any trademark, trade name, trade dress or service mark, or applications for registration thereof or (ii) any Patents or applications therefor, including any of the foregoing that may be based on Invention Disclosures that are covered by the Master Patent Ownership and License Agreement between the parties, but does include trade secret rights in and to inventions disclosed in such Patent applications and Invention Disclosures. 1.27 THIRD PARTY. "Third Party" means a Person other than 3Com and its Subsidiaries and Palm and its Subsidiaries. ARTICLE 2 OWNERSHIP 2.1 OWNERSHIP OF PALM TECHNOLOGY. The parties hereby confirm that Palm owns all right, title and interest in and to the Palm Technology. Subject to Sections 2.3 and 2.4 below, to the extent that 3Com has any ownership rights in and to the Palm Technology, 3Com hereby grants, conveys and assigns (and agrees to cause its appropriate Subsidiaries to grant, convey and assign) to Palm, by execution hereof (or, where appropriate or required, by execution of separate 4 instruments of assignment), all its (and their) right, title and interest in and to the Palm Technology, to be held and enjoyed by Palm, its successors and assigns. 3Com further grants, conveys and assigns (and agrees to cause its appropriate Subsidiaries to grant, convey and assign) to Palm all its (and their) right, title and interest in and to any and all causes of action and rights of recovery for past infringement of Copyrights, Database Rights and Mask Work Rights in and to the Palm Technology, and for past misappropriation of trade secrets in and to the Palm Technology. 3Com further covenants that 3Com will, without demanding any further consideration therefor, at the request and expense of Palm (except for the value of the time of 3Com employees), do (and cause its Subsidiaries to do) all lawful and just acts that may be or become necessary for evidencing, maintaining, recording and perfecting Palm's rights to such Palm Technology consistent with 3Com's general business practice as of the Separation Date, including but not limited to, execution and acknowledgement of (and causing its Subsidiaries to execute and acknowledge) assignments and other instruments in a form reasonably required by Palm for each Copyright, Mask Work Right or Database Right jurisdiction. 2.2 JOINT TECHNOLOGY. The parties hereby confirm that 3Com and Palm jointly own all right, title and interest in and to the Joint Technology. (a) Subject to Sections 2.3 and 2.4 below, 3Com hereby grants, conveys and assigns (and agrees to cause its appropriate Subsidiaries to grant, convey and assign) to Palm an undivided one-half interest in and to the Joint Technology to be held and enjoyed by Palm, its successors and assigns. 3Com further grants, conveys and assigns (and agrees to cause its appropriate Subsidiaries to grant, convey and assign) to Palm an undivided one-half interest in and to any and all causes of action and rights of recovery for past infringement of Copyrights, Database Rights and Mask Work Rights in and to the Joint Technology, and for past misappropriation of trade secrets in and to the Joint Technology. 3Com further covenants that 3Com will, without demanding any consideration therefor, at the request and expense of Palm (except for the value of the time of 3Com employees), do (and cause its Subsidiaries to do) all lawful and just acts including the execution and acknowledgement of instruments, that may be or become necessary for evidencing, maintaining and perfecting Palm's rights to such Joint Technology consistent with 3Com's general business practice as of the Separation Date, including but not limited to, execution and acknowledgement of (and causing its Subsidiaries to execute and acknowledge) assignments and other instruments in a form reasonably required by Palm for each Copyright, Mask Work Right or Database Right jurisdiction. (b) Subject to Sections 2.3 and 2.4 below, Palm hereby grants, conveys and assigns (and agrees to cause its appropriate Subsidiaries to grant, convey and assign) to 3Com an undivided one-half interest in and to the Joint Technology to be held and enjoyed by 3Com, its successors and assigns. Palm further grants, conveys and assigns (and agrees to cause its appropriate Subsidiaries to grant, convey and assign) to 3Com an undivided one-half interest in and to any and all causes of action and rights of recovery for past infringement of Copyrights, Database Rights and Mask Work Rights in and to the Joint Technology, and for past misappropriation of trade secrets in 5 and to the Joint Technology. Palm further covenants that Palm will, without demanding any consideration therefor, at the request and expense of 3Com (except for the value of the time of Palm employees), do (and cause its Subsidiaries to do) all lawful and just acts including the execution and acknowledgement of instruments, that may be or become necessary for evidencing, maintaining and perfecting 3Com's rights to such Joint Technology consistent with Palm's general business practice as of the Separation Date, including but not limited to, execution and acknowledgement of (and causing its Subsidiaries to execute and acknowledge) assignments and other instruments in a form reasonably required by 3Com for each Copyright, Mask Work Right or Database Right jurisdiction. 2.3 PRIOR GRANTS. (a) Palm acknowledges and agrees that the foregoing assignment is subject to any and all licenses or other rights that may have been granted by or to 3Com or its Subsidiaries with respect to the Palm Technology prior to the Separation Date. 3Com shall respond to reasonable inquiries from Palm regarding any such prior grants. (b) 3Com acknowledges and agrees that the foregoing assignment is subject t any and all licenses or other rights that may have been granted by or to Palm or its Subsidiaries with respect to the 3Com Technology prior to the Separation Date. Palm shall respond to reasonable inquiries from 3Com regarding any such prior grants. 2.4 ASSIGNMENT DISCLAIMER. THE PARTIES ACKNOWLEDGE AND AGREE THAT THE FOREGOING ASSIGNMENTS ARE MADE ON AN "AS IS," QUITCLAIM BASIS AND THAT NEITHER PARTY NOR ANY SUBSIDIARY OF EITHER PARTY HAS MADE OR WILL MAKE ANY WARRANTY WHATSOEVER, EXPRESS, IMPLIED OR STATUTORY, INCLUDING WITHOUT LIMITATION ANY IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, TITLE, ENFORCEABILITY OR NON-INFRINGEMENT. FURTHER, THE PARTIES ACKNOWLEDGE AND AGREE THAT NEITHER PARTY NOR ANY SUBSIDIARY OF EITHER PARTY SHALL HAVE ANY OBLIGATION UNDER THIS AGREEMENT TO MAINTAIN OR SUPPORT ANY OF THE TECHNOLOGY ASSIGNED UNDER THIS AGREEMENT OR TO PROVIDE ANY UPGRADES OR ENHANCEMENTS THERETO TO THE OTHER PARTY. ARTICLE 3 LICENSES AND RIGHTS 3.1 PALM COMPUTING PLATFORM. In recognition of the fact that 3Com and Palm were affiliated entities prior to the Separation Date, Palm agrees to grant a license (i) to 3Com with respect to the Palm Computing Platform on favorable terms, and (ii) to 3Com (IAD) with respect to certain portions of the Palm OS on favorable terms. The parties agree to negotiate such licensing 6 agreements reasonably and in good faith as promptly as they can reasonably accomplish, but in no event later than the Distribution Date. 3.2 GALAHAD PROJECT AND TDC. The parties agree to negotiate reasonably and in good faith joint development and licensing agreements with respect to Technology developed in the Galahad Project and TDC (with respect to Palm related projects) as promptly as they can reasonably accomplish, but in no event later than the Distribution Date. 3.3 RIGHTS TO JOINT TECHNOLOGY. (a) Each party has the right to (i) use and exploit the Joint Technology, (ii) license the Joint Technology to Third Parties, and (iii) transfer its ownership interest in any or all Joint Technology to any Third Party, in each case (x) without restriction, (y) without the consent of the other party, and (z) without the obligation to account to the other party for profits derived therefrom. (b) Should either party (the "Registering Party") desire at any time to register Copyrights, Database Rights or Mask Work Rights in and to the Joint Technology in any jurisdiction, such party shall notify the other party (the "Non-Registering Party") in writing of its intent and the reasons therefor. The Non-Registering Party promptly shall communicate in writing any objections it may have. In the absence of any written objections within thirty (30) days after the date of its notice, the Registering Party shall be free to proceed with the desired registration in the name of both 3Com and Palm. In the event of any such objections by the Non-Registering Party, the parties shall discuss and negotiate reasonably and in good faith to resolve the objections based on each party's business objectives with respect to the relevant item of Joint Technology. The parties shall share equally any actual and reasonable out-of-pocket expenses (expressly excluding the value of the time of either party's employees) incurred in connection with any such registration. The Registering Party promptly shall provide the Non-Registering Party with copies of each application and issued registration under this Section 3.3(b). (c) Should either party become aware of any actual infringement or misappropriation of Joint Technology, such party shall promptly communicate the details to the other party and the parties will meet and confer regarding any enforcement action with respect to such Joint Technology. If the parties decide jointly to bring an action for infringement or misappropriation of such Joint Technology, the parties shall equally share all actual and reasonable expenses associated therewith (except for the value of the time of each party's employees in connection with the action; each party shall alone bear its employee expenses) and any resulting damages or compensation, including any amounts paid in settlement. If the parties decide not to jointly bring such an action, either party or any of its Subsidiaries may, at its own expense (including, as the parties shall agree on a case by case basis, compensation, if any, of the other party for the value of time of the other party's employees as reasonably required in connection with the action), enforce any Joint Technology against any Third Party infringer or misappropriating Person without the consent of the other party, subject to the following: (i) neither party shall have any obligation to be joined as a party plaintiff in such action without its prior written consent, which may 7 be granted or withheld in its sole discretion, regardless of whether such joinder is required in order to confer jurisdiction in the jurisdiction in which the action is to be brought, (ii) if either party brings any such action on its own, including cases in which the other party consents to be named as party plaintiff, the party bringing the action agrees to defend, indemnify and hold harmless the other party for all losses, costs, liabilities and expenses arising out of or related to the bringing of such action, and (iii) the party bringing such action may not take any action, or make any admissions, that may affect the validity of any registration for Copyrights, Database Rights or Mask Work Rights covering Joint Technology without the prior written consent of the other party. If the enforcing party or its Subsidiaries recovers any damages or compensation for any action the enforcing party or the Subsidiaries of the enforcing party takes hereunder, including any settlement, the enforcing party or the Subsidiaries of the enforcing party shall retain one hundred percent (100%) of such damages. If the parties cooperate in any such enforcement action, then any recovery of damages or compensation shall be allocated pursuant to mutual agreement. 3.4 NO PATENT LICENSES. Nothing contained in this Agreement shall be construed as conferring to either party by implication, estoppel or otherwise any license or right under any Patent or applications therefor, whether or not the exercise of any right herein granted necessarily employs an invention of any existing or later issued Patent. The applicable licenses granted by 3Com to Palm with respect to Patents are set forth in a separate Master Patent Ownership and License Agreement. 3.5 THIRD PARTY TECHNOLOGY. The assignment of any applicable license agreements with respect to Third Party Technology are set forth in the General Assignment and Assumption Agreement. ARTICLE 4 CONFIDENTIALITY The terms of the Master Confidential Disclosure Agreement between the parties shall apply to any Confidential Information (as defined therein) which is the subject matter of this Agreement. ARTICLE 5 NO TERMINATION Each party acknowledges and agrees that its remedy for breach by the other party of any provision hereof shall be, subject to the requirements of Article 6, to bring a claim to recover damages subject to the limits set forth in this Agreement and to seek any other appropriate equitable relief, other than termination of this Agreement. For the avoidance of doubt, the parties intend that this Agreement continue in perpetuity. 8 ARTICLE 6 DISPUTE RESOLUTION 6.1 MEDIATION. If a dispute, controversy or claim ("Dispute") arises between the parties relating to the interpretation or performance of this Agreement appropriate senior executives (e.g. director or V.P. level) of each party who shall have the authority to resolve the matter shall meet to attempt in good faith to negotiate a resolution of the Dispute prior to pursuing other available remedies. The initial meeting between the appropriate senior executives shall be referred to herein as the "Dispute Resolution Commencement Date." Discussions and correspondence relating to trying to resolve such Dispute shall be treated as Confidential Information developed for the purpose of settlement and shall be exempt from discovery or production and shall not be admissible. If the senior executives are unable to resolve the Dispute within thirty (30) days from the Dispute Resolution Commencement Date, and either party wishes to pursue its rights relating to such Dispute, then the Dispute will be mediated by a mutually acceptable mediator appointed pursuant to the mediation rules of JAMS/Endispute within thirty (30) days after written notice by one party to the other demanding non-binding mediation. Neither party may unreasonably withhold consent to the selection of a mediator or the location of the mediation. Both parties will share the costs of the mediation equally, except that each party shall bear its own costs and expenses, including attorneys' fees, witness fees, travel expenses, and preparation costs. The parties may also agree to replace mediation with some other form of non-binding or binding alternate dispute resolution ("ADR"). 6.2 ARBITRATION. Any Dispute which the parties cannot resolve through mediation within ninety (90) days of the Dispute Resolution Commencement Date, unless otherwise mutually agreed, shall be submitted to final and binding arbitration under the then current Commercial Arbitration Rules of the American Arbitration Association ("AAA"), by three (3) arbitrators in Santa Clara County, California. Such arbitrators shall be selected by the mutual agreement of the parties or, failing such agreement, shall be selected according to the aforesaid AAA rules. The arbitrators will be instructed to prepare and deliver a written, reasoned opinion stating their decision within thirty (30) days of the completion of the arbitration. The prevailing party in such arbitration shall be entitled to expenses, including costs and reasonable attorneys' and other professional fees, incurred in connection with the arbitration (but excluding any costs and fees associated with prior negotiation or mediation). The decision of the arbitrator shall be final and non-appealable and may be enforced in any court of competent jurisdiction. The use of any ADR procedures will not be construed under the doctrine of laches, waiver or estoppel to adversely affect the rights of either party. 6.3 COURT ACTION. Any Dispute regarding the following is not required to be negotiated, mediated or arbitrated prior to seeking relief from a court of competent jurisdiction: breach of any obligation of confidentiality; infringement, misappropriation, or misuse of any intellectual property right; any other claim where interim relief from the court is sought to prevent serious and irreparable injury to one of the parties or to others. However, the parties to the Dispute 9 shall make a good faith effort to negotiate and mediate such Dispute, according to the above procedures, while such court action is pending. 6.4 CONTINUITY OF SERVICE AND PERFORMANCE. Unless otherwise agreed in writing, the parties will continue to provide service and honor all other commitments under this Agreement during the course of dispute resolution pursuant to the provisions of this Article 6 with respect to all matters not subject to such dispute, controversy or claim. ARTICLE 7 LIMITATION OF LIABILITY. IN NO EVENT SHALL EITHER PARTY OR ITS SUBSIDIARIES BE LIABLE TO THE OTHER PARTY OR ITS SUBSIDIARIES FOR ANY SPECIAL, CONSEQUENTIAL, INDIRECT, INCIDENTAL OR PUNITIVE DAMAGES OR LOST PROFITS, HOWEVER CAUSED AND ON ANY THEORY OF LIABILITY (INCLUDING NEGLIGENCE) ARISING IN ANY WAY OUT OF THIS AGREEMENT, WHETHER OR NOT SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES; PROVIDED, HOWEVER, THAT THE FOREGOING LIMITATIONS SHALL NOT LIMIT EACH PARTY'S OBLIGATIONS EXPRESSLY ASSUMED IN EXHIBIT J OF THE MASTER SEPARATION AND DISTRIBUTION AGREEMENT; PROVIDED FURTHER THAT THE EXCLUSION OF PUNITIVE DAMAGES SHALL APPLY IN ANY EVENT. ARTICLE 8 MISCELLANEOUS PROVISIONS 8.1 DISCLAIMER. EACH PARTY ACKNOWLEDGES AND AGREES THAT ALL TECHNOLOGY AND ANY OTHER INFORMATION OR MATERIALS PROVIDED HEREUNDER IS PROVIDED ON AN "AS IS" BASIS, AND THAT NEITHER PARTY NOR ANY OF ITS SUBSIDIARIES MAKES ANY REPRESENTATIONS OR EXTENDS ANY WARRANTIES WHATSOEVER, EXPRESS, IMPLIED OR STATUTORY, WITH RESPECT THERETO, INCLUDING WITHOUT LIMITATION ANY IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, TITLE, ENFORCEABILITY OR NON-INFRINGEMENT. Without limiting the generality of the foregoing, neither party nor any of its Subsidiaries makes any warranty or representation that any manufacture, use, importation, offer for sale or sale of any product or service will be free from infringement of any Patent or other intellectual property right of any Third Party. 8.2 NO IMPLIED LICENSES. Nothing contained in this Agreement shall be construed as conferring any rights by implication, estoppel or otherwise, under any intellectual property right, other than the rights expressly granted in this Agreement with respect to the Palm Technology and 10 the Joint Technology. Neither party is required hereunder to furnish or disclose to the other any technical or other information, except as specifically provided herein. 8.3 INFRINGEMENT SUITS. Neither party shall have any obligation hereunder to institute any action or suit against Third Parties for infringement of any Copyrights, Database Rights or Mask Work Rights or misappropriation of any trade secret rights in or to any Technology licensed to the other party hereunder, or to defend any action or suit brought by a Third Party which challenges or concerns the validity of any of such rights or which claims that any Technology assigned or licensed to the other party hereunder infringes any Patent, Copyright, Database Right, Mask Work Right or other intellectual property right of any Third Party or constitutes a misappropriated trade secret of any Third Party. 3Com shall not have any right to institute any action or suit against Third Parties for infringement of any of the Copyrights, Database Rights or Mask Work Rights in or to the Palm Technology. 8.4 NO OTHER OBLIGATIONS. NEITHER PARTY ASSUMES ANY RESPONSIBILITIES OR OBLIGATIONS WHATSOEVER, OTHER THAN THE RESPONSIBILITIES AND OBLIGATIONS EXPRESSLY SET FORTH IN THIS AGREEMENT OR A SEPARATE WRITTEN AGREEMENT BETWEEN THE PARTIES. Without limiting the generality of the foregoing, neither party, nor any of its Subsidiaries, is obligated under this Agreement to provide any technical assistance. 8.5 ENTIRE AGREEMENT. This Agreement, the Master Separation and Distribution Agreement and the other Ancillary Agreements and the Exhibits and Schedules referenced or attached hereto and thereto constitute the entire agreement between the parties with respect to the subject matter hereof and thereof and shall supersede all prior written and oral and all contemporaneous oral agreements and understandings with respect to the subject matter hereof and thereof. This Agreement shall prevail in the event of any conflicting terms or legends which may appear on any portion of the Palm Technology or the Joint Technology. To the extent there is a conflict between this Agreement and the Master Assignment and Assumption Agreement between the parties, the terms of this Agreement shall govern. To the extent that the parties enter into specific agreements regarding specific projects such as the Galahad Project or the Palm Computing Platform license, such agreements shall supersede this Agreement with respect to any common subject matter. 8.6 GOVERNING LAW. This Agreement shall be construed in accordance with and all Disputes hereunder shall be governed by the laws of the State of California, excluding its conflict of law rules and the United Nations Convention on Contracts for the International Sale of Goods. The Superior Court of Santa Clara County and/or the United States District Court for the Northern District of California shall have jurisdiction and venue over all Disputes between the parties that are permitted to be brought in a court of law pursuant to Article 6 above. 8.7 DESCRIPTIVE HEADINGS. The headings contained in this Agreement, in any Exhibit or Schedule hereto and in the table of contents to this Agreement are for reference purposes 11 only and shall not affect in any way the meaning or interpretation of this Agreement. Any capitalized term used in any Exhibit or Schedule but not otherwise defined therein, shall have the meaning assigned to such term in this Agreement. When a reference is made in this Agreement to an Article or a Section, Exhibit or Schedule, such reference shall be to an Article or Section of, or an Exhibit or Schedule to, this Agreement unless otherwise indicated. 8.8 NOTICES. Notices, offers, requests or other communications required or permitted to be given by either party pursuant to the terms of this Agreement shall be given in writing to the respective parties to the following addresses: if to 3Com: 3Com Corporation 5400 Bayfront Plaza Santa Clara, California 95052 Attention: General Counsel Fax: (408) 326-6434 if to Palm: Palm, Inc. 5400 Bayfront Plaza Santa Clara, California 95052 Attention: General Counsel Fax: (408) 326-6434 or to such other address as the party to whom notice is given may have previously furnished to the other in writing as provided herein. Any notice involving non-performance or renewal shall be sent by hand delivery, recognized overnight courier or, within the United States, may also be sent via certified mail, return receipt requested. All other notices may also be sent by fax, confirmed by first class mail. All notices shall be deemed to have been given and received on the earlier of actual delivery or three (3) days from the date of postmark. 8.9 NONASSIGNABILITY. Neither party may, directly or indirectly, in whole or in part, whether by operation of law or otherwise, assign or transfer this Agreement, without the other party's prior written consent, and any attempted assignment, transfer or delegation without such prior written consent shall be voidable at the sole option of such other party. Notwithstanding the foregoing, each party (or its successive assignees or transferees hereunder) may, without such consent, assign this Agreement to an entity that succeeds to all or substantially all of the business or assets of such party as long as such Person agrees to accept all of the terms set forth herein; provided, however, that the rights and obligations set forth in Sections 3.1 and 3.2 may not be assigned or transferred in any event (except in the case of a reincorporation of such party in another state). Without limiting the foregoing, this Agreement will be binding upon and inure to the benefit of the parties and their permitted successors and assigns. 12 8.10 SEVERABILITY. If any term or other provision of this Agreement is determined by a court, administrative agency or arbitrator to be invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to either party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that the transactions contemplated hereby are fulfilled to the fullest extent possible. 8.11 FAILURE OR INDULGENCE NOT WAIVER; REMEDIES CUMULATIVE. No failure or delay on the part of either party hereto in the exercise of any right hereunder shall impair such right or be construed to be a waiver of, or acquiescence in, any breach of any representation, warranty or agreement herein, nor shall any single or partial exercise of any such right preclude other or further exercise thereof or of any other right. All rights and remedies existing under this Agreement are cumulative to, and not exclusive of, any rights or remedies otherwise available. 8.12 AMENDMENT. No change or amendment will be made to this Agreement except by an instrument in writing signed on behalf of each of the parties to such agreement. 8.13 COUNTERPARTS. This Agreement, including the Ancillary Agreements and the Exhibits and Schedules hereto and thereto and the other documents referred to herein or therein, may be executed in counterparts, each of which shall be deemed to be an original but all of which shall constitute one and the same agreement. WHEREFORE, the parties have signed this Master Technology Ownership and License Agreement effective as of the date first set forth above. 3COM CORPORATION PALM, INC. By:_______________________________ By:_______________________________ Name:_____________________________ Name:_____________________________ Title:____________________________ Title:____________________________ 13 EX-2.4 5 FORM OF MASTER PATENT OWNERSHIP & LICENSE AGRMT EXHIBIT 2.4 MASTER PATENT OWNERSHIP AND LICENSE AGREEMENT BETWEEN 3COM CORPORATION AND PALM, INC. Effective as of _____, 2000 MASTER PATENT OWNERSHIP AND LICENSE AGREEMENT TABLE OF CONTENTS
Page ---- ARTICLE 1 DEFINITIONS............................................................. 1 1.1 ALLOCATED PATENT ASSETS DATABASE................................ 1 1.2 ASSIGNED PATENTS................................................ 2 1.3 BLUETOOTH....................................................... 2 1.4 DISTRIBUTION DATE............................................... 3 1.5 FIRST EFFECTIVE FILING DATE..................................... 3 1.6 GALAHAD PATENTS................................................. 3 1.7 GALAHAD PROJECT................................................. 3 1.8 INVENTION DISCLOSURE............................................ 3 1.9 MASTER SEPARATION AND DISTRIBUTION AGREEMENT.................... 3 1.10 PALM PATENTS.................................................... 3 1.11 PALM PRODUCTS................................................... 4 1.12 PATENTS......................................................... 4 1.13 PERSON.......................................................... 4 1.14 SEPARATION DATE................................................. 4 1.15 SUBSIDIARY...................................................... 4 1.16 THIRD PARTY..................................................... 5 1.17 THIRD PARTY PATENTS............................................. 5 1.18 3COM PATENTS.................................................... 5 1.19 3COM PRODUCTS................................................... 5 ARTICLE 2 OWNERSHIP............................................................... 5 2.1 OWNERSHIP OF PATENTS............................................ 5 2.2 PRIOR GRANTS.................................................... 6 2.3 ASSIGNMENT DISCLAIMER........................................... 6 ARTICLE 3 LICENSES AND COVENANTS NOT TO SUE....................................... 7 3.1 LICENSE GRANTS TO PALM WITH RESPECT TO GALAHAD PATENTS.......... 7 3.2 RESTRICTION ON 3COM LICENSING OF GALAHAD PATENTS................ 7 3.3 RESTRICTION ON PALM'S "HAVE MADE" RIGHTS TO GALAHAD PATENTS..... 7 3.4 COMBINATION EXCLUSION........................................... 7 3.5 PALM'S SUBLICENSE RIGHTS WITH RESPECT TO GALAHAD PATENTS........ 8 3.6 DURATION........................................................ 8 3.7 ACQUISITION OF PALM OR TRANSFER OF A BUSINESS OR SUBSIDIARY RELATED TO GALAHAD PATENTS...................................... 8
-i- TABLE OF CONTENTS (continued)
Page ---- 3.8 COPIES OF PATENT APPLICATIONS AND INVENTION DISCLOSURES......... 10 3.9 THIRD PARTY PATENTS............................................. 10 3.10 3COM COVENANT NOT TO SUE........................................ 10 3.11 PALM COVENANT NOT TO SUE........................................ 12 ARTICLE 4 ADDITIONAL OBLIGATIONS.................................................. 13 4.1 ADDITIONAL OBLIGATIONS WITH REGARD TO ASSIGNED PATENTS.......... 14 4.2 ADDITIONAL OBLIGATIONS WITH REGARD TO GALAHAD PATENTS........... 14 4.3 STANDARDS BODIES................................................ 15 4.4 ASSIGNMENT OF PATENTS........................................... 15 4.5 RECORDATION OF LICENSES......................................... 15 ARTICLE 5 CONFIDENTIALITY......................................................... 16 ARTICLE 6 TERMINATION............................................................. 16 6.1 VOLUNTARY TERMINATION........................................... 16 6.2 SURVIVAL........................................................ 16 6.3 NO OTHER TERMINATION............................................ 16 ARTICLE 7 DISPUTE RESOLUTION...................................................... 17 7.1 MEDIATION....................................................... 17 7.2 ARBITRATION..................................................... 17 7.3 COURT ACTION.................................................... 17 7.4 CONTINUITY OF SERVICE AND PERFORMANCE........................... 18 ARTICLE 8 LIMITATION OF LIABILITY................................................. 18 ARTICLE 9 MISCELLANEOUS PROVISIONS................................................ 18 9.1 DISCLAIMER...................................................... 18 9.2 NO IMPLIED LICENSES............................................. 19 9.3 INFRINGEMENT SUITS.............................................. 19 9.4 NO OTHER OBLIGATIONS............................................ 19 9.5 ENTIRE AGREEMENT................................................ 19 9.6 GOVERNING LAW................................................... 19 9.7 DESCRIPTIVE HEADINGS............................................ 20 9.8 NOTICES......................................................... 20 9.9 NONASSIGNABILITY................................................ 20 9.10 SEVERABILITY.................................................... 21 9.11 FAILURE OR INDULGENCE NOT WAIVER; REMEDIES CUMULATIVE........... 21
-ii- TABLE OF CONTENTS (continued)
Page ---- 9.12 AMENDMENT....................................................... 21 9.13 COUNTERPARTS.................................................... 21
-iii- MASTER PATENT OWNERSHIP AND LICENSE AGREEMENT This Master Patent Ownership and License Agreement (the "Agreement") is effective as of ________, 2000 (the "Effective Date"), between 3Com Corporation, a Delaware corporation ("3Com"), having an office at 5400 Bayfront Plaza, Santa Clara, California, 95052 and Palm, Inc., a Delaware corporation ("Palm"), having an office at 5400 Bayfront Plaza, Santa Clara, California, 95052. WHEREAS, the Board of Directors of 3Com has determined that it is in the best interest of 3Com and its stockholders to separate 3Com's existing businesses into two independent businesses; WHEREAS, as part of the foregoing, 3Com and Palm's predecessor, Palm Computing, Inc., a California Corporation, have entered into a Master Separation and Distribution Agreement (as defined below), which provides, among other things, for the separation of certain Palm assets and Palm liabilities, the initial public offering of Palm stock, the distribution of such stock and the execution and delivery of certain other agreements in order to facilitate and provide for the foregoing; WHEREAS, also as part of the foregoing, 3Com and Palm desire to confirm Palm's ownership of all patents, patent applications and invention disclosures invented by or for Palm and to record in Palm's name any such patents and patent applications that are recorded in 3Com's name; WHEREAS, Palm and 3Com desire to confirm 3Com's ownership of certain jointly developed technology and Palm desires to receive and 3Com is willing to grant to Palm certain licenses and rights under patents, patent applications and invention disclosures covering such technology; and WHEREAS, Palm and 3Com further desire to enter into reciprocal covenants not to sue for patent infringement. NOW, THEREFORE, in consideration of the mutual promises of the parties, and of good and valuable consideration, it is agreed by and between the parties as follows: ARTICLE 1 DEFINITIONS For the purpose of this Agreement the following capitalized terms are defined in this Article 1 and shall have the meaning specified herein: 1.1 ALLOCATED PATENT ASSETS DATABASE. "Allocated Patent Assets Database" means the mutually agreed Allocated Patent Assets Database as of the Separation Date, as it may be updated by the parties upon mutual agreement to add Patents, Patent applications and Invention Disclosures as of the Separation Date. 1 1.2 ASSIGNED PATENTS. "Assigned Patents" means only those (a) Patents, Patent applications and Invention Disclosures that are recorded in 3Com's name and are allocated to Palm in the Allocated Patent Assets Database; (b) Patent applications filed on the foregoing Invention Disclosures described in Section 1.2(a); (c) continuations, continuations-in-part, divisions and substitutions of any of the foregoing Patent applications described in Sections 1.2(a) and (b); (d) Patents which may issue on any of the foregoing Patent applications described in Sections 1.2(a)-(c); (e) renewals, reissues, reexaminations and extensions of the foregoing Patents described in Sections 1.2(a) and (d); and (f) foreign Patent applications and Patents that are counterparts of any of the foregoing Patent applications or Patents described in Sections 1.2(a)-(e), including any Patent application or Patent to the extent that it claims priority from any of the foregoing Patent applications or Patents described in Sections 1.2(a)-(e); but (g) excluding from any Patent or Patent application described in Sections 1.2(c)-(f) any claim (i) directed to subject matter that does not appear in any Patent application having a First Effective Filing Date prior to the Separation Date and (ii) of which neither Palm nor any person having a legal duty to assign his/her interest therein to Palm is entitled to be named as an inventor. 1.3 BLUETOOTH. "Bluetooth" means the short range wireless standard currently being promulgated by the Bluetooth Special Interest Group, of which 3Com is an adopter. 1.4 CURRENT PALM PRODUCTS. "Current Palm Products" means Palm Products of the businesses in which Palm or any of its Subsidiaries is engaged as of the Separation Date, including any Palm Products under development as set forth in 3Com's High Level Product Plan for Fiscal Year 2000 or as otherwise agreed by the parties, as well as future versions of such Palm Products, but only to the extent that they use the same designs and/or technology as such Palm Products. 1.5 CURRENT 3COM PRODUCTS. "Current 3Com Products" means 3Com Products of the businesses in which 3Com or any of its Subsidiaries is engaged as of the Separation Date, including any 3Com Products under development as set forth in 3Com's High Level Product Plan for Fiscal Year 2000 or as otherwise agreed by the parties, as well as future versions of such 3Com Products, but only to the extent that they use the same designs and/or technology as such 3Com Products. 2 1.6 DISTRIBUTION DATE. "Distribution Date" has the meaning set forth in the Master Separation and Distribution Agreement. 1.7 FIRST EFFECTIVE FILING DATE. "First Effective Filing Date" means the earliest effective filing date in the particular country for any Patent or any application for any Patent. By way of example, it is understood that the First Effective Filing Date for a United States Patent is the earlier of (i) the actual filing date of the United States Patent application which issued into such Patent, (ii) the priority date under 35 U.S.C. (S) 119 for such Patent, or (iii) the priority date under 35 U.S.C. (S) 120 for such Patent. 1.8 GALAHAD PATENTS. "Galahad Patents" means any Patents, Patent applications and Invention Disclosures arising from the Galahad Project which have at least one inventor employed by Palm and at least one inventor employed by 3Com. 1.9 GALAHAD PROJECT. "Galahad Project" means the development effort within 3Com's Wireless Connectivity Division (WCD) currently known internally as the Galahad Project. 1.10 INVENTION DISCLOSURE. "Invention Disclosure" means a disclosure of an invention (i) written for the purpose of allowing legal and business people to determine whether to file a Patent application with respect to such invention and (ii) recorded with a control number in the owning party's records) with a First Effective Filing Date before the Separation Date. 1.11 MASTER SEPARATION AND DISTRIBUTION AGREEMENT. "Master Separation and Distribution Agreement" means the Master Separation and Distribution Agreement between the parties. 1.12 PALM PATENTS. "Palm Patents" means: (a) the Assigned Patents; (b) every Patent to the extent entitled to a First Effective Filing Date prior to the Separation Date provided that, at any time after the First Effective Filing Date of any such Patent and prior to the Separation Date, Palm (or any Subsidiary of Palm) has ownership or control of any such Patent; and (c) applications for the foregoing Patents described in Section 1.10(b), including without limitation any continuations, continuations-in-part, divisions and substitutions. 1.13 PALM PRODUCTS. "Palm Products" means any and all products and services of the businesses in which Palm or any of its Subsidiaries is engaged now or in the future, in all cases which products are designed or created primarily by Palm (or by any sublicensed Subsidiary) and/or by a subcontractor for Palm (or for any sublicensed Subsidiary). 1.14 PATENTS. "Patents" means patents, utility models, design patents, design registrations, certificates of invention and other governmental grants for the protection of inventions 3 or industrial designs anywhere in the world and all reissues, renewals, re- examinations and extensions of any of the foregoing. 1.15 PERSON. "Person" means an individual, a partnership, a corporation, a limited liability company, an association, a joint stock company, a trust, a joint venture, an unincorporated organization and a governmental entity or any department, agency or political subdivision thereof. 1.16 SEPARATION DATE. "Separation Date" means 12:01 a.m., Pacific Time, February 26, 2000, or such other date as may be fixed by the Board of Directors of 3Com. 1.17 SUBSIDIARY. "Subsidiary" of any Person means a corporation or other organization, whether incorporated or unincorporated, of which at least a majority of the securities or interests having by the terms thereof ordinary voting power to elect at least a majority of the board of directors or others performing similar functions with respect to such corporation or other organization is directly or indirectly owned or controlled by such Person or by any one or more of its Subsidiaries, or by such Person and one or more of its Subsidiaries; provided, however, that no Person that is not directly or indirectly wholly-owned by any other Person shall be a Subsidiary of such other Person unless such other Person controls, or has the right, power or ability to control, that Person. For the purposes of this Agreement, Palm shall be deemed not to be a Subsidiary of 3Com. 1.18 THIRD PARTY. "Third Party" means a Person other than 3Com and its Subsidiaries and Palm and its Subsidiaries. 1.19 THIRD PARTY PATENTS. "Third Party Patents" means all Third Party Patents licensed by 3Com or any Subsidiary of 3Com that, as of the Effective Date, may be sublicensed to Palm (e.g., because Palm is a Subsidiary of 3Com) under the terms of this Agreement without the requirement to pay a royalty or other consideration to a Third Party (unless 3Com has the right to grant such a sublicense to Palm on payment of a royalty and Palm agrees to pay such royalty to such Third Party). 1.20 3COM PATENTS. "3Com Patents" means: (a) every Patent to the extent entitled to a First Effective Filing Date prior to the Separation Date provided that, at any time after the First Effective Filing Date of any such Patent and prior to the Separation Date, 3Com (or any Subsidiary of 3Com) has ownership or control of any such Patent; and (b) applications for the foregoing Patents described in Section 1.18(a), including without limitation any continuations, continuations-in-part, divisions and substitutions. 1.21 3COM PRODUCTS. "3Com Products" means any and all products and services of the businesses in which 3Com or any of its Subsidiaries is engaged now or in the future, in all cases which products are designed or created primarily by 3Com (or by any sublicensed Subsidiary) and/or by a subcontractor for 3Com (or for any sublicensed Subsidiary), as well as future versions of such 3Com Products. 4 ARTICLE 2 OWNERSHIP 2.1 OWNERSHIP OF PATENTS. (a) PALM PATENTS. The parties agree that Palm hereby retains ownership of all right, title and interest in and to all Palm Patents. (b) ASSIGNED PATENTS. Subject to Sections 2.2 and 2.3 below, 3Com hereby grants, conveys and assigns (and agrees to cause its appropriate Subsidiaries to grant, convey and assign) to Palm, by execution hereof (or, where appropriate or required, by execution of separate instruments of assignment), all its (and their) right, title and interest in and to the Assigned Patents, to be held and enjoyed by Palm, its successors and assigns. 3Com further grants, conveys and assigns (and agrees to cause its appropriate Subsidiaries to grant, convey and assign) to Palm all its (and their) right, title and interest in and to any and all causes of action and rights of recovery for past infringement of the Assigned Patents and the right to claim priority from the Assigned Patents. 3Com will, without demanding any further consideration therefor, at the request and expense of Palm (except for the value of the time of 3Com employees), do (and cause its Subsidiaries to do) all lawful and just acts, that may be or become necessary for prosecuting, sustaining, obtaining continuations of, or reissuing said Assigned Patents and for evidencing, maintaining, recording and perfecting Palm's rights to said Assigned Patents, consistent with 3Com's general business practice as of the Separation Date, including but not limited to execution and acknowledgement of (and causing its Subsidiaries to execute and acknowledge) assignments and other instruments in a form reasonably required by Palm for each Patent jurisdiction. (c) GALAHAD PATENTS. Subject to Sections 2.2 and 2.3 below, Palm hereby grants, conveys and assigns (and agrees to cause its appropriate Subsidiaries to grant, convey and assign) to 3Com, by execution hereof (or, where appropriate or required, by execution of separate instruments of assignment), all its (and their) right, title and interest in and to the Galahad Patents, to be held and enjoyed by 3Com, its successors and assigns. Palm further grants, conveys and assigns (and agrees to cause its appropriate Subsidiaries to grant, convey and assign) to 3Com all its (and their) right, title and interest in and to any and all causes of action and rights of recovery for past infringement of the Galahad Patents and the right to claim priority from the Galahad Patents. Palm will, without demanding any further consideration therefor, at the request and expense of 3Com (except for the value of the time of Palm employees), do (and cause its Subsidiaries to do) all lawful and just acts, that may be or become necessary for prosecuting, sustaining, obtaining continuations of, or reissuing said Galahad Patents and for evidencing, maintaining, recording and perfecting 3Com's rights to said Galahad Patents, consistent with Palm's general business practice as of the Separation Date, including but not limited to execution and acknowledgement of (and causing its Subsidiaries to execute and acknowledge) assignments and other instruments in a form reasonably required by 3Com for each Patent jurisdiction. 5 2.2 PRIOR GRANTS. Palm acknowledges and agrees that the foregoing assignments are subject to any and all licenses or other rights that may have been granted by 3Com or its Subsidiaries with respect to the Assigned Patents prior to the Separation Date. 3Com shall respond to reasonable inquiries from Palm regarding any such prior grants. 2.3 ASSIGNMENT DISCLAIMER. EACH PARTY ACKNOWLEDGES AND AGREES THAT THE FOREGOING ASSIGNMENTS ARE MADE ON AN "AS-IS," QUITCLAIM BASIS AND THAT NEITHER PARTY NOR ANY SUBSIDIARY OF SUCH PARTY HAS MADE OR WILL MAKE ANY WARRANTY WHATSOEVER, EXPRESS, IMPLIED OR STATUTORY, INCLUDING WITHOUT LIMITATION ANY IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, TITLE, ENFORCEABILITY, NON-INFRINGEMENT, OR VALIDITY OF PATENT CLAIMS (ISSUED OR PENDING). ARTICLE 3 LICENSES AND COVENANTS NOT TO SUE 3.1 LICENSE GRANTS TO PALM WITH RESPECT TO GALAHAD PATENTS. 3Com grants (and agrees to cause its appropriate Subsidiaries to grant) to Palm, under the Galahad Patents, an irrevocable, nonexclusive, worldwide, fully-paid, royalty- free and non-transferable (except as set forth in Section 9.9) license to make (including the right to practice methods, processes and procedures), have made (except as restricted in Section 3.3 below), use, lease, sell, offer for sale and import Palm Products. 3.2 RESTRICTION ON 3COM LICENSING OF GALAHAD PATENTS. 3Com agrees that it will not license any of the Galahad Patents to any Third Party for use in lightweight handheld mobile computing devices or operating systems for such devices; provided, however, that 3Com retains the right to license the Galahad Patents to Third Parties for such use for defensive purposes (i.e., to resolve a claim of patent infringement brought against 3Com by a Third Party). 3.3 RESTRICTION ON PALM'S "HAVE MADE" RIGHTS TO GALAHAD PATENTS. The license granted in Section 3.1 to have Palm Products made by a Third Party shall (i) only apply when the portion of the "have made" Palm Product covered by the Galahad Patents has been designed or created by Palm and/or one of Palm's subcontractors (not such Third Party) who is not a direct competitor of 3Com in the field of the Palm Product being designed or created and (ii) shall not apply to (A) any methods used, or (B) any Palm Products or portions thereof that have been manufactured or marketed, by a Third Party prior to Palm furnishing the designs or creations to such Third Party. 3.4 COMBINATION EXCLUSION. Except as expressly provided herein, no license or immunity is granted under this Agreement by 3Com, either directly or by implication, estoppel or otherwise to any third parties acquiring Palm Products from Palm for the combination of such Palm Products with other items or for the use of such combination. Notwithstanding the previous sentence, 6 3Com grants to the direct and indirect customers of Palm, an immunity from suit under the Galahad Patents for the combination of any such Palm Products with other Palm Products and their use in such combination where the Palm Products have no other substantial noninfringing use aside from the combination with other Palm Products sold or otherwise transferred by Palm directly or indirectly to such customer. 3.5 PALM'S SUBLICENSE RIGHTS WITH RESPECT TO GALAHAD PATENTS. (a) Palm may grant sublicenses to its Subsidiaries under the license grant set forth in Section 3.1 within the scope of Palm's license hereunder (with no right to grant further sublicenses other than, in the case of a sublicensed Subsidiary, to another Subsidiary of Palm and as described in Section 3.5(c) below). (b) Any sublicense under Section 3.5(a) may be made effective retroactively, but not prior to the sublicensee's becoming a Subsidiary of Palm. (c) Any Palm Product for which a software license is granted by Palm (or any sublicensed Subsidiary) to its distributors, resellers, OEM customers, VAR customers, VAD customers, systems integrators and other channels of distribution and to its end user customers (including, but not limited to, the Palm operating system) shall be considered to be covered under the license grant set forth in Section 3.1 within the scope of Palm's license hereunder, but only to the extent that the Palm Product incorporates the technology covered by the claims of the Galahad Patents. (d) Palm shall have no rights to grant sublicenses to the Galahad Patents, except as expressly provided in Section 3.5 (a), (b) and (c) above. 3.6 DURATION. (a) All licenses granted herein with respect to each Patent shall expire upon the expiration of the term of such Patent. (b) All sublicenses granted pursuant to this Agreement to a particular Subsidiary of Palm shall terminate the date that the Subsidiary ceases to be a Subsidiary of Palm. 3.7 ACQUISITION OF PALM OR TRANSFER OF A BUSINESS OR SUBSIDIARY RELATED TO GALAHAD PATENTS. (a) If Palm, after the Separation Date, transfers all or substantially all of its business or assets, or all or substantially all of the business or assets to which the Galahad Patents relate, then regardless of whether such transfer is part of (i) an asset sale to any Third Party, or (ii) a sale of shares or securities in Palm or a Subsidiary to a Third Party (in each case, any such Third Party shall be referred to herein as a "Transferee"), then upon written request by Palm and the Transferee to 3Com within sixty (60) days following the transfer, 3Com shall grant a royalty-free 7 license to the Transferee with respect to the Galahad Patents under the same terms of the license granted to Palm under this Agreement subject to the following: (i) the effective date of such license shall be the effective date of transfer; and (ii) the products and services of the Transferee that are subject to such license shall be limited to the specific Palm Products in the transferred business that are (A) commercially released as of the date of transfer or which, prior to the transfer, (B) were planned for release within three (3) months from the date of transfer and actually are commercially released within three (3) months from the date of transfer and (C) for new versions of such specific Palm Products covered by clauses (A) and (B) above that have merely minor differences from such Palm Products with no additional features; and (iii) the Galahad Patents that are subject to such license shall be limited to the Galahad Patents that are entitled to a First Effective Filing Date before the date of such transfer; and (iv) the Transferee shall have no right to grant sublicenses (except as set forth in Section 3.5(c) above); and (v) this Section 3.7 shall be excluded from such license in any event and therefore 3Com shall have no obligation to grant a license to a subsequent transferee; (b) provided, that 3Com shall have no obligation to grant such license unless the Transferee grants to 3Com a royalty-free license under a comparable license grant as the license granted to Palm under this Agreement, subject to the following: (i) the effective date of such license shall be the effective date of the transfer; and (ii) the products and services of 3Com that are subject to such license shall be all the 3Com Products; and (iii) the Patents of the Transferee that are subject to such license shall be the Patents owned or controlled by the Transferee claiming inventions in the wireless field that are entitled to a First Effective Filing Date on or before the date of such transfer and applications for such patents (including without limitation any continuations, continuations-in-part, divisions and substitutions); and (c) provided, further, that in the event that 3Com and the Transferee are engaged in litigation, arbitration or other formal dispute resolution proceedings covering Patent infringement (pending in any court, tribunal, or administrative agency or before any appointed or agreed upon arbitrator in any jurisdiction worldwide), then 3Com shall have no obligation to grant such license to the Transferee under this Section 3.7. -8- 3.8 COPIES OF PATENT APPLICATIONS AND INVENTION DISCLOSURES. 3Com agrees, at its own expense from time to time upon Palm's request, to provide to Palm copies of (i) the Assigned Patents and (ii) the Galahad Patents. 3.9 THIRD PARTY PATENTS. 3Com confirms that it has granted, and hereby grants (and agrees to cause its appropriate Subsidiaries to grant) to Palm, under the Third Party Patents, a nonexclusive, worldwide sublicense to make (including the right to practice methods, processes and procedures), have made, use, lease, sell, offer for sale and import any products and services subject to any and all terms and conditions set forth in the applicable agreement between 3Com and the Third Party Patent owner, but only to the extent and for the period of time 3Com has the legal right to grant such a sublicense. 3Com shall respond to reasonable inquires from Palm regarding any Third Party Patents. 3.10 3COM COVENANT NOT TO SUE. (a) 3Com irrevocably grants, on behalf of itself and its Subsidiaries, at no charge, an immunity from suit to Palm and its Subsidiaries, and its or their direct or indirect customers and Third Party manufacturers (subject to the restrictions set forth in the next sentence) for infringement of any 3Com Patent by any Current Palm Product. The foregoing covenant with respect to Third Party manufacturers (i) shall apply only when the portion of the "have made" Current Palm Product covered by the 3Com Patents has been designed or created by Palm and/or one of Palm's subcontractors (not the Third Party manufacturer) who is not a direct competitor of 3Com in the field of the Current Palm Product being designed or created and (ii) shall not apply to (A) any methods used, or (B) any products or portions thereof that have been manufactured or marketed, by any Third Party prior to Palm furnishing the designs or creations to such Third Party. No immunity is granted under the foregoing covenant by 3Com, either directly or by implication, estoppel or otherwise to any Third Parties acquiring Current Palm Products from Palm for the combination of such Current Palm Products with other items or for the use of such combination; provided, however, that the foregoing covenant shall apply to the direct and indirect customers of Palm for the combination of any such acquired Current Palm Products with other Palm Products and their use in such combination where the acquired Current Palm Products have no other substantial noninfringing use aside from the combination with other Palm Products sold or otherwise transferred by Palm directly or indirectly to such customer. (b) The foregoing covenant shall continue with respect to each 3Com Patent for the term of such 3Com Patent. (c) If Palm, after the Separation Date, transfers all or substantially all of its business or assets, or transfers a Subsidiary or business unit, then regardless of whether such transfer is part of (i) an asset sale to any Third Party, or (ii) a sale of shares or securities in Palm or a Subsidiary to a Third Party (in each case, any such Third Party shall be referred to herein as a "Transferee"), then upon written request by Palm and the Transferee to 3Com within sixty (60) days following the transfer, 3Com shall grant an immunity from suit to the Transferee under the same terms as the covenant set forth in Section 3.10 (a) and (b) above subject to the following: -9- (i) the effective date of such covenant shall be the effective date of transfer; and (ii) the products and services of the Transferee that are subject to such covenant shall be limited to the specific Current Palm Products in the transferred business that are (A) commercially released as of the date of transfer or which, prior to the transfer, (B) were planned for release within three (3) months from the date of transfer and actually are commercially released within three (3) months from the date of transfer and (C) for new versions of such specific Current Palm Products covered by Clauses (i) or (ii) above that have merely minor differences from such Current Palm Products with no additional features; and (iii) 3Com Patents that are subject to such covenant shall be limited to the 3Com Patents that are entitled to a First Effective Filing Date before the date of such transfer and, in the event that the transfer is a transfer of a Subsidiary or business unit and not all or substantially all of Palm's business or assets, then the 3Com Patents that are subject to such covenant shall be limited to the 3Com Patents in the field of use of the transferred Subsidiary or business; and (iv) this Section 3.10(c) shall be excluded from such covenant in any event and therefore 3Com shall have no obligation to grant a covenant not to sue to any subsequent transferee; (v) provided, however, that 3Com shall have no obligation to grant such covenant unless the Transferee grants to 3Com and its customers and suppliers a covenant not to sue at no charge on the following terms: (1) the effective date of such covenant shall be the effective date of the transfer; and (2) the products and services of 3Com that are subject to such covenant shall be the 3Com Products; and (3) the Patents of the Transferee that are subject to such covenant shall be all the Patents owned or controlled by the Transferee that are entitled to a First Effective Filing Date before the date of such transfer and applications for such Patents (including without limitation any continuations, continuations-in-part, divisions and substitutions); and (vi) provided, further, that in the event that 3Com and any such Transferee are engaged in litigation, arbitration or other formal dispute resolution proceedings covering Patent infringement (pending in any court, tribunal, or administrative agency or before any appointed or agreed upon arbitrator in any jurisdiction worldwide), then 3Com shall have no obligation to grant such covenant under this Section 3.10(c). 3.11 PALM COVENANT NOT TO SUE -10- (a) Palm irrevocably grants, on behalf of itself and its Subsidiaries, at no charge, an immunity from suit to 3Com and its Subsidiaries, and its or their direct or indirect customers and manufacturers (subject to the restrictions set forth in the next sentence) for infringement of any Palm Patent by any Current 3Com Product. The foregoing covenant with respect to Third Party manufacturers (i) shall apply only when the portion of the "have made" Current 3Com Product covered by the Palm Patents has been designed or created by 3Com and/or one of 3Com's subcontractors (not the Third Party manufacturer) who is not a direct competitor of Palm in the field of the Current 3Com Product being designed or created and (ii) shall not apply to (A) any methods used, or (B) any products or portions thereof that have been manufactured or marketed by any Third Party prior to 3Com furnishing the designs or creations to such Third Party. No immunity is granted under the foregoing covenant by Palm, either directly or by implication, estoppel or otherwise to any Third Parties acquiring Current 3Com Products from 3Com for the combination of such Current 3Com Products with other items or for the use of such combination; provided, however, that the foregoing covenant shall apply to the direct and indirect customers of 3Com for the combination of any such acquired Current 3Com Products with other 3Com Products and their use in such combination where the acquired Current 3Com Products have no other substantial noninfringing use aside from the combination with other 3Com Products sold or otherwise transferred by 3Com directly or indirectly to such customer. (b) The foregoing covenant shall continue with respect to each Palm Patent, for the term of such Palm Patent. (c) If 3Com, after the Separation Date, transfers all or substantially all of its business or assets, or transfers a Subsidiary or business unit, then regardless of whether such transfer is part of (i) an asset sale to any Third Party, or (ii) a sale of shares or securities in 3Com or a Subsidiary to a Third Party (in each case, any such Third Party shall be referred to herein as a "Transferee"), then upon written request by 3Com and the Transferee to Palm within sixty(60) days following the transfer, Palm shall grant an immunity from suit to the Transferee under the same terms as the covenant set forth in Section 3.11(a) and (b) above subject to the following: (i) the effective date of such covenant shall be the effective date of transfer; and (ii) the products and services of the Transferee that are subject to such covenant shall be limited to the specific Current 3Com Products in the transferred business that are (A) commercially released as of the date of transfer or which, prior to the transfer, (B) were planned for release within three (3) months from the date of transfer and actually are commercially released within three (3) months from the date of transfer and (C) for new versions of such specific Current 3Com Products covered by clauses (i) or (ii) above, that have merely minor differences from such Current 3Com Products with no additional features; and (iii) the Palm Patents that are subject to such covenant shall be limited to the Palm Patents that are entitled to a First Effective Filing Date before the date of such transfer and, in the event that the transfer is a transfer of a Subsidiary or business unit and not all or substantially -11- all of 3Com's business or assets, then the Palm Patents that are subject to such covenant shall be limited to the Palm Patents in the field of use of the transferred Subsidiary or business; and (iv) this Section 3.11(c) shall be excluded from such covenant in any event and therefore, Palm shall have no obligation to grant a covenant not to sue to any subsequent transferee; (v) provided, however, that Palm shall have no such obligation to grant such covenant unless the Transferee grants to Palm and its customers and suppliers a covenant not to sue at no charge on the following terms: (1) the effective date of such covenant shall be the effective date of the transfer; and (2) the products and services of Palm that are subject to such covenant shall be the Palm Products; and (3) the Patents of the Transferee that are subject to such covenant shall be all the Patents owned or controlled by the Transferee that are entitled to a First Effective Filing Date before the date of such transfer and applications for such Patents including without limitation any continuations, continuations-in-part, divisions and substitutions; and (vi) provided, further, that in the event that Palm and any such Transferee are engaged in litigation, arbitration or other formal dispute resolution proceedings covering Patent infringement (pending in any court, tribunal, or administrative agency or before any appointed or agreed upon arbitrator in any jurisdiction worldwide), then Palm shall have no obligation to grant such covenant under this Section 3.11(c). ARTICLE 4 ADDITIONAL OBLIGATIONS 4.1 ADDITIONAL OBLIGATIONS WITH REGARD TO ASSIGNED PATENTS. (a) The parties will cooperate to effect a smooth transfer of the responsibility for prosecution, maintenance and enforcement of the Assigned Patents from 3Com to Palm. Until such transfer has been effected, 3Com agrees to continue the prosecution and maintenance of, and ongoing litigation (if any) with respect to, the Assigned Patents (including payment of maintenance fees), and to maintain its files and records relating to the Assigned Patents using the same standard of care and diligence that it uses with respect to 3Com's Patents. Palm will reimburse 3Com for all actual and reasonable expenses (excluding the value of the time of 3Com employees) to continue to prosecute and maintain the Assigned Patents after the Separation Date until the transfer of -12- responsibility for the Assigned Patents has been completed and to continue any such ongoing litigation. The parties shall agree on a case by case basis on compensation, if any, of 3Com for the value of time of 3Com's employees as reasonably required in connection with any such litigation. 3Com will provide Palm with the originals or copies of its files relating to the Assigned Patents upon such transfer or at such earlier time as the parties may agree. (b) 3Com shall provide continuing reasonable support to Palm with respect to the Assigned Patents, including by way of example the following: (i) executing all documents prepared by Palm necessary for prosecution, maintenance, and litigation of the Assigned Patents, (ii) making available to Palm or its counsel, inventors and other persons employed by 3Com for interviews and/or testimony to assist in good faith in further prosecution, maintenance or litigation of the Assigned Patents, including the signing of documents related thereto, (iii) forwarding copies of all correspondence sent and received concerning the Assigned Patents within a reasonable period of time after receipt by 3Com, and (iv) making all relevant documents in the possession or control of 3Com and corresponding to the Assigned Patents, or any licenses thereunder, available to Palm or its counsel. Any actual and reasonable out-of-pocket expenses associated with any such assistance shall be borne by Palm, expressly excluding the value of the time of such 3Com employees; provided, however, that in the case of assistance with litigation, the parties shall agree on a case by case basis on compensation, if any, of 3Com for the value of the time of 3Com's employees as reasonably required in connection with such litigation. 4.2 ADDITIONAL OBLIGATIONS WITH REGARD TO GALAHAD PATENTS. Palm shall provide continuing reasonable support to 3Com with respect to the Galahad Patents, including by way of example the following: (a) executing all documents prepared by 3Com necessary for prosecution, maintenance, and litigation of the Galahad Patents, (b) making available to 3Com or its counsel, inventors and other persons employed by Palm for interviews and/or testimony to assist in good faith in further prosecution, maintenance or litigation of the Galahad Patents, including the signing of documents related thereto, (c) forwarding copies of all correspondence sent and received concerning the Galahad Patents within a reasonable period of time after receipt by Palm, and -13- (d) making all relevant documents in the possession or control of Palm and corresponding to the Galahad Patents, or any licenses thereunder, available to 3Com or its counsel. Any actual and reasonable out-of-pocket expenses associated with such assistance shall be borne by 3Com, expressly excluding the value of the time of such Palm personnel; provided, however, that in the case of assistance with litigation, the parties shall agree on a case by case basis on compensation, if any, of Palm for the value of the time of Palm's employees as reasonably required in connection with such litigation. 4.3 STANDARDS BODIES. For a period of five (5) years from the Separation Date, the parties agree to cooperate reasonably and in good faith with each other with respect to the licensing of each party's Patents in the context of Bluetooth related standards bodies, to the extent consistent with each party's own business objectives. 4.4 ASSIGNMENT OF PATENTS. 3Com shall not assign or grant any rights under any of the Galahad Patents unless such assignment or grant is made subject to the licenses granted in this Agreement. 4.5 RECORDATION OF LICENSES. (a) For any country, now or in the future, that requires the express consent of all inventors or their assignees to the grant of licenses or rights under Patents issued in such countries for joint inventions: (i) each party shall give such consent, or shall obtain such consent from its employees, its Subsidiaries or employees of any of its Subsidiaries, as required to make full and effective any such licenses and rights respecting any joint invention granted to a grantee hereunder by such party; and (ii) each party shall take steps that are reasonable under the circumstances to obtain from Third Parties whatever other consents are necessary to make full and effective such licenses and rights respecting any joint invention purported to be granted by it hereunder. If, in spite of such reasonable steps, such party is unable to obtain the requisite consents from such Third Parties, the resulting inability of such party to make full and effective its purported grant of such licenses and rights shall not be considered to be a breach of this Agreement. (b) Each party agrees, without demanding any further consideration, to execute (and to cause its Subsidiaries to execute) all documents reasonably requested by the other party to effect recordation of the license relationship between the parties created by this Agreement. ARTICLE 5 CONFIDENTIALITY -14- The terms of the Master Confidential Disclosure Agreement between the parties shall apply to any Confidential Information (as defined therein) which is the subject matter of this Agreement. ARTICLE 6 TERMINATION 6.1 VOLUNTARY TERMINATION. By written notice to 3Com, Palm may voluntarily terminate all or a specified portion of the licenses and rights granted to it hereunder by 3Com. Such notice shall specify the effective date of such termination and shall clearly specify any affected Patent, Patent application, Invention Disclosure, product or service. 6.2 SURVIVAL. Any voluntary termination of licenses and rights of Palm under Section 6.1 shall not affect Palm's licenses and rights with respect to any licensed product made or service furnished prior to such termination, and shall not affect the licenses and rights granted to 3Com hereunder. 6.3 NO OTHER TERMINATION. Each party acknowledges and agrees that its remedy for breach by the other party of the licenses granted to it hereunder or of any other provision hereof, shall be, subject to the requirements of Article 7, to bring a claim to recover damages subject to the limits set forth in this Agreement and to seek any other appropriate equitable relief, other than termination of the licenses or covenants not to sue granted by it in this Agreement. ARTICLE 7 DISPUTE RESOLUTION 7.1 MEDIATION. If a dispute, controversy or claim ("Dispute") arises between the parties relating to the interpretation or performance of this Agreement, or the grounds for the termination hereof, appropriate senior executives (e.g. director or V.P. level) of each party who shall have the authority to resolve the matter shall meet to attempt in good faith to negotiate a resolution of the Dispute prior to pursuing other available remedies. The initial meeting between the appropriate senior executives shall be referred to herein as the "Dispute Resolution Commencement Date." Discussions and correspondence relating to trying to resolve such Dispute shall be treated as confidential information developed for the purpose of settlement and shall be exempt from discovery or production and shall not be admissible. If the senior executives are unable to resolve the Dispute within thirty (30) days from the Dispute Resolution Commencement Date, and either party wishes to pursue its rights relating to such Dispute, then the Dispute will be mediated by a mutually acceptable mediator appointed pursuant to the mediation rules of JAMS/Endispute within thirty (30) days after written notice by one party to the other demanding non-binding mediation. Neither party may unreasonably withhold consent to the selection of a mediator or the location of the mediation. Both parties will share the costs of the mediation equally, except that each party shall bear its own costs -15- and expenses, including attorney's fees, witness fees, travel expenses, and preparation costs. The parties may also agree to replace mediation with some other form of non-binding or binding ADR. 7.2 ARBITRATION. Any Dispute which the parties cannot resolve through mediation within ninety (90) days of the Dispute Resolution Commencement Date, unless otherwise mutually agreed, shall be submitted to final and binding arbitration under the then current Commercial Arbitration Rules of the American Arbitration Association ("AAA"), by three (3) arbitrators in Santa Clara County, California. Such arbitrators shall be selected by the mutual agreement of the parties or, failing such agreement, shall be selected according to the aforesaid AAA rules. The arbitrators will be instructed to prepare and deliver a written, reasoned opinion stating their decision within thirty (30) days of the completion of the arbitration. The prevailing party in such arbitration shall be entitled to expenses, including costs and reasonable attorneys' and other professional fees, incurred in connection with the arbitration (but excluding any costs and fees associated with prior negotiation or mediation). The decision of the arbitrator shall be final and non-appealable and may be enforced in any court of competent jurisdiction. The use of any ADR procedures will not be construed under the doctrine of laches, waiver or estoppel to adversely affect the rights of either party. 7.3 COURT ACTION. Any Dispute regarding the following is not required to be negotiated, mediated or arbitrated prior to seeking relief from a court of competent jurisdiction: breach of any obligation of confidentiality; infringement, misappropriation, or misuse of any intellectual property right; any other claim where interim relief from the court is sought to prevent serious and irreparable injury to one of the parties or to others. However, the parties to the Dispute shall make a good faith effort to negotiate and mediate such Dispute, according to the above procedures, while such court action is pending. 7.4 CONTINUITY OF SERVICE AND PERFORMANCE. Unless otherwise agreed in writing, the parties will continue to provide service and honor all other commitments under this Agreement during the course of dispute resolution pursuant to the provisions of this Article 7 with respect to all matters not subject to such dispute, controversy or claim. ARTICLE 8 LIMITATION OF LIABILITY IN NO EVENT SHALL EITHER PARTY OR ITS SUBSIDIARIES BE LIABLE TO THE OTHER PARTY OR ITS SUBSIDIARIES FOR ANY SPECIAL, CONSEQUENTIAL, INDIRECT, INCIDENTAL OR PUNITIVE DAMAGES OR LOST PROFITS, HOWEVER CAUSED AND ON ANY THEORY OF LIABILITY (INCLUDING NEGLIGENCE) ARISING IN ANY WAY OUT OF THIS AGREEMENT, WHETHER OR NOT SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES; PROVIDED, HOWEVER, THAT THE FOREGOING LIMITATIONS SHALL NOT LIMIT DAMAGES FOR INFRINGEMENT AVAILABLE TO EITHER PARTY UNDER APPLICABLE LAW IN THE EVENT OF BREACH BY THE OTHER PARTY OF SECTIONS 3.1, 3.2, 3.3 OR 3.5(a) OR FOR INFRINGEMENT OF ANY INTELLECTUAL PROPERTY RIGHTS NOT LICENSED OR COVENANTED HEREIN AND -16- SHALL NOT LIMIT EACH PARTY'S OBLIGATIONS EXPRESSLY ASSUMED IN EXHIBIT J OF THE MASTER SEPARATION AND DISTRIBUTION AGREEMENT; PROVIDED FURTHER THAT THE EXCLUSION OF PUNITIVE DAMAGES SHALL APPLY IN ANY EVENT. ARTICLE 9 MISCELLANEOUS PROVISIONS 9.1 DISCLAIMER. EACH PARTY ACKNOWLEDGES AND AGREES THAT ALL PATENTS AND ANY OTHER INFORMATION OR MATERIALS LICENSED OR PROVIDED HEREUNDER ARE LICENSED OR PROVIDED ON AN "AS IS" BASIS AND THAT NEITHER PARTY NOR ANY OF ITS SUBSIDIARIES MAKES ANY REPRESENTATIONS OR EXTENDS ANY WARRANTIES WHATSOEVER, EXPRESS, IMPLIED OR STATUTORY, WITH RESPECT THERETO INCLUDING WITHOUT LIMITATION ANY IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, TITLE, ENFORCEABILITY OR NON-INFRINGEMENT. Without limiting the generality of the foregoing, neither party nor any of its Subsidiaries makes any warranty or representation as to the validity and/or scope of any Patent licensed by it to the other party hereunder or any warranty or representation that any manufacture, use, importation, offer for sale or sale of any product or service will be free from infringement of any Patent or other intellectual property right of any Third Party. 9.2 NO IMPLIED LICENSES. Nothing contained in this Agreement shall be construed as conferring any rights by implication, estoppel or otherwise, under any intellectual property right, other than the rights expressly granted in this Agreement with respect to the Galahad Patents and Assigned Patents. Neither party is required hereunder to furnish or disclose to the other any technical or other information except as specifically provided herein. 9.3 INFRINGEMENT SUITS. Neither party shall have any obligation hereunder to institute any action or suit against Third Parties for infringement of any Patent or to defend any action or suit brought by a Third Party which challenges or concerns the validity of any Patent. Unless the parties otherwise agree in writing, neither party shall have any right to institute any action or suit against Third Parties for infringement of any Patent owned by the other party. 9.4 NO OTHER OBLIGATIONS. NEITHER PARTY ASSUMES ANY RESPONSIBILITIES OR OBLIGATIONS WHATSOEVER, OTHER THAN THE RESPONSIBILITIES AND OBLIGATIONS EXPRESSLY SET FORTH IN THIS AGREEMENT OR A SEPARATE WRITTEN AGREEMENT BETWEEN THE PARTIES. Without limiting the generality of the foregoing, neither party, nor any of its Subsidiaries is obligated to (i) file any Patent application, or to secure any Patent or Patent rights, (ii) to maintain any Patent in force, or (iii) provide any technical assistance, except for the obligations expressly assumed in this Agreement. -17- 9.5 ENTIRE AGREEMENT. This Agreement, the Master Separation and Distribution Agreement and the other Ancillary Agreements (as defined in the Master Separation and Distribution Agreement) and the Exhibits and Schedules referenced or attached hereto and thereto constitute the entire agreement between the parties with respect to the subject matter hereof and thereof and shall supersede all prior written and oral and all contemporaneous oral agreements and understandings with respect to the subject matter hereof and thereof. To the extent there is a conflict between this Agreement and the Master Assignment and Assumption Agreement between the parties, the terms of this Agreement shall govern. 9.6 GOVERNING LAW. This Agreement shall be construed in accordance with and all Disputes hereunder shall be governed by the laws of the State of California, excluding its conflict of law rules and the United Nations Convention on Contracts for the International Sale of Goods. The Superior Court of Santa Clara County and/or the United States District Court for the Northern District of California shall have jurisdiction and venue over all Disputes between the parties that are permitted to be brought in a court of law pursuant to Article 7 above. 9.7 DESCRIPTIVE HEADINGS. The headings contained in this Agreement, in any Exhibit or Schedule hereto and in the table of contents to this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Any capitalized term used in any Exhibit or Schedule but not otherwise defined therein, shall have the meaning assigned to such term in this Agreement. When a reference is made in this Agreement to an Article or a Section, Exhibit or Schedule, such reference shall be to an Article or Section of, or an Exhibit or Schedule to, this Agreement unless otherwise indicated. 9.8 NOTICES. Notices, offers, requests or other communications required or permitted to be given by either party pursuant to the terms of this Agreement shall be given in writing to the respective parties to the following addresses: if to 3Com: 3Com Corporation 5400 Bayfront Plaza Santa Clara, California 95052 Attention: General Counsel Fax: (408) 326-6434 if to Palm: Palm, Inc. 5400 Bayfront Plaza Santa Clara, California 95052 Attention: General Counsel Fax: (408) 326-6434 or to such other address as the party to whom notice is given may have previously furnished to the other in writing as provided herein. Any notice involving non-performance, termination, or renewal shall be sent by hand delivery, recognized overnight courier or, within the United States, may also be -18- sent via certified mail, return receipt requested. All other notices may also be sent by fax, confirmed by first class mail. All notices shall be deemed to have been given and received on the earlier of actual delivery or three (3) days from the date of postmark. 9.9 NONASSIGNABILITY. Neither party may, directly or indirectly, in whole or in part, whether by operation of law or otherwise, assign or transfer this Agreement, without the other party's prior written consent, and any attempted assignment, transfer or delegation without such prior written consent shall be voidable at the sole option of such other party. Notwithstanding the foregoing, each party (or its successive assignees or transferees hereunder) may, without such consent, assign or transfer this Agreement, to a Person that succeeds to all or substantially all of its business or assets of such party as long as such Person agrees to accept all of the terms set forth herein; provided, however, that the licenses and covenants not to sue set forth in Article 3 may not be assigned or transferred in any event (except in the case of a reincorporation of such party in another state); and provided, further, that the prohibition on assignment or transfer of the licenses and covenants not to sue set forth in Article 3 shall not limit 3Com's or Palm's obligations in Sections 3.7, 3.10(c) and 3.11(c) to grant licenses and/or covenants not to sue to a Transferee. Without limiting the foregoing, this Agreement will be binding upon and inure to the benefit of the parties and their permitted successors and assigns. 9.10 SEVERABILITY. If any term or other provision of this Agreement is determined by a court, administrative agency or arbitrator to be invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to either party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that the transactions contemplated hereby are fulfilled to the fullest extent possible. 9.11 FAILURE OR INDULGENCE NOT WAIVER; REMEDIES CUMULATIVE. No failure or delay on the part of either party hereto in the exercise of any right hereunder shall impair such right or be construed to be a waiver of, or acquiescence in, any breach of any representation, warranty or agreement herein, nor shall any single or partial exercise of any such right preclude other or further exercise thereof or of any other right. All rights and remedies existing under this Agreement are cumulative to, and not exclusive of, any rights or remedies otherwise available. 9.12 AMENDMENT. No change or amendment will be made to this Agreement except by an instrument in writing signed on behalf of each of the parties to such agreement. 9.13 COUNTERPARTS. This Agreement, including the Ancillary Agreement and the Exhibits and Schedules hereto and thereto and the other documents referred to herein or therein, may be executed in counterparts, each of which shall be deemed to be an original but all of which shall constitute one and the same agreement. -19- WHEREFORE, the parties have signed this Master Patent Ownership and License Agreement effective as of the date first set forth above. 3COM CORPORATION PALM, INC. By:_____________________________ By:_____________________________________ Name:___________________________ Name:___________________________________ Title:__________________________ Title:__________________________________ -20- EX-2.5 6 FORM OF MASTER TRADEMARK OWNERSHIP & LICENSE AGRMT EXHIBIT 2.5 CONFIDENTIAL [WSGR DRAFT 12/01/1999] MASTER TRADEMARK OWNERSHIP AND LICENSE AGREEMENT BETWEEN 3COM CORPORATION AND PALM, INC. Effective as of _____, 2000 MASTER TRADEMARK OWNERSHIP AND LICENSE AGREEMENT TABLE OF CONTENTS
Page ---- ARTICLE 1 DEFINITIONS.............................................. 1 1.1 AUTHORIZED DEALERS...................................... 1 1.2 COLLATERAL MATERIALS.................................... 1 1.3 CORPORATE IDENTITY MATERIALS............................ 1 1.4 DISTRIBUTION DATE....................................... 2 1.5 LICENSED MARKS.......................................... 2 1.6 MAINTENANCE CONTRACTS................................... 2 1.7 MARK.................................................... 2 1.8 MASTER SEPARATION AND DISTRIBUTION AGREEMENT............ 2 1.9 PALM BUSINESS........................................... 2 1.10 PALM BUSINESS MARKS..................................... 2 1.11 PALM BUSINESS MARKS DATABASE............................ 2 1.12 PALM BUSINESS PRODUCTS.................................. 2 1.13 PERSON.................................................. 2 1.14 QUALITY STANDARDS....................................... 3 1.15 SELL.................................................... 3 1.16 SEPARATION DATE......................................... 3 1.17 SUBSIDIARY.............................................. 3 1.18 THIRD PARTY............................................. 3 1.19 TRADEMARK USAGE GUIDELINES.............................. 3 ARTICLE 2 OWNERSHIP................................................ 3 2.1 OWNERSHIP OF PALM BUSINESS MARKS........................ 3 2.2 PRIOR GRANTS............................................ 4 2.3 ASSIGNMENT DISCLAIMER................................... 4 ARTICLE 3 LICENSES ................................................ 4 3.1 LICENSE GRANT........................................... 4 3.2 LICENSE RESTRICTIONS.................................... 4 3.3 LICENSEE UNDERTAKINGS................................... 5 3.4 NON-TRADEMARK USE....................................... 5 3.5 RESERVATION OF RIGHTS................................... 5 3.6 THIRD PARTY LICENSES.................................... 6 ARTICLE 4 PERMITTED SUBLICENSES ................................... 6 4.1 SUBLICENSES............................................. 6 4.2 AUTHORIZED DEALERS' USE OF MARKS........................ 6 4.3 ENFORCEMENT OF AGREEMENTS............................... 6 -i- TABLE OF CONTENTS (continued) ARTICLE 5 TRADEMARK USAGE GUIDELINES .............................. 7 5.1 TRADEMARK USAGE GUIDELINES.............................. 7 5.2 TRADEMARK REVIEWS....................................... 7 ARTICLE 6 TRADEMARK USAGE GUIDELINE ENFORCEMENT ................... 7 6.1 INITIAL CURE PERIOD..................................... 7 6.2 SECOND CURE PERIOD...................................... 7 6.3 FINAL CURE PERIOD....................................... 8 ARTICLE 7 QUALITY STANDARDS........................................ 8 7.1 GENERAL................................................. 8 7.2 QUALITY STANDARDS....................................... 8 7.3 QUALITY CONTROL REVIEWS................................. 8 7.4 PRODUCT DISCONTINUATION................................. 8 ARTICLE 8 QUALITY STANDARD ENFORCEMENT............................. 9 8.1 INITIAL CURE PERIOD..................................... 9 8.2 SECOND CURE PERIOD...................................... 9 8.3 FINAL CURE PERIOD....................................... 9 ARTICLE 9 PROTECTION OF LICENSED MARKS............................. 9 9.1 OWNERSHIP AND RIGHTS.................................... 9 9.2 PROTECTION OF MARKS..................................... 9 9.3 SIMILAR MARKS........................................... 10 9.4 INFRINGEMENT PROCEEDINGS................................ 10 ARTICLE 10 TERMINATION............................................. 11 10.1 TERM 11 10.2 VOLUNTARY TERMINATION................................... 11 10.3 SURVIVAL................................................ 11 10.4 OTHER TERMINATION....................................... 11 ARTICLE 11 DISPUTE RESOLUTION...................................... 11 11.1 MEDIATION............................................... 11 11.2 ARBITRATION............................................. 11 11.3 COURT ACTION............................................ 12 11.4 CONTINUITY OF SERVICE AND PERFORMANCE................... 12 -ii- TABLE OF CONTENTS (continued) ARTICLE 12 LIMITATION OF LIABILITY................................. 12 ARTICLE 13 MISCELLANEOUS PROVISIONS................................ 13 13.1 DISCLAIMER.............................................. 13 13.2 NO IMPLIED LICENSES..................................... 13 13.3 INFRINGEMENT SUITS...................................... 13 13.4 NO OTHER OBLIGATIONS.................................... 13 13.5 ENTIRE AGREEMENT........................................ 13 13.6 GOVERNING LAW........................................... 14 13.7 DESCRIPTIVE HEADINGS.................................... 14 13.8 NOTICES................................................. 14 13.9 NONASSIGNABILITY........................................ 15 13.10 SEVERABILITY............................................ 15 13.11 FAILURE OR INDULGENCE NOT WAIVER; REMEDIES CUMULATIVE... 15 13.12 AMENDMENT............................................... 15 13.13 COUNTERPARTS............................................ 15
EXHIBIT A: LICENSED MARKS -iii- MASTER TRADEMARK OWNERSHIP AND LICENSE AGREEMENT This Master Trademark Ownership and License Agreement (the "Agreement") is effective as of ________, 2000 (the "Effective Date"), between 3Com Corporation, a Delaware corporation ("3Com"), having an office at 5400 Bayfront Plaza, Santa Clara, California, 95052 and Palm, Inc., a Delaware corporation ("Palm"), having an office at 5400 Bayfront Plaza, Santa Clara, California, 95052. WHEREAS, the Board of Directors of 3Com has determined that it is in the best interest of 3Com and its stockholders to separate 3Com's existing businesses into two independent businesses; WHEREAS, as part of the foregoing, 3Com and Palm's predecessor, Palm Computing, Inc., a California Corporation, have entered into a Master Separation and Distribution Agreement (as defined below) which provides, among other things, for the separation of certain Palm assets and Palm liabilities, the initial public offering of Palm stock, the distribution of such stock and the execution and delivery of certain other agreements in order to facilitate and provide for the foregoing; WHEREAS, the parties desire that 3Com assign and transfer to Palm the Palm Business Marks (as defined below); and WHEREAS, the parties further desire that 3Com license the Licensed Marks (as defined below) to Palm after the separation of the Palm businesses. NOW, THEREFORE, in consideration of the mutual promises of the parties, and of good and valuable consideration, it is agreed by and between the parties as follows: ARTICLE 1 DEFINITIONS For the purpose of this Agreement, the following capitalized terms are defined in this Article 1 and shall have the meaning specified herein: 1.1 AUTHORIZED DEALERS. "Authorized Dealers" means any distributor, dealer, OEM customer, VAR customer, VAD customer, systems integrator or other agent that on or after the Separation Date is authorized to market, advertise, sell, lease, rent, service or otherwise offer Palm Business Products. Palm will provide 3Com a list of the then current Authorized Dealers within a reasonable period after 3Com's request. 1.2 COLLATERAL MATERIALS. "Collateral Materials" means all packaging, tags, labels, advertising, promotions, display fixtures, instructions, warranties and other materials of any and all types associated with the Palm Business Products that are marked with at least one of the Licensed Marks. 1.3 CORPORATE IDENTITY MATERIALS. "Corporate Identity Materials" means materials that are not products or product-related and that Palm may now or hereafter use to -1- communicate its identity, including, by way of example and without limitation, business cards, letterhead, stationery, paper stock and other supplies, and signage on real property and buildings. 1.4 DISTRIBUTION DATE. "Distribution Date" has the meaning set forth in the Master Separation and Distribution Agreement. 1.5 LICENSED MARKS. "Licensed Marks" means the Marks set forth on Exhibit A hereto. 1.6 MAINTENANCE CONTRACTS. "Maintenance Contracts" means agreements pursuant to which Palm, its Subsidiaries or its or their Authorized Dealers or their designees provide repair and maintenance services (whether preventive, diagnostic, remedial, warranty or non-warranty) in connection with Palm Business Products, including without limitation agreements entered into by 3Com prior to the Separation Date and assigned to Palm pursuant to the Master Separation and Distribution Agreement or the Ancillary Agreements (as such term is defined in the Master Separation and Distribution Agreement). 1.7 MARK. "Mark" means any trademark, service mark, trade name, domain name, and the like, or other word, name, symbol or device, or any combination thereof, used or intended to be used by a Person to identify and distinguish the products or services of that Person from the products or services of others and to indicate the source of such goods or services, including without limitation all registrations and applications therefor throughout the world and all common law and other rights therein throughout the world. 1.8 MASTER SEPARATION AND DISTRIBUTION AGREEMENT. "Master Separation and Distribution Agreement" means the Master Separation and Distribution Agreement between the parties. 1.9 PALM BUSINESS. "Palm Business" means the business and operations of Palm. 1.10 PALM BUSINESS MARKS. "Palm Business Marks" means the mutually agreed Marks listed in the Palm Business Marks Database. 1.11 PALM BUSINESS MARKS DATABASE. "Palm Business Marks Database" means the mutually agreed Palm Business Marks Database as of the Separation Date, as it may be updated by the parties upon mutual agreement to add additional Marks as of the Separation Date. 1.12 PALM BUSINESS PRODUCTS means any and all products of the Palm Business commercially released prior to the Separation Date. 1.13 PERSON. "Person" means an individual, a partnership, a corporation, a limited liability company, an association, a joint stock company, a trust, a joint venture, an unincorporated organization, and a governmental entity or any department, agency or political subdivision thereof. -2- 1.14 QUALITY STANDARDS. "Quality Standards" means standards of quality applicable to the Palm Business Products, as in use immediately prior to the Separation Date, unless otherwise communicated in writing by 3Com from time to time. 1.15 SELL. To "Sell" a product means to sell, transfer, lease or otherwise dispose of a product. "Sale" and "Sold" have the corollary meanings ascribed thereto. 1.16 SEPARATION DATE. "Separation Date" means 12:01 a.m., Pacific Time, February 26, 2000, or such other date as may be fixed by the Board of Directors of 3Com. 1.17 SUBSIDIARY. "Subsidiary" of any Person means a corporation or other organization whether incorporated or unincorporated of which at least a majority of the securities or interests having by the terms thereof ordinary voting power to elect at least a majority of the board of directors or others performing similar functions with respect to such corporation or other organization is directly or indirectly owned or controlled by such Person or by any one or more of its Subsidiaries, or by such Person and one or more of its Subsidiaries; provided, however, that no Person that is not directly or indirectly wholly- owned by any other Person shall be a Subsidiary of such other Person unless such other Person controls, or has the right, power or ability to control, that Person. For purposes of this Agreement, Palm shall be deemed not to be a subsidiary of 3Com. 1.18 THIRD PARTY. "Third Party" means a Person other than 3Com and its Subsidiaries and Palm and its Subsidiaries. 1.19 TRADEMARK USAGE GUIDELINES. "Trademark Usage Guidelines" means the guidelines for proper usage of the Licensed Marks, as in use immediately prior to the Separation Date, as such guidelines may be revised and updated in writing by 3Com from time to time. ARTICLE 2 OWNERSHIP 2.1 OWNERSHIP OF PALM BUSINESS MARKS. The parties agree that Palm hereby retains ownership of all right, title and interest in and to the Palm Business Marks. Subject to Sections 2.2 and 2.3 below, to the extent that any Palm Business Marks are registered in 3Com's name anywhere in the world, or to the extent that 3Com otherwise has any ownership rights in and to the Palm Business Marks or any goodwill therein, 3Com hereby grants, conveys and assigns (and agrees to cause its appropriate Subsidiaries to grant, convey and assign) to Palm, by execution hereof (or, where appropriate or required, by execution of separate instruments of assignment), all its (and their) right, title and interest in and to the Palm Business Marks, including all goodwill of the Palm Business appurtenant thereto, to be held and enjoyed by Palm, its successors and assigns. 3Com further grants, conveys and assigns (and agrees to cause its appropriate Subsidiaries to grant, convey and assign) to Palm all its (and their) right, title and interest in and to any and all causes of action and rights of recovery for past infringement of the Palm Business Marks. 3Com will, without demanding any further consideration therefor, at the request and expense of Palm (except for the -3- value of the time of 3Com employees), do (and to cause its Subsidiaries to do) all lawful and just acts that may be or become necessary for evidencing, maintaining, recording and perfecting Palm's rights to such Palm Business Marks consistent with 3Com's general business practice as of the Separation Date, including but not limited to execution and acknowledgement of (and causing its Subsidiaries to execute and acknowledge) assignments and other instruments in a form reasonably required by Palm or the relevant governmental or other authorities for each Mark in all jurisdictions in which 3Com owns rights thereto. 2.2 PRIOR GRANTS. Palm acknowledges and agrees that the foregoing assignment is subject to any and all licenses or other rights that may have been granted by 3Com or its Subsidiaries with respect to the Palm Business Marks prior to the Separation Date. 3Com shall respond to reasonable inquiries from Palm regarding any such prior grants. 2.3 ASSIGNMENT DISCLAIMER. PALM ACKNOWLEDGES AND AGREES THAT THE FOREGOING ASSIGNMENTS ARE MADE ON AN "AS-IS," QUITCLAIM BASIS AND THAT NEITHER 3COM NOR ANY SUBSIDIARY OF 3COM HAS MADE OR WILL MAKE ANY WARRANTY WHATSOEVER, EXPRESS, IMPLIED OR STATUTORY, INCLUDING, WITHOUT LIMITATION, ANY IMPLIED WARRANTIES OF TITLE, ENFORCEABILITY OR NON-INFRINGEMENT. ARTICLE 3 LICENSES 3.1 LICENSE GRANT. 3Com grants (and agrees to cause its appropriate Subsidiaries to grant) to Palm a personal, irrevocable, nonexclusive, worldwide, fully-paid and non-transferable (except as set forth in Section 13.9) license to use the Licensed Marks on the Palm Business Products and in connection with the Sale and offer for Sale of Palm Business Products (or, in the case of Palm Business Products in the form of software, in connection with licensing of Palm Business Products) and to use the Licensed Marks in the advertisement and promotion of such Palm Business Products. 3.2 LICENSE RESTRICTIONS. (a) Palm may not make any use whatsoever, in whole or in part, of the Licensed Marks, or any other Mark owned by 3Com, in connection with Palm's corporate, doing business as, or fictitious name, or on Corporate Identity Materials without the prior written consent of 3Com, except as expressly set forth in this Section 3.2(a) or in Section 3.4 below. Notwithstanding the foregoing, Palm may use any business cards, letterhead, stationery, paper stock and other supplies, and the like throughout their useful life in connection with the conduct of the Palm Business, to the extent that, as of the Separation Date, they are in use, in inventory or on order. -4- (b) Palm may not use any Licensed Mark in direct association with another Mark such that the two Marks appear to be a single Mark or in any other composite manner with any Marks of Palm or any Third Party (other than the Palm Business Marks as permitted herein). (c) In all respects, Palm's usage of the Licensed Marks pursuant to the license granted hereunder shall be in a manner consistent with the high standards, reputation and prestige represented by the Licensed Marks, and any usage by Palm that is inconsistent with the foregoing shall be deemed to be outside the scope of the license granted hereunder. As a condition to the license granted hereunder, Palm shall at all times present, position and promote the Palm Business Products marked with one or more of the Licensed Marks in a manner consistent with the high standards and prestige represented by the Licensed Marks. 3.3 LICENSEE UNDERTAKINGS. As a condition to the licenses granted hereunder, Palm undertakes to 3Com that: (a) Palm shall not use the Licensed Marks (or any other Mark of 3Com) in any manner which is deceptive or misleading, which ridicules or is derogatory to the Licensed Marks, or which compromises or reflects unfavorably upon the goodwill, good name, reputation or image of 3Com or the Licensed Marks, or which might jeopardize or limit 3Com's proprietary interest therein. (b) Palm shall not use the Licensed Marks in connection with any products or services other than the Palm Business Products. (c) Palm shall not (i) misrepresent to any Person the scope of its authority under this Agreement, (ii) incur or authorize any expenses or liabilities chargeable to 3Com, or (iii) take any actions that would impose upon 3Com any obligation or liability to a Third Party other than obligations under this Agreement, or other obligations which 3Com expressly approves in writing for Palm to incur on its behalf. (d) All press releases and corporate advertising and promotions that embody the Licensed Marks and messages conveyed thereby shall be consistent with the high standards and prestige represented by the Licensed Marks. 3.4 NON-TRADEMARK USE. Each party may make appropriate and truthful references to the other party and the other party's products and technology. 3.5 RESERVATION OF RIGHTS. Except as otherwise expressly provided in this Agreement, 3Com shall retain all rights in and to the Licensed Marks, including without limitation: (a) All rights of ownership in and to the Licensed Marks; (b) The right to use (including the right of 3Com's Subsidiaries to use) the Licensed Marks, either alone or in combination with other Marks, in connection with the marketing, -5- offer or provision of any product or service, including any product or service which competes with Palm Business products; and (c) The right to license Third Parties to use the Licensed Marks. 3.6 THIRD PARTY LICENSES. 3Com agrees that it and its Subsidiaries will not license or transfer the Licensed Marks to Third Parties (other than to and among Subsidiaries or Joint Ventures (as defined below) of 3Com) for use in connection with products or services which compete with Palm Business Products that are listed on a mutually agreed Palm corporate price list as of the Distribution Date until two (2) years after the Separation Date. Such restriction shall be binding on any successors and assigns of the Licensed Marks. As used in this Section 3.6, "Joint Venture" means a corporation or other organization whether incorporated or unincorporated of which at least fifth percent (50%) of the securities or interests having by the terms thereof ordinary voting power to elect at least a majority of the board of directors or others performing similar functions with respect to such corporation or other organization is directly or indirectly owned or controlled by 3Com. ARTICLE 4 PERMITTED SUBLICENSES 4.1 SUBLICENSES (a) SUBLICENSES TO SUBSIDIARIES. Subject to the terms and conditions of this Agreement, including all applicable Quality Standards and Trademark Usage Guidelines and other restrictions in this Agreement, Palm may grant sublicenses to its Subsidiaries to use the Licensed Marks in accordance with the license grant in Section 3.1 above; provided, that (i) Palm enters into a written sublicense agreement with each such Subsidiary sublicensee, and (ii) such agreement does not include the right to grant further sublicenses other than, in the case of a sublicensed Subsidiary of Palm, to another Subsidiary of Palm. Palm shall provide copies of such written sublicense agreements to 3Com upon request. If Palm grants any sublicense rights pursuant to this Section 4.1(a) and any such sublicensed Subsidiary ceases to be a Subsidiary, then the sublicense granted to such Subsidiary pursuant to this Section 4.1(a) shall terminate 180 days from the date of such cessation. 4.2 AUTHORIZED DEALERS' USE OF MARKS. Subject to the terms and conditions of this Agreement, including all applicable Quality Standards and Trademark Usage Guidelines and other restrictions in this Agreement, Palm (and those Subsidiaries sublicensed to use the Licensed Marks pursuant to Section 4.1) may allow Authorized Dealers to, and may allow such Authorized Dealers to allow other Authorized Dealers to, use the Licensed Marks in the advertisement and promotion of Palm Business Products Sold by such Authorized Dealers. 4.3 ENFORCEMENT OF AGREEMENTS. Palm shall take all appropriate measures at Palm's expense promptly and diligently to enforce the terms of any sublicense agreement or other -6- agreement with any Subsidiary or Authorized Dealer, or of any existing agreement with any Authorized Dealer, and shall restrain any such Subsidiary or Authorized Dealer from violating such terms, including without limitation (i) monitoring the Subsidiaries' and Authorized Dealers' compliance with the relevant Trademark Usage Guidelines and Quality Standards and causing any noncomplying Subsidiary or Authorized Dealer promptly to remedy any failure, (ii) terminating such agreement and/or (iii) commencing legal action, in each case, using a standard of care consistent with 3Com's practices as of the Separation Date. In the event that 3Com determines that Palm has failed promptly and diligently to enforce the terms of any such agreement using such standard of care, 3Com reserves the right to enforce such terms, and Palm shall reimburse 3Com for its fully allocated direct costs and expenses incurred in enforcing such agreement, plus all out-of- pocket costs and expenses, plus five percent (5%). ARTICLE 5 TRADEMARK USAGE GUIDELINES 5.1 TRADEMARK USAGE GUIDELINES. Palm and its Subsidiaries and Authorized Dealers shall use the Licensed Marks only in a manner that is consistent with the Trademark Usage Guidelines. 5.2 TRADEMARK REVIEWS. At 3Com's request, Palm agrees to furnish or make available for inspection to 3Com samples of all Palm Business Products and Collateral Materials of Palm, its Subsidiaries and Authorized Dealers that are marked with one or more of the Licensed Marks (to the extent that Palm has the right to obtain such samples). If Palm is notified or determines that it or any of its Subsidiaries or Authorized Dealers is not complying with any Trademark Usage Guidelines, it shall notify 3Com and the provisions of Article 6 and Section 4.3 shall apply to such noncompliance. ARTICLE 6 TRADEMARK USAGE GUIDELINE ENFORCEMENT 6.1 INITIAL CURE PERIOD. If 3Com becomes aware that Palm or any Subsidiary or Authorized Dealer is not complying with any Trademark Usage Guidelines, 3Com shall notify Palm in writing, setting forth in reasonable detail a written description of the noncompliance and any requested action for curing such noncompliance. Palm shall then have sixty (60) days with regard to noncompliance by Authorized Dealers and thirty (30) days with regard to noncompliance by Palm or any Subsidiary after receipt of such notice ("Guideline Initial Cure Period") to correct such noncompliance or submit to 3Com a written plan to correct such noncompliance which written plan is reasonably acceptable to 3Com. 6.2 SECOND CURE PERIOD. If noncompliance with the Trademark Usage Guidelines continues beyond the Guideline Initial Cure Period, Palm and 3Com shall each promptly appoint a representative to negotiate in good faith actions that may be necessary to correct such -7- noncompliance. The parties shall have thirty (30) days following the expiration of the Guideline Initial Cure Period to agree on corrective actions, and Palm shall have thirty (30) days from the date of an agreement of corrective actions to implement such corrective actions and cure or cause the cure of such noncompliance ("Second Guideline Cure Period"). 6.3 FINAL CURE PERIOD. If the noncompliance with the Trademark Usage Guidelines remains uncured after the expiration of the Second Guideline Cure Period, then at 3Com's election, Palm, or the noncomplying Subsidiary or Authorized Dealer, whichever is applicable, promptly shall cease using the noncomplying Collateral Materials until 3Com determines that Palm, or the noncomplying Subsidiary or Authorized Dealer, whichever is applicable, has demonstrated its ability and commitment to comply with the Trademark Usage Guidelines. Nothing in this Article 6 shall be deemed to limit Palm's obligations under Section 4.3 above or to preclude 3Com from exercising any rights or remedies under Section 4.3 above. ARTICLE 7 QUALITY STANDARDS 7.1 GENERAL. Palm acknowledges that the Palm Business Products permitted by this Agreement to be marked with one or more of the Licensed Marks must continue to be of sufficiently high quality as to provide protection of the Licensed Marks and the goodwill they symbolize, and Palm further acknowledges that the maintenance of the high quality standards associated with such products is of the essence of this Agreement. 7.2 QUALITY STANDARDS. Palm and its Authorized Dealers and Subsidiaries shall use the Licensed Marks only on and in connection with Palm Business Products that meet or exceed in all respects the Quality Standards. 7.3 QUALITY CONTROL REVIEWS. At 3Com's request, Palm agrees to furnish or make available to 3Com for inspection sample Palm Business Products marked with one or more of the Licensed Marks. 3Com may also independently conduct customer satisfaction surveys to determine if Palm and its Subsidiaries and Authorized Dealers are meeting the Quality Standards. Palm shall cooperate with 3Com fully in the distribution of such surveys. In the event of a challenge by 3Com, 3Com shall, at the request of Palm, provide Palm with copies of customer surveys used by 3Com to determine if Palm is meeting the Quality Standards. If Palm is notified or determines that it or any of its Subsidiaries or Authorized Dealers is not complying with any Quality Standards, it shall notify 3Com and the provisions of Article 8 and Section 4.3 shall apply to such noncompliance. 7.4 PRODUCT DISCONTINUATION. If, at any time during or after the term of this Agreement, Palm discontinues the sale of a Palm Business Product that has been marked with one or more of the Licensed Marks, Palm shall substantially comply with the discontinuation procedure used by 3Com for such or similar products immediately prior to Separation Date. -8- ARTICLE 8 QUALITY STANDARD ENFORCEMENT 8.1 INITIAL CURE PERIOD. If 3Com becomes aware that Palm or any Subsidiary or Authorized Dealer sublicensee is not complying with any Quality Standards, 3Com shall notify Palm in writing, setting forth in reasonable detail a written description of the noncompliance and any requested action for curing such noncompliance. Palm shall then have thirty (30) days after receipt of such notice ("Initial Cure Period") to correct such noncompliance or submit to 3Com a written plan to correct such noncompliance which written plan is reasonably acceptable to 3Com. 8.2 SECOND CURE PERIOD. If noncompliance with the Quality Standards continues beyond the Initial Cure Period, Palm and 3Com shall each promptly appoint a representative to negotiate in good faith actions that may be necessary to correct such noncompliance. The parties shall have thirty (30) days following the expiration of the Initial Cure Period to agree on corrective actions, and Palm shall have thirty (30) days from the date of an agreement of corrective actions to implement such corrective actions and cure or cause the cure of such noncompliance ("Second Cure Period"). 8.3 FINAL CURE PERIOD. If the noncompliance with the Quality Standards remains uncured after the expiration of the Second Cure Period, then at 3Com's election, Palm, or the noncomplying Subsidiary or Authorized Dealer, whichever is applicable, promptly shall cease offering the noncomplying Palm Business Products under the Licensed Marks until 3Com determines that Palm, or the noncomplying Subsidiary or Authorized Dealer, whichever is applicable, has demonstrated its ability and commitment to comply with the Quality Standards. Nothing in this Article 8 shall be deemed to limit Palm's obligations under Section 4.3 above or to preclude 3Com from exercising any rights or remedies under Section 4.3 above. ARTICLE 9 PROTECTION OF LICENSED MARKS 9.1 OWNERSHIP AND RIGHTS. To the extent not contrary to applicable law, Palm agrees not to challenge the ownership or validity of the Licensed Marks. Palm shall not disparage, dilute or adversely affect the validity of the Licensed Marks. Palm's use of the Licensed Marks shall inure exclusively to the benefit of 3Com, and Palm shall not acquire or assert any rights therein. Palm recognizes the value of the goodwill associated with the Licensed Marks, and that the Licensed Marks may have acquired secondary meaning in the minds of the public. 9.2 PROTECTION OF MARKS. Palm shall assist 3Com, at 3Com's request and expense, in the procurement and maintenance of 3Com's intellectual property rights in the Licensed Marks. Palm will not grant or attempt to grant a security interest in the Licensed Marks, or to record any such security interest in the United States Patent and Trademark Office or elsewhere, against any trademark application or registration belonging to 3Com. Palm agrees to, and to cause its Subsidiaries to, execute all documents reasonably requested by 3Com to effect further registration -9- of, maintenance and renewal of the Licensed Marks, recordation of the license relationship between 3Com and Palm, and recordation of Palm as a registered user. 3Com makes no warranty or representation that trademark registrations have been or will be applied for, secured or maintained in the Licensed Marks throughout, or anywhere within, the world. Palm shall cause to appear on all Palm Business Products, and all Collateral Materials, such legends, markings and notices as may be required by applicable law or reasonably requested by 3Com. 9.3 SIMILAR MARKS. Palm agrees not to use or register in any country any Mark that infringes 3Com's rights in the Licensed Marks, or any element thereof. If any application for registration is, or has been, filed in any country by Palm which relates to any Mark that infringes 3Com's rights in the Licensed Marks, Palm shall immediately abandon any such application or registration or assign it to 3Com. To the extent not contrary to applicable law, Palm shall not challenge 3Com's ownership of or the validity of the Licensed Marks or any application for registration thereof throughout the world. Palm shall not use or register in any country any copyright, domain name, telephone number or any other intellectual property right, whether recognized currently or in the future, or other designation which would affect the ownership or rights of 3Com in and to the Licensed Marks, or otherwise to take any action which would adversely affect any of such ownership rights, or assist anyone else in doing so. Palm shall cause its Subsidiaries and Authorized Dealers to comply with the provisions of this Section 9.3. 9.4 INFRINGEMENT PROCEEDINGS. In the event that the Palm General Counsel learns of any infringement or threatened infringement of the Licensed Marks, or any unfair competition, passing-off or dilution with respect to the Licensed Marks, Palm shall notify 3Com or its authorized representative giving particulars thereof, and Palm shall provide necessary information and assistance to 3Com or its authorized representatives at 3Com's expense in the event that 3Com decides that proceedings should be commenced. Notwithstanding the foregoing, Palm is not obligated to monitor or police use of the Licensed Marks by Third Parties other than as specifically set forth in Section 4.3. 3Com shall have exclusive control of any litigation, opposition, cancellation or related legal proceedings, relating to the use of the licensed trademarks by third parties. The decision whether to bring, maintain or settle any such proceedings shall be at the exclusive option and expense of 3Com, and all recoveries shall belong exclusively to 3Com. Palm shall not and shall have no right to initiate any such litigation, opposition, cancellation or related legal proceedings in its own name, but, at 3Com's request, agrees to be joined as a party in any action taken by 3Com to enforce its rights in the Licensed Marks. 3Com shall incur no liability to Palm or any other Person under any legal theory by reason of 3Com's failure or refusal to prosecute or by 3Com's refusal to permit Palm to prosecute, any alleged infringement by Third Parties, nor by reason of any settlement to which 3Com may agree. -10- ARTICLE 10 TERMINATION 10.1 TERM. This Agreement shall remain in effect for a period of two (2) years from the Effective Date unless earlier terminated as provided below. 10.2 VOLUNTARY TERMINATION. By written notice to 3Com, Palm may voluntarily terminate all or a specified portion of the licenses and rights granted to it hereunder by 3Com. Such notice shall specify the effective date of such termination and shall clearly specify any affected Licensed Marks, Palm Business Products or services. 10.3 SURVIVAL. Any termination of licenses and rights of Palm under Section 10.2 shall not affect Palm's licenses and rights with respect to any Palm Business Products made or sold prior to such termination. 10.4 OTHER TERMINATION. 3Com acknowledges and agrees that its rights to terminate the licenses granted to Palm hereunder are solely as set forth in Section 4.3 and Articles 6 and 8. ARTICLE 11 DISPUTE RESOLUTION 11.1 MEDIATION. If a dispute, controversy or claim ("Dispute") arises between the parties relating to the interpretation or performance of this Agreement or the Ancillary Agreements, or the grounds for the termination hereof, appropriate senior executives (e. g. director or V.P. level) of each party who shall have the authority to resolve the matter shall meet to attempt in good faith to negotiate a resolution of the Dispute prior to pursuing other available remedies. The initial meeting between the appropriate senior executives shall be referred to herein as the "Dispute Resolution Commencement Date." Discussions and correspondence relating to trying to resolve such Dispute shall be treated as confidential information developed for the purpose of settlement and shall be exempt from discovery or production and shall not be admissible. If the senior executives are unable to resolve the Dispute within thirty (30) days from the Dispute Resolution Commencement Date, and either party wishes to pursue its rights relating to such Dispute, then the Dispute will be mediated by a mutually acceptable mediator appointed pursuant to the mediation rules of JAMS/Endispute within thirty (30) days after written notice by one party to the other demanding non-binding mediation. Neither party may unreasonably withhold consent to the selection of a mediator or the location of the mediation. Both parties will share the costs of the mediation equally, except that each party shall bear its own costs and expenses, including attorney's fees, witness fees, travel expenses, and preparation costs. The parties may also agree to replace mediation with some other form of non-binding or binding ADR. 11.2 ARBITRATION. Any Dispute which the parties cannot resolve through mediation within ninety (90) days of the Dispute Resolution Commencement Date, unless otherwise mutually -11- agreed, shall be submitted to final and binding arbitration under the then current Commercial Arbitration Rules of the American Arbitration Association ("AAA"), by three (3) arbitrators in Santa Clara County, California. Such arbitrators shall be selected by the mutual agreement of the parties or, failing such agreement, shall be selected according to the aforesaid AAA rules. The arbitrators will be instructed to prepare and deliver a written, reasoned opinion stating their decision within thirty (30) days of the completion of the arbitration. The prevailing party in such arbitration shall be entitled to expenses, including costs and reasonable attorneys' and other professional fees, incurred in connection with the arbitration (but excluding any costs and fees associated with prior negotiation or mediation). The decision of the arbitrator shall be final and non-appealable and may be enforced in any court of competent jurisdiction. The use of any ADR procedures will not be construed under the doctrine of laches, waiver or estoppel to adversely affect the rights of either party. 11.3 COURT ACTION. Any Dispute regarding the following is not required to be negotiated, mediated or arbitrated prior to seeking relief from a court of competent jurisdiction: breach of any obligation of confidentiality; infringement, misappropriation, or misuse of any intellectual property right; any other claim where interim relief from the court is sought to prevent serious and irreparable injury to one of the parties or to others. However, the parties to the Dispute shall make a good faith effort to negotiate and mediate such Dispute, according to the above procedures, while such court action is pending. 11.4 CONTINUITY OF SERVICE AND PERFORMANCE. Unless otherwise agreed in writing, the parties will continue to provide service and honor all other commitments under this Agreement and each Ancillary Agreement during the course of dispute resolution pursuant to the provisions of this Article 11 with respect to all matters not subject to such dispute, controversy or claim. ARTICLE 12 LIMITATION OF LIABILITY IN NO EVENT SHALL EITHER PARTY OR ITS SUBSIDIARIES BE LIABLE TO THE OTHER PARTY OR ITS SUBSIDIARIES FOR ANY SPECIAL, CONSEQUENTIAL, INDIRECT, INCIDENTAL OR PUNITIVE DAMAGES OR LOST PROFITS OR ANY OTHER DAMAGES, HOWEVER CAUSED AND ON ANY THEORY OF LIABILITY (INCLUDING NEGLIGENCE) ARISING IN ANY WAY OUT OF THIS AGREEMENT, WHETHER OR NOT SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES; PROVIDED, HOWEVER, THAT THE FOREGOING LIMITATIONS SHALL NOT LIMIT EACH PARTY'S OBLIGATIONS EXPRESSLY ASSUMED IN EXHIBIT J OF THE MASTER SEPARATION AND DISTRIBUTION AGREEMENT; PROVIDED FURTHER THAT THE EXCLUSION OF PUNITIVE DAMAGES SHALL APPLY IN ANY EVENT. -12- ARTICLE 13 MISCELLANEOUS PROVISIONS 13.1 DISCLAIMER. EACH PARTY ACKNOWLEDGES AND AGREES THAT ALL LICENSED MARKS AND ANY OTHER INFORMATION OR MATERIALS LICENSED OR PROVIDED HEREUNDER ARE LICENSED OR PROVIDED ON AN "AS IS" BASIS AND THAT NEITHER PARTY NOR ANY OF ITS SUBSIDIARIES MAKE ANY REPRESENTATIONS OR EXTENDS ANY WARRANTIES WHATSOEVER, EXPRESS, IMPLIED OR STATUTORY, WITH RESPECT THERETO INCLUDING WITHOUT LIMITATION ANY IMPLIED WARRANTIES OF TITLE, ENFORCEABILITY OR NON-INFRINGEMENT. Without limiting the generality of the foregoing, neither 3Com nor any of its Subsidiaries makes any warranty or representation as to the validity of any Mark licensed by it to Palm or any warranty or representation that any use of any Mark with respect to any product or service will be free from infringement of any rights of any Third Party. 13.2 NO IMPLIED LICENSES. Nothing contained in this Agreement shall be construed as conferring any rights by implication, estoppel or otherwise, under any intellectual property right, other than the rights expressly granted in this Agreement with respect to the Licensed Marks. Neither party is required hereunder to furnish or disclose to the other any information (including copies of registrations of the Marks), except as specifically provided herein. 13.3 INFRINGEMENT SUITS. Except as set forth in Section 4.3, (i) neither party shall have any obligation hereunder to institute any action or suit against Third Parties for infringement of any of the Licensed Marks or to defend any action or suit brought by a Third Party which challenges or concerns the validity of any of the Licensed Marks and (ii) Palm shall not have any right to institute any action or suit against Third Parties for infringement of any of the Licensed Marks. 13.4 NO OTHER OBLIGATIONS. NEITHER PARTY ASSUMES ANY RESPONSIBILITIES OR OBLIGATIONS WHATSOEVER, OTHER THAN THE RESPONSIBILITIES AND OBLIGATIONS EXPRESSLY SET FORTH IN THIS AGREEMENT OR A SEPARATE WRITTEN AGREEMENT BETWEEN THE PARTIES. Without limiting the generality of the foregoing, neither party, nor any of its Subsidiaries, is obligated to (i) file any application for registration of any Mark, or to secure any rights in any Marks, (ii) to maintain any Mark registration, or (iii) provide any assistance, except for the obligations expressly assumed in this Agreement. 13.5 ENTIRE AGREEMENT. This Agreement, the Master Separation and Distribution Agreement and the other Ancillary Agreements (as defined in the Master Separation and Distribution Agreement) and the Exhibits and Schedules referenced or attached hereto and thereto constitute the entire agreement between the parties with respect to the subject matter hereof and thereof and shall supersede all prior written and oral and all contemporaneous oral agreements and understandings with respect to the subject matter hereof and thereof. To the extent there is a conflict -13- between this Agreement and the General Assignment and Assumption Agreement between the parties, the terms of this Agreement shall govern. 13.6 GOVERNING LAW. This Agreement shall be construed in accordance with and all Disputes hereunder shall be governed by the laws of the State of California, excluding its conflict of law rules and the United Nations Convention on Contracts for the International Sale of Goods. The Superior Court of Santa Clara County and/or the United States District Court for the Northern District of California shall have jurisdiction and venue over all Disputes between the parties that are permitted to be brought in a court of law pursuant to Article 11 above. 13.7 DESCRIPTIVE HEADINGS. The headings contained in this Agreement, in any Exhibit or Schedule hereto and in the table of contents to this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Any capitalized term used in any Exhibit or Schedule but not otherwise defined therein, shall have the meaning assigned to such term in this Agreement. When a reference is made in this Agreement to an Article or a Section, Exhibit or Schedule, such reference shall be to an Article or Section of, or an Exhibit or Schedule to, this Agreement unless otherwise indicated. 13.8 NOTICES. Notices, offers, requests or other communications required or permitted to be given by either party pursuant to the terms of this Agreement shall be given in writing to the respective parties to the following addresses: if to 3Com : 3Com Corporation 5400 Bayfront Plaza Santa Clara, California 95052 Attention: General Counsel Fax: (408) 326-6434 if to Palm: Palm, Inc. 5400 Bayfront Plaza Santa Clara, California 95052 Attention: General Counsel Fax: (408) 326-6434 or to such other address as the party to whom notice is given may have previously furnished to the other in writing as provided herein. Any notice involving non-performance, termination, or renewal shall be sent by hand delivery, recognized overnight courier or, within the United States, may also be sent via certified mail, return receipt requested. All other notices may also be sent by fax, confirmed by first class mail. All notices shall be deemed to have been given and received on the earlier of actual delivery or three (3) days from the date of postmark. -14- 13.9 NONASSIGNABILITY. Neither party may, directly or indirectly, in whole or in part, whether by operation of law or otherwise, assign or transfer this Agreement, without the other party's prior written consent, and any attempted assignment, transfer or delegation without such prior written consent shall be voidable at the sole option of such other party. Notwithstanding the foregoing, each party (or its permitted successive assignees or transferees hereunder) may assign or transfer this Agreement as a whole without consent to a Person that succeeds to all or substantially all of the business or assets of such party as long as such Person agrees to accept all the terms and conditions set forth herein. Without limiting the foregoing, this Agreement will be binding upon and inure to the benefit of the parties and their permitted successors and assigns. 13.10 SEVERABILITY. If any term or other provision of this Agreement is determined by a court, administrative agency or arbitrator to be invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to either party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that the transactions contemplated hereby are fulfilled to the fullest extent possible. 13.11 FAILURE OR INDULGENCE NOT WAIVER; REMEDIES CUMULATIVE. No failure or delay on the part of either party hereto in the exercise of any right hereunder shall impair such right or be construed to be a waiver of, or acquiescence in, any breach of any representation, warranty or agreement herein, nor shall any single or partial exercise of any such right preclude other or further exercise thereof or of any other right. All rights and remedies existing under this Agreement are cumulative to, and not exclusive of, any rights or remedies otherwise available. 13.12 AMENDMENT. No change or amendment will be made to this Agreement except by an instrument in writing signed on behalf of each of the parties to such agreement. 13.13 COUNTERPARTS. This Agreement, including the Ancillary Agreements and the Exhibits and Schedules hereto and thereto and the other documents referred to herein or therein, may be executed in counterparts, each of which shall be deemed to be an original but all of which shall constitute one and the same agreement. WHEREFORE, the parties have signed this Trademark Ownership and License Agreement effective as of the date first set forth above. 3COM CORPORATION PALM, INC. By: By: ------------------------ ------------------------ -15- Name: Name: ---------------------- ----------------------- Title: Title: ---------------------- ---------------------- -16- EXHIBIT A TO MASTER TRADEMARK OWNERSHIP AND LICENSE AGREEMENT LICENSED MARKS 3Com 3Com Logo -2- EX-2.6 7 FORM OF EMPLOYEE MATTERS AGREEMENT EXHIBIT 2.6 ---------------------- Version 10 December 1, 1999 ---------------------- EMPLOYEE MATTERS AGREEMENT BETWEEN 3COM CORPORATION AND PALM, INC. EFFECTIVE AS OF _______________, 2000 TABLE OF CONTENTS
Page ---- ARTICLE I DEFINITIONS......................................................... 1 1.1 3Com................................................................. 1 1.2 3Com Employee........................................................ 1 1.3 3Com Group........................................................... 2 1.4 3Com Stock Value..................................................... 2 1.5 3Com Terminated Employee............................................. 2 1.6 401(k) Plan.......................................................... 2 1.7 AD&D Plan............................................................ 2 1.8 Affiliate............................................................ 2 1.9 Agreement............................................................ 2 1.10 Ancillary Agreements................................................. 2 1.11 ASO Contracts........................................................ 2 1.12 Assets............................................................... 2 1.13 Benefits Committee................................................... 2 1.14 Bonus Plan........................................................... 2 1.15 Business Travel Accident Insurance................................... 3 1.16 COBRA................................................................ 3 1.17 Code................................................................. 3 1.18 Deferred Compensation Plan........................................... 3 1.19 Disability Plan...................................................... 3 1.20 Distribution......................................................... 3 1.21 Distribution Date.................................................... 3 1.22 DOL.................................................................. 3 1.23 Educational Assistance Program....................................... 3 1.24 Employee Assistance Program.......................................... 4 1.25 ERISA................................................................ 4 1.26 Executive Bonus Plan................................................. 4 1.27 FMLA................................................................. 4 1.28 Food Programs........................................................ 4 1.29 Foreign Plan......................................................... 4 1.30 Fringe Benefit Plans................................................. 4 1.31 FSA/Dependent Reimbursement Plan..................................... 4 1.32 FSA/Medical Reimbursement Plan....................................... 4 1.33 General Assignment and Assumption Agreement.......................... 4 1.34 Group Insurance Policies............................................. 5 1.35 Group Life Plan...................................................... 5 1.36 HCFA................................................................. 5 1.37 Health and Welfare Plans............................................. 5 1.38 Health Plans......................................................... 5 1.39 HMO.................................................................. 5
ii TABLE OF CONTENTS (Continued)
Page ---- 1.40 HMO Agreements....................................................... 5 1.41 IPO.................................................................. 5 1.42 IPO Closing Date..................................................... 5 1.43 IPO Registration Statement........................................... 5 1.44 IRS.................................................................. 5 1.45 Leave of Absence Plans............................................... 5 1.46 Liabilities.......................................................... 6 1.47 Long-Term Care Plan.................................................. 6 1.48 Long-Term Disability Plan............................................ 6 1.49 Master Transitional Services Agreement............................... 6 1.50 Material Feature..................................................... 6 1.51 Nasdaq............................................................... 6 1.52 Non-U.S. Plan........................................................ 6 1.53 Option............................................................... 7 1.54 Outsource............................................................ 7 1.55 Palm................................................................. 7 1.56 Palm Business........................................................ 7 1.57 Palm Claims.......................................................... 7 1.58 Palm Employee........................................................ 7 1.59 Palm Group........................................................... 7 1.60 Palm Stock Value..................................................... 7 1.61 Palm Terminated Employee............................................. 7 1.62 Palm Transferred Employee............................................ 8 1.63 Participating Company................................................ 8 1.64 Person............................................................... 8 1.65 Plan................................................................. 8 1.66 Post-Distribution Period............................................. 8 1.67 Premium Plan......................................................... 8 1.68 PTO.................................................................. 9 1.69 QDRO................................................................. 9 1.70 QMCSO................................................................ 9 1.71 Rabbi Trust.......................................................... 9 1.72 Ratio................................................................ 9 1.73 Record Date.......................................................... 9 1.74 Restricted Stock..................................................... 9 1.75 Revenue.............................................................. 9 1.76 Sabbatical Plan...................................................... 9 1.77 SEC.................................................................. 9 1.78 Section 125 Plan..................................................... 10
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Page ---- 1.79 Separation........................................................... 10 1.80 Separation Agreement................................................. 10 1.81 Separation Date...................................................... 10 1.82 Severance Plan....................................................... 10 1.83 Short-Term Disability Plan........................................... 10 1.84 SOS Plan............................................................. 10 1.85 Stock Plan........................................................... 10 1.86 Stock Purchase Plan.................................................. 10 1.87 Subsidiary........................................................... 11 1.88 Tax Sharing Agreement................................................ 11 1.89 Unemployment Insurance Program....................................... 11 1.90 WellCom Program...................................................... 11 1.91 Workers' Compensation Plan........................................... 11 ARTICLE II GENERAL PRINCIPLES................................................. 12 2.1 Assumption of Palm Liabilities....................................... 12 2.2 Establishment of Palm Plans.......................................... 12 2.3 Palm Under No Obligation to Maintain Plans........................... 13 2.4 Palm's Participation in 3Com Plans................................... 13 2.5 Terms of Participation by Palm Transferred Employees in Palm Plans... 14 2.6 Benefits Committee and Dispute Resolution............................ 15 2.7 Foreign Plans........................................................ 15 ARTICLE III DEFINED CONTRIBUTION PLAN......................................... 16 3.1 401(k) Plan.......................................................... 16 ARTICLE IV NON-QUALIFIED PLAN................................................. 17 4.1 Deferred Compensation Plan........................................... 17 ARTICLE V HEALTH AND WELFARE PLANS............................................ 18 5.1 Health Plans as of the Distribution Date............................. 18 5.2 Health Plans from the Separation Date through the Distribution Date.. 19
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Page ---- 5.3 Group Life Plan...................................................... 19 5.4 AD&D Plan............................................................ 20 5.5 Severance Plan....................................................... 20 5.6 Sabbatical Plan...................................................... 20 5.7 Disability Plans..................................................... 21 5.8 Business Travel Accident Insurance................................... 21 5.9 Long-Term Care Plan.................................................. 22 5.10 Section 125 Plan..................................................... 22 5.11 COBRA................................................................ 22 5.12 Leave of Absence Plans and FMLA...................................... 23 5.13 Workers' Compensation Plan........................................... 23 5.14 Administrative Services.............................................. 24 ARTICLE VI EQUITY AND OTHER COMPENSATION...................................... 25 6.1 Bonus Plan........................................................... 25 6.2 Executive Bonus Plan................................................. 25 6.3 3Com Options......................................................... 26 6.4 3Com Restricted Stock................................................ 26 6.5 Stock Purchase Plan.................................................. 27 6.6 Administrative Services.............................................. 27 ARTICLE VII FRINGE AND OTHER BENEFITS......................................... 28 7.1 Employee Assistance Program.......................................... 28 7.2 Educational Assistance Program....................................... 28 7.3 Credit Union......................................................... 28 7.4 Cafeteria and Related Subsidies...................................... 28 7.5 Employee Product Discounts and Company Store......................... 29 7.6 WellCom.............................................................. 29 7.7 SOS Plan............................................................. 29 7.8 Other Benefits....................................................... 29 7.9 Administrative Services.............................................. 30
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Page ---- ARTICLE VIII ADMINISTRATIVE PROVISIONS........................................ 31 8.1 Master Transitional Services Agreement............................... 31 8.2 Payment of Liabilities, Plan Expenses and Related Matters............ 31 8.3 Transitional Staffing Services....................................... 32 8.4 Sharing of Participant Information................................... 32 8.5 Reporting and Disclosure Communications to Participants.............. 32 8.6 Audits Regarding Vendor Contracts.................................... 32 8.7 Employee Identification Numbers...................................... 33 8.8 Beneficiary Designations............................................. 33 8.9 Requests for IRS and DOL Opinions.................................... 33 8.10 Fiduciary Matters.................................................... 33 8.11 Consent of Third Parties............................................. 33 8.12 3Com Intranet........................................................ 33 8.13 Tax Cooperation...................................................... 33 ARTICLE IX EMPLOYMENT-RELATED MATTERS......................................... 34 9.1 Terms of Palm Employment............................................. 34 9.2 HR Data Support Systems.............................................. 34 9.3 Non-Solicitation of Employees........................................ 34 9.4 Employment of Employees with U.S. Work Visas......................... 34 9.5 Confidentiality and Proprietary Information.......................... 35 9.6 PTO.................................................................. 35 9.7 Personnel Records.................................................... 35 9.8 Medical Records...................................................... 35 9.9 Unemployment Insurance Program....................................... 35 9.10 Non-Termination of Employment; No Third-Party Beneficiaries.......... 36 9.11 Employment Litigation................................................ 36 ARTICLE X GENERAL PROVISIONS.................................................. 37 10.1 Effect if Separation, IPO and/or Distribution Does Not Occur......... 37 10.2 Relationship of Parties.............................................. 37
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Page ---- 10.3 Affiliates........................................................... 37 10.4 Incorporation of Separation Agreement Provisions..................... 37 10.5 Governing Law........................................................ 37 10.6 Assignment........................................................... 37 10.7 Severability......................................................... 38 10.8 Interpretation....................................................... 38 10.9 Amendment............................................................ 38 10.10 Termination.......................................................... 38 10.11 Conflict............................................................. 38 10.12 Counterparts......................................................... 38
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Page ---- SCHEDULES SCHEDULE 2.7 FOREIGN PLANS.......................................... i SCHEDULE 5.1(a) PALM HEALTH AND WELFARE PLANS.......................... ii SCHEDULE 5.1(c)(i) THIRD PARTY ASO........................................ iii SCHEDULE 5.1(c)(ii) GROUP INSURANCE POLICIES............................... iv SCHEDULE 5.1(c)(iii) HMO AGREEMENT.......................................... v SCHEDULE 5.2(a) 3COM HEALTH AND WELFARE PLANS.......................... vi SCHEDULE 6.3 OPTIONS HELD BY CERTAIN NON-U.S. PALM.................. vii TRANSFERRED EMPLOYEES SCHEDULE 6.4 3COM RESTRICTED STOCK HELD BY NON-U.S. PALM............ viii TRANSFERRED EMPLOYEES SCHEDULE 7.8 OTHER FRINGE BENEFITS.................................. ix SCHEDULE 8.3 TRANSITIONAL STAFFING SERVICES......................... x
-viii- EMPLOYEE MATTERS AGREEMENT This EMPLOYEE MATTERS AGREEMENT is entered into on _________, 2000, between 3Com Corporation, a Delaware corporation, and Palm, Inc., a Delaware corporation. Capitalized terms used herein (other than the formal names of 3Com Plans (as defined below) and related trusts of 3Com) and not otherwise defined, shall have the respective meanings assigned to them in Article I hereof. WHEREAS, the Board of Directors of 3Com has determined that it is in the best interests of 3Com and its shareholders to separate 3Com's existing businesses into two (2) independent businesses, 3Com and the Palm Business; WHEREAS, in furtherance of the foregoing, 3Com and Palm have agreed to enter into this Agreement to allocate between them Assets, Liabilities and responsibilities with respect to certain employee compensation, benefit plans, programs and arrangements, and certain employment matters; and NOW, THEREFORE, in consideration of the foregoing and the covenants and agreements set forth below, the parties hereto agree as follows: ARTICLE I DEFINITIONS ----------- Wherever used in this Agreement, the following terms shall have the meanings indicated below, unless a different meaning is plainly required by the context. The singular shall include the plural, unless the context indicates otherwise. Headings of sections are used for convenience of reference only, and in case of conflict, the text of this Agreement, rather than such headings, shall control: 1.1 3Com. "3Com" means 3Com Corporation, a Delaware corporation. In all ---- such instances in which 3Com is referenced in this Agreement, it shall also be deemed to include a reference to each member of the 3Com Group, unless it specifically provides otherwise; 3Com shall be solely responsible to Palm for ensuring that each member of the 3Com Group complies with the applicable terms of this Agreement. 1.2 3Com Employee. "3Com Employee" means an individual who, on the ------------- Distribution Date, is: (a) either actively employed by, or on leave of absence from, the 3Com Group; (b) a 3Com Terminated Employee; or (c) an employee or group of employees designated as 3Com Employees by 3Com and Palm, by mutual agreement. 1.3 3Com Group. "3Com Group" means 3Com and each Subsidiary and Affiliate ---------- of 3Com (or any predecessor organization thereof). 1.4 3Com Stock Value. "3Com Stock Value" means the closing per-share price ---------------- of 3Com common stock as listed on the Nasdaq on the last trading day before the Distribution Date. 1.5 3Com Terminated Employee. "3Com Terminated Employee" means any ------------------------ individual who is a former employee of the 3Com Group and who, on the Distribution Date, is not a Palm Transferred Employee. 1.6 401(k) Plan. "401(k) Plan," when immediately preceded by "3Com," means ----------- the 3Com Corporation 401(k) Plan, a defined contribution plan. When immediately preceded by "Palm," "401(k) Plan" means the defined contribution plan to be established by Palm pursuant to Section 2.2 and Article III. 1.7 AD&D Plan. "AD&D Plan," when immediately preceded by "3Com," means the --------- 3Com Accidental Death and Dismemberment ("AD&D") Plan. When immediately preceded by "Palm," "AD&D Plan" means the accidental death and dismemberment plan to be established by Palm pursuant to Sections 2.2 and 5.4. 1.8 Affiliate. "Affiliate" means, with respect to any specified Person, --------- means any entity that Controls, is Controlled by, or is under common Control with such Person. For this purpose, "Control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such entity, whether through ownership of voting securities or other interests, by control, or otherwise. 1.9 Agreement. "Agreement" means this Employee Matters Agreement, --------- including all the Schedules hereto, and all amendments made hereto from time to time. 1.10 Ancillary Agreements. "Ancillary Agreements" means all of the -------------------- underlying agreements, documents and instruments referred to, contemplated by, or made a part of the Separation Agreement. 1.11 ASO Contracts. "ASO Contracts" is defined in Subsection 5.1(c)(i) and ------------- Schedule 5.1(c)(i). 1.12 Assets. "Assets" is defined in Section 4.4 of the General Assignment ------ and Assumption Agreement. 1.13 Benefits Committee. "Benefits Committee" means the benefits committee ------------------ established, implemented and operated pursuant to Section 2.6. 1.14 Bonus Plan. "Bonus Plan," when immediately preceded by "3Com," means ---------- the 3Com 3Bonus Plan; provided, however, with respect to Palm Employees in the 3Com 3Bonus Plan, 2 that "Bonus Plan" means the bonus plan as established and implemented with respect to the Palm Employees. When immediately preceded by "Palm," "Bonus Plan" means the bonus plan to be established by Palm pursuant to Sections 2.2 and 6.1. 1.15 Business Travel Accident Insurance. "Business Travel Accident ---------------------------------- Insurance," when immediately preceded by "3Com," means the policy or policies covering 3Com Business Travel Accident Insurance in the U.S. and to the extent applicable, outside the U.S. When immediately preceded by "Palm," "Business Travel Accident Insurance" means the policy or policies covering the business travel accident insurance to be established by Palm pursuant to Sections 2.2 and 5.8. 1.16 COBRA. "COBRA" means the continuation coverage requirements for ----- "group health plans" under Title X of the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended from time to time, and as codified in Code Section 4980B and ERISA Sections 601 through 608. 1.17 Code. "Code" means the Internal Revenue Code of 1986, as amended from ---- time to time. 1.18 Deferred Compensation Plan. "Deferred Compensation Plan," when -------------------------- immediately preceded by "3Com," means the 3Com Deferred Compensation Plan. When immediately preceded by "Palm," "Deferred Compensation Plan" means the deferred compensation plan to be established by Palm pursuant to Section 2.2 and Article IV. 1.19 Disability Plan. "Disability Plan," when immediately preceded by --------------- "3Com," means the 3Com Disability Plan which consists of the 3Com Short-Term Disability Plan and the 3Com Long-Term Disability Plan. When immediately preceded by "Palm," "Disability Plan" means the Palm Short-Term Disability Plan and the Palm Long-Term Disability Plan, to be established by Palm pursuant to Sections 2.2 and 5.7. 1.20 Distribution. "Distribution" means 3Com's pro rata distribution to ------------ the holders of its common stock, $0.001 par value, several months following the IPO, of all the shares of Palm common stock owned by 3Com. 1.21 Distribution Date. "Distribution Date" means the date that the ----------------- Distribution is effective. 1.22 DOL. "DOL" means the United States Department of Labor. --- 1.23 Educational Assistance Program. "Educational Assistance Program," ------------------------------ when immediately preceded by "3Com," means the 3Com Educational Assistance Program. When immediately preceded by "Palm," "Educational Assistance Program" means the educational assistance program to be established by Palm pursuant to Sections 2.2 and 7.2. 3 1.24 Employee Assistance Program. "Employee Assistance Program," when --------------------------- immediately preceded by "3Com," means the 3Com Employee Assistance Program. When immediately preceded by "Palm," "Employee Assistance Program" means the employee assistance program to be established by Palm pursuant to Sections 2.2 and 7.1. 1.25 ERISA. "ERISA" means the Employee Retirement Income Security Act of ----- 1974, as amended from time to time. 1.26 Executive Bonus Plan. "Executive Bonus Plan," when immediately -------------------- preceded by "3Com," means the 3Com Executive Bonus Program. When immediately preceded by "Palm," "Executive Bonus Plan" means the executive bonus plan to be established by Palm pursuant to Sections 2.2 and 6.2. 1.27 FMLA. "FMLA" means the Family and Medical Leave Act of 1993, as ---- amended from time to time. 1.28 Food Programs. "Food Programs" is defined in Section 7.4. ------------- 1.29 Foreign Plan. "Foreign Plan," when immediately preceded by "3Com," ------------ means a Plan maintained by the 3Com Group for the benefit of its employees outside the U.S. When immediately preceded by "Palm," "Foreign Plan" means a Plan to be established by Palm for the benefit of its employees outside the U.S. 1.30 Fringe Benefit Plans. "Fringe Benefit Plans," when immediately -------------------- preceded by "3Com," means the 3Com employee assistance program, educational assistance program and other fringe benefit plans, programs and arrangements, sponsored and maintained by 3Com (as set forth in Article VII and Schedule 7.8). When immediately preceded by "Palm," "Fringe Benefit Plans" means the fringe benefit plans, programs and arrangements to be established by Palm pursuant to Section 2.2 and Article VII. 1.31 FSA/Dependent Reimbursement Plan. "FSA/Dependent Reimbursement Plan," -------------------------------- when immediately preceded by "3Com," means the 3Com FSA/Dependent Reimbursement Plan. When immediately preceded by "Palm," "FSA/Dependent Reimbursement Plan" means the dependent care assistance reimbursement plan to be established by Palm pursuant to Sections 2.2 and 5.10. 1.32 FSA/Medical Reimbursement Plan. "FSA/Medical Reimbursement Plan," when ------------------------------ immediately preceded by "3Com," means the 3Com FSA/Medical Reimbursement Plan. When immediately preceded by "Palm," "FSA/Medical Reimbursement Plan" means the medical expense reimbursement plan to be established by Palm pursuant to Sections 2.2 and 5.10. 1.33 General Assignment and Assumption Agreement. "General Assignment and ------------------------------------------- Assumption Agreement" means the Ancillary Agreement which is Exhibit C to the Separation Agreement. 4 1.34 Group Insurance Policies. "Group Insurance Policies" is defined in ------------------------ Subsection 5.1(c)(ii) and Schedule 5.1(c)(ii). 1.35 Group Life Plan. "Group Life Plan," when immediately preceded by --------------- "3Com," means the 3Com Group Life Plan. When immediately preceded by "Palm," "Group Life Plan" means the group life plan to be established by Palm pursuant to Sections 2.2 and 5.3. 1.36 HCFA. "HCFA" means the United States Health Care Financing ---- Administration. 1.37 Health and Welfare Plans. "Health and Welfare Plans," when immediately ------------------------ preceded by "3Com," means the 3Com Health Plans, the 3Com Section 125 Plan, and the health and welfare plans listed on Schedule 5.2(a) established and maintained by 3Com for the benefit of eligible employees of the 3Com Group, and such other welfare plans or programs as may apply to such employees as of the Distribution Date. When immediately preceded by "Palm," "Health and Welfare Plans" means the Palm Health Plans, the Palm Section 125 Plan, and the health and welfare plans to be established by Palm pursuant to Section 2.2, Article V, and Schedule 5.1(a). 1.38 Health Plans. "Health Plans," when immediately preceded by "3Com," ------------ means the medical, HMO, vision, and dental plans and any similar or successor Plans. When immediately preceded by "Palm," "Health Plans" means the medical, HMO, vision and dental plans to be established by Palm pursuant to Section 2.2 and Article V. 1.39 HMO. "HMO" means a health maintenance organization that provides --- benefits under the 3Com Health Plans or the Palm Health Plans. 1.40 HMO Agreements. "HMO Agreements" is defined in Subsection 5.1(c)(iii) -------------- and Schedule 5.1(c)(iii). 1.41 IPO. "IPO" means the initial public offering of Palm common stock --- pursuant to a registration statement on Form S-1 pursuant to the Securities Act of 1933, as amended. 1.42 IPO Closing Date. "IPO Closing Date" means the closing of the IPO, ---------------- which is currently scheduled to occur prior to June 2, 2001. 1.43 IPO Registration Statement. "IPO Registration Statement" means the -------------------------- registration statement on Form S-1 pursuant to the Securities Act of 1933 as amended, to be filed with the SEC registering the shares of common stock of Palm to be issued in the IPO, together with all amendments thereto. 1.44 IRS. "IRS" means the United States Internal Revenue Service. --- 1.45 Leave of Absence Plans. "Leave of Absence Plans," when immediately ---------------------- preceded by "3Com," means the personal, medical/disability, military, and FMLA leave offered from time to time under the personnel policies and practices of 3Com. When immediately preceded by "Palm," 5 "Leave of Absence Plans" means the leave of absence programs to be established by Palm pursuant to Sections 2.2 and 5.12. 1.46 Liabilities. "Liabilities" means all debts, liabilities, guarantees, ----------- assurances, commitments, and obligations, whether fixed, contingent or absolute, asserted or unasserted, matured or unmatured, liquidated or unliquidated, accrued or not accrued, known or unknown, due or to become due, whenever or however arising (including, without limitation, whether arising out of any Contract or tort based on negligence or strict liability) and whether or not the same would be required by generally accepted accounting principles to be reflected in financial statements or disclosed in the notes thereto. For this purpose, "Contract" means any contract, agreement, lease, license, sales order, purchase order, instrument or other commitment that is binding on any Person or any part of its property under applicable law. 1.47 Long-Term Care Plan. "Long-Term Care Plan," when immediately preceded ------------------- by "3Com," means the 3Com Long-Term Care Plan. When immediately preceded by "Palm," "Long-Term Care Plan" means the long-term care plan, if any, that may be established by Palm pursuant to Sections 2.2 and 5.9. 1.48 Long-Term Disability Plan. "Long-Term Disability Plan," when ------------------------- immediately preceded by "3Com," means the 3Com Long-Term Disability Plan. When immediately preceded by "Palm," Long-Term Disability Plan" means the long-term disability plan to be established by Palm pursuant to Section 2.2 and Subsection 5.7(b). 1.49 Master Transitional Services Agreement. "Master Transitional Services -------------------------------------- Agreement" means the Ancillary Agreement which is Exhibit G to the Separation Agreement. 1.50 Material Feature. "Material Feature" means any feature of a Plan that ---------------- could reasonably be expected to be of material importance, in the aggregate, to the sponsoring employer or the participants (or their dependents or beneficiaries) of that Plan, which could include, depending on the type and purpose of the particular Plan, the class or classes of employees eligible to participate in such Plan, the nature, type, form, source, and level of benefits provided under such Plan, the amount or level of contributions, if any, required to be made by participants (or their dependents or beneficiaries) to such Plan, and the costs and expenses incurred by the sponsoring employer or Participating Companies for implementing and/or maintaining such Plan. 1.51 Nasdaq. "Nasdaq" means the Nasdaq National Market. ------ 1.52 Non-U.S. Plan. "Non-U.S. Plan" means the local transfer agreements, ------------- assignments, assumptions, novations and other documents executed by the foreign subsidiaries of 3Com and Palm as shall be necessary to carry out the plan of reorganization described in Exhibit K to the Separation Agreement to effect the purposes of the Separation Agreement with respect to 3Com and Palm's respective operations outside the U.S. 6 1.53 Option. "Option," when immediately preceded by "3Com," means an option ------ to purchase 3Com common stock pursuant to a Stock Plan. When immediately preceded by "Palm," "Option" means an option to purchase Palm common stock pursuant to a Stock Plan. 1.54 Outsource. "Outsource" is defined in Section 5.13(c). --------- 1.55 Palm. "Palm" means Palm, Inc., a Delaware corporation. In all such ---- instances in which Palm is referred to in this Agreement, it shall also be deemed to include a reference to each member of the Palm Group, unless it specifically provides otherwise; Palm shall be solely responsible to 3Com for ensuring that each member of the Palm Group complies with the applicable terms of this Agreement. 1.56 Palm Business. "Palm Business" means the hand held computing business ------------- and related businesses and operations as described in the IPO Registration Statement. 1.57 Palm Claims. "Palm Claims" is defined in Subsection 5.13(a). ----------- 1.58 Palm Employee. "Palm Employee" means any individual who is: (a) either ------------- actively employed by, or on leave of absence from, the Palm Group on the Separation Date; (b) either actively employed by, or on leave of absence from, the 3Com Group as either part of a work group or organization, or common support function that, at any time after the Separation Date and before the Distribution Date, moves to the employ of the Palm Group from the employ of the 3Com Group; (c) a Palm Terminated Employee; (d) employed by the Palm Group; (e) any other employee or group of employees designated as Palm Employees (as of the specified date) by 3Com and Palm by mutual agreement; or (f) an alternate payee under a QDRO, alternate recipient under a QMCSO, beneficiary, covered dependent, or qualified beneficiary (as such term is defined under COBRA), in each case, of an employee or former employee, described in Subsections 1.58(a) through (e) with respect to that employee's or former employee's benefit under the applicable Plan(s) (unless specified otherwise in this Agreement, such an alternate payee, alternate recipient, beneficiary, covered dependent, or qualified beneficiary shall not otherwise be considered a Palm Employee with respect to any benefits he or she accrues or accrued under any applicable Plan(s), unless he or she is a Palm Employee by virtue of Subsections 1.58(a) through (e)). 1.59 Palm Group. "Palm Group" means Palm and each Subsidiary and Affiliate ---------- of Palm immediately after the Separation Date, or that is contemplated to be a Subsidiary or Affiliate of Palm pursuant to the Non-U.S. Plan and each Person that becomes a Subsidiary or Affiliate of Palm after the Separation Date. 1.60 Palm Stock Value. "Palm Stock Value" means the opening per-share price ---------------- of Palm common stock as listed on Nasdaq, as applicable, on the first trading day after the Distribution Date. 1.61 Palm Terminated Employee. "Palm Terminated Employee" means any ------------------------ individual who is: (a) a former employee of the 3Com Group who was terminated from the Palm Business on or before the Separation Date; or (b) a former employee of the Palm Group. Notwithstanding the 7 foregoing, "Palm Terminated Employee" shall not, unless otherwise expressly provided to the contrary in this Agreement, include: (a) an individual who is a 3Com Employee at the Distribution Date; or (b) an individual who is otherwise a Palm Terminated Employee, but who is subsequently employed by the 3Com Group prior to the Distribution Date. 1.62 Palm Transferred Employee. "Palm Transferred Employee" means any ------------------------- individual who, as of the Distribution Date, is: (a) either actively employed by, or on a leave of absence from, the Palm Group; (b) a Palm Terminated Employee; (c) an employee or group of employees designated by 3Com and Palm, by mutual agreement, as Palm Transferred Employees; or (d) an alternate payee under a QDRO, alternate recipient under a QMCSO, beneficiary, covered dependent, or qualified beneficiary (as such term is defined under COBRA), in each case, of an employee or former employee, described in Subsections 1.62(a) through (c) with respect to that employee's or former employee's benefit under the applicable Plan(s) (unless specified otherwise in this Agreement, such an alternate payee, alternate recipient, beneficiary, covered dependent, or qualified beneficiary shall not otherwise be considered a Palm Transferred Employee with respect to any benefits he or she accrues or accrued under any applicable Plan(s), unless he or she is a Palm Transferred Employee by virtue of Subsections 1.62(a) through (c)). An employee may be a Palm Transferred Employee pursuant to this Section regardless of whether such employee is, as of the Distribution Date, alive, actively employed, on a temporary leave of absence from active employment, on layoff, terminated from employment, retired or on any other type of employment or post-employment status relative to a 3Com Plan, and regardless of whether, as of the Distribution Date, such employee is then receiving any coverage under or benefits from a 3Com Plan. 1.63 Participating Company. "Participating Company" means: (a) 3Com; (b) --------------------- any Person (other than an individual) that 3Com has approved for participation in, has accepted participation in, and which is participating in, a Plan sponsored by 3Com; and (c) any Person (other than an individual) which, by the terms of such Plan, participates in such Plan or any employees of which, by the terms of such Plan, participate in or are covered by such Plan. 1.64 Person. "Person" means an individual, a partnership, a corporation, a ------ limited liability company, an association, a joint stock company, a trust, a joint venture, an unincorporated organization, and a governmental entity or any department, agency or political subdivision thereof. 1.65 Plan. "Plan" means any plan, policy, program, payroll practice, ---- arrangement, contract, trust, insurance policy, or any agreement or funding vehicle providing compensation or benefits to employees, former employees, directors or consultants of 3Com or Palm. 1.66 Post-Distribution Period. "Post-Distribution Period" means, for each ------------------------ designated Plan, the period beginning as of the Distribution Date and ending on the date that no member of the Palm Group is using 3Com benefit delivery and administrative services with respect to that Plan. 1.67 Premium Plan. "Premium Plan," when immediately preceded by "3Com," ------------ means the 3Com Medical/Dental Pre-Tax Premium Plan, the vehicle by which employees participating in the 3Com Health and Welfare Plans can contribute their portion of the premium payments with pre-tax 8 dollars. When immediately preceded by "Palm," "Premium Plan" means the medical/dental pre-tax premium plan to be established by Palm pursuant to Sections 2.2 and 5.10. 1.68 PTO. "PTO," when immediately preceded by "3Com," means the 3Com --- Personal Time Off Policy. When immediately preceded by "Palm," "PTO" means the Palm personal time off policy to be established by Palm pursuant to Sections 2.2 and 9.6. 1.69 QDRO. "QDRO" means a domestic relations order which qualifies under ---- Code Section 414(p) and ERISA Section 206(d) and which creates or recognizes an alternate payee's right to, or assigns to an alternate payee, all or a portion of the benefits payable to a participant under the 3Com 401(k) Plan. 1.70 QMCSO. "QMCSO" means a medical child support order which qualifies ----- under ERISA Section 609(a) and which creates or recognizes the existence of an alternate recipient's right to, or assigns to an alternate recipient the right to, receive benefits for which a participant or beneficiary is eligible under any of the Health Plans. 1.71 Rabbi Trust. "Rabbi Trust," when immediately preceded by "3Com," ----------- means the rabbi trust established for purposes of holding assets under the 3Com Deferred Compensation Plan. When immediately preceded by "Palm," "Rabbi Trust" means the grantor trust to be established by Palm pursuant to Section 4.1(a). 1.72 Ratio. "Ratio" means the ratio determined by dividing the Palm Stock ----- Value by the 3Com Stock Value. 1.73 Record Date. "Record Date" means the close of business on the date to ----------- be determined by the Board of Directors of 3Com as the record date for determining the stockholders of 3Com entitled to receive shares of common stock of Palm in the Distribution 1.74 Restricted Stock. "Restricted Stock," when immediately preceded by ---------------- "3Com," means shares of 3Com common stock that are subject to transfer restrictions or to employment and/or performance vesting conditions, pursuant to a 3Com Stock Plan. When immediately preceded by "Palm," "Restricted Stock" means shares of Palm common stock that are subject to transfer restrictions or to employment and/or performance vesting conditions, pursuant to a Palm Stock Plan. 1.75 Revenue. "Revenue" means net revenue as determined in accordance with ------- generally accepted accounting principles. 1.76 Sabbatical Plan. "Sabbatical Plan," when immediately preceded by --------------- "3Com," means the 3Com Sabbatical Plan. When immediately preceded by "Palm," "Sabbatical Plan" means the sabbatical plan, if any, to be established by Palm pursuant to Sections 2.2 and 5.6. 1.77 SEC. "SEC" means the United States Securities and Exchange --- Commission. 9 1.78 Section 125 Plan. "Section 125 Plan," when immediately preceded by ---------------- "3Com," means the 3Com Premium Plan, the 3Com FSA/Dependent Reimbursement Plan, and the 3Com FSA/Medical Reimbursement Plan. When immediately preceded by "Palm," "Section 125 Plan" means the Palm Premium Plan, the Palm FSA/Dependent Reimbursement Plan, and the Palm FSA/Medical Reimbursement Plan to be established by Palm pursuant to Sections 2.2 and 5.10. 1.79 Separation. "Separation" means the contribution and transfer from 3Com ---------- to Palm, and Palm's receipt and assumption of, directly or indirectly, substantially all of the Assets and Liabilities currently associated with the Palm Business and the stock, investments or similar interests currently held by 3Com in subsidiaries and other entities that conduct such business. 1.80 Separation Agreement. "Separation Agreement" means the Master -------------------- Separation and Distribution Agreement, dated as of [December ___, 1999], of which this is Exhibit E thereto. 1.81 Separation Date. "Separation Date" means the effective date and time --------------- of each transfer of property, assumption of liability, license, undertaking, or agreement in connection with the Separation which shall, with respect to non- Foreign Plans and U.S. employees, be 12:01 a.m., Pacific Time, [February 25/26, 2000], and/or such other date(s) as may be fixed by the Board of Directors of 3Com. 1.82 Severance Plan. "Severance Plan," when immediately preceded by "3Com," -------------- means the 3Com Severance Plan. When immediately preceded by "Palm," "Severance Plan" means the severance program, if any, to be established by Palm pursuant to Sections 2.2 and 5.5. 1.83 Short-Term Disability Plan. "Short-Term Disability Plan," when -------------------------- immediately preceded by "3Com," means the 3Com Short-Term Disability Plan. When immediately preceded by "Palm," Short-Term Disability Plan" means the short-term disability plan to be established by Palm pursuant to Section 2.2 and Subsection 5.7(a). 1.84 SOS Plan. "SOS Plan," when immediately preceded by "3Com," means the -------- 3Com Share Our Success ("SOS") Plan. When immediately preceded by "Palm," "SOS" means the matching gift program for charitable contributions, if any, to be established by Palm pursuant to Sections 2.2 and 7.7. 1.85 Stock Plan. "Stock Plan," when immediately preceded by "3Com," means ---------- any plan, program, or arrangement, other than the Stock Purchase Plan, pursuant to which employees and other service providers hold Options, 3Com Restricted Stock, or other 3Com equity incentives. When immediately preceded by "Palm," "Stock Plan" means substantially similar plans, programs, or arrangements, to be established by Palm pursuant to Section 2.2 and Article VI. 1.86 Stock Purchase Plan. "Stock Purchase Plan," when immediately preceded ------------------- by "3Com," means the 3Com Employee Stock Purchase Plan. When immediately preceded by "Palm," "Stock Purchase Plan" means the employee stock purchase plan to be established by Palm pursuant to Sections 2.2 and 6.5. 10 1.87 Subsidiary. "Subsidiary" of any person means a corporation or other ---------- organization, whether incorporated or unincorporated, of which at least a majority of the securities or interest having by the terms thereof ordinary voting power to elect at least a majority of the board of directors or others performing similar functions with respect to such corporation or other organization, is directly or indirectly owned or controlled by such Person or by any one or more of its Subsidiaries, or by such Person and one or more of its Subsidiaries; provided, however that no Person that is not directly or indirectly wholly-owned by any other Person shall be a Subsidiary of such other Person unless such other Person controls, or has the right, power or ability to control that Person. Unless the context otherwise requires, reference to 3Com and its Subsidiaries shall not include the subsidiaries of 3Com that will be transferred to Palm after giving effect to the Separation, including the actions taken pursuant to the Non-U.S. Plans. 1.88 Tax Sharing Agreement. "Tax Sharing Agreement" means the Ancillary --------------------- Agreement, which is Exhibit F to the Separation Agreement. 1.89 Unemployment Insurance Program. "Unemployment Insurance Program," ------------------------------ when immediately preceded by "3Com," means the group unemployment insurance policies purchased by 3Com from time to time. When immediately preceded by "Palm," "Unemployment Insurance Program" means any group unemployment insurance program to be established by Palm pursuant to Section 9.10. 1.90 WellCom Program. "WellCom Program" is defined in Section 7.6. --------------- 1.91 Workers' Compensation Plan. "Workers' Compensation Plan" when -------------------------- immediately preceded by "3Com" means the 3Com Workers' Compensation Plan, comprised of the various arrangements established by a member of the 3Com Group to comply with the workers' compensation requirements of the states in which the 3Com Group conducts business. When immediately preceded by "Palm," "Workers' Compensation Plan" means the workers' compensation program to be established by Palm pursuant to Section 5.13. 11 ARTICLE II GENERAL PRINCIPLES ------------------ 2.1 Assumption of Palm Liabilities. Except as specified otherwise in this ------------------------------ Agreement or as mutually agreed upon by Palm and 3Com from time to time, effective as of Separation Date, Palm hereby assumes and agrees to pay, perform, fulfill and discharge, in accordance with their respective terms, all of the following: (a) all Liabilities of, or relating to, Palm Employees or Palm Transferred Employees, in each case relating to, arising out of, or resulting from future, present or former employment with the Palm Business (including Liabilities relating to, arising out of, or resulting from 3Com Plans and Palm Plans); (b) all Liabilities relating to, arising out of, or resulting from any other actual or alleged employment relationship with the Palm Group; and (c) all other Liabilities relating to, arising out of, or resulting from obligations, liabilities and responsibilities expressly assumed or retained by the Palm Group, or a Palm Plan pursuant to this Agreement. Except as specified otherwise in this Agreement or as otherwise mutually agreed upon by 3Com and Palm from time to time, 3Com shall transfer to Palm amounts equal to trust assets, insurance reserves, and other related assets as consistent with the applicable Plan transition that relates to, arises out of, or results from Palm's pro rata interest in each 3Com Plan. 2.2 Establishment of Palm Plans. --------------------------- (a) Health and Welfare Plans. Except as specified otherwise in this ------------------------ Agreement, effective as of the Distribution Date (or such other date(s) as 3Com and Palm may mutually agree), Palm shall adopt the Palm Health and Welfare Plans. Except as otherwise specified in this Agreement, to the extent administratively and financially practicable, each of the foregoing Palm Plans as in effect as of the Distribution Date (or such other date(s) as 3Com and Palm may mutually agree), shall be comparable in the aggregate in all Material Features to the corresponding 3Com Plan as in effect as of such agreed upon date. (b) 401(k) and Fringe Benefit Plans. Except as specified otherwise in ------------------------------- this Agreement, effective as of the Distribution Date (or such other date(s) as 3Com and Palm may mutually agree), Palm shall adopt the Palm 401(k) Plan and the Palm Fringe Benefit Plans. Except as otherwise specified in this Agreement, to the extent administratively and financially practicable, each of the foregoing Palm Plans as in effect as of the Distribution Date (or such other date(s) as 3Com and Palm may mutually agree), shall be comparable in the aggregate in all Material Features to the corresponding 3Com Plan as in effect as of such agreed upon date. (c) Equity and Other Compensation. Except as specified otherwise in ----------------------------- this Agreement, effective on or before the IPO (or such other date(s) as 3Com and Palm may mutually agree), Palm shall adopt the Palm Stock Plans. Except as specified otherwise in this Agreement, effective as of Distribution Date (or such other date(s) as 3Com and Palm may mutually agree), Palm shall adopt the Palm Executive Bonus Plan and the Palm Bonus Plan. Effective on or before 12 the IPO (or such other date as 3Com and Palm may mutually agree), Palm shall adopt the Palm Stock Purchase Plan. Each of the foregoing Palm Plans as in effect as of the IPO (or such other date(s) as 3Com and Palm may mutually agree), shall be comparable in the aggregate in all Material Features to the corresponding 3Com Plan as in effect on the IPO. (d) Other Plans. Except as otherwise specified in this Agreement, ----------- effective as of the Separation Date (or such other date(s) as 3Com and Palm may mutually agree), Palm shall adopt certain Palm Plans that are specifically tied to its payroll practices, including, without limitation, a Short-Term Disability Plan, a PTO Plan and a Deferred Compensation Plan. Palm shall also adopt a Section 125 Plan, effective as of January 1, 2000. 2.3 Palm Under No Obligation to Maintain Plans. Except as specified ------------------------------------------ otherwise in this Agreement, nothing in this Agreement shall preclude Palm, at any time after the Distribution Date, from amending, merging, modifying, terminating, eliminating, reducing, or otherwise altering in any respect any Palm Plan, any benefit under any Palm Plan or any trust, insurance policy or funding vehicle related to any Palm Plans, or any employment or other service arrangement with Palm Employees or vendors (to the extent permitted by law). 2.4 Palm's Participation in 3Com Plans. ---------------------------------- (a) Participation in 3Com Plans. Except as specified otherwise in --------------------------- this Agreement or as 3Com and Palm may mutually agree, Palm shall, until the Distribution Date, continue to be a Participating Company in the 3Com Plans to the extent that Palm has not established a corresponding Plan. Effective as of any date on or after the Separation Date and before the Distribution Date (or such other date(s) as 3Com or Palm may mutually agree), any member of the Palm Group not described in the preceding sentence may, at its request and with the consent of 3Com and Palm, become a Participating Company in any or all of the 3Com Plans, to the extent that Palm has not yet established a corresponding Plan. (b) 3Com's General Obligations as Plan Sponsor. To the extent that ------------------------------------------ Palm is a Participating Company in any 3Com Plan, 3Com shall continue to administer, or cause to be administered, in accordance with its terms and applicable law, such 3Com Plan, and shall have the sole and absolute discretion and authority to interpret the 3Com Plan, as set forth therein. 3Com shall not amend any Material Feature of any 3Com Plan in which Palm is a Participating Company, except to the extent: (i) such amendment would not materially affect any coverage or benefits of Palm Employees or Palm Transferred Employees under such Plan; (ii) Palm shall consent to such amendment and such consent shall not be unreasonably withheld; or (iii) such amendment is necessary or appropriate to comply with applicable law. (c) Palm's General Obligations as Participating Company. Palm shall --------------------------------------------------- perform, with respect to its participation in the 3Com Plans, the duties of a Participating Company as set forth in each such Plan or any procedures adopted pursuant thereto, including (without limitation): (i) assistance in the administration of claims, to the extent requested by the claims administrator of the applicable 3Com Plan; (ii) full cooperation with 3Com Plan auditors, benefit personnel and 13 benefit vendors; (iii) preservation of the confidentiality of all financial arrangements 3Com has or may have with any vendors, claims administrators, trustees, service providers or any other entity or individual with whom 3Com has entered into an agreement relating to the 3Com Plans; and (iv) preservation of the confidentiality of participant information (including, without limitation, health information in relation to FMLA leaves) to the extent not specified otherwise in this Agreement. (d) Termination of Participating Company Status. Except as otherwise ------------------------------------------- may be mutually agreed upon by 3Com and Palm, effective as of the Distribution Date or such other date as Palm establishes a corresponding Plan (as specified in Section 2.2 or otherwise in this Agreement), Palm shall automatically cease to be a Participating Company in the corresponding 3Com Plan. 2.5 Terms of Participation by Palm Transferred Employees in Palm Plans. ------------------------------------------------------------------ (a) Non-Duplication of Benefits. Except as specified otherwise in --------------------------- this Agreement, as of the Distribution Date, or other later date that applies to the particular Palm Plan established thereafter, the Palm Plans shall be, with respect to Palm Transferred Employees, in all respects the successors in interest to, and shall not provide benefits that duplicate benefits provided by, the corresponding 3Com Plans. 3Com and Palm shall agree on methods and procedures, including amending the respective Plan documents, to prevent Palm Employees from receiving duplicate benefits from the 3Com Plans and the Palm Plans. (b) Service Credit. Except as specified otherwise in this Agreement, -------------- with respect to Palm Transferred Employees, each Palm Plan shall provide that all service, all compensation and all other benefit-affecting determinations that, as of the Distribution Date, were recognized under the corresponding 3Com Plan shall, as of the Distribution Date, receive full recognition and credit and be taken into account under such Palm Plan to the same extent as if such items occurred under such Palm Plan, except to the extent that duplication of benefits would result. Notwithstanding the foregoing, 3Com and Palm shall recognize service with either 3Com or Palm that was recognized as of the Distribution Date, except to the extent provided in Subsection 2.5(a) above. The service crediting provisions shall be subject to any respectively applicable "service bridging," "break in service," "employment date," or "eligibility date" rules under the Palm Plans and the 3Com Plans. (c) Assumption of Liabilities. Except as specified otherwise in this ------------------------- Agreement (including, without limitation, the exception applicable to self- insured Health Plans), the provisions of this Agreement for the transfer of Assets relating to 3Com Plans to Palm and/or the appropriate Palm Plans are based upon the understanding of the parties that Palm and/or the appropriate Palm Plan will assume all Liabilities of the corresponding 3Com Plan to or relating to Palm Transferred Employees, as provided for herein. If any such Liabilities are not effectively assumed by Palm and/or the appropriate Palm Plan, then the amount of transferred Assets shall be recomputed accordingly, taking into account the retention of such Liabilities by such 3Com Plan, and Assets shall be transferred from Palm and/or the appropriate Palm Plan to 3Com and/or the appropriate 3Com Plan so as to place Palm and/or the appropriate Palm Plan in the position it would have been in had the initial Asset transfer been made in accordance with such recomputed amount of assets. 14 2.6 Benefits Committee and Dispute Resolution. From the date of this ----------------------------------------- Agreement through the later of the Distribution Date or the end of the Post- Distribution Period, as applicable, the management of the Plans shall be conducted under the supervision of the Benefits Committee. The Benefits Committee shall consist of an equal number of representatives from 3Com and Palm as appointed by the 3Com Senior Vice President, Human Resources, and the functional equivalent of Palm, and shall provide strategic oversight and direction of the cohesive administration of the Plans. Issues that cannot be resolved by the Benefits Committee shall be decided, at the request of either party, by the Palm Senior Vice President, Human Resources (or the functional equivalent) (or his or her authorized delegate) and the 3Com Senior Vice President, Human Resources (or his or her authorized delegate). After the exhaustion of the process, as specified herein, any outstanding issue shall be resolved in accordance with Section 5.9 of the Separation Agreement, entitled "Dispute Resolution." 2.7 Foreign Plans. Palm and 3Com each intend that matters, issues, or ------------- Liabilities relating to, arising out of, or resulting from Foreign Plans and non-U.S.-related employment matters be handled in a manner that is consistent with comparable U.S. matters, issues, or Liabilities as reflected in this Agreement (to the extent permitted by applicable law or as otherwise specified in the applicable Section or Schedule thereto or Schedule 2.7). 15 ARTICLE III DEFINED CONTRIBUTION PLAN ------------------------- 3.1 401(k) Plan. ----------- (a) 401(k) Plan Trust. Effective as of the Distribution Date (or such ----------------- other date as 3Com and Palm may mutually agree), Palm shall establish, or cause to be established, a separate trust, which is intended to be tax-qualified under Code Section 401(a), to be exempt from taxation under Code Section 501(a)(1), and to form the Palm 401(k) Plan. (b) 401(k) Plan: Assumption of Liabilities and Transfer of Assets. ------------------------------------------------------------- Effective as of the Distribution Date (or such other date as 3Com and Palm may mutually agree): (i) the Palm 401(k) Plan shall assume and be solely responsible for all Liabilities relating to, arising out of, or resulting from Palm Transferred Employees under the 3Com 401(k) Plan; and (ii) 3Com shall cause the accounts of the Palm Transferred Employees under the 3Com 401(k) Plan that are held by its related trust to be transferred to the Palm 401(k) Plan and its related trust, and Palm shall cause such transferred accounts to be accepted by such Plan and its related trust. Effective as of the Distribution Date (or such other date as 3Com and Palm may mutually agree), Palm shall use its commercially reasonable best efforts to enter into agreements satisfactory to Palm to accomplish such assumption and transfer, the maintenance of the necessary participant records, the appointment of State Street Corporation as the initial trustee under the Palm 401(k) Plan, and the engagement of State Street Global Advisors as the initial recordkeeper under the Palm 401(k) Plan. Palm and 3Com each agree to use their commercially reasonable best efforts to accomplish this 401(k) Plan and related trust spin-off. (c) 401(k) Plan: Stock Considerations. As a result of the spin-off of --------------------------------- the 3Com 401(k) Plan and to the extent that immediately prior to such time, the 3Com 401(k) Plan continues to consist of 3Com employer securities, then the resulting 3Com 401(k) Plan and Palm 401(k) Plan shall both consist in part of 3Com and Palm employer securities. Palm and 3Com shall assume sole responsibility for ensuring that their respective company stock funds, and underlying employer securities held in each such fund, are maintained in compliance with all requirements of the SEC. (d) No Distribution to Palm Transferred Employees. The 3Com 401(k) --------------------------------------------- Plan and the Palm 401(k) Plan shall provide that no distribution of account balances shall be made to any Palm Transferred Employee on account of the Palm Group ceasing to be an Affiliate of the 3Com Group as of the Distribution Date. 16 ARTICLE IV NON-QUALIFIED PLAN ------------------ 4.1 Deferred Compensation Plan. -------------------------- (a) Establishment of Palm Rabbi Trust. Effective on or before the --------------------------------- Separation Date (or such other date as 3Com and Palm may mutually agree), Palm shall establish the Palm Deferred Compensation Plan and the Palm Rabbi Trust. (b) Allocation and Assumption of Liabilities. As of the date that ---------------------------------------- Palm establishes the Palm Deferred Compensation Plan, 3Com shall determine the amount of Liabilities under the 3Com Deferred Compensation Plan, attributable to Palm Employees. As soon as administratively practicable thereafter, 3Com shall pay to Palm or to the trustee of the Palm Rabbi Trust, as Palm specifies, an amount of 3Com's Assets equal to such Liabilities. Coincident with the receipt of such transfer of Assets, Palm shall assume all responsibilities and obligations relating to, arising out of, or resulting from such Liabilities. (c) Participation in Deferred Compensation Plans. Effective as of the -------------------------------------------- Separation Date (or such other date as 3Com and Palm may mutually agree), eligible Palm Employees may commence participation in the Palm Deferred Compensation Plan. Palm Employees who are currently participating in the 3Com Deferred Compensation Plan shall continue their participation in that Plan (according to its terms) to the Separation Date (or such other date as 3Com and Palm may mutually agree). 17 ARTICLE V HEALTH AND WELFARE PLANS ------------------------ 5.1 Health Plans as of the Distribution Date. ---------------------------------------- (a) Palm Health Plans. As of the Distribution Date (or such other ----------------- date(s) as 3Com and Palm may mutually agree), Palm shall have established the Palm Health Plans listed on Schedule 5.1(a) and, correspondingly, Palm shall cease to be a Participating Company in the 3Com Health Plans. Palm shall be solely responsible for the administration of the Palm Health Plans, including the payment of all employer-related costs in establishing and maintaining the Palm Health Plans, and for the collection and remittance of employee premiums, subject to Section 8.2. (b) Pending Treatments. Notwithstanding Subsection 5.1(a) above, all ------------------ treatments which have been pre-certified for or are being provided to a Palm Transferred Employee as of the Distribution Date shall be provided without interruption under the appropriate 3Com Health Plan (to the extent such continued treatment is not provided under a Palm Health Plan) until such treatment is concluded, discontinued, or, if earlier, through December 31, 2000, pursuant to applicable Health Plan rules and limitations, but Palm shall continue to be responsible for all Liabilities relating to, arising out of, or resulting from such on-going treatments as of the Distribution Date. (c) Vendor Arrangements. 3Com shall use its commercially reasonable ------------------- best efforts for and on behalf of Palm to procure, effective as of the Distribution Date (or such other date(s) as 3Com and Palm may mutually agree): (i) third party ASO Contracts which are comparable in the aggregate in all Material Features to the ASO Contracts entered into by 3Com, as set forth in Schedule 5.1(c)(i) (the "ASO Contracts); (ii) Group Insurance Policies, which are comparable in the aggregate in all Material Features to the Group Insurance Policies entered into by 3Com, as set forth in Schedule 5.1(c)(ii) (the "Group Insurance Policies"); and (iii) an HMO Agreement which is comparable in the aggregate in all Material Features to the HMO Agreement entered into by 3Com, as set forth in Schedule 5.1(c)(iii) (the "HMO Agreement"). In each case, Palm shall, as of the Distribution Date (or such other date as 3Com and Palm may mutually agree), establish, adopt and/or implement such contracts, agreements or arrangements. Palm may, at such future date after the Distribution Date, elect to discontinue such contracts, agreements or arrangements in accordance with Section 2.3. (d) Continuance of Elections, Co-Payments and Maximum Benefits. ---------------------------------------------------------- (i) As of the Distribution Date and for the remainder of the plan year in which the Distribution Date occurs (or such other period as 3Com and Palm may mutually agree), Palm shall make its commercially reasonable best efforts to cause the Palm Health Plans to recognize and maintain all coverage and contribution elections made by Palm Employees and Palm Transferred Employees under the 3Com Health Plans and apply such elections under the Palm 18 Health Plans for the remainder of the period or periods for which such elections are by their terms applicable. The transfer or other movement of employment between 3Com to Palm at any time upon or before the Distribution Date shall neither constitute nor be treated as a "status change" or termination of employment under the 3Com Health Plans or the Palm Health Plans. (ii) On and after the Distribution Date, Palm shall cause the Palm Health Plans to recognize and give credit for (A) all amounts applied to deductibles, out-of-pocket maximums, co-payments and other applicable benefit coverage limits with respect to which such expenses have been incurred by Palm Transferred Employees under the 3Com Health Plans for the remainder of the calendar year in which the Distribution Date occurs, and (B) all benefits paid to Palm Transferred Employees under the 3Com Health Plans for purposes of determining when such persons have reached their lifetime maximum benefits under the Palm Health Plans. (e) HCFA. As of the Separation Date (or such other date as 3Com and ---- Palm may mutually agree), Palm shall assume all Liabilities relating to, arising out of, or resulting from claims, if any, under the HCFA data match reports that relate to Palm Transferred Employees 5.2 Health Plans from the Separation Date through the Distribution Date. ------------------------------------------------------------------- Except as otherwise agreed by 3Com and Palm, for the period beginning with the Separation Date and ending on the Distribution Date (or such other period as 3Com and Palm may mutually agree), Palm shall be a Participating Company in the 3Com Health Plans listed on Schedule 5.2(a). 3Com shall administer claims incurred under the 3Com Health Plans by Palm Employees before the Distribution Date but only to the extent that Palm has not, before the Distribution Date, established and assumed administrative responsibility for a corresponding Health Plan. Any determination made or settlements entered into by 3Com with respect to such claims shall be final and binding. 3Com shall retain financial and administrative ("run-out") Liability and all related obligations and responsibilities for all claims incurred by Palm Transferred Employees before the Distribution Date (or such other date(s) as 3Com and Palm may mutually agree), including any claims that were administered by 3Com as of, on, or after the Distribution Date (or such other date(s) as 3Com and Palm may mutually agree). Except as set forth in the preceding sentence, Palm shall reimburse 3Com for any and all direct and indirect costs and expenses associated with its participation in the 3Com Health Plans, subject to Section 8.2. 5.3 Group Life Plan. --------------- (a) Palm's Participation in 3Com Group Life Plan. Palm shall, until -------------------------------------------- the Distribution Date (or such other date as 3Com and Palm may mutually agree), continue to be a Participating Company in the 3Com Group Life Plan. Palm shall cease to be a Participating Company in the 3Com Group Life Plan coincident with Palm's establishment of the Palm Group Life Plan (or, if none, Palm's written notice to 3Com of its withdrawal as a Participating Company in the 3Com Group Life Plan). Palm shall reimburse 3Com for any and all direct and indirect costs and expenses associated with its participation in the 3Com Group Life Plan, subject to Section 8.2. 19 (b) Palm's Establishment of Palm Group Life Plan. 3Com shall make its -------------------------------------------- commercially reasonable best efforts to procure an arrangement on behalf of Palm for a Group Life Plan which shall be comparable in the aggregate in all Material Features to the 3Com Group Life Plan as are financially, administratively and legally practicable. If 3Com procures such an arrangement, Palm will not unreasonably withhold its consent to adopt such an arrangement to constitute the Palm Group Life Plan. Palm will reimburse 3Com for its direct and indirect costs and expenses associated with its procurement, preparation, and implementation of the Palm Group Life Plan, subject to Section 8.2. 5.4 AD&D Plan. --------- (a) Palm's Participation in 3Com AD&D Plan. Palm shall, until the -------------------------------------- Distribution Date (or such other date as 3Com and Palm may mutually agree), continue to be a Participating Company in the 3Com AD&D Plan. Palm shall cease to be a Participating Company in the 3Com AD&D Plan coincident with Palm's establishment of the Palm AD&D Plan (or, if none, Palm's written notice to 3Com of its withdrawal as a Participating Company in the 3Com AD&D Plan). Palm shall reimburse 3Com for any and all direct and indirect costs and expenses associated with its participation in the 3Com AD&D Plan, subject to Section 8.2. (b) Palm's Establishment of Palm AD&D Plan. 3Com shall make its -------------------------------------- commercially reasonable best efforts to procure an arrangement on behalf of Palm for an AD&D Plan which shall be comparable in the aggregate in all Material Features to the 3Com AD&D Plan as are financially, administratively and legally practicable to Palm. If 3Com procures such an arrangement, Palm shall not unreasonably withhold its consent to adopt such an arrangement to constitute the Palm AD&D Plan. Palm will reimburse 3Com for its direct and indirect costs and expenses associated with its procurement, preparation and implementation of the Palm AD&D Plan, subject to Section 8.2. 5.5 Severance Plan. Palm shall, until the Distribution Date (or such other -------------- date as 3Com and Palm may mutually agree), continue to be a Participating Company in the 3Com Severance Plan. Palm shall cease to be a Participating Company in the 3Com Severance Plan coincident with Palm's establishment of the Palm Severance Plan (or if none, Palm's written notice to 3Com of its withdrawal as a Participating Company in the 3Com Severance Plan). If Palm so elects, 3Com will assist Palm in establishing the Palm Severance Plan. Palm will reimburse 3Com for any and all direct and indirect costs and expenses related to its participation in the 3Com Severance Plan and 3Com's preparation and implementation of the Palm Severance Plan, subject to Section 8.2. 5.6 Sabbatical Plan. --------------- (a) Palm's Participation in 3Com Sabbatical Plan. Palm shall, until -------------------------------------------- the Distribution Date (or such other date as 3Com and Palm may mutually agree), continue to be a Participating Company in the 3Com Sabbatical Plan. Palm shall remit to 3Com or the trust fund for the 3Com Sabbatical Plan, as specified by 3Com, sufficient funds to assume its funding Liability under the 3Com Sabbatical Plan relating to, arising out of, or resulting from Palm's participation in 20 the 3Com Sabbatical Plan. Palm will also reimburse 3Com for any and all direct and indirect costs and expenses associated with its participation in the 3Com Sabbatical Plan, subject to Section 8.2. Palm shall cease to be a Participating Company in the 3Com Sabbatical Plan coincident with Palm's establishment of the Palm Sabbatical Plan. (b) Allocation and Assumption of Liabilities. 3Com shall determine ---------------------------------------- the amount of Assets under the 3Com Sabbatical Plan and related trust as of the Distribution Date (or such other date that Palm establishes the Palm Sabbatical Plan) attributable to Palm. As soon as administratively practicable thereafter, 3Com shall pay to Palm or to the trustee of the Palm Sabbatical Plan, as Palm specifies, an amount equal to Palm's Assets under the 3Com Sabbatical Plan, if any. (c) Palm Sabbatical Plan. Effective as of the Distribution Date (or -------------------- such other date as 3Com and Palm may mutually agree), Palm shall establish the Palm Sabbatical Plan which is comparable in the aggregate in all Material Features to the 3Com Sabbatical Plan. If Palm so elects, 3Com will assist Palm in preparing and implementing the Palm Sabbatical Plan and Palm will reimburse 3Com for its costs and expenses associated with the preparation and implementation of the Palm Sabbatical Plan, subject to Section 8.2. 5.7 Disability Plans. ---------------- (a) Short-Term Disability Plan. Effective on or before the Separation -------------------------- Date (or such other date as 3Com and Palm may mutually agree), Palm shall implement or cause to be implemented, payroll procedures for purposes of sponsoring and administering the Palm Short-Term Disability Plan outside of California. Palm has adopted a state voluntary Disability Plan for Palm Employees and Palm Transferred Employees who are employed in California. 3Com will administer Palm's Short-Term Disability Plan through the Distribution Date (or such other date as 3Com and Palm may mutually agree). Palm shall reimburse 3Com for its costs and expenses associated with such administration, subject to Section 8.2. (b) Long-Term Disability Plan. Palm shall, until the Distribution ------------------------- Date (or such other date as Palm and 3Com may mutually agree), continue to be a Participating Company in the 3Com Long-Term Disability Plan. 3Com shall use its commercially reasonable best efforts for and on behalf of Palm to procure, effective as of the Distribution Date (or such other date as 3Com and Palm may mutually agree), a Palm Long-Term Disability Plan. Palm will reimburse 3Com for any and all direct and indirect costs and expenses associated with its participation in the 3Com Long-Term Disability Plan and 3Com's assistance in procuring, preparing, and implementing the Palm Long-Term Disability Plan, subject to Section 8.2. 5.8 Business Travel Accident Insurance. Through the Distribution Date (or ---------------------------------- such other date as 3Com and Palm may mutually agree), Palm shall remain a Participating Company in the 3Com Business Travel Accident Insurance policy. 3Com shall be responsible for administering or causing to be administered the 3Com Business Travel Accident Insurance policy with respect to Palm Employees. Palm shall reimburse 3Com for any and all direct and indirect expenses and costs 21 associated with its participation in the 3Com Business Travel Accident Insurance policy, subject to Section 8.2. 3Com shall use its commercially reasonable best efforts for and on behalf of Palm to procure a Business Travel Accident Insurance policy which shall be comparable in the aggregate in all Material Features to the 3Com Business Travel Accident Insurance policy, effective as of the Distribution Date (or such other date as 3Com and Palm may mutually agree). If 3Com procures such an agreement, Palm shall not unreasonably withhold its consent to adopt such an agreement to constitute the Palm Business Travel Accident Insurance policy. Effective as of the Distribution Date, Palm shall be solely responsible for maintaining its own Business Travel Accident Insurance policy. 5.9 Long-Term Care Plan. Through the Distribution Date (or such other ------------------- date as 3Com and Palm may mutually agree), Palm shall remain a Participating Company in the 3Com Long-Term Care Plan. 3Com shall be responsible for administering or causing to be administered the 3Com Long-Term Care Plan. Palm shall reimburse 3Com for any and all direct and indirect costs and expenses associated with its participation in the 3Com Long-Term Care Plan, subject to Section 8.2. The Palm Employees and Palm Transferred Employees participating in the 3Com Long-Term Care Plan shall have the rights to take their existing benefits with them under such 3Com Long-Term Care Plan (a "portable benefit") at the time their rights to participation would otherwise terminate. 5.10 Section 125 Plan. Through December 31, 1999 (or such other date as ---------------- 3Com and Palm may mutually agree), Palm and designated members of the Palm Group shall remain Participating Companies in the 3Com Section 125 Plan. The existing elections for Palm Employees participating in the 3Com Section 125 Plan and for newly-eligible Palm Employees who elect to participate in the 3Com Section 125 Plan shall remain in effect through December 31, 1999 (or such other date as 3Com and Palm may mutually agree). Effective on January 1, 2000 (or such other date immediately following the date that Palm's participation in the 3Com Section 125 Plan terminates), Palm shall establish, or caused to be established, the Palm Section 125 Plan and Palm shall be solely responsible for the Palm Section 125 Plan. 3Com will administer, or cause to be administered, the 3Com Section 125 Plan for Palm Employees and the Palm Section 125 Plan through such date as 3Com and Palm may mutually agree. Palm shall reimburse 3Com for any and all direct and indirect expenses and costs attributable to Palm Employees, subject to Section 8.2. 5.11 COBRA. 3Com shall be responsible through the Distribution Date (or ----- such other date as 3Com and Palm may mutually agree), for compliance with the health care continuation coverage requirements of COBRA and the 3Com Health and Welfare Plans with respect to Palm Employees and qualified beneficiaries (as such term is defined under COBRA). Palm shall be responsible for providing 3Com with all necessary employee change notices and related information for covered dependents, spouses, qualified beneficiaries (as such term is defined under COBRA), and alternate recipients pursuant to QMCSO, in accordance with applicable 3Com COBRA policies and procedures. As soon as administratively practicable after the Distribution Date (or such other date as 3Com and Palm may mutually agree), 3Com shall provide Palm (through hard copy, electronic format, or such other mechanism as is appropriate under the circumstances), with a list of all qualified beneficiaries (as such term is defined under COBRA) that relate to the Palm Group and 22 the relevant information pertaining to their coverage elections and remaining COBRA time periods. Effective as of the Distribution Date (or such other date as 3Com and Palm may mutually agree), Palm shall be solely responsible for compliance with the health care continuation coverage requirements of COBRA and the Palm Health and Welfare Plans for Palm Transferred Employees and their qualified beneficiaries (as such term is defined under COBRA); provided, however, Palm may elect to retain 3Com's services in such manner and for such period as 3Com and Palm may mutually agree to assist it with COBRA administration and Palm will reimburse 3Com for its costs and expenses associated with such administration, subject to Section 8.2. 5.12 Leave of Absence Plans and FMLA. ------------------------------- (a) Allocation of Responsibilities After Separation Date. Effective ---------------------------------------------------- as of the Separation Date (or such other date as 3Com and Palm may mutually agree): (i) Palm shall adopt Leave of Absence Plans which shall be comparable in the aggregate in all Material Features to the 3Com Leave of Absence Plans as in effect on the Separation Date (or such other date as 3Com and Palm may mutually agree); (ii) Palm shall honor all terms and conditions of leaves of absence which have been granted to any Palm Employee under a 3Com Leave of Absence Plan or FMLA before the Separation Date by 3Com, including such leaves that are to commence after the Separation Date (or such other date as 3Com and Palm may mutually agree); and (iii) Palm shall recognize all periods of service of Palm Employees and Palm Transferred Employees with the 3Com Group, as applicable, to the extent such service is recognized by the 3Com Group for the purpose of eligibility for leave entitlement under the 3Com Leave of Absence Plans and FMLA; provided, however, that no duplication of benefits shall, to the extent permitted by law, be required by the foregoing. (b) Administration. Through the Distribution Date (or such other -------------- such period as 3Com and Palm may mutually agree), 3Com will administer, or cause to be administered, the Palm Leave of Absence Plans in such manner as 3Com and Palm may mutually agree. Palm will reimburse 3Com for its costs and expenses associated with such administration, subject to Section 8.2. (c) Disclosure. Before the Distribution Date (or such other date as ---------- 3Com and Palm may mutually agree), 3Com shall provide to Palm copies of all records pertaining to the 3Com Leave of Absence Plans and FMLA with respect to all Palm Employees and Palm Transferred Employees to the extent such records have not been previously provided. 5.13 Workers' Compensation Plan. -------------------------- (a) Assumption of 3Com and Palm Workers' Compensation Plan ------------------------------------------------------ Liabilities by Palm. Effective as of the Separation Date, Palm shall assume and - ------------------- be solely responsible for all Liabilities relating to, arising out of, or resulting from their claims by Palm Employees and Palm Transferred Employees employment with the Palm Business ("Palm Claims") whether incurred before or after the Separation Date. 23 (b) Participation in the 3Com Workers' Compensation Plan. Palm shall, ---------------------------------------------------- until the Distribution Date (or such earlier date as Palm and 3Com may mutually agree), continue to be a Participating Company in the 3Com Workers' Compensation Plan. 3Com shall continue to administer, or cause to be administered, the 3Com Workers' Compensation Plan in accordance with its terms and applicable law. Palm shall fully cooperate with 3Com and its insurance company in the administration and reporting of Palm Claims under the 3Com Workers' Compensation Plan. Any determination made, or settlement entered into, by or on behalf of 3Com or its insurance company with respect to Palm claims under the 3Com Workers' Compensation Plan shall be final and binding. Palm shall reimburse 3Com and its insurance company for any and all direct and indirect costs related to the Palm claims or Palm's participation in the 3Com Workers' Compensation Plan, including, but not limited to loss costs, claims administration fees, legal expenses, premium audits, and retrospective premium adjustments, subject to Section 8.2. 3Com shall transfer to and reimburse Palm any assets related to the Palm claims or Palm's participation in the 3Com Workers' Compensation Plan, including, but not limited to, loss reserves, premium audits, and retrospective premium adjustments. (c) Outsourcing of Palm Workers' Compensation Plan Claims. Palm shall ----------------------------------------------------- have the right to transfer the administration of Palm Claims incurred under the 3Com Workers' Compensation Plan to a third party administrator, vendor, or insurance company ("Outsource"). Palm shall promptly notify 3Com of its intent to transfer such claims, including the material terms and conditions of the transfer before the effective date thereof. 3Com, upon the request of Palm, shall use its commercially reasonable best efforts to procure such Outsourcing on behalf of Palm, assist Palm in the transition to Outsourcing, and provide Palm with any information that is in the possession of 3Com and is reasonably available and necessary to obtain such Outsourcing. (d) Establishment of the Palm Workers' Compensation Plan. As of the ---------------------------------------------------- Distribution Date, Palm shall be responsible for complying with the workers' compensation requirements of the states in which the Palm Group conducts business and for obtaining and maintaining insurance programs for its risk of loss. Such insurance arrangements shall be separate and apart from the 3Com Workers' Compensation Plan. Notwithstanding the foregoing, 3Com, upon the request of Palm, shall use its commercially reasonable best efforts to procure workers' compensation insurance policies on behalf of Palm, assist Palm in the transition to its own separate insurance program, and provide Palm with any information that is in the possession of 3Com and is reasonably available and necessary to either obtain insurance coverages for Palm or to assist Palm in preventing unintended self-insurance, in whatever form. 5.14 Administrative Services. To the extent not provided otherwise in ----------------------- this Article, 3Com shall provide certain administrative services to Palm in conjunction with both the 3Com and Palm Health and Welfare Plans in such manner and for such period as 3Com and Palm may mutually agree. Palm shall reimburse 3Com for any and all direct and indirect costs and expenses related thereto, subject to Section 8.2. 24 ARTICLE VI EQUITY AND OTHER COMPENSATION ----------------------------- 6.1 Bonus Plan. Employees of the Palm Business (including, for this ---------- purpose, any employees of 3Com who are designated as employees of the Palm Business for purposes of the Separation) shall cease their participation in the 3Com Bonus Plan in the quarter ending prior to the Distribution Date (or such other date as 3Com and Palm may mutually agree). Any bonus pool, or portion thereof, that has been finally determined or accrued for under the 3Com Bonus Plan for the benefit of, or that is allocable to, employees of the Palm Business (including for this purpose, any employees of 3Com who are designated as employees of the Palm Business for purposes of the Separation) shall be paid to such Employees pursuant to the terms and conditions of the 3Com Bonus Plan, except that such payment shall be made on the Distribution Date (or such other date as 3Com and Palm may mutually agree). Effective as of the Distribution Date (or such other date as 3Com and Palm may mutually agree), Palm shall establish the Palm Bonus Plan for Palm Employees and Palm Transferred Employees for Palm fiscal period(s) beginning on and after the Distribution Date (or such other date as 3Com and Palm may mutually agree), to be administered by the Compensation Committee of the Palm Board of Directors. 6.2 Executive Bonus Plan. Employees of the Palm Business (including, for -------------------- this purpose, any employees of 3Com who are designated as employees of the Palm Business for purposes of the Separation) shall cease their participation in the 3Com Executive Bonus Plan in the quarter ending prior to the Distribution Date (or such other date as 3Com and Palm may mutually agree). Any bonus pool, or portion thereof, that has been finally determined or accrued for under the 3Com Executive Bonus Plan for the benefit of, or that is allocable to, employees of the Palm Business (including for this purpose, any employees of 3Com who are designated as employees of the Palm Business for purposes of the Separation) shall be paid to such Employees pursuant to the terms and conditions of the 3Com Bonus Plan, except that such payment shall be made on the Distribution Date (or such other date as 3Com and Palm may mutually agree). The 3Com Board of Directors may, in its absolute discretion following the IPO, adjust the performance and other factors applicable to any employee of the Palm Business (including, for this purpose, any employees of 3Com who are designated as employees of the Palm Business for purposes of the Separation) under the 3Com Executive Bonus Plan to reflect any changes in such employee's position, duties and responsibilities following the IPO in such equitable fashion as it shall determine. Effective as of the Distribution Date (or such other date as 3Com and Palm may mutually agree), Palm shall establish the Palm Executive Bonus Plan for Palm Employees and Palm Transferred Employees for Palm fiscal period(s) beginning on and after the Distribution Date (or such other date as 3Com and Palm may mutually agree), to be administered by the Compensation Committee of the Palm Board of Directors. 25 6.3 3Com Options. ------------ (a) Option Assumption by Palm. At the Distribution Date (or such ------------------------- other date as 3Com and Palm may mutually agree), each outstanding 3Com Option held by Palm Transferred Employees, whether vested or unvested, shall be, in connection with the Distribution, assumed by Palm. Each 3Com Option so assumed by Palm shall continue to have, and be subject to, the same terms and conditions set forth in the 3Com Stock Plans and as provided in the respective option agreements governing such 3Com Option as of the Distribution Date (or such other date as 3Com and Palm may mutually agree), except that (i) such 3Com Option shall be exercisable for that number of whole shares of Palm common stock equal to the quotient of the number of shares of 3Com common stock that were issuable upon exercise of such 3Com Option as of the Distribution Date divided by the Ratio, rounded down to the nearest whole number of shares of Palm common stock, and (ii) the per share exercise price for the shares of Palm common stock issuable upon exercise of such assumed 3Com Option shall be equal to the product determined by multiplying the exercise price per share of 3Com common stock at which such 3Com Option was exercisable as of the Distribution Date by the Ratio, rounded up to the nearest whole cent. (b) Assumption Criteria. It is the intention of 3Com and Palm that ------------------- the assumption of 3Com Options by Palm pursuant to Subsection 6.3(a) meet the following criteria: (i) the aggregate intrinsic value of the assumed 3Com Options immediately after the assumption is not greater than such value immediately before the assumption; (ii) with respect to each such assumed 3Com Option, the ratio of the exercise price per share to the Palm Stock Value of the assumed 3Com Options immediately after the assumption is not less than the ratio of the exercise price per share to the 3Com Stock Value immediately before the assumption; and (iii) the vesting and option term of the assumed 3Com Options shall not be changed. (c) Certain Non-U.S. Optionees. Except as may otherwise be agreed -------------------------- upon by 3Com and Palm and/or as set forth in Schedule 6.3, this Section 6.3 shall govern the treatment of 3Com Options held by non-U.S. Palm Transferred Employees. 6.4 3Com Restricted Stock. --------------------- (a) Forfeiture. Except as otherwise specified herein and subject to ---------- the terms of the applicable 3Com Stock Plans, on the Distribution Date, 3Com Restricted Stock (including any Palm common stock issued with respect to such 3Com Restricted Stock in connection with the Distribution) held by Palm Transferred Employees shall be forfeited in accordance with the terms of the applicable 3Com Stock Plans. (b) Substitution. Each Palm Employee who holds 3Com Restricted Stock ------------ shall receive Palm Restricted Stock at the Distribution Date (or such other date as 3Com and Palm may mutually agree), as more fully set forth in this Subsection 6.4(b). The value of a Palm Employee's 26 resulting Palm Restricted Stock award shall be substantially equivalent to the value of his or her forfeited 3Com Restricted Stock award (such value to be reasonably determined by Palm immediately before the Record Date, the Distribution Date (or such other date as 3Com and Palm may mutually agree)). The resulting Palm Restricted Stock shall vest under circumstances substantially identical to the vesting conditions applicable to the corresponding 3Com Restricted Stock. (c) Certain Non U.S. Restricted Stock Holders. Except as may ----------------------------------------- otherwise be agreed upon by 3Com and Palm and/or as set forth in Schedule 6.4, this Section 6.4 shall govern the treatment of 3Com Restricted Stock held by non-U.S. Palm Transferred Employees. 6.5 Stock Purchase Plan. Through the Distribution Date, employees of the ------------------- Palm Business (including for this purpose any employee of 3Com who is designated as an employee of the Palm Business for purposes of the Separation) shall continue to be eligible for participation in the 3Com Stock Purchase Plan. Effective on or before the IPO (or such other date as 3Com and Palm may mutually agree), Palm shall sponsor a Stock Purchase Plan for the benefit of Palm Employees and Palm Transferred Employees which shall be comparable in the aggregate in all Material Features to the corresponding 3Com Stock Purchase Plan, except that the Palm Stock Purchase Plan shall limit the payroll deductions that may be made by a participant thereunder, when cumulated with his or her payroll deductions under the 3Com Stock Purchase Plan, to an aggregate of ten percent (10%) of his or her compensation (as such term is defined in the 3Com and Palm Stock Purchase Plans). 6.6 Administrative Services. To the extent not provided otherwise in this ----------------------- Article, 3Com shall provide certain administrative services to Palm in conjunction with both the 3Com and Palm Bonus Plans, Executive Bonus Plan and Stock Plans in such manner and for such period as 3Com and Palm may mutually agree. Palm shall reimburse 3Com for any and all direct and indirect costs and expenses related thereto, subject to Section 8.2. 27 ARTICLE VII FRINGE AND OTHER BENEFITS ------------------------- 7.1 Employee Assistance Program. 3Com shall use its commercially --------------------------- reasonable best efforts for and on behalf of Palm to procure, effective as of the Distribution Date (or such other date as 3Com and Palm may mutually agree), a contract with Concern, which is comparable in the aggregate in all Material Features to 3Com's contract with Concern that provides for a Palm Employee Assistance Program. Palm shall not unreasonably withhold its consent to enter into such contracts and/or arrangements as procured by 3Com. Palm shall cease to be a Participating Company in the 3Com Employee Assistance Program coincident with Palm's establishment of the Palm Employee Assistance Program. Palm shall reimburse 3Com for any and all direct and indirect costs and expense associated with its participation in the 3Com Employee Assistance Program and 3Com's procurement of a contract or arrangement on behalf of Palm, subject to Section 8.2. 7.2 Educational Assistance Program. Effective as of the Distribution Date ------------------------------ (or such other date as Palm and 3Com may mutually agree), Palm shall provide a Palm Educational Assistance Program to Palm Employees which is comparable in the aggregate in all Material Features to the 3Com Educational Assistance Program. Palm shall cease to be a Participating Company in the 3Com Educational Assistance Program coincident with Palm's establishment of the Palm Educational Assistance Program. At such time, any and all outstanding approved reimbursements under the 3Com Educational Assistance Program for Palm Employees shall be made by Palm. Furthermore, Palm shall reimburse 3Com for any and all direct and indirect costs and expenses associated with its participation in the 3Com Educational Assistance Program and 3Com's preparation of an Educational Assistance Program on behalf of Palm, subject to Section 8.2. 7.3 Credit Union. 3Com shall use its commercially reasonable best efforts ------------ to make the AEA Technology Credit Union available to Palm Employees on substantially similar terms and conditions as are offered to current employees of the 3Com Group, through such date as Palm and 3Com may mutually agree). 3Com shall use its commercially reasonable best efforts to make certain other credit unions are available to former Employees of Palm on substantially similar terms and conditions as offered to former employees of the 3Com Group, through such date as Palm and 3Com may mutually agree). Palm shall reimburse 3Com for any and all direct and indirect costs and expenses related thereto, subject to Section 8.2. 7.4 Cafeteria and Related Subsidies. 3Com shall continue to make its ------------------------------- cafeterias, vending machines, and other food or beverage provision facilities at the 3Com Santa Clara campus (collectively, the "Food Programs"), available to Palm Employees on substantially similar terms and conditions as are offered to employees of the 3Com Group, until the termination of the occupancy agreements between 3Com and Palm regarding Palm's occupancy of the 3Com Santa Clara campus 28 (or such other date as 3Com and Palm may mutually agree). 3Com and Palm shall use their commercially reasonable best efforts to mutually agree on the appropriate methods and/or processes to ensure continued tax-favored status of 3Com's Food Programs under the Code. To the extent not otherwise addressed in the occupancy agreements, Palm shall reimburse 3Com for any and all direct and indirect costs and expenses associated with allowing Palm access to 3Com's Food Programs, subject to Section 8.2. 7.5 Employee Product Discounts and Company Store. 3Com shall provide -------------------------------------------- access to its Company Store until the termination of the occupancy agreements between 3Com and Palm at the 3Com Santa Clara campus (or such other date as 3Com and Palm may mutually agree). 3Com shall provide qualified employee discounts available to Palm Employees on substantially similar terms and conditions as such discounts are made available to employees of the 3Com Group through the Distribution Date (or such other date as 3Com and Palm may mutually agree). To the extent not otherwise addressed in the occupancy agreements, 3Com and Palm shall each reimburse the other for any and all direct and indirect cost and expenses relating to the provision of qualified discounts and access to the Company Store, subject to Section 8.2. 7.6 WellCom. 3Com shall continue to provide access to its gym and other ------- athletic facilities (collectively, the "WellCom Program") available to Palm Employees on substantially similar terms and conditions as are offered to employees of the 3Com Group until the termination of the occupancy agreements between 3Com and Palm regarding Palm's occupancy of the 3Com Santa Clara campus (or such other date as 3Com and Palm may mutually agree). To the extent not otherwise addressed in the occupancy agreements, Palm shall reimburse 3Com for any and all direct and indirect costs and expenses associated with allowing Palm access to 3Com's WellCom Program, subject to Section 8.2. 7.7 SOS Plan. Effective as of the Distribution Date (or such other date -------- as Palm and 3Com may mutually agree), Palm shall provide an SOS Plan to Palm Employees. Palm shall cease to be a Participating Company in the 3Com SOS Plan coincident with Palm's establishment of the Palm SOS Plan (or, if none, Palm's written notice to 3Com of its withdrawal as a Participating Company in the 3Com SOS Plan). At such time, any and all outstanding approved matching charity contributions under the 3Com SOS Plan for Palm Employees shall be made by Palm. Furthermore, Palm shall reimburse 3Com for any and all direct and indirect costs and expenses associated with its participation in the 3Com SOS Plan and 3Com's preparation of an SOS Plan on behalf of Palm, subject to Section 8.2. 7.8 Other Benefits. To the extent that 3Com maintains, sponsors or -------------- provides other fringe benefits specified in Schedule 7.8 to its eligible employees, then 3Com shall, to the extent permitted by law, continue to make such benefits available to Palm Employees on substantially similar terms and conditions as are offered to the employees of the 3Com Group through the Distribution Date (or such other date upon which Palm and 3Com mutually agree). Palm shall reimburse 3Com for any and all direct and indirect costs and expenses associated with, arising out of, or resulting from the provision of such other fringe benefits to its employees, subject to Section 8.2. Palm and 3Com 29 agree to make commercially reasonable best efforts to mutually agree on whether, when, and on what terms any member of the Palm Group shall maintain, sponsor, or offer fringe benefits. 7.9 Administrative Services. To the extent not provided otherwise in this ----------------------- Article, 3Com shall provide certain administrative services to Palm in conjunction with both the 3Com and the Palm Fringe Benefit Plans in such manner and for such period as 3Com and Palm may mutually agree. Palm shall reimburse 3Com for any and all direct and indirect costs and expenses related thereto, subject to Section 8.2. 30 ARTICLE VIII ADMINISTRATIVE PROVISIONS ------------------------- 8.1 Master Transitional Services Agreement. On or prior to the Separation -------------------------------------- Date (or such other date as Palm and 3Com may mutually agree), 3Com and Palm may enter into a Master Transitional Services Agreement covering the provisions of interim services, including financial, accounting, legal, benefits-related and other services by 3Com to Palm or, in certain circumstances, vice versa, if appropriate or necessary. 8.2 Payment of Liabilities, Plan Expenses and Related Matters. --------------------------------------------------------- (a) Expenses and Costs Chargeable to a Trust. Effective as of the ---------------------------------------- Separation Date, Palm shall pay its share of any contributions made to any trust maintained in connection with a 3Com Plan while Palm is a Participating Company in that 3Com Plan. (b) Contributions to Trusts. With respect to 3Com Plans to which ----------------------- Palm Employees and Palm Transferred Employees make contributions, 3Com shall use reasonable procedures to determine Palm Assets and Liabilities associated with each such Plan, taking into account such contributions, settlements, refunds and similar payments. (c) Administrative Expenses Not Chargeable to a Trust. Effective as ------------------------------------------------- of the Separation Date, to the extent not charged pursuant to a Master Transitional Services Agreement (as contemplated by Section 8.1) or another Ancillary Agreement, and to the extent not otherwise agreed to in writing by 3Com and Palm, and to the extent not chargeable to a trust established in connection with a 3Com Plan (as provided in paragraph (a)), Palm shall be responsible, through either direct payment or reimbursement to 3Com in accordance with Section 5.3 of the Separation Agreement and/or the Master Transitional Services Agreement, for its allocable share of actual third party and/or vendor costs and expenses incurred by 3Com and additional costs and expenses, subject to the methodology reasonably agreed upon by 3Com and Palm, in the administration of (i) the 3Com Plans while Palm participates in such 3Com Plans, and (ii) the Palm Plans, to the extent 3Com procures, prepares, implements and/or administers such Palm Plans. To the extent not otherwise determinable through direct allocation of costs and expenses, Palm's allocable share of such costs and expenses will be based on Palm Revenue as a percentage of total 3Com Revenue. (d) Allocation of Costs and Expenses. Except as otherwise provided -------------------------------- in this Agreement, the Master Transitional Services Agreement, or in any underlying transitional services schedule between 3Com and Palm (as contemplated in Section 8.1) relating to the Separation, the IPO, or the Distribution, all costs and expenses of the parties hereto in connection with the Separation, the IPO (including underwriting discounts and commissions) and the Distribution and costs and expenses of the parties hereto in connection with the Separation shall be allocated between 31 Palm and 3Com. Palm and 3Com shall each be responsible for their own internal fees, costs and expenses incurred in connection with the Separation, the IPO and the Distribution. 8.3 Transitional Staffing Services. 3Com will provide certain ------------------------------ transitional staffing services and other services as 3Com and Palm may mutually agree, as set forth on Schedule 8.3 (provided, however, for purposes of the Workers' Compensation Plan (as set forth in Section 5.13) the Transitional Staffing Services Agreement for finance shall control) to Palm in such manner and for such period as 3Com and Palm may mutually agree. Palm shall reimburse 3Com for any and all direct and indirect costs and expenses related thereto, subject to Section 8.2. 8.4 Sharing of Participant Information. In addition to the ---------------------------------- responsibilities and obligations of 3Com and Palm specified in Exhibit I to the Separation Agreement, 3Com and Palm shall share, or cause to be shared, all participant information that is necessary or appropriate for the efficient and accurate administration of each of the 3Com Plans and the Palm Plans during the respective periods applicable to such Plans as Palm and 3Com may mutually agree). 3Com and Palm and their respective authorized agents shall, subject to applicable laws of confidentiality and data protection, be given reasonable and timely access to, and may make copies of, all information relating to the subjects of this Agreement in the custody of the other party or its agents, to the extent necessary or appropriate for such administration. 8.5 Reporting and Disclosure Communications to Participants. While Palm ------------------------------------------------------- is a Participating Company in the 3Com Plans, Palm shall take, or cause to be taken, all actions necessary or appropriate to facilitate the distribution of all 3Com Plan-related communications and materials to employees, participants and beneficiaries, including (without limitation) summary plan descriptions and related summaries of material modification(s), summary annual reports, investment information, prospectuses, notices and enrollment material for the 3Com Plans and Palm Plans. Palm shall reimburse 3Com for the costs and expenses relating to the copies of all such documents provided to Palm, except to the extent such costs are charged pursuant to Section 8.2 (or are otherwise addressed in this Agreement) or pursuant to an Ancillary Agreement. Palm shall assist 3Com in complying with all reporting and disclosure requirements of ERISA, including the preparation of Form Series 5500 annual reports for the 3Com Plans, where applicable. 8.6 Audits Regarding Vendor Contracts. From the period beginning as of --------------------------------- the Separation Date and ending on such date as 3Com and Palm may mutually agree, 3Com and Palm and their duly authorized representatives shall have the right to conduct joint audits with respect to any vendor contracts that relate to both the 3Com Health and Welfare Plans and the Palm Health and Welfare Plans. The scope of such audits shall encompass the review of all correspondence, account records, claim forms, canceled drafts (unless retained by the bank), provider bills, medical records submitted with claims, billing corrections, vendor's internal corrections of previous errors and any other documents or instruments relating to the services performed by the vendor under the applicable vendor contracts. 3Com and Palm shall agree on the performance standards, audit methodology, auditing policy and quality measures, reporting requirements, and the manner in which costs and expenses incurred in connection with such audits will be shared. 32 8.7 Employee Identification Numbers. Until the Distribution Date (or such ------------------------------- other period as 3Com and Palm may mutually agree), 3Com and Palm shall not change any employee identification numbers assigned by 3Com. 3Com and Palm mutually agree to establish a policy pursuant to which employee identification numbers assigned to either employees of 3Com or Palm shall not be duplicated between 3Com and Palm. 8.8 Beneficiary Designation. Subject to Section 8.11, all beneficiary ----------------------- designations made by Palm Employees and Palm Transferred Employees for the 3Com Plans shall be transferred to and be in full force and effect under the corresponding Palm Plans, in accordance with the terms of each such applicable Palm Plan, until such beneficiary designations are replaced or revoked by the Palm Employees and Palm Transferred Employee who made the beneficiary designation. 8.9 Requests for IRS and DOL Opinions. 3Com and Palm shall make such --------------------------------- applications to regulatory agencies, including the IRS and DOL, as may be necessary or appropriate. Palm and 3Com shall cooperate fully with one another on any issue relating to the transactions contemplated by this Agreement for which 3Com and/or Palm elects to seek a determination letter or private letter ruling from the IRS or an advisory opinion from the DOL. 8.10 Fiduciary Matters. 3Com and Palm each acknowledge that actions ----------------- contemplated to be taken pursuant to this Agreement may be subject to fiduciary duties or standards of conduct under ERISA or other applicable law, and that no party shall be deemed to be in violation of this Agreement if such party fails to comply with any provisions hereof based upon such party's good faith determination that to do so would violate such a fiduciary duty or standard. 8.11 Consent of Third Parties. If any provision of this Agreement is ------------------------ dependent on the consent of any third party (such as a vendor) and such consent is withheld, 3Com and Palm shall use their commercially reasonable best efforts to implement the applicable provisions of this Agreement. If any provision of this Agreement cannot be implemented due to the failure of such third party to consent, 3Com and Palm shall negotiate in good faith to implement the provision in a mutually satisfactory manner. 8.12 3Com Intranet. Through the Distribution Date (or such other date as ------------- Palm and 3Com may mutually agree), 3Com shall make its 3Community intranet site available to Palm Employees on substantially the same terms as such intranet site is made available to 3Com Employees. Palm shall reimburse 3Com for any and all costs and expenses related to making its intranet site available to Palm Employees, subject to the Master Transitional Services Agreement. 3Com and Palm shall use their commercially reasonable best efforts to mutually agree on the appropriate methods by which Palm shall establish its own intranet site. 8.13 Tax Cooperation. In connection with the interpretation and --------------- administration of this Agreement, 3Com and Palm shall take into account the agreements and policies established pursuant to the Separation Agreement and the parties' intent to qualify the Distribution as a tax-free reorganization under Code Sections 355 and 368(a)(1)(D). 33 ARTICLE IX EMPLOYMENT-RELATED MATTERS -------------------------- 9.1 Terms of Palm Employment. All basic terms and conditions of ------------------------ employment for Palm Employees and Palm Transferred Employees including, without limitation, their pay and benefits in the aggregate, shall, to the extent legally and practicably possible, remain substantially the same through the Distribution Date as the terms and conditions that were in place when the Palm Employee or Palm Transferred Employee was employed by the 3Com Group, as applicable. Notwithstanding the foregoing, Palm Employees and Palm Transferred Employees shall be required to execute a new agreement regarding confidential information and proprietary developments in a form approved by Palm by the Separation Date. In addition, nothing in the Separation Agreement, this Agreement, or any Ancillary Agreement should be construed to change the at-will status of the employment of any of the employees of the 3Com Group or the Palm Group. 9.2 HR Data Support Systems. 3Com shall provide human resources data ----------------------- support for Palm Employees and Palm Transferred Employees through December 31, 2000 (or such other period as 3Com and Palm may mutually agree). Palm agrees to fully reimburse 3Com for any and all direct and indirect costs and expenses associated with its use of the 3Com human resources data support systems, subject to Section 8.2. In the event that 3Com and Palm agree to extend the time period beyond December 31, 2000, then the costs and expenses will be computed in accordance with Section 8.2; provided, however, an additional ten percent (10%) charge will be incurred by Palm. 3Com and Palm each reserves the right to discontinue Palm's access to any 3Com human resources data support systems with sixty (60) days notice (or such other period as 3Com and Palm may mutually agree). 9.3 Non-Solicitation of Employees. Subject to Section 5.12 of the ----------------------------- Separation Agreement, 3Com and Palm each agree not to solicit or recruit, without the other party's express written consent, the other party's employees for a period of two (2) years following the Distribution Date. To the extent this prohibition is waived, any recruitment efforts by either 3Com or Palm during the period of two (2) years after the Distribution Date shall be coordinated with each party's Senior Vice President of Human Resources or his or her designate and appropriate management. Notwithstanding the foregoing, this prohibition on solicitation does not apply to actions taken by a party either: (a) solely as a result of an employee's affirmative response to a general recruitment effort carried out through a public solicitation or general solicitation, or (b) as a result of an employee's initiative. 9.4 Employment of Employees with U.S. Work Visas. Palm Employees with -------------------------------------------- U.S. work visas authorizing them to work for Palm will continue to hold work authorization for the Palm Group after the Separation Date. Palm will request amendments to the nonimmigrant visa status of Palm Employees and Palm Transferred Employees with U.S. work visas authorizing them to work for 3Com, excluding the Palm Group, to request authorization to work for Palm. 34 9.5 Confidentiality and Proprietary Information. No provision of the ------------------------------------------- Separation Agreement or any Ancillary Agreement shall be deemed to release any individual for any violation of the 3Com non-competition guideline or any agreement or policy pertaining to confidential or proprietary information of any member of the 3Com Group, or otherwise relieve any individual of his or her obligations under such non-competition guideline, agreement, or policy. 9.6 PTO. Effective as of the Separation Date (or such other date as 3Com --- and Palm may mutually agree), Palm shall establish the Palm PTO Plan which shall be comparable in the aggregate in all Material Features to the 3Com PTO Plan. Effective as soon as administratively practicable after the Separation Date (or such other date as 3Com and Palm may mutually agree), 3Com shall transfer to Palm all data and information relating to the 3Com PTO Plan. Effective as soon as administratively practicable following the Separation Date (or such other date as 3Com and Palm may mutually agree), Palm shall assume all Liabilities attributable to Palm Employees under the 3Com PTO Plan. In the event that a 3Com Employee or Palm Employee transfers his or her employment to the other party before the Distribution Date, such transfer of employment shall not result in a payout or constitute a termination event for purposes of the PTO Plan, and no duplication of benefits shall occur as a result of any such transfer of employment between 3Com and Palm. Furthermore, the Liability attributable to any Palm Employee or 3Com Employee who transfers employment between 3Com and Palm prior to the Distribution Date shall be assumed by the employer subsequent to the transfer. 9.7 Personnel Records. Subject to applicable laws on confidentiality and ----------------- data protection, 3Com shall deliver to Palm prior to the Distribution Date (or such other date as 3Com and Palm may mutually agree), personnel records of Palm Employees and Palm Transferred Employees to the extent such records relate to Palm Employees' and Palm Transferred Employees' active employment by, leave of absence from, or termination of employment with Palm. Palm shall fully reimburse 3Com for any and all direct and indirect costs and expenses associated with such delivery, subject to Section 8.2. 9.8 Medical Records. Subject to applicable laws on confidentiality and --------------- data protection, 3Com shall deliver to Palm prior to the Distribution Date (or such other date as 3Com and Palm may mutually agree), medical records of Palm Employees and Palm Transferred Employees to the extent such records (a) relate to Palm Employees' and Palm Transferred Employees' active employment by, leave of absence from, or termination of employment with Palm, and (b) are necessary to administer and maintain employee benefit plans, including Health Plans and Workers' Compensation Plan and for determining eligibility for paid and unpaid Leaves of Absence for medical reasons. Palm shall fully reimburse 3Com for any and all direct and indirect costs and expenses associated with such delivery, subject to Section 8.2. 9.9 Unemployment Insurance Program. ------------------------------ (a) Claims Administration Through Distribution Date. Unless otherwise ----------------------------------------------- directed by Palm, 3Com shall use its commercially reasonable best efforts to cause Palm to receive service from 3Com's third party unemployment insurance administrator through the Distribution Date (or 35 such other date as 3Com and Palm may mutually agree). Palm shall reimburse 3Com for its allocable share of fees paid and related costs and expenses by 3Com to its third party unemployment insurance administrator for services rendered during such period, pursuant to the Master Transitional Services Agreement. Palm shall cooperate with the unemployment insurance administrator by providing any and all necessary or appropriate information reasonably available to Palm. (b) Claim Administration Post-Distribution Date. Before the ------------------------------------------- Distribution Date, 3Com shall use its commercially reasonable best efforts for and on behalf of Palm to procure an agreement with its third party unemployment insurance administrator comparable in the aggregate in all Material Features to the 3Com third party unemployment insurance agreement, including, without limitation, administration of all unemployment compensation claims of Palm Transferred Employees and Palm Employees, regardless of whether such claims were filed before, on, or after the Distribution Date. Palm shall not unreasonably withhold its consent to adopt such an agreement with such administrator. Palm shall reimburse 3Com for any and all direct and indirect costs and expenses associated with such procurement, subject to the Master Transitional Services Agreement. 9.10 Non-Termination of Employment; No Third-Party Beneficiaries. No ----------------------------------------------------------- provision of this Agreement, the Separation Agreement, or any Ancillary Agreement shall be construed to create any right or accelerate entitlement to any compensation or benefit whatsoever on the part of any Palm Employee, Palm Transferred Employee or other former, present or future employee of 3Com or Palm under any 3Com Plan or Palm Plan or otherwise. Without limiting the generality of the foregoing: (a) neither the Distribution or Separation, nor the termination of the Participating Company status of Palm or any member of the Palm Group shall cause any employee to be deemed to have incurred a termination of employment; and (b) no transfer of employment between 3Com and Palm before the Distribution Date shall be deemed a termination of employment for any purpose hereunder. 9.11 Employment Litigation. --------------------- (a) Claims to be Transferred to Palm and/or Jointly Defended by 3Com ---------------------------------------------------------------- and Palm. On or before the Separation Date, 3Com and Palm will enter into a - -------- written agreement that specifies the legal responsibility and accompanying Liability for identified claims of Palm. (b) Unscheduled Claims. Palm shall have the sole responsibility for ------------------ all employment-related claims regarding Palm Employees and Palm Transferred Employees that exist, or come into existence, on or after the Separation Date relating to, arising out of, or resulting from their employment with the Palm Business or the Palm Group. 36 ARTICLE X GENERAL PROVISIONS ------------------ 10.1 Effect if Separation, IPO and/or Distribution Does Not Occur. Subject ------------------------------------------------------------ to Section 10.10, if the Separation, IPO and/or Distribution does not occur, then all actions and events that are, under this Agreement, to be taken or occur effective as of the Separation Date, IPO, and/or Distribution Date, or otherwise in connection with the Separation, IPO and/or Distribution, shall not be taken or occur except to the extent specifically agreed by Palm and 3Com. 10.2 Relationship of Parties. Nothing in this Agreement shall be deemed ------------------------ or construed by the parties or any third party as creating the relationship of principal and agent, partnership or joint venture between the parties, the understanding and agreement being that no provision contained herein, and no act of the parties, shall be deemed to create any relationship between the parties other than the relationship set forth herein. 10.3 Affiliates. Each of 3Com and Palm shall cause to be performed and ----------- hereby guarantee the performance of any and all actions of the 3Com Group or the Palm Group, respectively. 10.4 Incorporation of Separation Agreement Provisions. The following ------------------------------------------------- provisions of the Separation Agreement are hereby incorporated herein by reference, and unless otherwise expressly specified herein, such provisions shall apply as if fully set forth herein (references in this Section to an "Article" or "Section" shall mean Articles or Sections of the Separation Agreement, and, except as expressly set forth below, references within the material incorporated herein by reference shall be references to the Separation Agreement): Section 5.4 (relating to Agreement for Exchange of Information); Section 5.9 (relating to Dispute Resolution); Section 5.11 (relating to No Representation or Warranty); and Article V (relating to Covenants and Other Matters). 10.5 Governing Law. To the extent not preempted by applicable federal ------------- law, including, without limitation, ERISA, the Code and applicable securities laws, this Agreement shall be governed by, construed and interpreted in accordance with the laws of the State of California, irrespective of the choice of law principles of the State of California, as to all matters, including matters of validity, construction, effect, performance and remedies. 10.6 Assignment. This Agreement shall inure to the benefit of and be ----------- binding upon the parties hereto and their respective legal representatives and successors, and nothing in this Agreement, express or implied, is intended to confer upon any other Person any rights or remedies of any nature whatsoever under or by reason of this Agreement. This Agreement may be enforced separately by each member of the 3Com Group and each member of the Palm Group. Neither party may assign this Agreement or any rights or obligations hereunder, without the prior written consent of the other party, and any such assignment shall be void; provided, however, either party may assign this Agreement to a successor entity in conjunction with such party's reincorporation. 37 10.7 Severability. If any term or other provision of this Agreement is ------------ determined to be invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to either party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible and in an acceptable manner to the end that transactions contemplated hereby are fulfilled to the fullest possible extent. 10.8 Interpretation. The headings contained in this Agreement or any -------------- Schedule hereto and in the table of contents to this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Any capitalized term used in any Schedule but not otherwise defined therein shall have the meaning assigned to such term in this Agreement. When a reference is made in this Agreement to an Article, Section or Schedule, such reference shall be to an Article of, Section of, or Schedule to this Agreement unless otherwise indicated. 10.9 Amendment. The Board of Directors of Palm and 3Com may mutually --------- agree to amend the provisions of this Agreement at any time or times, for any reason, either prospectively or retroactively, to such extent and in such manner as the Boards mutually deem advisable. Each Board may delegate its amendment power, in whole or in part, to one or more Persons or committees as it deems advisable. The Senior Vice President, Human Resources of 3Com and the functional equivalent of Palm have full power and authority to mutually adopt an amendment to this Agreement (subject to each of their authority to amend Plans). No change or amendment will be made to this Agreement, except by an instrument in writing signed by authorized individuals. 10.10 Termination. This Agreement may be terminated and the Distribution ----------- abandoned at any time prior to the IPO Closing Date by and in the sole discretion of 3Com without the approval of Palm. This Agreement may be terminated at any time after the IPO Closing Date and before the Distribution Date by mutual consent of 3Com and Palm. In the event of termination pursuant to this Section, no party shall have any liability of any kind to the other party. 10.11 Conflict. In the event of any conflict between the provisions of -------- this Agreement and the Separation Agreement, any Ancillary Agreement, or Plan, the provisions of this Agreement shall control. 10.12 Counterparts. This Agreement, including the Schedules hereto and ------------ the other documents referred to herein, may be executed in counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same agreement. 38 IN WITNESS WHEREOF, each of the parties have caused this Agreement to be executed on its behalf by its officers thereunto duly authorized on the day and year first above written. 3COM CORPORATION By:_________________________________________ Name:_______________________________________ Title: Chairman and Chief Executive Officer PALM, INC. By:_________________________________________ Name:_______________________________________ Title: 39 SCHEDULE 2.7 FOREIGN PLANS ------------- [BAKER & McKENZIE TO PROVIDE] -i- SCHEDULE 5.1(a) PALM HEALTH AND WELFARE PLANS ----------------------------- Palm Health Plans: - Aetna US Healthcare Exclusive Provider Organization (EPO) - Aetna US Healthcare Preferred Provider Organization (PPO) - Aetna US Healthcare Out-of-Area Plan - Kaiser HMO - MetLife Dental Plan - Vision Service Plan Palm Welfare Plans Group Life Plan AD&D Plan Severance Plan Sabbatical Plan Disability Plans Business Travel Accident Insurance Section 125 Plan Leave of Absence Programs and FMLA 3Com Workers' Compensation Plan -ii- SCHEDULE 5.1(c)(i) THIRD PARTY ASO --------------- [BAKER & McKENZIE TO REVIEW] Aetna US Healthcare Medical Plans MetLife Dental Plans Matrix Short-Term Disability Plan Administrator -iii- SCHEDULE 5.1(c)(ii) GROUP INSURANCE POLICIES ------------------------ [BAKER & McKENZIE TO REVIEW] Prudential Life Insurance Prudential LTD Insurance The Hartford Accidental Death and Dismemberment (AD&D) Insurance The Hartford Business Travel Accident (BTA) Insurance -iv- SCHEDULE 5.1(c)(iii) HMO AGREEMENT ------------- Kaiser HMO -v- SCHEDULE 5.2(a) 3COM HEALTH AND WELFARE PLANS ----------------------------- 3Com Health Plans: - - Aetna US Healthcare Exclusive Provider Organization (EPO) - - Aetna US Healthcare Preferred Provider Organization (PPO) - - Aetna US Healthcare Out-of-Area Plan - - Harvard Pilgrim Health Care HMO - - HMO Illinois - - Kaiser HMO - - MetLife Dental Plan - - Vision Service Plan 3Com Welfare Plans Group Life Plan AD&D Plan Severance Plan Sabbatical Plan Disability Plans Business Travel Accident Insurance Long-Term Care Plan Section 125 Plan Leave of Absence Programs and FMLA Workers' Compensation Plan -vi- SCHEDULE 6.3 OPTIONS HELD BY CERTAIN NON-U.S. PALM TRANSFERRED EMPLOYEES --------------------- United Kingdom - -------------- Notwithstanding anything in Subsection 6.3(a) to the contrary, and unless otherwise mutually agreed by 3Com and Palm, United Kingdom ("UK") approved 3Com Options held by Palm Employees shall not be eligible for assumption by Palm; such 3Com Options shall remain exercisable in accordance with the terms of the applicable 3Com Stock Plan, and the exercise price and the number of shares of 3Com common stock relating to such 3Com Options shall not be adjusted by 3Com in connection with the Distribution. UK Palm Transferred Employees who (i) are actively employed by or on a leave of absence from, the Palm Group as of the Distribution Date, and (ii) hold such 3Com Options shall receive additional Palm Stock Options as of the Distribution Date for a number of shares of Palm common stock and with exercise prices that are reasonably determined by Palm to provide a value which, when added to the value of such 3Com Options immediately after the Distribution Date, provides, in the aggregate, a value that is substantially equivalent to the value of such 3Com Options immediately prior to the Distribution Date. -vii- SCHEDULE 6.4 3COM RESTRICTED STOCK HELD BY NON-U.S. PALM TRANSFERRED EMPLOYEES ----------------------------------- NONE -viii- SCHEDULE 7.8 OTHER FRINGE BENEFITS --------------------- Financial Engines Retirement Web Advisor Hyatt Legal MetLife Group Auto and Home Insurance Human Resources Education and Development Program International SOS Assistance (travel protection) Outplacement Services Training -ix- SCHEDULE 8.3 TRANSITIONAL STAFFING SERVICES ------------------------------ AA/EEO Advertising Agencies Alternative Workforce (e.g. temporary hires) Background Checking Administration Benefits Program Consulting Events/Trade Shows Expatriate Administration I-9 Outplacement Services Relocation Services Administration Web Databases Other programs as 3Com and Palm may mutually agree -x- EX-2.7 8 FORM OF TAX SHARING AGREEMENT EXHIBIT 2.7 Tax Sharing Agreement This Tax Sharing Agreement, dated ___, 2000, is by and between 3Com Corporation ("3Com"), a Delaware corporation, and Palm, Inc. ("Palm"), a Delaware corporation. Recitals A. U.S. Robotics Corporation ("USR"), a Delaware corporation, acquired all of the stock of Palm on September 1, 1995. Consequently, Palm was a member of the affiliated group of corporations of which USR was the common parent (the "USR Group"), beginning on September 2, 1995, and ending on June 12, 1997, when 3Com acquired all of the stock of USR. B. During the period that Palm was a member of the USR Group, it joined other members of the group in filing consolidated federal income tax returns. For its taxable years ended October 1, 1995, and September 26, 1996, Palm incurred net operating losses that reduced the consolidated tax liability of the USR Group. Palm received no compensation from USR or other members of the Group for the use of Palm's net operating losses to offset taxable income of other members of the Group. For its taxable year ended June 12, 1997, when 3Com acquired USR, Palm had taxable income that increased the consolidated tax liability of the USR Group. Palm did not pay USR to compensate USR for Palm's share of the group's consolidated federal income tax liability. C. When 3Com acquired USR, both USR and Palm became members of the affiliated group of corporations of which 3Com was the common parent (the "3Com Group"). Beginning with its taxable year ended May 31, 1998, Palm has joined the other members of the 3Com Group in filing consolidated federal income tax returns. During its 1998 taxable year, Palm earned taxable income that was offset by net operating losses incurred by other members of the group. Palm did not pay 3Com to compensate for the use of losses of other group members to offset Palm's income. D. Under the tax laws of some states and foreign jurisdictions, Palm has joined other members of the USR Group or the 3Com Group in filing consolidated, combined, or unitary returns. Palm has made no payments to other members in respect of its share of the tax liability reported on those returns or to compensate other members for the use of their losses, credits or similar tax attributes to reduce Palm's share of the aggregate tax liability. Similarly, Palm has received no payments from other members to compensate Palm for the use of its losses, credits, or similar tax attributes to reduce the aggregate tax liability. E. Palm plans to issue new shares of its common stock through a combination of private placements to strategic investors and a public offering. Thereafter, pursuant to a Master Separation and Distribution Agreement dated ___, 2000 between 3Com and Palm, 3Com will distribute all of its stock in Palm to its shareholders (the "Distribution"). The Distribution will cause Palm to leave the 3Com Group. F. In anticipation of Palm's departure from the 3Com Group, 3Com and Palm would like to allocate responsibilities for certain tax matters. In particular, the parties would like to provide for the payment by Palm of its share of tax liabilities determined on a consolidated, combined, or unitary basis and to compensate affiliates for the use of their losses, credits, or other tax attributes to reduce Palm's share of the aggregate tax liability. Similarly, the parties would like to provide for the compensation of Palm for the use of its losses, credits, or similar tax attributes to reduce the aggregate tax liability. The parties would also like to provide for compensation or reimbursement as appropriate to reflect redeterminations of the tax liability of Palm for periods during which it joined in the filing of consolidated, combined, or unitary returns with 3Com or other affiliates. Finally, the parties would like to provide and fix the responsibilities for certain administrative matters, such as (1) the preparation and filing of tax returns for periods beginning before the date of the Distribution (the "Distribution Date"), (2) the payment of taxes shown to be due and payable on those returns (as well as any estimated or advance payments required before the filing of those returns), (3) the retention, maintenance and provision of access to all records necessary to prepare and file appropriate tax returns, and (4) the conduct of audits, examinations, and proceedings that could result in a redetermination of tax liabilities of 3Com, Palm or other subsidiaries of 3Com for periods beginning before the Distribution Date. Agreement To accomplish the purposes described above, 3Com and Palm agree as follows: 1. Definitions. For purposes of this Agreement, the term "Tax" shall mean all federal, state, local, foreign or other taxes, assessments or other governmental charges, including income, estimated income, business occupation, franchise, property, sales, use, excise, employment, unemployment, payroll, social security, ad valorem, transfer, gains, profits, capital stock, license, gross receipts, stamp, real estate, severance and withholding taxes, customs duties and harbor maintenance fees. Taxes associated with improper classification of employees as independent contractors shall be treated as payroll taxes and thus included within the definition of Taxes. Other capitalized terms not defined in this Agreement shall have the meaning given those terms by the Master Separation and Distribution Agreement entered into as of [date] between 3Com and Palm. 2. Computation of Tax Liability. The computation of Tax liability on any consolidated, combined or unitary return that includes Palm and at least one other corporation and covers a period beginning before the Distribution (a "Pre- Distribution Group Return") shall, to the extent permitted by law, be made in accordance with the methods used in comparable returns filed before the date of this Agreement. 3. Allocation of Tax Liability (a) Regular Federal Income Tax. If the consolidated federal income tax liability of the USR Group or 3Com Group for any taxable year for which the group filed or files a Pre-Distribution Group Return is determined on a regular tax basis, the amount of federal income taxes allocable to Palm shall be determined using the method described in section 1.1502-32(b)(3)(iv)(D) of the Treasury regulations. Thus, Palm shall be required to pay for any reduction in its separate company liability because of the absorption of losses, credits or other tax attributes of other members. -2- Conversely, Palm shall be entitled to compensation to the extent that the absorption of its losses, credits, or other tax attributes reduces the group's consolidated federal income tax liability. (b) Federal Alternative Minimum Tax. (i) General Rule. If the USR Group or 3Com Group pays alternative minimum tax (AMT) for any year for which it filed or files a Pre-Distribution Group Return, Palm's share of the group's consolidated federal income taxes shall equal its share of the group's consolidated AMT, determined under Section 3(b)(ii), with the adjustments provided in Section 3(b)(iii) to reflect the absorption of losses, credits or other tax attributes. (ii) Palm's Share of Consolidated AMT. Palm's share of the group's consolidated AMT for any year shall equal the excess, if any, of (A) the total consolidated AMT, over (B) the consolidated AMT for the year computed by excluding Palm's items of income, gain, deduction and loss, and Palm's credits. (iii) Adjustments for Absorption of Tax Attributes. Palm's share of the group's consolidated AMT shall be adjusted to reflect the absorption of losses, credits or other tax attributes, based on principles similar to those underlying the method of allocating regular federal income taxes described in section 1.1502-32(b)(3)(iv)(D) of the Treasury regulations. If, for any taxable year, the regular tax attributes allocable to members other than Palm that can be carried forward to the succeeding taxable year are less than those carryforwards would have been if Palm had not been a member of the group, then Palm's share of the group's consolidated federal income tax liability shall be increased to reflect the incremental absorption of the tax attributes of other members. Conversely, if Palm's regular tax attributes are used to offset taxable income of other members, or tax liability attributable to such income, then Palm's share of the group's consolidated federal income tax liability shall be decreased to reflect such use of Palm's tax attributes. The amount of the adjustment for absorbed credits shall equal the amount of those credits. The amount of the adjustment for absorbed losses shall equal the product of the absorbed losses and the highest marginal regular federal income tax rate in effect for the year in which the losses are absorbed. If the adjustment described in this Section 3(b)(iii) exceeds the amount determined in Section 3(b)(ii), the excess shall be credited against Palm's liability for other taxable years or, in the case of taxable years covered by returns filed after the public offering, Palm shall be entitled to receive the amount of such excess pursuant to Section 4(b). (c) Other Taxes. Palm's share of Taxes other than federal income taxes that are determined on a consolidated, combined, or unitary basis shall be determined by applying the principles underlying the allocation method described in section 1.1502-32(b)(3)(iv)(D) of the Treasury regulations. Thus, Palm's share of the Taxes will generally equal the Tax liability that Palm would have had if it had filed a separate return for the relevant period. Palm shall be required to pay 3Com to the extent that Palm's separate company liability is reduced by the absorption of losses, credits or other tax attributes of other members. Conversely, 3Com shall compensate Palm to the extent that the absorption of Palm's losses, credits, or other tax attributes reduces the combined tax liability. -3- 4. Payment of Allocated Tax. (a) Returns Filed Before Public Offering. Within [10] days after completion of the planned public offering of common shares of Palm, Palm shall pay to 3Com the net, cumulative amount of its share of the taxes assessed pursuant to Pre-Distribution Group Returns filed prior to the public offering. (b) Returns Filed After Public Offering. Palm shall pay to 3Com Palm's share of any Tax liability assessed pursuant to a Pre-Distribution Group Return filed after the public offering referred to in Section 4(a) within 30 days after the filing of that return. Within that same period, 3Com shall make to Palm any payments required as a result of benefits realized by 3Com or other members of the 3Com Group from the use Palm's tax attributes. 5. Refunds. 3Com shall be entitled to receive any overpayment of Taxes shown on any Pre-Distribution Group Return, as originally filed. 6. Allocation of Minimum Tax Credits. When Palm leaves the 3Com Group, the group shall allocate to Palm a portion of its consolidated minimum tax credit equal to the ratio that (a) the cumulative amounts of consolidated AMT allocated to Palm pursuant to Section 3(b)(ii) bears to (b) the total amounts of consolidated AMT paid by the USR Group or 3Com Group for taxable years for which the group filed a Pre-Distribution Group Return. If the Treasury Department issues regulations that require an allocation of a different amount of consolidated minimum tax credit to Palm, Palm shall be required to pay (or entitled to receive) the amount by which its share of the consolidated minimum tax credit allocated pursuant to the regulations exceeds (or is less than) the amount that would have been allocated to Palm pursuant to this Section 6. 7. Carryback of Post-Distribution Tax Attributes of Palm. If, for any taxable period beginning on or after the Distribution Date, Palm recognizes a loss, credit, or similar tax attribute that, under applicable law, can or must be carried back to a taxable period during which Palm joined in filing a Pre- Distribution Group Return, 3Com shall, at Palm's expense, file appropriate refund claims within a reasonable period after being requested by Palm. 3Com shall promptly remit to Palm any refunds received with respect to any tax attribute so carried back. 8. Conduct of Tax Contests. (a) Separate Palm Claims. Palm shall have sole and complete authority to contest any claim by a taxing authority arising from an examination of a return that includes only Palm (a "Separate Palm Claim"). (b) Group Claims. 3Com shall be entitled to control the contest of any claim by a taxing authority arising from an examination of a Pre-Distribution Group Return (a "Group Claim"). 3Com shall notify Palm of the commencement of any such examination and shall keep Palm apprised of the status of the examination. Palm shall be entitled to advise 3Com regarding the handling of claims that could affect Palm's allocable share of the consolidated, combined or unitary Tax liability, and -4- 3Com shall not unreasonably reject Palm's advice. If a claim affects only Palm's share of the consolidated, combined or unitary Tax liability, and not that of any other member of the 3Com Group, Palm shall be entitled to prepare any written materials submitted to the taxing authority in defense against the claim. Neither Palm nor its representatives shall be entitled to attend meetings with representatives of the taxing authority without 3Com's consent. 3Com shall have sole authority to make decisions regarding the settlement of Group Claims. Palm shall bear any expenses it incurs in participating in the contest of a Group Claim. (c) Cooperation. 3Com and Palm shall each provide the assistance reasonably requested by the other in conducting any tax contest, including execution of any powers of attorney or other appropriate documentation, attendance of administrative or judicial proceedings as requested, performance of necessary computations, and, subject to the confidentiality provisions of Section 14, provision of access to or furnishing books, records, tax returns, and supporting work papers. 9. Redetermined Tax Liabilities. (a) Separate Palm Claims. If a redetermination of Taxes results from a Separate Palm Claim, Palm shall pay any resulting increases in Tax liability and shall be entitled to receive any refunds related to a decrease in Tax liability attributable to the claim. (b) Group Claims. Any Tax deficiency arising from a Group Claim shall be paid to the relevant taxing authority by 3Com, and 3Com shall be entitled to receive any tax refund arising from the contest of the Group Claim. Within 30 days after the final determination of the Group Claim, 3Com shall allocate the Tax liabilities for the affected periods, as redetermined, among the members of the 3Com Group that joined in filing the relevant Pre-Distribution Group Returns. In allocating the redetermined Tax liabilities, 3Com shall apply the allocation method prescribed by Section 3. If the amount of redetermined Tax liability allocated to Palm for any period exceeds the amounts previously paid by Palm to 3Com in respect of Palm's allocated Tax liability for that period, Palm shall pay such excess to 3Com within 10 days of receiving notice from 3Com of the amount due. If the amounts previously paid by Palm to 3Com in respect of Palm's allocated Tax liability for any period exceed the amount of redetermined Tax liability allocated to Palm for that period, 3Com shall pay such excess to Palm within 40 days after the final determination of the Group Claim that led to the redetermination of Tax liability. (c) Interest. If applicable law provides for interest on any Tax deficiency or refund to which Section 9(b) applies, then any payments made between Palm and 3Com pursuant to that Section as a result of the deficiency or refund shall also bear interest, computed at the same rate or rates and for the same period as the deficiency or refund bears interest. 10. Retention of and Access to Records; Cooperation and Assistance. (a) Retention of and Access to Records. Each party shall retain all tax returns for periods beginning before the Distribution Date, together with all related reports, work papers, schedules or other documents or computer files, and, subject to the confidentiality provisions of Section 14, shall -5- make these documents or files available to the other upon request. Neither party shall dispose of any of these documents or files without the other's permission. (b) Cooperation and Assistance. Subject to the confidentiality provisions of Section 14, 3Com and Palm shall provide each other with such cooperation, assistance, and information as either of them may reasonably request of the other with respect to the filing with any taxing authority of any tax return, amended return, claim for refund, or other document. With respect to any Pre- Distribution Group Return, such assistance shall include the timely submission by Palm to 3Com of pro forma tax returns for Palm, including a pro forma return for the tax period of Palm that will end on the Distribution Date. 11. Preparation of Tax Returns; Estimated Payments. (a) Filing of Returns. 3Com shall prepare and timely file all Pre- Distribution Group Returns. Within [75] days after the close of each taxable period (including, if applicable, the period that ends on the Distribution Date), Palm shall, subject to the confidentiality provisions of Section 14: (1) furnish to 3Com draft tax returns for Palm and all supporting information and documentation useful in preparing the relevant Pre-Distribution Group Return; (2) allow 3Com access at any reasonable time after the Distribution Date to all tax returns of Palm and supporting papers for those returns; and (3) furnish to 3Com such additional tax information and documents as 3Com may reasonably request. Palm shall cooperate in connection with the preparation of any Pre- Distribution Group Returns. 3Com shall be responsible for any payments to the applicable taxing authorities required in connection with those returns. (b) Amended Returns. 3Com shall not amend any Pre-Distribution Group Return in a respect that would affect Palm's allocable share of the Tax liability for the period covered by the return without providing Palm an opportunity to review and comment on the proposed amended return. 3Com shall not unreasonably reject any comments provided by Palm on the proposed amended return. (c) Estimated Payments. 3Com shall make all estimated payments to any taxing authorities required in connection with Pre-Distribution Group Returns, and all payments required in connection with requests for extensions of time to file those returns. After making such a payment, 3Com shall promptly notify Palm of any portion of the payment that 3Com believes in good faith to be attributable to Palm's share of the aggregate Tax liability, as determined under Section 3. Within 10 days after its receipt of such notice, Palm shall pay such amount to 3Com or advise 3Com of the basis for its disagreement. 12. Indemnification. (a) Indemnity Obligations of 3Com. 3Com shall indemnify Palm and hold Palm harmless from and against: -6- (i) any liability, cost, or expense arising out of fraudulent or negligently prepared information, workpapers, documents, or other items used in the preparation of, or presented in, any return, amended return, or claim for refund prepared by 3Com; and (ii) any Tax liability, and related cost or expense, incurred or paid by Palm in excess of that portion of the Tax liability allocated to Palm by this Agreement. (b) Indemnity Obligations of Palm. Palm shall indemnify 3Com and hold 3Com harmless from and against any liability for: (i) sales Taxes attributable to sales of products purchased by 3Com from Palm on or before the Distribution Date; (ii) customs duties or harbor maintenance fees on products exported or imported by 3Com on behalf of Palm; (iii) Taxes imposed on 3Com or any other member of the 3Com Group other than Palm that would not have been imposed but for the Distribution or transactions undertaken in preparation for the Distribution, provided, however, that federal income taxes resulting from the application to the Distribution of section 355(e) of the Internal Revenue Code shall be covered by this imdemnity only if the application of that section results from an acquisition of Palm stock; and (iv) any interest or penalties related to Taxes described in this Section 12(b). 13. Gross-Up for Taxes on Required Payments. If the receipt or accrual of any payment required by this Agreement is subject to any Tax, the payor shall pay an additional amount so that the total amount received by the payee, net of any applicable Taxes, equals the amount of the required payment. 14. Confidentiality of Documents and Information. Any documents or information provided pursuant to this Agreement in connection with a tax contest or filing with a tax authority shall be provided or disclosed by the recipient only to those of its employees responsible for the tax contest or filing or to attorneys or accountants advising the recipient on these matters. Any wider dissemination of these documents or this information shall be allowed only if required by law or authorized by the party providing the documents or information. 15. Dispute Resolution. (a) If a dispute, controversy or claim ("Dispute") arises between the parties relating to the interpretation or performance of this Agreement, or the grounds for the termination hereof, appropriate senior executives (e.g. director or V.P. level) of each party who shall have the authority to resolve the matter shall meet to attempt in good faith to negotiate a resolution of the Dispute prior to pursuing other available remedies. The initial meeting between the appropriate senior executives -7- shall be referred to herein as the "Dispute Resolution Commencement Date." Discussions and correspondence relating to trying to resolve such Dispute shall be treated as confidential information developed for the purpose of settlement and shall be exempt from discovery or production and shall not be admissible. If the senior executives are unable to resolve the Dispute within thirty (30) days from the Dispute Resolution Commencement Date, and either party wishes to pursue its rights relating to such Dispute, then the Dispute will be mediated by a mutually acceptable mediator appointed pursuant to the mediation rules of JAMS/Endispute within thirty (30) days after written notice by one party to the other demanding non-binding mediation. Neither party may unreasonably withhold consent to the selection of a mediator or the location of the mediation. Both parties will share the costs of the mediation equally, except that each party shall bear its own costs and expenses, including attorney's fees, witness fees, travel expenses, and preparation costs. The parties may also agree to replace mediation with some other form of non-binding or binding ADR. (b) Any Dispute which the parties cannot resolve through mediation within ninety (90) days of the Dispute Resolution Commencement Date, unless otherwise mutually agreed, shall be submitted to final and binding arbitration under the then current Commercial Arbitration Rules of the American Arbitration Association ("AAA"), by three (3) arbitrators in Santa Clara County, California. Such arbitrators shall be selected by the mutual agreement of the parties or, failing such agreement, shall be selected according to the aforesaid AAA rules. The arbitrators will be instructed to prepare and deliver a written, reasoned opinion stating their decision within thirty (30) days of the completion of the arbitration. The prevailing party in such arbitration shall be entitled to expenses, including costs and attorneys' and other professional fees, incurred in connection with the arbitration (but excluding any costs and fees associated with prior negotiation or mediation). The decision of the arbitrator shall be final and non-appealable and may be enforced in any court of competent jurisdiction. The use of any ADR procedures will not be construed under the doctrine of laches, waiver or estoppel to adversely affect the rights of either party. (c) Any Dispute regarding the following is not required to be negotiated, mediated or arbitrated prior to seeking relief from a court of competent jurisdiction: breach of any obligation of confidentiality; any claim where interim relief from the court is sought to prevent serious and irreparable injury to one of the parties or to others. However, the parties to the Dispute shall make a good faith effort to negotiate and mediate such Dispute, according to the above procedures, while such court action is pending. (d) Unless otherwise agreed in writing, the parties will continue to honor all commitments under this Agreement during the course of dispute resolution pursuant to the provisions of this Section 15 with respect to all matters not subject to such dispute, controversy, or claim. 16. Entire Agreement. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and shall supersede all prior written and oral and all contemporaneous oral agreements and understandings with respect to the subject matter hereof. -8- 17. Governing Law. This Agreement shall be construed in accordance with and all Disputes hereunder shall be governed by the laws of the State of California, excluding its conflict of law rules and the United Nations Convention on Contracts for the International Sales of Goods. The Superior Court of Santa Clar County and/or the United States District Court for the Northern Distribut of California shall have jurisdiction and venue over all Disputes between the parties that are permitted to be brought in a court of loaw pursuant to Section 15. 18. Notices. Notices, Demands, offers, requests or other communications required or permitted to be given by either party pursuant to the terms of this Agreement shall be given in writing to the respective parties to the following addresses: if to 3Com: 3Com Corporation 5400 Bayfront Plaza Santa Clara, California 95052 Attention: General Counsel Fax: (408) 326-6434 if to Palm: Palm Computing, Inc. 5400 Bayfront Plaza Santa Clara, California 95052 Attention: General Counsel Fax: ____________ Or to such other address as the party to whom notice is given may have previously furnished to the other in writing as provided herein. Any notice involving non-performance, termination, or renewal shall be sent by hand delivery, recognized overnight courier or, within the United States, may also be sent via certified mail, return receipt requested. All other notices may also be sent by fax, confirmed by first class mail. All notices shall be deemed to have been given and received on the earlier of actual delivery or three (3) days from the date of postmark. 19. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed to be an original but all of which shall constitute one and the same agreement. 20. Binding Effect; Assignment. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective legal representatives and successors, and nothing in this Agreement, express or implied, is intended to confer upon any other Person any rights or remedies of any nature whatsoever under or by reason of this Agreement. This Agreement may be enforced separately by each member of the 3Com Group (defined, for this purpose, as provided in section 7.14 of the Master Separation and Distribution Agreement) and each member of the Palm Group. Neither party may assign this Agreement or any rights or obligations hereunder, without the prior -9- written consent of the other party, and any such assignment shall be void; provided, however, either party may assign this Agreement to a successor entity in conjunction with such party's reincorporation. 21. Severability. If any term or any other provision of this Agreement is determined by a court, administrative agency or arbitrator to be invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to either party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that transactions contemplated hereby are fulfilled to the fullest extent possible. 22. Failure or Indulgence Not Waiver; Remedies Cumulative. No failure or delay on the part of any party hereto in the exercise of any right hereunder shall impair such right or be construed to be a waiver of, or acquiescence in, any breach of any agreement herein, nor shall any single or partial exercise of any such right preclude other or further exercise thereof or of any other right. All rights and remedies existing under this Agreement are cumulative to, and not exclusive of, any rights or remedies otherwise available. 23. Amendment. No change or amendment will be made to this Agreement except by an instrument in writing signed on behalf of each of the parties to such agreement. 24. Authority. Each of the parties hereto represents to the other that (a) it has the corporate or other requisite power and authority to execute, deliver, and perform this Agreement, (b) the execution, delivery and performance of this Agreement by it have been duly authorized by all necessary corporate or other actions, (c) it has duly and validly executed and delivered this Agreement, and (d) this Agreement is a legal, valid and binding obligation, enforceable against it in accordance with its terms subject to applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally and general equity principles. 25. Interpretation. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. When a reference is made in this Agreement to a Section, such reference shall be to a Section of this Agreement unless otherwise indicated. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed as of the date first set forth above. 3COM CORPORATION PALM, INC. By:_____________________________ By:__________________________________ -10- Name:___________________________ Name:_______________________________ Title:__________________________ Title:______________________________ -11- EX-2.8 9 FORM OF MASTER TRANSITIONAL SERVICES AGREEMENT EXHIBIT 2.8 MASTER TRANSITIONAL SERVICES AGREEMENT BETWEEN 3COM CORPORATION AND PALM, INC. Effective as of _____, 2000 MASTER TRANSITIONAL SERVICES AGREEMENT This Master Transitional Services Agreement (the "Agreement") is effective as of ________, 2000 (the "Effective Date"), between 3Com Corporation, a Delaware corporation ("3Com"), having an office at 5400 Bayfront Plaza, Santa Clara, California, 95052 and Palm, Inc., a Delaware corporation ("Palm"), having an office at 5400 Bayfront Plaza, Santa Clara, California, 95052. ARTICLE 1 DEFINITIONS For the purpose of this Agreement, the following capitalized terms shall have the following meanings: 1.1 ADDITIONAL SERVICES. "Additional Services" shall have the meaning set forth in Section 3.5. 1.2 ANCILLARY AGREEMENTS. "Ancillary Agreements" shall have the meaning set forth in the Master Separation and Distribution Agreement. 1.3 DISTRIBUTION DATE. "Distribution Date" shall have the meaning set forth in the Master Separation and Distribution Agreement. 1.4 IMPRACTICABLE. "Impracticable" shall have the meaning set forth in Section 3.3. 1.5 LOCALIZED VERSION. "Localized Version" means localized versions of the Software. 1.6 MASTER CONFIDENTIAL DISCLOSURE AGREEMENT. "Master Confidential Disclosure Agreement" shall mean that certain Master Confidential Disclosure Agreement between 3Com and Palm. 1.7 MASTER SEPARATION AND DISTRIBUTION AGREEMENT. "Master Separation and Distribution Agreement" shall mean that certain Master Separation and Distribution Agreement between 3Com and Palm. 1.8 SEPARATION DATE. Unless otherwise provided in this Agreement, or in any agreement to be executed in connection with this Agreement, the effective time and date of each transfer of property, assumption of liability, license, undertaking, or agreement in connection with the Separation shall be 12:01 a.m., Pacific Time, February 26, 2000 or such other date as may be fixed by the Board of Directors of 3Com (the "Separation Date"). 1.9 SERVICE(S). "Service(s)" shall have the meaning set forth in Section 3.1. 1.10 SOFTWARE. "Software" means 3Com's software program(s), in object code only, listed and described in the relevant Transition Service Schedule. 1.11 SOURCE CODE. "Source Code" means any human readable code, including interpreted code, of 3Com, listed and described in the relevant Transition Service Schedule. 1.12 SOURCE CODE DOCUMENTATION. "Source Code Documentation" means the manuals and other documentation that are reasonably necessary to use the Source Code licensed herein, including those items listed and described in the relevant Transition Service Schedule hereto. 1.13 SUBSIDIARY. "Subsidiary" of any Person means a corporation or other organization whether incorporated or unincorporated of which at least a majority of the securities or interests having by the terms thereof ordinary voting power to elect at least a majority of the board of directors or others performing similar functions with respect to such corporation or other organization is directly or indirectly owned or controlled by such Person or by any one or more of its Subsidiaries, or by such Person and one or more of its Subsidiaries; provided, however, that no Person that is not directly or indirectly wholly- owned by any other Person shall be a Subsidiary of such other Person unless such other Person controls, or has the right, power or ability to control, that Person. For purposes of this Agreement, Palm shall be deemed not to be a subsidiary of 3Com. ARTICLE 2 TRANSITION SERVICE SCHEDULES This Agreement will govern individual transitional services as requested by Palm and provided by 3Com, the details of which are set forth in the Transition Service Schedules attached to this Agreement. Each Service shall be covered by this Agreement upon execution of a transition service schedule in the form attached hereto (each transition service schedule, a "Transition Service Schedule"). For each Service, the parties shall set forth, among other things, the time period during which the Service will be provided if different from the term of this Agreement determined pursuant to Article 4 hereof, a summary of the Service to be provided; a description of the Service; and the estimated charge, if any, for the Service and any other terms applicable thereto on the Transition Service Schedule. Obligations regarding each Transition Service Schedule shall be effective upon execution of this Agreement. This Agreement and all the Transition Service Schedules shall be defined as the "Agreement" and incorporated herein wherever reference to it is made. ARTICLE 3 SERVICES 3.1 SERVICES GENERALLY. Except as otherwise provided herein, for the term determined pursuant to Article 4 hereof, 3Com shall provide or cause to be provided to Palm the service(s) described in the Transition Service Schedule(s) attached hereto. The service(s) described -2- on a single Transition Service Schedule shall be referred to herein as a "Service." Collectively, the services described on all the Transition Service Schedules (including Additional Services) shall be referred to herein as "Services." 3.2 SERVICE BOUNDARIES. Except as provided in a Transition Service Schedule for a specific Service: (i) 3Com shall be required to provide the Services only to the extent and only at the locations such Services are being provided by 3Com for Palm immediately prior to the Effective Date; and (ii) the Services will be available only for purposes of conducting the business of Palm substantially in the manner it was conducted prior to the Effective Date. 3.3 IMPRACTICABILITY. 3Com shall not be required to provide any Service to the extent the performance of such Service becomes "Impracticable" as a result of a cause or causes outside the reasonable control of 3Com including unfeasible technological requirements, or to the extent the performance of such Services would require 3Com to violate any applicable laws, rules or regulations or would result in the breach of any software license or other applicable contract. 3.4 ADDITIONAL RESOURCES. Except as provided in a Transition Service Schedule for a specific Service, in providing the Services, 3Com shall not be obligated to: (i) hire any additional employees; (ii) maintain the employment of any specific employee; (iii) purchase, lease or license any additional equipment or software; or (iv) pay any costs related to the transfer or conversion of Palm's data to Palm or any alternate supplier of Services. 3.5 ADDITIONAL SERVICES. From time to time after the Effective Date, the parties may identify additional services that one party will provide to the other party in accordance with the terms of this Agreement (the "Additional Services"). Accordingly, the parties shall execute additional Transition Service Schedules for such Additional Services pursuant to Article 2. Except as set forth in Section 3.6, the parties may agree in writing on Additional Services during the term of this Agreement. 3.6 OBLIGATIONS AS TO ADDITIONAL SERVICES. Except as set forth in the next sentence, 3Com shall be obligated to perform, at a charge determined using the principles for determining fees under Section 5.1, any Additional Service that: (a) was provided by 3Com immediately prior to the Separation Date and that Palm reasonably believes was inadvertently or unintentionally omitted from the list of Services, or (b) is essential to effectuate an orderly transition under the Master Separation and Distribution Agreement unless such performance would significantly disrupt 3Com's operations or materially increase the scope of its responsibility under this Agreement. If 3Com reasonably believes the performance of Additional Services required under subparagraphs (a) or (b) would significantly disrupt its operations or materially increase the scope of its responsibility under this Agreement, 3Com and Palm shall negotiate in good faith to establish terms under which 3Com can provide such Additional Services, but 3Com shall not be obligated to provide such Additional Services if, following good faith negotiation, it is unable to reach agreement on such terms. -3- ARTICLE 4 TERM The term of this Agreement shall commence on the Effective Date and shall remain in effect until one (1) year after the Effective Date (the "Expiration Date"), unless earlier terminated under Article 7. This Agreement may be extended by the parties in writing, either in whole or with respect to one or more of the Services; provided, however, that such extension shall only apply to the Services for which the Agreement was extended. The parties shall be deemed to have extended this Agreement with respect to a specific Service if the Transition Service Schedule for such Service specifies a completion date beyond the aforementioned Expiration Date. The parties may agree on an earlier expiration date respecting a specific Service by specifying such date on the Transition Service Schedule for that Service. Services shall be provided up to and including the date set forth in the applicable Transition Service Schedule, subject to earlier termination as provided herein. ARTICLE 5 COMPENSATION 5.1 CHARGES FOR SERVICES. Palm shall pay 3Com the charges, if any, set forth on the Transition Service Schedules for each of the Services listed therein as adjusted, from time to time, in accordance with the processes and procedures established under Section 5.4 and Section 5.5 hereof. Such fees shall include the direct costs, as determined using the process described in such Transition Service Schedule, and indirect costs of providing the Services plus five percent (5%), unless specifically indicated otherwise on a Transition Service Schedule. However, if the term of this Agreement is extended beyond the Expiration Date as provided in Article 4, Palm will reimburse 3Com such costs plus ten percent (10%) for the Services unless the Transition Service Schedule for such Service indicates it is to extend beyond the Expiration Date. The parties also intend for charges to be easy to administer and justify and, therefore, they hereby acknowledge it may be counterproductive to try to recover every cost, charge or expense, particularly those that are insignificant or de minimus. The parties shall use good faith efforts to discuss any situation in which the actual charge for a Service is reasonably expected to exceed the estimated charge, if any, set forth on a Transition Service Schedule for a particular Service; provided, however, that the incurrence of charges in excess of any such estimate on such Transition Service Schedule shall not justify stopping the provision of, or payment for, Services under this Agreement. 5.2 PAYMENT TERMS. 3Com shall bill Palm monthly for all charges pursuant to this Agreement. Such bills shall be accompanied by reasonable documentation or other reasonable explanation supporting such charges. Palm shall pay 3Com for all Services provided hereunder within forty-five (45) days after receipt of an invoice therefor. Late payments shall bear interest at the lesser of 12% or the maximum rate allowed by law. 5.3 PERFORMANCE UNDER ANCILLARY AGREEMENTS. Notwithstanding anything to the contrary contained herein, Palm shall not be charged under this Agreement for any -4- obligations that are specifically required to be performed under the Master Separation and Distribution Agreement or any other Ancillary Agreement and any such other obligations shall be performed and charged for (if applicable) in accordance with the terms of the Master Separation and Distribution Agreement or such other Ancillary Agreement. 5.4 ERROR CORRECTION; TRUE-UPS; ACCOUNTING. The parties shall reasonably agree on a process and procedure for conducting internal audits and making adjustments to charges as a result of the movement of employees and functions between parties, the discovery of errors or omissions in charges, as well as a true-up of amounts owed. In no event shall such processes and procedures extend beyond two (2) years after completion of a Service. 5.5 PRICING ADJUSTMENTS. In the event of a tax audit adjustment relating to the pricing of any or all Services provided pursuant to this Agreement in which it is determined by a taxing authority that any of the charges, individually or in combination, did not result in an arm's-length payment, as determined under internationally accepted arm's-length standards, then the parties, including any 3Com subcontractor providing Services hereunder, may agree to make corresponding adjustments to the charges in question for such period to the extent necessary to achieve arm's-length pricing. Any adjustment made pursuant to this Section 5.5 at any time during the term of this Agreement or after termination of this Agreement and shall be reflected in the parties' legal books and records, and the resulting underpayment or overpayment shall create, respectively, an obligation to be paid in the manner specified in Section 5.2, or shall create a credit against amounts owed under this Agreement. ARTICLE 6 GENERAL OBLIGATIONS; STANDARD OF CARE 6.1 PERFORMANCE METRICS: 3COM. Subject to Sections 3.4 and any other terms and conditions of this Agreement, 3Com shall maintain sufficient resources to perform its obligations hereunder. Specific performance metrics for 3Com for a specific Service may be set forth in the corresponding Transition Service Schedule. Where none is set forth, 3Com shall use reasonable efforts to provide Services in accordance with the policies, procedures and practices in effect before the Effective Date and shall exercise the same care and skill as it exercises in performing similar services for itself. 6.2 DISCLAIMER OF WARRANTIES. 3COM MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, INCLUDING BUT NOT LIMITED TO THE IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, WITH RESPECT TO THE SERVICES, SOFTWARE OR OTHER DELIVERABLES PROVIDED BY IT HEREUNDER. 6.3 PERFORMANCE METRICS: PALM. Specific performance metrics for Palm for a specific Service may be set forth in the corresponding Transition Service Schedule. Where none is set forth, Palm shall use reasonable efforts, in connection with receiving Services, to follow the policies, procedures and practices in effect before the Effective Date including providing -5- information and documentation sufficient for 3Com to perform the Services as they were performed before the Effective Date and making available, as reasonably requested by 3Com, sufficient resources and timely decisions, approvals and acceptances in order that 3Com may accomplish its obligations hereunder in a timely manner. 6.4 TRANSITIONAL NATURE OF SERVICES; CHANGES. The parties acknowledge the transitional nature of the Services and that 3Com may make changes from time to time in the manner of performing the Services if 3Com is making similar changes in performing similar services for itself and if 3Com furnishes to Palm sixty (60) days written notice regarding such changes. 6.5 RESPONSIBILITY FOR ERRORS; DELAYS. 3Com's sole responsibility to Palm: (a) for errors or omissions in Services, shall be to furnish correct information, payment and/or adjustment in the Services, at no additional cost or expense to Palm; provided, Palm must promptly advise 3Com of any such error or omission of which it becomes aware after having used reasonable efforts to detect any such errors or omissions in accordance with the standard of care set forth in Section 6.1; and (b) for failure to deliver any Service because of Impracticability, shall be to use reasonable efforts, subject to Section 3.3, to make the Services available and/or to resume performing the Services as promptly as reasonably practicable. 6.6 GOOD FAITH COOPERATION; CONSENTS. The parties will use good faith efforts to cooperate with each other in all matters relating to the provision and receipt of Services. Such cooperation shall include exchanging information, performing true-ups and adjustments, and obtaining all third party consents, licenses, sublicenses or approvals necessary to permit each party to perform its obligations hereunder (including by way of example, not by way of limitation, rights to use third party software needed for the performance of Services). The costs of obtaining such third party consents, licenses, sublicenses or approvals shall be borne by Palm. The parties will maintain in accordance with its standard document retention procedures, documentation supporting the information relevant to cost calculations contained in the Transition Service Schedules and cooperate with each other in making such information available as needed in the event of a tax audit, whether in the United States or any other country. 6.7 ALTERNATIVES. If 3Com reasonably believes it is unable to provide any Service because of a failure to obtain necessary consents, licenses, sublicenses or approvals pursuant to Section 6.6 or because of Impracticability, the parties shall cooperate to determine the best alternative approach. Until such alternative approach is found or the problem otherwise resolved to the satisfaction of the parties, 3Com shall use reasonable efforts, subject to Section 3.3 and Section 3.4, to continue providing the Service. To the extent an agreed upon alternative approach requires payment above and beyond that which is included in 3Com's charge for the Service in question, the parties shall share equally in making any such payment unless they otherwise agree in writing. -6- ARTICLE 7 TERMINATION 7.1 TERMINATION. Palm may terminate this Agreement, either with respect to all or with respect to any one or more of the Services provided to Palm hereunder, for any reason or for no reason, at any time upon sixty (60) days prior written notice to 3Com. In addition, subject to the provisions of Article 16 below, either party may terminate this Agreement with respect to a specific Service if the other party materially breaches a material provision with regard to that particular Service and does not cure such breach (or does not take reasonable steps required under the circumstances to cure such breach going forward) within sixty (60) days after being given notice of the breach; provided, however, that the non-terminating party may request that the parties engage in a dispute resolution negotiation as specified in Article 16 below prior to termination for breach. 7.2 SURVIVAL. Those Sections of this Agreement that, by their nature, are intended to survive termination will survive in accordance with their terms. Notwithstanding the foregoing, in the event of any termination with respect to one or more, but less than all Services, this Agreement shall continue in full force and effect with respect to any Services not terminated hereby. 7.3 USER IDS, PASSWORDS. The parties shall use good faith efforts at the termination or expiration of this Agreement or any specific Service hereto to ensure that all applicable user IDs and passwords are canceled. ARTICLE 8 RELATIONSHIP BETWEEN THE PARTIES The relationship between the parties established under this Agreement is that of independent contractors and neither party is an employee, agent, partner, or joint venturer of or with the other. 3Com will be solely responsible for any employment-related taxes, insurance premiums or other employment benefits respecting its personnels' performance of Services under this Agreement. Palm agrees to grant 3Com personnel access to sites, systems and information (subject to the provisions of confidentiality in Article 13 below) as necessary for 3Com to perform its obligations hereunder. 3Com personnel agree to obey any and all security regulations and other published policies of Palm. ARTICLE 9 SUBCONTRACTORS 3Com may engage a "Subcontractor" to perform all or any portion of 3Com's duties under this Agreement, provided that any such Subcontractor agrees in writing to be bound by confidentiality obligations at least as protective as the terms of Article 13 regarding confidentiality below, and provided further that 3Com remains responsible for the performance of such -7- Subcontractor. As used in this Agreement, "Subcontractor" will mean any individual, partnership, corporation, firm, association, unincorporated organization, joint venture, trust or other entity engaged to perform hereunder. ARTICLE 10 INTELLECTUAL PROPERTY 10.1 ALLOCATION OF RIGHTS BY ANCILLARY AGREEMENTS. This Agreement and the performance of this Agreement will not affect the ownership of any copyrights or other intellectual property rights allocated in the Ancillary Agreements. 10.2 EXISTING OWNERSHIP RIGHTS UNAFFECTED. Neither party will gain, by virtue of this Agreement, any rights of ownership of copyrights, patents, trade secrets, trademarks or any other intellectual property rights owned by the other. 10.3 OWNERSHIP OF DEVELOPED WORKS. Except as set forth in Section 10.2, 3Com will own all copyrights, patents, trade secrets, trademarks and other intellectual property rights subsisting in the Software Deliverables (as defined in Section 11.1 below) and other works developed by 3Com for purposes of this Agreement. 10.4 LICENSE TO PREEXISTING WORKS. Palm grants 3Com a non-exclusive, worldwide, royalty-free license to use, copy, and make derivative works of, distribute, display, perform and transmit Palm's pre-existing copyrighted works or other intellectual property rights solely to the extent necessary to perform its obligations under this Agreement. ARTICLE 11 SOFTWARE LICENSE 11.1 SOFTWARE DELIVERABLE/LICENSE. Unless otherwise agreed by the parties under the Ancillary Agreements or any separate license or technology agreement, if 3Com supplies Palm with a deliverable that in whole or in part consists of software, firmware, or other computer code (referred to as a "Software Deliverable") as indicated in a Transition Service Schedule, such Software Deliverables will be supplied in object code form only and will be subject to the terms of this Article 11. In the event that such Software Deliverables are licensed to 3Com by third parties, Palm agrees to be bound by any different or additional conditions that are required by such third parties and are communicated in writing by 3Com to Palm. 11.2 DELIVERY AND ACCEPTANCE. (a) DELIVERY. 3Com agrees to deliver to Palm one (1): (i) master copy of the Software in object code form only (as specified on the relevant Transition Service Schedule of the Agreement) on the media described on the relevant Transition Service Schedule and (ii) Documentation for the Software on the media described in the relevant Transition Service Schedule -8- ((i) and (ii) collectively a "Complete Copy") as listed in the relevant Transition Service Schedule no later than ten (10) days after the Effective Date (or any other start date as specifically indicated in the relevant Transition Service Schedule). If Source Code is licensed under this Agreement, 3Com agrees to deliver one (1) copy of such Source Code no later than ten (10) days after the Effective Date (or any other start date as specifically indicated in the relevant Transition Service Schedule). Additional Software or Source Code may be added to this Agreement from time to time by execution by the parties of a Transition Service Schedule. (b) ACCEPTANCE OF SOFTWARE (NON-SOURCE CODE). Palm will have thirty (30) days from the date of receipt of a Complete Copy of the Software to evaluate the Software for conformity with the manuals and other documentation that 3Com makes available with the Software to end users or which are reasonably necessary to use the Software licensed herein, including those items listed and described in the relevant Transition Service Schedule hereto (the "Documentation") and specifications, and either accept, return for rework (provided the Software has not previously been reworked), or reject the Software. Palm shall accept the Software if it substantially conforms with Documentation and specifications. Palm will be entitled to test and evaluate the Software and 3Com hereby grants to Palm the right to use and reproduce the Software only to the extent necessary for Palm to perform its evaluation. Such license will include the right of Palm to use third party subcontractors bound by the relevant restrictions herein solely as necessary to achieve the foregoing. If Palm returns the Software for rework, 3Com will use reasonable commercial efforts to correct the identified defects and resubmit the Software for re-evaluation under the same acceptance procedure. In the event Palm rejects the Software a second time, this Agreement will terminate with respect to that Software. Payment due from Palm to 3Com under a Transition Service Schedule that includes Software to be licensed shall be reduced by the pro rata portion of compensation attributable to the Software unless the Software has been accepted by Palm in writing or Palm fails to reject the Software within such 30 day period. (c) ACCEPTANCE OF SOURCE CODE. The Source Code is provided for Palm's reference only and subject to the limitations below in Section 11.3. The Source Code may not be accepted or rejected according to the provisions above in Section 11.2(b). If Palm rejects the Source Code, Palm must destroy all copies of such rejected Source Code and promptly furnish evidence of such rejection and destruction to 3Com. 11.3 RIGHTS GRANTED AND RESTRICTIONS. (a) LICENSE TO SOFTWARE. Subject to the terms and conditions of this Agreement, 3Com hereby grants to Palm, under 3Com's intellectual property rights in and to the Software, a non-exclusive, nontransferable worldwide license to (a) use and display the Software for its own internal information processing services and computing needs, and to make sufficient copies as necessary for such use, and (b) use the Documentation in connection with the permitted use of the Software and make sufficient copies as necessary for such use. (b) LICENSE TO SOURCE CODE. Subject to the terms and conditions of this Agreement, 3Com hereby grants to Palm, under 3Com's intellectual property rights in and to the Software, a non-exclusive, nontransferable worldwide license to (a) use and reproduce (for archival -9- and back-up purposes only), and prepare derivative works of the Source Code, for the sole purpose of supporting the object code version of the Software (if such object code exists), or, if no object code exists, for the sole purpose of its own internal information processing services and computing needs and (b) to use Source Code Documentation in connection with the permitted use of the Source Code and make copies for archival and back-up purposes only. (c) RESTRICTIONS. Palm shall not itself, or through any Subsidiary, affiliate, agent or third party: (a) sell, lease, license or sublicense the Software, the Source Code, the Documentation or the Source Code Documentation; (b) decompile, disassemble, or reverse engineer the Software or Source Code, in whole or in part, except to the extent such restriction is prohibited by applicable law; (c) allow access to the Software or Source Code by any user other than Palm; (d) write or develop any derivative software or any other software program based upon the Software or Source Code; (e) use the Software or Source Code to provide processing services to third parties, or (f) otherwise use the Software or Source Code on a "service bureau" basis; or provide, disclose, divulge or make available to, or permit use of the Software or Source Code by any third party without 3Com's prior written consent. (d) CONFIDENTIALITY. The Source Code and Source Code Documentation are hereby deemed "Confidential Information" and subject to the terms and procedures of the Master Confidential Disclosure Agreement. The period of disclosure shall be one (1) year from the Effective Date of this Agreement, and the period of confidentiality shall be perpetual. (e) TRADEMARKS. Neither party is granted any ownership in or license to the trademarks, marks or trade names (collectively, "Marks") of the other party with respect to this Software. (f) OWNERSHIP. 3Com hereby reserves all rights to the Software, Source Code and Documentation, and any copyrights, patents, or trademarks, embodied therein or used in connection therewith, except for the rights expressly granted herein. (g) COPYRIGHT NOTICES. Palm agrees that it will not remove any copyright notices, proprietary markings, trademarks or trade names from the Software, Source Code, Documentation, or Source Code Documentation. (h) TECHNICAL ASSISTANCE AND TRAINING. 3Com agrees to provide technical assistance and training to Palm personnel only if such assistance is set forth in the relevant Transition Service Schedule. 11.4 AS-IS WARRANTY. (a) AS-IS WARRANTY. THE SOFTWARE AND SOURCE CODE PROVIDED HEREUNDER IS LICENSED ON AN "AS-IS" BASIS ONLY, WITHOUT ANY EXPRESS WARRANTIES OF ANY KIND. -10- (b) IMPLIED WARRANTY DISCLAIMER. 3COM MAKES NO WARRANTIES WHATSOEVER, EITHER EXPRESS OR IMPLIED, REGARDING THE SOFTWARE OR SOURCE CODE (INCLUDING DOCUMENTATION AND SOURCE CODE DOCUMENTATION), ITS MERCHANTABILITY OR ITS FITNESS FOR ANY PARTICULAR PURPOSE. 11.5 MISCELLANEOUS. (a) NO OBLIGATIONS. NEITHER PARTY ASSUMES ANY RESPONSIBILITY OR OBLIGATIONS WHATEVER, OTHER THAN THE RESPONSIBILITIES AND OBLIGATIONS EXPRESSLY SET FORTH IN THIS AGREEMENT OR A SEPARATE WRITTEN AGREEMENT BETWEEN THE PARTIES (b) NON-RESTRICTIVE RELATIONSHIP. Nothing in this Agreement will be construed to preclude Palm from independently developing, acquiring or marketing computer software packages which may perform the same or similar functions as the Software provided by 3Com. ARTICLE 12 INFRINGEMENT DEFENSE Notwithstanding anything to the contrary in Article 13 below or the Master Confidential Disclosure Agreement, to the extent 3Com delivers or licenses any intellectual property to Palm after the Separation Date in performance of this Agreement, 3Com agrees to defend Palm and its directors, officers, employees and agents against any and all claims, actions or suits (any of the foregoing, a "Claim") incurred by or asserted against Palm based upon infringement of a third party patent or other intellectual property right. Palm agrees to notify 3Com promptly of any Claim and permit 3Com at 3Com's expense to defend such Claim and will cooperate in the defense thereof. 3Com agrees to pay any awards or settlement amounts arising from a Claim. Neither 3Com nor Palm will enter into or permit any settlement of any such Claim without the express written consent of the other party. Palm may, at its option and expense, have its own counsel participate in any proceeding that is under the direction of 3Com and will cooperate with 3Com and its insurer in the disposition of any such matter. ARTICLE 13 CONFIDENTIALITY The terms of the Master Confidential Disclosure Agreement between the parties shall apply to any Confidential Information (as defined therein) which is the subject matter of this Agreement. ARTICLE 14 LIMITATION OF LIABILITY -11- NEITHER PARTY WILL BE LIABLE TO THE OTHER FOR ANY LOST PROFITS, LOSS OF DATA, LOSS OF USE, COST OF COVER, BUSINESS INTERRUPTION OR OTHER SPECIAL, INCIDENTAL, INDIRECT, PUNITIVE OR CONSEQUENTIAL DAMAGES, HOWEVER CAUSED, UNDER ANY THEORY OF LIABILITY, ARISING FROM THE PERFORMANCE OF, OR RELATING TO, THIS AGREEMENT. THE FOREGOING LIMITATION WILL NOT LIMIT 3COM'S OBLIGATIONS WITH RESPECT TO PAYMENT OF DAMAGES OF ANY KIND INCLUDED IN AN AWARD OR SETTLEMENT OF A THIRD PARTY CLAIM UNDER ANY INDEMNITY OR INFRINGEMENT DEFENSE PROVISIONS SPECIFIED HEREIN. ARTICLE 15 FORCE MAJEURE Each party will be excused for any failure or delay in performing any of its obligations under this Agreement, other than the obligations of Palm to make certain payments to 3Com pursuant to Article 5 hereof for services rendered, if such failure or delay is caused by Force Majeure. "Force Majeure" means any act of God or the public enemy, any accident, explosion, fire, storm, earthquake, flood, or any other circumstance or event beyond the reasonable control of the party relying upon such circumstance or event. ARTICLE 16 DISPUTE RESOLUTION 16.1 MEDIATION. If a dispute, controversy or claim ("Dispute") arises between the parties relating to the interpretation or performance of this Agreement or the Ancillary Agreements, or the grounds for the termination hereof, appropriate senior executives (e.g. director or V.P. level) of each party who shall have the authority to resolve the matter shall meet to attempt in good faith to negotiate a resolution of the Dispute prior to pursuing other available remedies. The initial meeting between the appropriate senior executives shall be referred to herein as the "Dispute Resolution Commencement Date." Discussions and correspondence relating to trying to resolve such Dispute shall be treated as confidential information developed for the purpose of settlement and shall be exempt from discovery or production and shall not be admissible. If the senior executives are unable to resolve the Dispute within thirty (30) days from the Dispute Resolution Commencement Date, and either party wishes to pursue its rights relating to such Dispute, then the Dispute will be mediated by a mutually acceptable mediator appointed pursuant to the mediation rules of JAMS/Endispute within thirty (30) days after written notice by one party to the other demanding non-binding mediation. Neither party may unreasonably withhold consent to the selection of a mediator or the location of the mediation. Both parties will share the costs of the mediation equally, except that each party shall bear its own costs and expenses, including attorney's fees, witness fees, travel expenses, and preparation costs. The parties may also agree to replace mediation with some other form of non-binding or binding ADR. -12- 16.2 ARBITRATION. Any Dispute which the parties cannot resolve through mediation within ninety (90) days of the Dispute Resolution Commencement Date, unless otherwise mutually agreed, shall be submitted to final and binding arbitration under the then current Commercial Arbitration Rules of the American Arbitration Association ("AAA"), by three (3) arbitrators in Santa Clara County, California. Such arbitrators shall be selected by the mutual agreement of the parties or, failing such agreement, shall be selected according to the aforesaid AAA rules. The arbitrators will be instructed to prepare and deliver a written, reasoned opinion stating their decision within thirty (30) days of the completion of the arbitration. The prevailing party in such arbitration shall be entitled to expenses, including costs and reasonable attorneys' and other professional fees, incurred in connection with the arbitration (but excluding any costs and fees associated with prior negotiation or mediation). The decision of the arbitrator shall be final and non-appealable and may be enforced in any court of competent jurisdiction. The use of any ADR procedures will not be construed under the doctrine of laches, waiver or estoppel to adversely affect the rights of either party. 16.3 COURT ACTION. Any Dispute regarding the following is not required to be negotiated, mediated or arbitrated prior to seeking relief from a court of competent jurisdiction: breach of any obligation of confidentiality; infringement, misappropriation, or misuse of any intellectual property right; any other claim where interim relief from the court is sought to prevent serious and irreparable injury to one of the parties or to others. However, the parties to the Dispute shall make a good faith effort to negotiate and mediate such Dispute, according to the above procedures, while such court action is pending. 16.4 CONTINUITY OF SERVICE AND PERFORMANCE. Unless otherwise agreed in writing, the parties will continue to provide service and honor all other commitments under this Agreement and each Ancillary Agreement during the course of dispute resolution pursuant to the provisions of this Article 16 with respect to all matters not subject to such dispute, controversy or claim. ARTICLE 17 MISCELLANEOUS 17.1 ENTIRE AGREEMENT. This Agreement, the Master Separation and Distribution Agreement and the other Ancillary Agreements and the Exhibits and Schedules referenced or attached hereto and thereto constitute the entire agreement between the parties with respect to the subject matter hereof and thereof and shall supersede all prior written and oral and all contemporaneous oral agreements and understandings with respect to the subject matter hereof and thereof. 17.2 GOVERNING LAW. This Agreement shall be construed in accordance with and all Disputes hereunder shall be governed by the laws of the State of California, excluding its conflict of law rules and the United Nations Convention on Contracts for the International Sale of Goods. The Superior Court of Santa Clara County and/or the United States District Court for the Northern -13- District of California shall have jurisdiction and venue over all Disputes between the parties that are permitted to be brought in a court of law pursuant to Article 16 above. 17.3 DESCRIPTIVE HEADINGS. The headings contained in this Agreement, in any Exhibit or Schedule hereto and in the table of contents to this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Any capitalized term used in any Exhibit or Schedule but not otherwise defined therein, shall have the meaning assigned to such term in this Agreement. When a reference is made in this Agreement to an Article or a Section, Exhibit or Schedule, such reference shall be to an Article or Section of, or an Exhibit or Schedule to, this Agreement unless otherwise indicated. 17.4 NOTICES. Notices, offers, requests, or other communications required or permitted to be given by either party pursuant to the terms of this Agreement shall be given in writing to the respective parties to the following addresses: if to 3Com : 3Com Corporation 5400 Bayfront Plaza Santa Clara, California 95052 Attention: General Counsel Fax: (408) 326-6434 if to Palm: Palm, Inc. 5400 Bayfront Plaza Santa Clara, California 95052 Attention: General Counsel Fax: (408) 326-6434 or to such other address as the party to whom notice is given may have previously furnished to the other in writing as provided herein. Any notice involving non-performance, termination, or renewal shall be sent by hand delivery, recognized overnight courier or, within the United States, may also be sent via certified mail, return receipt requested. All other notices may also be sent by fax, confirmed by first class mail. All notices shall be deemed to have been given and received on the earlier of actual delivery or three (3) days from the date of postmark. 17.5 NONASSIGNABILITY. Except as specifically permitted under Article 10 above, neither party may, directly or indirectly, in whole or in part, whether by operation of law or otherwise, assign or transfer this Agreement, without the other party's prior written consent, and any attempted assignment, transfer or delegation without such prior written consent shall be voidable at the sole option of such other party. Notwithstanding the foregoing, each party (or its permitted successive assignees or transferees hereunder) may assign or transfer this Agreement as a whole without consent to an entity that succeeds to all or substantially all of the business or assets of such party. Without limiting the foregoing, this Agreement will be binding upon and inure to the benefit of the parties and their permitted successors and assigns. -14- 17.6 SEVERABILITY. If any term or other provision of this Agreement is determined by a court, administrative agency or arbitrator to be invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement will nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated is not affected in any manner materially adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that transactions contemplated hereby are fulfilled to the fullest extent possible. 17.7 FAILURE OR INDULGENCE NOT WAIVER; REMEDIES CUMULATIVE. If any term or other provision of this Agreement or the Exhibits or Schedules attached hereto is determined by a court, administrative agency or arbitrator to be invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to either party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that transactions contemplated hereby are fulfilled to the fullest extent possible. 17.8 AMENDMENT. No change or amendment will be made to this Agreement except by an instrument in writing signed on behalf of each of the parties to such agreement. IN WITNESS WHEREOF, each of the parties has caused this Agreement to be executed in duplicate originals by its duly authorized representatives. 3COM CORPORATION PALM, INC. By:_______________________ By:__________________________ Title:____________________ Title:_______________________ -15- Transition Service Schedule to Master Transitional Services Agreement 1. Transition Service Schedule #:____________ (To be inserted by responsible individual or department.) 2. Functional Area:_______________ 3. Start/End Date: The Services start on the Effective Date of the Master Transitional Services Agreement between 3Com Corporation ("3Com") and Palm Computing, Inc. ("Palm") to which this Transition Service Schedule is attached and end on February 1, 2001 unless otherwise indicated below. Indicate below if other start/end date: -------------------------------------- Start Date:_______________________ End Date:_________________________ If Start and End dates vary by service and/or country, please indicate in Section 5 below. 4. Summary of Services (Describe the service to be provided in appropriate detail. - -------------------------------------------------------------------------------- Service Name Description - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 5. List of services to be provided per country and site: (List all the services to be provided at each site. Enter Start Date and End Date if different than Section 3 above.) - -------------------------------------------------------------------------------- Country Site Service(s) Start Date End Date - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 6. Performance parameters/Service level: (State minimum performance expected from each service, if applicable.): 7. Estimated Total Compensation:----------------------- 8. Describe cost methodology and cost drivers affecting Estimated Total Compensation (Describe on an individual service basis if necessary): 9. Describe the process by which the cost of services will be adjusted in the instance of an increase/reduction in the services provided: (Describe on an individual service basis if necessary.) 10. Software: Will software be used or included with the Services to be provided under this Transition Service Schedule: ____ Yes ____ No If yes, will source code be provided: ____ Yes ____ No List software to be provided: Software Application Number of Licenses to be Provided -------------------- --------------------------------- ____________________________________________________________ ____________________________________________________________ Upon execution of this Transition Service Schedule by both parties, this Transition Service Schedule is hereby deemed incorporated into and made part of that certain Master Transitional Services Agreement between 3Com Corporation and Palm Computing, Inc. 3COM CORPORATION PALM, INC. By:___________________________ By:________________________________ (Authorized Signature) (Authorized Signature) Date:_________________________ Date:______________________________ Name:_________________________ Name:______________________________ Title:________________________ Title:_____________________________ -2- EX-2.9 10 FORM OF REAL ESTATE MATTERS AGREEMENT EXHIBIT 2.9 Real Estate Matters Agreement between 3COM CORPORATION and PALM, INC. _______________, 2000 TABLE OF CONTENTS
Page ---- ARTICLE I PROPERTY........................................................... 1 Section 1.1 Leased Property............................................. 1 Section 1.2 Shared Properties........................................... 1 Section 1.3 Headquarters Facility....................................... 2 Section 1.4 Obtaining the Lease Consents................................ 2 Section 1.5 Occupation by Palm.......................................... 3 Section 1.6 Obligation to Complete...................................... 4 Section 1.7 Form of Transfer............................................ 5 Section 1.8 Casualty; Lease Termination................................. 6 Section 1.9 Tenant's Fixtures and Fittings.............................. 6 Section 1.10 Costs....................................................... 6 ARTICLE II MISCELLANEOUS..................................................... 7 Section 2.1 Limitation of Liability..................................... 7 Section 2.2 Entire Agreement............................................ 7 Section 2.3 Governing Law............................................... 7 Section 2.4 Notices..................................................... 7 Section 2.5 Counterparts................................................ 9 Section 2.6 Binding Effect; Assignment.................................. 9 Section 2.7 Severability................................................ 9 Section 2.8 Failure or Indulgence Not Waiver; Remedies Cumulative....... 9 Section 2.9 Amendment................................................... 10 Section 2.10 Authority................................................... 10 Section 2.11 Interpretation.............................................. 10 Section 2.12 Disputes.................................................... 10 ARTICLE III DEFINITIONS...................................................... 10
-2- REAL ESTATE MATTERS AGREEMENT This Real Estate Matters Agreement (this "Agreement") is entered into on __________, 2000 between 3Com Corporation, a Delaware corporation ("3Com"), and Palm, Inc., a Delaware corporation ("Palm"). Capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed to such terms in the Separation Agreement (as defined below). RECITALS WHEREAS, 3Com has transferred or will transfer to Palm effective as of the Separation Date, substantially all of the business and assets of the Palm Business owned by 3Com in accordance with the Master Separation and Distribution Agreement dated as of December ___, 1999 between 3Com and Palm's predecessor corporation, Palm Computing, Inc., a California corporation (the "Separation Agreement"). WHEREAS, the parties desire to set forth certain agreements regarding real estate matters. NOW, THEREFORE, in consideration of the foregoing and the covenants and agreements set forth below, the parties hereto agree as follows: ARTICLE I PROPERTY Section 1.1 Leased Property (a) 3Com shall assign or cause its applicable Subsidiary to assign, and Palm shall accept and assume, or cause its applicable Subsidiary to accept and assume, 3Com's or its Subsidiary's interest in the Leased Properties, subject to the other provisions of this Agreement and (to the extent not inconsistent with the provisions of this Agreement) the terms of the Separation Agreement and the other Ancillary Agreements. Such assignment shall be completed on the later of: (i) the Separation Date; and (ii) the earlier of (A) the fifth (5/th/) business day after the relevant Lease Consent has been granted and (B) the date agreed upon by the parties in accordance with Section 1.6(a) below. (b) Subject to the completion of the assignment to Palm or its applicable Subsidiary of the relevant Leased Property, with respect to each Leased Property which is also a Shared Property, Palm shall grant or cause its applicable Subsidiary to grant to 3Com or its applicable Subsidiary a license to occupy that part of the relevant Leased Property identified in Section A of Schedule 1 of this Agreement and 3Com shall accept or cause its applicable Subsidiary to accept the same. Such license shall be completed immediately following completion of the transfer of the relevant Leased Property to Palm or its applicable Subsidiary. Section 1.2 Shared Properties 3Com shall grant or cause its applicable Subsidiary to grant to Palm or its applicable Subsidiary a license to occupy those parts of the Shared Properties identified in Section B of Schedule 1 of this Agreement and Palm shall accept or cause its applicable Subsidiary to accept the same, subject to the other provisions of this Agreement and (to the extent not inconsistent with the provisions of this Agreement) the terms of the Separation Agreement and the other Ancillary Agreements. Such license shall be completed on the Separation Date. Section 1.3 Headquarters Facility 3Com shall grant to Palm a lease of those parts of the Headquarters Facility identified in Section C of Schedule 1 of this Agreement as leased and a sublease of those parts of the Headquarters Facility identified in Section C of Schedule 1 of this Agreement as subleased, and Palm shall accept the same, subject to the other provisions of this Agreement and (to the extent not inconsistent with the provisions of this Agreement) the terms of the Separation Agreement and the other Ancillary Agreements. Such lease and sublease shall be completed on the Separation Date. Section 1.4 Obtaining the Lease Consents (a) 3Com confirms that, with respect to each Leased Property, an application has been made or will be made by the Separation Date to the relevant Landlord for the Lease Consents required with respect to the transactions contemplated by this Agreement. (b) 3Com will use its reasonable commercial efforts to obtain the Lease Consents as to each Leased Property, but 3Com shall not be required to commence judicial proceedings for a declaration that a Lease Consent has been unreasonably withheld or delayed, nor shall 3Com be required to pay any consideration in excess of that required by the Relevant Lease or that which is typical in the open market to obtain the relevant Lease Consent. Palm shall cooperate as reasonably requested by 3Com to obtain the Lease Consents. (c) Palm and 3Com will promptly satisfy or cause their applicable Subsidiaries to satisfy the lawful requirements of the Landlord, and Palm will take or cause its applicable Subsidiary to take all steps to assist 3Com in obtaining the Lease Consents as to each Leased Property, including, without limitation: (i) if properly required by the Landlord, entering into an agreement with the relevant Landlord to observe and perform the tenant's obligations contained in the Relevant Lease throughout the remainder of the term of the Relevant Lease, subject to any statutory limitations of such liability; (ii) if properly required by the Landlord, providing a guarantee, surety or other security (including, without limitation, a security deposit) for the obligations of Palm or its applicable Subsidiary as tenant under the Relevant Lease, and otherwise taking all steps which are reasonably necessary and which Palm or its applicable Subsidiary is reasonably capable of doing to meet the lawful requirements of the Landlord so as to ensure that the Lease Consents are obtained; and (iii) using all reasonable commercial efforts to assist 3Com with obtaining the Landlord's consent to the release of any guarantee, surety or other security which 3Com or its Subsidiary may have previously provided to the Landlord and, if required, offering the same or equivalent security to the Landlord in order to obtain such release. Notwithstanding the foregoing, (1) except with respect to guarantees, sureties or other security referenced in Section 1.4(c)(ii) above, Palm shall not be required to obtain a release of any obligation entered into by 3Com or its Subsidiary with any Landlord or other third party with respect to any Property and (2) Palm shall not communicate or permit its applicable Subsidiary to communicate directly with any of the Landlords unless Palm can show 3Com reasonable grounds for doing so. (d) If, with respect to any Leased Properties, 3Com and Palm are unable to obtain a release by the Landlord of any guarantee, surety or other security which 3Com or its Subsidiary has previously provided to the Landlord, Palm shall indemnify, defend, protect and hold harmless 3Com and its Subsidiary from and after the Separation Date against all losses, costs, claims, damages, or liabilities incurred by 3Com or its Subsidiary as a result of Palm's occupancy of the Leased Property with respect to such guarantee, surety or other security. Section 1.5 Occupation by Palm (a) Subject to compliance with Section 1.5(b) below, in the event that the Actual Completion Date for any Leased Property does not occur on the Separation Date, Palm or its applicable Subsidiary shall, commencing on the Separation Date, be entitled to occupy the relevant Property (except to the extent that the same is a Retained Part) as a licensee upon the terms and conditions contained in 3Com's Lease. Such license shall not be revocable prior to the date for completion as provided in Section 1.1(a) unless an enforcement action or forfeiture by the relevant Landlord due to Palm's or its applicable Subsidiary's occupation of the Property constituting a breach of 3Com's Lease cannot, in the reasonable opinion of 3Com, be avoided other than by requiring Palm or its applicable Subsidiary to immediately vacate the relevant Property, in which case 3Com may by notice to Palm immediately require Palm or its applicable Subsidiary to vacate the relevant Property. Palm will be responsible for all costs, expenses and liabilities incurred by 3Com or its applicable Subsidiary as a consequence of such occupation, except for any losses, claims, costs, demands and liabilities incurred by 3Com or its Subsidiary as a result of any enforcement action taken by the Landlord against 3Com or its Subsidiary with respect to any breach by 3Com or its Subsidiary of the Relevant Lease in permitting Palm or its applicable Subsidiary to so occupy the Property without obtaining the required Lease Consent, for which 3Com or its Subsidiary shall be solely responsible. Neither Palm nor its applicable Subsidiary shall be entitled to make any claim or demand against, or obtain reimbursement from, 3Com or its applicable Subsidiary with respect to any costs, losses, claims, liabilities or damages incurred by Palm or its applicable Subsidiary as a consequence of being obliged to vacate the Property or in obtaining alternative premises, including, without limitation, any enforcement action which a Landlord may take against Palm or its applicable Subsidiary. (b) In the event that the Actual Completion Date for any Leased Property does not occur on the Separation Date, whether or not Palm or its applicable Subsidiary occupies a Property as licensee as provided in Section 1.5(a) above, Palm shall, effective as of the Separation Date, (i) pay or cause its applicable Subsidiary to pay 3Com all rents, service charges, insurance premiums and other sums payable by 3Com or its applicable Subsidiary under any Relevant Lease, (ii) observe or cause its applicable Subsidiary to observe the tenant's covenants, obligations and conditions contained in 3Com's Lease and (iii) indemnify, defend, protect and hold harmless 3Com and its applicable Subsidiary from and against all losses, costs, claims, damages and liabilities arising on account of any breach thereof by Palm or its applicable Subsidiary. (c) 3Com shall supply promptly to Palm copies of all invoices, demands, notices and other communications received by 3Com or its applicable Subsidiaries or agents in connection with any of the matters for which Palm or its applicable Subsidiary may be liable to make any payment or perform any obligation pursuant to Section 1.5(a) or (b), and shall, at Palm's cost, take any steps and pass on any objections which Palm or its applicable Subsidiary may have in connection with any such matters. Palm shall promptly supply to 3Com any notices, demands, invoices and other communications received by Palm or its applicable Subsidiary or agents from any Landlord while Palm or its applicable Subsidiary occupies any Property without the relevant Lease Consent. Section 1.6 Obligation to Complete (a) If, with respect to any Leased Property, at any time the relevant Lease Consent is formally and unconditionally refused in writing, 3Com and Palm shall commence good faith negotiations and use commercially reasonable efforts to determine how to allocate the applicable Property, based on the relative importance of the applicable Property to the operations of each party, the size of the applicable Property, the number of employees of each party at the applicable Property and the potential risk and liability to each party in the event an enforcement action is brought by the applicable Landlord. Such commercially reasonable efforts shall include consideration of alternate structures to accommodate the needs of both parties and the allocation of the costs thereof, including entering into amendments of the size, term or other terms of the Relevant Lease, restructuring a proposed lease assignment to be a sublease and relocating one party. If the parties are unable to agree upon an allocation of the Property within fifteen (15) days after commencement of negotiations between the parties as described above, then either party may, by delivering written notice to the other, require that the matter be referred to the Chief Financial Officers of both parties. In such event, the Chief Financial Officers shall use commercially reasonable efforts to determine the allocation of the Property, including having a meeting or telephone conference within ten (10) days thereafter. If the parties are unable to agree upon the allocation of an applicable Property within fifteen (15) days after the matter is referred to the Chief Financial Officers of the parties as described above, the disposition of the applicable Property and the risks associated therewith shall be allocated between the parties as set forth in subparts (b) and (c) of this section below. (b) If, with respect to any Leased Property, the parties are unable to agree upon the allocation of a Property as set forth in Section 1.6(a), 3Com may by written notice to Palm elect to apply to the relevant Landlord for consent to sublease all of the relevant Property to Palm or its applicable Subsidiary for the remainder of the Relevant Lease term less three (3) days at a rent equal to the rent from time to time under the Relevant Lease, but otherwise on substantially the same terms and conditions as the Relevant Lease. If 3Com makes such an election, until such time as the relevant Lease Consent is obtained and a sublease is completed, the provisions of Section 1.5 will apply and, on the grant of the Lease Consent required to sublease the Leased Property in question, 3Com shall sublease or cause its applicable Subsidiary to sublease to Palm or its applicable Subsidiary the relevant Property which sublease shall be for the term and rent set forth in the Relevant Lease and otherwise on the terms of the Relevant Lease. (c) If the parties are unable to agree upon the allocation of a Property as set forth in Section 1.6(a) and 3Com does not make an election pursuant to Section 1.6(b) above, 3Com may elect by written notice to Palm to require Palm or its applicable Subsidiary to vacate the relevant Property immediately or by such other date as may be specified in the notice served by 3Com (the "Notice Date"), in which case Palm shall vacate or cause its applicable Subsidiary to vacate the relevant Property on the Notice Date but shall indemnify 3Com and its applicable Subsidiary from and against all costs, claims, losses, liabilities and damages in relation to the relevant Property arising from and including the Separation Date to and including the later of the Notice Date and date on which Palm or its applicable Subsidiary vacates the relevant Property, except for any costs, losses, damages, claims and liabilities incurred by 3Com or its Subsidiary with respect to any enforcement action taken by the Landlord against 3Com or its Subsidiary with respect to any breach by 3Com or its Subsidiary of the Relevant Lease in permitting Palm or its applicable Subsidiary to so occupy the Property without obtaining the required Lease Consent. Neither Palm nor its applicable Subsidiary shall be entitled to make any claim or demand against or obtain reimbursement from 3Com or its applicable Subsidiary with respect to any costs, losses, claims, liabilities or damages incurred by Palm or its applicable Subsidiary as a consequence of being obliged to vacate the Property or obtaining alternative premises, including, without limitation, any enforcement action which a Landlord may take against Palm or its applicable Subsidiary. Section 1.7 Form of Transfer (a) The assignment to Palm or its applicable Subsidiary of each relevant Leased Property shall be in substantially the form attached in Schedule 2, with such amendments which in the reasonable opinion of 3Com are necessary with respect to a particular Property, including, without limitation, in all cases where a relevant Landlord has required a guarantor or surety to guarantee the obligations of Palm or its applicable Subsidiary contained in the relevant Lease Consent or any other document which Palm or its applicable Subsidiary is required to complete, the giving of such guarantee by a guarantor or surety, and the giving by Palm or its applicable Subsidiary and any guarantor or surety of Palm's or its applicable Subsidiary's obligations of direct obligations to 3Com or third parties where required under the terms of any of the Lease Consent or any covenant, condition, restriction, easement, lease or other encumbrance to which the Property is subject. Such amendments shall be submitted to Palm for approval, which approval shall not be unreasonably withheld or delayed. (b) The licenses to be granted by Palm or its applicable Subsidiary to 3Com or its applicable Subsidiary, and 3Com or its applicable Subsidiary to Palm or its applicable Subsidiary, with respect to the Shared Properties shall be at a rental rate set forth in Schedule 5 hereof and be for a term of six (6) months; provided, however, that the license as to the warehouse facility located at 2940-2990 Mead Avenue, Santa Clara, California shall be at a monthly rental rate of $1.10 per square foot and terminate on December 31, 2000. Either party shall have the right to terminate the license as to any of the Properties upon thirty (30) days' prior notice. Rent shall be abated for the period from the Separation Date to March 1, 2000. The license shall be substantially in the form of the License Form, with such amendments as are, in the reasonable opinion of 3Com, necessary with respect to a particular Property. Such amendments shall be submitted to Palm for approval, which approval shall not be unreasonably withheld. (c) The lease and sublease to be granted to Palm with respect to the Headquarters Facility shall be at a monthly rental rate of $3.72 per square foot full service gross including furniture and copier rental through February 28, 2001, $3.82 per square foot full service gross including furniture and copier rental from March 1, 2001 through February 28, 2002 and $3.93 per square foot full service gross including furniture and copier rental thereafter, and be for a term commencing on the Separation Date and expiring (i) February 28, 2003 as to Buildings 12 and 15 and the related common areas and (ii) August 1, 2002 as to Buildings 9 and 10 and the related common areas; provided, however, that in the event 3Com extends its underlying lease as to Buildings 9 and 10 or purchases the underlying fee interest in such property, the expiration date as to Buildings 9 and 10 and the related common areas shall be automatically extended to February 28, 2003. Either party may terminate the lease or sublease as to any of the buildings then subject to the lease or sublease upon six (6) months prior notice, which notice may be given at any time after December 31, 2000; provided, however, that any given termination notice may apply as to only one building and neither party may give a termination notice within thirty (30) days of any previous termination notice given by either party. The lease and sublease shall commence as to the various buildings within the Headquarters Facility in accordance with the schedule set forth in Section C of Schedule 1 hereof; provided, however, that the lease as to Buildings 12 and 15 shall not commence until such buildings are delivered to Tenant. Rent shall be abated for the period from the Separation Date to March 1, 2000. Such lease and sublease shall be substantially in the form of the lease and sublease forms attached hereto as Schedule 4 and shall include such amendments which in the reasonable opinion of 3Com are necessary with respect to a particular Property. Such amendments shall be submitted to Palm for approval, which approval shall not be unreasonably withheld or delayed. Section 1.8 Casualty; Lease Termination The parties hereto shall grant and accept assignments, leases, subleases or licenses of the Properties as described in this Agreement, regardless of any casualty damage or other change in the condition of the Properties. In addition, subject to 3Com's obligations in Section 5.6 of the Separation Agreement, in the event that 3Com's Lease with respect to a Leased Property or a Shared Property or 3Com's interest in the leased portion of the Headquarters Facility is terminated prior to the Separation Date, (a) 3Com or its applicable Subsidiary shall not be required to assign, sublease or license such Property, (b) Palm or its applicable Subsidiary shall not be required to accept an assignment, sublease or license of such Property and (c) neither party shall have any further liability with respect to such Property hereunder. Section 1.9 Tenant's Fixtures and Fittings The provisions of the Separation Agreement and the other Ancillary Agreements shall apply to any trade fixtures and personal property located at each Property. The lease and sublease of the Headquarters Facility and the licenses as to the Shared Properties shall include the rental of the furniture at such Properties. Section 1.10 Costs 3Com shall pay all reasonable costs and expenses incurred in connection with obtaining the Lease Consents, including, without limitation, Landlord's consent fees and attorneys' fees and any costs and expenses relating to re-negotiation of 3Com's Leases. ARTICLE II MISCELLANEOUS Section 2.1 Limitation of Liability. IN NO EVENT SHALL ANY MEMBER OF THE 3COM GROUP OR PALM GROUP BE LIABLE TO ANY OTHER MEMBER OF THE 3COM GROUP OR PALM GROUP FOR ANY SPECIAL, CONSEQUENTIAL, INDIRECT, INCIDENTAL OR PUNITIVE DAMAGES OR LOST PROFITS, HOWEVER CAUSED AND ON ANY THEORY OF LIABILITY (INCLUDING NEGLIGENCE) ARISING IN ANY WAY OUT OF THIS AGREEMENT, WHETHER OR NOT SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES; PROVIDED, HOWEVER, THAT THE FOREGOING LIMITATIONS SHALL NOT LIMIT EACH PARTY'S INDEMNIFICATION OBLIGATIONS FOR LIABILITIES TO THIRD PARTIES AS SET FORTH IN THE INDEMNIFICATION AND INSURANCE MATTERS AGREEMENT. Section 2.2 Entire Agreement. This Agreement, the Separation Agreement, the other Ancillary Agreements and the Exhibits and Schedules referenced or attached hereto and thereto, constitute the entire agreement between the parties with respect to the subject matter hereof and shall supersede all prior written and oral and all contemporaneous oral agreements and understandings with respect to the subject matter hereof. Section 2.3 Governing Law. This Agreement shall be construed in accordance with and all Disputes hereunder shall be governed by the laws of the State of California, excluding its conflict of law rules and the United Nations Convention on Contracts for the International Sale of Goods. The Superior Court of Santa Clara County and/or the United States District Court for the Northern District of California shall have jurisdiction and venue over all Disputes between the parties that are permitted to be brought in a court of law pursuant to Section 5.9 of the Separation Agreement. Notwithstanding the foregoing, the applicable Property transfers shall be performed in accordance with the laws of the state in which the applicable Property is located. Section 2.4 Notices. Notices, demands, offers requests or other communications required or permitted to be given by either party pursuant to the terms of this Agreement shall be given in writing to the respective parties to the following addresses: if to 3Com: 3Com Corporation 5400 Bayfront Plaza Santa Clara, California 95052 Attention: General Counsel Fax: 408.326.6434 if to Palm: Palm Computing, Inc. 5400 Bayfront Plaza Santa Clara, California 95052 Attention: General Counsel Fax: (408) 326-5001 or to such other address as the party to whom notice is given may have previously furnished to the other in writing as provided herein. Any notice involving non-performance, termination, or renewal shall be sent by hand delivery, recognized overnight courier or, within the United States, may also be sent via certified mail, return receipt requested. All other notices may also be sent by fax, confirmed by first class mail. All notices shall be deemed to have been given and received on the earlier of actual delivery or three (3) days from the date of postmark. Section 2.5 Counterparts. This Agreement, including the Schedules and Exhibits hereto, and the other documents referred to herein, may be executed in counterparts, each of which shall be deemed to be an original but all of which shall constitute one and the same agreement. Section 2.6 Binding Effect; Assignment. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective legal representatives and successors, and nothing in this Agreement, express or implied, is intended to confer upon any other Person any rights or remedies of any nature whatsoever under or by reason of this Agreement. This Agreement may be enforced separately by each member of the 3Com Group and each member of the Palm Group. Neither party may assign this Agreement or any rights or obligations hereunder, without the prior written consent of the other party, and any such assignment shall be void; provided, however, either party may assign this Agreement to a successor entity in conjunction with such party's reincorporation. Section 2.7 Severability. If any term or other provision of this Agreement or the Schedules or Exhibits attached hereto is determined by a court, administrative agency or arbitrator to be invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to either party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that transactions contemplated hereby are fulfilled to the fullest extent possible. Section 2.8 Failure or Indulgence Not Waiver; Remedies Cumulative. No failure or delay on the part of either party hereto in the exercise of any right hereunder shall impair such right or be construed to be a waiver of, or acquiescence in, any breach of any representation, warranty or agreement herein, nor shall any single or partial exercise of any such right preclude other or further exercise thereof or of any other right. All rights and remedies existing under this Agreement or the Exhibits or Schedules attached hereto are cumulative to, and not exclusive of, any rights or remedies otherwise available. Section 2.9 Amendment. No change or amendment will be made to this Agreement or the Exhibits or Schedules attached hereto except by an instrument in writing signed on behalf of each of the parties to such agreement. Section 2.10 Authority. Each of the parties hereto represents to the other that (a) it has the corporate or other requisite power and authority to execute, deliver and perform this Agreement, (b) the execution, delivery and performance of this Agreement by it have been duly authorized by all necessary corporate or other action, (c) it has duly and validly executed and delivered this Agreement, and (d) this Agreement is a legal, valid and binding obligation, enforceable against it in accordance with its terms subject to applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally and general equity principles. Section 2.11 Interpretation. The headings contained in this Agreement, in any Exhibit or Schedule hereto and in the table or contents to this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Any capitalized term used in any Schedule or Exhibit but not otherwise defined therein, shall have the meaning assigned to such term in this Agreement. When a reference is made in this Agreement to an Article or a Section, Exhibit or Schedule, such reference shall be to an Article or Section of, or an Exhibit or Schedule to, this Agreement unless otherwise indicated. Section 2.12 Disputes. Any Disputes that arise under this Agreement shall be resolved in accordance with the provisions of Section 5.9 of the Separation Agreement. ARTICLE III DEFINITIONS The following terms, as used herein, shall have the following meanings: Actual Completion Date means, with respect to each Property, the date upon which completion of the assignment, lease or sublease of that Property actually takes place. Headquarters Facility means Buildings 9, 10, 12 and 15 located at 3Com's campus at Santa Clara, California, as set forth in Section C of Schedule 1 of this Agreement, together with the non-exclusive right to use the Building 1 and Building 9 cafeterias, the Building 6 bistro cafe, the Building 5 annex, the Company Store, food and beverage facilities located on 3Com's campus upon the terms and subject to the restrictions set forth in the lease and sublease forms attached hereto a Schedule 4. Landlord means the landlord under 3Com's Lease, and its successors and assigns, and includes the holder of any other interest which is superior to the interest of the landlord under 3Com's Lease. Lease Consents means all consents, waivers or amendments required from the Landlord or other third parties under the Relevant Leases to assign the Relevant Leases to Palm or its applicable Subsidiary. Leased Properties means those Properties in Section A of Schedule 1 of this Agreement. License Form means the form license attached hereto as Schedule 3. Property means the Leased Properties, the Shared Properties and the Headquarters Facility. Relevant Leases means those of 3Com's Leases with respect to which the Landlord's consent is required for assignment or sublease to a third party or which prohibit assignments or subleases. Retained Parts means those parts of the Leased Properties which, following assignment to Palm or its applicable Subsidiary, are intended to be licensed to 3Com or its applicable Subsidiary. Shared Properties means those Properties listed in (a) Section A of Schedule 1 as a Property involving a license back to 3Com and (b) Section B of Schedule 1 of this Agreement. 3Com's Lease means, in relation to each Property, the lease(s) or sublease(s) or license(s) under which 3Com or its applicable Subsidiary holds such Property and any other supplemental document completed prior to the Actual Completion Date. IN WITNESS WHEREOF, each of the parties has caused this Agreement to be executed on its behalf by its officers thereunto duly authorized on the day and year first above written. 3COM CORPORATION By: _______________________ Name: _____________________ Title: ____________________ PALM, INC. By: _______________________ Name: _____________________ Title: ____________________ Schedule 1 ---------- Properties Section A: Leased Properties ---------------------------------------------------------- Address License back Area to be to licensed 3Com? (Y/N) ---------------------------------------------------------- Tour Kupka A Y 5,750 18 Rue Hoche 92800 Paris La Defense, France ---------------------------------------------------------- 3180 139th Ave. SE, N Ste. # 200 Bellevue, WA ---------------------------------------------------------- 321 Main Street, Elm N Suite Farmington, CT ---------------------------------------------------------- 1750 Montgomery Street N San Francisco, CA ---------------------------------------------------------- Immeuble Alliance 1 N 77 rue Samuel Morse B.P. 59 3400 Montpellier, FR ---------------------------------------------------------- Section B: Shared Properties ---------------------------------------------------------- Address Area to be Approximate Number licensed of Employees ---------------------------------------------------------- 2940-2290 Mead Ave. ~800 SF 0 - storage Santa Clara, CA ---------------------------------------------------------- 605 N 5600 West N/A 1 Salt Lake City, UT ---------------------------------------------------------- 3800 Golf Rd. N/A 5 Chicago, IL ---------------------------------------------------------- 220 Warfdale Rd. N/A 18 Winnersh, England ---------------------------------------------------------- 3 Changhi North St. N/A 5 #2 Singapore ---------------------------------------------------------- Six Concourse Pkwy N/A 1 #1450 Atlanta, GA ---------------------------------------------------------- 7760 France Ave. N/A 1 South, 6th Fl. Bloomington MN ---------------------------------------------------------- 1100 Burloak Dr. N/A 3 Burlington, ON, ---------------------------------------------------------- 3001 N. Rocky Point, N/A 1 Ste. #200 Tampa, FL ---------------------------------------------------------- 2070 Chain Bridge Rd. N/A 1 Vienna, VA ---------------------------------------------------------- 3606 AK Maarssen N/A 2 Netherlands ---------------------------------------------------------- D-85609 N/A 7 Aschheim-Dornach, Germany ---------------------------------------------------------- Frosundaviks Alle 15, N/A 3 Box 1251 171 24 Solna Sweden ---------------------------------------------------------- ---------------------------------------------------------- 54 Thurgauer Strasse N/A 1 CH-8050 Zurich Switzerland ---------------------------------------------------------- Li Po Chun Chambers, N/A 3 89 Des Voeux Rd. Central Hong Kong ---------------------------------------------------------- 65 Berry St.level N/A 2 12/13 Sydney Australia ---------------------------------------------------------- 2-28-8 Honkomagome N/A 3 Bunkyo-Ku Tokyo Japan 113-6591 ---------------------------------------------------------- 50 Raffles Place N/A 3 #27-05/06 Singapore ---------------------------------------------------------- Avenida Paseo De Las N/A 1 Palmas 405-903 Mexico City, Mexico ---------------------------------------------------------- Avenida Alfredo N/A 1 Agidio #177 Sao Paolo, Brazil ---------------------------------------------------------- Section C: Headquarters Facility ---------------------------------------------------------- Address Leased or Estimated Estimated Subleased? Commencement Square Area Date Footage ---------------------------------------------------------- 5400 Bayfront Plaza, Leased 3/1/00 34,989 Bldg 12 Santa Clara, CA ---------------------------------------------------------- 5400 Bayfront Plaza, Leased 12/01/00 34,989 Bldg. 15 Santa Clara, CA ---------------------------------------------------------- 5400 Bayfront Plaza, Subleased 3/1/00 63,595 Bldg. 9 ---------------------------------------------------------- 5400 Bayfront Plaza, Subleased 3/1/00 83,079 Bldg. 10 ---------------------------------------------------------- Common Area Subleased 3/1/00 12,837 ---------------------------------------------------------- Schedule 2 ---------- Form Assignment for Leased Properties Schedule 3 ---------- Form License for Shared Properties Schedule 4 ---------- Form Lease and Sublease for the Headquarters Facility Schedule 5 ---------- License Rental Rates ---------------------------------------------------------- Approximate Allocation Cost per Person per Month ---------------------------------------------------------- ---------------------------------------------------------- Chicago $ 1,900.00 ---------------------------------------------------------- Winnersh $ 1,900.00 ---------------------------------------------------------- Singapore - Campus to Field $ 1,900.00 ---------------------------------------------------------- ---------------------------------------------------------- Salt Lake City $ 1,900.00 ---------------------------------------------------------- Field - Americas ---------------------------------------------------------- Atlanta, GA $ 1,900.00 ---------------------------------------------------------- Bloomington, MN $ 1,900.00 ---------------------------------------------------------- Burlington, ON $ 1,900.00 ---------------------------------------------------------- Tampa, FL $ 1,900.00 ---------------------------------------------------------- Vienna, VA $ 1,900.00 ---------------------------------------------------------- ---------------------------------------------------------- Field - EMEA ---------------------------------------------------------- Maarsen, Netherlands $ 1,900.00 ---------------------------------------------------------- Munich, Germany $ 1,900.00 ---------------------------------------------------------- Solna, Sweden $ 1,900.00 ---------------------------------------------------------- Zurich, Switzerland $ 1,900.00 ---------------------------------------------------------- ---------------------------------------------------------- ---------------------------------------------------------- Field - APR ---------------------------------------------------------- Hong Kong $ 1,900.00 ---------------------------------------------------------- North Sydney, Australia $ 1,900.00 ---------------------------------------------------------- Japan $ 1,900.00 ---------------------------------------------------------- Singapore (Sales Office) $ 1,900.00 ---------------------------------------------------------- ---------------------------------------------------------- Field - Latin America ---------------------------------------------------------- Mexico $ 1,900.00 ---------------------------------------------------------- Brazil $ 1,900.00 ---------------------------------------------------------- EX-2.10 11 FORM OF MASTER CONFIDENTIAL DISCLOSURE AGREEMENT EXHIBIT 2.10 MASTER CONFIDENTIAL DISCLOSURE AGREEMENT between 3COM CORPORATION and PALM, INC. Effective as of ______, 2000 MASTER CONFIDENTIAL DISCLOSURE AGREEMENT This Master Confidential Disclosure Agreement (the "Agreement") is effective as of ________, 2000 (the "Effective Date"), between 3Com Corporation, a Delaware corporation ("3Com"), having an office at 5400 Bayfront Plaza, Santa Clara, California, 95052 and Palm, Inc., a Delaware corporation ("Palm"), having an office at 5400 Bayfront Plaza, Santa Clara, California, 95052. WHEREAS, the Board of Directors of 3Com has determined that it is in the best interest of 3Com and its stockholders to separate 3Com's existing businesses into two independent businesses; WHEREAS, as part of the foregoing, 3Com and Palm's predecessor, Palm Computing, Inc., a California Corporation, have entered into a Master Separation and Distribution Agreement (as defined below), which provides, among other things, for the separation of certain Palm assets and Palm liabilities, the initial public offering of Palm stock, the distribution of such stock, and the execution and delivery of certain other agreements in order to facilitate and provide for the foregoing; and WHEREAS, also as part of the foregoing, the parties further desire to enter into this Agreement to provide for the protection of their Confidential Information (as defined below). NOW, THEREFORE, in consideration of the mutual promises of the parties, and of good and valuable consideration, it is agreed by and between the parties as follows: ARTICLE 1 DEFINITIONS For the purpose of this Agreement the following capitalized terms are defined in this Article 1 and shall have the meaning specified herein: 1.1 ANCILLARY AGREEMENTS. "Ancillary Agreements" means the items and agreements listed in Section 2.1 of the Master Separation and Distribution Agreement and all agreements and documents contemplated by such agreements. 1.2 CONFIDENTIAL INFORMATION. (a) "Confidential Information" means business information, technical data, know-how and other information which is not otherwise in the public domain and of which the owner actively undertakes to restrict or control the disclosure to Third Parties in a manner reasonably intended to maintain its confidentiality, and which (i) the Disclosing Party disclosed to the Receiving Party or the Receiving Party had access to on or before the Separation Date, (ii) is the subject of any Transaction Agreement and known to or in the possession of the Receiving Party as of the Separation Date or (iii) is disclosed to the Receiving Party pursuant to any Transaction Agreement for a period of one (1) year after the Effective Date. Confidential Information may include information relating to, by way of example, research, products, services, customers, markets, -1- software, developments, inventions, processes, designs, drawings, engineering, marketing or finances, and may be in writing, disclosed orally or learned by inspection of computer programming code, equipment or facilities. (b) Confidential Information of Third Parties that is known to, in the possession of or acquired by a Receiving Party pursuant to a relationship with the Disclosing Party shall be deemed the Disclosing Party's Confidential Information for purposes herein. (c) Notwithstanding the foregoing provisions of this Section 1.2, Confidential Information shall exclude information that: (i) was in the Receiving Party's possession before receipt from the Disclosing Party and obtained from a source other than the Disclosing Party and other than through the prior relationship of the Disclosing Party and the Receiving Party before the Separation Date; (ii) is or becomes a matter of public knowledge through no fault of the Receiving Party; (iii) is rightfully received by the Receiving Party from a Third Party without a duty of confidentiality; (iv) is disclosed by the Disclosing Party to a Third Party without a duty of confidentiality on the Third Party; (v) is independently developed by the Receiving Party; or (vi) is disclosed by the Receiving Party with the Disclosing Party's prior written approval. 1.3 CONFIDENTIALITY PERIOD. "Confidentiality Period" means, (i) with respect to Confidential Information that is not Highly Confidential Information, five (5) years, and (ii) with respect to Highly Confidential Information, in perpetuity, after either (A) the Separation Date with respect to Confidential Information of the Disclosing Party that is known to or in the possession of the Receiving Party as of the Separation Date or (B) the date of disclosure with respect to Confidential Information that is disclosed by the Disclosing Party to the Receiving Party after the Separation Date. 1.4 DISCLOSING PARTY. "Disclosing Party" means the party owning or disclosing the relevant Confidential Information. 1.5 DISTRIBUTION DATE. "Distribution Date" has the meaning set forth in the Master Separation and Distribution Agreement. 1.6 HIGHLY CONFIDENTIAL INFORMATION. "Highly Confidential Information" means Confidential Information that is source code for products that are commercially released or for which substantial steps have been taken to commercialization. 1.7 MASTER SEPARATION AND DISTRIBUTION AGREEMENT. "Master Separation and Distribution Agreement" means that certain Master Separation and Distribution Agreement between 3Com and Palm. 1.8 PERSON. "Person" means an individual, a partnership, a corporation, a limited liability company, an association, a joint stock company, a trust, a joint venture, an unincorporated organization, and a governmental entity or any department, agency or political subdivision thereof. 1.9 RECEIVING PARTY. "Receiving Party" means the non-owning party or recipient of the relevant Confidential Information. -2- 1.10 SEPARATION DATE. "Separation Date" means 12:01 a.m., Pacific Time, February 26, 2000, or such other date as may be fixed by the Board of Directors of 3Com. 1.11 SUBSIDIARY. "Subsidiary" of any Person means a corporation or other organization, whether incorporated or unincorporated, of which at least a majority of the securities or interests having by the terms thereof ordinary voting power to elect at least a majority of the board of directors or others performing similar functions with respect to such corporation or other organization is directly or indirectly owned or controlled by such Person or by any one or more of its Subsidiaries, or by such Person and one or more of its Subsidiaries; provided, however, that no Person that is not directly or indirectly wholly-owned by any other Person shall be a Subsidiary of such other Person unless such other Person controls, or has the right, power or ability to control, that Person. For purposes of this Agreement, Palm shall be deemed not to be a subsidiary of 3Com. 1.12 THIRD PARTY. "Third Party" means a Person other than 3Com and its Subsidiaries and Palm and its Subsidiaries. 1.13 TRANSACTION AGREEMENTS. "Transaction Agreements" mean the Master Separation and Distribution Agreement and the Ancillary Agreements. ARTICLE 2 CONFIDENTIALITY 2.1 CONFIDENTIALITY AND NON-USE OBLIGATIONS. During the Confidentiality Period, the Receiving Party shall (i) protect the Confidential Information of the Disclosing Party by using the same degree of care, but no less than a reasonable degree of care, to prevent the unauthorized use, dissemination, or publication of the Confidential Information as Receiving Party uses to protect its own confidential information of a like nature, (ii) not use such Confidential Information in violation of any use restriction in any Transaction Agreement, and (iii) not disclose such Confidential Information to any Third Party, except as expressly permitted under this Agreement, in the Transaction Agreements or in any other agreements entered into between the parties in writing, without prior written consent of the Disclosing Party. 2.2 DISCLOSURE TO SUBLICENSEES. The Receiving Party has the right to disclose to its sublicensees permitted under a Transaction Agreement portions of Confidential Information as reasonably necessary in the exercise of the Receiving Party's sublicense rights under such Transaction Agreement, subject to the sublicensee's agreement in writing to confidentiality and non-use terms at least as protective of the Disclosing Party as the provisions of this Agreement. 2.3 CONTRACT MANUFACTURERS AND FOUNDRIES. The Receiving Party has the right to disclose to its contract manufacturers and foundries permitted under any Transaction Agreement portions of the Confidential Information as reasonably necessary in the exercise of the Receiving Party's "have made" rights under any Transaction Agreement, subject to the contract manufacturer's and foundry's agreement in writing to confidentiality and non-use terms at least as protective of the Disclosing Party as the provisions of this Agreement. -3- 2.4 RESIDUALS. Notwithstanding any other provision of this Agreement, the Receiving Party shall be free, and the Disclosing Party hereby grants to the Receiving Party, except as otherwise provided in this Section 2.4, the right, to use or exploit for any purpose and without restriction the Residuals resulting from access to or work with the Confidential Information of the Disclosing Party. "Residuals" means information retained in the unaided memory of an individual who has had access to Confidential Information. The Receiving Party shall have no obligation to pay royalties for any use of Residuals. However, this Section 2.4 does not grant the Receiving Party any rights under any patents or copyrights of the Disclosing Party. 2.5 COMPELLED DISCLOSURE. If the Receiving Party or any of its respective Subsidiaries believes that it will be compelled by a court or other authority to disclose Confidential Information of the Disclosing Party, it shall (i) give the Disclosing Party prompt written notice so that the Disclosing Party may take steps to oppose such disclosure, and (ii) cooperate with the Disclosing Party in its attempts to oppose such disclosure. If the Receiving Party complies with the above, it shall not be prohibited from complying with such requirement to disclose, but shall take all reasonable steps to make such disclosure subject to a suitable protective order or otherwise prevent unrestricted or public disclosure. 2.6 NO RESTRICTION ON DISCLOSING PARTY. Nothing in this Agreement shall restrict the Disclosing Party from using, disclosing, or disseminating its own Confidential Information in any way. 2.7 NO RESTRICTION ON REASSIGNMENT. This Agreement shall not restrict reassignment of the Receiving Party's employees. 2.8 THIRD PARTY RESTRICTIONS. Nothing in the Agreement supersedes any restriction imposed by Third Parties on their Confidential Information, and there is no obligation on the Disclosing Party to conform Third Party agreements to the terms of this Agreement. ARTICLE 3 WARRANTY DISCLAIMER EACH PARTY ACKNOWLEDGES AND AGREES THAT ALL CONFIDENTIAL INFORMATION IS PROVIDED ON AN "AS IS, WHERE IS" BASIS AND THAT NEITHER PARTY NOR ANY OF ITS SUBSIDIARIES HAS MADE OR WILL MAKE ANY WARRANTY WHATSOEVER, EXPRESS, IMPLIED OR STATUTORY, INCLUDING, WITHOUT LIMITATION, ANY IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, TITLE, ENFORCEABILITY OR NON- INFRINGEMENT. ARTICLE 4 CONFIDENTIALITY OF AGREEMENT Each party agrees that the terms and conditions of the Transaction Agreements marked as confidential shall be treated as Confidential Information and that neither party will disclose such -4- terms or conditions to any Third Party without the prior written consent of the other party, provided, however, that each party may disclose such terms and conditions of such agreements marked as confidential: (a) as required by any court or other governmental body (subject to Section 2.5); (b) as otherwise required by law (subject to Section 2.5); (c) in confidence, to legal counsel of the parties, accountants, and other professional advisors; (d) in confidence to banks, investors and other financing sources and their advisors; (e) in connection with the enforcement of this Agreement or rights under this Agreement; or (f) in confidence, in connection with an actual or prospective merger or acquisition or similar transaction. ARTICLE 5 TERM AND TERMINATION 5.1 TERM. This Agreement shall remain in full force and effect unless and until terminated by the mutual written agreement of the parties. 5.2 SURVIVAL. Articles 2 (with respect to Confidential Information acquired or disclosed prior to the date of termination), 3, 4, 6, 7 and 8 shall survive any termination of this Agreement. ARTICLE 6 DISPUTE RESOLUTION 6.1 MEDIATION. If a dispute, controversy or claim ("Dispute") arises between the parties relating to the interpretation or performance of this Agreement or the grounds for the termination hereof, appropriate senior executives (e.g. director or V.P. level) of each party who shall have the authority to resolve the matter shall meet to attempt in good faith to negotiate a resolution of the Dispute prior to pursuing other available remedies. The initial meeting between the appropriate senior executives shall be referred to herein as the "Dispute Resolution Commencement Date." Discussions and correspondence relating to trying to resolve such Dispute shall be treated as confidential information developed for the purpose of settlement and shall be exempt from discovery or production and shall not be admissible. If the senior executives are unable to resolve the Dispute within thirty (30) days from the Dispute Resolution Commencement Date, and either party wishes to pursue its rights relating to such Dispute, then the Dispute will be mediated by a mutually acceptable -5- mediator appointed pursuant to the mediation rules of JAMS/Endispute within thirty (30) days after written notice by one party to the other demanding non- binding mediation. Neither party may unreasonably withhold consent to the selection of a mediator or the location of the mediation. Both parties will share the costs of the mediation equally, except that each party shall bear its own costs and expenses, including attorney's fees, witness fees, travel expenses, and preparation costs. The parties may also agree to replace mediation with some other form of non-binding or binding ADR. 6.2 ARBITRATION. Any Dispute which the parties cannot resolve through mediation within ninety (90) days of the Dispute Resolution Commencement Date, unless otherwise mutually agreed, shall be submitted to final and binding arbitration under the then current Commercial Arbitration Rules of the American Arbitration Association ("AAA"), by three (3) arbitrators in Santa Clara County, California. Such arbitrators shall be selected by the mutual agreement of the parties or, failing such agreement, shall be selected according to the aforesaid AAA rules. The arbitrators will be instructed to prepare and deliver a written, reasoned opinion stating their decision within thirty (30) days of the completion of the arbitration. The prevailing party in such arbitration shall be entitled to expenses, including costs and reasonable attorneys' and other professional fees, incurred in connection with the arbitration (but excluding any costs and fees associated with prior negotiation or mediation). The decision of the arbitrator shall be final and non-appealable and may be enforced in any court of competent jurisdiction. The use of any ADR procedures will not be construed under the doctrine of laches, waiver or estoppel to adversely affect the rights of either party. 6.3 COURT ACTION. Any Dispute regarding the following is not required to be negotiated, mediated or arbitrated prior to seeking relief from a court of competent jurisdiction: breach of any obligation of confidentiality; infringement, misappropriation, or misuse of any intellectual property right; any other claim where interim relief from the court is sought to prevent serious and irreparable injury to one of the parties or to others. However, the parties to the Dispute shall make a good faith effort to negotiate and mediate such Dispute, according to the above procedures, while such court action is pending. 6.4 CONTINUITY OF SERVICE AND PERFORMANCE. Unless otherwise agreed in writing, the parties will continue to provide service and honor all other commitments under this Agreement and each Ancillary Agreement during the course of dispute resolution pursuant to the provisions of this Article 6 with respect to all matters not subject to such dispute, controversy or claim.. ARTICLE 7 MISCELLANEOUS PROVISIONS 7.1 EXPORT RESTRICTIONS. Both parties shall adhere to all applicable laws, regulations and rules relating to the export of technical data, and shall not export or reexport any technical data, any products received from Disclosing Party, or the direct product of such technical data, to any proscribed country listed in such applicable laws, regulations and rules unless properly authorized. -6- 7.2 NO IMPLIED LICENSES. Nothing contained in this Agreement shall be construed as conferring any rights by implication, estoppel or otherwise, under any intellectual property right, other than the rights expressly granted in this Agreement with respect to Confidential Information. Neither party is required hereunder to furnish or disclose to the other any technical or other information. 7.3 INFRINGEMENT SUITS. Neither party shall have any obligation hereunder to institute any action or suit against Third Parties for misappropriation of any of its Confidential Information or to defend any action or suit brought by a Third Party that alleges infringement of any intellectual property rights by the Receiving Party's authorized use of the Disclosing Party's Confidential Information. 7.4 NO OTHER OBLIGATIONS. NEITHER PARTY ASSUMES ANY RESPONSIBILITIES OR OBLIGATIONS WHATSOEVER, OTHER THAN THE RESPONSIBILITIES AND OBLIGATIONS EXPRESSLY SET FORTH IN THIS AGREEMENT OR A SEPARATE WRITTEN AGREEMENT BETWEEN THE PARTIES. 7.5 ENTIRE AGREEMENT. This Agreement, the Master Separation and Distribution Agreement and the other Ancillary Agreements and the Exhibits and Schedules referenced or attached hereto and thereto constitute the entire agreement between the parties with respect to the subject matter hereof and thereof and shall supersede all prior written and oral and all contemporaneous oral agreements and understandings with respect to the subject matter hereof and thereof. Notwithstanding the foregoing, the parties agree that any agreements entered into between them on or after the Separation Date for the protection of specific Confidential Information shall supersede the terms of this Agreement with respect to such Confidential Information. 7.6 GOVERNING LAW. This Agreement shall be construed in accordance with and all Disputes hereunder shall be governed by the laws of the State of California, excluding its conflict of law rules and the United Nations Convention on Contracts for the International Sale of Goods. The Superior Court of Santa Clara County and/or the United States District Court for the Northern District of California shall have jurisdiction and venue over all Disputes between the parties that are permitted to be brought in a court of law pursuant to Section 6 above. 7.7 INTERPRETATION. The headings contained in this Agreement, in any Exhibit hereto and in the table of contents to this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Any capitalized term used in any Exhibit but not otherwise defined therein, shall have the meaning assigned to such term in this Agreement. When a reference is made in this Agreement to an Article or a Section or an Exhibit, such reference shall be to an Article or Section of, or an Exhibit to, this Agreement unless otherwise indicated. 7.8 NOTICES. Notices, offers, requests or other communications required or permitted to be given by either party pursuant to the terms of this Agreement shall be given in writing to the respective parties to the following addresses: if to 3Com : -7- 3Com Corporation 5400 Bayfront Plaza Santa Clara, California 95052 Attention: General Counsel Fax: (408) 326-6434 if to Palm: Palm, Inc. 5400 Bayfront Plaza Santa Clara, California 95052 Attention: General Counsel Fax: (408) 326-6434 or to such other address as the party to whom notice is given may have previously furnished to the other in writing as provided herein. Any notice involving non-performance, termination, or renewal shall be sent by hand delivery, recognized overnight courier or, within the United States, may also be sent via certified mail, return receipt requested. All other notices may also be sent by fax, confirmed by first class mail. All notices shall be deemed to have been given and received on the earlier of actual delivery or three (3) days from the date of postmark. 7.9 NONASSIGNABILITY. Neither party may, directly or indirectly, in whole or in part, whether by operation of law or otherwise, assign or transfer this Agreement, without the other party's prior written consent, and any attempted assignment, transfer or delegation without such prior written consent shall be voidable at the sole option of such other party. Notwithstanding the foregoing, each party (or its permitted successive assignees or transferees hereunder) may assign or transfer this Agreement as a whole without consent to a Person that succeeds to all or substantially all of the business or assets of such party as long as such Person agrees to accept all the terms and conditions set forth herein. Without limiting the foregoing, this Agreement will be binding upon and inure to the benefit of the parties and their permitted successors and assigns. 7.11 SEVERABILITY. If any term or other provision of this Agreement or the Exhibits attached hereto is determined by a court, administrative agency or arbitrator to be invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to either party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that transactions contemplated hereby are fulfilled to the fullest extent possible. 7.12 FAILURE OR INDULGENCE NOT WAIVER; REMEDIES CUMULATIVE. No failure or delay on the part of either party hereto in the exercise of any right hereunder shall impair such right or be construed to be a waiver of, or acquiescence in, any breach of any representation, warranty or agreement herein, nor shall any single or partial exercise of any such right preclude other or further exercise thereof or of any other right. All rights and remedies existing under this -8- Agreement or the Exhibits attached hereto are cumulative to, and not exclusive of, any rights or remedies otherwise available. 7.13 AMENDMENT. No change or amendment will be made to this Agreement or the Exhibits attached hereto except by an instrument in writing signed on behalf of each of the parties to such agreement. 7.14 COUNTERPARTS. This Agreement, including the Ancillary Agreements and the Exhibits and Schedules hereto and thereto and the other documents referred to herein or therein, may be executed in counterparts, each of which shall be deemed to be an original but all of which shall constitute one and the same agreement. WHEREFORE, the parties have signed this Master Confidential Disclosure Agreement effective as of the date first set forth above. 3COM CORPORATION PALM, INC. By:_____________________________ By:__________________________________ Name:___________________________ Name:________________________________ Title:__________________________ Title:_______________________________ -9- EX-2.11 12 FORM OF INDEMNIFICATION & INSURANCE MATTERS AGRMT EXHIBIT 2.11 Indemnification and Insurance Matters Agreement between 3COM CORPORATION and PALM, INC. ______________, 2000 TABLE OF CONTENTS
Page ---- ARTICLE I. MUTUAL RELEASES; INDEMNIFICATION.................................................. 1 Section 1.1. Release of Pre-Closing Claims............................................... 1 Section 1.2. Indemnification by Palm..................................................... 2 Section 1.3. Indemnification by 3Com..................................................... 2 Section 1.4. Indemnification With Respect to Environmental Actions and Conditions........ 3 Section 1.5. Reductions for Insurance Proceeds and Other Recoveries...................... 4 Section 1.6. Procedures for Defense, Settlement and Indemnification of Third Party Claims ............................................................................ 4 Section 1.7. Additional Matters.......................................................... 5 Section 1.8. Survival of Indemnities..................................................... 6 ARTICLE II. INSURANCE MATTERS................................................................ 6 Section 2.1. Palm Insurance Coverage During the Transition Period........................ 6 Section 2.2. Cooperation and Agreement Not to Release Carriers........................... 7 Section 2.3. Palm Insurance Coverage After the Insurance Transition Period............... 7 Section 2.4. Responsibilities for Deductibles and/or Self-insured Obligations............ 7 Section 2.5. Procedures With Respect to Insured Palm Liabilities......................... 8 Section 2.6. Insufficient Limits of Liability for 3Com Liabilities and Palm Liabilities.. 8 Section 2.7. Cooperation................................................................. 8 Section 2.8. No Assignment or Waiver..................................................... 8 Section 2.9. No Liability................................................................ 8 Section 2.10. Additional or Alternate Insurance........................................... 9 Section 2.11. Further Agreements.......................................................... 9 Section 2.12. Matters Governed by Employee Matters Agreement.............................. 9 ARTICLE III. MISCELLANEOUS.................................................................. 10 Section 3.1. Entire Agreement............................................................ 10 Section 3.2. Governing Law............................................................... 10 Section 3.3. Dispute Resolution.......................................................... 10 Section 3.4. Notices..................................................................... 11 Section 3.5. Parties in Interest......................................................... 11 Section 3.6. Other Agreements Evidencing Indemnification Obligations..................... 12 Section 3.7. Counterparts................................................................ 12 Section 3.8. Assignment.................................................................. 12 Section 3.9. Severability................................................................ 12 Section 3.10. Failure or Indulgence Not Waiver............................................ 13 Section 3.11. Amendment................................................................... 13 Section 3.12. Authority................................................................... 13 Section 3.13. Interpretation.............................................................. 13
-i- TABLE OF CONTENTS (continued)
Page ---- ARTICLE IV. DEFINITIONS...................................................................... 13 Section 4.1. 3Com Business............................................................... 13 Section 4.2. 3Com Facilities............................................................. 13 Section 4.3. 3Com Group.................................................................. 13 Section 4.4. 3Com Indemnitees............................................................ 14 Section 4.5. Action...................................................................... 14 Section 4.6. Affiliated Company.......................................................... 14 Section 4.7. Assets...................................................................... 14 Section 4.8. Assignment Agreement........................................................ 14 Section 4.9. Coverage Amount............................................................. 14 Section 4.10. Employee Matters Agreement.................................................. 14 Section 4.11. Environmental Actions....................................................... 14 Section 4.12. Environmental Conditions.................................................... 15 Section 4.13. Environmental Laws.......................................................... 15 Section 4.14. Hazardous Materials......................................................... 15 Section 4.15. Indemnitee.................................................................. 15 Section 4.16. Insurance Policies.......................................................... 15 Section 4.17. Insurance Proceeds.......................................................... 15 Section 4.18. Insurance Transition Period................................................. 16 Section 4.19. Insured Palm Liability...................................................... 16 Section 4.20. IPO Date.................................................................... 16 Section 4.21. IPO Liabilities............................................................. 16 Section 4.22. IPO Registration Statement.................................................. 16 Section 4.23. Liabilities................................................................. 16 Section 4.24. Non-US Plan................................................................. 16 Section 4.25. Palm Business............................................................... 16 Section 4.26. Palm Contracts.............................................................. 16 Section 4.27. Palm Covered Parties........................................................ 17 Section 4.28. Palm Facilities............................................................. 17 Section 4.29. Palm Group.................................................................. 17 Section 4.30. Palm Indemnitees............................................................ 17 Section 4.31. Palm Liabilities............................................................ 17 Section 4.32. Person...................................................................... 17 Section 4.33. Pre-Separation Third Party Site Liabilities................................. 17 Section 4.34. Release..................................................................... 17 Section 4.35. Separation.................................................................. 18 Section 4.36. Separation Agreement........................................................ 18 Section 4.37. Separation Date............................................................. 18 Section 4.38. Shared 3Com Percentage...................................................... 18
-ii- TABLE OF CONTENTS (continued)
Page ---- Section 4.39. Shared Palm Percentage...................................................... 18 Section 4.40. Shared Percentage........................................................... 18 Section 4.41. Subsidiary.................................................................. 18 Section 4.42. Tax Sharing Agreement....................................................... 19 Section 4.43. Taxes....................................................................... 19 Section 4.44. Third Party Claim........................................................... 19
-iii- INDEMNIFICATION AND INSURANCE MATTERS AGREEMENT This Indemnification and Insurance Matters Agreement (this "Agreement") is entered into on _________, 2000 between 3Com Corporation, a Delaware corporation ("3Com"), and Palm, Inc., a Delaware corporation ("Palm"). Capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed to such terms in the Article IV below. RECITALS WHEREAS, 3Com and its Subsidiaries have transferred or will transfer to Palm and its Subsidiaries effective as of the Separation Date, substantially all of the assets of the Palm Business in accordance with the Master Separation and Distribution Agreement dated as of December ___, 1999 between 3Com and Palm's predecessor corporation, Palm Computing, Inc., a California corporation (the "Separation Agreement"). WHEREAS, the parties desire to set forth certain agreements regarding indemnification and insurance. NOW, THEREFORE, in consideration of the foregoing and the covenants and agreements set forth below, the parties hereto agree as follows: ARTICLE I. MUTUAL RELEASES; INDEMNIFICATION Section 1.1. Release of Pre-Closing Claims. (a) Palm Release. Except as provided in Section 1.1(c) and Schedule 1.1 to this Agreement, effective as of the Separation Date, Palm does hereby, for itself and as agent for each member of the Palm Group, remise, release and forever discharge the 3Com Indemnitees from any and all Liabilities whatsoever, whether at law or in equity (including any right of contribution), whether arising under any contract or agreement, by operation of law or otherwise, existing or arising from any acts or events occurring or failing to occur or alleged to have occurred or to have failed to occur or any conditions existing or alleged to have existed on or before the Separation Date, including in connection with the transactions and all other activities to implement any of the Separation, the IPO and the Distribution. (b) 3Com Release. Except as provided in Section 1.1(c) and Schedule 1.1 to this Agreement, effective as of the Separation Date, 3Com does hereby, for itself and as agent for each member of the 3Com Group, remise, release and forever discharge the Palm Indemnitees from any and all Liabilities whatsoever, whether at law or in equity (including any right of contribution), whether arising under any contract or agreement, by operation of law or otherwise, existing or arising from any acts or events occurring or failing to occur or alleged to have occurred or to have failed to occur or any conditions existing or alleged to have existed on or before the Separation Date, including in connection with the transactions and all other activities to implement any of the Separation, the IPO and the Distribution. (c) No Impairment. Nothing contained in Section 1.1(a) or (b) shall impair any right of any Person to enforce the Separation Agreement or any other Ancillary Agreement (including this Agreement), in each case in accordance with its terms. (d) No Actions as to Released Claims. Palm agrees, for itself and as agent for each member of the Palm Group, not to make any claim or demand, or commence any Action asserting any claim or demand, including any claim of contribution or any indemnification, against 3Com or any member of the 3Com Group, or any other Person released pursuant to Section 1.1(a), with respect to any Liabilities released pursuant to Section 1.1(a). 3Com agrees, for itself and as agent for each member of the 3Com Group, not to make any claim or demand, or commence any Action asserting any claim or demand, including any claim of contribution or any indemnification, against Palm or any member of the Palm Group, or any other Person released pursuant to Section 1.1(b), with respect to any Liabilities released pursuant to Section 1.1(b). (e) Further Instruments. At any time, at the request of any other party, each party shall cause each member of its respective Group to execute and deliver releases reflecting the provisions hereof. Section 1.2. Indemnification by Palm. Except as otherwise provided in this Agreement, Palm shall, for itself and as agent for each member of the Palm Group, indemnify, defend (or, where applicable, pay the defense costs for) and hold harmless the 3Com Indemnitees from and against any and all Liabilities that any third party seeks to impose upon the 3Com Indemnitees, or which are imposed upon the 3Com Indemnitees, and that relate to, arise out of or result from any of the following items (without duplication): (i) the Palm Business, any Palm Liability or any Palm Contract; (ii) any breach by Palm or any member of the Palm Group of the Separation Agreement or any of the Ancillary Agreements (including this Agreement); and (iii) any IPO Liabilities. In the event that any member of the Palm Group makes a payment to the 3Com Indemnitees hereunder, and any of the 3Com Indemnitees subsequently diminishes the Liability on account of which such payment was made, either directly or through a third-party recovery, 3Com will promptly repay (or will procure a 3Com Indemnitee to promptly repay) such member of the Palm Group the amount by which the payment made by such member of the Palm Group exceeds the actual cost of the associated indemnified Liability. This Section 1.2 shall not apply to any Liability indemnified under Section 1.4. Section 1.3. Indemnification by 3Com. Except as otherwise provided in this Agreement, 3Com shall, for itself and as agent for each member of the 3Com Group, indemnify, defend (or, where applicable, pay the defense costs for) and hold harmless the Palm Indemnitees from and -2- against any and all Liabilities that any third party seeks to impose upon the Palm Indemnitees, or which are imposed upon the Palm Indemnitees, and that relate to, arise out of or result from any of the following items (without duplication): (i) the 3Com Business or any Liability of the 3Com Group other than the Palm Liabilities; and (ii) any breach by 3Com or any member of the 3Com Group of the Separation Agreement or any of the Ancillary Agreements (including this Agreement). In the event that any member of the 3Com Group makes a payment to the Palm Indemnitees hereunder, and any of the Palm Indemnitees subsequently diminishes the Liability on account of which such payment was made, either directly or through a third-party recovery, Palm will promptly repay (or will procure a Palm Indemnitee to promptly repay) such member of the 3Com Group the amount by which the payment made by such member of the 3Com Group exceeds the actual cost of the indemnified Liability. This Section 1.3 shall not apply to any Liability indemnified under Section 1.4. Section 1.4. Indemnification With Respect to Environmental Actions and Conditions. (a) Indemnification by Palm. Palm shall, for itself and as agent for each member of the Palm Group, indemnify, defend and hold harmless the 3Com Indemnitees from and against any and all Environmental Actions relating to, arising out of or resulting from Environmental Conditions (i) arising out of operations occurring on and after the Separation Date at any of the Palm Facilities, or (ii) on any of the Palm Facilities arising from an event causing contamination that first occurs on or after the Separation Date (including any Release of Hazardous Materials occurring after the Separation Date that migrates to any of the Palm Facilities), except to the extent that such Environmental Conditions arise out of the operations of the 3Com Group on and after the Separation Date. (b) Indemnification by 3Com. 3Com shall, for itself and as agent for each member of the 3Com Group, indemnify, defend and hold harmless the Palm Indemnitees from and against any and all Environmental Actions relating to, arising out of or resulting from any of the following items: (i) Environmental Conditions (x) existing on, under, about or in the vicinity of any of the Palm Facilities prior to the Separation Date, or (y) arising out of operations occurring on or before the Separation Date at any of the Palm Facilities; (ii) Except as arising out of the operations of the Palm Group on and after the Separation Date, Environmental Conditions on, under, about or arising out of operations occurring at any time, whether before or after the Separation Date, at any of the 3Com Facilities; and (iii) Pre-Separation Third Party Site Liabilities. (c) Agreement Regarding Payments to Indemnitee. In the event an Indemnifying Party makes any payment to or on behalf of an Indemnitee with respect to an Environmental Action for -3- which the Indemnifying Party is obligated to indemnify under this Section 1.4, and the Indemnitee subsequently receives any payment from a third party on account of the same financial obligation covered by the payment made by the Indemnifying Party for that Environmental Action or otherwise diminishes the financial obligation, the Indemnitee will promptly pay the Indemnifying Party the amount by which the payment made by the Indemnifying Party, exceeds the actual cost of the financial obligation. Section 1.5. Reductions for Insurance Proceeds and Other Recoveries. The amount that any party (an "Indemnifying Party") is or may be required to pay to any other Person (an "Indemnitee") pursuant to Section 1.2, 1.3 or 1.4, as applicable, shall be reduced (retroactively or prospectively) by any Insurance Proceeds or other amounts actually recovered from third parties by or on behalf of such Indemnitee in respect of the related loss. The existence of a claim by an Indemnitee for monies from an insurer or against a third party in respect of any indemnifiable loss shall not, however, delay any payment pursuant to the indemnification provisions contained herein and otherwise determined to be due and owing by an Indemnifying Party. Rather the Indemnifying Party shall make payment in full of the amount determined to be due and owing by it against an assignment by the Indemnitee to the Indemnifying Party of the entire claim of the Indemnitee for Insurance Proceeds or against such third party. Notwithstanding any other provisions of this Agreement, it is the intention of the parties that no insurer or any other third party shall be (i) entitled to a benefit it would not be entitled to receive in the absence of the foregoing indemnification provisions, or (ii) relieved of the responsibility to pay any claims for which it is obligated. If an Indemnitee has received the payment required by this Agreement from an Indemnifying Party in respect of any indemnifiable loss and later receives Insurance Proceeds or other amounts in respect of such indemnifiable loss, then such Indemnitee shall hold such Insurance Proceeds or other amounts in trust for the benefit of the Indemnifying Party (or Indemnifying Parties) and shall pay to the Indemnifying Party, as promptly as practicable after receipt, a sum equal to the amount of such Insurance Proceeds or other amounts received, up to the aggregate amount of any payments received from the Indemnifying Party pursuant to this Agreement in respect of such indemnifiable loss (or, if there is more than one Indemnifying Party, the Indemnitee shall pay each Indemnifying Party, its proportionate share (based on payments received from the Indemnifying Parties) of such Insurance Proceeds). Section 1.6. Procedures for Defense, Settlement and Indemnification of Third Party Claims. (a) Notice of Claims. If a 3Com Indemnitee or a Palm Indemnitee (as applicable) (an "Indemnitee") shall receive notice or otherwise learn of the assertion by a Person (including any Governmental Authority) who is not a member of the 3Com Group or the Palm Group of any claim or of the commencement by any such Person of any Action (collectively, a "Third Party Claim") with respect to which a party (an "Indemnifying Party") may be obligated to provide indemnification to such Indemnitee pursuant to Section 1.2, 1.3 or 1.4, or any other section of the Separation Agreement or any Ancillary Agreement (including this Agreement), 3Com and Palm (as applicable) will ensure that such Indemnitee shall give such Indemnifying Party written notice thereof within 30 days after becoming aware of such Third Party Claim. Any such notice shall describe the Third Party Claim in reasonable detail. Notwithstanding the foregoing, the delay or -4- failure of any Indemnitee or other Person to give notice as provided in this Section 1.6(a) shall not relieve the related Indemnifying Party of its obligations under this Article I, except to the extent that such Indemnifying Party is actually and substantially prejudiced by such delay or failure to give notice. (b) Defense By Indemnifying Party. An Indemnifying Party will manage the defense of and may settle or compromise any Third Party Claim. Within 30 days after the receipt of notice from an Indemnitee in accordance with Section 1.6(a) (or sooner, if the nature of such Third Party Claim so requires), the Indemnifying Party shall notify the Indemnitee that the Indemnifying Party will assume responsibility for managing the defense of such Third Party Claim, which notice shall specify any reservations or exceptions. (c) Defense By Indemnitee. If an Indemnifying Party fails to assume responsibility for managing the defense of a Third Party Claim, or fails to notify an Indemnitee that it will assume responsibility as provided in Section 1.6(a), such Indemnitee may manage the defense of such Third Party Claim; provided, however, that the Indemnifying Party shall reimburse all such costs and expenses in the event it is ultimately determined that the Indemnifying Party is obligated to indemnify the Indemnitee with respect to such Third Party Claim. (d) No Settlement By Indemnitee Without Consent. Unless the Indemnifying Party has failed to manage the defense of the Third Party Claim in accordance with the terms of this Agreement, no Indemnitee may settle or compromise any Third Party Claim without the consent of the Indemnifying Party. (e) No Consent to Certain Judgments or Settlements Without Consent. Notwithstanding any provision of this Section 1.6, no party shall consent to entry of any judgment or enter into any settlement of a Third Party Claim without the consent of the other party (such consent not to be unreasonably withheld) if the effect of such judgment or settlement is to (A) permit any injunction, declaratory judgment, other order or other nonmonetary relief to be entered, directly or indirectly, against the other party or (B) affect the other party in a material fashion due to the allocation of Liabilities and related indemnities set forth in the Separation Agreement, this Agreement or any other Ancillary Agreement. Section 1.7. Additional Matters. (a) Cooperation in Defense and Settlement. With respect to any Third Party Claim that implicates both Palm and 3Com in a material fashion due to the allocation of Liabilities, responsibilities for management of defense and related indemnities set forth in the Separation Agreement, this Agreement or any of the Ancillary Agreements, the parties agree to cooperate fully and maintain a joint defense (in a manner that will preserve the attorney-client privilege with respect thereto) so as to minimize such Liabilities and defense costs associated therewith. The party that is not responsible for managing the defense of such Third Party Claims shall, upon reasonable request, be consulted with respect to significant matters relating thereto and may, if necessary or helpful, associate counsel to assist in the defense of such claims. -5- (b) Substitution. In the event of an Action in which the Indemnifying Party is not a named defendant, if either the Indemnitee or the Indemnifying Party shall so request, the parties shall endeavor to substitute the Indemnifying Party for the named defendant. If such substitution or addition cannot be achieved for any reason or is not requested, the rights and obligations of the parties regarding indemnification and the management of the defense of claims as set forth in this Article I shall not be altered. (c) Subrogation. In the event of payment by or on behalf of any Indemnifying Party to or on behalf of any Indemnitee in connection with any Third Party Claim, such Indemnifying Party shall be subrogated to and shall stand in the place of such Indemnitee, in whole or in part based upon whether the Indemnifying Party has paid all or only part of the Indemnitee's Liability, as to any events or circumstances in respect of which such Indemnitee may have any right, defense or claim relating to such Third Party Claim against any claimant or plaintiff asserting such Third Party Claim or against any other person. Such Indemnitee shall cooperate with such Indemnifying Party in a reasonable manner, and at the cost and expense of such Indemnifying Party, in prosecuting any subrogated right, defense or claim. (d) Not Applicable to Taxes. This Agreement shall not apply to Taxes (which are covered by the Tax Sharing Agreement). Section 1.8. Survival of Indemnities. Subject to Section 3.8, the rights and obligations of the members of the 3Com Group and the Palm Group under this Article I shall survive the sale or other transfer by any party of any Assets or businesses or the assignment by it of any Liabilities or the sale by any member of the 3Com Group or the Palm Group of the capital stock or other equity interests of any Subsidiary to any Person. ARTICLE II. INSURANCE MATTERS Section 2.1. Palm Insurance Coverage During the Transition Period. (a) Maintain Comparable Insurance. Throughout the period beginning on the Separation Date and ending on the Distribution Date (i.e., the "Insurance Transition Period"), 3Com shall, subject to insurance market conditions and other factors beyond its control, maintain policies of insurance, including for the benefit of Palm or any of its Subsidiaries, directors, officers, employees or other covered parties (collectively, the "Palm Covered Parties") which are comparable to those maintained generally by 3Com; provided, however, that if 3Com determines that (i) the amount or scope of such coverage will be reduced to a level materially inferior to the level of coverage in existence immediately prior to the Insurance Transition Period or (ii) the retention or deductible level applicable to such coverage, if any, will be increased to a level materially greater than the levels in existence immediately prior to the Insurance Transition Period, 3Com shall give Palm notice of such determination as promptly as practicable. Upon notice of such determination, Palm shall be entitled to no less than 60 days to evaluate its options regarding continuance of coverage hereunder and may cancel its interest in all or any portion of such coverage as of any day within such 60 day period. -6- (b) Reimbursement for Premiums. Palm shall promptly pay or reimburse 3Com, as the case may be, for premium expenses, and Palm Covered Parties shall promptly pay or reimburse 3Com for any costs and expenses which 3Com may incur in connection with the insurance coverages maintained pursuant to this Section 2.1, including but not limited to any subsequent premium adjustments. All payments and reimbursements by Palm and Palm Covered Parties to 3Com shall be made within thirty (30) days after Palm's receipt of an invoice from 3Com. Section 2.2. Cooperation and Agreement Not to Release Carriers. Each of 3Com and Palm will share such information as is reasonably necessary in order to permit the other to manage and conduct its insurance matters in an orderly fashion. Each of 3Com and Palm, at the request of the other, shall cooperate with and use commercially reasonable efforts to assist the other in recoveries for claims made under any insurance policy for the benefit of any insured party, and neither 3Com nor Palm, nor any of their Subsidiaries, shall take any action which would intentionally jeopardize or otherwise interfere with either party's ability to collect any proceeds payable pursuant to any insurance policy. Except as otherwise contemplated by the Separation Agreement, this Agreement or any Ancillary Agreement, after the Separation Date, neither 3Com nor Palm shall (and shall ensure that no member of their respective Groups shall), without the consent of the other, provide any insurance carrier with a release, or amend, modify or waive any rights under any such policy or agreement, if such release, amendment, modification or waiver would adversely affect any rights or potential rights of any member of the other Group thereunder. However, nothing in this Section 2.2 shall (A) preclude any member of any Group from presenting any claim or from exhausting any policy limit, (B) require any member of any Group to pay any premium or other amount or to incur any Liability, or (C) require any member of any Group to renew, extend or continue any policy in force. Section 2.3. Palm Insurance Coverage After the Insurance Transition Period. From and after expiration of the Insurance Transition Period, Palm shall be responsible for obtaining and maintaining insurance programs for its risk of loss and such insurance arrangements shall be separate and apart from 3Com's insurance programs. Notwithstanding the foregoing, 3Com, upon the request of Palm, shall use all commercially reasonable efforts to assist Palm in the transition to its own separate insurance programs from and after the Insurance Transition Period, and shall provide Palm with any information that is in the possession of 3Com and is reasonably available and necessary to either obtain insurance coverages for Palm or to assist Palm in preventing unintended self- insurance, in whatever form. Section 2.4. Responsibilities for Deductibles and/or Self-insured Obligations. Palm will reimburse 3Com for all amounts necessary to exhaust or otherwise satisfy all applicable self-insured retentions, amounts for fronted policies, deductibles and retrospective premium adjustments and similar amounts not covered by Insurance Policies in connection with Palm Liabilities and Insured Palm Liabilities. -7- Section 2.5. Procedures With Respect to Insured Palm Liabilities. (a) Reimbursement. Palm will reimburse 3Com for all amounts incurred to pursue insurance recoveries from Insurance Policies for Insured Palm Liabilities. (b) Management of Claims. The defense of claims, suits or actions giving rise to potential or actual Insured Palm Liabilities will be managed (in conjunction with 3Com's insurers, as appropriate) by the party that would have had responsibility for managing such claims, suits or actions had such Insured Palm Liabilities been Palm Liabilities. Section 2.6. Insufficient Limits of Liability for 3Com Liabilities and Palm Liabilities. In the event that there are insufficient limits of liability available under 3Com's Insurance Policies in effect prior to the Distribution Date to cover the Liabilities of 3Com and/or Palm that would otherwise be covered by such Insurance Policies, then to the extent that other insurance is not available to 3Com and/or Palm for such Liabilities an adjustment will be made in accordance with the following procedures: (a) Each party will be allocated an amount equal to their Shared Percentage of the lesser of (A) the available limits of liability available under 3Com's Insurance Policies in effect prior to the Distribution Date net of uncollectible amounts attributable to insurer insolvencies, and (B) the proceeds received from 3Com's Insurance Policies if the Liabilities are the subject of disputed coverage claims and, following consultation with each other, 3Com and/or Palm agree to accept less than full policy limits from 3Com's and Palm's insurers (the "Coverage Amount"). (b) A party who receives more than its share of the Coverage Amount (the "Overallocated Party") agrees to reimburse the other party (the "Underallocated Party") to the extent that the Liabilities of the Underallocated Party that would have been covered under such Insurance Policies is less than the Underallocated Party's share of the Coverage Amount. (c) This Section 2.6(a) shall terminate ten years following the Distribution Date. Section 2.7. Cooperation. 3Com and Palm will cooperate with each other in all respects, and they shall execute any additional documents which are reasonably necessary, to effectuate the provisions of this Article II. Section 2.8. No Assignment or Waiver. This Agreement shall not be considered as an attempted assignment of any policy of insurance or as a contract of insurance and shall not be construed to waive any right or remedy of any member of the 3Com Group in respect of any Insurance Policy or any other contract or policy of insurance. Section 2.9. No Liability. Palm does hereby, for itself and as agent for each other member of the Palm Group, agree that no member of the 3Com Group or any 3Com Indemnitee shall have any Liability whatsoever as a result of the insurance policies and practices of 3Com and its Subsidiaries as in effect at any time prior to the Distribution Date, including as a result of the level or scope of any such insurance, the creditworthiness of any insurance carrier, the terms and conditions -8- of any policy, the adequacy or timeliness of any notice to any insurance carrier with respect to any claim or potential claim or otherwise. Section 2.10. Additional or Alternate Insurance. Notwithstanding any provision of this Agreement, during the Insurance Transition Period 3Com and Palm shall work together to evaluate insurance options and secure additional or alternate insurance for Palm and/or 3Com if desired and cost effective. Nothing in this Agreement shall be deemed to restrict any member of the Palm Group from acquiring at its own expense any other insurance policy in respect of any Liabilities or covering any period. Section 2.11. Further Agreements. The Parties acknowledge that they intend to allocate financial obligations without violating any laws regarding insurance, self-insurance or other financial responsibility. If it is determined that any action undertake pursuant to the Separation Agreement, this Agreement or any Ancillary Agreement is violative of any insurance, self-insurance or related financial responsibility law or regulation, the parties agree to work together to do whatever is necessary to comply with such law or regulation while trying to accomplish, as much as possible, the allocation of financial obligations as intended in the Separation Agreement, this Agreement and any Ancillary Agreement. Section 2.12. Matters Governed by Employee Matters Agreement. This Article II shall not apply to any insurance policies that are the subject of the Employee Matters Agreement. ARTICLE III. MISCELLANEOUS Section 3.1. Entire Agreement. This Agreement, the Master Separation Agreement, the other Ancillary Agreements and the Exhibits and Schedules attached hereto and thereto, constitutes the entire agreement between the parties with respect to the subject matter hereof and shall supersede all prior written and oral and all contemporaneous oral agreements and understandings with respect to the subject matter hereof. Section 3.2. Governing Law. This Agreement shall be construed in accordance with and all Disputes hereunder shall be governed by the laws of the State of California, excluding its conflict of law rules and the United Nations Convention on Contracts for the International Sale of Goods. The Superior Court of Santa Clara County and/or the United States District Court for the Northern District of California shall have jurisdiction and venue over all Disputes between the parties that are permitted to be brought in a court of law pursuant to Section 3.3. Section 3.3. Dispute Resolution. If a dispute, controversy or claim ("Dispute") arises between the parties relating to the interpretation or performance of this Agreement, or the grounds for the termination hereof, appropriate senior executives (e.g. director or V.P. level) of each party who shall have the authority to resolve the matter shall meet to attempt in good faith to negotiate a resolution of the Dispute prior to pursuing other available remedies. The initial meeting between the appropriate senior executives shall be referred to herein as the "Dispute Resolution Commencement Date." Discussions and correspondence relating to trying to resolve such Dispute shall be treated as -9- confidential information developed for the purpose of settlement and shall be exempt from discovery or production and shall not be admissible. If the senior executives are unable to resolve the Dispute within thirty (30) days from the Dispute Resolution Commencement Date, and either party wishes to pursue its rights relating to such Dispute, then the Dispute will be mediated by a mutually acceptable mediator appointed pursuant to the mediation rules of JAMS/Endispute within thirty (30) days after written notice by one party to the other demanding non-binding mediation. Neither party may unreasonably withhold consent to the selection of a mediator or the location of the mediation. Both parties will share the costs of the mediation equally, except that each party shall bear its own costs and expenses, including attorney's fees, witness fees, travel expenses, and preparation costs. The parties may also agree to replace mediation with some other form of non-binding or binding ADR. Any Dispute which the parties cannot resolve through mediation within ninety (90) days of the Dispute Resolution Commencement Date, unless otherwise mutually agreed, shall be submitted to final and binding arbitration under the then current Commercial Arbitration Rules of the American Arbitration Association ("AAA"), by three (3) arbitrators in Santa Clara County, California. Such arbitrators shall be selected by the mutual agreement of the parties or, failing such agreement, shall be selected according to the aforesaid AAA rules. The arbitrators will be instructed to prepare and deliver a written, reasoned opinion stating their decision within thirty (30) days of the completion of the arbitration. The prevailing party in such arbitration shall be entitled to expenses, including costs and attorneys' and other professional fees, incurred in connection with the arbitration (but excluding any costs and fees associated with prior negotiation or mediation). The decision of the arbitrator shall be final and non-appealable and may be enforced in any court of competent jurisdiction. The use of any ADR procedures will not be construed under the doctrine of laches, waiver or estoppel to adversely affect the rights of either party. Any Dispute regarding the following is not required to be negotiated, mediated or arbitrated prior to seeking relief from a court of competent jurisdiction: breach of any obligation of confidentiality; infringement, misappropriation, or misuse of any intellectual property right; any other claim where interim relief from the court is sought to prevent serious and irreparable injury to one of the parties or to others. However, the parties to the Dispute shall make a good faith effort to negotiate and mediate such Dispute, according to the above procedures, while such court action is pending. Section 3.4. Notices. Notices, offers, requests or other communications required or permitted to be given by either party pursuant to the terms of this Agreement shall be given in writing to the respective parties to the following addresses: if to 3Com: 3Com Corporation 5400 Bayfront Plaza Santa Clara, California 95052 Attention: General Counsel Fax: (408) 326-6434 if to Palm: -10- Palm Computing, Inc. 5400 Bayfront Plaza Santa Clara, California 95052 Attention: General Counsel Fax: (408) 326-5001 or to such other address as the party to whom notice is given may have previously furnished to the other in writing as provided herein. Any notice involving non-performance, termination, or renewal shall be sent by hand delivery, recognized overnight courier or, within the United States, may also be sent via certified mail, return receipt requested. All other notices may also be sent by fax, confirmed by first class mail. All notices shall be deemed to have been given and received on the earlier of actual delivery or three (3) days from the date of postmark. Section 3.5. Parties in Interest. This Agreement, including the Schedules and Exhibits hereto, and the other documents referred to herein, shall be binding upon 3Com, 3Com's Subsidiaries, Palm and Palm's Subsidiaries and inure solely to the benefit of the Palm Indemnitees and the 3Com Indemnitees and their respective permitted assigns, and nothing in this Agreement, express or implied, is intended to confer upon any other Person any rights or remedies of any nature whatsoever under or by reason of this Agreement. Section 3.6. Other Agreements Evidencing Indemnification Obligations. 3Com hereby agrees to execute, for the benefit of any Palm Indemnitee, such documents as may be reasonably requested by such Palm Indemnitee, evidencing 3Com's agreement that the indemnification obligations of 3Com set forth in this Agreement inure to the benefit of and are enforceable by such Palm Indemnitee. Palm hereby agrees to execute, for the benefit of any 3Com Indemnitee, such documents as may be reasonably requested by such 3Com Indemnitee, evidencing Palm's agreement that the indemnification obligations of Palm set forth in this Agreement inure to the benefit of and are enforceable by such 3Com Indemnitee. Section 3.7. Counterparts. This Agreement, including the Schedules and Exhibits hereto, and the other documents referred to herein, may be executed in counterparts, each of which shall be deemed to be an original but all of which shall constitute one and the same agreement. Section 3.8. Assignment. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective legal representatives and successors, and nothing in this Agreement, express or implied, is intended to confer upon any other Person any rights or remedies of any nature whatsoever under or by reason of this Agreement. This Agreement may be enforced separately by each member of the 3Com Group and each member of the Palm Group. Neither party may assign this Agreement or any rights or obligations hereunder, without the prior written consent of the other party, and any such assignment shall be void; provided, however, either party may assign this Agreement to a successor entity in conjunction with such party's reincorporation. Section 3.9. Severability. If any term or other provision of this Agreement or the Schedules or Exhibits attached hereto is determined by a nonappealable decision by a court, administrative agency or arbitrator to be invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain -11- in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that transactions contemplated hereby are fulfilled to the fullest extent possible. Section 3.10. Failure or Indulgence Not Waiver. No failure or delay on the part of either party hereto in the exercise of any right hereunder shall impair such right or be construed to be a waiver of, or acquiescence in, any breach of any representation, warranty or agreement herein, nor shall any single or partial exercise of any such right preclude other or further exercise thereof or of any other right. Section 3.11. Amendment. No change or amendment will be made to this Agreement except by an instrument in writing signed on behalf of each of the parties to this Agreement. Section 3.12. Authority. Each of the parties hereto represents to the other that (a) it has the corporate or other requisite power and authority to execute, deliver and perform this Agreement, (b) the execution, delivery and performance of this Agreement by it have been duly authorized by all necessary corporate or other action, (c) it has duly and validly executed and delivered this Agreement, and (d) this Agreement is a legal, valid and binding obligation, enforceable against it in accordance with its terms subject to applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally and general equity principles. Section 3.13. Interpretation. The headings contained in this Agreement, in any Exhibit or Schedule hereto and in the table or contents to this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Any capitalized term used in any Schedule or Exhibit but not otherwise defined therein, shall have the meaning assigned to such term in this Agreement. When a reference is made in this Agreement to an Article or a Section, Exhibit or Schedule, such reference shall be to an Article or Section of, or an Exhibit or Schedule to, this Agreement unless otherwise indicated. ARTICLE IV. DEFINITIONS Section 4.1. 3Com Business. "3Com Business" means any business of 3Com other than the Palm Business. Section 4.2. 3Com Facilities. "3Com Facilities" means all of the real property and improvements thereon owned or occupied at any time on or before the Separation Date by any member of the 3Com Group, whether for the 3Com Business or the Palm Business, excluding the Palm Facilities. Section 4.3. 3Com Group. "3Com Group" means 3Com, each Subsidiary and Affiliated Company of 3Com (other than any member of the Palm Group) immediately after the Separation -12- Date, after giving effect to the Non-US Plan and each Person that becomes a Subsidiary or Affiliate Company of 3Com after the Separation Date. Section 4.4. 3Com Indemnitees. "3Com Indemnitees" means 3Com, each member of the 3Com Group and each of their respective directors, officers and employees. Section 4.5. Action. "Action" means any demand, action, suit, countersuit, arbitration, inquiry, proceeding or investigation by or before any federal, state, local, foreign or international governmental authority or any arbitration or mediation tribunal. Section 4.6. Affiliated Company. "Affiliated Company" of any Person means any entity that controls, is controlled by, or is under common control with such Person. As used herein, "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such entity, whether through ownership of voting securities or other interests, by contract or otherwise. Section 4.7. Assets. "Assets" has the meaning set forth in Section 4.4 of the Assignment Agreement. Section 4.8. Assignment Agreement. "Assignment Agreement" means the General Assignment and Assumption Agreement attached as Exhibit C to the Separation Agreement. Section 4.9. Coverage Amount. "Coverage Amount" has the meaning set forth in Section 2.6(a) of this Agreement. Section 4.10. Employee Matters Agreement. "Employee Matters Agreement" means the Employee Matters Agreement attached as Exhibit E to the Separation Agreement. Section 4.11. Environmental Actions. "Environmental Actions" means any notice, claim, act, cause of action, order, decree or investigation by any third party (including, without limitation, any Governmental Authority) alleging potential liability (including potential liability for investigatory costs, cleanup costs, governmental response costs, natural resources damages, damage to flora or fauna caused by Environmental Conditions, real property damages, personal injuries or penalties) arising out of, based on or resulting from the Release of or exposure of any individual to any Hazardous Materials. Section 4.12. Environmental Conditions. "Environmental Conditions" means the presence in the environment, including the soil, groundwater, surface water or ambient air, of any Hazardous Material at a level which exceeds any applicable standard or threshold under any Environmental Law or otherwise requires investigation or remediation (including, without limitation, investigation, study, health or risk assessment, monitoring, removal, treatment or transport) under any applicable Environmental Laws. -13- Section 4.13. Environmental Laws. "Environmental Laws" means all laws and regulations of any Governmental Authority with jurisdiction that relate to the protection of the environment (including ambient air, surface water, ground water, land surface or subsurface strata) including laws and regulations relating to the Release of Hazardous Materials, or otherwise relating to the treatment, storage, disposal, transport or handling of Hazardous Materials, or to the exposure of any individual to a Release of Hazardous Materials. Section 4.14. Hazardous Materials. "Hazardous Materials" means chemicals, pollutants, contaminants, wastes, toxic substances, radioactive and biological materials, hazardous substances, petroleum and petroleum products or any fraction thereof. Section 4.15. Indemnitee. "Indemnitee" has the meaning set forth in Section 1.5(a) hereof. Section 4.16. Insurance Policies. "Insurance Policies" means insurance policies pursuant to which a Person makes a true risk transfer to an insurer. Section 4.17. Insurance Proceeds. "Insurance Proceeds" means those monies: (a) received by an insured from an insurance carrier; or (b) paid by an insurance carrier on behalf of the insured; from Insurance Policies. Section 4.18. Insurance Transition Period. "Insurance Transition Period" has the meaning set forth in Section 2.1 of this Agreement. Section 4.19. Insured Palm Liability. "Insured Palm Liability" means any Palm Liability to the extent that (i) it is covered under the terms of 3Com's Insurance Policies in effect prior to the Distribution Date, and (ii) Palm is not a named insured under, or otherwise entitled to the benefits of, such Insurance Policies. Section 4.20. IPO Date. "IPO Date" means the date on which Palm effects its initial public offering of common stock. Scheduled to occur on or before June 2, 2000. Section 4.21. IPO Liabilities. "IPO Liabilities" means any Liabilities relating to, arising out of or resulting from any untrue statement or alleged untrue statement of a material fact or omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, with respect to all information contained in the IPO Registration Statement or any preliminary, final or supplemental prospectus forming a part of a IPO Registration Statement. Section 4.22. IPO Registration Statement. "IPO Registration Statement" means the registration statement on Form S-1 pursuant to the Securities Act to be filed with the SEC registering the shares of common stock of Palm to be issued in the IPO, together with all amendments thereto. -14- Section 4.23. Liabilities. "Liabilities" has the meaning set forth in Section 4.15 of the Assignment Agreement. Section 4.24. Non-US Plan. "Non-US Plan" means the plan of reorganization described in Exhibit K of the Separation Agreement. Section 4.25. Palm Business. "Palm Business" means the business and operations of Palm, as described in the IPO Registration Statement and except as otherwise expressly provided herein, any terminated, divested or discontinued businesses or operations that at the time of termination, divestiture or discontinuation primarily related to the Palm Business as then conducted. Section 4.26. Palm Contracts. "Palm Contracts" has the meaning set forth in Section 4.23 of the Assignment Agreement. Section 4.27. Palm Covered Parties. "Palm Covered Parties" shall have the meaning set forth in Section 2.1(a) of this Agreement. Section 4.28. Palm Facilities. "Palm Facilities" means all of those facilities to be transferred to Palm on the Separation Date as set forth on Schedule 1 to the Real Estate Matters Agreement. Section 4.29. Palm Group. "Palm Group" means Palm, each Subsidiary and Affiliated Company of Palm immediately after the Separation Date or that is contemplated to be a Subsidiary or Affiliated Company of Palm pursuant to the Non-US Plan and each Person that becomes a Subsidiary or Affiliate Company of Palm after the Separation Date. Section 4.30. Palm Indemnitees. "Palm Indemnitees" means Palm, each member of the Palm Group and each of their respective directors, officers and employees. Section 4.31. Palm Liabilities. "Palm Liabilities" has the meaning set forth in Section 1.3 of the Assignment Agreement. Section 4.32. Person. "Person" means an individual, a partnership, a corporation, a limited liability company, an association, a joint stock company, a trust, a joint venture, an unincorporated organization and a governmental entity or any department, agency or political subdivision thereof. Section 4.33. Pre-Separation Third Party Site Liabilities. "Pre- Separation Third Party Site Liabilities" means any and all Environmental Actions arising out of Hazardous Materials found on, under or about any landfill any waste, storage, transfer or recycling site and resulting from or arising out of Hazardous Materials stored, treated, recycled disposed or otherwise handled at such site prior to the Separation Date (whether for the operation of the Palm Business or for the operation of any past or presently (as of the date hereof) existing 3Com Business as operated on or before the Separation Date). Section 4.34. Release. "Release" means any release, spill, emission, leaking, pumping, injection, deposit, disposal, discharge, dispersal, leaching or migration into the indoor or outdoor -15- environment, including, without limitation, the movement of Hazardous Materials through ambient air, soil, surface water, groundwater, wetlands, land or subsurface strata. Section 4.35. Separation. "Separation" means the transfer and contribution from 3Com to Palm, and Palm's receipt and assumption of, directly or indirectly, substantially all of the Assets and Liabilities currently associated with the Palm Business and the stock, investments or similar interests currently held by 3Com in subsidiaries and other entities that conduct such business. Section 4.36. Separation Agreement. "Separation Agreement" means the Master Separation and Distribution Agreement dated as of December ___, 1999, of which this is an Exhibit thereto. Section 4.37. Separation Date. " Separation Date" means the effective date and time of each transfer of property, assumption of liability, license, undertaking, or agreement in connection with the Separation, which shall be 12:01 a.m., Pacific Time, February 26, 2000, or such date as may be fixed by the Board of Directors of 3Com. Section 4.38. Shared 3Com Percentage. "Shared 3Com Percentage" means 90%. Section 4.39. Shared Palm Percentage. "Shared Palm Percentage" means 10%. Section 4.40. Shared Percentage. "Shared Percentage" means the Shared Palm Percentage or the Shared 3Com Percentage, as the case may be. Section 4.41. Subsidiary. "Subsidiary" of any Person means a corporation or other organization whether incorporated or unincorporated of which at least a majority of the securities or interests having by the terms thereof ordinary voting power to elect at least a majority of the board of directors or others performing similar functions with respect to such corporation or other organization is directly or indirectly owned or controlled by such Person or by any one or more of its Subsidiaries, or by such Person and one or more of its Subsidiaries; provided, however, that no Person that is not directly or indirectly wholly-owned by any other Person shall be a Subsidiary of such other Person unless such other Person controls, or has the right, power or ability to control, that Person. Section 4.42. Tax Sharing Agreement. "Tax Sharing Agreement" means the Tax Sharing Agreement, attached as Exhibit F to the Separation Agreement. Section 4.43. Taxes. "Taxes" has the meaning set forth in the Tax Sharing Agreement. Section 4.44. Third Party Claim. "Third Party Claim" has the meaning set forth in Section 1.5(a) of this Agreement. [SIGNATURES ON FOLLOWING PAGE] -16- IN WITNESS WHEREOF, each of the parties has caused this Indemnification and Insurance Matters Agreement to be executed on its behalf by its officers thereunto duly authorized on the day and year first above written. 3COM CORPORATION PALM, INC. By:___________________________ By:_______________________________ Name:_________________________ Name:_____________________________ Title:________________________ Title:____________________________ -17- EX-2.12 13 FORM OF NON-U.S. PLAN EXHIBIT 2.12 PALM INC. NON-U.S. PLAN This document describes, by jurisdiction, the transfers of assets and liabilities from various foreign subsidiaries of 3Com Corporation to newly- formed subsidiaries of Palm, Inc. that will occur as part of the separation of the Palm business from the 3Com business. In certain jurisdictions, these transfers of assets and liabilities may result in the transfer, by operation of law, of those employees of the 3Com subsidiary who work in the Palm business. In these cases, the 3Com subsidiaries would be required to give prior written notice of the proposed transfers to the affected employees and consult with employees and/or employee representatives. If the transfer of employees does not occur as a matter of law, the appropriate Palm subsidiary will offer employment to the relevant employees on terms expected to be substantially the same as their current employment with the local 3Com subsidiary. 1. Canada ------ . Before the prescribed "Separation Date," Palm, Inc. will form a wholly-owned subsidiary in Canada (Palm Canada). . On the Separation Date, or as soon as practicable thereafter, Palm Canada will assume certain liabilities of 3Com Canada related to the Palm business. Concurrently, 3Com Canada will transfer to Palm Canada all of 3Com Canada's rights in those of its tangible assets related to the Palm business. The parties will settle in cash the difference between the fair market value of the transferred assets and the amount of the assumed liabilities. It is expected that the assumed liabilities will exceed the value of the transferred assets, so that the required cash payment would be made by 3Com Canada to Palm Canada. 2. Mexico ------ . Before the Separation Date, Palm will cause a legal entity to be registered or established in Mexico (Palm Mexico). Palm, Inc. will own all of the stock of Palm Mexico, either directly or through its wholly-owned Delaware subsidiary, Palm International, Inc. . On the Separation Date, or as soon as practicable thereafter, Palm Mexico may assume certain liabilities related to the Palm business from 3Com de Mexico. If so, 3Com de Mexico will pay Palm Mexico cash equal to the amount of the assumed liabilities. 3. France ------ . Before the Separation Date, Palm Technology Investment Holdings, a wholly-owned Irish subsidiary of Palm, Inc., will form Palm Ltd., a private liability company under the laws of England and Wales. Palm Ltd. will form a wholly-owned subsidiary in France ("Palm France"), which will be incorporated as an SAS (societe par actions simplifee). . On the Separation Date, or as soon as practicable thereafter, Palm France will assume certain liabilities of 3Com France related to the Palm business. Concurrently, 3Com France will transfer to Palm France all of 3Com France's rights in those of its tangible assets related to the Palm business. The parties will settle in cash the difference between the fair market value of the transferred assets and the amount of the assumed liabilities. It is expected that the assumed liabilities will exceed the value of the transferred assets, so that the required cash payment would be made by 3Com France to Palm France. 4. Ireland ------- . Before the Separation Date, Palm Technology Investment Holdings will form another Irish subsidiary, Palm Manufacturing Technologies Limited, which, after the Separation Date, will manufacture and procure Palm products. 5. Italy ----- . Before the Separation Date Palm Italia will be formed or established as either a limited liability company wholly-owned by Palm Ltd. or as a registered branch of Palm Ltd. or one of its European subsidiaries. . There are no Palm assets or liabilities in Italy to transfer to Palm Italia. 6. Netherlands ----------- . Before the Separation Date, Palm Ltd. will form a wholly-owned subsidiary under the laws of the Netherlands (Palm Netherlands), incorporated as a Dutch "BV." . On the Separation Date, or as soon as practicable thereafter, Palm Netherlands will assume certain liabilities of 3Com Benelux related to the Palm business. Concurrently, 3Com Benelux will transfer to Palm Netherlands all of 3Com Benelux's rights in those of its tangible assets related to the Palm business. The parties will settle in cash the difference between the fair market value of the transferred assets and the amount of the assumed liabilities. It is expected that the assumed liabilities will exceed the value of the transferred assets, so that the required cash payment would be made by 3Com Benelux to Palm Netherlands. 7. Sweden ------ . Before the Separation Date, Palm Ltd. will form a wholly-owned subsidiary under the laws of Sweden (Palm Sweden), incorporated as an "A/B." . On the Separation Date, or as soon as practicable thereafter, Palm Sweden will assume certain liabilities of 3Com Nordic A/B related to the Palm business. Concurrently, 3Com Nordic will transfer to Palm Sweden all of 3Com Nordic's rights in those of its tangible -2- assets related to the Palm business. The parties will settle in cash the difference between the fair market value of the transferred assets and the amount of the assumed liabilities. It is expected that the assumed liabilities will exceed the value of the transferred assets, so that the required cash payment would be made by 3Com Nordic to Palm Sweden. 8. Switzerland ----------- . Before the Separation Date, Palm Switzerland will be formed or established as either a wholly-owned subsidiary of Palm Ltd., incorporated as a Swiss GmbH or SARL, or as a registered branch of Palm Ltd. or one of its European subsidiaries. . There are no Palm assets or liabilities in Switzerland to transfer to Palm Switzerland. 9. United Kingdom -------------- . On the Separation Date, or as soon as practicable thereafter, Palm Ltd. will acquire the tangible assets owned by 3Com Europe Ltd., and will assume certain liabilities of 3Com Europe related to the Palm business. If the transaction is structured as a sale, the parties will settle in cash the difference between the fair market value of the transferred assets and the amount of the assumed liabilities. It is expected that the assumed liabilities will exceed the value of the transferred assets, so that the required cash payment would be made by 3Com Europe to Palm Ltd. The parties may, however, decide to structure the transaction in a form other than a sale. 10. Australia --------- . Before the Separation Date, Palm Ltd. will form a wholly-owned private limited company under the laws New South Wales (Palm Australia). . On the Separation Date, or as soon as practicable thereafter, Palm Australia will assume certain liabilities of 3Com Australia related to the Palm business. Concurrently, 3Com Australia will transfer to Palm Australia all of 3Com Australia's rights in those of its tangible assets related to the Palm business. The parties will settle in cash the difference between the fair market value of the transferred assets and the amount of the assumed liabilities. It is expected that the assumed liabilities will exceed the value of the transferred assets, so that the required cash payment would be made by 3Com Australia to Palm Australia. 11. Hong Kong --------- . Before the Separation Date, Palm Ltd. will form a wholly-owned limited liability company under Hong Kong law (Palm HK). -3- . On the Separation Date, or as soon as practicable thereafter, Palm HK will assume certain liabilities of 3Com Asia Ltd. related to the Palm business. Concurrently, 3Com Asia will transfer to Palm HK all of 3Com Asia's rights in those of its tangible assets related to the Palm business. The parties will settle in cash the difference between the fair market value of the transferred assets and the amount of the assumed liabilities. It is expected that the assumed liabilities will exceed the value of the transferred assets, so that the required cash payment would be made by 3Com Asia to Palm HK. 12. Japan ----- . Before the Separation Date, Palm, Inc. will form a wholly-owned subsidiary (Palm K.K.), which will be incorporated as a kabushiki kaisha. . On the Separation Date, or as soon as practicable thereafter, Palm K.K. will assume certain liabilities of 3Com Japan K.K. related to the Palm business. Concurrently, 3Com Japan will transfer to Palm K.K. all of 3Com Japan's rights in those of its tangible assets related to the Palm business. The parties will settle in cash the difference between the fair market value of the transferred assets and the amount of the assumed liabilities. It is expected that the assumed liabilities will exceed the value of the transferred assets, so that the required cash payment would be made by 3Com Japan to Palm K.K. 13. Singapore --------- . Before the Separation Date, Palm Ltd. will form a wholly-owned subsidiary (Palm Singapore), incorporated as a Singapore private limited company. . On the Separation Date, or as soon as practicable thereafter, 3Com Asia/Pacific will transfer to Palm, Inc. all of 3Com Asia/Pacific's rights in those of its tangible assets related to the Palm business. In consideration, Palm, Inc. will pay cash and assume certain liabilities of 3Com Asia/Pacific related to the Palm business. . On the Separation Date, or as soon as practicable thereafter, Palm Singapore will assume certain liabilities of 3Com South Asia related to the Palm business. Concurrently, 3Com South Asia will transfer to Palm Singapore all of 3Com South Asia's rights in those of its tangible assets related to the Palm business. The parties will settle in cash the difference between the fair market value of the transferred assets and the amount of the assumed liabilities. It is expected that the assumed liabilities will exceed the value of the transferred assets, so that the required cash payment would be made by 3Com South Asia to Palm Singapore. -4- EX-10.7 14 MANAGEMENT RETENTION AGREEMENT DATED 12/1/99 EXHIBIT 10.7 PALM COMPUTING MANAGEMENT RETENTION AGREEMENT This Management Retention Agreement (the "Agreement") is made and entered into by and between Carl J. Yankowski (the "Employee") and Palm Computing (the "Company"), effective as of the latest date set forth by the signatures of the parties hereto below (the "Effective Date"). R E C I T A L S --------------- A. It is expected that the Company from time to time will consider the possibility of an acquisition by another company or other change of control. The Board of Directors of the Company (the "Board") recognizes that such consideration can be a distraction to the Employee and can cause the Employee to consider alternative employment opportunities. The Board has determined that it is in the best interests of the Company and its stockholders to assure that the Company will have the continued dedication and objectivity of the Employee, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined below) of the Company. B. The Board believes that it is in the best interests of the Company and its stockholders to provide the Employee with an incentive to continue his employment and to motivate the Employee to maximize the value of the Company upon a Change of Control for the benefit of its stockholders. C. The Board believes that it is imperative to provide the Employee with severance benefits upon Employee's termination of employment following a Change of Control which provides the Employee with enhanced financial security and provides incentive and encouragement to the Employee to remain with the Company notwithstanding the possibility of a Change of Control. D. Certain capitalized terms used in the Agreement are defined in Section 5 below. The parties hereto agree as follows: 1. Term of Agreement. This Agreement shall terminate upon the date that all ----------------- obligations of the parties hereto with respect to this Agreement have been satisfied. 2. At-Will Employment. The Company and the Employee acknowledge that the ------------------ Employee's employment is and shall continue to be at-will, as defined under applicable law, and may be terminated by either party at any time, with or without cause. If the Employee's employment terminates for any reason, including (without limitation) any termination prior to a Change of Control, the Employee shall not be entitled to any payments, benefits, damages, awards or compensation other than as provided by this Agreement, or as may otherwise be available in accordance with the Company's established employee plans or pursuant to other written agreements with the Company. 3. Change of Control Severance Benefits. ------------------------------------ (a) Involuntary Termination other than for Cause, Death or Disability or -------------------------------------------------------------------- Voluntary Termination for Good Reason Following A Change of Control. If, within - ------------------------------------------------------------------- twenty-four (24) months following a Change of Control, Employee's employment is terminated (i) involuntarily by the Company other than for Cause, death or Disability or (ii) by the Employee pursuant to a Voluntary Termination for Good Reason, then, subject to Employee entering into a standard form of mutual release of claims with the Company, the Company shall provide Employee with the following benefits upon such termination: (i) Severance Payment. A lump-sum cash payment in an amount equal to ----------------- two hundred percent (200%) of the Employee's Annual Compensation; (ii) Continued Employee Benefits. Company-paid health, dental, --------------------------- vision, long-term disability and life insurance coverage at the same level of coverage as was provided to such Employee immediately prior to the Change of Control and at the same ratio of Company premium payment to Employee premium payment as was in effect immediately prior to the Change of Control (the "Company-Paid Coverage"). If such coverage included the Employee's dependents immediately prior to the Change of Control, such dependents shall also be covered at Company expense. Company-Paid Coverage shall continue until the earlier of (i) two years from the date of termination, or (ii) the date upon which the Employee and his dependents become covered under another employer's group health, dental, vision, long-term disability or life insurance plans that provide Employee and his dependents with comparable benefits and levels of coverage. For purposes of Title X of the Consolidated Budget Reconciliation Act of 1985 ([ ]COBRA[ ]), the date of the "qualifying event" for Employee and his or her dependents shall be the date upon which the Company-Paid Coverage commences, and each month of Company-Paid Coverage provided hereunder shall offset a month of continuation coverage otherwise due under COBRA. (iii) Pro-Rated Bonus Payment. A lump-sum cash payment equal to 100% ----------------------- of such Employee's target bonus as in effect for the fiscal year in which the Change of Control occurs, pro-rated by multiplying such bonus amount by a fraction, the numerator of which shall be the number of days prior to occurrence of the Change of Control during such fiscal year, and the denominator of which shall be three-hundred and sixty-five. (iv) Equity Compensation Accelerated Vesting. One Hundred percent --------------------------------------- (100%) of the unvested portion of any stock option, restricted stock or other Company equity compensation held by the Employee shall automatically be accelerated in full so as to become completely vested. (b) Voluntary Resignation; Termination For Cause. If the Employee's -------------------------------------------- employment terminates by reason of the Employee's voluntary resignation (and is not a Voluntary Termination for Good Reason), or if the Employee is terminated for Cause, then the Employee shall not be entitled to receive severance or other benefits except for those (if any) as may then be established under the Company's then existing severance and benefits plans or pursuant to other written agreements with the Company. (c) Disability; Death. If the Employee's employment with the Company ----------------- terminates as a result of the Employee's Disability, or if Employee's employment is terminated due to the death of the Employee, then the Employee shall not be entitled to receive severance or other benefits except for those (if any) as may then be established under the Company's then existing severance and benefits plans or pursuant to other written agreements with the Company. (d) Termination Apart from Change of Control. In the event the Employee's ---------------------------------------- employment is terminated for any reason, either prior to the occurrence of a Change of Control or after the twenty-four (24) month period following a Change of Control, then the Employee shall be entitled to receive severance and any other benefits only as may then be established under the Company's existing severance and benefits plans or pursuant to other written agreements with the Company. 4. Golden Parachute Excise Tax Full Gross-Up. In the event that the benefits ----------------------------------------- provided for in this Agreement or otherwise payable to the Employee constitute "parachute payments" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code") and will be subject to the excise tax imposed by Section 4999 of the Code, then the Employee shall receive (i) a payment from the Company sufficient to pay such excise tax, plus (ii) an additional payment from the Company sufficient to pay the excise tax and federal and state income and employment taxes arising from the payments made by the Company to Employee pursuant to this sentence. Unless the Company and the Executive otherwise agree in writing, the determination of Executive's excise tax liability and the amount required to be paid under this Section 4 shall be made in writing by the Company's independent auditors who are primarily used by the Company immediately prior to the Change of Control (the "Accountants"). For purposes of making the calculations required by this Section 4, the Accountants may make reasonable assumptions and approximations concerning applicable taxes and may rely on reasonable, good faith interpretations concerning the application of Sections 280G and 4999 of the Code. The Company and the Employee shall furnish to the Accountants such information and documents as the Accountants may reasonably request in order to make a determination under this Section. The Company shall bear all costs the Accountants may reasonably incur in connection with any calculations contemplated by this Section 4. 5. Definition of Terms. The following terms referred to in this Agreement ------------------- shall have the following meanings: (a) Annual Compensation. "Annual Compensation" shall mean an amount equal ------------------- to the sum of (i) the Employee's Company annual base salary as in effect immediately preceding the Change of Control, and (ii) 100% of the Employee's Target Bonus. (b) Target Bonus. "Target Bonus" shall mean Employee's annual bonus, ------------ assuming 100% "on target" satisfaction of any objective or subjective performance milestones. (c) Cause. "Cause" shall mean (i) an act of personal dishonesty taken by ----- the Employee in connection with his responsibilities as an employee and intended to result in substantial personal enrichment of the Employee, (ii) Employee being convicted of a felony, (iii) a willful act by the Employee which constitutes gross misconduct and which is injurious to the Company, (iv) following delivery to the Employee of a written demand for performance from the Company which describes the basis for the Company's reasonable belief that the Employee has not substantially performed his duties, continued violations by the Employee of the Employee's obligations to the Company which are demonstrably willful and deliberate on the Employee's part. (d) Change of Control. "Change of Control" means the occurrence of any of ----------------- the following events: (i) Any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the total voting power represented by the Company's then outstanding voting securities; or (ii) the consummation of the sale or disposition by the Company of all or substantially all the Company's assets; or (iii) The consummation of a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; or (iv) A change in the composition of the Board occurring within a two-year period, as a result of which fewer than a majority of the directors are Incumbent Directors. "Incumbent Directors" shall mean directors who either (A)+are directors of the Company as of the date upon which this Agreement was entered into, or (B) are elected, or nominated for election, to the Board with the affirmative votes of at least a majority of those directors whose election or nomination was not in connection with any transaction described in subsections (i), (ii), or (iii) above, or in connection with an actual or threatened proxy contest relating to the election of directors to the Company; or (v) The sale or disposition to third parties (other than pursuant to a spin-off or similar transaction) by the Company of all or substantially all of any the Carrier, PCBU, Enterprise, Palm or comparable business units; provided, however, that such transactions shall only constitute a "Change of Control" under this Agreement with respect to the Section 16 executive officers working primarily for the sold or disposed business unit immediately prior to the effective date of the Change of Control who are not offered a comparable position within the Company. (e) Disability. "Disability" shall mean that the Employee has been ---------- unable to perform his Company duties as the result of his incapacity due to physical or mental illness, and such inability, at least 26 weeks after its commencement, is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Employee or the Employee's legal representative (such Agreement as to acceptability not to be unreasonably withheld). Termination resulting from Disability may only be effected after at least 30 days' written notice by the Company of its intention to terminate the Employee's employment. In the event that the Employee resumes the performance of substantially all of his duties hereunder before the termination of his employment becomes effective, the notice of intent to terminate shall automatically be deemed to have been revoked. (f) Voluntary Termination for Good Reason. "Voluntary Termination ------------------------------------- for Good Reason" shall mean the Employee voluntarily resigns after the occurrence of any of the following (i) without the Employee's express written consent, a material reduction of the Employee's duties, title, authority or responsibilities, relative to the Employee's duties, title, authority or responsibilities as in effect immediately prior to such reduction, or the assignment to Employee of such reduced duties, title, authority or responsibilities; provided, however, that a reduction in duties, title, authority or responsibilities solely by virtue of the Company being acquired and made part of a larger entity (as, for example, when the senior vice-president of a business unit of the Company remains as such following a Change of Control) shall not by itself constitute grounds for a "Voluntary Termination for Good Reason;" (ii) without the Employee's express written consent, a material reduction, without good business reasons, of the facilities and perquisites (including office space and location) available to the Employee immediately prior to such reduction; (iii) a reduction by the Company in the base salary of the Employee as in effect immediately prior to such reduction; (iv) a material reduction by the Company in the aggregate level of employee benefits, including bonuses, to which the Employee was entitled immediately prior to such reduction with the result that the Employee's aggregate benefits package is materially reduced (other than a reduction that generally applies to Company employees); (v) the relocation of the Employee to a facility or a location more than thirty- five (35) miles from the Employee's then present location, without the Employee's express written consent; (vi) the failure of the Company to obtain the assumption of this agreement by any successors contemplated in Section 7(a) below; or (vii) any act or set of facts or circumstances which would, under California case law or statute constitute a constructive termination of the Employee. 6. Non-Solicitation. In consideration for the severance benefits Employee ---------------- is to receive herein, if any, Employee agrees that he or she will not, at any time during the one year following his or her termination date, directly or indirectly solicit any individuals to leave the Company's (or any of its subsidiaries') employ for any reason or interfere in any other manner with the employment relationships at the time existing between the Company (or any of its subsidiaries) and its current or prospective employees. 7. Successors. ---------- (a) Company's Successors. Any successor to the Company (whether -------------------- direct or indirect and whether by purchase, merger, consolidation, liquidation or otherwise) to all or substantially all of the Company's business and/or assets shall assume the obligations under this Agreement and agree expressly to perform the obligations under this Agreement in the same manner and to the same extent as the Company would be required to perform such obligations in the absence of a succession. For all purposes under this Agreement, the term Company shall include any successor to the Company's business and/or assets which executes and delivers the assumption agreement described in this Section 7(a) or which becomes bound by the terms of this Agreement by operation of law. (b) Employee's Successors. The terms of this Agreement and all rights --------------------- of the Employee hereunder shall inure to the benefit of, and be enforceable by, the Employee's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. 8. Notice. ------ (a) General. Notices and all other communications contemplated by ------- this Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or one day following mailing via Federal Express or similar overnight courier service. In the case of the Employee, mailed notices shall be addressed to him at the home address which he most recently communicated to the Company in writing. In the case of the Company, mailed notices shall be addressed to its corporate headquarters, and all notices shall be directed to the attention of its Secretary. (b) Notice of Termination. Any termination by the Company for Cause --------------------- or by the Employee pursuant to a Voluntary Termination for Good Reason shall be communicated by a notice of termination to the other party hereto given in accordance with Section 8(a) of this Agreement. Such notice shall indicate the specific termination provision in this Agreement relied upon, shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination under the provision so indicated, and shall specify the termination date (which shall be not more than 30 days after the giving of such notice). The failure by the Employee to include in the notice any fact or circumstance which contributes to a showing of Voluntary Termination for Good Reason shall not waive any right of the Employee hereunder or preclude the Employee from asserting such fact or circumstance in enforcing his rights hereunder. 9. Pooling of Interests Limitation. To the extent any of the benefits ------------------------------- (including the equity compensation vesting acceleration and the 280G excise tax gross-up) hereunder would cause a contemplated Change of Control transaction that was intended to be accounted for as a "pooling-of-interests" transaction to become ineligible for such accounting treatment under generally accepted accounting principles, as determined by the Accountants, then this Agreement shall automatically be deemed amended to provide Employee with such lesser benefits as would allow for the contemplated Change of Control transaction to be accounted for as a "pooling-of-interests" transaction. 10. Miscellaneous Provisions. ------------------------ (a) No Duty to Mitigate. The Employee shall not be required to ------------------- mitigate the value of any benefits contemplated by this Agreement, nor shall any such benefits be reduced by any earnings or benefits that the Employee may receive from any other source. (b) Waiver. No provision of this Agreement shall be modified, waived ------ or discharged unless the modification, waiver or discharge is agreed to in writing and signed by the Employee and by two authorized officers of the Company (other than the Employee). No waiver by either party of any breach of, or of compliance with, any condition or provision of this Agreement by the other party shall be considered a waiver of any other condition or provision or of the same condition or provision at another time. (c) Whole Agreement. No agreements, representations or --------------- understandings (whether oral or written and whether express or implied) which are not expressly set forth in this Agreement, other than the employment offer letter dated November 30, 1999, have been made or entered into by either party with respect to the subject matter hereof. This Agreement and the offer letter represent the entire understanding of the parties hereto with respect to the subject matter hereof and supersedes all prior arrangements and understandings regarding same. (d) Choice of Law. The validity, interpretation, construction and ------------- performance of this Agreement shall be governed by the laws of the State of California. (e) Severability. The invalidity or unenforceability of any provision ------------ or provisions of this Agreement shall not affect the validity or enforceability of any other provision hereof, which shall remain in full force and effect. (f) Counterparts. This Agreement may be executed in counterparts, ------------ each of which shall be deemed an original, but all of which together will constitute one and the same instrument. IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case of the Company by its duly authorized officer, as of the day and year set forth below. COMPANY PALM COMPUTING By: /s/ Eric A. Benhamou ----------------------------------- ERIC A. BENHAMOU Title: Chairman & CEO, 3Com Corporation Date: December 1, 1999 --------------------------------- By: /s/ Mark D. Michael ------------------------------------ MARK D. MICHAEL Title: S.V.P., General Counsel & Secretary Date: December 1, 1999 --------------------------------- EMPLOYEE /s/ Carl J. Yankowski --------------------------------- CARL J. YANKOWSKI Date: December 1, 1999 -------------------------------- EX-27.1 15 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE UNAUDITED FINANCIAL STATEMENTS AS AT AUGUST 27, 1999 AND FOR THE THREE MONTH PERIOD THEN ENDED AND THE AUDITED FINANCIAL STATEMENTS AS AT MAY 28, 1999 AND FOR THE YEAR THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR 3-MOS MAY-28-1999 JUN-02-1999 JUN-01-1998 MAY-29-1999 MAY-28-1999 AUG-27-1999 478 37,138 0 0 95,839 86,216 3,817 3,287 12,186 31,230 130,229 179,125 14,054 16,357 5,918 7,197 152,247 201,346 77,720 88,051 0 0 0 0 0 0 0 0 74,527 113,295 152,247 201,346 563,525 176,505 563,525 176,505 315,616 98,324 515,186 160,639 0 0 0 0 223 63 48,116 15,803 18,488 6,145 29,628 9,658 0 0 0 0 0 0 29,628 9,658 0 0 0 0
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