-----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, MtZ57alddwskZhq6PtDNRq7PB49ooslhvd5hWyTs2xcnXpahFMw9aKwLkS2Lr6HK bmwPpGL1suthmyHSnh7DTQ== 0001012870-00-000266.txt : 20000203 0001012870-00-000266.hdr.sgml : 20000203 ACCESSION NUMBER: 0001012870-00-000266 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 20 FILED AS OF DATE: 20000128 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PALM INC CENTRAL INDEX KEY: 0001100389 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER TERMINALS [3575] IRS NUMBER: 943150688 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-92657 FILM NUMBER: 516205 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/A 1 AMENDMENT NO. 2 TO THE FORM S-A As filed with the Securities and Exchange Commission on January 28, 2000 Registration No. 333-92657 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------- AMENDMENT NO. 2 TO 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. 5470 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 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
Proposed Title of Each Class of Proposed Maximum Proposed Amount of Securities to be Maximum Amount Offering Price Maximum Aggregate Registration Registered to be Registered(1) per Share Offering Price(2) Fee(3) - -------------------------------------------------------------------------------------------- Common Stock, par value $0.001 per share...... 26,450,000 $16.00 $423,200,000 $111,724.80
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (1) Includes 3,450,000 shares of common stock issuable upon exercise of the underwriters' over-allotment option. (2) 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. (3) $26,400.00 of which has been previously paid. -------------- 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 January 28, 2000. 23,000,000 Shares [PALM, INC. LOGO APPEARS HERE] Palm, Inc. Common Stock ---------- This is an initial public offering of shares of common stock of Palm, Inc. All of the 23,000,000 shares of common stock are being sold by Palm. Prior to this offering, there has been no public market for the common stock. We estimate that the initial public offering price will be between $14.00 and $16.00 per share. 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 23,000,000 shares of the common stock, the underwriters have the option to purchase up to an additional 3,450,000 shares from Palm at the initial public offering price less the underwriting discount. ---------- The underwriters expect to deliver the shares in New York, New York on , 2000. Goldman, Sachs & Co. Morgan Stanley Dean Witter Merrill Lynch & Co. Robertson Stephens ---------- Prospectus dated , 2000. [Blue Palm logo with small picture of Palm V handheld device] "Simply Palm. In all aspects of our business we strive to create solutions that are simple and intuitive to use, elegant in their design and truly useful in their function. These are the ideas that are driving our company to create a world class brand. Example: Palm V handheld." 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 allow users to automatically copy and conform, or synchronize, information between the device and 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 technology that enables users to synchronize information between a Palm device and a personal computer, 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. 3 As of December 31, 1999, we had sold over 5.5 million Palm devices worldwide. As of December 31, 1999, more than 33,000 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. OUR RELATIONSHIP WITH 3COM We are currently a wholly-owned subsidiary of 3Com Corporation. After the completion of this offering and the private placements, 3Com will own approximately 93.3% of the outstanding shares of our common stock, or approximately 92.8% 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 shares of our common stock in private placements that will occur concurrently with the closing of this offering. These investors will pay a per share purchase price for this common stock equal to the initial public offering price in this offering. Based on an assumed public offering price of $15.00, America Online will purchase 5,333,333 shares, Motorola will purchase 4,333,334 shares and Nokia will purchase 5,333,333 shares of our common stock. 4 THE OFFERING Common stock offered....................... 23,000,000 shares Common stock to be outstanding immediately after this offering and the private placements................................ 570,000,000 shares Common stock to be held by 3Com immediately after this offering and the private placements................................ 532,000,000 shares Use of proceeds............................ For payment of a dividend of at least $50 million to 3Com, repayment of our intercompany payable to 3Com, which was approximately $58 million as of November 26, 1999, 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 532,000,000 shares outstanding immediately prior to this offering and the private placements, all of which are owned by 3Com. Unless we specifically state otherwise, the information in this prospectus does not take into account the issuance of up to 3,450,000 shares of common stock that the underwriters have the option to purchase. If the underwriters exercise in full their option to purchase additional shares, 573,450,000 shares of common stock will be outstanding after this offering and the private placements. The number of shares of our common stock to be outstanding immediately after this offering listed above does not take into account approximately 25,500,000 shares of our common stock reserved for issuance under our stock plans, of which no options to purchase shares have been granted as of January 27, 2000, but does include an aggregate of 15,000,000 shares to be issued to America Online, Motorola and Nokia in private placements 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.
Years Ended Six Months Ended ---------------------------------------------- ----------------- June 30, May 26, May 25, May 31, May 28, Nov. 27, Nov. 26, 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 $263,302 $435,060 Gross profit............ 1,229 2,575 36,472 114,388 247,909 116,015 188,718 Operating income (loss)................. (2,231) (6,777) (13,513) 6,461 48,339 26,389 36,745 Net income (loss)....... (2,166) (3,062) (7,862) 4,171 29,628 16,187 22,520 Basic and diluted net income (loss) per share.................. $ -- $ (.01) $ (.01) $ .01 $ .06 $ .03 $ .04 Shares used in computing basic and diluted net income (loss) per share.................. 532,000 532,000 532,000 532,000 532,000 532,000 532,000 Unaudited pro forma basic and diluted net income per share(3).... $ .06 $ .04 Shares used in computing unaudited pro forma basic and diluted net income per share(3).... 535,585 535,585
Nov. 26, 1999 ----------------------- Pro Forma Actual As Adjusted(4) -------- -------------- (in thousands) Consolidated Balance Sheet Data: Cash and cash equivalents............................... $ 29,568 $467,376 Working capital......................................... 3,765 415,162 Total assets............................................ 247,369 555,451 Payable to 3Com Corporation............................. 57,935 -- Stockholder's net investment............................ 26,431 437,828
- ------- Notes: (1) Our fiscal year end was June 30 prior to our acquisition by U.S. Robotics. (2) Fiscal 1996 includes only eleven months of operating results. (3) Pro forma basic and diluted net income per share amounts are calculated using the common shares outstanding prior to the offering of 532,000,000 shares plus the 3,585,431 shares of common stock whose proceeds will be used to pay an assumed $50 million dividend to 3Com, based on an assumed initial public offering price of $15.00, reduced by the estimated per share offering costs. (4) Pro forma as adjusted amounts give effect to the following actions as though these actions had been taken as of November 26, 1999: . our sale of 23,000,000 shares of common stock in this offering at an assumed initial public offering price of $15.00 per share and after deducting an assumed underwriting discount and estimated offering expenses payable by us; . our sale of 15,000,000 shares of common stock to America Online, Motorola and Nokia concurrently with the closing of this offering at an assumed offering price of $15.00 per share; . for administrative convenience, 3Com intends to retain most of our accounts receivable and accounts payable at the time of our separation; accordingly, such accounts receivable and accounts payable are excluded from our pro forma balance sheet as of November 26, 1999; . payment of a dividend to 3Com of an assumed $50 million; and . repayment of an intercompany payable to 3Com, which was approximately $58 million at November 26, 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. 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 ability to generate revenues 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 because we would not be able to compete effectively and our ability to generate revenues would suffer. 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, we may not be able to secure sufficient quantities or cost-effective production of our handheld devices or we could have costly excess production or inventories. 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 7 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. . 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. 8 . 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. . 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 reputation and results of 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 began working with Manufacturers' Services Limited when it purchased 3Com's Utah facility in November 1999. As a result, we have not had significant working experience with Manufacturers' Service Limited. 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. 9 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, crystals and several radio frequency and discrete components, come from sole or single source suppliers. Alternative sources are not currently available for these sole and 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 would be seriously harmed. In addition, because we rely on one-time purchase orders with our suppliers, including our sole and single source 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 six months ended November 26, 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 results of operations. A significant portion of our revenues comes from only a small number of distributors. Ingram Micro represented approximately 34% of our revenues in the six months ended November 26, 1999 and 24% of our revenues in fiscal 1999. Tech Data represented approximately 8% of our revenues in the six months ended November 26, 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 adversely affect our ability to generate revenues from the sale of our handheld devices. 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. The products we sell to distributors and retailers accounted for approximately 89% of our revenues in the six months ended November 26, 1999 and 88% of our revenues in fiscal 1999. Our 10 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. 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. 11 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. 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, we may not be able to successfully manage our business, which could cause us to fail to meet our customer demand or to attract new customers. 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 December 31, 1997, we had a total of approximately 220 employees and at December 31, 1999, we had a total of approximately 652 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. 12 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. The market for the delivery of Internet services through handheld devices is new and rapidly evolving, and our business and our ability to generate revenues from our handheld devices, Palm platform or Internet services 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 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. We may not be able to deliver Internet access 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 13 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 ability to generate revenues from our Internet services 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 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 could suffer and customers may not be willing to use our Internet services, which could cause our revenues to decline. 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. 14 We may not be able to maintain and expand our business 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. 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. Xerox Corporation has filed suit against us alleging willful infringement of a Xerox United States patent relating to computerized interpretation of handwriting. See "Business--Legal Proceedings" for a description of the matter. 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 at all 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. WaveWare Communications, Inc. has filed suit against us alleging, among other things, breach of contract, fraud and deceit and misappropriation of trade secrets. We are in the preliminary stages of investigating the allegations contained in the suit, and we have not yet responded to the complaint. See "Business--Legal Proceedings" for a description of this matter. An adverse determination in this litigation could subject us to substantial damages and require us to obtain a license from WaveWare or to modify our software. A license may not be available at all or on terms acceptable to us. Telxon Corporation and Penright! Corporation have filed suit against us alleging copyright infringement, unfair competition and theft of trade secrets and seeking damages and to enjoin the sale of our Palm OS operating system. We are in the preliminary stages of investigating the allegations contained in the suit, and we have not yet responded to the complaint. See "Business--Legal Proceedings" for a description of this matter. An adverse determination in this litigation could subject us to substantial damages and require us to obtain a license to continue using our Palm OS operating system or to modify our software. A license may not be available at all or on terms acceptable to us. 15 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 the Xerox, WaveWare and Telxon and Penright! suits. 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. 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 future results could be harmed by economic, political, regulatory 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; 16 . 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 we may not be able to successfully manage our operations 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 reputation or cause us to make expenditures to fix the problems. 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. To date we have not experienced any material problems attributable to the inability to recognize dates beginning with the year 2000 in our products or internal systems. It is possible that our current products contain undetected errors or defects associated with year 2000 date functions that may result in material costs or liabilities to us in the future. 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 released a downloadable software patch to fix this problem. If any of our products experienced a material year 2000 error, 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, if we experienced a material year 2000 related failure, we could experience delays in our ability to manufacture and ship products and deliver services, disruptions in 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. 17 Risks Related to Our Separation from 3Com We currently use 3Com's operational and administrative infrastructure, and our ability to satisfy our customers and operate 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 may decline and we will not be able to operate our business without 3Com's control 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 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. 18 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 93.3% of our outstanding common stock, or approximately 92.8% 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. 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 handheld computing business that we comprise. Accordingly, the historical financial information we have included in this prospectus does not necessarily 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. Our costs and expenses include allocations from 3Com for centralized corporate services and infrastructure costs, including: . legal; . accounting; . treasury; . real estate; . information technology; . distribution; . customer service; . sales; . marketing; and . engineering. These allocations have been determined on bases that 3Com and Palm considered to be reasonable reflections of the utilization of services provided to or the benefit received by Palm. The historical financial information is not necessarily indicative of what our results of operations, financial position 19 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 financing from other sources may not 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 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 and, because of 3Com's controlling ownership, we may not resolve these conflicts on the most favorable terms to us. 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. 20 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; . 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 all of the 532,000,000 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. 21 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; . 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 $14.25 in net tangible book value per share. 22 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. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including those discussed in "Risk Factors", "Managements' Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this prospectus. 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. 23 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 and the private placements, 3Com will own approximately 93.3% of the outstanding shares of our common stock, or approximately 92.8% if the underwriters fully exercise their option to purchase additional shares. 3Com currently plans to complete its divestiture of Palm approximately six months after this offering by distributing all of its shares of our common 24 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. 25 USE OF PROCEEDS We estimate that our net proceeds from this offering will be approximately $320.7 million, based on an assumed initial public offering price of $15.00 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 $225 million, based on an assumed offering price of $15.00 per share. We intend to use the proceeds of this offering and the private placements for: . payment of a dividend to 3Com of at least $50 million, provided that if the aggregate estimated net proceeds of this offering and the private placements exceed $620 million, 3Com may elect to receive an additional dividend of up to 50% of the amount of the aggregate estimated net proceeds in excess of $620 million; . repayment of an intercompany payable to 3Com, which was approximately $58 million at November 26, 1999; . increased capital expenditures of approximately $25 million 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 of approximately $30 million 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. 26 CAPITALIZATION The following table sets forth our capitalization as of November 26, 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 November 26, 1999, the declaration of a dividend payable to 3Com of $50 million; and . on a pro forma as adjusted basis to reflect our receipt of the estimated net proceeds from the sale of 23,000,000 shares of common stock in this offering and our sale of 15,000,000 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.
November 26, 1999 ------------------------------ Pro Forma Actual Pro Forma As Adjusted ------- --------- ----------- (in thousands) Payable to 3Com Corporation(1)(2)............ $57,935 $ 107,935 $ -- ======= ========= ========= Stockholders' equity: Preferred stock............. $ -- $ -- $ -- Common stock................ -- -- 570 Additional paid-in capital.. -- -- 545,173 3Com Corporation equity (deficiency)(1)............ 26,395 (107,951) (107,951) Accumulated other comprehensive income (loss)..................... 36 36 36 ------- --------- --------- Total stockholders' equity (deficiency)............. $26,431 $(107,915) $ 437,828 ======= ========= ========= Total capitalization.... $26,431 $(107,915) $ 437,828 ======= ========= =========
- -------- Notes: (1) We intend to declare a dividend payable to 3Com of $50 million, provided that if the aggregate estimated net proceeds of this offering and the private placements exceed $620 million, 3Com may elect to receive an additional dividend of up to 50% of the amount of the aggregate estimated net proceeds in excess of $620 million. We intend to pay this dividend using a portion of the proceeds from this offering. (2) We intend to repay our intercompany payable to 3Com, which was approximately $58 million as of November 26, 1999, using a portion of the proceeds of this offering. 27 DILUTION Our net tangible book value at November 26, 1999 was approximately $14.6 million, or $.03 per share. Pro forma net tangible book value per share is determined by dividing our pro forma tangible net worth, which is total tangible assets less total liabilities after giving 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 November 26, 1999 and the payment to 3Com of an assumed dividend of $50 million, by the number of shares of common stock outstanding immediately before this offering and the private placements. Dilution in pro forma 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 pro forma net tangible book value per share of our common stock immediately afterwards. After giving effect to the following: . our sale of 23,000,000 shares of common stock in this offering at an assumed initial public offering price of $15.00 per share and after deducting an assumed underwriting discount and estimated offering expenses payable by us; and . our sale of 15,000,000 shares of common stock to America Online, Motorola and Nokia in private placements concurrently with the closing of this offering at an assumed offering price of $15.00 per share; our pro forma as adjusted net tangible book value at November 26, 1999 would have been approximately $426.0 million, or $.75 per share. This represents an immediate increase in pro forma net tangible book value of $.98 per share to our existing stockholder and an immediate dilution in pro forma net tangible book value of $14.25 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.................. $15.00 Pro forma net tangible book value per share as of November 26, 1999.......................................................... $(.23) Increase in pro forma book value per share attributable to new investors (including the private placements).................. .98 ----- Pro forma, as adjusted, net tangible book value per share after this offering and the private placements........................ .75 ------ Dilution in pro forma net tangible book value per share to new investors (including the private placements).................... $14.25 ======
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 November 26, 1999, there were no options outstanding to purchase shares of common stock. To the extent that any options are granted and exercised, there will be further dilution to new investors. 28 The following table sets forth, as of November 26, 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 $15.00 per share, before deducting the estimated underwriting discounts and commissions and offering expenses payable by us.
Average Shares Purchased Total Consideration Price ---------------------- ----------------------- Per Number Percentage Amount Percentage Share ----------- ---------- ------------ ---------- -------- Existing stockholder.... 532,000,000 93.3% $ -- --% $ -- New investors (including the private placements)............ 38,000,000 6.7 570,000,000 100.0 15.00 ----------- ----- ------------ ----- -------- Total................. 570,000,000 100.0% $570,000,000 100.0% $ 1.00 =========== ===== ============ ===== ========
No cash was paid by 3Com in consideration for our common stock. Accordingly, the cash consideration related to the existing stockholder is reported as zero in the above table. 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 92.8% of the total number of shares of common stock outstanding; and . the number of shares held by new investors will be increased to 41,450,000 shares or approximately 7.2% of the total number of shares of our common stock outstanding after this offering. 29 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 six months ended November 27, 1998 and November 26, 1999 and the consolidated balance sheet data as of November 26, 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.
Years Ended Six Months Ended ------------------------------------------------ ------------------ June 30, May 26, May 25, May 31, May 28, Nov. 27, Nov. 26, 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 $263,302 $435,060 Cost of revenues........ 174 4,479 77,685 157,749 315,616 147,287 246,342 ------- ------- -------- -------- -------- -------- -------- Gross profit........... 1,229 2,575 36,472 114,388 247,909 116,015 188,718 ------- ------- -------- -------- -------- -------- -------- Operating expenses: Sales and marketing.... 1,099 2,783 30,305 70,765 127,726 57,862 102,686 Research and development........... 1,384 4,716 13,442 21,863 46,027 20,460 28,551 General and administrative........ 977 1,853 6,238 15,299 23,692 11,304 16,956 Purchased in-process technology............ -- -- -- -- 2,125 -- -- Separation costs....... -- -- -- -- -- -- 3,780 ------- ------- -------- -------- -------- -------- -------- Total operating expenses............. 3,460 9,352 49,985 107,927 199,570 89,626 151,973 ------- ------- -------- -------- -------- -------- -------- Operating income (loss)................. (2,231) (6,777) (13,513) 6,461 48,339 26,389 36,745 Interest and other income (expense), net.. 65 81 (515) (56) (223) (100) 214 ------- ------- -------- -------- -------- -------- -------- Income (loss) before income taxes........... (2,166) (6,696) (14,028) 6,405 48,116 26,289 36,959 Income tax provision (credit)............... -- (3,634) (6,166) 2,234 18,488 10,102 14,439 ------- ------- -------- -------- -------- -------- -------- Net income (loss)....... $(2,166) $(3,062) $ (7,862) $ 4,171 $ 29,628 $ 16,187 $ 22,520 ======= ======= ======== ======== ======== ======== ======== Basic and diluted net income (loss) per share.................. $ -- $ (.01) $ (.01) $ .01 $ .06 $ .03 $ .04 ======= ======= ======== ======== ======== ======== ======== Shares used in computing basic and diluted net income (loss) per share.................. 532,000 532,000 532,000 532,000 532,000 532,000 532,000 ======= ======= ======== ======== ======== ======== ======== Unaudited pro forma basic and diluted net income per share(3).... $ .06 $ .04 ======== ======== Shares used in computing unaudited pro forma basic and diluted net income per share(3).... 535,585 535,585 ======== ======== June 30, May 26, May 25, May 31, May 28, Nov. 26, 1995(1) 1996(2) 1997 1998 1999 1999 -------- -------- -------- -------- -------- -------- (in thousands) Consolidated Balance Sheet Data: Working capital.................. $ 987 $ 3,899 $ 26,963 $ 53,354 $ 12,682 $ 3,765 Total assets..................... 2,432 9,618 45,984 115,359 152,247 247,369 Payable to 3Com Corporation...... -- 752 4,412 15,617 40,509 57,935 Stockholder's net investment..... 627 6,466 31,245 65,675 34,018 26,431
- ------- Notes: (1)Our fiscal year end was June 30 prior to our acquisition by U.S. Robotics. (2)Fiscal 1996 includes only eleven months of operating results. (3) Pro forma basic and diluted net income per share amounts are calculated using the common shares outstanding prior to the offering of 532,000,000 shares plus the 3,585,431 shares of common stock whose proceeds will be used to pay an assumed $50 million dividend to 3Com, based on an assumed initial public offering price of $15.00 per share, reduced by the estimated per share offering costs. 30 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. 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 31, 1999, we had sold over 5.5 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 and the private placements, 3Com will own approximately 93.3% of our outstanding common stock, or approximately 92.8% 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 Approximately 99% of our revenues to date have been generated from sales of our handheld devices and related peripherals and accessories. Less than 1% of our revenues to date have been derived 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 32% of our total revenues for the six months ended November 26, 1999. Revenues from our handheld device products, which have accounted for approximately 99% of our revenues to date, consist primarily of sales to distributors, retailers and resellers and to end users 31 who buy through our Palm.com website. We recognize revenues when the product has been shipped. We have not offered maintenance and support contracts for our handheld device products. We provide for estimated product returns, price protection, warranty, royalties and post-sale telephone support in the period in which revenue is recognized. Revenues from licensing of the Palm platform to manufacturers of other handheld devices, which have accounted for less than 1% of our revenues to date, 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 otherwise earned in accordance with American Institute of Certified Public Accountants Statement of Position No. 97-2, Software Revenue Recognition. Maintenance and support is provided in connection with the licensing agreements. Because most of our licensing activity has occurred relatively recently, none of these agreements has been renewed to date. Revenues from Internet services, which have accounted for less than 1% of our revenues to date, consist primarily of fees paid by subscribers for our wireless Internet access service, Palm.net. We recognize subscription service revenues over the period during which services are provided, typically one month. As of December 31, 1999 we had approximately 34,000 subscribers to our Palm.net service. To date we have earned no enterprise application hosting fees or advertising revenues related to our Palm.com and Palm.net Internet services. 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. 32 We do not expect that changes in foreign currency exchange rates will have a material effect on our financial position or results of operations, as substantially all of our revenues are denominated in U.S. dollars, and the effect of any significant remaining foreign currency exposures would be offset by hedging strategies. 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. 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:
Years Ended Six Months Ended ----------------------- ----------------- May 25, May 31, May 28, Nov. 27, Nov. 26, 1997 1998 1999 1998 1999 ------- ------- ------- -------- -------- Revenues............................ 100% 100% 100% 100% 100% Cost of revenues.................... 68 58 56 56 57 --- --- --- --- --- Gross profit........................ 32 42 44 44 43 --- --- --- --- --- Operating expenses: Sales and marketing............... 27 26 23 22 24 Research and development.......... 12 8 8 8 6 General and administrative........ 5 5 4 4 4 Purchased in-process technology... -- -- 1 -- -- Separation costs.................. -- -- -- -- 1 --- --- --- --- --- Total operating expenses........ 44 39 36 34 35 --- --- --- --- --- Operating income (loss)............. (12) 3 8 10 8 Interest and other income (expense), net................................ -- -- -- -- -- --- --- --- --- --- Income (loss) before income taxes... (12) 3 8 10 8 Income tax provision (credit)....... (5) 1 3 4 3 --- --- --- --- --- Net income (loss)................... (7)% 2% 5% 6% 5% === === === === ===
33 Six Months Ended November 26, 1999 and November 27, 1998 Revenues Revenues in the six months ended November 26, 1999 and November 27, 1998 consisted almost entirely of revenues from sales of our handheld device products. Revenues were $435.1 million in the six months ended November 26, 1999, a 65% increase over revenues of $263.3 million in the six months ended November 27, 1998. The increase in revenues during this period was driven by increased demand for our handheld devices, which reflects the growing market adoption of our products. Average selling prices over this period decreased slightly due to a price reduction in October 1999 on existing products not fully offset by sales of the new Palm Vx and Palm VII devices which have higher average selling prices. International revenues have become an increasing percentage of our total revenues, representing 32% of total revenues in the six months ended November 26, 1999 compared to 25% in the six months ended November 27, 1998. As we continue to expand the number of international markets we serve, we expect our international business to continue to increase as a percentage of our overall business. Revenues from new handheld device products introduced during the preceding four quarters represented substantially all of our revenues for the six months ended November 26, 1999. 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 six months ended November 26, 1999, costs related to our wireless Internet service resulting from the introduction of our Palm VII product. Gross margin was 43% of revenues in the six months ended November 26, 1999, a one percentage point decline from a gross margin of 44% of revenues in the six months ended November 27, 1998. The decline in gross margin in the six months ended November 26, 1999 was a result of cost of revenues including $5.2 million of 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 $102.7 million in the six months ended November 26, 1999, a 77% increase over expenses of $57.9 million in the six months ended November 27, 1998. Sales and marketing expenses represented 24% of revenues in the six months ended November 26, 1999 compared to 22% in the six months ended November 27, 1998. Approximately $25.1 million of the increase in expenses was due to additional spending on U.S. demand generation activities and media advertising production and placement. Approximately $9.2 million of the increase in expenses was due to increased sales and marketing activities in Europe and approximately $3.5 million of the increase was due to increased headcount. 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 $28.6 million in the six months ended November 26, 1999, a 40% increase over expenses of $20.5 million in the six months ended November 27, 1998. Research and development expenses represented 6% of revenues in the six months ended November 26, 1999 compared to 8% in the six months ended November 27, 1998. Approximately $6.1 million of the increase in research and development spending from period to period was 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. Incremental spending resulting from the acquisition of Smartcode in 34 February 1999 accounted for approximately $1.0 million of the increase in research and development spending. 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 $17.0 million in the six months ended November 26, 1999, an increase of 50% over expenses of $11.3 million in the six months ended November 27,1998. General and administrative expenses represented 4% of revenues in the six months ended November 26, 1999 as well as in the six months ended November 27, 1998. The $5.7 million increase in expenses was due to approximately $4.1 million of increased infrastructure costs as we continue to build our infrastructure to support a stand-alone, publicly-held company and a $3.7 million increase in allocated costs from 3Com due to our revenue growth. These increases were offset by a $2.1 million reduction in the provision for doubtful accounts receivable. Separation Costs Separation costs consist of one-time costs, such as consulting and professional fees, associated with the process of becoming a stand-alone, publicly held company. Separation costs were $3.8 million in the six months ended November 26, 1999. We expect these costs to continue at similar to slightly increased levels for the remainder of the fiscal year. 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 six months ended November 26, 1999 was 39% compared to 38% in the six months ended November 27, 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 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. Revenues from new handheld device products introduced during the preceding four quarters represented over 85% of our revenues for fiscal 1999, 1998 and 1997. The growth in revenues in fiscal 1999 and fiscal 1998 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. 35 Gross Margin Gross margin was 44% of revenues in fiscal 1999, a two percentage point increase over fiscal 1998. Gross margin was 42% of revenues in fiscal 1998, a 10 percentage point increase over gross margin of 32% of revenues 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, 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 as a percentage of revenues were 23% in fiscal 1999 compared to 26% in fiscal 1998 and 27% in fiscal 1997. Sales and marketing expenses have increased in each period, but have declined as a percentage of revenues due to fixed costs being spread over a higher revenue base. The absolute dollar increase in sales and marketing expenses in fiscal 1999 resulted primarily from an increase in advertising of $29.6 million, which includes 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. In addition, marketing expenses increased by $15.7 million due to our expansion into the European market. The absolute dollar increase in sales and marketing expenses in fiscal 1998 was primarily the result of an increase of $25.1 million in costs associated with the continued growth of our sales and marketing organization in the United States. In addition, approximately $11.3 million of the increase was due to the expansion of our sales organization into Europe 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. 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 absolute dollar increase in research and development expenses in fiscal 1999 resulted primarily from an increase of $8.2 million in personnel-related expenses associated with expanding the size of our engineering organization and an increase of $4.0 million in expenses related to contractors, consultants and project materials. During fiscal 1999, we also incurred an additional $6.9 million in engineering costs to develop our wireless Internet access service that supports our wireless Palm VII device. The absolute dollar increase in research and development expenses in fiscal 1998 resulted primarily from the expansion of our development activities, including personnel-related expenses, contractor and consulting fees and product development expenditures. The decrease in research and development expenses as a percentage of revenues from fiscal 1997 to fiscal 1998 resulted from economies of scale as fixed costs were spread over a higher revenue base. 36 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 in fiscal 1999 resulted from an increase in allocated costs from 3Com of $4.3 million 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 of $3.3 million for doubtful accounts receivable. Approximately half of the increased provision for doubtful accounts was due to specific reserves provided for a number of different customer account balances. The remaining increase in the provision resulted from the overall increase in our level of accounts receivable, which increased by nearly 200% over the previous year. Purchased In-Process Technology We acquired Smartcode Technologie SARL on February 8, 1999 for $17.4 million in cash, including approximately $0.2 million 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. Approximately $5.4 million of the purchase price was allocated to existing technology, with this amount being amortized over four years. The purchased in-process technology acquired related primarily to Globalpulse, a software GSM terminal adapter which acts as a software modem for products utilizing the Palm operating system. The estimated value for the in- process technology was determined using the income approach which discounted to present value the cash flows expected to be derived from products that were still in the process of development at the date of acquisition. The projections were based on future expectations of the revenue and expenses to be generated in connection with the products that were still under development. Revenues and operating profit attributable to the in-process technology were estimated to total $50.0 million and $9.4 million, respectively, over a five-year projection period. The resulting projected net cash flows were discounted to their present value of $2.1 million using a discount rate of 40%, which was calculated based on the weighted average cost of capital, adjusted for the technology risk associated with the purchased in-process technology, which was considered to be significant due to the nature of the technology under development. For projected cash flows attributable to existing technology, a discount rate of 35% was used, which reflects the weighted average cost of capital, adjusted for the technology risk associated with these technologies. The nature of the efforts required to develop the purchased in-process technology into commercially viable products principally relates to the completion of all planning, designing, prototyping, verification and testing activities that are necessary to establish whether the products will be able to meet its design specifications, including functions, features and technical performance requirements. The estimated cost to develop the in-process technology was approximately $0.3 million, all of which was expected to be incurred before the end of fiscal 2000. The actual cost to develop the in- process technology has been consistent with the forecasted amount. The primary project was completed in July 1999 and Palm began to derive revenue beginning in the second quarter of fiscal 2000. As of November 26, 1999, revenues have been as expected. 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. 37 Quarterly Results of Operations The following tables present our operating results for each of the ten fiscal quarters in the period ended November 26, 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 necessarily 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, Nov. 26, 1997 1997 1998 1998 1998 1998 1999 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 $258,555 Cost of revenues........ 29,906 42,115 37,392 48,336 62,998 84,289 67,583 100,746 98,324 148,018 ------- ------- ------- ------- -------- -------- -------- -------- -------- -------- Gross profit............ 21,769 27,882 28,374 36,363 53,071 62,944 58,306 73,588 78,181 110,537 ------- ------- ------- ------- -------- -------- -------- -------- -------- -------- Operating expenses: Sales and marketing..... 11,314 20,286 17,335 21,830 23,969 33,893 28,725 41,139 42,648 60,038 Research and development............ 4,538 5,170 5,209 6,946 9,738 10,722 10,989 14,578 12,507 16,044 General and administrative......... 2,470 3,290 3,181 6,358 6,233 5,071 5,739 6,649 7,160 9,796 Purchased in-process technology............. -- -- -- -- -- -- 2,125 -- -- -- Separation costs........ -- -- -- -- -- -- -- -- -- 3,780 ------- ------- ------- ------- -------- -------- -------- -------- -------- -------- Total operating expenses............... 18,322 28,746 25,725 35,134 39,940 49,686 47,578 62,366 62,315 89,658 ------- ------- ------- ------- -------- -------- -------- -------- -------- -------- Operating income (loss)................. 3,447 (864) 2,649 1,229 13,131 13,258 10,728 11,222 15,866 20,879 Interest and other income (expense), net.. (35) (44) (5) 28 (25) (75) (15) (108) (63) 277 ------- ------- ------- ------- -------- -------- -------- -------- -------- -------- Income (loss) before income taxes........... 3,412 (908) 2,644 1,257 13,106 13,183 10,713 11,114 15,803 21,156 Income tax provision (credit)............... 1,190 (317) 922 439 5,036 5,066 4,116 4,270 6,145 8,294 ------- ------- ------- ------- -------- -------- -------- -------- -------- -------- Net income (loss)....... $ 2,222 $ (591) $ 1,722 $ 818 $ 8,070 $ 8,117 $ 6,597 $ 6,844 $ 9,658 $ 12,862 ======= ======= ======= ======= ======== ======== ======== ======== ======== ======== As a Percentage of Revenues: Revenues................ 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Cost of revenues........ 58 60 57 57 54 57 54 58 56 57 ------- ------- ------- ------- -------- -------- -------- -------- -------- -------- Gross profit............ 42 40 43 43 46 43 46 42 44 43 ------- ------- ------- ------- -------- -------- -------- -------- -------- -------- Operating expenses: Sales and marketing..... 22 29 26 26 22 23 23 24 24 23 Research and development............ 9 7 8 8 8 7 9 8 7 6 General and administrative......... 5 5 5 7 5 4 4 4 4 4 Purchased in-process technology............. -- -- -- -- -- -- 2 -- -- -- Separation costs........ -- -- -- -- -- -- -- -- -- 1 ------- ------- ------- ------- -------- -------- -------- -------- -------- -------- Total operating expenses............... 36 41 39 41 35 34 38 36 35 34 ------- ------- ------- ------- -------- -------- -------- -------- -------- -------- Operating income (loss)................. 6 (1) 4 2 11 9 8 6 9 9 Interest and other income (expense), net.. -- -- -- -- -- -- -- -- -- -- ------- ------- ------- ------- -------- -------- -------- -------- -------- -------- Income (loss) before income taxes........... 6 (1) 4 2 11 9 8 6 9 9 Income tax provision (credit)............... 2 -- 1 1 4 3 3 2 4 4 ------- ------- ------- ------- -------- -------- -------- -------- -------- -------- Net income (loss)....... 4% (1)% 3% 1% 7% 6% 5% 4% 5% 5% ======= ======= ======= ======= ======== ======== ======== ======== ======== ========
38 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 November 26, 1999, we reported cash of $29.6 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 which 3Com will retain for administrative convenience. 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 of $50 million, provided that if the aggregate estimated net proceeds of this offering and the private placements exceed $620 million, 3Com may elect to receive an additional dividend of up to 50% of the amount of the aggregate estimated net proceeds in excess of $620 million. In addition, we will make a payment to 3Com of an intercompany payable, which was approximately $58 million as of November 26, 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, fund our increased working capital needs associated with revenue growth and fund increased capital and marketing expenditures. Cash provided by operating activities was $66.3 million for the six months ended November 26, 1999. Cash provided by operating activities was $84.0 million in fiscal 1999, cash used in operating activities was $21.4 million in fiscal 1998 and $31.2 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 39 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. We had capital expenditures of $5.7 million in the six months ended November 26, 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 Interest Rate Sensitivity As of November 26, 1999, we had cash and cash equivalents of $29.6 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. 40 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, No. 133, "Accounting for Derivative Instruments and Hedging Activities" and SFAS No. 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 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. To date we have not experienced any material problems attributable to the inability to recognize dates beginning with the year 2000 in our products or internal systems. We face risks associated with the year 2000 issue if we encounter undetected errors or defects. 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. 41 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 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 released a downloadable software patch to fix this problem. If any of our products experienced a material year 2000 error, 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. 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 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 have been implemented and these plans will be validated and modified as needed. 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; 42 . consultant and contractor fees to assist in assessments and to perform remediation and integration testing; 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. 43 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 6,900 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. 44 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 45 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 31, 1999, more than 33,000 developers had registered to use Palm developer tools to create software applications for the Palm platform. We provide these developer tools at no charge to our developer community. While no license revenue is derived directly from these developers, we believe the existence of software applications developed by third-party developers helps to increase the market for our handheld device products and services. 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 46 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. 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 focusing on increasing the adoption of Palm devices by 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 six months of fiscal 2000, revenues outside the United States accounted for 32% of our total revenues compared to 25% for the first six 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 47 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 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 48 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; . 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 49 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. 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 our capital stock. 50 Sony. In November 1999, we entered into a non-exclusive, royalty-bearing 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. 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. 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 our capital stock. International Business Machines. In January 2000, we entered into a non- binding memorandum of understanding with IBM pursuant to which the parties intend to enter into a definitive agreement or set of agreements to integrate, develop, market and deploy Palm and IBM products and services in the enterprise market. The memorandum is non-binding, and we may not be able to enter into one or more definitive, binding agreements with IBM regarding this relationship. 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 31, 1999, more than 33,000 developers had registered to create applications for the Palm platform. In addition, over 6,900 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. 51 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 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. 52 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. 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 December 31, 1999, we had 263 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. The components that make up our devices are supplied by a number of vendors such as AMD, Fujitsu and Toshiba, who each supply DRAM memory chips, and Motorola, the supplier of our microprocessor. 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. Key components of our handheld device products that we obtain from sole and single source suppliers include displays, power supply integrated circuits, digital signal processors, Motorola 53 microprocessors, crystals and several radio frequency and discrete components. We obtain displays from Sharp, integrated circuits from Anadigics, Analog Devices, Burr Brown, Fairchild, Linear Tech, Linfinity, Lucent, Maxim, Micro Linear, Motorola, Seiko Epson, Sharp, Siemens, Toko and others, digital signal processors from Lucent, discrete components from Murata, Coilcraft, Sumida Electronics and Toko and crystals from KDS and Murata. 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 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. We believe that we compete more favorably than many of our current competitors with respect to some or all of these factors due to our operating history, greater number of customers, greater number of third-party software application and greater brand recognition. 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. We believe that we compete more favorably than many of our current competitors with respect to some or all of these factors due to our operating history, greater number of customers, greater number of third-party software application and greater brand recognition. 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 13 United States patents issued for our technology and we have 61 United States patent applications pending. We also have 3 foreign patents issued and 25 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 54 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. 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 shipped as soon as possible after receipt of an order, usually within one to four weeks. With very few exceptions, orders may be canceled or rescheduled by the customer without penalty. Employees As of December 31, 1999, we had a total of approximately 652 employees, of which approximately 77 were in supply chain and service and support, 263 were in engineering, 249 were in sales and marketing and 63 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 55 willful infringement of a Xerox United States patent, relating to computerized interpretation of handwriting. The complaint seeks unspecified damages and injunctive relief. Xerox has asserted that Graffiti software and certain of our products infringe the patent. On June 25, 1999, the Court stayed the action pending reexamination of the patent by the U.S. Patent and Trademark Office. On December 15, 1999, we received a Notice of Intent to Issue Reexamination Certificate from the United States Patent and Trademark Office stating that the reexamination has been terminated and that a certificate will be issued in due course. The notice stated that the certificate will indicate that there will be no changes to the patent specification or drawing and that all claims of the patent will be confirmed without any changes. On January 18, 2000, the court held a status hearing during which it lifted the stay of the action and established that all of the parties' briefs relating to motions for summary judgment would be filed with the court by April 28, 2000. We anticipate that oral argument on these motions will be heard thereafter. No trial date has been set. 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. 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 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. 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. On December 13, 1999, WaveWare Communications, Inc. filed suit against 3Com, Palm and others in the Superior Court of California, San Mateo County. The case is captioned WaveWare Communications, Inc. v. 3Com Corporation; Palm Computing, Inc.; and Mark Bercow, No. 411331. The complaint alleges breach of contract, constructive fraud, fraud and deceit, negligent misrepresentation, misappropriation of assets and trade secrets, unfair competition, unjust enrichment and intentional interference with economic advantage in connection with our and 3Com's discussions with WaveWare concerning WaveWare's potential acquisition by 3Com. The complaint seeks unspecified monetary damages and injunctive relief. We have not yet responded to the complaint. To date, no trial date has been set, and no discovery has been exchanged. 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. On December 27, 1999, Telxon Corporation and Penright! Corporation filed a complaint in the U.S. District Court for the Northern District of Ohio, Eastern Division (Case No. 1:99CV3157) against 3Com and Palm alleging copyright infringement, unfair competition and theft of trade secrets. The plaintiffs allege that the Palm OS operating system contains graphical user interface software copied from the plaintiffs' software. The complaint seeks unspecified compensatory and treble damages and to enjoin, among other things, distribution and sales of the Palm OS operating system. We are in the preliminary stages of investigating the allegations contained in the complaint. To date, no trial date has been set, and no discovery has been exchanged. 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. 56 MANAGEMENT Directors, Executive Officers and Key Employees Set forth below is information concerning our directors and executive officers and their ages as of January 25, 2000.
Name Age Position ---- --- -------- Directors and Executive Officers: Carl J. Yankowski....... 51 Chief Executive Officer and Director Eric A. Benhamou........ 44 Director James L. Barksdale...... 57 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............. 39 Vice President, Strategic Alliances & Platform Development Gregory S. Rhine........ 42 Vice President, Worldwide Sales Peng K. Lim............. 37 Vice President, Worldwide Product Engineering Daniel S. Keller........ 43 Vice President, Platform Engineering Dinesh Raghavan......... 45 Vice President, Global Supply Chain Operations Charles Yort............ 41 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, 57 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. 58 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. 59 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. 60 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. 61 The following table sets forth the number of shares of 3Com common stock beneficially owned on December 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 December 31, 1999 was 343,174,491.
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).............................. 55,791 * Susan G. Swenson................................... -- * Alan J. Kessler(4)................................. 179,716 * Judy Bruner(5)..................................... 77,943 * Stephen Yu(6)...................................... 11,278 * All directors and executive officers as a group.... 2,233,545 *
- -------- * Represents holdings of less than one percent. (1) Includes 1,377,505 shares issuable upon the exercise of options exercisable within 60 days of December 31, 1999. (2) Includes 60,000 shares issuable upon the exercise of options exercisable within 60 days of December 31, 1999 and 60,000 shares are held by Mr. Barksdale and his spouse. (3) Includes 55,791 shares issuable upon the exercise of options exercisable within 60 days of December 31, 1999. (4) Includes 179,716 shares issuable upon the exercise of options exercisable within 60 days of December 31, 1999. (5) Includes 75,922 shares issuable upon the exercise of options exercisable within 60 days of December 31, 1999. (6) Includes 10,539 shares issuable upon the exercise of options exercisable within 60 days of December 31, 1999. 62 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. 63 (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. 64 Treatment of 3Com Options We intend to assume substantially all of the 3Com options held by our employees on the distribution date. As of December 31, 1999, our employees held options to purchase 3,389,784 shares of 3Com common stock at a weighted average exercise price per share of $29.36. The price of 3Com common stock on that date was $47.00. 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 December 31, 1999, our employees held 39,000 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 January 27, 2000, a total of 20,000,000 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, 25,000,000 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 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. 65 No optionee may be granted an option to purchase more than 3,000,000 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 6,000,000 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 within 12 months following a change of control, 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 5,000,000 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, 10,000,000 shares, or a lesser amount as may be determined by our board of directors. 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. 66 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 4,000 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 Director Plan provides for the periodic grant of nonstatutory stock options to our non-employee directors. 67 Number of Shares Available under the Director Plan. As of January 27, 2000, a total of 500,000 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 500,000 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 40,000 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 25,000 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 40,000 share option becomes exercisable as to 33% of the shares subject to the option on each anniversary of the date of grant, and each 25,000 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. 68 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 80.1% 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 80.1% 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; 69 . 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 relating to governmental, accounting, contractual and other similar requirements of our ongoing businesses, 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; 70 . 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. It is anticipated that we will bear the costs and expenses associated with this offering and 3Com will bear the costs and expenses associated with the distribution. 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 inventory to us that it holds related to our business, to the extent that the inventory was, prior to the separation date, a 3Com asset. 71 Excluded Assets. The general assignment and assumption agreement also provides that 3Com will not transfer most accounts receivable related to our business. Assumption of Liabilities. Effective on the separation date, we will assume liabilities from 3Com, to the extent that these liabilities were, prior to the separation date, liabilities held by 3Com related to our business and except as provided in an ancillary or other agreement. 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. 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. 72 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. To date, there are no patents or patent applications that have resulted 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 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. 73 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. 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. 74 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. 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. 75 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. 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. 76 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. 77 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 93.3%, or about 92.8% 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. None of our executive officers, directors or director nominees currently owns any shares of our common stock, but those who own shares of 3Com common stock will be treated on the same terms as other holders of 3Com stock in any distribution by 3Com. See "Stock Ownership of Directors and Executive Officers" for a description of the ownership of 3Com stock by our directors and executive officers. 78 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 2,000,000,000 shares of common stock, $0.001 par value, and 125,000,000 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 532,000,000 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 79 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. 80 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 FleetBoston 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.......... FleetBoston Robertson Stephens Inc.......................... ------------- Total..................................................... 23,000,000 =============
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 3,450,000 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 3,450,000 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. 81 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 directors of 3Com and Palm and 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. A prospectus in electronic format may be made available on the websites maintained by one or more Underwriters or securities dealers. The Underwriters may agree to allocate a number of shares to Underwriters for sale to their online brokerage account holders. Internet distributions will be allocated by the lead managers to Underwriters that may make Internet distributions on the same basis as other allocations. In addition, shares may be sold by the Underwriters to securities dealers who resell shares to online brokerage account holders. Palm estimates that its share of the total expenses of the offering, excluding underwriting discounts and commissions, will be approximately $4,420,000. Palm has agreed to indemnify the several Underwriters against specified liabilities, including liabilities under the Securities Act of 1933. Goldman, Sachs & Co. has from time to time performed various investment banking services for 3Com in the past, and it may from time to time in the future perform investment banking services for 3Com and Palm for which they have received and will receive customary fees. 82 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. 83 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. 84 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, November 26, 1999 (unaudited) and Pro Forma at November 26, 1999 (unaudited)........ F-3 Consolidated Statements of Operations for the Years Ended May 25, 1997, May 31, 1998, May 28, 1999 and Six Months Ended November 27, 1998 and November 26, 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 Six Months ended November 26, 1999 (unaudited).......................................... F-5 Consolidated Statements of Cash Flows for the Years Ended May 25, 1997, May 31, 1998, May 28, 1999 and Six Months Ended November 27, 1998 and November 26, 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. /s/ DELOITTE & TOUCHE LLP San Jose, California November 29, 1999 (January 24, 2000 as to the third, fourth and fifth paragraphs of Note 13 and all of Note 15) F-2 PALM, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except par value amounts)
Pro Forma May 31, May 28, November 26, November 26, 1998 1999 1999 1999 -------- -------- ------------ ------------ (Unaudited) (Unaudited) ASSETS Current assets: Cash and cash equivalents....... $ -- $ 478 $ 29,568 $ 29,568 Accounts receivable, net of allowance for doubtful accounts of $4,451, $3,817 and $5,141... 80,985 95,839 129,726 -- Inventories..................... 13,769 12,186 36,695 36,695 Deferred income taxes........... 8,092 20,688 26,137 26,137 Prepaids and other.............. 192 1,038 2,182 2,182 -------- -------- -------- -------- Total current assets.......... 103,038 130,229 224,308 94,582 Property and equipment, net....... 9,121 8,136 10,276 10,276 Goodwill, intangibles and other assets........................... 175 13,829 12,733 12,733 Deferred income taxes............. 3,025 53 52 52 -------- -------- -------- -------- Total assets................ $115,359 $152,247 $247,369 $117,643 ======== ======== ======== ======== LIABILITIES AND STOCKHOLDER'S NET INVESTMENT Current liabilities: Accounts payable................ $ 15,792 $ 35,577 $ 71,586 $ 26,206 Payable to 3Com Corporation..... 15,617 40,509 57,935 107,935 Other accrued liabilities....... 18,275 40,793 90,832 90,832 Current portion of long-term debt........................... -- 668 190 190 -------- -------- -------- -------- Total current liabilities..... 49,684 117,547 220,543 225,163 -------- -------- -------- -------- Long-term debt.................... -- 682 395 395 Commitments and contingencies (Notes 7 and 13) Stockholder's net investment: Preferred stock, $.001 par value, 125,000 shares authorized pro forma; none outstanding pro forma.......... -- -- -- -- Common stock, $.001 par value, 2,000,000 shares authorized pro forma; 532,000 shares outstanding pro forma.......... -- -- -- -- 3Com Corporation equity (deficiency)................... 65,675 34,151 26,395 (107,951) Accumulated other comprehensive income (loss).................. -- (133) 36 36 -------- -------- -------- -------- Total stockholder's net investment (deficiency)...... 65,675 34,018 26,431 (107,915) -------- -------- -------- -------- Total liabilities and stockholder's net investment................. $115,359 $152,247 $247,369 $117,643 ======== ======== ======== ========
See notes to consolidated financial statements. F-3 PALM, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts)
Years Ended Six Months Ended ---------------------------- ------------------------- May 25, May 31, May 28, November 27, November 26, 1997 1998 1999 1998 1999 -------- -------- -------- ------------ ------------ (Unaudited) Revenues................ $114,157 $272,137 $563,525 $263,302 $435,060 Cost of revenues........ 77,685 157,749 315,616 147,287 246,342 -------- -------- -------- -------- -------- Gross profit.......... 36,472 114,388 247,909 116,015 188,718 -------- -------- -------- -------- -------- Operating expenses: Sales and marketing... 30,305 70,765 127,726 57,862 102,686 Research and development.......... 13,442 21,863 46,027 20,460 28,551 General and administrative....... 6,238 15,299 23,692 11,304 16,956 Purchased in-process technology........... -- -- 2,125 -- -- Separation costs...... -- -- -- -- 3,780 -------- -------- -------- -------- -------- Total operating expenses........... 49,985 107,927 199,570 89,626 151,973 -------- -------- -------- -------- -------- Operating income (loss)................. (13,513) 6,461 48,339 26,389 36,745 Interest and other income (expense), net.. (515) (56) (223) (100) 214 -------- -------- -------- -------- -------- Income (loss) before income taxes........... (14,028) 6,405 48,116 26,289 36,959 Income tax provision (credit)............... (6,166) 2,234 18,488 10,102 14,439 -------- -------- -------- -------- -------- Net income (loss)....... $ (7,862) $ 4,171 $ 29,628 $ 16,187 $ 22,520 ======== ======== ======== ======== ======== Basic and diluted net income (loss) per share.................. $ (.01) $ .01 $ .06 $ .03 $ .04 ======== ======== ======== ======== ======== Shares used in computing basic and diluted net income (loss) per share amounts.......... 532,000 532,000 532,000 532,000 532,000 ======== ======== ======== ======== ======== Unaudited pro forma basic and diluted net income per share....... $ .06 $ .04 ======== ======== Shares used in computing unaudited pro forma basic and diluted net income per share amounts................ 535,585 535,585 ======== ========
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....................... $ 6,466 $ -- $ 6,466 Net loss..................................... (7,862) -- (7,862) Net transfers from 3Com Corporation.......... 32,641 -- 32,641 ------- ---- ------- Balances, May 25, 1997....................... 31,245 -- 31,245 Net income................................... 4,171 -- 4,171 Net transfers from 3Com Corporation.......... 30,259 -- 30,259 ------- ---- ------- Balances, May 31, 1998....................... 65,675 -- 65,675 Components of comprehensive income: Net income................................. 29,628 -- 29,628 Accumulated translation adjustments........ -- (133) (133) Total comprehensive income............... Net transfers to 3Com Corporation............ (61,152) -- (61,152) ------- ---- ------- Balances, May 28, 1999....................... 34,151 (133) 34,018 Components of comprehensive income: Net income*................................ 22,520 -- 22,520 Accumulated translation adjustments*....... -- 169 169 Total comprehensive income*.............. Net transfers to 3Com Corporation*........... (30,276) -- (30,276) ------- ---- ------- Balances, November 26, 1999*................. $26,395 $ 36 $26,431 ======= ==== =======
- -------- * Unaudited See notes to consolidated financial statements. F-5 PALM, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Years Ended Six Months Ended ---------------------------- ------------------------- May 25, May 31, May 28, November 27, November 26, 1997 1998 1999 1998 1999 -------- -------- -------- ------------ ------------ (Unaudited) Cash flows from operating activities: Net income (loss)...... $ (7,862) $ 4,171 $ 29,628 $ 16,187 $ 22,520 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization......... 685 2,029 4,565 1,488 4,395 Loss on disposal of property and equipment............ 36 145 2,567 889 872 Deferred income taxes................ (3,344) (5,361) (8,880) (4,812) (5,449) Purchased in-process technology........... -- -- 2,125 -- -- Changes in assets and liabilities: Accounts receivable.. (18,842) (56,783) (13,307) (39,460) (33,887) Inventories.......... (13,269) (397) 1,650 (6,281) (24,509) Prepaids and other... (142) (176) (805) (480) (1,144) Accounts payable..... 4,710 10,874 19,437 1,488 36,009 Payable to 3Com Corporation......... 3,660 11,205 24,892 16,187 17,426 Other accrued liabilities......... 3,217 12,867 22,133 19,032 50,039 -------- -------- -------- -------- -------- Net cash provided by (used in) operating activities......... (31,151) (21,426) 84,005 4,238 66,272 -------- -------- -------- -------- -------- Cash flows from investing activities: Purchases of property and equipment......... (2,543) (8,833) (5,347) (2,922) (5,717) Business acquired in purchase transaction, net of cash acquired.. -- -- (16,831) -- -- Other, net............. 27 -- 97 -- (593) -------- -------- -------- -------- -------- Net cash used in investing activities......... (2,516) (8,833) (22,081) (2,922) (6,310) -------- -------- -------- -------- -------- Cash flows from financing activities: Net transfers (to) from 3Com Corporation...... 32,641 30,259 (61,152) (1,316) (30,276) Other, net............. -- -- (294) -- (596) -------- -------- -------- -------- -------- Net cash provided by (used in) financing activities......... 32,641 30,259 (61,446) (1,316) (30,872) -------- -------- -------- -------- -------- Change in cash and cash equivalents............ (1,026) -- 478 -- 29,090 Cash and cash equivalents, beginning of period.............. 1,026 -- -- -- 478 -------- -------- -------- -------- -------- Cash and cash equivalents, end of period................. $ -- $ -- $ 478 $ -- $ 29,568 ======== ======== ======== ======== ======== Other cash flow information: Interest paid.......... $ -- $ -- $ 10 $ -- $ 11 ======== ======== ======== ======== ======== 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 Six Months Ended November 27, 1998 and November 26, 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 the separation agreement, 3Com will transfer to Palm the 3Com-owned assets and liabilities which relate to Palm prior to the date of separation from 3Com ("the separation date"), except for most of Palm's 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 financial information included herein may not reflect the consolidated financial statements, 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. 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. Management believes that the expenses allocated to Palm are representative of the operating expenses it would have incurred had Palm been operated on a stand-alone basis. 2. Significant Accounting Policies Fiscal Year Prior to June 1, 1998, Palm's 52-53 week fiscal year ended on the Sunday nearest to May 31. Effective June 1, 1998, Palm changed its 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 Six Months Ended November 27, 1998 and November 26, 1999 nearest to May 31. These changes did not have a significant effect on the 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 Palm 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 November 26, 1999 and for the six months ended November 27, 1998 and November 26, 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 six months ended November 26, 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 subsidiaries. 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 Six Months Ended November 27, 1998 and November 26, 1999 The following individual customers accounted for 10% or more of total revenue:
Years Ended Six Months Ended ----------------------- ----------------- May 25, May 31, May 28, Nov. 27, Nov. 26, 1997 1998 1999 1998 1999 ------- ------- ------- -------- -------- (Unaudited) Company A............................. 28% 22% 24% 27% 34% Company B............................. -- -- 14% 15% -- Company C............................. 11% -- -- -- --
The following individual customers accounted for 10% or more of total accounts receivable:
May 31, May 28, Nov. 26, 1998 1999 1999 ------- ------- ----------- (Unaudited) Company A........................................... 28% 24% 34% 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. Long-lived assets include intangible assets acquired in a business combination (see Note 3 to the consolidated financial statements). Intangible assets are being amortized as follows: goodwill over six years, purchased technology over four years, assembled workforce, customer list and other intangibles over two to three 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. Palm believes its 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 Six Months Ended November 27, 1998 and November 26, 1999 3Com Corporation Equity 3Com Corporation equity represents 3Com's net investment in Palm. Payable to 3Com represents the net amount due to 3Com as the result of intercompany transactions between 3Com and Palm that had not been settled as of each balance sheet date. No intercompany interest income or expense has been allocated to, or included in, the accompanying financial statements. Revenue Recognition Revenue from sales of handheld device products is recognized upon shipment at which time provisions are made for estimated product returns, price protection, warranty, royalties and post-sale telephone support. Sales of handheld device products accounted for approximately 99% of revenues for each of the periods presented. Revenue from software license agreements with manufacturers of other handheld devices is recognized on a per-unit royalty basis or as otherwise earned in accordance with American Institute of Certified Public Accountants (AICPA) Statement of Position SOP No. 97-2, Software Revenue Recognition, as amended. Revenue from wireless Internet access service subscriptions is recognized over the service period. Revenue from these sources accounted for less than 1% of revenues for each of the periods presented. Advertising Advertising costs are expensed as incurred. Cooperative advertising and marketing development obligations for channel customers are expensed in the period the related revenue is recognized. Separation Costs Separation costs consist of one-time costs, such as consulting and professional fees, associated with the process of becoming a stand-alone, publicly held company. 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). F-10 PALM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended May 25, 1997, May 31, 1998 and May 28, 1999 and Six Months Ended November 27, 1998 and November 26, 1999 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 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 Net Income (Loss) Per Share All of the outstanding Palm common stock is owned by 3Com. Basic and diluted net income (loss) per share amounts are computed by dividing the net income (loss) for the period by the common shares outstanding after the reincorporation of Palm in Delaware and the conversion of the 1,000 shares of Palm common stock held by 3Com into 532,000,000 shares as discussed in Note 15 to the consolidated financial statements. Net income (loss) per share amounts do not give effect to any conversion of 3Com stock options 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 at the distribution date. Unaudited Pro Forma Net Income Per Share As discussed in Note 15 to the consolidated financial statements, Palm declared a dividend to 3Com in the amount of $50 million, provided that if the aggregate estimated net proceeds of this offering and the private placements exceed $620 million, 3Com may elect to receive an additional dividend of up to 50% of the amount of the aggregate estimated net proceeds in excess of $620 million, and intends to pay such dividend to 3Com using a portion of the proceeds from the initial public offering. Unaudited pro forma basic and diluted net income per share amounts include the effect of such dividend and are calculated using common shares outstanding of 532,000,000 shares plus the 3,585,431 shares of common stock whose proceeds will be used to pay an assumed $50 million dividend, assuming an initial public offering price of $15.00 per share, reduced by estimated per share offering costs. Unaudited Pro Forma Balance Sheet The unaudited pro forma balance sheet as of November 26, 1999 gives pro forma effect to the assumed dividend discussed in the preceding paragraph, as though it had been declared and was payable as of that date. The unaudited pro forma balance sheet also gives effect to the authorizations of preferred and common stock and the conversion of Palm common stock into 532,000,000 shares as discussed in Note 15 to the consolidated financial statements, as well as the retention of most of Palm's accounts receivable and accounts payable by 3Com at the time of separation, as described in Note 14 to the consolidated financial statements, as though such retention had occurred as of November 26, 1999. F-11 PALM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended May 25, 1997, May 31, 1998 and May 28, 1999 and Six Months Ended November 27, 1998 and November 26, 1999 Comprehensive Income (Loss) On June 1, 1998, Palm 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 No. 133, Accounting for Derivative Instruments and Hedging Activities and SFAS No. 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. Management believes that the adoption of these statements will not have a significant impact on Palm's 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. Palm adopted SOP 98-1 in the first quarter of fiscal 2000. The adoption of this statement did not have a significant impact on Palm's 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. The purchase price of $17.4 million was allocated as follows: net tangible assets of $0.9 million, intangible assets of $14.4 million, and purchased in- process technology of $2.1 million. Intangible assets consisted of the following amounts: goodwill of $6.9 million, developed technology of $5.4 million, assembled workforce of $1.0 million, customer list of $0.9 million, and licenses of $0.2 million. Approximately $2.1 million of 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. The in-process technology related primarily to Globalpulse, a software GSM terminal adapter (which acts as a "software modem") for products utilizing the Palm operating system. The value of the in-process technology was determined using the income approach which discounted to present value the cash flows expected to be derived from products that were still in the process of development at the date of acquisition. The projections were based on future expectations of the revenue and expenses to be generated in connection with the products under development. The discount rate of 40% used reflected the risk associated with the development of the in-process technology. The primary project was completed in July 1999 and Palm began to derive revenue in the second quarter of fiscal 2000. F-12 PALM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended May 25, 1997, May 31, 1998 and May 28, 1999 and Six Months Ended November 27, 1998 and November 26, 1999 Unaudited pro forma results of operations, assuming the acquisition had taken place at the beginning of fiscal 1998, are as follows (in thousands):
Years ended ------------------ May 31, May 28, 1998 1999 ------- ------- Revenues.......................................... $274,892 $565,908 Net income (loss)................................. $ (1,150) $ 26,466 Net income (loss) per share....................... $ -- $ .05
The above table gives unaudited pro forma effect to the revenues and expenses of Smartcode prior to its acquisition by Palm, reflects the charge for in- process research and development as if it had occurred in fiscal 1998 and gives effect to the amortization of the acquired intangibles commencing at the beginning of fiscal 1998. 4. Inventories Inventories consist of the following (in thousands):
May 31, May 28, November 26, 1998 1999 1999 ------- ------- ------------ (Unaudited) Finished goods..................................... $ 8,809 $ 5,900 $29,857 Work in process.................................... 1,089 4,011 5,095 Purchased components............................... 3,871 2,275 1,743 ------- ------- ------- Total............................................ $13,769 $12,186 $36,695 ======= ======= =======
5. Property and Equipment, Net Property and equipment, net consists of the following (in thousands):
May 31, May 28, November 26, 1998 1999 1999 ------- ------- ------------ (Unaudited) Equipment........................................ $ 7,945 $11,971 $12,723 Leasehold improvements........................... 4,372 1,398 2,532 Furniture and fixtures........................... 60 685 1,039 ------- ------- ------- Total.......................................... 12,377 14,054 16,294 Accumulated depreciation and amortization........ (3,256) (5,918) (6,018) ------- ------- ------- Property and equipment, net.................... $ 9,121 $ 8,136 $10,276 ======= ======= =======
F-13 PALM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended May 25, 1997, May 31, 1998 and May 28, 1999 and Six Months Ended November 27, 1998 and November 26, 1999 6. Other Accrued Liabilities Other accrued liabilities consist of the following (in thousands):
May 31, May 28, November 26, 1998 1999 1999 ------- ------- ------------ (Unaudited) Accrued payroll and related expenses............. $ 3,217 $ 4,871 $ 8,927 Accrued product warranty......................... 4,112 11,329 15,815 Accrued cooperative advertising and marketing development expenses............................ 3,403 7,195 10,662 Accrued price protection......................... 224 6,994 11,892 Deferred revenue................................. 3,845 948 34,991 Other............................................ 3,474 9,456 8,545 ------- ------- ------- Other accrued liabilities...................... $18,275 $40,793 $90,832 ======= ======= =======
7. Borrowing Arrangements and Commitments Certain Palm 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%. The balance remaining is due over a four-year period through September 2003. F-14 PALM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended May 25, 1997, May 31, 1998 and May 28, 1999 and Six Months Ended November 27, 1998 and November 26, 1999 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 share of the minimum annual purchase goal in each year, it would be required to make payments up to a maximum of the following: $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. F-15 PALM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended May 25, 1997, May 31, 1998 and May 28, 1999 and Six Months Ended November 27, 1998 and November 26, 1999 A summary of options held by Palm employees under the 3Com plans follows: (Shares in thousands)
Number of 3Com Weighted average shares exercise price ------- ---------------- Outstanding May 27, 1996.............................. 1,872 $19.61 ------ ------ Granted............................................... 679 41.95 Exercised............................................. (146) 13.47 Cancelled............................................. -- -- ------ ------ Outstanding May 25, 1997.............................. 2,405 26.29 Granted............................................... 1,886 38.47 Exercised............................................. (286) 19.76 Cancelled............................................. (1,130) 48.19 ------ ------ Outstanding May 31, 1998.............................. 2,875 26.31 Granted............................................... 1,401 28.85 Exercised............................................. (997) 20.47 Cancelled............................................. (229) 28.71 ------ ------ Outstanding May 28, 1999.............................. 3,050 29.21 Granted*.............................................. 1,144 25.68 Exercised*............................................ (447) 19.65 Cancelled*............................................ (432) 29.62 ------ ------ Outstanding November 26, 1999*........................ 3,315 $29.35 ====== ======
- -------- *Unaudited
Outstanding 3Com options as of May 28, 1999 Exercisable at May 28, 1999 ------------------------------------------------ --------------------------------- Weighted average Number Number Weighted average remaining of Weighted average Range of exercise prices of shares exercise price contractual life shares exercise price - ------------------------ -------------- ---------------- ---------------- ------------- ------------------ (in thousands) (in years) $ .19 to $13.75....... 41 $ 5.87 4.5 41 $ 5.92 18.28 to 24.81....... 687 20.82 7.2 441 20.26 25.28 to 28.88....... 595 27.62 9.3 8 27.45 29.00 to 32.75....... 1,219 30.02 8.4 579 29.42 33.06 to 60.50....... 508 42.38 7.0 208 44.96 ----- ------ --- ------------- -------------- Total................... 3,050 $29.21 8.0 1,277 $28.03 ===== ====== === ============= ==============
Options to purchase 2.1 million shares of 3Com common stock were exercisable as of both May 25, 1997 and May 31, 1998 with weighted average exercise prices of $25.00 and $23.93 per share, respectively. F-16 PALM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended May 25, 1997, May 31, 1998 and May 28, 1999 and Six Months Ended November 27, 1998 and November 26, 1999 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. Palm employees who have 3Com restricted stock grants will forfeit the unvested portion of their 3Com restricted stock grants at the distribution date. To the extent that Palm grants restricted stock in the future, compensation expense will be recognized as the granted shares vest. 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 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%
F-17 PALM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended May 25, 1997, May 31, 1998 and May 28, 1999 and Six Months Ended November 27, 1998 and November 26, 1999 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. 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 -------- -------- ------- Pro forma net income (loss)........................ $(22,162) $(10,235) $15,664 Pro forma net income (loss) per share.............. $ (.04) $ (.02) $ .03
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. F-18 PALM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended May 25, 1997, May 31, 1998 and May 28, 1999 and Six Months Ended November 27, 1998 and November 26, 1999 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 November 26, 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. 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% ===== ==== ====
F-19 PALM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended May 25, 1997, May 31, 1998 and May 28, 1999 and Six Months Ended November 27, 1998 and November 26, 1999 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. 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 Six Months Ended -------------------------- ----------------- May 25, May 31, May 28, Nov. 27, Nov. 26, 1997 1998 1999 1998 1999 -------- -------- -------- -------- -------- (Unaudited) Revenues: United States.................... $ 96,280 $198,630 $399,944 $197,433 $296,225 Other............................ 17,877 73,507 163,581 65,869 138,835 -------- -------- -------- -------- -------- Total.......................... $114,157 $272,137 $563,525 $263,302 $435,060 ======== ======== ======== ======== ========
For fiscal 1997, 1998, 1999 and the six months ended November 27, 1998 and November 26, 1999 (unaudited) no single country outside the United States accounted for 10% or more of total revenues.
May 31, May 28, Nov. 26, 1998 1999 1999 ------- ------- ----------- (Unaudited) Property and equipment: United States..................................... $8,231 $7,247 $ 9,183 France............................................ 827 811 979 Other............................................. 63 78 114 ------ ------ ------- Total........................................... $9,121 $8,136 $10,276 ====== ====== =======
At May 31, 1998, May 28, 1999 and November 26, 1999 (unaudited), no other individual country had property and equipment of 10% or more of total property and equipment. Long-lived assets also include goodwill, intangibles and other assets, substantially all of which relate to the acquisition of a company in France as discussed in Note 3 to the consolidated financial statements. 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 F-20 PALM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended May 25, 1997, May 31, 1998 and May 28, 1999 and Six Months Ended November 27, 1998 and November 26, 1999 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 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 Palm is a party to lawsuits in the normal course of its 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. Palm believes that it has defenses to the cases set forth below and is vigorously contesting these matters. An unfavorable resolution of these lawsuits could adversely affect Palm's 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 Graffiti software and certain products of Palm Computing, Inc. infringe the patent. On June 25, 1999, the Court stayed the action pending reexamination of the patent by the U.S. Patent and Trademark Office. On December 15, 1999, Palm received a Notice of Intent to Issue Reexamination Certificate from the United States Patent and Trademark Office stating that the reexamination has been terminated and that a certificate will be issued in due course. The notice stated that the certificate will indicate that there will be no changes to the patent specification or drawings and that all claims of the patent will be confirmed without any changes. On January 18, 2000, the court held a status hearing during which it lifted the stay of the action and established that all of the parties' briefs relating to motions for summary judgment would be filed with the court by April 28, 2000. Palm anticipates that oral argument on these motions will be heard thereafter. No trial date has been set. In connection with Palm's 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. On December 13, 1999, WaveWare Communications, Inc. filed suit against 3Com, Palm and others in the Superior Court of California, San Mateo County. The case is captioned WaveWare Communications, Inc. v. 3Com Corporation; Palm Computing, Inc.; and Mark Bercow, No. 411331. The complaint alleges breach of contract, constructive fraud, fraud and deceit, negligent misrepresentation, misappropriation of assets and trade secrets, unfair competition, unjust enrichment and intentional interference with economic advantage in connection with Palm's and 3Com's discussions with WaveWare concerning WaveWare's potential acquisition by 3Com. The complaint seeks unspecified monetary damages and injunctive relief. Palm has not yet responded to F-21 PALM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended May 25, 1997, May 31, 1998 and May 28, 1999 and Six Months Ended November 27, 1998 and November 26, 1999 the complaint. To date, no trial date has been set, and no discovery has been exchanged. In connection with Palm's 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. On December 27, 1999, Telxon Corporation and Penright! Corporation filed a complaint in the U.S. District Court for the Northern District of Ohio, Eastern Division (Case No. 1:99CV3157) against 3Com and Palm alleging copyright infringement, unfair competition and theft of trade secrets. The plaintiffs allege that the Palm OS operating system contains graphical user interface software copied from the plaintiffs' software. The complaint seeks unspecified compensatory and treble damages and to enjoin, among other things, distribution and sales of the Palm OS operating system. Palm is in the preliminary stages of investigating the allegations contained in the complaint. To date, no trial date has been set, and no discovery has been exchanged. In connection with Palm's 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. Palm also files suits against others to protect its intellectual property, such as the matter 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 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 For the periods presented, intercompany transactions and balances between Palm and 3Com consisted of the following (in thousands):
Years Ended Six Months Ended --------------------------- ------------------ May 25, May 31, May 28, Nov. 27, Nov. 26, 1997 1998 1999 1998 1999 ------- -------- -------- -------- -------- Balance at beginning of period...................... $ 752 $ 4,412 $ 15,617 $ 15,617 $ 40,509 Payroll expenses............. 10,084 24,575 40,982 19,751 25,959 Marketing expenses........... -- 710 12,800 940 2,356 Development expenses......... -- 273 6,401 542 1,863 Allocation of corporate services.................... -- 1,466 7,447 2,563 6,721 Current income tax provision................... (2,822) 7,594 28,112 14,919 19,889 Other........................ -- 2,724 10,661 4,170 2,349 Net cash transfers to 3Com... (3,602) (26,137) (81,511) (26,698) (41,711) ======= ======== ======== ======== ======== Balance at end of period..... $ 4,412 $ 15,617 $ 40,509 $ 31,804 $ 57,935 ======= ======== ======== ======== ======== Average balance during the period...................... $ 2,582 $ 10,015 $ 28,063 $ 23,711 $ 49,222 ======= ======== ======== ======== ========
F-22 PALM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended May 25, 1997, May 31, 1998 and May 28, 1999 and Six Months Ended November 27, 1998 and November 26, 1999 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 Six Months Ended ----------------------- ----------------- May 25, May 31, May 28, Nov. 27, Nov. 26, 1997 1998 1999 1998 1999 ------- ------- ------- -------- -------- (Unaudited) Cost of revenues.................... $4,374 $3,694 $ 9,238 $3,966 $ 6,333 Sales and marketing................. 1,144 7,023 16,625 7,101 13,209 Research and development............ 1,573 845 3,437 1,182 3,746 General and administrative.......... 2,574 5,212 14,085 5,521 9,657 Other (income) and expense, net..... 523 25 218 100 (214)
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 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 Palm's 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 F-23 PALM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended May 25, 1997, May 31, 1998 and May 28, 1999 and Six Months Ended November 27, 1998 and November 26, 1999 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 pursuant to a separate agreement that the two parties will negotiate with pricing and other terms more favorable than it would agree to in customary transactions with third parties. 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. 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. F-24 PALM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended May 25, 1997, May 31, 1998 and May 28, 1999 and Six Months Ended November 27, 1998 and November 26, 1999 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. 3Com is responsible for filing all tax returns for all periods before the distribution and paying any taxes shown as due on those returns. Palm must provide 3Com with sufficient information about its activities to enable 3Com to file these returns. Palm also must pay its share of the tax liability to 3Com within 30 days after 3Com files the return. Palm and 3Com must retain tax returns and related materials for periods beginning before the distribution and make these materials available to each other upon request. In general, 3Com will be entitled to control the contest of any claim by a taxing authority arising from the audit of a return for any period before the distribution, unless the return covers only Palm's activities. 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. 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. F-25 PALM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended May 25, 1997, May 31, 1998 and May 28, 1999 and Six Months Ended November 27, 1998 and November 26, 1999 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 In December 1999, Palm entered into agreements with America Online, Motorola and Nokia for their purchase of Palm's common stock in private placements to occur concurrently with the sale of shares offered in the initial public offering. America Online and Nokia each agreed to purchase shares of common stock equal to the lesser of $80 million or 1 1/2% of Palm's capital stock. Motorola agreed to purchase shares of common stock equal to the lesser of $65 million or 1 1/2% of Palm's capital stock. On January 24, 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. and the conversion of the 1,000 shares of Palm common stock held by 3Com into 532,000,000 shares at the time of reincorporation. All shares and per share amounts in these financial statements have been adjusted to give effect to the reincorporation and conversion of shares. . An increase in the authorized number of shares of common stock to 2,000,000,000 shares and creation of newly undesignated preferred stock totaling 125,000,000 shares, contingent upon the approval of the reincorporation of Palm in Delaware and the closing of the initial public offering. . The payment of a dividend to 3Com of $50 million, provided that if the aggregate estimated net proceeds of this offering and the private placements exceed $620 million, 3Com may elect to receive an additional dividend of up to 50% of the amount of the aggregate estimated net proceeds in excess of $620 million. . The 1999 Stock Plan. The 1999 Stock Plan becomes effective upon the closing of the initial public offering. A total of 20,000,000 shares have been reserved for issuance under the 1999 F-26 PALM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended May 25, 1997, May 31, 1998 and May 28, 1999 and Six Months Ended November 27, 1998 and November 26, 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 Palm's fiscal year 2001, in an amount equal to the lesser of (a) 25,000,000 shares, or (b) 5% of the common stock 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 500,000 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 500,000 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. . 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 4,000 shares in any one purchase period. A total of 5,000,000 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 Palm's fiscal year 2001, by an amount equal to the lesser of (a) 10,000,000 shares, or (b) 2% of the common shares outstanding on the first day of the fiscal year, or (c) a lesser amount as may be determined by Palm's Board of Directors. * * * * * F-27 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 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 Special Note Regarding Forward-Looking Statements........................ 23 Our Separation From 3Com................................................. 24 Use of Proceeds.......................................................... 26 Dividend Policy.......................................................... 26 Capitalization........................................................... 27 Dilution................................................................. 28 Selected Consolidated Financial Data..................................... 30 Management's Discussion and Analysis of Financial Condition and Results of Operations .......................................................... 31 Business................................................................. 44 Management............................................................... 57 Arrangements Between Palm and 3Com....................................... 69 Principal Stockholder.................................................... 78 Description of Capital Stock ............................................ 79 Underwriting............................................................. 81 Shares Eligible for Future Sale.......................................... 83 Validity of Common Stock................................................. 83 Experts.................................................................. 83 Where You Can Find More Information...................................... 84 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. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 23,000,000 Shares Palm, Inc. Common Stock -------------- [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.............. $ 111,725 NASD registration fee............................................ 30,500 Nasdaq Stock Market original and continued listing fees.......... 139,000 Blue Sky qualification fees and expenses......................... 12,000 Legal fees and expenses.......................................... 2,000,000 Accounting fees and expenses..................................... 1,300,000 Transfer agent and registrar fees................................ 25,000 Printing and engraving expenses.................................. 500,000 Miscellaneous expenses........................................... 301,775 ---------- Total.......................................................... $4,420,000 ==========
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 10.8 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, as amended. 2.2 Form of General Assignment and Assumption Agreement between 3Com and the registrant, as amended. 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 Form of Amended and Restated Certificate of Incorporation. 3.2 Bylaws. 5.1 Form of Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation. 10.1 1999 Stock Plan. 10.2 Form of 1999 Stock Plan Agreements. 10.3 1999 Employee Stock Purchase Plan. 10.4 Form of 1999 Employee Stock Purchase Plan Agreements. 10.5 1999 Director Option Plan. 10.6 Form of 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 (now BellSouth Wireless Data, L.P.) 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. 27.1 Financial Data Schedule.
- -------- * To be filed by amendment. ** Previously filed. + Confidential treatment requested on portions of this exhibit. Unredacted versions of this exhibit have been filed separately with the Commission. 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 January 28, 2000. * _____________________________________ Carl J. Yankowski Chief Executive Officer and Director Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated:
Signature Title Date --------- ----- ---- * Chief Executive Officer and January 28, 2000 ______________________________________ Director (Principal Carl J. Yankowski Executive Officer) /s/ Judy Bruner Senior Vice President and January 28, 2000 ______________________________________ Chief Financial Officer Judy Bruner (Principal Financial and Accounting Officer) * Director January 28, 2000 ______________________________________ Eric A. Benhamou * Director January 28, 2000 ______________________________________ James L. Barksdale * Director January 28, 2000 ______________________________________ Gordon A. Campbell * Director January 28, 2000 ______________________________________ Susan G. Swenson /s/ Judy Bruner *By:__________________________________ Judy Bruner Attorney-in-fact
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, as amended. 2.2 Form of General Assignment and Assumption Agreement between 3Com and the registrant, as amended. 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 Form of Amended and Restated Certificate of Incorporation. 3.2 Bylaws. 5.1 Form of Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation. 10.1 1999 Stock Plan. 10.2 Form of 1999 Stock Plan Agreements. 10.3 1999 Employee Stock Purchase Plan. 10.4 Form of 1999 Employee Stock Purchase Plan Agreements. 10.5 1999 Director Option Plan. 10.6 Form of 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 (now BellSouth Wireless Data, L.P.) 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. 27.1 Financial Data Schedule.
- -------- * To be filed by amendment. ** Previously filed. + Confidential treatment requested on portions of this exhibit. Unredacted versions of this exhibit have been filed separately with the Commission. EX-1.1 2 FORM OF UNDERWRITING AGREEMENT EXHIBIT 1.1 ----------- Draft of December 7, 1999 Palm, Inc. Common Stock ----------- Form of Underwriting Agreement ------------------------------------------- ................, 1999 Goldman, Sachs & Co., Morgan Stanley & Co. Incorporated Merrill Lynch, Pierce, Fenner & Smith Incorporated FleetBoston Robertson Stephens Inc. As representatives of the several Underwriters named in Schedule I hereto, c/o Goldman, Sachs & Co., 85 Broad Street, New York, New York 10004. Ladies and Gentlemen: Palm, Inc., a Delaware corporation (the "Company"), proposes, subject to the terms and conditions stated herein, to issue and sell to the Underwriters named in Schedule I hereto (the "Underwriters") an aggregate of ........ shares (the "Firm Shares") and, at the election of the Underwriters, up to ......... additional shares (the "Optional Shares") of Common Stock ("Stock") of the Company (the Firm Shares and the Optional Shares that the Underwriters elect to purchase pursuant to Section 2 hereof being collectively called the "Shares"). 1. The Company represents and warrants to, and agrees with, each of the Underwriters that: (a) A registration statement on Form S-1 (File No. 333-....) (the "Initial Registration Statement") in respect of the Shares has been filed with the Securities and Exchange Commission (the "Commission"); the Initial Registration Statement and any post-effective amendment thereto, each in the form heretofore delivered to you, and, excluding exhibits thereto, to you for each of the other Underwriters, have been declared effective by the Commission in such form; other than a registration statement, if any, increasing the size of the offering (a "Rule 462(b) Registration Statement"), filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended (the "Act"), which became effective upon filing, no other document with respect to the Initial Registration Statement has heretofore been filed with the Commission; and no stop order suspending the effectiveness of the Initial Registration Statement, any post-effective amendment thereto or the Rule 462(b) Registration Statement, if any, has been issued 1 and no proceeding for that purpose has been initiated or threatened by the Commission (any preliminary prospectus included in the Initial Registration Statement or filed with the Commission pursuant to Rule 424(a) of the rules and regulations of the Commission under the Act is hereinafter called a "Preliminary Prospectus"; the various parts of the Initial Registration Statement and the Rule 462(b) Registration Statement, if any, including all exhibits thereto and including the information contained in the form of final prospectus filed with the Commission pursuant to Rule 424(b) under the Act in accordance with Section 5(a) hereof and deemed by virtue of Rule 430A under the Act to be part of the Initial Registration Statement at the time it was declared effective, each as amended at the time such part of the Initial Registration Statement became effective or such part of the Rule 462(b) Registration Statement, if any, became or hereafter becomes effective, are hereinafter collectively called the "Registration Statement"; and such final prospectus, in the form first filed pursuant to Rule 424(b) under the Act, is hereinafter called the "Prospectus"; (b) No order preventing or suspending the use of any Preliminary Prospectus has been issued by the Commission, and each Preliminary Prospectus, at the time of filing thereof, conformed in all material respects to the requirements of the Act and the rules and regulations of the Commission thereunder, and did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that this representation and warranty shall not apply to any statements or omissions made in reliance upon and in conformity with information furnished in writing to the Company by an Underwriter through you jointly or Goldman, Sachs & Co. expressly for use therein; (c) The Registration Statement conforms, and the Prospectus and any further amendments or supplements to the Registration Statement or the Prospectus will conform, in all material respects to the requirements of the Act and the rules and regulations of the Commission thereunder and do not and will not, as of the applicable effective date as to the Registration Statement and any amendment thereto and as of the applicable filing date as to the Prospectus and any amendment or supplement thereto, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, in the case of the Registration Statement or any amendment thereto, or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, in the case of the Prospectus or any amendment or supplement thereto; provided, however, that this representation and warranty shall not apply to any statements or omissions made in reliance upon and in conformity with information furnished in writing to the Company by an Underwriter through you jointly or Goldman, Sachs & Co. expressly for use therein; (d) Neither the Company nor any of its subsidiaries has sustained since the date of the latest audited financial statements included in the Prospectus any material loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, otherwise than as set forth or contemplated in the Prospectus; and, since the respective dates as of which information is given in the Registration 2 Statement and the Prospectus, there has not been any change in the capital stock or long-term debt of the Company or any of its subsidiaries or any material adverse change, or any development involving a prospective material adverse change, in or affecting the general affairs, management, financial position, stockholders' equity or results of operations of the Company and its subsidiaries, otherwise than as set forth or contemplated in the Prospectus; (e) The Company and its subsidiaries own no real property and have good and marketable title to all personal property owned by them, in each case free and clear of all liens, encumbrances and defects except such as are described in the Prospectus or such as do not materially affect the value of such property and do not interfere with the use made and proposed to be made of such property by the Company and its subsidiaries; and any real property and buildings held under lease by the Company and its subsidiaries are held by them under valid, subsisting and enforceable leases with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Company and its subsidiaries; (f) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Delaware, with power and authority (corporate and other) to own its properties and conduct its business as described in the Prospectus, and has been duly qualified as a foreign corporation for the transaction of business and is in good standing under the laws of each other jurisdiction in which it owns or leases properties or conducts any business so as to require such qualification, or is subject to no material liability or disability by reason of the failure to be so qualified in any such jurisdiction; and each subsidiary of the Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation; (g) The Company has an authorized capitalization as set forth in the Prospectus, and all of the issued shares of capital stock of the Company have been duly and validly authorized and issued, are fully paid and non- assessable, conform to the description of the Stock contained in the Prospectus and are owned by 3Com Corporation ("3Com"); and all of the issued shares of capital stock of each subsidiary of the Company have been duly and validly authorized and issued, are fully paid and non-assessable and (except as set forth in the Prospectus) are owned directly or indirectly by the Company, free and clear of all liens, encumbrances, equities or claims; (h) The Shares have been duly and validly authorized and, when issued and delivered against payment therefor as provided herein, will be duly and validly issued and fully paid and non-assessable and will conform to the description of the Stock contained in the Prospectus; (i) The issue and sale of the Shares by the Company hereunder and the compliance by the Company with all of the provisions of this Agreement and the consummation of the transactions herein contemplated will not conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which the Company or any 3 of its subsidiaries is a party or by which the Company or any of its subsidiaries is bound or to which any of the property or assets of the Company or any of its subsidiaries is subject, nor will such action result in any violation of the provisions of the Certificate of Incorporation or By-laws of the Company or any statute or any order, rule or regulation of any court or governmental agency or body having jurisdiction over the Company or any of its subsidiaries or any of their properties; and no consent, approval, authorization, order, registration or qualification of or with any such court or governmental agency or body is required for the issue and sale of the Shares or the consummation by the Company of the transactions contemplated by this Agreement, except the registration under the Act of the Shares and such consents, approvals, authorizations, registrations or qualifications as may be required under state securities or Blue Sky laws in connection with the purchase and distribution of the Shares by the Underwriters; (j) Neither the Company nor any of its subsidiaries is in violation of its Certificate of Incorporation or By-laws or in default in the performance or observance of any obligation, agreement, covenant or condition contained in any indenture, mortgage, deed of trust, loan agreement, lease or other agreement or instrument to which it is a party or by which it or any of its properties may be bound that would have a material adverse effect on the business, financial condition, results of operations or prospects of the Company and its subsidiaries, taken as a whole; (k) The statements set forth in the Prospectus under the caption "Description of Capital Stock", insofar as they purport to constitute a summary of the terms of the Stock, under the caption "Arrangements Between Palm and 3Com" and under the caption "Underwriting" (other than information furnished in writing to the Company by an Underwriter through you jointly or Goldman, Sachs & Co. expressly for use therein), insofar as they purport to describe the provisions of the laws and documents referred to therein, are accurate and complete; (l) Other than as set forth or contemplated in the Prospectus, there are no legal or governmental proceedings pending to which the Company or any of its subsidiaries is a party or of which any property of the Company or any of its subsidiaries is the subject which, if determined adversely to the Company or any of its subsidiaries, would individually or in the aggregate have a material adverse effect on the current or future consolidated financial position, stockholders' equity or results of operations of the Company and its subsidiaries; and, to the Company's knowledge, no such proceedings are threatened or contemplated by governmental authorities or threatened by others; (m) The Company is not and, after giving effect to the offering and sale of the Shares, will not be an "investment company", as such term is defined in the Investment Company Act of 1940, as amended (the "Investment Company Act"); (n) Neither the Company nor any of its affiliates does business with the government of Cuba or with any person or affiliate located in Cuba within the meaning of Section 517.075, Florida Statutes; (o) Deloitte & Touche LLP, who have certified certain financial statements of the Company and its subsidiaries, are independent public accountants as required by the Act and the rules and regulations of the Commission thereunder; 4 (p) The Company has reviewed its operations and that of its subsidiaries and any third parties with which the Company or any of its subsidiaries has a material relationship to evaluate the extent to which the business or operations of the Company or any of its subsidiaries will be affected by the Year 2000 Problem. As a result of such review, the Company has no reason to believe, and does not believe, that the Year 2000 Problem will have a material adverse effect on the general affairs, management, the current or future consolidated financial position, business prospects, stockholders' equity or results of operations of the Company and its subsidiaries or result in any material loss or interference with the Company's business or operations. The "Year 2000 Problem" as used herein means any significant risk that computer hardware or software used in the receipt, transmission, processing, manipulation, storage, retrieval, retransmission or other utilization of data or in the operation of mechanical or electrical systems of any kind will not, in the case of dates or time periods occurring after December 31, 1999, function at least as effectively as in the case of dates or time periods occurring prior to January 1, 2000; (q) To the knowledge of the Company, except as set forth under "Arrangements Between Palm and 3Com" in the Prospectus, the Company and its subsidiaries own or possess valid licenses or other rights to use all patents, trademarks, service marks, trade names, copyrights, know-how, trade secrets and other intellectual property necessary to conduct the business of the Company and its subsidiaries in the manner in which it has been and is being conducted, and except as set forth in the Prospectus the Company and its subsidiaries have not received any notice of infringement or of conflict with (and the Company knows of no such infringement or conflict with) asserted rights of others with respect to any patents, trademarks, service marks, trade names, copyrights, know-how, trade secrets or other intellectual property which, if determined adversely to the Company or its subsidiaries, would individually or in the aggregate have a material adverse effect on the general affairs, management, the current or future consolidated financial position, business prospects, stockholders' equity or results of operations of the Company and its subsidiaries; and the inventions, products or processes referred to in the Prospectus do not, to the knowledge of the Company, infringe or conflict with any right or patent, or any invention, product or process which is the subject of a patent application known to the Company, which if determined adversely would have a material adverse effect on the general affairs, management, the current or future consolidated financial position, business prospects, stockholders' equity or results of operations of the Company and its subsidiaries; (r) Each of the Master Separation and Distribution Agreement, General Assignment and Assumption Agreement, Master Patent Ownership and License Agreement, Master Technology Ownership and License Agreement, Master Trademark Ownership and License Agreement, Master Confidential Disclosure Agreement, Master Transitional Services Agreement, Employee Matters Agreement, Tax Sharing Agreement, Real Estate Matters Agreement, Indemnification and Insurance Matters Agreement and Non-U.S. Plan (collectively, the "Intercompany Agreements"), has been duly authorized, executed and delivered by the Company and 3Com, is in full force and effect, and constitutes a valid and legally binding obligation of the Company and 3Com, enforceable against each of the Company and 3Com in accordance with its terms, subject to bankruptcy, insolvency, reorganization and other laws of general applicability relating to or affecting creditors' rights and to general equity principles; and 5 (s) The Company and its subsidiaries, taken as a whole, are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are prudent and customary in the business in which they are engaged; and neither the Company nor any of its subsidiaries has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not have a material adverse effect on the general affairs, management, the current or future consolidated financial position, business prospects, stockholders' equity or results of operations of the Company and its subsidiaries. 2. Subject to the terms and conditions herein set forth, (a) the Company agrees to issue and sell to each of the Underwriters, and each of the Underwriters agrees, severally and not jointly, to purchase from the Company, at a purchase price per share of $........................, the number of Firm Shares set forth opposite the name of such Underwriter in Schedule I hereto and (b) in the event and to the extent that the Underwriters shall exercise the election to purchase Optional Shares as provided below, the Company agrees to issue and sell to each of the Underwriters, and each of the Underwriters agrees, severally and not jointly, to purchase from the Company, at the purchase price per share set forth in clause (a) of this Section 2, that portion of the number of Optional Shares as to which such election shall have been exercised (to be adjusted by you so as to eliminate fractional shares) determined by multiplying such number of Optional Shares by a fraction, the numerator of which is the maximum number of Optional Shares which such Underwriter is entitled to purchase as set forth opposite the name of such Underwriter in Schedule I hereto and the denominator of which is the maximum number of Optional Shares that all of the Underwriters are entitled to purchase hereunder. The Company hereby grants to the Underwriters the right to purchase at their election up to ............ Optional Shares, at the purchase price per share set forth in the paragraph above, for the purpose of covering sales of shares in excess of the number of Firm Shares. Any such election to purchase Optional Shares may be exercised only by written notice from you to the Company, given within a period of 30 calendar days after the date of this Agreement, setting forth the aggregate number of Optional Shares to be purchased and the date on which such Optional Shares are to be delivered, as determined by you but in no event earlier than the First Time of Delivery (as defined in Section 4 hereof) or, unless you and the Company otherwise agree in writing, earlier than two or later than ten business days after the date of such notice. 3. Upon the authorization by you of the release of the Firm Shares, the several Underwriters propose to offer the Firm Shares for sale upon the terms and conditions set forth in the Prospectus. 4. (a) The Shares to be purchased by each Underwriter hereunder, in definitive or electronic form, and in such authorized denominations and registered in such names as Goldman, Sachs & Co. may request upon at least forty-eight hours' prior notice to the Company, shall be delivered by or on behalf of the Company to Goldman, Sachs & Co., through the facilities of the Depository Trust Company ("DTC"), for the account of such Underwriter, against payment by or on behalf of such Underwriter of the purchase price therefor by wire transfer of Federal (same-day) funds to the account specified by the Company to Goldman, Sachs & Co. at least forty-eight hours in advance. The Company will cause the certificates representing the Shares to be made available for checking and packaging at least twenty-four hours prior to the Time of Delivery (as defined below) 6 with respect thereto at the office DTC or its designated custodian. Goldman, Sachs & Co., 85 Broad Street, New York, New York 10004 (the "Designated Office"). The time and date of such delivery and payment shall be, with respect to the Firm Shares, 9:30 a.m., New York City time, on ............., 1999 or such other time and date as Goldman, Sachs & Co. and the Company may agree upon in writing, and, with respect to the Optional Shares, 9:30 a.m., New York time, on the date specified by Goldman, Sachs & Co. in the written notice given by Goldman, Sachs & Co. of the Underwriters' election to purchase such Optional Shares, or such other time and date as Goldman, Sachs & Co. and the Company may agree upon in writing. Such time and date for delivery of the Firm Shares is herein called the "First Time of Delivery", such time and date for delivery of the Optional Shares, if not the First Time of Delivery, is herein called the "Second Time of Delivery", and each such time and date for delivery is herein called a "Time of Delivery". (b) The documents to be delivered at each Time of Delivery by or on behalf of the parties hereto pursuant to Section 7 hereof, including the cross receipt for the Shares and any additional documents requested by the Underwriters pursuant to Section 7(i) hereof, will be delivered at the offices of Wilson, Sonsini, Goodrich & Rosati, 650 Page Mill Road, Palo Alto, California 94304 (the "Closing Location"), and the Shares will be delivered at the Designated Office, all at such Time of Delivery. A meeting will be held at the Closing Location at 1:00 p.m., California time, on the New York Business Day next preceding such Time of Delivery, at which meeting the final drafts of the documents to be delivered pursuant to the preceding sentence will be available for review by the parties hereto. For the purposes of this Section 4, "New York Business Day" shall mean each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions in New York are generally authorized or obligated by law or executive order to close. 5. The Company agrees with each of the Underwriters: (a) To prepare the Prospectus in a form approved by you and to file such Prospectus pursuant to Rule 424(b) under the Act not later than the Commission's close of business on the second business day following the execution and delivery of this Agreement, or, if applicable, such earlier time as may be required by Rule 430A(a)(3) under the Act; to make no further amendment or any supplement to the Registration Statement or Prospectus which shall be disapproved by you promptly after reasonable notice thereof; to advise you, promptly after it receives notice thereof, of the time when any amendment to the Registration Statement has been filed or becomes effective or any supplement to the Prospectus or any amended Prospectus has been filed and to furnish you with copies thereof; to advise you, promptly after it receives notice thereof, of the issuance by the Commission of any stop order or of any order preventing or suspending the use of any Preliminary Prospectus or prospectus, of the suspension of the qualification of the Shares for offering or sale in any jurisdiction, of the initiation or threatening of any proceeding for any such purpose, or of any request by the Commission for the amending or supplementing of the Registration Statement or Prospectus or for additional information; and, in the event of the issuance of any stop order or of any order preventing or suspending the use of any Preliminary Prospectus or prospectus or suspending any such qualification, promptly to use its best efforts to obtain the withdrawal of such order; 7 (b) Promptly from time to time to take such action as you may reasonably request to qualify the Shares for offering and sale under the securities laws of such jurisdictions as you may request and to comply with such laws so as to permit the continuance of sales and dealings therein in such jurisdictions for as long as may be necessary to complete the distribution of the Shares, provided that in connection therewith the Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any jurisdiction; (c) Prior to 10:00 A.M. New York City time, on the New York Business Day next succeeding the date of this Agreement and from time to time, to furnish the Underwriters with copies of the Prospectus in New York City in such quantities as you may reasonably request, and, if the delivery of a prospectus is required at any time prior to the expiration of nine months after the time of issue of the Prospectus in connection with the offering or sale of the Shares and if at such time any event shall have occurred as a result of which the Prospectus as then amended or supplemented would include an untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made when such Prospectus is delivered, not misleading, or, if for any other reason it shall be necessary during such period to amend or supplement the Prospectus in order to comply with the Act, to notify you and upon your request to prepare and furnish without charge to each Underwriter and to any dealer in securities as many copies as you may from time to time reasonably request of an amended Prospectus or a supplement to the Prospectus which will correct such statement or omission or effect such compliance, and in case any Underwriter is required to deliver a prospectus in connection with sales of any of the Shares at any time nine months or more after the time of issue of the Prospectus, upon your request but at the expense of such Underwriter, to prepare and deliver to such Underwriter as many copies as you may request of an amended or supplemented Prospectus complying with Section 10(a)(3) of the Act; (d) To make generally available to its securityholders as soon as practicable, but in any event not later than eighteen months after the effective date of the Registration Statement (as defined in Rule 158(c) under the Act), an earnings statement of the Company and its subsidiaries (which need not be audited) complying with Section 11(a) of the Act and the rules and regulations thereunder (including, at the option of the Company, Rule 158); (e) During the period beginning from the date hereof and continuing to and including the date 180 days after the date of the Prospectus, not to offer, sell, contract to sell or otherwise dispose of, except as provided hereunder, any securities of the Company that are substantially similar to the Shares, including but not limited to any securities that are convertible into or exchangeable for, or that represent the right to receive, Stock or any such substantially similar securities (other than pursuant to employee stock option or purchase plans existing on, or upon the conversion or exchange of convertible or exchangeable securities outstanding as of, the date of this Agreement), without your prior written consent; (f) To furnish to its stockholders as soon as practicable after the end of each fiscal year an annual report (including a balance sheet and statements of income, 8 stockholders' equity and cash flows of the Company and its consolidated subsidiaries certified by independent public accountants) and, as soon as practicable after the end of each of the first three quarters of each fiscal year (beginning with the fiscal quarter ending after the effective date of the Registration Statement), to make available to its stockholders consolidated summary financial information of the Company and its subsidiaries for such quarter in reasonable detail; (g) During a period of three years from the effective date of the Registration Statement, to furnish to you copies of all reports or other communications (financial or other) furnished to stockholders, and to deliver to you (i) as soon as they are available, copies of any reports and financial statements furnished to or filed with the Commission or any national securities exchange on which any class of securities of the Company is listed; and (ii) such additional publicly-available information concerning the business and financial condition of the Company as you may from time to time reasonably request (such financial statements to be on a consolidated basis to the extent the accounts of the Company and its subsidiaries are consolidated in reports furnished to its stockholders generally or to the Commission); (h) To use the net proceeds received by it from the sale of the Shares pursuant to this Agreement in the manner specified in the Prospectus under the caption "Use of Proceeds"; (i) To use its best efforts to list for quotation the Shares on the National Association of Securities Dealers Automated Quotations National Market System ("NASDAQ"); (j) To file with the Commission such information on Form 10-Q or Form 10-K as may be required by Rule 463 under the Act; and (k) If the Company elects to rely upon Rule 462(b), the Company shall file a Rule 462(b) Registration Statement with the Commission in compliance with Rule 462(b) by 10:00 P.M., Washington, D.C. time, on the date of this Agreement, and the Company shall at the time of filing either pay to the Commission the filing fee for the Rule 462(b) Registration Statement or give irrevocable instructions for the payment of such fee pursuant to Rule 111(b) under the Act. 6. The Company covenants and agrees with the several Underwriters that the Company will pay or cause to be paid the following: (i) the fees, disbursements and expenses of the Company's counsel and accountants in connection with the registration of the Shares under the Act and all other expenses in connection with the preparation, printing and filing of the Registration Statement, any Preliminary Prospectus and the Prospectus and amendments and supplements thereto and the mailing and delivering of copies thereof to the Underwriters and dealers; (ii) the cost of printing or producing any Agreement among Underwriters, this Agreement, the Blue Sky Memorandum, closing documents (including compilations thereof) and any other documents in connection with the offering, purchase, sale and delivery of the Shares; (iii) all expenses in connection with the qualification of the Shares for offering and sale under state securities laws as provided in Section 5(b) hereof, including the fees and disbursements of counsel for the Underwriters in connection with such qualification and in connection with the Blue Sky survey; (iv) all fees and expenses in connection with listing the Shares on the NASDAQ; (v) the filing fees incident to, and the fees and disbursements of 9 counsel for the Underwriters in connection with, securing any required review by the National Association of Securities Dealers, Inc. of the terms of the sale of the Shares]; (vi) the cost of preparing stock certificates; (vii) the cost and charges of any transfer agent or registrar; and (viii) all other costs and expenses incident to the performance of its obligations hereunder which are not otherwise specifically provided for in this Section. It is understood, however, that, except as provided in this Section, and Sections 8 and 11 hereof, the Underwriters will pay all of their own costs and expenses, including the fees of their counsel, stock transfer taxes on resale of any of the Shares by them, and any advertising expenses connected with any offers they may make. 7. The obligations of the Underwriters hereunder, as to the Shares to be delivered at each Time of Delivery, shall be subject, in their discretion, to the condition that all representations and warranties and other statements of the Company herein are, at and as of such Time of Delivery, true and correct, the condition that the Company shall have performed all of its obligations hereunder theretofore to be performed, and the following additional conditions: (a) The Prospectus shall have been filed with the Commission pursuant to Rule 424(b) within the applicable time period prescribed for such filing by the rules and regulations under the Act and in accordance with Section 5(a) hereof; if the Company has elected to rely upon Rule 462(b), the Rule 462(b) Registration Statement shall have become effective by 10:00 P.M., Washington, D.C. time, on the date of this Agreement; no stop order suspending the effectiveness of the Registration Statement or any part thereof shall have been issued and no proceeding for that purpose shall have been initiated or threatened by the Commission; and all requests for additional information on the part of the Commission shall have been complied with to your reasonable satisfaction; (b) Sullivan & Cromwell, counsel for the Underwriters, shall have furnished to you such written opinion or opinions (a draft of each such opinion is attached as Annex II(a) hereto), dated such Time of Delivery, with respect to such matters as you may reasonably request, and such counsel shall have received such papers and information as they may reasonably request to enable them to pass upon such matters; (c) Wilson Sonsini Goodrich & Rosati, counsel for the Company, shall have furnished to you their written opinion (a draft of such opinion is attached as Annex II(b) hereto), dated such Time of Delivery, in form and substance satisfactory to you, to the effect that: (i) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Delaware, with corporate power and authority to own its properties and conduct its business as described in the Prospectus; (ii) The Company has an authorized capitalization as set forth in the Prospectus, and all of the issued shares of capital stock of the Company (including the Shares being delivered at such Time of Delivery) have been duly and validly authorized and issued and are fully paid and nonassessable; and the Shares conform to the description of the Stock contained in the Prospectus; 10 (iii) The Company has been duly qualified as a foreign corporation for the transaction of business and is in good standing under the laws of each other jurisdiction in which it owns or leases properties or conducts any business so as to require such qualification, or is subject to no material liability or disability by reason of failure to be so qualified in any such jurisdiction (such counsel being entitled to rely in respect of the opinion in this clause upon opinions of local counsel and in respect of matters of fact upon certificates of officers of the Company, provided that such counsel shall state that they believe that both you and they are justified in relying upon such opinions and certificates); (iv) The Intercompany Agreements have been duly authorized, executed and delivered by the Company and 3Com, and each constitutes a valid and legally binding agreement of the Company and 3Com, enforceable in accordance with its terms, subject to bankruptcy, insolvency, reorganization and other laws of general applicability relating to or affecting creditors' rights and to general equity principles; (v) To such counsel's knowledge and other than as set forth in the Prospectus, there are no legal or governmental proceedings pending to which the Company or any of its subsidiaries is a party or of which any property of the Company or any of its subsidiaries is the subject which, if determined adversely to the Company or any of its subsidiaries, would individually or in the aggregate have a material adverse effect on the current or future consolidated financial position, stockholders' equity or results of operations of the Company and its subsidiaries; and, to such counsel's knowledge, no such proceedings are threatened or contemplated by governmental authorities or threatened by others; (vi) This Agreement has been duly authorized, executed and delivered by the Company; (vii) The issue and sale of the Shares being delivered at such Time of Delivery by the Company and the compliance by the Company with all of the provisions of this Agreement and the consummation of the transactions herein and therein contemplated and the performance by the Company and 3Com of their respective obligations under the Intercompany Agreements will not conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument identified to such counsel by the Company in a certificate of an executive officer of the Company attached to such opinion as being the agreements that are material to the Company, nor will such action result in any violation of the provisions of the Certificate of Incorporation or By-laws of the Company or 3Com or any statute or any order, rule or regulation known to such counsel of any court or governmental agency or body having jurisdiction over the Company, 3Com or any of their subsidiaries or any of their properties; (viii) No consent, approval, authorization, order, registration or qualification of or with any court or governmental agency or body is required under any statute, rule or regulation or, to the Company's knowledge, otherwise, for the 11 issue and sale of the Shares or the consummation by the Company of the transactions contemplated by this Agreement, except the registration under the Act of the Shares, and such consents, approvals, authorizations, registrations or qualifications as may be required under state or foreign securities or Blue Sky laws in connection with the purchase and distribution of the Shares by the Underwriters; (ix) Neither the Company nor any of its subsidiaries is in violation of its Certificate of Incorporation or By-laws or in default in the performance or observance of any obligation, agreement, covenant or condition contained in any indenture, mortgage, deed of trust, loan agreement, lease or other agreement or instrument to which it is a party or by which it or any of its properties may be bound, which defaults would, individually or in the aggregate, reasonably be expected to have a material adverse effect on the business, financial condition, results of operations or prospects of the Company and its subsidiaries, taken as a whole; (x) The statements set forth in the Prospectus under the caption "Description of Capital Stock", insofar as they purport to constitute a summary of the terms of the Stock, under the caption "Arrangements Between Palm and 3Com" and under the caption "Underwriting", insofar as they purport to describe the provisions of the laws and documents referred to therein, are accurate and complete; (xi) The Company is not an "investment company", as such term is defined in the Investment Company Act; and (xii) The Registration Statement and the Prospectus and any further amendments and supplements thereto made by the Company prior to such Time of Delivery (other than the financial statements and related schedules therein, as to which such counsel need express no opinion) comply as to form in all material respects with the requirements of the Act and the rules and regulations thereunder, although they do not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement or the Prospectus, except for those referred to in the opinion in subsection (x) of this Section 7(c); they have no reason to believe that, as of its effective date, the Registration Statement or any further amendment thereto made by the Company prior to such Time of Delivery (other than the financial statements and related statements and related schedules therein, as to which such counsel need express no opinion) contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that, as of its date, the Prospectus or any further amendment or supplement thereto made by the Company prior to such Time of Delivery (other than the financial statements and related schedules therein, as to which such counsel need express no opinion) contained an untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading or that, as of such Time of Delivery, either the Registration Statement or the Prospectus or any further amendment or 12 supplement thereto made by the Company prior to such Time of Delivery (other than the financial statements and related schedules therein, as to which such counsel need express no opinion) contains an untrue statement of a material fact or omits to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and they do not know of any amendment to the Registration Statement required to be filed or of any contracts or other documents of a character required to be filed as an exhibit to the Registration Statement or required to be described in the Registration Statement or the Prospectus which are not filed or described as required. In rendering such opinion, such counsel may state that they express no opinion as to the laws of any jurisdiction outside the United States. (d) Mark Micheal, general counsel of 3Com, shall have furnished to you such written opinion or opinions (a draft of each such opinion is attached as Annex II(c) hereto), dated such Time of Delivery, to the effect that: (i) The performance by 3Com of its obligations under the Intercompany Agreements will not conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument known to such counsel to which the Company or any of its subsidiaries is a party or by which the Company, 3Com or any of their subsidiaries is bound or to which any of the property or assets of the Company, 3Com or any of their subsidiaries is subject, nor will such action result in any violation of the provisions of the Certificate of Incorporation or By-laws of the Company or 3Com or any statute or any order, rule or regulation known to such counsel of any court or governmental agency or body having jurisdiction over the Company, 3Com or any of their subsidiaries or any of their properties; and (ii) No consent, approval, authorization, order, registration or qualification of or with any court or governmental agency or body having is required for the execution and delivery by 3Com of, and compliance by 3Com with, the provisions of each of the Intercompany Agreements, except such as shall have been obtained or waived or that, if not obtained or waived, would not have a material adverse effect on the separation of the Company's businesses from those of 3Com as described in the prospectus or on the ability of the Company and the Underwriters to consummate the offering contemplated hereby. In rendering such opinion, such counsel may state that he expresses no opinion as to the laws of any jurisdiction outside the United States. (e) Baker & McKenzie shall have furnished to you such written opinion or opinions (a draft of each such opinion is attached as Annex II(d) hereto), dated such Time of Delivery, with respect to Palm Computing SARL (France), to the effect that: (i) Such subsidiary has been duly incorporated and is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation; 13 and all of the issued shares of capital stock of each such subsidiary have been duly and validly authorized and issued, are fully paid and non-assessable, and (except as otherwise set forth in the Prospectus) are owned directly or indirectly by the Company, free and clear of all liens, encumbrances, equities or claims (such counsel being entitled to rely in respect of the opinion in this clause upon opinions of local counsel and in respect to matters of fact upon certificates of officers of the Company or its subsidiaries, provided that such counsel shall state that they believe that both you and they are justified in relying upon such opinions and certificates); (ii) The agreements between international subsidiaries have been duly authorized, executed and delivered by such subsidiary, and constitutes a valid and legally binding agreement of such subsidiary, enforceable in accordance with its terms, subject to bankruptcy, insolvency, reorganization and other laws of general applicability relating to or affecting creditors' rights and to general equity principles; (iii) No consent, approval, authorization, order, registration or qualification of or with any court or governmental agency or body is required for the execution and delivery of, and compliance with, the provisions of the agreements between international subsidiaries by the parties thereto, except such as shall have been obtained or waived or that, if not obtained or waived, would not have a material adverse effect on the separation of the business of such subsidiary of the Company from those of 3Com as described in the prospectus or on the ability of the Company and the Underwriters to consummate the offering contemplated hereby; and (iv) The performance by the parties to the agreements between international subsidiaries of their obligations thereunder will not result in any violation any order, rule or regulation known to such counsel of any court or governmental agency or body having jurisdiction over such subsidiary or any of its properties. (f) On the date of the Prospectus at a time prior to the execution of this Agreement, at 9:30 a.m., New York City time, on the effective date of any post-effective amendment to the Registration Statement filed subsequent to the date of this Agreement and also at each Time of Delivery, Deloitte & Touche LLP shall have furnished to you a letter or letters, dated the respective dates of delivery thereof, in form and substance satisfactory to you, to the effect set forth in Annex I hereto (the executed copy of the letter delivered prior to the execution of this Agreement is attached as Annex I(a) hereto and a draft of the form of letter to be delivered on the effective date of any post-effective amendment to the Registration Statement and as of each Time of Delivery is attached as Annex I(b) hereto); (g)(i) Neither the Company nor any of its subsidiaries shall have sustained since the date of the latest audited financial statements included in the Prospectus any loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, otherwise than as set forth or contemplated in the Prospectus, and (ii) since 14 the respective dates as of which information is given in the Prospectus there shall not have been any change in the capital stock or long-term debt of the Company or any of its subsidiaries or any change, or any development involving a prospective change, in or affecting the general affairs, management, financial position, stockholders' equity or results of operations of the Company and its subsidiaries, otherwise than as set forth or contemplated in the Prospectus, the effect of which, in any such case described in clause (i) or (ii), is in the judgment of the Representatives so material and adverse as to make it impracticable or inadvisable to proceed with the public offering or the delivery of the Shares being delivered at such Time of Delivery on the terms and in the manner contemplated in the Prospectus; (h) On or after the date hereof there shall not have occurred any of the following: (i) a suspension or material limitation in trading in securities generally on the New York Stock Exchange or on the NASDAQ; (ii) a suspension or material limitation in trading in the Company's securities on the NASDAQ; (iii) a general moratorium on commercial banking activities declared by either Federal or New York or California State authorities; or (iv) the outbreak or escalation of hostilities involving the United States or the declaration by the United States of a national emergency or war, if the effect of any such event specified in this clause (iv) in the judgment of the Representatives makes it impracticable or inadvisable to proceed with the public offering or the delivery of the Shares being delivered at such Time of Delivery on the terms and in the manner contemplated in the Prospectus; (i) The Shares to be sold at such Time of Delivery shall have been duly listed for quotation on NASDAQ; (j) The Company has obtained and delivered to the Underwriters executed copies of an agreement from 3Com and each executive officer and director of the Company, substantially to the effect set forth in Subsection 5(e) hereof in form and substance satisfactory to you; (k) The Company shall have complied with the provisions of Section 5(c) hereof with respect to the furnishing of prospectuses on the New York Business Day next succeeding the date of this Agreement; and (l) The Company shall have furnished or caused to be furnished to you at such Time of Delivery certificates of officers of the Company satisfactory to you as to the accuracy of the representations and warranties of the Company herein at and as of such Time of Delivery, as to the performance by the Company of all of its obligations hereunder to be performed at or prior to such Time of Delivery, as to the matters set forth in subsections (a) and (e) of this Section and as to such other matters as you may reasonably request. 8. (a) The Company will indemnify and hold harmless each Underwriter against any losses, claims, damages or liabilities, joint or several, to which such Underwriter may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus, the Registration Statement or the Prospectus, or any 15 amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse each Underwriter for any legal or other expenses reasonably incurred by such Underwriter in connection with investigating or defending any such action or claim as such expenses are incurred; provided, however, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in any Preliminary Prospectus, the Registration Statement or the Prospectus or any such amendment or supplement in reliance upon and in conformity with written information furnished to the Company by any Underwriter through Goldman, Sachs & Co. expressly for use therein. (b) Each Underwriter will indemnify and hold harmless the Company against any losses, claims, damages or liabilities to which the Company may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus, the Registration Statement or the Prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in any Preliminary Prospectus, the Registration Statement or the Prospectus or any such amendment or supplement in reliance upon and in conformity with written information furnished to the Company by such Underwriter through Goldman, Sachs & Co. expressly for use therein; and will reimburse the Company for any legal or other expenses reasonably incurred by the Company in connection with investigating or defending any such action or claim as such expenses are incurred. (c) Promptly after receipt by an indemnified party under subsection (a) or (b) above of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under such subsection, notify the indemnifying party in writing of the commencement thereof; but the omission so to notify the indemnifying party shall not relieve it from any liability which it may have to any indemnified party otherwise than under such subsection. In case any such action shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party (who shall not, except with the consent of the indemnified party, be counsel to the indemnifying party), and, after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party under such subsection for any legal expenses of other counsel or any other expenses, in each case subsequently incurred by such indemnified party, in connection with the defense thereof other than reasonable costs of investigation. No indemnifying party shall, without the written consent of the indemnified party, effect the settlement or compromise of, or consent to the entry of any judgment with respect to, any pending or threatened action 16 or claim in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified party is an actual or potential party to such action or claim) unless such settlement, compromise or judgment (i) includes an unconditional release of the indemnified party from all liability arising out of such action or claim and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act, by or on behalf of any indemnified party. (d) If the indemnification provided for in this Section 8 is unavailable to or insufficient to hold harmless an indemnified party under subsection (a) or (b) above in respect of any losses, claims, damages or liabilities (or actions in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters on the other from the offering of the Shares. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law or if the indemnified party failed to give the notice required under subsection (c) above, then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company on the one hand and the Underwriters on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from the offering of the Shares purchased under this Agreement (before deducting expenses) received by the Company bear to the total underwriting discounts and commissions received by the Underwriters with respect to the Shares purchased under this Agreement, in each case as set forth in the table on the cover page of the Prospectus. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or the Underwriters on the other and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Underwriters agree that it would not be just and equitable if contributions pursuant to this subsection (d) were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this subsection (d). The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above in this subsection (d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this subsection (d), no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent 17 misrepresentation. The Underwriters' obligations in this subsection (d) to contribute are several in proportion to their respective underwriting obligations and not joint. (e) The obligations of the Company under this Section 8 shall be in addition to any liability which the Company may otherwise have and shall extend, upon the same terms and conditions, to each person, if any, who controls any Underwriter within the meaning of the Act; and the obligations of the Underwriters under this Section 8 shall be in addition to any liability which the respective Underwriters may otherwise have and shall extend, upon the same terms and conditions, to each officer and director of the Company (including any person who, with his or her consent, is named in the Registration Statement as about to become a director of the Company) and to each person, if any, who controls the Company within the meaning of the Act. 9. (a) If any Underwriter shall default in its obligation to purchase the Shares which it has agreed to purchase hereunder at a Time of Delivery, you may in your discretion arrange for you or another party or other parties to purchase such Shares on the terms contained herein. If within thirty-six hours after such default by any Underwriter you do not arrange for the purchase of such Shares, then the Company shall be entitled to a further period of thirty-six hours within which to procure another party or other parties satisfactory to you to purchase such Shares on such terms. In the event that, within the respective prescribed periods, you notify the Company that you have so arranged for the purchase of such Shares, or the Company notifies you that it has so arranged for the purchase of such Shares, you or the Company shall have the right to postpone such Time of Delivery for a period of not more than seven days, in order to effect whatever changes may thereby be made necessary in the Registration Statement or the Prospectus, or in any other documents or arrangements, and the Company agrees to file promptly any amendments to the Registration Statement or the Prospectus which in your opinion may thereby be made necessary. The term "Underwriter" as used in this Agreement shall include any person substituted under this Section with like effect as if such person had originally been a party to this Agreement with respect to such Shares. (b) If, after giving effect to any arrangements for the purchase of the Shares of a defaulting Underwriter or Underwriters by you and the Company as provided in subsection (a) above, the aggregate number of such Shares which remains unpurchased does not exceed one-eleventh of the aggregate number of all the Shares to be purchased at such Time of Delivery, then the Company shall have the right to require each non- defaulting Underwriter to purchase the number of Shares which such Underwriter agreed to purchase hereunder at such Time of Delivery and, in addition, to require each non-defaulting Underwriter to purchase its pro rata share (based on the number of Shares which such Underwriter agreed to purchase hereunder) of the Shares of such defaulting Underwriter or Underwriters for which such arrangements have not been made; but nothing herein shall relieve a defaulting Underwriter from liability for its default. (c) If, after giving effect to any arrangements for the purchase of the Shares of a defaulting Underwriter or Underwriters by you and the Company as provided in subsection (a) above, the aggregate number of such Shares which remains unpurchased exceeds one-eleventh of the aggregate number of all the Shares to be 18 purchased at such Time of Delivery, or if the Company shall not exercise the right described in subsection (b) above to require non-defaulting Underwriters to purchase Shares of a defaulting Underwriter or Underwriters, then this Agreement (or, with respect to the Second Time of Delivery, the obligations of the Underwriters to purchase and of the Company to sell the Optional Shares) shall thereupon terminate, without liability on the part of any non-defaulting Underwriter or the Company, except for the expenses to be borne by the Company and the Underwriters as provided in Section 6 hereof and the indemnity and contribution agreements in Section 8 hereof; but nothing herein shall relieve a defaulting Underwriter from liability for its default. 10. The respective indemnities, agreements, representations, warranties and other statements of the Company and the several Underwriters, as set forth in this Agreement or made by or on behalf of them, respectively, pursuant to this Agreement, shall remain in full force and effect, regardless of any investigation (or any statement as to the results thereof) made by or on behalf of any Underwriter or any controlling person of any Underwriter, or the Company, or any officer or director or controlling person of the Company, and shall survive delivery of and payment for the Shares. 11. If this Agreement shall be terminated pursuant to Section 9 hereof, the Company shall not then be under any liability to any Underwriter except as provided in Sections 6 and 8 hereof; but, if for any other reason, any Shares are not delivered by or on behalf of the Company as provided herein, the Company will reimburse the Underwriters through you for all out-of-pocket expenses approved in writing by you, including fees and disbursements of counsel, reasonably incurred by the Underwriters in making preparations for the purchase, sale and delivery of the Shares not so delivered, but the Company shall then be under no further liability to any Underwriter in respect of the Shares not so delivered except as provided in Sections 6 and 8 hereof. 12. In all dealings hereunder, you shall act on behalf of each of the Underwriters, and the parties hereto shall be entitled to act and rely upon any statement, request, notice or agreement on behalf of any Underwriter made or given by you jointly or by Goldman, Sachs & Co. on behalf of you as the representatives. All statements, requests, notices and agreements hereunder shall be in writing, and if to the Underwriters shall be delivered or sent by mail, telex or facsimile transmission to you as the representatives in care of Goldman, Sachs & Co., 32 Old Slip, 21st Floor, New York, New York 10005, Attention: Registration Department; and if to the Company shall be delivered or sent by mail, telex or facsimile transmission to the address of the Company set forth in the Registration Statement, Attention: Secretary; provided, however, that any notice to an Underwriter pursuant to Section 8(c) hereof shall be delivered or sent by mail, telex or facsimile transmission to such Underwriter at its address set forth in its Underwriters' Questionnaire, or telex constituting such Questionnaire, which address will be supplied to the Company by you upon request. Any such statements, requests, notices or agreements shall take effect at the time of receipt thereof. 13. This Agreement shall be binding upon, and inure solely to the benefit of, the Underwriters, the Company and, to the extent provided in Sections 8 and 10 hereof, the officers and directors of the Company and each person who controls the Company or any Underwriter, and their respective heirs, executors, administrators, successors and assigns, and no other person shall acquire or have any right under or by virtue of this Agreement. No purchaser of any of the Shares from any Underwriter shall be deemed a successor or assign by reason merely of such purchase. 19 14. Time shall be of the essence of this Agreement. As used herein, the term "business day" shall mean any day when the Commission's office in Washington, D.C. is open for business. 15. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. 16. This Agreement may be executed by any one or more of the parties hereto in any number of counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same instrument. 20 If the foregoing is in accordance with your understanding, please sign and return to us 4 counterparts hereof, and upon the acceptance hereof by you, on behalf of each of the Underwriters, this letter and such acceptance hereof shall constitute a binding agreement between each of the Underwriters and the Company. It is understood that your acceptance of this letter on behalf of each of the Underwriters is pursuant to the authority set forth in a form of Agreement among Underwriters, the form of which shall be submitted to the Company for examination upon request, but without warranty on your part as to the authority of the signers thereof. Very truly yours, Palm, Inc. By:.................................... Name: Title: Accepted as of the date hereof: Goldman, Sachs & Co. Morgan Stanley & Co. Incorporated Merrill Lynch, Pierce, Fenner & Smith Incorporated FleetBoston Robertson Stephens Inc. By:.......................................... Goldman, Sachs & Co. On behalf of each of the Underwriters 21
SCHEDULE I Number of Optional Shares to be Total Number of Purchased if Firm Shares Maximum Option Underwriter to be Purchased Exercised ----------- ----------------- ------------------ Goldman, Sachs & Co......................................................... Morgan Stanley & Co. Incorporated........................................... Merrill Lynch, Pierce, Fenner & Smith Incorporated.......................... FleetBoston Robertson Stephens Inc.......................................... ----------------- ------------------ Total............................................................. ================= ==================
22 ANNEX I FORM OF COMFORT LETTER Pursuant to Section 7(f) of the Underwriting Agreement, the accountants shall furnish letters to the Underwriters to the effect that: (i) They are independent certified public accountants with respect to the Company and its subsidiaries within the meaning of the Act and the applicable published rules and regulations thereunder; (ii) In their opinion, the financial statements and schedules examined by them and included in the Prospectus or the Registration Statement comply as to form in all material respects with the applicable accounting requirements of the Act and the related published rules and regulations thereunder; and, if applicable, they have made a review in accordance with standards established by the American Institute of Certified Public Accountants of the unaudited consolidated interim financial statements and selected financial data derived from audited financial statements of the Company for the periods specified in such letter, as indicated in their reports thereon, copies of which have been furnished separately to the representatives of the Underwriters (the "Representatives"); (iii) They have made a review in accordance with standards established by the American Institute of Certified Public Accountants of the unaudited condensed consolidated statements of operations, consolidated balance sheets and consolidated statements of cash flows included in the Prospectus as indicated in their reports thereon copies of which have been separately furnished to the Representatives and on the basis of specified procedures including inquiries of officials of the Company who have responsibility for financial and accounting matters regarding whether the unaudited condensed consolidated financial statements referred to in paragraph (vi)(A)(i) below comply as to form in all material respects with the applicable accounting requirements of the Act and the related published rules and regulations, nothing came to their attention that caused them to believe that the unaudited condensed consolidated financial statements do not comply as to form in all material respects with the applicable accounting requirements of the Act and the related published rules and regulations; (iv) The unaudited selected financial information with respect to the consolidated results of operations and financial position of the Company for the five most recent fiscal years included in the Prospectus agrees with the corresponding amounts in the audited or unaudited consolidated financial statements for such five fiscal years; (v) They have compared the information in the Prospectus under selected captions with the disclosure requirements of Regulation S-K and on the basis of limited procedures specified in such letter nothing came to their attention as a result of the foregoing procedures that caused them to believe that this information does not conform in all material respects with the disclosure requirements of Items 301, 302, 402 and 503(d), respectively, of Regulation S-K; I-1 (vi) On the basis of limited procedures, not constituting an examination in accordance with generally accepted auditing standards, consisting of a reading of the unaudited financial statements and other information referred to below, a reading of the latest available interim financial statements of the Company and its subsidiaries, inspection of the minute books of the Company and its subsidiaries since the date of the latest audited financial statements included in the Prospectus, inquiries of officials of the Company and its subsidiaries responsible for financial and accounting matters and such other inquiries and procedures as may be specified in such letter, nothing came to their attention that caused them to believe that: (A) (i) the unaudited consolidated statements of operations, consolidated balance sheets and consolidated statements of cash flows included in the Prospectus do not comply as to form in all material respects with the applicable accounting requirements of the Act and the related published rules and regulations, or (ii) any material modifications should be made to the unaudited condensed consolidated statements of operations, consolidated balance sheets and consolidated statements of cash flows included in the Prospectus for them to be in conformity with generally accepted accounting principles; (B) any other unaudited statement of operations data and balance sheet items included in the Prospectus do not agree with the corresponding items in the unaudited consolidated financial statements from which such data and items were derived, and any such unaudited data and items were not determined on a basis substantially consistent with the basis for the corresponding amounts in the audited consolidated financial statements included in the Prospectus; (C) the unaudited financial statements which were not included in the Prospectus but from which were derived any unaudited condensed financial statements referred to in clause (A) and any unaudited statement of operations data and balance sheet items included in the Prospectus and referred to in clause (B) were not determined on a basis substantially consistent with the basis for the audited consolidated financial statements included in the Prospectus; (D) any unaudited pro forma consolidated condensed financial statements included in the Prospectus do not comply as to form in all material respects with the applicable accounting requirements of the Act and the published rules and regulations thereunder or the pro forma adjustments have not been properly applied to the historical amounts in the compilation of those statements; (E) as of a specified date not more than five days prior to the date of such letter, there have been any changes in the consolidated capital stock (other than issuances of capital stock upon exercise of options and stock appreciation rights, upon earn-outs of performance shares and upon conversions of convertible securities, in each case which were outstanding on the date of the latest financial statements included in the Prospectus) or any increase in the consolidated long- term debt of the Company and its subsidiaries, or any decreases in consolidated net current assets or stockholders' equity or other items specified by the Representatives, or any increases in any items specified by the I-2 Representatives, in each case as compared with amounts shown in the latest balance sheet included in the Prospectus, except in each case for changes, increases or decreases which the Prospectus discloses have occurred or may occur or which are described in such letter; and (F) for the period from the date of the latest financial statements included in the Prospectus to the specified date referred to in clause (E) there were any decreases in consolidated revenues or operating profit or the total or per share amounts of consolidated income or other items specified by the Representatives, or any increases in any items specified by the Representatives, in each case as compared with the comparable period of the preceding year and with any other period of corresponding length specified by the Representatives, except in each case for decreases or increases which the Prospectus discloses have occurred or may occur or which are described in such letter; and (vii) In addition to the examination referred to in their report(s) included in the Prospectus and the limited procedures, inspection of minute books, inquiries and other procedures referred to in paragraphs (iii) and (vi) above, they have carried out certain specified procedures, not constituting an examination in accordance with generally accepted auditing standards, with respect to certain amounts, percentages and financial information specified by the Representatives, which are derived from the general accounting records of the Company and its subsidiaries, which appear in the Prospectus, or in Part II of, or in exhibits and schedules to, the Registration Statement specified by the Representatives, and have compared certain of such amounts, percentages and financial information with the accounting records of the Company and its subsidiaries and have found them to be in agreement. I-3 EX-2.1 3 MASTER SEPARATION AND 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 after the IPO and any private placements of securities of Palm concluded prior to or concurrent with the IPO 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: -1- 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 and any private placements of securities of Palm concluded prior to or concurrent with 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 4 FORM OF GENERAL ASSIGNMENT AND ASSUMPTION AGREEMEN EXHIBIT 2.2 Form of 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, -1- 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)(viii) 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)(viii) 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 None. -21- Schedule 1.2(a)(viii) Specific Palm Assets to be Transferred Inventories. -22- Schedule 1.2(b)(i) Excluded Assets None. -23- Schedule 1.3(a)(vi) Divested Businesses Which Contain Liabilities to be Transferred to Palm None. -24- Schedule 1.3(a)(vii) Specific Palm Liabilities None. -25- Schedule 1.3(b)(i) Excluded Liabilities None. -26- EX-3.1 5 FORM OF AMENDED AND RESTATED CERTIFICATE EXHIBIT 3.1 FORM OF AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF PALM, INC. Palm, Inc., a corporation organized and existing under the laws of the State of Delaware, does hereby certify: 1. The name of the corporation is Palm, Inc. Palm, Inc. was originally incorporated under the same name, and the original Certificate of Incorporation was filed with the Secretary of State of the State of Delaware on December 21, 1999. 2. Pursuant to Sections 242 and 228 of the General Corporation Law of the State of Delaware, the amendments and restatement herein set forth have been duly approved by the Board of Directors and stockholders of Palm, Inc. 3. Pursuant to Section 245 of the General Corporation Law of the State of Delaware, this Amended and Restated Certificate of Incorporation restates and integrates and amends the provisions of the Amended and Restated Certificate of Incorporation of this corporation. 4. The text of the Restated Certificate of Incorporation is hereby restated and amended to read in its entirety as follows: ARTICLE I The name of the Corporation is Palm, Inc. (the "Corporation"). ARTICLE II The address of the Corporation's registered office in the State of Delaware is 1209 Orange Street, Wilmington, Delaware 19801, County of New Castle. The name of its registered agent at such address is The Corporation Trust Company. ARTICLE III The nature of the business or purposes to be conducted or promoted by the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware, as the same exists or may hereafter be amended. -1- ARTICLE IV The Corporation is authorized to issue two classes of stock to be designated, respectively, Common Stock, par value $0.001 per share ("Common Stock"), and Preferred Stock, par value $0.001 per share ("Preferred Stock"). The total number of shares of Common Stock that the Corporation shall have authority to issue is 2,000,000,000. The total number of shares of Preferred Stock that the Corporation shall have authority to issue is 125,000,000. The Preferred Stock may be issued from time to time in one or more series. The Corporation shall from time to time in accordance with the laws of the State of Delaware increase the authorized amount of its Common Stock if at any time the number of shares of Common Stock remaining unissued and available for issuance shall not be sufficient to permit conversion of all outstanding Preferred Stock. The Board of Directors is hereby authorized, subject to limitations prescribed by law and the provisions of this Article IV, by resolution to provide for the issuance of the shares of Preferred Stock in one or more series, and to establish from time to time the number of shares to be included in each such series, and to fix the designation, powers, privileges, preferences, and relative participating, optional or other rights, if any, of the shares of each such series and the qualifications, limitations or restrictions thereof. The authority of the Board of Directors with respect to each series shall include, but not be limited to, determination of the following: A. The number of shares constituting that series (including an increase or decrease in the number of shares of any such series (but not below the number of shares in any such series then outstanding)) and the distinctive designation of that series; B. The dividend rate on the shares of that series, whether dividends shall be cumulative, and, if so, from which date or dates, and the relative rights of priority, if any, of payment of dividends on shares of that series; C. Whether that series shall have the voting rights (including multiple or fractional votes per share) in addition to the voting rights provided by law, and, if so, the terms of such voting rights; D. Whether that series shall have conversion privileges, and, if so, the terms and conditions of such privileges, including provision for adjustment of the conversion rate in such events as the Board of Directors shall determine; E. Whether or not the shares of that series shall be redeemable, and, if so, the terms and conditions of such redemption, including the date or dates upon or after which they shall -2- be redeemable, and the amount per share payable in case of redemption, which amount may vary under different conditions and at different redemption rates; F. Whether that series shall have a sinking fund for the redemption or purchase of shares of that series, and, if so, the terms and the amount of such sinking funds; G. The rights of the shares of that series in the event of voluntary or involuntary liquidation, dissolution or winding up of the Corporation, and the relative rights of priority, if any, of payment of shares of that series; and H. Any other relative rights, preferences and limitations of that series. No holders of shares of the Corporation of any class, now or hereafter authorized, shall have any preferential or preemptive rights to subscribe for, purchase or receive any shares of the Corporation of any class, now or hereafter authorized, or any options or warrants for such shares, or any rights to subscribe for, purchase or receive any securities convertible to or exchangeable for such shares, which may at any time be issued, sold or offered for sale by the Corporation, except in the case of any shares of Preferred Stock to which such rights are specifically granted by any resolution or resolutions of the Board of Directors adopted pursuant to this Article IV. ARTICLE V Effective as of the time at which 3 Com Corporation, a Delaware corporation, and its affiliates shall cease to be the beneficial owner of an aggregate of at least a majority of the then outstanding shares of Common Stock (the "Trigger Date"), any action required or permitted to be taken by the stockholders of the Corporation must be effected at a duly called annual or special meeting of such holders and may not be effected by any consent in writing by such holders. Effective as of the Trigger Date, except as otherwise required by law and subject to the rights of the holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation, special meetings of stockholders of the Corporation for any purpose or purposes may be called only by the Board of Directors or by the Chairman of the Board of Directors of the Corporation and, effective as of the Trigger Date, any power of stockholders to call a special meeting is specifically denied. No business other than that stated in the notice shall be transacted at any special meeting. ARTICLE VI The Corporation is to have perpetual existence. ARTICLE VII For the management of the business and for the conduct of affairs of the Corporation, and in further definition, limitation and regulation of powers of the Corporation, of its directors and of its stockholders or any class thereof, as the case may be, it is further provided that: -3- A. The management of the business and the conduct of the affairs of the Corporation shall be vested in its Board of Directors. The number of directors of this Corporation shall be fixed and may be changed from time to time by resolution of the Board of Directors. B. The Directors, other than those who may be elected by the holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation, shall be classified, with respect to the time for which they severally hold office, into three classes, as nearly equal in number as possible, one class to be originally elected for a term expiring at the annual meeting of stockholders to be held in 2000, another class to be originally elected for a term expiring at the annual meeting of stockholders to be held in 2001, and another class to be originally elected for a term expiring at the annual meeting of stockholders to be held in 2002, with each class to hold office until its successor is duly elected and qualified. At each succeeding annual meeting of stockholders, directors elected to succeed those directors whose terms then expire shall be elected for a term of office to expire at the third succeeding annual meeting of stockholders after their election. C. Notwithstanding the foregoing provisions of this Article VII, each director shall serve until his or her successor is duly elected and qualified or until his or her death, resignation or removal. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. D. Any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal, or other causes unless the Board of Directors determines by resolution that any such vacancies or newly created directorships shall be filled by stockholders, and except as otherwise provided by law, shall be filled only by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum of the Board of Directors and not by the stockholders. E. In furtherance and not in limitation of the powers conferred by the laws of the State of Delaware, the Board of Directors is expressly authorized to make, alter, amend or repeal the Bylaws of the Corporation. F. The directors of the Corporation need not be elected by written ballot unless the Bylaws of the Corporation so provide. G. Advance notice of stockholder nomination for the election of directors and of any other business to be brought by stockholders before any meeting of the stockholders of the Corporation shall be given in the manner provided in the Bylaws of the Corporation. -4- ARTICLE VIII A. To the fullest extent permitted by the Delaware General Corporation Law as the same exists or as may hereafter be amended, no director of the Corporation shall be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. B. The Corporation may indemnify to the fullest extent permitted by law any person made or threatened to be made a party to an action or proceeding, whether criminal, civil, administrative or investigative, by reason of the fact that he, his testator or intestate is or was a director, officer or employee of the Corporation or any predecessor of the Corporation or serves or served at any other enterprise as a director, officer or employee at the request of the Corporation or any predecessor to the Corporation. C. Neither any amendment nor repeal of this Article VIII, nor the adoption of any provision of this Corporation's Certificate of Incorporation inconsistent with this Article VIII, shall eliminate or reduce the effect of this Article VIII, in respect of any matter occurring, or any action or proceeding accruing or arising or that, but for this Article VIII, would accrue or arise, prior to such amendment, repeal or adoption of an inconsistent provision. ARTICLE IX Meetings of stockholders may be held within or without the State of Delaware, as the Bylaws may provide. The books of the Corporation may be kept (subject to any provision contained in the laws of the State of Delaware) outside of the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the Bylaws of the Corporation. -5- ARTICLE X Except as provided in Article VIII above, the Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by the laws of the state of Delaware, and all rights conferred upon stockholders herein are granted subject to this reservation. Notwithstanding anything contained in this Certificate of Incorporation to the contrary, the affirmative vote of the holders of at least 80% of the voting power of all shares of the Corporation entitled to vote generally in the election of directors (the "Voting Stock") then outstanding, voting together as a single class shall be required to alter, amend, adopt any provision inconsistent with or repeal Article V or VII or this sentence. IN WITNESS WHEREOF, Palm, Inc. has caused this Amended and Restated Certificate of Incorporation to be executed by Stephen Yu, its Secretary this ______ day of _________________, 2000. -------------------------------- -6- EX-3.2 6 BYLAWS OF PALM, INC. EXHIBIT 3.2 BYLAWS OF PALM, INC. TABLE OF CONTENTS
Page ---- ARTICLE I - CORPORATE OFFICES..................................................... 1 1.1 Registered Office................................................. 1 1.2 Other Offices..................................................... 1 ARTICLE II - MEETINGS OF STOCKHOLDERS............................................. 1 2.1 Place of Meetings................................................. 1 2.2 Annual Meeting.................................................... 1 2.3 Special Meeting................................................... 3 2.4 Organization...................................................... 3 2.5 Notice of Stockholders' Meetings.................................. 4 2.6 Manner of Giving Notice; Affidavit of Notice...................... 4 2.7 Quorum............................................................ 4 2.8 Adjourned Meeting; Notice......................................... 4 2.9 Voting............................................................ 5 2.10 Validation of Meetings; Waiver of Notice; Consent................. 5 2.11 No Stockholder Action by Written Consent.......................... 5 2.12 Record Date for Stockholder Notice; Voting; Giving Consents....... 6 2.13 Proxies........................................................... 6 2.14 Inspectors of Election............................................ 6 ARTICLE III - DIRECTORS........................................................... 7 3.1 Powers............................................................ 7 3.2 Number............................................................ 7 3.3 Election and Term of Office of Directors.......................... 7 3.4 Resignation and Vacancies......................................... 8 3.5 Removal........................................................... 9 3.6 Place of Meetings; Meetings by Telephone.......................... 9 3.7 Regular Meetings.................................................. 9 3.8 Special Meetings; Notice.......................................... 9 3.9 Quorum............................................................ 10 3.10 Waiver of Notice.................................................. 10 3.11 Adjournment....................................................... 10 3.12 Notice of Adjournment............................................. 10 3.13 Board Action by Written Consent Without a Meeting................. 10 3.14 Organization...................................................... 10 3.15 Fees and Compensation of Directors................................ 11 ARTICLE IV - COMMITTEES........................................................... 11 4.1 Committees of Directors........................................... 11
-i- TABLE OF CONTENTS (continued)
Page ---- 4.2 Meetings and Action of Committees................................. 11 4.3 Committee Minutes................................................. 11 4.4 Executive Committee............................................... 11 ARTICLE V - OFFICERS.............................................................. 2 5.1 Officers.......................................................... 12 5.2 Election of Officers.............................................. 12 5.3 Terms of Office and Compensation.................................. 12 5.4 Removal; Resignation of Officers and Vacancies.................... 2 5.5 Chairman of the Board............................................. 13 5.6 Vice Chairman of the Board........................................ 13 5.7 Chairman of Executive Committee................................... 13 5.8 President......................................................... 13 5.9 Vice Presidents................................................... 13 5.10 Secretary......................................................... 13 5.11 Chief Financial Officer........................................... 14 ARTICLE VI - INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND OTHER AGENTS. 15 6.1 Indemnification of Directors and Officers......................... 15 6.2 Indemnification of Others......................................... 15 6.3 Insurance......................................................... 16 6.4 Expenses.......................................................... 16 6.5 Non-Exclusivity of Rights......................................... 16 6.6 Survival of Rights................................................ 17 6.7 Amendments........................................................ 17 ARTICLE VII - RECORDS AND REPORTS................................................. 17 7.1 Maintenance and Inspection of Records............................. 17 7.2 Inspection by Director............................................ 17 7.3 Representation of Shares of Other Corporations.................... 17 ARTICLE VIII - GENERAL MATTERS.................................................... 18 8.1 Record Date for Purposes Other than Notice and Voting............. 18 8.2 Checks; Drafts; Evidences of Indebtedness......................... 18 8.3 Corporate Contracts and Instruments; How Executed................. 18 8.4 Fiscal Year....................................................... 18 8.5 Stock Certificates................................................ 18 8.6 Special Designation on Certificates............................... 19 8.7 Lost Certificates................................................. 19
-ii- TABLE OF CONTENTS (continued)
Page ---- 8.8 Construction; Definitions......................................... 19 8.9 Provisions Additional to Provisions of Law........................ 19 8.10 Provisions Contrary to Provisions of Law.......................... 19 8.11 Notices........................................................... 20 ARTICLE IX - AMENDMENTS........................................................... 20
-iii- BYLAWS OF PALM, INC. ARTICLE I CORPORATE OFFICES 1.1 Registered Office. The registered office of the corporation shall be fixed in the Certificate of Incorporation of the corporation. 1.2 Other Offices. The board of directors may at any time establish branch or subordinate offices at any place or places where the corporation is qualified to do business. ARTICLE II MEETINGS OF STOCKHOLDERS 2.1 Place of Meetings. Meetings of stockholders shall be held at any place within or outside the State of Delaware designated by the board of directors. In the absence of any such designation, stockholders' meetings shall be held at the registered office of the corporation. 2.2 Annual Meeting. (a) The annual meeting of stockholders shall be held each year on a date and at a time designated by the board of directors. At the meeting, directors shall be elected, and any other proper business may be transacted. (b) At an annual meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be: (A) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the board of directors, (B) otherwise properly brought before the meeting by or at the direction of the board of directors, or (C) otherwise properly brought before the meeting by a stockholder. For nominations or other business to be properly brought before a stockholders meeting by a stockholder pursuant to clause (C) of the preceding sentence, the stockholder must have given timely notice thereof in writing to the Secretary of the corporation and such other business must otherwise be a proper matter for stockholder action. To be timely, a stockholder's notice shall be delivered to the Secretary at the principal executive offices of the corporation not less than ninety (90) calendar days in advance of the first anniversary of the preceding year's annual meeting; provided, however, that in the event that (i) no annual meeting was held in 1 the previous year or (ii) the date of the annual meeting has been changed by more than thirty (30) days from the date of the previous year's meeting, notice by the stockholder to be timely must be so delivered not earlier than the close of business on the later of: (i) the day ninety (90) calendar days in advance of such meeting or (ii) the day ten (10) calendar days following the day on which public announcement of the date of the meeting is first made. For purposes of determining whether a stockholder's notice shall have been delivered in a timely manner for the annual meeting of stockholders in 2000, the first anniversary of the previous year's meeting shall be deemed to be ____________, 2000. In no event shall the public announcement of an adjournment of a stockholders meeting commence a new time period for the giving of a stockholder's notice as described above. A stockholder's notice to the secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting: (a) a brief description of the business desired to be brought before the meeting, (b) the name and address, as they appear on the corporation's books, of the stockholder proposing such business, (c) the class number of shares of the corporation which are owned beneficially by such stockholder, (d) any material interest of the stockholder in such business, and (e) any other information that is required to be provided by the stockholder pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "1934 Act") (or any successor thereto) in such stockholder's capacity as a proponent of a stockholder proposal. Notwithstanding anything in these Bylaws to the contrary, no business shall be conducted at any annual meeting except in accordance with the procedures set forth in this paragraph (b). The chairman of the annual meeting shall, if the facts warrant, determine and declare at the meeting that business was not properly brought before the meeting and in accordance with the provisions of this paragraph (b), and, if he should so determine, he shall so declare at the meeting that any such business not properly brought before the meeting shall not be transacted. (c) Only persons who are nominated in accordance with the procedures set forth in this paragraph (c) shall be eligible for election as directors. Nominations of persons for election to the board of directors of the corporation may be made at a meeting of stockholders by or at the direction of the board of directors or by any stockholder of the corporation entitled to vote in the election of directors at the meeting who complies with the notice procedures set forth in this paragraph (c). Such nominations, other than those made by or at the direction of the board of directors, shall be made pursuant to timely notice in writing to the secretary of the corporation in accordance with the provisions of paragraph (b) of this Section 2.2. Such stockholder's notice shall set forth (i) as to each person, if any, whom the stockholder proposes to nominate for election or re-election as a director: (A) the name, age, business address and residence address of such person, (B) the principal occupation or employment of such person, (C) the class and number of shares of the corporation which are beneficially owned by such person, (D) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nominations are to be made by the stockholder, and (E) any other information relating to such person that is required to be disclosed in solicitations of proxies for elections of directors, or is 2 otherwise required, in each case pursuant to Regulation 14A under the 1934 Act (or any successor thereto) (including without limitation such person's written consent to being named in the proxy statement, if any, as a nominee and to serving as a director if elected); and (ii) as to such stockholder giving notice, the information required to be provided pursuant to paragraph (b) of this Section 2.2. At the request of the board of directors, any person nominated by a stockholder for election as a director shall furnish to the secretary of the corporation that information required to be set forth in the stockholder's notice of nomination which pertains to the nominee. No person shall be eligible for election as a director of the corporation unless nominated in accordance with the procedures set forth in this paragraph (c). The chairman of the meeting shall, if the facts warrant, determine and declare at the meeting that a nomination was not made in accordance with the procedures prescribed by these Bylaws, and if he should so determine, he shall so declare at the meeting, and the defective nomination shall be disregarded. 2.3 Special Meeting. A special meeting of the stockholders may be called at any time by the board of directors or the chairman of the board. In addition, prior to the Trigger Date (as defined in the Certificate of Incorporation), the corporation will call a special meeting of stockholders promptly upon request by 3Com Corporation, a Delaware corporation, so long as such entity is a stockholder of the corporation. Special meetings of the stockholders may not be called by any other person or persons. Only such business shall be considered at a special meeting of stockholders as shall have been stated in the notice for such meeting. 2.4 Organization. Meetings of stockholders shall be presided over by the chairman of the board, if any, or in his or her absence by the vice chairman of the board, if any, or in his or her absence, or in the absence of the foregoing persons by a chairman of the meeting, which chairman must be an officer or director of the Company, designated by the board of directors. The secretary or in his or her absence an assistant secretary or in the absence of the secretary and all assistant secretaries a person whom the chairman of the meeting shall appoint shall act as secretary of the meeting and keep a record of the proceedings thereof. The board of directors of the corporation shall be entitled to make such rules or regulations for the conduct of meetings of stockholders as it shall deem necessary, appropriate or convenient. Subject to such rules and regulations of the board of directors, if any, the chairman of the meeting shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts as, in the judgment of such chairman, are necessary, appropriate or convenient for the proper conduct of the meeting, including, without limitation, establishing an agenda or order of business for the meeting, rules and procedures for maintaining order at the meeting and the safety of those present, limitations on participation in such meeting to stockholders of record of the corporation and their duly authorized and constituted proxies, and such other persons as the chairman shall permit, restrictions on entry to the meeting after the time fixed for the commencement thereof, limitations on the time allotted to questions or comments by participants and regulation of the opening and closing of the polls for balloting and matters which are to be voted on by ballot. Unless and to the extent determined by the board of directors or the chairman of the meeting, meetings of stockholders shall not be required to be held in accordance with rules of parliamentary procedure. 3 2.5 Notice of Stockholders' Meetings. All notices of meetings of stockholders shall be sent or otherwise given in accordance with Section 2.6 of these Bylaws not less than ten (10) nor more than sixty (60) days before the date of the meeting. The notice shall specify the place, date, and hour of the meeting and (i) in the case of a special meeting, the purpose or purposes for which the meeting is called (no business other than that specified in the notice may be transacted) or (ii) in the case of the annual meeting, those matters which the board of directors, at the time of giving the notice, intends to present for action by the stockholders (but any proper matter may be presented at the meeting for such action). The notice of any meeting at which directors are to be elected shall include the name of any nominee or nominees who, at the time of the notice, the board intends to present for election. 2.6 Manner of Giving Notice; Affidavit of Notice. Notice of any meeting of stockholders shall be given either personally or by mail, telecopy, telegram or other electronic or wireless means. Notices not personally delivered shall be sent charges prepaid and shall be addressed to the stockholder at the address of that stockholder appearing on the books of the corporation or given by the stockholder to the corporation for the purpose of notice. Notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or at the time of transmission when sent by telecopy, telegram or other electronic or wireless means. An affidavit of the mailing or other means of giving any notice of any stockholders' meeting, executed by the secretary, assistant secretary or any transfer agent of the corporation giving the notice, shall be prima facie evidence of the giving of such notice or report. 2.7 Quorum. The holders of a majority in voting power of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by statute or by the Certificate of Incorporation. If, however, such quorum is not present or represented at any meeting of the stockholders, then either (i) the chairman of the meeting or (ii) the stockholders by the vote of the holders of a majority of the stock, present in person or represented by proxy shall have power to adjourn the meeting in accordance with Section 2.8 of these Bylaws. When a quorum is present at any meeting, the vote of the holders of a majority of the stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which, by express provision of the laws of the State of Delaware or of the Certificate of Incorporation or these Bylaws, a vote of a greater number or voting by classes is required, in which case such express provision shall govern and control the decision of the question. If a quorum be initially present, the stockholders may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum, if any action taken is approved by a majority of the stockholders initially constituting the quorum. 2.8 Adjourned Meeting; Notice. Any stockholders' meeting, annual or special, whether or not a quorum is present, may be adjourned from time to time by the vote of the majority of the voting power of the shares represented at that meeting, either in person or by proxy. In the absence 4 of a quorum, no other business may be transacted at that meeting except as provided in Section 2.7 of these Bylaws. When any meeting of stockholders, either annual or special, is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place are announced at the meeting at which the adjournment is taken. However, if a new record date for the adjourned meeting is fixed or if the adjournment is for more than thirty (30) days from the date set for the original meeting, then notice of the adjourned meeting shall be given. Notice of any such adjourned meeting shall be given to each stockholder of record entitled to vote at the adjourned meeting in accordance with the provisions of Sections 2.5 and 2.6 of these Bylaws. At any adjourned meeting the corporation may transact any business which might have been transacted at the original meeting. 2.9 Voting. The stockholders entitled to vote at any meeting of stockholders shall be determined in accordance with the provisions of Section 2.12 of these Bylaws, subject to the provisions of Sections 217 and 218 of the General Corporation Law of Delaware (relating to voting rights of fiduciaries, pledgers and joint owners, and to voting trusts and other voting agreements). Except as may be otherwise provided in the Certificate of Incorporation, by these Bylaws or required by law, each stockholder shall be entitled to one vote for each share of capital stock held by such stockholder. Any stockholder entitled to vote on any matter may vote part of the shares in favor of the proposal and refrain from voting the remaining shares or, except when the matter is the election of directors, may vote them against the proposal; but if the stockholder fails to specify the number of shares which the stockholder is voting affirmatively, it will be conclusively presumed that the stockholder's approving vote is with respect to all shares which the stockholder is entitled to vote. 2.10 Validation of Meetings; Waiver of Notice; Consent. The transactions of any meeting of stockholders, either annual or special, however called and noticed, and wherever held, shall be as valid as though they had been taken at a meeting duly held after regular call and notice, if a quorum be present either in person or by proxy. Whenever notice is required to be given under any provision of the General Corporation Law of Delaware or of the Certificate of Incorporation or these Bylaws, a written waiver thereto, signed by the person entitled to notice, whether before or after the time stated therein, will be deemed equivalent to notice. Attendance by a person at a meeting shall also constitute a waiver of notice of and presence at that meeting, except when the person objects at the beginning of the meeting to the transaction of any business because the meeting is not lawfully called or convened. Attendance at a meeting is not a waiver of any right to object to the consideration of matters required by law to be included in the notice of the meeting but not so included, if that objection is expressly made at the meeting. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders need be specified in any written waiver of notice unless so required by the Certificate of Incorporation or these Bylaws. 2.11 No Stockholder Action by Written Consent. Effective as of the Trigger Date, any action required or permitted to be taken by the stockholders of the corporation must be effected at a 5 duly called annual or special meeting of such holders and may not be effected by any consent in writing by such holders. 2.12 Record Date for Stockholder Notice; Voting; Giving Consents. For purposes of determining the stockholders entitled to notice of any meeting or to vote thereat, the board of directors may fix, in advance, a record date, which shall not be more than sixty (60) days nor less than ten (10) days before the date of any such meeting, and in such event only stockholders of record on the date so fixed are entitled to notice and to vote, notwithstanding any transfer of any shares on the books of the corporation after the record date, except as otherwise provided in the Certificate of Incorporation, by these Bylaws, by agreement or by applicable law. If the board of directors does not so fix a record date, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the business day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting unless the board of directors fixes a new record date for the adjourned meeting, but the board of directors shall fix a new record date if the meeting is adjourned for more than thirty (30) days from the date set for the original meeting. The record date for any other purpose shall be as provided in Section 8.1 of these Bylaws. 2.13 Proxies. Every person entitled to vote for directors, or on any other matter, shall have the right to do so either in person or by one or more agents authorized by a written proxy filed with the secretary of the corporation. A written proxy may be in the form of a telegram, cablegram, or other means of electronic transmission which sets forth or is submitted with information from which it can be determined that the telegram, cablegram, or other means of electronic transmission was authorized by the person. No such proxy shall be voted or acted upon after three (3) years from its date, unless the proxy provides for a longer period. A duly executed proxy shall be irrevocable if it states that it is irrevocable and if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Section 212(e) of the General Corporation Law of Delaware. A stockholder may revoke any proxy which is not irrevocable by attending the meeting and voting in person or by filing an instrument in writing revoking the proxy or by filing another duly executed proxy bearing a later date with the secretary of the corporation. A proxy is not revoked by the death or incapacity of the maker unless, before the vote is counted, written notice of such death or incapacity is received by the corporation. 2.14 Inspectors of Election. Before any meeting of stockholders, the board of directors shall appoint an inspector or inspectors of election to act at the meeting or its adjournment. The number of inspectors shall be either one (1) or three (3). If any person appointed as inspector fails to appear or fails or refuses to act, then the chairman of the meeting may, and upon the request of any stockholder or a stockholder's proxy shall, appoint a person to fill that vacancy. 6 Such inspectors shall: (a) determine the number of shares outstanding and the voting power of each, the number of shares represented at the meeting, the existence of a quorum, and the authenticity, validity, and effect of proxies; (b) receive votes, ballots or consents; (c) hear and determine all challenges and questions in any way arising in connection with the right to vote; (d) count and tabulate all votes or consents; (e) determine when the polls shall close; (f) determine the result; and (g) do any other acts that may be proper to conduct the election or vote with fairness to all stockholders. The inspectors of election shall perform their duties impartially, in good faith, to the best of their ability and as expeditiously as is practical. If there are three (3) inspectors of election, the decision, act or certificate of a majority is effective in all respects as the decision, act or certificate of all. Any report or certificate made by the inspectors of election is prima facie evidence of the facts stated therein. ARTICLE III DIRECTORS 3.1 Powers. Subject to the provisions of the General Corporation Law of Delaware and to any limitations in the Certificate of Incorporation or these Bylaws relating to action required to be approved by the stockholders or by the outstanding shares, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the board of directors. 3.2 Number. The authorized number of directors shall be fixed and may be changed from time to time by resolution of the Board of Directors. No reduction of the authorized number of directors shall have the effect of removing any director before that director's term of office expires. If for any cause, the directors shall not have been elected at an annual meeting, they may be elected as soon thereafter as convenient at a special meeting of the stockholders called for that purpose in the manner provided in these Bylaws. 3.3 Election and Term of Office of Directors. Except as provided in the Certificate of Incorporation or Section 3.4 of these Bylaws, directors shall be classified, with respect to the time 7 for which they severally hold office, into three classes, as nearly equal in number as possible, one class to be originally elected for a term expiring at the annual meeting of stockholders to be held in 2000, another class to be originally elected for a term expiring at the annual meeting of stockholders to be held in 2001, and another class to be originally elected for a term expiring at the annual meeting of stockholders to be held in 2002, with each class to hold office until its successor is duly elected and qualified. At each succeeding annual meeting of stockholders, directors elected to succeed those directors whose terms then expire shall be elected for a term of office to expire at the third succeeding annual meeting of stockholders after their election, with each director to hold office until such person's successor shall have been elected and qualified or until such person's earlier resignation or removal. Each director, including a director elected or appointed to fill a vacancy, shall hold office until his successor is elected and qualified or until his earlier resignation or removal. Directors need not be stockholders unless so required by the Certificate of Incorporation or by these Bylaws; wherein other qualifications for directors may be prescribed. Election of directors need not be by written ballot unless so required by the Certificate of Incorporation or by these Bylaws; wherein other qualifications for directors may be prescribed. 3.4 Resignation and Vacancies. Any director may resign effective on giving written notice to the chairman of the board, the president, the secretary or the board of directors, unless the notice specifies a later time for that resignation to become effective. If the resignation of a director is effective at a future time, the board of directors may elect a successor to take office when the resignation becomes effective. Unless otherwise provided in the Certificate of Incorporation or these Bylaws: (i) Vacancies and newly created directorships resulting from any increase in the authorized number of directors elected by all of the stockholders having the right to vote as a single class may be filled by a majority of the directors then in office, even if less than a quorum, or by a sole remaining director. Each director so elected shall hold office for the remainder of the full term of the class of directors in which the new directorship was created or the vacancy occurred and until a successor has been elected and qualified. (ii) Whenever the holders of any class or classes of stock or series thereof are entitled to elect one or more directors by the provisions of the Certificate of Incorporation, vacancies and newly created directorships of such class or classes or series may be filled by a majority of the directors elected by such class or classes or series thereof then in office, or by a sole remaining director so elected. If at any time, by reason of death or resignation or other cause, the corporation should have no directors in office, then any officer or any stockholder or an executor, administrator, trustee or guardian of a stockholder, or other fiduciary entrusted with like responsibility for the person or estate of a stockholder, may call a special meeting of stockholders solely for he purpose of electing directors in accordance with the provisions of the Certificate of Incorporation or these Bylaws, or 8 may apply to the Court of Chancery for a decree summarily ordering an election as provided in Section 211 of the General Corporation Law of Delaware. If, at the time of filling any vacancy or any newly created directorship, the directors then in office constitute less than a majority of the whole board (as constituted immediately prior to any such increase), then the Court of Chancery may, upon application of any stockholder or stockholders holding at least ten percent (10%) of the total number of the then outstanding shares having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in office as aforesaid, which election shall be governed by the provisions of Section 211 of the General Corporation Law of Delaware as far as applicable. 3.5 Removal. Unless otherwise restricted by statute, by the Certificate of Incorporation or by these Bylaws, any director or the entire board of directors may be removed from office only for cause by the holders of a majority of the shares then entitled to vote at an election of directors. 3.6 Place of Meetings; Meetings by Telephone. Regular meetings of the board of directors may be held at any place within or outside the State of Delaware that has been designated from time to time by resolution of the board of directors. In the absence of such a designation, regular meetings shall be held at the principal executive office of the corporation. Special meetings of the board of directors may be held at any place within or outside the State of Delaware that has been designated in the notice of the meeting or, if not stated in the notice or if there is no notice, at the principal executive office of the corporation. Any meeting, regular or special, may be held by conference telephone or similar communication equipment, so long as all directors participating in the meeting can hear one another; and all such directors shall be deemed to be present in person at the meeting. 3.7 Regular Meetings. Regular meetings of the board of directors may be held without notice if the times of such meetings are fixed by the board of directors. 3.8 Special Meetings; Notice. Special meetings of the board of directors for any purpose or purposes may be called at any time by the chairman of the board, the vice chairman of the board, the president, the chairman of the executive committee, any vice president or the secretary or by any two (2) or more of the directors. Notice of the time and place of special meetings shall be delivered personally or by telephone to each director or sent by mail, telecopy, telegram or other electronic or wireless means, charges prepaid, addressed to each director at that director's address as it is shown on the records of the corporation or if the address is not readily ascertainable, notice shall be addressed to the director at the city or place in which the meetings of directors are regularly held. If the notice is mailed, it shall be deposited in the United States mail at least four (4) days before the time of the holding of the meeting. If the notice is delivered personally or by telephone, telecopy, telegram or other electronic or wireless means, it shall be delivered personally or by telephone or other electronic or wireless means or to the telegraph company at least twenty-four (24) hours before the time of the holding of the meeting. Any oral notice given personally or by telephone may be communicated either to the 9 director or to a person at the office of the director who the person giving the notice has reason to believe will promptly communicate it to the director. If the meeting is to be held at the principal executive office of the corporation, the notice need not specify the place of the meeting. Moreover, a notice of special meeting need not state the purpose of such meeting, and, unless indicated in the notice thereof, any and all business may be transacted at a special meeting. 3.9 Quorum. A majority of the authorized number of directors shall constitute a quorum for the transaction of business, except to fill vacancies in the board of directors as provided in Section 3.4 and to adjourn as provided in Section 3.11 of these Bylaws. Every act or decision done or made by a majority of the directors present at a duly held meeting at which a quorum is present shall be regarded as the act of the board of directors, subject to the provisions of the Certificate of Incorporation and applicable law. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for that meeting. 3.10 Waiver of Notice. Notice of a meeting need not be given to any director (i) who signs a waiver of notice or a consent to holding the meeting or an approval of the minutes thereof, whether before or after the meeting, or (ii) who attends the meeting without protesting, prior thereto or at its commencement, the lack of notice to such directors. The transactions of any meeting of the board, however called and noticed or wherever held, are as valid as though had at a meeting duly held after regular call and notice if a quorum is present and if, either before or after the meeting, each of the directors not present signs a written waiver of notice. All such waivers shall be filed with the corporate records or made part of the minutes of the meeting. A waiver of notice need not specify the purpose of any regular or special meeting of the board of directors. 3.11 Adjournment. A majority of the directors present, whether or not constituting a quorum, may adjourn any meeting to another time and place. 3.12 Notice of Adjournment. Notice of the time and place of holding an adjourned meeting need not be given if announced unless the meeting is adjourned for more than twenty-four (24) hours. If the meeting is adjourned for more than twenty-four (24) hours, then notice of the time and place of the adjourned meeting shall be given before the adjourned meeting takes place, in the manner specified in Section 3.8 of these Bylaws, to the directors who were not present at the time of the adjournment. 3.13 Board Action by Written Consent Without a Meeting. Any action required or permitted to be taken by the board of directors may be taken without a meeting, provided that all members of the board of directors individually or collectively consent in writing to that action. Such action by written consent shall have the same force and effect as a unanimous vote of the board of directors. Such written consent and any counterparts thereof shall be filed with the minutes of the proceedings of the board. 3.14 Organization. Meetings of the board of directors be presided over by the chairman of the board, if any, or in his or her absence by the vice chairman of the board, if any, or in 10 his or her absence by the chairman of the executive committee, if any, or in his or her absence by the president, if any, or in his or her absence by the executive vice president. In the absence of all such directors, a president pro tem chosen by a majority of the directors present shall preside at the meeting. The secretary shall act as secretary of the meeting, but in his or her absence the chairman of the meeting may appoint any person to act as secretary of the meeting. 3.15 Fees and Compensation of Directors. Directors and members of committees may receive such compensation, if any, for their services and such reimbursement of expenses as may be fixed or determined by resolution of the board of directors. This Section 3.15 shall not be construed to preclude any director from serving the corporation in any other capacity as an officer, agent, employee or otherwise and receiving compensation for those services. ARTICLE IV COMMITTEES 4.1 Committees of Directors. The board of directors may designate one (1) or more committees, each consisting of one or more directors, to serve at the pleasure of the board of directors. The board of directors may designate one (1) or more directors as alternate members of any committee, who may replace any absent member at any meeting of the committee. Any committee, to the extent provided in the resolution of the board, shall have all the authority of the board, but no such committee shall have the power or authority to (i) approve or adopt or recommend to the stockholders any action or matter that requires the approval of the stockholders or (ii) adopt, amend or repeal any Bylaw of the corporation. 4.2 Meetings and Action of Committees. Meetings and actions of committees shall be governed by, and held and taken in accordance with, the provisions of Article III of these Bylaws, Section 3.6 (place of meetings), Section 3.7 (regular meetings), Section 3.8 (special meetings and notice), Section 3.9 (quorum), Section 3.10 (waiver of notice), Section 3.11 (adjournment), Section 3.12 (notice of adjournment), and Section 3.13 (action without meeting), with such changes in the context of those Bylaws as are necessary to substitute the committee and its members for the board of directors and its members; provided, however, that the time of regular meetings of committees may be determined either by resolution of the board of directors or by resolution of the committee, that special meetings of committees may also be called by resolution of the board of directors, and that notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The board of directors may adopt rules for the government of any committee not inconsistent with the provisions of these Bylaws. 4.3 Committee Minutes. Each committee shall keep regular minutes of its meetings and report the same to the board of directors when required. 4.4 Executive Committee. In the event that the board of directors appoints an executive committee, such executive committee, in all cases in which specific directions to the contrary shall not have been given by the board of directors, shall have and may exercise, during the intervals 11 between the meetings of the board of directors, all the powers and authority of the board of directors in the management of the business and affairs of the corporation (except as provided in Section 4.1 hereof) in such manner as the executive committee may deem in the best interests of the corporation. ARTICLE V OFFICERS 5.1 Officers. The officers of this corporation shall consist of a president, one or more vice presidents, a secretary and a chief financial officer who shall be chosen by the Board of Directors and such other officers, including but not limited to a chairman of the board, a vice chairman of the board, a chairman of the executive committee and a treasurer as the board of directors shall deem expedient, who shall be chosen in such manner and hold their offices for such terms as the board of directors may prescribe. Any two or more of such offices may be held by the same person. The board of directors may designate one or more vice presidents as executive vice presidents or senior vice presidents. Either the chairman of the board, the vice chairman of the board, the chairman of the executive committee, or the president, as the board of directors may designate from time to time, shall be the chief executive officer of the corporation. The board of directors may from time to time designate the president or any executive vice president as the chief operating officer of the corporation. Any vice president, treasurer or assistant treasurer, or assistant secretary respectively may exercise any of the powers of the president, the chief financial officer, or the secretary, respectively, as directed by the board of directors and shall perform such other duties as are imposed upon such officer by the Bylaws or the board of directors. 5.2 Election of Officers. In addition to officers elected by the board of directors in accordance with Sections 5.1 and 5.3, the corporation may have one or more appointed vice presidents. Such vice presidents may be appointed by the chairman of the board or the president and shall have such duties as may be established by the chairman or president. Vice presidents appointed pursuant to this Section 5.2 may be removed in accordance with Section 5.4. 5.3 Terms of Office and Compensation. The term of office and salary of each of said officers and the manner and time of the payment of such salaries shall be fixed and determined by the board of directors and may be altered by said board from time to time at its pleasure, subject to the rights, if any, of said officers under any contract of employment. 5.4 Removal; Resignation of Officers and Vacancies. Any officer of the corporation may be removed at the pleasure of the board of directors at any meeting or, except in the case of an officer chosen by the board of directors, at the pleasure of any officer who may be granted such power by a resolution of the board of directors. Any officer may resign at any time upon written notice to the corporation without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party. If any vacancy occurs in any office of the corporation, the board of directors may elect a successor to fill such vacancy for the remainder of the unexpired term and until a successor is duly chosen and qualified. 12 5.5 Chairman of the Board. The chairman of the board, if such an officer be elected, shall have general supervision, direction and control of the corporation's business and its officers, and, if present, preside at meetings of the stockholders and the board of directors and exercise and perform such other powers and duties as may from time to time be assigned to him by the board of directors or as may be prescribed by these Bylaws. The chairman of the board shall report to the board of directors. 5.6 Vice Chairman of the Board. The vice chairman of the board of directors, if there shall be one, shall, in the case of the absence, disability or death of the chairman, exercise all the powers and perform all the duties of the chairman of the board. The vice chairman shall have such other powers and perform such other duties as may be granted or prescribed by the board of directors. 5.7 Chairman of Executive Committee. The chairman of the executive committee, if there be one, shall have the power to call meetings of the board of directors to be held subject to the limitations prescribed by law or by these Bylaws, at such times and at such places as the chairman of the executive committee shall deem proper. The chairman of the executive committee shall have such other powers and be subject to such other duties as the board of directors may from time to time prescribe. 5.8 President. The powers and duties of the president are: (a) To call meetings of the board of directors to be held, subject to the limitations prescribed by law or by these Bylaws, at such times and at such places as the president shall deem proper. (b) To affix the signature of the corporation to all deeds, conveyances, mortgages, leases, obligations, bonds, certificates and other papers and instruments in writing which have been authorized by the board of directors or which, in the judgment of the president, should be executed on behalf of the corporation, and to sign certificates for shares of stock of the corporation. (c) To have such other powers and be subject to such other duties as the board of directors may from time to time prescribe. 5.9 Vice Presidents. In case of the absence, disability or death of the president, the elected vice president, or one of the elected vice presidents, shall exercise all the powers and perform all the duties of the president. If there is more than one elected vice president, the order in which the elected vice presidents shall succeed to the powers and duties of the president shall be as fixed by the board of directors. The elected vice president or elected vice presidents shall have such other powers and perform such other duties as may be granted or prescribed by the board of directors. Vice presidents appointed pursuant to Section 5.2 shall have such powers and duties as may be fixed by the chairman or president, except that such appointed vice presidents may not exercise the powers and duties of the president. 5.10 Secretary. The powers and duties of the secretary are: 13 (a) To keep a book of minutes at the principal office of the corporation, or such other place as the board of directors may order, of all meetings of its directors and stockholders with the time and place of holding, whether regular or special, and, if special, how authorized, the notice thereof given, the names of those present at directors' meetings, the number of shares present or represented at stockholders' meetings and the proceedings thereof. (b) To keep the seal of the corporation and affix the same to all instruments which may require it. (c) To keep or cause to be kept at the principal office of the corporation, or at the office of the transfer agent or agents, a share register, or duplicate share registers, showing the names of the stockholders and their addresses, the number of and classes of shares, and the number and date of cancellation of every certificate surrendered for cancellation. (d) To keep a supply of certificates for shares of the corporation, to fill in all certificates issued, and to make a proper record of each such issuance; provided, that so long as the corporation shall have one or more duly appointed and acting transfer agents of the shares, or any class or series of shares, of the corporation, such duties with respect to such shares shall be performed by such transfer agent or transfer agents. (e) To transfer upon the share books of the corporation any and all shares of the corporation; provided, that so long as the corporation shall have one or more duly appointed and acting transfer agents of the shares, or any class or series of shares, of the corporation, such duties with respect to such shares shall be performed by such transfer agent or transfer agents, and the method of transfer of each certificate shall be subject to the reasonable regulations of the transfer agent to which the certificate is presented for transfer, and also, if the corporation then has one or more duly appointed and acting registrars, to the reasonable regulations of the registrar to which the new certificate is presented for registration; and provided, further that no certificate for shares of stock shall be issued or delivered or, if issued or delivered, shall have any validity whatsoever until and unless it has been signed or authenticated in the manner provided in Section 8.5 hereof. (f) To make service and publication of all notices that may be necessary or proper, and without command or direction from anyone. In case of the absence, disability, refusal, or neglect of the secretary to make service or publication of any notices, then such notices may be served and/or published by the president or a vice president, or by any person thereunto authorized by either of them or by the board of directors or by the holders of a majority of the outstanding shares of the corporation. (g) Generally to do and perform all such duties as pertain to the office of secretary and as may be required by the board of directors. 5.11 Chief Financial Officer. The powers and duties of the chief financial officer are: 14 (a) To supervise the corporate-wide treasury functions and financial reporting to external bodies. (b) To have the custody of all funds, securities, evidence of indebtedness and other valuable documents of the corporation and, at the chief financial officer's discretion, to cause any or all thereof to be deposited for account of the corporation at such depositary as may be designated from time to time by the board of directors. (c) To receive or cause to be received, and to give or cause to be given, receipts and acquittances for monies paid in for the account of the corporation. (d) To disburse, or cause to be disbursed, all funds of the corporation as may be directed by the board of directors, taking proper vouchers for such disbursements. (e) To render to the president and to the board of directors, whenever they may require, accounts of all transactions and of the financial condition of the corporation. (f) Generally to do and perform all such duties as pertain to the office of chief financial officer and as may be required by the board of directors. ARTICLE VI INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND OTHER AGENTS 6.1 Indemnification of Directors and Officers. The corporation shall, to the maximum extent and in the manner permitted by the General Corporation Law of Delaware, indemnify each of its directors and officers against expenses (including attorneys' fees), judgments, fines, settlements and other amounts actually and reasonably incurred in connection with any proceeding, arising by reason of the fact that such person is or was an agent of the corporation; provided, however, that the corporation may modify the extent of such indemnification by individual contracts with its directors and executive officers and, provided, further, that the corporation shall not be required to indemnify any director or officer in connection with any proceeding (or part thereof) initiated by such person unless (i) such indemnification is expressly required to be made by law, (ii) the proceeding was authorized in advance by the board of directors of the corporation, (iii) such indemnification is provided by the corporation, in its sole discretion, pursuant to the powers vested in the corporation under the General Corporation Law of Delaware or (iv) such indemnification is required to be made pursuant to an individual contract. For purposes of this Section 6.1, a "director" or "officer" of the corporation includes any person (i) who is or was a director or officer of the corporation, (ii) who is or was serving at the request of the corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was a director or officer of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. 6.2 Indemnification of Others. The corporation shall have the power, to the maximum extent and in the manner permitted by the General Corporation Law of Delaware, to indemnify each 15 of its employees and agents (other than directors and officers) against expenses (including attorneys' fees), judgments, fines, settlements and other amounts actually and reasonably incurred in connection with any proceeding, arising by reason of the fact that such person is or was an agent of the corporation. For purposes of this Section 6.2, an "employee" or "agent" of the corporation (other than a director or officer) includes any person (i) who is or was an employee or agent of the corporation, (ii) who is or was serving at the request of the corporation as an employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was an employee or agent of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. 6.3 Insurance. The corporation may 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, partnership, joint venture, trust or other enterprise against any liability asserted against him or her and incurred by him or her in any such capacity, or arising out of his or her status as such, whether or not the corporation would have the power to indemnify him or her against such liability under the provisions of the General Corporation Law of Delaware. 6.4 Expenses. The corporation shall advance to any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he or she is or was a director or officer of the corporation, or is or was serving at the request of the corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, prior to the final disposition of the proceeding, promptly following request therefor, all expenses incurred by any director or officer in connection with such proceeding, upon receipt of an undertaking by or on behalf of such person to repay said amounts if it should be determined ultimately that such person is not entitled to be indemnified under this Bylaw or otherwise; provided, however, that the corporation shall not be required to advance expenses to any director or officer in connection with any proceeding (or part thereof) initiated by such person unless the proceeding was authorized in advance by the board of directors of the corporation. Notwithstanding the foregoing, unless otherwise determined pursuant to Section 6.5, no advance shall be made by the corporation to an officer of the corporation (except by reason of the fact that such officer is or was a director of the corporation in which event this paragraph shall not apply) in any action, suit or proceeding, whether civil, criminal, administrative or investigative, if a determination is reasonably and promptly made (i) by the board of directors by a majority vote of a quorum consisting of directors who were not parties to the proceeding, or (ii) if such quorum is not obtainable, or, even if obtainable, a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, that the facts known to the decision-making party at the time such determination is made demonstrate clearly and convincingly that such person acted in bad faith or in a manner that such person did not believe to be in or not opposed to the best interests of the corporation. 6.5 Non-Exclusivity of Rights. The rights conferred on any person by this Bylaw shall not be exclusive of any other right which such person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, Bylaws, agreement, vote of stockholders or 16 disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding office. The corporation is specifically authorized to enter into individual contracts with any or all of its directors, officers, employees or agents respecting indemnification and advances, to the fullest extent not prohibited by the General Corporation Law of Delaware. 6.6 Survival of Rights. The rights conferred on any person by this Bylaw shall continue as to a person who has ceased to be a director, officer, employee or other agent and shall inure to the benefit of the heirs, executors and administrators of such a person. 6.7 Amendments. Any repeal or modification of this Bylaw shall only be prospective and shall not affect the rights under this Bylaw in effect at the time of the alleged occurrence of any action or omission to act that is the cause of any proceeding against any agent of the corporation. ARTICLE VII RECORDS AND REPORTS 7.1 Maintenance and Inspection of Records. The corporation shall, either at its principal executive office or at such place or places as designated by the board of directors, keep a record of its stockholders listing their names and addresses and the number and class of shares held by each stockholder, a copy of these Bylaws as amended to date, accounting books and other records. Any stockholder of record, in person or by attorney or other agent, shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose the corporation's stock ledger, a list of its stockholders, and its other books and records and to make copies or extracts therefrom. A proper purpose shall mean a purpose reasonably related to such person's interest as a stockholder. In every instance where an attorney or other agent is the person who seeks the right to inspection, the demand under oath shall be accompanied by a power of attorney or such other writing that authorizes the attorney or other agent to so act on behalf of the stockholder. The demand under oath shall be directed to the corporation at its registered office in Delaware or at its principal place of business. 7.2 Inspection by Director. Any director shall have the right to examine the corporation's stock ledger, a list of its stockholders and its other books and records for a purpose reasonably related to his or her position as a director. The Court of Chancery is hereby vested with the exclusive jurisdiction to determine whether a director is entitled to the inspection sought. The Court may summarily order the corporation to permit the director to inspect any and all books and records, the stock ledger, and the stock list and to make copies or extracts therefrom. The Court may, in its discretion, prescribe any limitations or conditions with reference to the inspection, or award such other and further relief as the Court may deem just and proper. 7.3 Representation of Shares of Other Corporations. The president or any other officer of this corporation authorized by the board of directors is authorized to vote, represent, and exercise 17 on behalf of this corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of this corporation. The authority herein granted may be exercised either by such person directly or by any other person authorized to do so by proxy or power of attorney duly executed by such person having the authority. ARTICLE VIII GENERAL MATTERS 8.1 Record Date for Purposes Other than Notice and Voting. For purposes of determining the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any other lawful action, the board of directors may fix, in advance, a record date, which shall not be more than sixty (60) days before any such action. In that case, only stockholders of record at the close of business on the date so fixed are entitled to receive the dividend, distribution or allotment of rights, or to exercise such rights, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date so fixed, except as otherwise provided in the Certificate of Incorporation, by these Bylaws, by agreement or by law. If the board of directors does not so fix a record date, then the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the board adopts the applicable resolution or the sixtieth (60th) day before the date of that action, whichever is later. 8.2 Checks; Drafts; Evidences of Indebtedness. From time to time, the board of directors shall determine by resolution which person or persons may sign or endorse all checks, drafts, other orders for payment of money, notes or other evidences of indebtedness that are issued in the name of or payable to the corporation, and only the persons so authorized shall sign or endorse those instruments. 8.3 Corporate Contracts and Instruments; How Executed. The board of directors, except as otherwise provided in these Bylaws, may authorize any officer or officers, or agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation; such authority may be general or confined to specific instances. Unless so authorized or ratified by the board of directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. 8.4 Fiscal Year. The fiscal year of this corporation shall begin on the first day of November of each year and end on the last day of October of the following year. 8.5 Stock Certificates. There shall be issued to each holder of fully paid shares of the capital stock of the corporation a certificate or certificates for such shares. Every holder of shares of the corporation shall be entitled to have a certificate signed by, or in the name of the corporation by, the chairman or vice chairman of the board of directors, or the president or a vice president, and by 18 the treasurer or an assistant treasurer, or the secretary or an assistant secretary of such corporation representing the number of shares registered in certificate form. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate has ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he or she were such officer, transfer agent or registrar at the date of issue. 8.6 Special Designation on Certificates. If the corporation is authorized to issue more than one class of stock or more than one series of any class, then the powers, the designations, the preferences, and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate that the corporation shall issue to represent such class or series of stock; provided, however, that, except as otherwise provided in Section 202 of the General Corporation Law of Delaware, in lieu of the foregoing requirements there may be set forth on the face or back of the certificate that the corporation shall issue to represent such class or series of stock a statement that the corporation will furnish without charge to each stockholder who so requests the powers, the designations, the preferences, and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. 8.7 Lost Certificates. The corporation may issue a new share certificate or new certificate for any other security in the place of any certificate theretofore issued by it, alleged to have been lost, stolen or destroyed, and the corporation may require the owner of the lost, stolen or destroyed certificate or the owner's legal representative to give the corporation a bond (or other adequate security) sufficient to indemnify it against any claim that may be made against it (including any expense or liability) on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate. The board of directors may adopt such other provisions and restrictions with reference to lost certificates, not inconsistent with applicable law, as it shall in its discretion deem appropriate. 8.8 Construction; Definitions. Unless the context requires otherwise, the general provisions, rules of construction, and definitions in the General Corporation Law of Delaware shall govern the construction of these Bylaws. Without limiting the generality of this provision, the singular number includes the plural, the plural number includes the singular, and the term "person" includes both a corporation and a natural person. 8.9 Provisions Additional to Provisions of Law. All restrictions, limitations, requirements and other provisions of these Bylaws shall be construed, insofar as possible, as supplemental and additional to all provisions of law applicable to the subject matter thereof and shall be fully complied with in addition to the said provisions of law unless such compliance shall be illegal. 8.10 Provisions Contrary to Provisions of Law. Any article, section, subsection, subdivision, sentence, clause or phrase of these Bylaws which upon being construed in the manner provided in Section 8.9 hereof, shall be contrary to or inconsistent with any applicable provisions of law, shall not apply so long as said provisions of law shall remain in effect, but such result shall not 19 affect the validity or applicability of any other portions of these Bylaws, it being hereby declared that these Bylaws would have been adopted and each article, section, subsection, subdivision, sentence, clause or phrase thereof, irrespective of the fact that any one or more articles, sections, subsections, subdivisions, sentences, clauses or phrases is or are illegal. 8.11 Notices. Any reference in these Bylaws to the time a notice is given or sent means, unless otherwise expressly provided, the time a written notice by mail is deposited in the United States mails, postage prepaid; or the time any other written notice is personally delivered to the recipient or is delivered to a common carrier for transmission, or actually transmitted by the person giving the notice by electronic means, to the recipient; or the time any oral notice is communicated, in person or by telephone or wireless, to the recipient or to a person at the office of the recipient who the person giving the notice has reason to believe will promptly communicate it to the recipient. ARTICLE IX AMENDMENTS Subject to Section 6.7 hereof, the original or other bylaws of the corporation may be adopted, amended or repealed (1) at any annual or special meeting of stockholders, by the affirmative vote of the holders of a majority of the voting power of the stock issued and outstanding and entitled to vote thereat, provided, however, that any proposed alteration or repeal of, or the adoption of any By-Law inconsistent with, Section 2.2, 2.3, 2.5 or 2.11 of Article II of the By-Laws or with Section 3.2, 3.3, 3.4 or 3.5 of Article III of the By-Laws or this sentence, by the stockholders shall require the affirmative vote of the holders of at least 80% of the voting power of all Voting Stock then outstanding, voting together as a single class; and, provided, further, however, that in the case of any such stockholder action at a special meeting of stockholders, notice of the proposed alteration, repeal or adoption of the new By-Law or By-Laws must be contained in the notice of such special meeting, or (2) by the affirmative vote of a majority of the Board of Directors. The fact that the power to amend these By-Laws has been so conferred upon the directors shall not divest the stockholders of the power, nor limit their power to adopt, amend or repeal bylaws. Whenever an amendment or new bylaw is adopted, it shall be copied in the book of bylaws with the original bylaws, in the appropriate place. If any bylaw is repealed, the fact of repeal with the date of the meeting at which the repeal was enacted or the filing of the operative written consent(s) shall be stated in said book. 20 EX-5.1 7 OPINION OF WILSON SONSINI GOODRICH AND ROSATI EXHIBIT 5.1 ___________ ___, 2000 Palm, Inc. 5400 Bayfront Plaza Santa Clara, CA 95052-8145 Re: Registration Statement on Form S-1 Ladies and Gentlemen: We have examined the Registration Statement on Form S-1 filed by Palm, Inc., a Delaware corporation (the "Company") with the Securities and Exchange Commission on December 13, 1999 (as such may thereafter be amended or supplemented, the "Registration Statement") in connection with the registration under the Securities Act of 1933, as amended, of 26,450,000 shares of the Company's Common Stock, $.001 par value (the "Stock"). The Stock includes 23,000,000 shares to be issued and sold by the Company and an over-allotment option granted by the Company to the Underwriters to purchase 3,450,000 additional shares. We understand that the Stock is to be sold to the Underwriters for resale to the public as described in the Registration Statement. As the Company's legal counsel, we have examined the proceedings taken by the Company in connection with the issuance and sale by the Company of the Stock. It is our opinion that the Stock, when issued and sold in the manner referred to in the Registration Statement and in accordance with the resolutions adopted by the Board of Directors of the Company, will be duly authorized, legally and validly issued, fully paid and nonassessable. We consent to the use of this opinion as an exhibit to the Registration Statement and further consent to the use of our name wherever appearing in the Registration Statement, including the prospectus constituting a part thereof, and any amendments thereto. Very truly yours, WILSON SONSINI GOODRICH & ROSATI Professional Corporation EX-10.1 8 1999 STOCK PLAN EXHIBIT 10.1 PALM, INC. 1999 STOCK PLAN 1. Purposes of the Plan. The purposes of this 1999 Stock Plan are: -------------------- . to attract and retain the best available personnel for positions of substantial responsibility, . to provide additional incentive to Employees, Directors and Consultants, and . to promote the success of the Company's business. Options granted under the Plan may be Incentive Stock Options or Nonstatutory Stock Options, as determined by the Administrator at the time of grant. Stock Purchase Rights may also be granted under the Plan. 2. Definitions. As used herein, the following definitions shall apply: ----------- (a) "Administrator" means the Board or any of its Committees as shall ------------- be administering the Plan, in accordance with Section 4 of the Plan. (b) "Applicable Laws" means the requirements relating to the --------------- administration of stock option plans under U.S. state corporate laws, U.S. federal and state securities laws, the Code, any stock exchange or quotation system on which the Common Stock is listed or quoted and the applicable laws of any foreign country or jurisdiction where Options or Stock Purchase Rights are, or will be, granted under the Plan. (c) "Board" means the Board of Directors of the Company. ----- (d) "Cause" shall mean (i) an act of personal dishonesty taken by the ----- Optionee in connection with his or her responsibilities as a Service Provider and intended to result in substantial personal enrichment of the Optionee, (ii) Optionee being convicted of a felony, (iii) a willful act by the Optionee which constitutes gross misconduct and which is injurious to the Company, (iv) following delivery to the Optionee of a written demand for performance from the Company which describes the basis for the Company's reasonable belief that the Optionee has not substantially performed his duties, continued violations by the Optionee of the Optionee's obligations to the Company which are demonstrably willful and deliberate on the Optionee's part. (e) "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 Exchange Act) becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the 1 total voting power represented by the Company's then outstanding voting securities who is not already such as of the Effective Date; 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 out-standing or by being converted into voting securities of the surviving entity or its parent) at least fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity or its parent 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 Effective Date, 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. Notwithstanding the foregoing, in no event shall either or both of the following events constitute a Change of Control: (i) the initial public offering of the Company's securities pursuant to a registration statement filed under Section 12 of the Exchange Act or (ii) the spin-off of the Company from 3Com pursuant to one or more transactions in which 3Com distributes eighty percent (80%) or more of its securities ownership of the Company to the shareholders of 3Com. (f) "Code" means the Internal Revenue Code of 1986, as amended. ---- (g) "Committee" means a committee of Directors appointed by the --------- Board in accordance with Section 4 of the Plan. (h) "Common Stock" means the common stock of the Company. ------------ (i) "Company" means Palm, Inc., a Delaware corporation. ------- (j) "Consultant" means any person, including an advisor, engaged by ---------- the Company or a Parent or Subsidiary to render services to such entity. (k) "Director" means a member of the Board. -------- (l) "Disability" means total and permanent disability as defined in ---------- Section 22(e)(3) of the Code. (m) "Effective Date" means the effective date of this Plan as -------------- determined in accordance with Section 7. -2- (n) "Employee" means any person, including Officers and Directors, -------- employed by the Company or any Parent or Subsidiary of the Company. A Service Provider shall not cease to be an Employee in the case of (i) any leave of absence approved by the Company or (ii) transfers between locations of the Company or between the Company, its Parent, any Subsidiary, or any successor. For purposes of Incentive Stock Options, no such leave may exceed ninety days, unless reemployment upon expiration of such leave is guaranteed by statute or contract. If reemployment upon expiration of a leave of absence approved by the Company is not so guaranteed, then three (3) months following the 91st day of such leave any Incentive Stock Option held by the Optionee shall cease to be treated as an Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory Stock Option. Neither service as a Director nor payment of a director's fee by the Company shall be sufficient to constitute "employment" by the Company. (o) "Exchange Act" means the Securities Exchange Act of 1934, as ------------ amended. (p) "Fair Market Value" means, as of any date, the value of Common ----------------- Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system for the last market trading day prior to the time of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable; (ii) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a Share of Common Stock shall be the mean between the high bid and low asked prices for the Common Stock on the last market trading day prior to the day of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable; (iii) In the absence of an established market for the Common Stock, the Fair Market Value shall be determined in good faith by the Administrator; or (iv) For purposes of Option grants made on the effective date of the Company's initial public offering of Common Stock, the Fair Market Value shall be the initial price to the public as set forth in the final prospectus included with the registration on Form S-1 filed with the Securities and Exchange Commission for such offering. (q) "Incentive Stock Option" means an Option intended to qualify as ---------------------- an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder. (r) "Nonstatutory Stock Option" means an Option not intended to ------------------------- qualify as an Incentive Stock Option. -3- (s) "Notice of Grant" means a written or electronic notice --------------- evidencing certain terms and conditions of an individual Option or Stock Purchase Right grant. The Notice of Grant is part of the Option Agreement. (t) "Officer" means a person who is an officer of the Company within ------- the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. (u) "Option" means a stock option granted pursuant to the Plan. ------ (v) "Option Agreement" means an agreement between the Company and ---------------- an Optionee evidencing the terms and conditions of an individual Option grant. The Option Agreement is subject to the terms and conditions of the Plan. (w) "Option Exchange Program" means a program whereby outstanding ----------------------- Options are surrendered in exchange for Options with a lower exercise price. (x) "Optioned Stock" means the Common Stock subject to an Option or -------------- Stock Purchase Right. (y) "Optionee" means the holder of an outstanding Option or Stock -------- Purchase Right granted under the Plan. (z) "Parent" means a "parent corporation," whether now or hereafter ------ existing, as defined in Section 424(e) of the Code. (aa) "Plan" means this 1999 Stock Plan. ---- (bb) "Restricted Stock" means shares of Common Stock acquired ---------------- pursuant to a grant of Stock Purchase Rights under Section 11 of the Plan. (cc) "Restricted Stock Purchase Agreement" means a written agreement ----------------------------------- between the Company and the Optionee evidencing the terms and restrictions applying to stock purchased under a Stock Purchase Right. The Restricted Stock Purchase Agreement is subject to the terms and conditions of the Plan and the Notice of Grant. (dd) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any ---------- successor to Rule 16b-3, as in effect when discretion is being exercised with respect to the Plan. (ee) "Section 16(b) " means Section 16(b) of the Exchange Act. ------------- (ff) "Service Provider" means an Employee, Director or Consultant. In ---------------- addition, an individual who receives an award under this Plan while an Employee, Director or Consultant, and who ceases to be an Employee, Director or Consultant, but who remains an employee, director or consultant to 3Com shall be deemed Service Provider for purposes of this Plan. (gg) "Share" means a share of the Common Stock, as adjusted in ----- accordance with Section 13 of the Plan. -4- (hh) "Stock Purchase Right" means the right to purchase Common Stock -------------------- pursuant to Section 11 of the Plan, as evidenced by a Notice of Grant. (ii) "Subsidiary" means a "subsidiary corporation", whether now or ---------- hereafter existing, as defined in Section 424(f) of the Code. (jj) "3Com" means 3Com Corporation, a Delaware corporation. ---- 3. Stock Subject to the Plan. Subject to the provisions of Section 13 ------------------------- of the Plan, the maximum aggregate number of Shares that may be optioned and sold under the Plan is 20,000,000 Shares, plus an annual increase to be added the first day of the Company's fiscal year, beginning in fiscal 2001, equal to the lesser of (i) 25,000,000 shares, (ii) 5% of the outstanding shares of Common Stock on such date, or (iii) a lesser amount determined by the Board. The Shares may be authorized, but unissued, or reacquired Common Stock. If an Option or Stock Purchase Right expires or becomes unexercisable without having been exercised in full, or is surrendered pursuant to an Option Exchange Program, the unpurchased Shares which were subject thereto shall become available for future grant or sale under the Plan (unless the Plan has terminated); provided, however, that Shares that have actually been issued under -------- the Plan, whether upon exercise of an Option or Right, shall not be returned to the Plan and shall not become available for future distribution under the Plan, except that if Shares of Restricted Stock are repurchased by the Company at their original purchase price, such Shares shall become available for future grant under the Plan. 4. Administration of the Plan. -------------------------- (a) Procedure. --------- (i) Multiple Administrative Bodies. Different Committees with ------------------------------ respect to different groups of Service Providers may administer the Plan. (ii) Section 162(m). To the extent that the Administrator -------------- determines it to be desirable to qualify Options granted hereunder as "performance-based compensation" within the meaning of Section 162(m) of the Code, the Plan shall be administered by a Committee of two or more "outside directors" within the meaning of Section 162(m) of the Code. (iii) Rule 16b-3. To the extent desirable to qualify ---------- transactions hereunder as exempt under Rule 16b-3, the transactions contemplated hereunder shall be structured to satisfy the requirements for exemption under Rule 16b-3. (iv) Other Administration. Other than as provided above, the -------------------- Plan shall be administered by (A) the Board or (B) a Committee, which committee shall be constituted to satisfy Applicable Laws. (b) Powers of the Administrator. Subject to the provisions of the --------------------------- Plan, and in the case of a Committee, subject to the specific duties delegated by the Board to such Committee, the Administrator shall have the authority, in its discretion: -5- (i) to determine the Fair Market Value; (ii) to select the Employees, Directors and Consultants to whom Options and Stock Purchase Rights may be granted hereunder; (iii) to determine the number of shares of Common Stock to be covered by each Option and Stock Purchase Right granted hereunder; (iv) to approve forms of agreement for use under the Plan; (v) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any Option or Stock Purchase Right granted hereunder. Such terms and conditions include, but are not limited to, the exercise price, the time or times when Options or Stock Purchase Rights may be exercised (which may be based on performance criteria), any vesting acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Option or Stock Purchase Right or the shares of Common Stock relating thereto, based in each case on such factors as the Administrator, in its sole discretion, shall determine; (vi) to reduce the exercise price of any Option or Stock Purchase Right to the then current Fair Market Value if the Fair Market Value of the Common Stock covered by such Option or Stock Purchase Right shall have declined since the date the Option or Stock Purchase Right was granted; (vii) to institute an Option Exchange Program; (viii) to construe and interpret the terms of the Plan and awards granted pursuant to the Plan; (ix) to prescribe, amend and rescind rules and regulations relating to the Plan, including rules and regulations relating to sub-plans established for the purpose of qualifying for preferred treatment under foreign laws; (x) to modify or amend each Option or Stock Purchase Right (subject to Section 15(c) of the Plan), including the discretionary authority to extend the post-termination exercisability period of Options longer than is otherwise provided for in the Plan; (xi) to allow Optionees to satisfy withholding tax obligations by electing to have the Company withhold from the Shares to be issued upon exercise of an Option or Stock Purchase Right that number of Shares having a Fair Market Value equal to (or less than) the minimum amount required to be withheld. The Fair Market Value of the Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined. All elections by an Optionee to have Shares withheld for this purpose shall be made in such form and under such conditions as the Administrator may deem necessary or advisable; (xii) to authorize any person to execute on behalf of the Company any instrument required to effect the grant of an Option or Stock Purchase Right previously granted by the Administrator; -6- (xiii) to make all other determinations deemed necessary or advisable for administering the Plan. (c) Effect of Administrator's Decision. The Administrator's ---------------------------------- decisions, determinations and interpretations shall be final and binding on all Optionees and any other holders of Options or Stock Purchase Rights. 5. Eligibility. Nonstatutory Stock Options and Stock Purchase Rights ----------- may be granted to Employees, Directors or Consultants. Incentive Stock Options may be granted only to Employees. 6. Limitations. ----------- (a) Each Option shall be designated in the Option Agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such designation, to the extent that the aggregate Fair Market Value of the Shares with respect to which Incentive Stock Options are exercisable for the first time by the Optionee during any calendar year (under all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such Options shall be treated as Nonstatutory Stock Options. For purposes of this Section 6(a), Incentive Stock Options shall be taken into account in the order in which they were granted. The Fair Market Value of the Shares shall be determined as of the time the Option with respect to such Shares is granted. (b) Neither the Plan nor any Option or Stock Purchase Right shall confer upon an Optionee any right with respect to continuing the Optionee's relationship as a Service Provider, nor shall they interfere in any way with the Optionee's right or the Company's or 3Com's right, as applicable, to terminate such relationship at any time, with or without cause. (c) The following limitations shall apply to grants of Options: (i) No Service Provider shall be granted, in any fiscal year of the Company, Options to purchase more than 3,000,000 Shares. (ii) In connection with his or her initial service, a Service Provider may be granted Options to purchase up to an additional 6,000,000 Shares, which shall not count against the limit set forth in subsection (i) above. (iii) The foregoing limitations shall be adjusted proportionately in connection with any change in the Company's capitalization as described in Section 13. (iv) If an Option is cancelled in the same fiscal year of the Company in which it was granted (other than in connection with a transaction described in Section 13), the cancelled Option will be counted against the limits set forth in subsections (i) and (ii) above. For this purpose, if the exercise price of an Option is reduced, the transaction will be treated as a cancellation of the Option and the grant of a new Option. 7. Term of Plan. Subject to Section 19 of the Plan, the Plan shall ------------ become effective upon its adoption by the Board. It shall continue in effect for a term of ten (10) years unless terminated earlier under Section 15 of the Plan. -7- 8. Term of Option. The term of each Option shall be stated in the -------------- Option Agreement. In the case of an Incentive Stock Option, the term shall be ten (10) years from the date of grant or such shorter term as may be provided in the Option Agreement. Moreover, in the case of an Incentive Stock Option granted to an Optionee who, at the time the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Incentive Stock Option shall be five (5) years from the date of grant or such shorter term as may be provided in the Option Agreement. 9. Option Exercise Price and Consideration. --------------------------------------- (a) Exercise Price. The per share exercise price for the Shares -------------- to be issued pursuant to exercise of an Option shall be determined by the Administrator, subject to the following: (i) In the case of an Incentive Stock Option (A) granted to an Employee who, at the time the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant. (B) granted to any Employee other than an Employee described in paragraph (A) immediately above, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant. (ii) In the case of a Nonstatutory Stock Option, the per Share exercise price shall be determined by the Administrator. In the case of a Nonstatutory Stock Option intended to qualify as "performance-based compensation" within the meaning of Section 162(m) of the Code, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant. (iii) Notwithstanding the foregoing, Options may be granted with a per Share exercise price of less than 100% of the Fair Market Value per Share on the date of grant pursuant to a merger or other corporate transaction. (b) Waiting Period and Exercise Dates. At the time an Option --------------------------------- is granted, the Administrator shall fix the period within which the Option may be exercised and shall determine any conditions that must be satisfied before the Option may be exercised. (c) Form of Consideration. The Administrator shall determine --------------------- the acceptable form of consideration for exercising an Option, including the method of payment. In the case of an Incentive Stock Option, the Administrator shall determine the acceptable form of consideration at the time of grant. Such consideration may consist entirely of: (i) cash; (ii) check; -8- (iii) promissory note; (iv) other Shares which (A) in the case of Shares acquired upon exercise of an option, have been owned by the Optionee for more than six months on the date of surrender, and (B) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised; (v) consideration received by the Company under a cashless exercise program implemented by the Company in connection with the Plan; (vi) a reduction in the amount of any Company liability to the Optionee, including any liability attributable to the Optionee's participation in any Company-sponsored deferred compensation program or arrangement; (vii) any combination of the foregoing methods of payment; or (viii) such other consideration and method of payment for the issuance of Shares to the extent permitted by Applicable Laws. 10. Exercise of Option. ------------------ (a) Procedure for Exercise; Rights as a Shareholder. Any ----------------------------------------------- Option granted hereunder shall be exercisable according to the terms of the Plan and at such times and under such conditions as determined by the Administrator and set forth in the Option Agreement. Unless the Administrator provides otherwise, vesting of Options granted hereunder shall be tolled during any unpaid leave of absence. An Option may not be exercised for a fraction of a Share. An Option shall be deemed exercised when the Company receives: (i) written or electronic notice of exercise (in accordance with the Option Agreement) from the person entitled to exercise the Option, and (ii) full payment for the Shares with respect to which the Option is exercised. Full payment may consist of any consideration and method of payment authorized by the Administrator and permitted by the Option Agreement and the Plan. Shares issued upon exercise of an Option shall be issued in the name of the Optionee or, if requested by the Optionee, in the name of the Optionee and his or her spouse. Until the Shares are issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such Shares promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Shares are issued, except as provided in Section 13 of the Plan. Exercising an Option in any manner shall decrease the number of Shares thereafter available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (b) Termination of Relationship as a Service Provider. If an ------------------------------------------------- Optionee ceases to be a Service Provider, other than upon the Optionee's death or Disability, the Optionee may exercise -9- his or her Option within such period of time as is specified in the Option Agreement to the extent that the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement). In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for three (3) months following the Optionee's termination. If, on the date of termination, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified by the Administrator, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (c) Disability of Optionee. If an Optionee ceases to be a ---------------------- Service Provider as a result of the Optionee's Disability, the Optionee may exercise his or her Option within such period of time as is specified in the Option Agreement to the extent the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement). In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for twelve (12) months following the Optionee's termination. If, on the date of termination, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (d) Death of Optionee. If an Optionee dies while a Service ----------------- Provider, the Option may be exercised within such period of time as is specified in the Option Agreement (but in no event later than the expiration of the term of such Option as set forth in the Notice of Grant) but only to the extent that the Option is vested on the date of death. In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for twelve (12) months following the Optionee's death. The Option may be exercised by the Optionee's designated beneficiary, provided such beneficiary has been designated prior to Optionee's death in a form acceptable by the Administrator. If no such beneficiary has been designated by the Optionee, then such Option may be exercised within the applicable time period by the personal representative of the Optionee's estate or by the person or persons to whom the Option is transferred pursuant to the Optionee's will or in accordance with the laws of descent and distribution. If, at the time of death, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall immediately revert to the Plan. If the Option is not so exercised within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (e) Buyout Provisions. The Administrator may at any time offer ----------------- to buy out for a payment in cash or Shares an Option previously granted based on such terms and conditions as the Administrator shall establish and communicate to the Optionee at the time that such offer is made. 11. Stock Purchase Rights. --------------------- (a) Rights to Purchase. Stock Purchase Rights may be issued ------------------ either alone, in addition to, or in tandem with other awards granted under the Plan and/or cash awards made outside of the Plan; provided, however that in no event may Stock Purchase Rights be issued in any fiscal year of the Company for more than ten percent (10%) of the total Shares available for issuance -10- hereunder, in the aggregate, on the first day of such fiscal year. After the Administrator determines that it will offer Stock Purchase Rights under the Plan, it shall advise the offeree in writing or electronically, by means of a Notice of Grant, of the terms, conditions and restrictions related to the offer, including the number of Shares that the offeree shall be entitled to purchase, the price to be paid, and the time within which the offeree must accept such offer. The offer shall be accepted by execution of a Restricted Stock Purchase Agreement in the form determined by the Administrator. (b) Repurchase Option. Unless the Administrator determines ----------------- otherwise, the Restricted Stock Purchase Agreement shall grant the Company a repurchase option exercisable upon the voluntary or involuntary termination of the purchaser's service with the Company for any reason (including death or Disability). The purchase price for Shares repurchased pursuant to the Restricted Stock Purchase Agreement shall be the original price paid by the purchaser and may be paid by cancellation of any indebtedness of the purchaser to the Company. The repurchase option shall lapse at a rate determined by the Administrator. (c) Other Provisions. The Restricted Stock Purchase Agreement ---------------- shall contain such other terms, provisions and conditions not inconsistent with the Plan as may be determined by the Administrator in its sole discretion. (d) Rights as a Shareholder. Once the Stock Purchase Right is ----------------------- exercised, the purchaser shall have the rights equivalent to those of a shareholder, and shall be a shareholder when his or her purchase is entered upon the records of the duly authorized transfer agent of the Company. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Stock Purchase Right is exercised, except as provided in Section 13 of the Plan. 12. Transferability of Options and Stock Purchase Rights. Unless ---------------------------------------------------- determined otherwise by the Administrator, an Option or Stock Purchase Right may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. If the Administrator makes an Option or Stock Purchase Right transferable, such Option or Stock Purchase Right shall contain such additional terms and conditions as the Administrator deems appropriate. 13. Adjustments Upon Changes in Capitalization, Dissolution, Merger --------------------------------------------------------------- or Asset Sale. - ------------- (a) Changes in Capitalization. Subject to any required action ------------------------- by the shareholders of the Company, the number of shares of Common Stock which have been authorized for issuance under the Plan, including Shares as to which no Options or Stock Purchase Rights have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option or Stock Purchase Right, the number of Shares that may be added annually to the Shares reserved under the Plan (pursuant to Section 3(i)), and the number of shares of Common Stock covered by each outstanding Option and Stock Purchase Right, as well as the price per share of Common Stock covered by each such outstanding Option or Stock Purchase Right, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without -11- receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option or Stock Purchase Right. (b) Dissolution or Liquidation. In the event of the proposed -------------------------- dissolution or liquidation of the Company, the Administrator shall notify each Optionee as soon as practicable prior to the effective date of such proposed transaction. The Administrator in its discretion may provide for an Optionee to have the right to exercise his or her Option until ten (10) days prior to such transaction as to all of the Optioned Stock covered thereby, including Shares as to which the Option would not otherwise be exercisable. In addition, the Administrator may provide that any Company repurchase option applicable to any Shares purchased upon exercise of an Option or Stock Purchase Right shall lapse as to all such Shares, provided the proposed dissolution or liquidation takes place at the time and in the manner contemplated. To the extent it has not been previously exercised, an Option or Stock Purchase Right will terminate immediately prior to the consummation of such proposed action. (c) Merger or Asset Sale. In the event of a merger of the -------------------- Company with or into another corporation, or the sale of substantially all of the assets of the Company, each outstanding Option and Stock Purchase Right shall be assumed or an equivalent option or right substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. In the event that the successor corporation refuses to assume or substitute for the Option or Stock Purchase Right, the Optionee shall fully vest in and have the right to exercise the Option or Stock Purchase Right as to all of the Optioned Stock, including Shares as to which it would not otherwise be vested or exercisable. If an Option or Stock Purchase Right becomes fully vested and exercisable in lieu of assumption or substitution in the event of a merger or sale of assets, the Administrator shall notify the Optionee in writing or electronically that the Option or Stock Purchase Right shall be fully vested and exercisable for a period of fifteen (15) days from the date of such notice, and the Option or Stock Purchase Right shall terminate upon the expiration of such period. For the purposes of this paragraph, the Option or Stock Purchase Right shall be considered assumed if, following the merger or sale of assets, the option or right confers the right to purchase or receive, for each Share of Optioned Stock subject to the Option or Stock Purchase Right immediately prior to the merger or sale of assets, the consideration (whether stock, cash, or other securities or property) received in the merger or sale of assets by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the merger or sale of assets is not solely common stock of the successor corporation or its Parent, the Administrator may, with the consent of the successor corporation, provide for the consideration to be received upon the exercise of the Option or Stock Purchase Right, for each Share of Optioned Stock subject to the Option or Stock Purchase Right, to be solely common stock of the successor corporation or its Parent equal in fair market value to the per share consideration received by holders of Common Stock in the merger or sale of assets. -12- Notwithstanding the foregoing, if an Optionee's status as a Service Provider is terminated for reasons other than Cause within twelve (12) months following a Change of Control, then the vesting and exercisability of each of the Optionee's outstanding Options and Stock Purchase Rights shall partially accelerate upon such termination with respect to fifty percent (50%) of the then unvested Shares subject to or acquired under each such Option or Stock Purchase Right. 14. Date of Grant. The date of grant of an Option or Stock Purchase ------------- Right shall be, for all purposes, the date on which the Administrator makes the determination granting such Option or Stock Purchase Right, or such other later date as is determined by the Administrator. Notice of the determination shall be provided to each Optionee within a reasonable time after the date of such grant. 15. Amendment and Termination of the Plan. ------------------------------------- (a) Amendment and Termination. The Board may at any time amend, ------------------------- alter, suspend or terminate the Plan. (b) Shareholder Approval. The Company shall obtain shareholder -------------------- approval of any Plan amendment to the extent necessary and desirable to comply with Applicable Laws. (c) Effect of Amendment or Termination. No amendment, ---------------------------------- alteration, suspension or termination of the Plan shall impair the rights of any Optionee, unless mutually agreed otherwise between the Optionee and the Administrator, which agreement must be in writing and signed by the Optionee and the Company. Termination of the Plan shall not affect the Administrator's ability to exercise the powers granted to it hereunder with respect to Options granted under the Plan prior to the date of such termination. 16. Conditions Upon Issuance of Shares. ---------------------------------- (a) Legal Compliance. Shares shall not be issued pursuant to ---------------- the exercise of an Option or Stock Purchase Right unless the exercise of such Option or Stock Purchase Right and the issuance and delivery of such Shares shall comply with Applicable Laws and shall be further subject to the approval of counsel for the Company with respect to such compliance. (b) Investment Representations. As a condition to the exercise -------------------------- of an Option or Stock Purchase Right, the Company may require the person exercising such Option or Stock Purchase Right to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required. 17. Inability to Obtain Authority. The inability of the Company to ----------------------------- obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. -13- 18. Reservation of Shares. The Company, during the term of this --------------------- Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. 19. Shareholder Approval. The Plan shall be subject to approval by -------------------- the shareholders of the Company within twelve (12) months after the date the Plan is adopted. Such shareholder approval shall be obtained in the manner and to the degree required under Applicable Laws. -14- EX-10.2 9 FORM OF 1999 STOCK PLAN AGREEMENTS EXHIBIT 10.2 PALM, INC. 1999 STOCK PLAN FORM OF STOCK OPTION AGREEMENT Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Option Agreement. I. NOTICE OF STOCK OPTION GRANT ---------------------------- [Optionee's Name and Address] You have been granted an option to purchase Common Stock of the Company, subject to the terms and conditions of the Plan and this Option Agreement, as follows: Grant Number _________________________________ Date of Grant _________________________________ Vesting Commencement Date _________________________________ Exercise Price per Share $________________________________ Total Number of Shares Granted _________________________________ Total Exercise Price $________________________________ Type of Option: ___ Incentive Stock Option ___ Nonstatutory Stock Option Term/Expiration Date: _________________________________ Vesting Schedule: ---------------- Subject to accelerated vesting as set forth below, this Option may be exercised, in whole or in part, in accordance with the following schedule: [25% of the Shares subject to the Option shall vest twelve months after the Vesting Commencement Date, and 1/48 of the Shares subject to the Option shall vest each month thereafter, subject to the Optionee continuing to be a Service Provider on such dates]. -1- Termination Period: ------------------ This Option may be exercised for [three months] after Optionee ceases to be a Service Provider. Upon the death or Disability of the Optionee, this Option may be exercised for [twelve months] after Optionee ceases to be a Service Provider. In no event shall this Option be exercised later than the Term/Expiration Date as provided above. II. AGREEMENT --------- A. Grant of Option. --------------- The Plan Administrator of the Company hereby grants to the Optionee named in the Notice of Grant attached as Part I of this Agreement (the "Optionee") an option (the "Option") to purchase the number of Shares, as set forth in the Notice of Grant, at the exercise price per share set forth in the Notice of Grant (the "Exercise Price"), subject to the terms and conditions of the Plan, which is incorporated herein by reference. Subject to Section 15(c) of the Plan, in the event of a conflict between the terms and conditions of the Plan and the terms and conditions of this Option Agreement, the terms and conditions of the Plan shall prevail. If designated in the Notice of Grant as an Incentive Stock Option ("ISO"), this Option is intended to qualify as an Incentive Stock Option under Section 422 of the Code. However, if this Option is intended to be an Incentive Stock Option, to the extent that it exceeds the $100,000 rule of Code Section 422(d) it shall be treated as a Nonstatutory Stock Option ("NSO"). B. Exercise of Option. ------------------ (a) Right to Exercise. This Option is exercisable during its term in ----------------- accordance with the Vesting Schedule set out in the Notice of Grant and the applicable provisions of the Plan and this Option Agreement. (b) Method of Exercise. This Option is exercisable by delivery of ------------------ an exercise notice, in the form attached as Exhibit A (the "Exercise Notice"), which shall state the election to exercise the Option, the number of Shares in respect of which the Option is being exercised (the "Exercised Shares"), and such other representations and agreements as may be required by the Company pursuant to the provisions of the Plan. The Exercise Notice shall be completed by the Optionee and delivered to the Company. The Exercise Notice shall be accompanied by payment of the aggregate Exercise Price as to all Exercised Shares. This Option shall be deemed to be exercised upon receipt by the Company of such fully executed Exercise Notice accompanied by such aggregate Exercise Price. No Shares shall be issued pursuant to the exercise of this Option unless such issuance and exercise complies with Applicable Laws. Assuming such compliance, for income tax purposes the Exercised Shares shall be considered transferred to the Optionee on the date the Option is exercised with respect to such Exercised Shares. -2- C. Method of Payment. ----------------- Payment of the aggregate Exercise Price shall be by any of the following, or a combination thereof, at the election of the Optionee: 1. cash; or 2. check; or 3. consideration received by the Company under a cashless exercise program implemented by the Company in connection with the Plan; or 4. surrender of other Shares which (i) in the case of Shares acquired upon exercise of an option, have been owned by the Optionee for more than six (6) months on the date of surrender, and (ii) have a Fair Market Value on the date of surrender equal to the aggregate Exercise Price of the Exercised Shares. D. Non-Transferability of Option. ----------------------------- This Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of Optionee only by the Optionee. The terms of the Plan and this Option Agreement shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee. E. Term of Option. -------------- This Option may be exercised only within the term set out in the Notice of Grant, and may be exercised during such term only in accordance with the Plan and the terms of this Option Agreement. F. Tax Consequences. ---------------- Some of the federal tax consequences relating to this Option, as of the date of this Option, are set forth below. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. THE OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES. 1. Exercising the Option. --------------------- (a) Nonstatutory Stock Option. The Optionee may incur regular ------------------------- federal income tax liability upon exercise of a NSO. The Optionee will be treated as having received compensation income (taxable at ordinary income tax rates) equal to the excess, if any, of the Fair Market Value of the Exercised Shares on the date of exercise over their aggregate Exercise Price. If the Optionee is an Employee or a former Employee, the Company will be required to withhold from his or her compensation or collect from Optionee and pay to the applicable taxing authorities an amount in cash equal to a percentage of this compensation income at the time of exercise, and may refuse to honor the exercise and refuse to deliver Shares if such withholding amounts are not delivered at the time of exercise. -3- (b) Incentive Stock Option. If this Option qualifies as an ISO, ---------------------- the Optionee will have no regular federal income tax liability upon its exercise, although the excess, if any, of the Fair Market Value of the Exercised Shares on the date of exercise over their aggregate Exercise Price will be treated as an adjustment to alternative minimum taxable income for federal tax purposes and may subject the Optionee to alternative minimum tax in the year of exercise. In the event that the Optionee ceases to be an Employee but remains a Service Provider, any Incentive Stock Option of the Optionee that remains unexercised shall cease to qualify as an Incentive Stock Option and will be treated for tax purposes as a Nonstatutory Stock Option on the date three (3) months and one (1) day following such change of status. 2. Disposition of Shares. --------------------- (a) NSO. If the Optionee holds NSO Shares for at least one year, --- any gain realized on disposition of the Shares will be treated as long-term capital gain for federal income tax purposes. (b) ISO. If the Optionee holds ISO Shares for at least one year --- after exercise and two years after the grant date, any gain realized on disposition of the Shares will be treated as long-term capital gain for federal income tax purposes. If the Optionee disposes of ISO Shares within one year after exercise or two years after the grant date, any gain realized on such disposition will be treated as compensation income (taxable at ordinary income rates) to the extent of the excess, if any, of the lesser of (A) the difference between the Fair Market Value of the Shares acquired on the date of exercise and the aggregate Exercise Price, or (B) the difference between the sale price of such Shares and the aggregate Exercise Price. Any additional gain will be taxed as capital gain, short-term or long-term depending on the period that the ISO Shares were held. (c) Notice of Disqualifying Disposition of ISO Shares. If the ------------------------------------------------- Optionee sells or otherwise disposes of any of the Shares acquired pursuant to an ISO on or before the later of (i) two years after the grant date, or (ii) one year after the exercise date, the Optionee shall immediately notify the Company in writing of such disposition. The Optionee agrees that he or she may be subject to income tax withholding by the Company on the compensation income recognized from such early disposition of ISO Shares by payment in cash or out of the current earnings paid to the Optionee. G. Entire Agreement; Governing Law. ------------------------------- The Plan is incorporated herein by reference. The Plan and this Option Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and Optionee with respect to the subject matter hereof, and may not be modified adversely to the Optionee's interest except by means of a writing signed by the Company and Optionee. The internal substantive laws, but not the choice of law rules, of Delaware govern this agreement. H. NO GUARANTEE OF CONTINUED SERVICE. --------------------------------- OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (AND NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED AN OPTION OR PURCHASING -4- SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL NOT INTERFERE WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE OPTIONEE'S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR WITHOUT CAUSE. By your signature and the signature of the Company's representative below, you and the Company agree that this Option is granted under and governed by the terms and conditions of the Plan and this Option Agreement. Optionee has reviewed the Plan and this Option Agreement in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Option Agreement and fully understands all provisions of the Plan and Option Agreement. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Administrator upon any questions relating to the Plan and Option Agreement. Optionee further agrees to notify the Company upon any change in the residence address indicated below. OPTIONEE: PALM, INC. ____________________________ _______________________________ Signature By ____________________________ _______________________________ Print Name Title ____________________________ Residence Address ____________________________ -5- EXHIBIT A --------- PALM, INC. 1999 STOCK PLAN EXERCISE NOTICE Palm, Inc. [address] Attention: [Title] 1. Exercise of Option. Effective as of today, ________________, _____, ------------------ the undersigned ("Purchaser") hereby elects to purchase ______________ shares (the "Shares") of the Common Stock of Palm, Inc. (the "Company") under and pursuant to the 1999 Stock Plan (the "Plan") and the Stock Option Agreement dated, _____ (the "Option Agreement"). The purchase price for the Shares shall be $_____, as required by the Option Agreement. 2. Delivery of Payment. Purchaser herewith delivers to the Company the ------------------- full purchase price for the Shares. 3. Representations of Purchaser. Purchaser acknowledges that Purchaser ---------------------------- has received, read and understood the Plan and the Option Agreement and agrees to abide by and be bound by their terms and conditions. 4. Rights as Shareholder. Until the issuance (as evidenced by the --------------------- appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the Shares, no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Shares so acquired shall be issued to the Optionee as soon as practicable after exercise of the Option. No adjustment will be made for a dividend or other right for which the record date is prior to the date of issuance, except as provided in Section 13 of the Plan. 5. Tax Consultation. Purchaser understands that Purchaser may suffer ---------------- adverse tax consequences as a result of Purchaser's purchase or disposition of the Shares. Purchaser represents that Purchaser has consulted with any tax consultants Purchaser deems advisable in connection with the purchase or disposition of the Shares and that Purchaser is not relying on the Company for any tax advice. 6. Entire Agreement; Governing Law. The Plan and Option Agreement are ------------------------------- incorporated herein by reference. This Agreement, the Plan and the Option Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and Purchaser with respect to the subject matter hereof, and may not be modified adversely to the Purchaser's interest except by means of a writing signed by the Company and Purchaser. The internal substantive laws, but not the choice of law rules, of [Delaware] govern this agreement. Submitted by: Accepted by: PURCHASER: PALM, INC. ______________________________ ________________________________ Signature By ______________________________ ________________________________ Print Name Its Address: Address: - ------- ------- ______________________________ PALM, INC. ______________________________ [address] ________________________________ Date Received EX-10.3 10 1999 EMPLOYEE STOCK PURCHASE PLAN EXHIBIT 10.3 PALM, INC. 1999 EMPLOYEE STOCK PURCHASE PLAN The following constitute the provisions of the 1999 Employee Stock Purchase Plan of Palm, Inc. 1. Purpose. The purpose of the Plan is to provide employees of the ------- Company and its Designated Subsidiaries with an opportunity to purchase Common Stock of the Company through accumulated payroll deductions. It is the intention of the Company to have the Plan qualify as an "Employee Stock Purchase Plan" under Section 423 of the Internal Revenue Code of 1986, as amended. The provisions of the Plan, accordingly, shall be construed so as to extend and limit participation in a manner consistent with the requirements of that section of the Code. 2. Definitions. ----------- (a) "Board" shall mean the Board of Directors of the Company or any ----- committee thereof designated by the Board of Directors of the Company in accordance with Section 14 of the Plan. (b) "Code" shall mean the Internal Revenue Code of 1986, as amended. ---- (c) "Common Stock" shall mean the common stock of the Company. ------------ (d) "Company" shall mean Palm, Inc. and any Designated Subsidiary of ------- the Company. (e) "Compensation" shall mean all base straight time gross earnings ------------ and commissions, but exclusive of payments for overtime, shift premium, incentive compensation, incentive payments, bonuses and other compensation. (f) "Designated Subsidiary" shall mean any Subsidiary that has been --------------------- designated by the Board from time to time in its sole discretion as eligible to participate in the Plan. (g) "Employee" shall mean any individual who is an Employee of the -------- Company for tax purposes whose customary employment with the Company is at least twenty (20) hours per week and more than five (5) months in any calendar year. For purposes of the Plan, the employment relationship shall be treated as continuing intact while the individual is on sick leave or other leave of absence approved by the Company. Where the period of leave exceeds 90 days and the individual's right to reemployment is not guaranteed either by statute or by contract, the employment relationship shall be deemed to have terminated on the 91st day of such leave. (h) "Enrollment Date" shall mean the first Trading Day of each --------------- Offering Period. (i) "Exercise Date" shall mean the last Trading Day of each Purchase ------------- Period. -1- (j) "Fair Market Value" shall mean, as of any date, the value of ----------------- Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system for the last market trading day prior to the date of determination, as reported in The Wall Street Journal or such other source as the Board deems reliable; (ii) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, its Fair Market Value shall be the mean of the closing bid and asked prices for the Common Stock prior to the date of determination, as reported in The Wall Street Journal or such other source as the Board deems reliable; (iii) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Board; or (iv) For purposes of the Enrollment Date of the first Offering Period under the Plan, the Fair Market Value shall be the initial price to the public as set forth in the final prospectus included with the registration statement on Form S-1 filed with the Securities and Exchange Commission for the initial public offering of the Company's Common Stock (the "Registration Statement"). (k) "Offering Periods" shall mean the periods of approximately ---------------- twenty-four (24) months during which an option granted pursuant to the Plan may be exercised, commencing on the first Trading Day on or after April 1 and October 1 of each year and terminating on the last Trading Day in the periods ending twenty-four months later; provided, however, that the first Offering Period under the Plan shall commence with the first Trading Day on or after the date on which the Securities and Exchange Commission declares the Company's Registration Statement effective and ending on the last Trading Day on or before March 31, 2002. If a new Offering Period is established in accordance with Section 24, the new Offering Period shall commence on the last Exercise Date of the immediately preceding Offering Period following the exercise of options on such Exercise Date. The duration and timing of Offering Periods may be changed pursuant to Section 4 of this Plan. (l) "Parent" shall mean a "parent corporation," whether now or ------ hereafter existing, as defined in Section 424(e) of the Code. (m) "Plan" shall mean this 1999 Employee Stock Purchase Plan. ---- (n) "Purchase Period" shall mean the approximately six month period --------------- commencing after one Exercise Date and ending with the next Exercise Date, except that the first Purchase Period of any Offering Period shall commence on the Enrollment Date and end with the next Exercise Date. (o) "Purchase Price" shall mean 85% of the Fair Market Value of a -------------- share of Common Stock on the Enrollment Date or on the Exercise Date, whichever is lower; provided however, that the Purchase Price may be adjusted by the Board pursuant to Section 20. -2- (p) "Reserves" shall mean the number of shares of Common Stock -------- covered by each option under the Plan which have not yet been exercised and the number of shares of Common Stock which have been authorized for issuance under the Plan but not yet placed under option. (q) "Subsidiary" shall mean a corporation, domestic or foreign, of ---------- which not less than 50% of the voting shares are held by the Company or a Subsidiary, whether or not such corporation now exists or is hereafter organized or acquired by the Company or a Subsidiary. (r) "Trading Day" shall mean a day on which national stock exchanges ----------- and the Nasdaq System are open for trading. 3. Eligibility. ----------- (a) Any Employee who shall be employed by the Company on a given Enrollment Date shall be eligible to participate in the Plan. (b) Any provisions of the Plan to the contrary notwithstanding, no Employee shall be granted an option under the Plan (i) to the extent that, immediately after the grant, such Employee (or any other person whose stock would be attributed to such Employee pursuant to Section 424(d) of the Code) would own capital stock of the Company or any Parent or Subsidiary and/or hold outstanding options to purchase such stock possessing five percent (5%) or more of the total combined voting power or value of all classes of the capital stock of the Company or any Parent or Subsidiary, or (ii) to the extent that his or her rights to purchase stock under all employee stock purchase plans of the Company, any Parent and Subsidiary accrues at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) worth of stock (determined at the fair market value of the shares at the time such option is granted) for each calendar year in which such option is outstanding at any time. 4. Offering Periods. The Plan shall be implemented by consecutive, ---------------- overlapping Offering Periods with a new Offering Period commencing on the first Trading Day on or after April 1 and October 1 each year, or on such other date as the Board shall determine, and continuing thereafter until terminated in accordance with Section 20 hereof; provided, however, that the first Offering Period under the Plan shall commence with the first Trading Day on or after the date on which the Securities and Exchange Commission declares the Company's Registration Statement effective and ending on the last Trading Day on or before March 31, 2002. If a new Offering Period is established in accordance with Section 24, the new Offering Period shall commence on the last Exercise Date of the immediately preceding Offering Period following the exercise of options on such Exercise Date. The Board shall have the power to change the duration of Offering Periods (including the commencement dates thereof) with respect to future offerings without shareholder approval if such change is announced at least five (5) days prior to the scheduled beginning of the first Offering Period to be affected thereafter. -3- 5. Participation. ------------- (a) An eligible Employee may become a participant in the Plan by completing a subscription agreement authorizing payroll deductions in the form of Exhibit A to this Plan and filing it with the Company's payroll office prior to the applicable Enrollment Date. (b) Payroll deductions for a participant shall commence on the first payroll following the Enrollment Date and shall end on the last payroll in the Offering Period to which such authorization is applicable, unless sooner terminated by the participant as provided in Section 10 hereof. 6. Payroll Deductions. ------------------ (a) At the time a participant files his or her subscription agreement, he or she shall elect to have payroll deductions made on each pay day during the Offering Period in an amount not exceeding ten percent (10%) of the Compensation which he or she receives on each pay day during the Offering Period. However, if the percentage of a participant's Compensation deducted for purposes of this Plan and all other plans of the Company, any Parent and Subsidiary, that are intended to qualify as an "employee stock purchase plans" under Section 423 of the Code exceeds ten percent (10%), then the percentage of Compensation deducted for purposes of this Plan shall be reduced such that the participant's percentage of Compensation deducted under all such plans that qualify under Section 423 of the Code does not exceed ten percent (10%) of the Compensation which the participant receives on each pay day during the Offering Period. (b) All payroll deductions made for a participant shall be credited to his or her account under the Plan and shall be withheld in whole percentages only. A participant may not make any additional payments into such account. (c) A participant may discontinue his or her participation in the Plan as provided in Section 10 hereof, or may increase or decrease the rate of his or her payroll deductions during the Offering Period by completing or filing with the Company a new subscription agreement authorizing a change in payroll deduction rate. The Board may, in its discretion, limit the number of participation rate changes during any Offering Period. The change in rate shall be effective with the first full payroll period following five (5) business days after the Company's receipt of the new subscription agreement unless the Company elects to process a given change in participation more quickly. A participant's subscription agreement shall remain in effect for successive Offering Periods unless terminated as provided in Section 10 hereof. (d) Notwithstanding the foregoing, to the extent necessary to comply with Section 423(b)(8) of the Code and Section 3(b) hereof, a participant's payroll deductions may be decreased to zero percent (0%) at any time during a Purchase Period. Payroll deductions shall recommence at the rate provided in such participant's subscription agreement at the beginning of the first Purchase Period which is scheduled to end in the following calendar year, unless terminated by the participant as provided in Section 10 hereof. (e) At the time the option is exercised, in whole or in part, or at the time some or all of the Company's Common Stock issued under the Plan is disposed of, the participant must make adequate provision for the Company's federal, state, or other tax withholding obligations, if any, -4- which arise upon the exercise of the option or the disposition of the Common Stock. At any time, the Company may, but shall not be obligated to, withhold from the participant's compensation the amount necessary for the Company to meet applicable withholding obligations, including any withholding required to make available to the Company any tax deductions or benefits attributable to sale or early disposition of Common Stock by the Employee. 7. Grant of Option. On the Enrollment Date of each Offering Period, each --------------- eligible Employee participating in such Offering Period shall be granted an option to purchase on each Exercise Date during such Offering Period (at the applicable Purchase Price) up to a number of shares of the Company's Common Stock determined by dividing such Employee's payroll deductions accumulated prior to such Exercise Date and retained in the Participant's account as of the Exercise Date by the applicable Purchase Price; provided that in no event shall an Employee be permitted to purchase during each Purchase Period more than 4,000 shares of the Company's Common Stock (subject to any adjustment pursuant to Section 19), and provided further that such purchase shall be subject to the limitations set forth in Sections 3(b) and 12 hereof. The Board may, for future Offering Periods, increase or decrease, in its absolute discretion, the maximum number of shares of the Company's Common Stock an Employee may purchase during each Purchase Period of such Offering Period. Exercise of the option shall occur as provided in Section 8 hereof, unless the participant has withdrawn pursuant to Section 10 hereof. The option shall expire on the last day of the Offering Period. 8. Exercise of Option. ------------------ (a) Unless a participant withdraws from the Plan as provided in Section 10 hereof, his or her option for the purchase of shares shall be exercised automatically on the Exercise Date, and the maximum number of full shares subject to option shall be purchased for such participant at the applicable Purchase Price with the accumulated payroll deductions in his or her account. No fractional shares shall be purchased; any payroll deductions accumulated in a participant's account which are not sufficient to purchase a full share shall be retained in the participant's account for the subsequent Purchase Period or Offering Period, subject to earlier withdrawal by the participant as provided in Section 10 hereof. Any other monies left over in a participant's account after the Exercise Date shall be returned to the participant. During a participant's lifetime, a participant's option to purchase shares hereunder is exercisable only by him or her. (b) If the Board determines that, on a given Exercise Date, the number of shares with respect to which options are to be exercised may exceed (i) the number of shares of Common Stock that were available for sale under the Plan on the Enrollment Date of the applicable Offering Period, or (ii) the number of shares available for sale under the Plan on such Exercise Date, the Board may in its sole discretion (x) provide that the Company shall make a pro rata allocation of the shares of Common Stock available for purchase on such Enrollment Date or Exercise Date, as applicable, in as uniform a manner as shall be practicable and as it shall determine in its sole discretion to be equitable among all participants exercising options to purchase Common Stock on such Exercise Date, and continue all Offering Periods then in effect, or (y) provide that the Company shall make a pro rata allocation of the shares available for purchase on such Enrollment Date or Exercise Date, as applicable, in as uniform a manner as shall be practicable and as it shall determine in its sole discretion to be equitable among all participants exercising options to purchase Common -5- Stock on such Exercise Date, and terminate any or all Offering Periods then in effect pursuant to Section 20 hereof. The Company may make pro rata allocation of the shares available on the Enrollment Date of any applicable Offering Period pursuant to the preceding sentence, notwithstanding any authorization of additional shares for issuance under the Plan by the Company's shareholders subsequent to such Enrollment Date. 9. Delivery. As promptly as practicable after each Exercise Date on -------- which a purchase of shares occurs, the Company shall arrange the delivery to each participant, as appropriate, of a certificate representing the shares purchased upon exercise of his or her option. 10. Withdrawal. ---------- (a) A participant may withdraw all but not less than all the payroll deductions credited to his or her account and not yet used to exercise his or her option under the Plan at any time by giving written notice to the Company in the form of Exhibit B to this Plan. All of the participant's payroll deductions credited to his or her account shall be paid to such participant promptly after receipt of notice of withdrawal and such participant's option for the Offering Period shall be automatically terminated, and no further payroll deductions for the purchase of shares shall be made for such Offering Period. If a participant withdraws from an Offering Period, payroll deductions shall not resume at the beginning of the succeeding Offering Period unless the participant delivers to the Company a new subscription agreement. (b) A participant's withdrawal from an Offering Period shall not have any effect upon his or her eligibility to participate in any similar plan which may hereafter be adopted by the Company or in succeeding Offering Periods which commence after the termination of the Offering Period from which the participant withdraws. 11. Termination of Employment. ------------------------- Upon a participant's ceasing to be an Employee, for any reason, he or she shall be deemed to have elected to withdraw from the Plan and the payroll deductions credited to such participant's account during the Offering Period but not yet used to exercise the option shall be returned to such participant or, in the case of his or her death, to the person or persons entitled thereto under Section 15 hereof, and such participant's option shall be automatically terminated. The preceding sentence notwithstanding, a participant who receives payment in lieu of notice of termination of employment shall be treated as continuing to be an Employee for the participant's customary number of hours per week of employment during the period in which the participant is subject to such payment in lieu of notice. 12. Interest. No interest shall accrue on the payroll deductions of a -------- participant in the Plan. 13. Stock. ----- (a) Subject to adjustment upon changes in capitalization of the Company as provided in Section 19 hereof, the maximum number of shares of the Company's Common Stock which shall be made available for sale under the Plan shall be 5,000,000 shares plus an annual increase to be added on the first day of the Company's fiscal year, beginning in 2001, equal to the -6- lesser of (i) 10,000,000 shares, (ii) 2% of the outstanding shares of Common Stock on such date or (iii) a lesser amount determined by the Board. (b) The participant shall have no interest or voting right in shares covered by his option until such option has been exercised. (c) Shares to be delivered to a participant under the Plan shall be registered in the name of the participant or in the name of the participant and his or her spouse. 14. Administration. The Plan shall be administered by the Board or a -------------- committee of members of the Board appointed by the Board. The Board or its committee shall have full and exclusive discretionary authority to construe, interpret and apply the terms of the Plan, to determine eligibility and to adjudicate all disputed claims filed under the Plan. Every finding, decision and determination made by the Board or its committee shall, to the full extent permitted by law, be final and binding upon all parties. 15. Designation of Beneficiary. -------------------------- (a) A participant may file a written designation of a beneficiary who is to receive any shares and cash, if any, from the participant's account under the Plan in the event of such participant's death subsequent to an Exercise Date on which the option is exercised but prior to delivery to such participant of such shares and cash. In addition, a participant may file a written designation of a beneficiary who is to receive any cash from the participant's account under the Plan in the event of such participant's death prior to exercise of the option. If a participant is married and the designated beneficiary is not the spouse, spousal consent shall be required for such designation to be effective. (b) Such designation of beneficiary may be changed by the participant at any time by written notice. In the event of the death of a participant and in the absence of a beneficiary validly designated under the Plan who is living at the time of such participant's death, the Company shall deliver such shares and/or cash to the executor or administrator of the estate of the participant, or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its discretion, may deliver such shares and/or cash to the spouse or to any one or more dependents or relatives of the participant, or if no spouse, dependent or relative is known to the Company, then to such other person as the Company may designate. 16. Transferability. Neither payroll deductions credited to a --------------- participant's account nor any rights with regard to the exercise of an option or to receive shares under the Plan may be assigned, transferred, pledged or otherwise disposed of in any way (other than by will, the laws of descent and distribution or as provided in Section 15 hereof) by the participant. Any such attempt at assignment, transfer, pledge or other disposition shall be without effect, except that the Company may treat such act as an election to withdraw funds from an Offering Period in accordance with Section 10 hereof. 17. Use of Funds. All payroll deductions received or held by the Company ------------ under the Plan may be used by the Company for any corporate purpose, and the Company shall not be obligated to segregate such payroll deductions. -7- 18. Reports. Individual accounts shall be maintained for each participant ------- in the Plan. Statements of account shall be given to participating Employees at least annually, which statements shall set forth the amounts of payroll deductions, the Purchase Price, the number of shares purchased and the remaining cash balance, if any. 19. Adjustments Upon Changes in Capitalization, Dissolution, Liquidation, --------------------------------------------------------------------- Merger or Asset Sale. - -------------------- (a) Changes in Capitalization. Subject to any required action by the ------------------------- shareholders of the Company, the Reserves, the number of shares that may be added annually to the Shares reserved under the Plan (pursuant to Section 13(a)(i)), the maximum number of shares each participant may purchase each Purchase Period (pursuant to Section 7), as well as the price per share and the number of shares of Common Stock covered by each option under the Plan which has not yet been exercised, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an option. (b) Dissolution or Liquidation. In the event of the proposed -------------------------- dissolution or liquidation of the Company, the Offering Period then in progress shall be shortened by setting a new Exercise Date (the "New Exercise Date"), and shall terminate immediately prior to the consummation of such proposed dissolution or liquidation, unless provided otherwise by the Board. The New Exercise Date shall be before the date of the Company's proposed dissolution or liquidation. The Board shall notify each participant in writing, at least ten (10) business days prior to the New Exercise Date, that the Exercise Date for the participant's option has been changed to the New Exercise Date and that the participant's option shall be exercised automatically on the New Exercise Date, unless prior to such date the participant has withdrawn from the Offering Period as provided in Section 10 hereof. (c) Merger or Asset Sale. In the event of a proposed sale of all or -------------------- substantially all of the assets of the Company, or the merger of the Company with or into another corporation, each outstanding option shall be assumed or an equivalent option substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. In the event that the successor corporation refuses to assume or substitute for the option, any Purchase Periods then in progress shall be shortened by setting a new Exercise Date (the "New Exercise Date") and any Offering Periods then in progress shall end on the New Exercise Date. The New Exercise Date shall be before the date of the Company's proposed sale or merger. The Board shall notify each participant in writing, at least ten (10) business days prior to the New Exercise Date, that the Exercise Date for the participant's option has been changed to the New Exercise Date and that the participant's option shall be exercised automatically on the New Exercise Date, unless prior to such date the participant has withdrawn from the Offering Period as provided in Section 10 hereof. -8- 20. Amendment or Termination. ------------------------ (a) The Board of Directors of the Company may at any time and for any reason terminate or amend the Plan. Except as provided in Section 19 hereof, no such termination can affect options previously granted, provided that an Offering Period may be terminated by the Board of Directors on any Exercise Date if the Board determines that the termination of the Offering Period or the Plan is in the best interests of the Company and its shareholders. Except as provided in Section 19 and this Section 20 hereof, no amendment may make any change in any option theretofore granted which adversely affects the rights of any participant. To the extent necessary to comply with Section 423 of the Code (or any successor rule or provision or any other applicable law, regulation or stock exchange rule), the Company shall obtain shareholder approval in such a manner and to such a degree as required. (b) Without shareholder consent and without regard to whether any participant rights may be considered to have been "adversely affected," the Board (or its committee) shall be entitled to change the Offering Periods, limit the frequency and/or number of changes in the amount withheld during an Offering Period, establish the exchange ratio applicable to amounts withheld in a currency other than U.S. dollars, permit payroll withholding in excess of the amount designated by a participant in order to adjust for delays or mistakes in the Company's processing of properly completed withholding elections, establish reasonable waiting and adjustment periods and/or accounting and crediting procedures to ensure that amounts applied toward the purchase of Common Stock for each participant properly correspond with amounts withheld from the participant's Compensation, and establish such other limitations or procedures as the Board (or its committee) determines in its sole discretion advisable which are consistent with the Plan. (c) In the event the Board determines that the ongoing operation of the Plan may result in unfavorable financial accounting consequences, the Board may, in its discretion and, to the extent necessary or desirable, modify or amend the Plan to reduce or eliminate such accounting consequence including, but not limited to: (i) altering the Purchase Price for any Offering Period including an Offering Period underway at the time of the change in Purchase Price; (ii) shortening any Offering Period so that Offering Period ends on a new Exercise Date, including an Offering Period underway at the time of the Board action; and (iii) allocating shares. Such modifications or amendments shall not require stockholder approval or the consent of any Plan participants. 21. Notices. All notices or other communications by a participant to the ------- Company under or in connection with the Plan shall be deemed to have been duly given when received in the form specified by the Company at the location, or by the person, designated by the Company for the receipt thereof. 22. Conditions Upon Issuance of Shares. Shares shall not be issued with ---------------------------------- respect to an option unless the exercise of such option and the issuance and delivery of such shares pursuant -9- thereto shall comply with all applicable provisions of law, domestic or foreign, including, without limitation, the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an option, the Company may require the person exercising such option to represent and warrant at the time of any such exercise that the shares are being purchased only for investment and without any present intention to sell or distribute such shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned applicable provisions of law. 23. Term of Plan. The Plan shall become effective upon the earlier to ------------ occur of its adoption by the Board of Directors or its approval by the shareholders of the Company. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 20 hereof. 24. Automatic Transfer to Low Price Offering Period. To the extent ----------------------------------------------- permitted by any applicable laws, regulations, or stock exchange rules if the Fair Market Value of the Common Stock on any Exercise Date in an Offering Period is lower than the Fair Market Value of the Common Stock on the Enrollment Date of such Offering Period, then all participants in such Offering Period shall be automatically withdrawn from such Offering Period immediately after the exercise of their option on such Exercise Date and automatically re-enrolled in the immediately following Offering Period. The new Offering Period shall commence on the last Exercise Date of the immediately preceding Offering Period after all options have been exercised on such Exercise Date. -10- EX-10.4 11 FORM OF 1999 EMPLOYEE STOCK PURCHASE PLAN AGREEMENTS EXHIBIT 10.4 EXHIBIT A --------- PALM, INC. 1999 EMPLOYEE STOCK PURCHASE PLAN FORM OF SUBSCRIPTION AGREEMENT _____ Original Application Enrollment Date: ___________ _____ Change in Payroll Deduction Rate _____ Change of Beneficiary(ies) 1. ____________ hereby elects to participate in the Palm, Inc. Employee Stock Purchase Plan (the "Palm ESPP") and subscribes to purchase shares of the Company's Common Stock in accordance with this Subscription Agreement and the Palm ESPP. 2. I hereby authorize payroll deductions from each paycheck in the amount of ____% of my Compensation on each payday (from 0 to 10%) during the Offering Period in accordance with the Palm ESPP. I understand that if the percentage of my Compensation deducted for purposes of the Palm ESPP and all other employee stock purchase plans in which I participate, including the 3Com Corporation 1984 Employee Stock Purchase Plan, exceeds 10% of my Compensation, then the percentage of my Compensation that is deducted under the Palm ESPP will be reduced so that my percentage deduction of Compensation under all such employee stock purchase plans does not exceed 10% of my Compensation. (Please note that no fractional percentages are permitted.) 3. I understand that said payroll deductions shall be accumulated for the purchase of shares of Common Stock at the applicable Purchase Price determined in accordance with the Palm ESPP. I understand that if I do not withdraw from an Offering Period, any accumulated payroll deductions will be used to automatically exercise my option. 4. I have received a copy of the complete Palm ESPP. I understand that my participation in the Palm ESPP is in all respects subject to the terms of the Plan. I understand that my ability to exercise the option under this Subscription Agreement is subject to shareholder approval of the Palm ESPP. 5. Shares purchased for me under the Palm ESPP should be issued in the name(s) of (Employee or Employee and Spouse only). 6. I understand that if I dispose of any shares received by me pursuant to the Plan within 2 years after the Enrollment Date (the first day of the Offering Period during which I purchased such shares) or one year after the Exercise Date, I will be treated for federal income tax purposes as having received ordinary income at the time of such disposition in an amount equal to the excess of the fair market value of the shares at the time such shares were purchased by me -1- over the price which I paid for the shares. I hereby agree to notify the ---------------------------- Company in writing within 30 days after the date of any disposition of my ------------------------------------------------------------------------- shares and I will make adequate provision for Federal, state or other tax ------------------------------------------------------------------------- withholding obligations, if any, which arise upon the disposition of the ------------------------------------------------------------------------ Common Stock. The Company may, but will not be obligated to, withhold from ------------ my compensation the amount necessary to meet any applicable withholding obligation including any withholding necessary to make available to the Company any tax deductions or benefits attributable to sale or early disposition of Common Stock by me. If I dispose of such shares at any time after the expiration of the 2-year and 1-year holding periods, I understand that I will be treated for federal income tax purposes as having received income only at the time of such disposition, and that such income will be taxed as ordinary income only to the extent of an amount equal to the lesser of (1) the excess of the fair market value of the shares at the time of such disposition over the purchase price which I paid for the shares, or (2) 15% of the fair market value of the shares on the first day of the Offering Period. The remainder of the gain, if any, recognized on such disposition will be taxed as capital gain. 7. I hereby agree to be bound by the terms of the Palm ESPP. The effectiveness of this Subscription Agreement is dependent upon my eligibility to participate in the Palm ESPP. 8. In the event of my death, I hereby designate the following as my beneficiary(ies) to receive all payments and shares due me under the Palm ESPP: NAME: (Please print) _________________________________________________ (First) (Middle) (Last) ________________________ _________________________________________________ Relationship _________________________________________________ (Address) Employee's Social Security Number: _________________________________________________ Employee's Address: _________________________________________________ _________________________________________________ _________________________________________________ -2- I UNDERSTAND THAT THIS SUBSCRIPTION AGREEMENT SHALL REMAIN IN EFFECT THROUGHOUT SUCCESSIVE OFFERING PERIODS UNLESS TERMINATED BY ME. Dated:_____________ _____________________________________________________ Signature of Employee _____________________________________________________ Spouse's Signature (If beneficiary other than spouse) -3- EXHIBIT B --------- PALM, INC. FORM OF 1999 EMPLOYEE STOCK PURCHASE PLAN NOTICE OF WITHDRAWAL The undersigned participant in the Offering Period of the Palm, Inc. Employee Stock Purchase Plan which began on ____________, ______ (the "Enrollment Date") hereby notifies the Company that he or she hereby withdraws from the Offering Period. He or she hereby directs the Company to pay to the undersigned as promptly as practicable all the payroll deductions credited to his or her account with respect to such Offering Period. The undersigned understands and agrees that his or her option for such Offering Period will be automatically terminated. The undersigned understands further that no further payroll deductions will be made for the purchase of shares in the current Offering Period and the undersigned shall be eligible to participate in succeeding Offering Periods only by delivering to the Company a new Subscription Agreement. Name and Address of Participant: ____________________________________________ ____________________________________________ ____________________________________________ Signature: ____________________________________________ Date: ______________________________________ -4- EX-10.5 12 1999 DIRECTOR OPTION PLAN EXHIBIT 10.5 PALM, INC. 1999 DIRECTOR OPTION PLAN 1. Purposes of the Plan. The purposes of this 1999 Director Option Plan -------------------- are to attract and retain the best available personnel for service as Outside Directors (as defined herein) of the Company, to provide additional incentive to the Outside Directors of the Company to serve as Directors, and to encourage their continued service on the Board. All options granted hereunder shall be nonstatutory stock options. 2. Definitions. As used herein, the following definitions shall apply: ----------- (a) "Board" means the Board of Directors of the Company. ----- (b) "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 Exchange Act) becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange 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 who is not already such as of the Effective Date; 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 out-standing or by being converted into voting securities of the surviving entity or its parent) at least fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity or its parent 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 Effective Date, 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. Notwithstanding the foregoing, in no event shall either or both of the following events constitute a Change of Control: (i) the initial public offering of the Company's securities pursuant to -1- a registration statement filed under Section 12 of the Exchange Act or (ii) the spin-off of the Company from 3Com pursuant to one or more transactions in which 3Com distributes eighty percent (80%) or more of its securities ownership of the Company to the shareholders of 3Com. (c) "Code" means the Internal Revenue Code of 1986, as amended. ---- (d) "Common Stock" means the common stock of the Company. ------------ (e) "Company" means Palm, Inc., a Delaware corporation. ------- (f) "Director" means a member of the Board. -------- (g) "Disability" means total and permanent disability as defined in ---------- Section 22(e)(3) of the Code. (h) "Effective Date" means the effective date of this Plan as -------------- determined in accordance with Section 6. (i) "Employee" means any person, including officers and Directors, -------- employed by the Company or any Parent or Subsidiary of the Company. The payment of a Director's fee by the Company shall not be sufficient in and of itself to constitute "employment" by the Company. (j) "Exchange Act" means the Securities Exchange Act of 1934, as ------------ amended. (k) "Fair Market Value" means, as of any date, the value of Common ----------------- Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system for the last market trading day prior to the time of determination as reported in The Wall Street Journal or such other source as the Administrator deems reliable; (ii) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a Share of Common Stock shall be the mean between the high bid and low asked prices for the Common Stock for the last market trading day prior to the time of determination, as reported in The Wall Street Journal or such other source as the Board deems reliable; (iii) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Board; or (iv) For purposes of Option grants made on the effective date of the Company's initial public offering of Common Stock (the "IPO"), the Fair Market Value shall be the initial price to the public as set forth in the final prospectus included with the registration on Form S-1 filed with the Securities and Exchange Commission for such offering. -2- (l) "Inside Director" means a Director who is an Employee. --------------- (m) "Option" means a stock option granted pursuant to the Plan. ------ (n) "Optioned Stock" means the Common Stock subject to an Option. -------------- (o) "Optionee" means a Director who holds an Option. -------- (p) "Outside Director" means a Director who is not an Employee. ---------------- (q) "Parent" means a "parent corporation," whether now or hereafter ------ existing, as defined in Section 424(e) of the Code. (r) "Plan" means this 1999 Director Option Plan. ---- (s) "Share" means a share of the Common Stock, as adjusted in ----- accordance with Section 10 of the Plan. (t) "Subsidiary" means a "subsidiary corporation," whether now or ---------- hereafter existing, as defined in Section 424(f) of the Internal Revenue Code of 1986. (u) "3Com" means 3Com Corporation, a Delaware corporation. ---- 3. Stock Subject to the Plan. Subject to the provisions of Section 10 of ------------------------- the Plan, the maximum aggregate number of Shares which may be optioned and sold under the Plan is 500,000 Shares, plus an annual increase to be added on the first day of the Company's fiscal year, beginning in 2001, equal to 500,000 Shares or a lesser amount determined by the Board (the "Pool"). The Shares may be authorized, but unissued, or reacquired Common Stock. If an Option expires or becomes unexercisable without having been exercised in full, the unpurchased Shares which were subject thereto shall become available for future grant or sale under the Plan (unless the Plan has terminated). Shares that have actually been issued under the Plan shall not be returned to the Plan and shall not become available for future distribution under the Plan. 4. Administration and Grants of Options under the Plan. --------------------------------------------------- (a) Procedure for Grants. All grants of Options to Outside Directors -------------------- under this Plan shall be automatic and nondiscretionary and shall be made strictly in accordance with the following provisions: (i) No person shall have any discretion to select which Outside Directors shall be granted Options or to determine the number of Shares to be covered by Options. (ii) Each Outside Director shall be automatically granted an Option to purchase 40,000 Shares (the "First Option") on the date on which the later of the following events occurs: (A) the Effective Date, or (B) the date on which such person first becomes an Outside Director, whether through election by the shareholders of the Company or appointment by the Board -3- to fill a vacancy; provided, however, that an Inside Director who ceases to be an Inside Director but who remains a Director shall not receive a First Option. (iii) Each Outside Director shall be automatically granted an Option to purchase 25,000 Shares (a "Subsequent Option") on the date of the annual stockholder meeting in which the election for such Outside Director is to be held, provided he or she is then an Outside Director and if as of such date, he or she shall have served on the Board for at least the preceding six (6) months. (iv) Notwithstanding the provisions of subsections (ii) and (iii) hereof, any exercise of an Option granted before the Company has obtained shareholder approval of the Plan in accordance with Section 16 hereof shall be conditioned upon obtaining such shareholder approval of the Plan in accordance with Section 16 hereof. (v) The terms of a First Option granted hereunder shall be as follows: (A) the term of the First Option shall be ten (10) years. (B) the First Option shall be exercisable only while the Outside Director remains a Director of the Company, except as set forth in Sections 8 and 10 hereof. (C) the exercise price per Share shall be 100% of the Fair Market Value per Share on the date of grant of the First Option. (D) subject to Section 10 hereof, the First Option shall become exercisable in three (3) successive equal annual installments on each of the first three (3) anniversaries of its date of grant, provided that the Optionee continues to serve as a Director on such dates. Notwithstanding the foregoing, a First Option granted to an Outside Director who commenced service with the Company before the effective date of the Company's initial public offering of equity securities shall vest in three (3) successive equal annual installments on each of the first three (3) anniversaries of such Outside Director's commencement of service with the Company. (vi) The terms of a Subsequent Option granted hereunder shall be as follows: (A) the term of the Subsequent Option shall be ten (10) years. (B) the Subsequent Option shall be exercisable only while the Outside Director remains a Director of the Company, except as set forth in Sections 8 and 10 hereof. (C) the exercise price per Share shall be 100% of the Fair Market Value per Share on the date of grant of the Subsequent Option. (D) subject to Section 10 hereof, the Subsequent Option shall become exercisable as to 100% percent of the Shares subject to the Subsequent Option on the first anniversary of its date of grant, provided that the Optionee continues to serve as a Director on such date. -4- (vii) In the event that any Option granted under the Plan would cause the number of Shares subject to outstanding Options plus the number of Shares previously purchased under Options to exceed the Pool, then the remaining Shares available for Option grant shall be granted under Options to the Outside Directors on a pro rata basis. No further grants shall be made until such time, if any, as additional Shares become available for grant under the Plan through action of the Board or the shareholders to increase the number of Shares which may be issued under the Plan or through cancellation or expiration of Options previously granted hereunder. 5. Eligibility. Options may be granted only to Outside Directors. All ----------- Options shall be automatically granted in accordance with the terms set forth in Section 4 hereof. The Plan shall not confer upon any Optionee any right with respect to continuation of service as a Director or nomination to serve as a Director, nor shall it interfere in any way with any rights which the Director or the Company may have to terminate the Director's relationship with the Company at any time. 6. Term of Plan. The Plan shall become effective upon the IPO. It shall ------------ continue in effect for a term of ten (10) years unless sooner terminated under Section 11 of the Plan. 7. Form of Consideration. The consideration to be paid for the Shares --------------------- to be issued upon exercise of an Option, including the method of payment, shall consist of (i) cash, (ii) check, (iii) other shares which (x) in the case of Shares acquired upon exercise of an option, have been owned by the Optionee for more than six (6) months on the date of surrender, and (y) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised, (iv) consideration received by the Company under a cashless exercise program implemented by the Company in connection with the Plan, or (v) any combination of the foregoing methods of payment. 8. Exercise of Option. ------------------ (a) Procedure for Exercise; Rights as a Shareholder. Any Option ----------------------------------------------- granted hereunder shall be exercisable at such times as are set forth in Section 4 hereof; provided, however, that no Options shall be exercisable until shareholder approval of the Plan in accordance with Section 16 hereof has been obtained. An Option may not be exercised for a fraction of a Share. An Option shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Option by the person entitled to exercise the Option and full payment for the Shares with respect to which the Option is exercised has been received by the Company. Full payment may consist of any consideration and method of payment allowable under Section 7 of the Plan. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the stock certificate evidencing such Shares, no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. A share certificate for the number of Shares so acquired shall be issued to the -5- Optionee as soon as practicable after exercise of the Option. No adjustment shall be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 10 of the Plan. Exercise of an Option in any manner shall result in a decrease in the number of Shares which thereafter may be available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (b) Termination of Continuous Status as a Director. Subject to ---------------------------------------------- Section 10 hereof, in the event an Optionee's status as a Director terminates (other than upon the Optionee's death or Disability), the Optionee may exercise his or her Option, but only within three (3) months following the date of such termination, and only to the extent that the Optionee was entitled to exercise it on the date of such termination (but in no event later than the expiration of its ten (10) year term). To the extent that the Optionee was not entitled to exercise an Option on the date of such termination, and to the extent that the Optionee does not exercise such Option (to the extent otherwise so entitled) within the time specified herein, the Option shall terminate. (c) Disability of Optionee. In the event Optionee's status as a ---------------------- Director terminates as a result of Disability, the Optionee may exercise his or her Option, but only within twelve (12) months following the date of such termination, and only to the extent that the Optionee was entitled to exercise it on the date of such termination (but in no event later than the expiration of its ten (10) year term). To the extent that the Optionee was not entitled to exercise an Option on the date of termination, or if he or she does not exercise such Option (to the extent otherwise so entitled) within the time specified herein, the Option shall terminate. (d) Death of Optionee. In the event of an Optionee's death, each of ----------------- the Optionee's outstanding Options shall accelerate and become immediately vested and exercisable with respect to one hundred percent (100%) of the Shares then subject to each such Option. Each such Option may be exercised by the Optionee's designated beneficiary, provided such beneficiary has been designated prior to Optionee's death in a form acceptable by the Board. If no such beneficiary has been designated by the Optionee, then each such Option may be exercised by the personal representative of the Optionee's estate or by the person or persons to whom the Option is transferred pursuant to the Optionee's will or in accordance with the laws of descent and distribution. The Option may be exercised in whole or in part by the Optionee's designated beneficiary, estate or the person or persons who acquire the right to exercise the Option, but only within twelve (12) months following the date of death (but in no event later than the expiration of its ten (10) year term). To the extent the Option is not exercised within the time specified herein, the Option shall terminate. 9. Non-Transferability of Options. The Option may not be sold, pledged, ------------------------------ assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. -6- 10. Adjustments Upon Changes in Capitalization, Dissolution, Merger or ------------------------------------------------------------------ Asset Sale. - ---------- (a) Changes in Capitalization. Subject to any required action by the ------------------------- shareholders of the Company, the number of Shares which have been authorized for issuance under the Plan, including Shares as to which no Options have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option, the number of Shares that may be added annually to the Shares reserved under the Plan (pursuant to Section 3(i)), the number of Shares covered by each outstanding Option, as well as the price per Share covered by each such outstanding Option, and the number of Shares issuable pursuant to the automatic grant provisions of Section 4 hereof shall be proportionately adjusted for any increase or decrease in the number of issued Shares resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued Shares effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of Shares subject to an Option. (b) Dissolution or Liquidation. In the event of the proposed -------------------------- dissolution or liquidation of the Company, to the extent that an Option has not been previously exercised, it shall terminate immediately prior to the consummation of such proposed action. (c) Merger or Asset Sale. In the event of a merger of the Company -------------------- with or into another corporation or the sale of substantially all of the assets of the Company, outstanding Options may be assumed or equivalent options may be substituted by the successor corporation or a Parent or Subsidiary thereof (the "Successor Corporation"). If an Option is assumed or substituted for, the Option or equivalent option shall continue to be exercisable as provided in Section 4 hereof for so long as the Optionee serves as a Director or a director of the Successor Corporation. Thereafter, the Option or option shall remain exercisable in accordance with Sections 8(b) through (d) above. If the Successor Corporation does not assume an outstanding Option or substitute for it an equivalent option, the Option shall become fully vested and exercisable, including as to Shares for which it would not otherwise be exercisable. In such event the Board shall notify the Optionee that the Option shall be fully exercisable for a period of thirty (30) days from the date of such notice, and upon the expiration of such period the Option shall terminate. For the purposes of this Section 10(c), an Option shall be considered assumed if, following the merger or sale of assets, the Option confers the right to purchase or receive, for each Share of Optioned Stock subject to the Option immediately prior to the merger or sale of assets, the consideration (whether stock, cash, or other securities or property) received in the merger or sale of assets by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares). If such consideration received in the merger or sale of assets is not solely common stock of the successor corporation or its Parent, the Administrator may, with the consent of the successor corporation, provide for the consideration to be received upon the exercise of the Option, for each Share of Optioned Stock subject to the Option, to be solely common stock of -7- the successor corporation or its Parent equal in fair market value to the per share consideration received by holders of Common Stock in the merger or sale of assets. Notwithstanding the foregoing, in the event of a Change of Control, each outstanding Option shall accelerate and become vested and exercisable immediately prior to such Change of Control with respect to one hundred percent (100%) of the Shares then subject to each such Option. Each such outstanding Option shall terminate immediately following the Change of Control. 11. Amendment and Termination of the Plan. ------------------------------------- (a) Amendment and Termination. The Board may at any time amend, ------------------------- alter, suspend, or discontinue the Plan, but no amendment, alteration, suspension, or discontinuation shall be made which would impair the rights of any Optionee under any grant theretofore made, without his or her consent. In addition, to the extent necessary and desirable to comply with any applicable law, regulation or stock exchange rule, the Company shall obtain shareholder approval of any Plan amendment in such a manner and to such a degree as required. (b) Effect of Amendment or Termination. Any such amendment or ---------------------------------- termination of the Plan shall not affect Options already granted and such Options shall remain in full force and effect as if this Plan had not been amended or terminated. 12. Time of Granting Options. The date of grant of an Option shall, for ------------------------ all purposes, be the date determined in accordance with Section 4 hereof. 13. Conditions Upon Issuance of Shares. Shares shall not be issued ---------------------------------- pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated thereunder, state securities laws, and the requirements of any stock exchange upon which the Shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an Option, the Company may require the person exercising such Option to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares, if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned relevant provisions of law. Inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. -8- 14. Reservation of Shares. The Company, during the term of this Plan, --------------------- will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. 15. Option Agreement. Options shall be evidenced by written option ---------------- agreements in such form as the Board shall approve. 16. Shareholder Approval. The Plan shall be subject to approval by the -------------------- shareholders of the Company within twelve (12) months after the date the Plan is adopted. Such shareholder approval shall be obtained in the degree and manner required under applicable state and federal law and any stock exchange rules. -9- EX-10.6 13 FORM OF 1999 DIRECTOR OPTION PLAN AGREEMENTS EXHIBIT 10.6 [FIRST OPTION] PALM, INC. FORM OF DIRECTOR OPTION AGREEMENT Palm, Inc. (the "Company"), has granted to ___________________ (the "Optionee"), an option to purchase a total of 40,000 shares of the Company's Common Stock (the "Optioned Stock"), at the price determined as provided herein, and in all respects subject to the terms, definitions and provisions of the Company's 1999 Director Option Plan (the "Plan") adopted by the Company which is incorporated herein by reference. The terms defined in the Plan shall have the same defined meanings herein. 1. Nature of the Option. This Option is a nonstatutory option and is not -------------------- intended to qualify for any special tax benefits to the Optionee. 2. Exercise Price. The exercise price is $_______ for each share of -------------- Common Stock. 3. Exercise of Option. This Option shall be exercisable during its term ------------------ in accordance with the provisions of Section 8 of the Plan as follows: (i) Right to Exercise. ----------------- (a) This Option shall become exercisable in installments cumulatively with respect to one-third (1/3) of the Optioned Stock one year after the date [of grant/the Optionee began his or her service to the Company], and as to an additional one-third (1/3) of the Optioned Stock on each anniversary of the date [of grant/the Optionee began his or her Service to the Company], so that one hundred percent (100%) of the Optioned Stock shall be exercisable three (3) years after the date [of grant/the Optionee began his or her service to the Company]; provided, that the Optionee remains in service on such dates; provided, further, that in no event shall any Option be exercisable prior to the date the stockholders of the Company approve the Plan. (b) This Option may not be exercised for a fraction of a share. (c) In the event of Optionee's death, disability or other termination of service as a Director, the exercisability of the Option is governed by Section 8 of the Plan. (ii) Method of Exercise. This Option shall be exercisable by written ------------------ notice which shall state the election to exercise the Option and the number of Shares in respect of which the Option is being exercised. Such written notice, in the form attached hereto as Exhibit A, shall be signed by the Optionee and shall be delivered in person or by certified mail to the Secretary of the Company. The written notice shall be accompanied by payment of the exercise price. 4. Method of Payment. Payment of the exercise price shall be by any of ----------------- the following, or a combination thereof, at the election of the Optionee: (i) cash; (ii) check; or (iii) surrender of other shares which (x) in the case of Shares acquired upon exercise of an Option, have been owned by the Optionee for more than six (6) months on the date of surrender, and (y) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised; or (iv) delivery of a properly executed exercise notice together with such other documentation as the Company and the broker, if applicable, shall require to effect an exercise of the Option and delivery to the Company of the sale or loan proceeds required to pay the exercise price. 5. Restrictions on Exercise. This Option may not be exercised if the ------------------------ issuance of such Shares upon such exercise or the method of payment of consideration for such shares would constitute a violation of any applicable federal or state securities or other law or regulations, or if such issuance would not comply with the requirements of any stock exchange upon which the Shares may then be listed. As a condition to the exercise of this Option, the Company may require Optionee to make any representation and warranty to the Company as may be required by any applicable law or regulation. 6. Non-Transferability of Option. This Option may not be transferred in ----------------------------- any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of Optionee only by the Optionee. The terms of this Option shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee. 7. Term of Option. This Option may not be exercised more than ten (10) -------------- years from the date of grant of this Option, and may be exercised during such period only in accordance with the Plan and the terms of this Option. 8. Taxation Upon Exercise of Option. Optionee understands that, upon -------------------------------- exercise of this Option, he or she will recognize income for tax purposes in an amount equal to the excess of the then Fair Market Value of the Shares purchased over the exercise price paid for such Shares. Since the Optionee is subject to Section 16(b) of the Securities Exchange Act of 1934, as amended, under certain limited circumstances the measurement and timing of such income (and the commencement of any capital gain holding period) may be deferred, and the Optionee is advised to contact a tax advisor concerning the application of Section 83 in general and the availability a Section 83(b) election in particular in connection with the exercise of the Option. Upon a resale of such Shares by the Optionee, any difference between the sale price and the Fair Market Value of the Shares on the -2- date of exercise of the Option, to the extent not included in income as described above, will be treated as capital gain or loss. DATE OF GRANT: ______________ Palm, Inc. A Delaware corporation By: ________________________________ Optionee acknowledges receipt of a copy of the Plan, a copy of which is attached hereto, and represents that he or she is familiar with the terms and provisions thereof, and hereby accepts this Option subject to all of the terms and provisions thereof. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Board upon any questions arising under the Plan. Dated: _________________ ______________________________ Optionee -3- EXHIBIT A DIRECTOR OPTION EXERCISE NOTICE Palm, Inc. ______________ ______________ Attention: Corporate Secretary 1. Exercise of Option. The undersigned ("Optionee") hereby elects to ------------------ exercise Optionee's option to purchase _______ shares of the Common Stock (the "Shares") of Palm, Inc. (the "Company") under and pursuant to the Company's 1999 Director Option Plan and the Director Option Agreement dated _______________ (the "Agreement"). 2. Representations of Optionee. Optionee acknowledges that Optionee has --------------------------- received, read and understood the Agreement. 3. Federal Restrictions on Transfer. Optionee understands that the Shares -------------------------------- must be held indefinitely unless they are registered under the Securities Act of 1933, as amended (the "1933 Act"), or unless an exemption from such registration is available, and that the certificate(s) representing the Shares may bear a legend to that effect. Optionee understands that the Company is under no obligation to register the Shares and that an exemption may not be available or may not permit Optionee to transfer Shares in the amounts or at the times proposed by Optionee. 4. Tax Consequences. Optionee understands that Optionee may suffer adverse ---------------- tax consequences as a result of Optionee's purchase or disposition of the Shares. Optionee represents that Optionee has consulted with any tax consultant(s) Optionee deems advisable in connection with the purchase or disposition of the Shares and that Optionee is not relying on the Company for any tax advice. 5. Delivery of Payment. Optionee herewith delivers to the Company the ------------------- aggregate purchase price for the Shares that Optionee has elected to purchase and has made provision for the payment of any federal or state withholding taxes required to be paid or withheld by the Company. 6. Entire Agreement. The Agreement is incorporated herein by reference. ---------------- This Exercise Notice and the Agreement constitute the entire agreement of the parties and supersede in their entirety all prior undertakings and agreements of the Company and Optionee with respect to the subject matter hereof. This Exercise Notice and the Agreement are governed by [Delaware] law except for that body of law pertaining to conflict of laws. Submitted by: Accepted by: OPTIONEE: PALM, INC. By: _______________________ By: _______________________________ Its: ______________________________ Address: Dated: ____________________ Dated: ____________________________ [SUBSEQUENT OPTION] PALM, INC. DIRECTOR OPTION AGREEMENT Palm, Inc. (the "Company"), has granted to ___________________ (the "Optionee"), an option to purchase a total of 25,000 shares of the Company's Common Stock (the "Optioned Stock"), at the price determined as provided herein, and in all respects subject to the terms, definitions and provisions of the Company's 1999 Director Option Plan (the "Plan") adopted by the Company which is incorporated herein by reference. The terms defined in the Plan shall have the same defined meanings herein. 1. Nature of the Option. This Option is a nonstatutory option and is not -------------------- intended to qualify for any special tax benefits to the Optionee. 2. Exercise Price. The exercise price is $_______ for each share of -------------- Common Stock. 3. Exercise of Option. This Option shall be exercisable during its term ------------------ in accordance with the provisions of Section 8 of the Plan as follows: (i) Right to Exercise. ----------------- (a) This Option shall become exercisable as to 100% of the Optioned Stock one year after the date of grant; provided that the Optionee remains in service on such date; provided, further, that in no event shall any Option be exercisable prior to the date the stockholders of the Company approve the Plan. (b) This Option may not be exercised for a fraction of a share. (c) In the event of Optionee's death, disability or other termination of service as a Director, the exercisability of the Option is governed by Section 8 of the Plan. (ii) Method of Exercise. This Option shall be exercisable by ------------------ written notice which shall state the election to exercise the Option and the number of Shares in respect of which the Option is being exercised. Such written notice, in the form attached hereto as Exhibit A, shall be signed by the Optionee and shall be delivered in person or by certified mail to the Secretary of the Company. The written notice shall be accompanied by payment of the exercise price. 4. Method of Payment. Payment of the exercise price shall be by any of ----------------- the following, or a combination thereof, at the election of the Optionee: (i) cash; (ii) check; or (iii) surrender of other shares which (x) in the case of Shares acquired upon exercise of an Option, have been owned by the Optionee for more than six (6) months on the date of surrender, and (y) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised; or (iv) delivery of a properly executed exercise notice together with such other documentation as the Company and the broker, if applicable, shall require to effect an exercise of the Option and delivery to the Company of the sale or loan proceeds required to pay the exercise price. 5. Restrictions on Exercise. This Option may not be exercised if the ------------------------ issuance of such Shares upon such exercise or the method of payment of consideration for such shares would constitute a violation of any applicable federal or state securities or other law or regulations, or if such issuance would not comply with the requirements of any stock exchange upon which the Shares may then be listed. As a condition to the exercise of this Option, the Company may require Optionee to make any representation and warranty to the Company as may be required by any applicable law or regulation. 6. Non-Transferability of Option. This Option may not be transferred in ----------------------------- any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of Optionee only by the Optionee. The terms of this Option shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee. 7. Term of Option. This Option may not be exercised more than ten (10) -------------- years from the date of grant of this Option, and may be exercised during such period only in accordance with the Plan and the terms of this Option. 8. Taxation Upon Exercise of Option. Optionee understands that, upon -------------------------------- exercise of this Option, he or she will recognize income for tax purposes in an amount equal to the excess of the then Fair Market Value of the Shares purchased over the exercise price paid for such Shares. Since the Optionee is subject to Section 16(b) of the Securities Exchange Act of 1934, as amended, under certain limited circumstances the measurement and timing of such income (and the commencement of any capital gain holding period) may be deferred, and the Optionee is advised to contact a tax advisor concerning the application of Section 83 in general and the availability a Section 83(b) election in particular in connection with the exercise of the Option. Upon a resale of such Shares by the Optionee, any difference between the sale price and the Fair Market Value of the Shares on the date of exercise of the Option, to the extent not included in income as described above, will be treated as capital gain or loss. DATE OF GRANT: ______________ Palm, Inc. A Delaware corporation By: ______________________________ Optionee acknowledges receipt of a copy of the Plan, a copy of which is attached hereto, and represents that he or she is familiar with the terms and provisions thereof, and hereby accepts this Option subject to all of the terms and provisions thereof. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Board upon any questions arising under the Plan. Dated: _________________ ______________________________ Optionee EXHIBIT A DIRECTOR OPTION EXERCISE NOTICE Palm, Inc. ______________ ______________ Attention: Corporate Secretary 1. Exercise of Option. The undersigned ("Optionee") hereby elects to ------------------ exercise Optionee's option to purchase _______ shares of the Common Stock (the "Shares") of Palm, Inc. (the "Company") under and pursuant to the Company's 1999 Director Option Plan and the Director Option Agreement dated _______________ (the "Agreement"). 2. Representations of Optionee. Optionee acknowledges that Optionee has --------------------------- received, read and understood the Agreement. 3. Federal Restrictions on Transfer. Optionee understands that the Shares -------------------------------- must be held indefinitely unless they are registered under the Securities Act of 1933, as amended (the "1933 Act"), or unless an exemption from such registration is available, and that the certificate(s) representing the Shares may bear a legend to that effect. Optionee understands that the Company is under no obligation to register the Shares and that an exemption may not be available or may not permit Optionee to transfer Shares in the amounts or at the times proposed by Optionee. 4. Tax Consequences. Optionee understands that Optionee may suffer ---------------- adverse tax consequences as a result of Optionee's purchase or disposition of the Shares. Optionee represents that Optionee has consulted with any tax consultant(s) Optionee deems advisable in connection with the purchase or disposition of the Shares and that Optionee is not relying on the Company for any tax advice. 5. Delivery of Payment. Optionee herewith delivers to the Company the ------------------- aggregate purchase price for the Shares that Optionee has elected to purchase and has made provision for the payment of any federal or state withholding taxes required to be paid or withheld by the Company. 6. Entire Agreement. The Agreement is incorporated herein by reference. ---------------- This Exercise Notice and the Agreement constitute the entire agreement of the parties and supersede in their entirety all prior undertakings and agreements of the Company and Optionee with respect to the subject matter hereof. This Exercise Notice and the Agreement are governed by [Delaware] law except for that body of law pertaining to conflict of laws. Submitted by: Accepted by: OPTIONEE: PALM, INC. By:________________________ By: __________________________ Its: _________________________ Address: Dated: ____________________ Dated: _______________________ -2- EX-10.8 14 FORM OF INDEMNIFICATION AGREEMENT EXHIBIT 10.8 PALM, INC. FORM OF INDEMNIFICATION AGREEMENT This Indemnification Agreement ("Agreement") is entered into as of ____________, ___ by and between Palm, Inc., a Delaware corporation (the "Company") and ____________________________________ ("Indemnitee"). RECITALS -------- A. The Company and Indemnitee recognize the significant increases in the cost of liability insurance for its directors, officers, employees, agents and fiduciaries. B. The Company and Indemnitee further recognize the substantial increase in corporate litigation in general, subjecting directors, officers, employees, agents and fiduciaries to expensive litigation risks at the same time as the availability and coverage of liability insurance has been severely limited. C. Indemnitee does not regard the current protection available as adequate under the present circumstances, and Indemnitee and other directors, officers, employees, agents and fiduciaries of the Company may not be willing to continue to serve in such capacities without additional protection. D. The Company desires to attract and retain the services of highly qualified individuals, such as Indemnitee, to serve the Company and, in part, in order to induce Indemnitee to continue to provide services to the Company, wishes to provide for the indemnification and advancing of expenses to Indemnitee to the maximum extent permitted by law. E. In view of the considerations set forth above, the Company desires that Indemnitee be indemnified by the Company as set forth herein. NOW, THEREFORE, the Company and Indemnitee hereby agree as follows: 1. Indemnification. --------------- (a) Indemnification of Expenses. The Company shall indemnify --------------------------- Indemnitee to the fullest extent permitted by law if Indemnitee was or is or becomes a party to or witness or other participant in, or is threatened to be made a party to or witness or other participant in, any threatened, pending or completed action, suit, proceeding or alternative dispute resolution mechanism, or any hearing, inquiry or investigation that Indemnitee in good faith believes might lead to -1- the institution of any such action, suit, proceeding or alternative dispute resolution mechanism, whether civil, criminal, administrative, investigative or other (hereinafter a "Claim") by reason of (or arising in part out of) any event or occurrence related to the fact that Indemnitee is or was a director, officer, employee, agent or fiduciary of the Company, or any subsidiary of the Company, or is or was serving at the request of the Company as a director, officer, employee, agent or fiduciary of another corporation, partnership, joint venture, trust or other enterprise, or by reason of any action or inaction on the part of Indemnitee while serving in such capacity (hereinafter an "Indemnifiable Event") against any and all expenses (including attorneys' fees and all other costs, expenses and obligations incurred in connection with investigating, defending, being a witness in or participating in (including on appeal), or preparing to defend, be a witness in or participate in, any such action, suit, proceeding, alternative dispute resolution mechanism, hearing, inquiry or investigation), judgments, fines, penalties and amounts paid in settlement (if such settlement is approved in advance by the Company, which approval shall not be unreasonably withheld) of such Claim and any federal, state, local or foreign taxes imposed on Indemnitee as a result of the actual or deemed receipt of any payments under this Agreement (collectively, hereinafter "Expenses"), including all interest, assessments and other charges paid or payable in connection with or in respect of such Expenses. Such payment of Expenses shall be made by the Company as soon as practicable but in any event no later than five days after written demand by Indemnitee therefor is presented to the Company. (b) Reviewing Party. Notwithstanding the foregoing, (i) the --------------- obligations of the Company under Section 1(a) shall be subject to the condition that the Reviewing Party (as described in Section 10(e) hereof) shall not have determined (in a written opinion, in any case in which the Independent Legal Counsel referred to in Section 1(c) hereof is involved) that Indemnitee would not be permitted to be indemnified under applicable law, and (ii) the obligation of the Company to make an advance payment of Expenses to Indemnitee pursuant to Section 2(a) (an "Expense Advance") shall be subject to the condition that, if, when and to the extent that the Reviewing Party determines that Indemnitee would not be permitted to be so indemnified under applicable law, the Company shall be entitled to be reimbursed by Indemnitee (who hereby agrees to reimburse the Company) for all such amounts theretofore paid; provided, however, that if Indemnitee has commenced or thereafter commences legal proceedings in a court of competent jurisdiction to secure a determination that Indemnitee should be indemnified under applicable law, any determination made by the Reviewing Party that Indemnitee would not be permitted to be indemnified under applicable law shall not be binding and Indemnitee shall not be required to reimburse the Company for any Expense Advance until a final judicial determination is made with respect thereto (as to which all rights of appeal therefrom have been exhausted or lapsed). Indemnitees' obligation to reimburse the Company for any Expense Advance shall be unsecured and no interest shall be charged thereon. If there has not been a Change in Control (as defined in Section 10(c) hereof), the Reviewing Party shall be selected by the Board of Directors, and if there has been such a Change in Control (other than a Change in Control which has been approved by a majority of the Company's Board of Directors who were directors immediately prior to such Change in Control), the Reviewing Party shall be the Independent Legal Counsel referred to in -2- Section 1(c) hereof. If there has been no determination by the Reviewing Party or if the Reviewing Party determines that Indemnitee substantively would not be permitted to be indemnified in whole or in part under applicable law, Indemnitee shall have the right to commence litigation seeking an initial determination by the court or challenging any such determination by the Reviewing Party or any aspect thereof, including the legal or factual bases therefor, and the Company hereby consents to service of process and to appear in any such proceeding. Any determination by the Reviewing Party otherwise shall be conclusive and binding on the Company and Indemnitee. (c) Change in Control. The Company agrees that if there is a Change ----------------- in Control of the Company (other than a Change in Control which has been approved by a majority of the Company's Board of Directors who were directors immediately prior to such Change in Control) then, with respect to all matters thereafter arising concerning the rights of Indemnitees to payments of Expenses and Expense Advances under this Agreement or any other agreement or under the Company's Certificate of Incorporation or Bylaws as now or hereafter in effect, Independent Legal Counsel (as defined in Section 10(d) hereof) shall be selected by Indemnitee and approved by the Company (which approval shall not be unreasonably withheld). Such counsel, among other things, shall render its written opinion to the Company and Indemnitee as to whether and to what extent Indemnitee would be permitted to be indemnified under applicable law and the Company agrees to abide by such opinion. The Company agrees to pay the reasonable fees of the Independent Legal Counsel referred to above and to fully indemnify such counsel against any and all expenses (including attorneys' fees), claims, liabilities and damages arising out of or relating to this Agreement or its engagement pursuant hereto. (d) Mandatory Payment of Expenses. Notwithstanding any other ----------------------------- provision of this Agreement other than Section 9 hereof, to the extent that Indemnitee has been successful on the merits or otherwise, including, without limitation, the dismissal of an action without prejudice, in defense of any action, suit, proceeding, inquiry or investigation referred to in Section (1)(a) hereof or in the defense of any claim, issue or matter therein, Indemnitee shall be indemnified against all Expenses incurred by Indemnitee in connection therewith. 2. Expenses; Indemnification Procedure. ----------------------------------- (a) Advancement of Expenses. The Company shall advance all Expenses ----------------------- incurred by Indemnitee. The advances to be made hereunder shall be paid by the Company to Indemnitee as soon as practicable but in any event no later than five days after written demand by Indemnitee therefor to the Company. (b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a -------------------------------- condition precedent to Indemnitees' right to be indemnified under this Agreement, give the Company notice in writing as soon as practicable of any Claim made against Indemnitee for which indemnification will or could be sought under this Agreement. Notice to the Company shall be directed to the -3- Chief Executive Officer of the Company at the address shown on the signature page of this Agreement (or such other address as the Company shall designate in writing to Indemnitee). In addition, Indemnitee shall give the Company such information and cooperation as it may reasonably require and as shall be within Indemnitees' power. (c) No Presumptions; Burden of Proof. For purposes of this -------------------------------- Agreement, the termination of any Claim by judgment, order, settlement (whether with or without court approval) or conviction, or upon a plea of nolo ---- contendere, or its equivalent, shall not create a presumption that Indemnitee - ---------- did not meet any particular standard of conduct or have any particular belief or that a court has determined that indemnification is not permitted by applicable law. In addition, neither the failure of the Reviewing Party to have made a determination as to whether Indemnitee has met any particular standard of conduct or had any particular belief, nor an actual determination by the Reviewing Party that Indemnitee has not met such standard of conduct or did not have such belief, prior to the commencement of legal proceedings by Indemnitee to secure a judicial determination that Indemnitee should be indemnified under applicable law, shall be a defense to Indemnitee's claim or create a presumption that Indemnitee has not met any particular standard of conduct or did not have any particular belief. In connection with any determination by the Reviewing Party or otherwise as to whether Indemnitee is entitled to be indemnified hereunder, the burden of proof shall be on the Company to establish that Indemnitee is not so entitled. (d) Notice to Insurers. If, at the time of the receipt by the ------------------ Company of a notice of a Claim pursuant to Section 2(b) hereof, the Company has liability insurance in effect which may cover such Claim, the Company shall give prompt notice of the commencement of such Claim to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of Indemnitee, all amounts payable as a result of such action, suit, proceeding, inquiry or investigation in accordance with the terms of such policies. (e) Selection of Counsel. In the event the Company shall be -------------------- obligated hereunder to pay the Expenses of any Claim, the Company shall be entitled to assume the defense of such Claim with counsel approved by Indemnitee, which approval shall not be unreasonably withheld, upon the delivery to Indemnitee of written notice of its election so to do. After delivery of such notice, approval of such counsel by Indemnitee and the retention of such counsel by the Company, the Company will not be liable to Indemnitee under this Agreement for any fees of counsel subsequently incurred by Indemnitee with respect to the same Claim; provided that, (i) Indemnitee shall have the right to employ Indemnitees' counsel in any such Claim at Indemnitee expense and (ii) if (A) the employment of counsel by Indemnitee has been previously authorized by the Company, (B) Indemnitee shall have reasonably concluded that there is a conflict of interest between the Company and Indemnitee in the conduct of any such defense, or (C) the Company shall not continue to retain such counsel to defend such Claim, then the fees and expenses of Indemnitee counsel shall be at the expense of the Company. The Company shall have -4- the right to conduct such defense as it sees fit in its sole discretion, including the right to settle any claim against Indemnitee without the consent of the Indemnitee. 3. Additional Indemnification Rights; Nonexclusivity. ------------------------------------------------- (a) Scope. The Company hereby agrees to indemnify Indemnitee to the ----- fullest extent permitted by law, notwithstanding that such indemnification is not specifically authorized by the other provisions of this Agreement, the Company's Certificate of Incorporation, the Company's Bylaws or by statute. In the event of any change after the date of this Agreement in any applicable law, statute or rule which expands the right of a Delaware corporation to indemnify a member of its Board of Directors or an officer, employee, agent or fiduciary, it is the intent of the parties hereto that Indemnitee shall enjoy by this Agreement the greater benefits afforded by such change. In the event of any change in any applicable law, statute or rule which narrows the right of a Delaware corporation to indemnify a member of its Board of Directors or an officer, employee, agent or fiduciary, such change, to the extent not otherwise required by such law, statute or rule to be applied to this Agreement, shall have no effect on this Agreement or the parties' rights and obligations hereunder except as set forth in Section 8(a) hereof. (b) Nonexclusivity. The indemnification provided by this Agreement -------------- shall be in addition to any rights to which Indemnitee may be entitled under the Company's Certificate of Incorporation, its Bylaws, any agreement, any vote of stockholders or disinterested directors, the General Corporation Law of the State of Delaware, or otherwise. The indemnification provided under this Agreement shall continue as to Indemnitee for any action Indemnitee took or did not take while serving in an indemnified capacity even though Indemnitee may have ceased to serve in such capacity. 4. No Duplication of Payments. The Company shall not be liable under -------------------------- this Agreement to make any payment in connection with any Claim made against Indemnitee to the extent Indemnitee has otherwise actually received payment (under any insurance policy, Certificate of Incorporation, Bylaw or otherwise) of the amounts otherwise indemnifiable hereunder. 5. Partial Indemnification. If Indemnitee is entitled under any ----------------------- provision of this Agreement to indemnification by the Company for some or a portion of Expenses incurred in connection with any Claim, but not, however, for all of the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion of such Expenses to which Indemnitee are entitled. 6. Mutual Acknowledgement. Both the Company and Indemnitee acknowledge ---------------------- that in certain instances, Federal law or applicable public policy may prohibit the Company from indemnifying its directors, officers, employees, agents or fiduciaries under this Agreement or otherwise. Indemnitee understands and acknowledges that the Company has undertaken or may be required in the future to undertake with the Securities and Exchange Commission to submit the -5- question of indemnification to a court in certain circumstances for a determination of the Company's right under public policy to indemnify Indemnitee. 7. Liability Insurance. To the extent the Company maintains liability ------------------- insurance applicable to directors, officers, employees, agents or fiduciaries, Indemnitee shall be covered by such policies in such a manner as to provide Indemnitee the same rights and benefits as are accorded to the most favorably insured of the Company's directors, if Indemnitee is a director; or of the Company's officers, if Indemnitee is not a director of the Company but is an officer; or of the Company's key employees, agents or fiduciaries, if Indemnitee is not an officer or director but is a key employee, agent or fiduciary. 8. Exceptions. Any other provision herein to the contrary ---------- notwithstanding, the Company shall not be obligated pursuant to the terms of this Agreement: (a) Excluded Action or Omissions. (i) To indemnify Indemnitee for ---------------------------- Indemnitee's acts, omissions or transactions from which Indemnitee or the Indemnitee may not be indemnified under applicable law; or (ii) to indemnify Indemnity for Indemnity's intentional acts or transactions in violation of the Company's policies; (b) Claims Initiated by Indemnitee. To indemnify or advance expenses ------------------------------ to Indemnitee with respect to Claims initiated or brought voluntarily by Indemnitee and not by way of defense, except (i) with respect to actions or proceedings brought to establish or enforce a right to indemnification under this Agreement or any other agreement or insurance policy or under the Company's Certificate of Incorporation or Bylaws now or hereafter in effect relating to Claims for Indemnifiable Events, (ii) in specific cases if the Board of Directors has approved the initiation or bringing of such Claim, or (iii) as otherwise required under Section 145 of the Delaware General Corporation Law, regardless of whether Indemnitee ultimately is determined to be entitled to such indemnification, advance expense payment or insurance recovery, as the case may be; (c) Lack of Good Faith. To indemnify Indemnitee for any expenses ------------------ incurred by Indemnitee with respect to any proceeding instituted by Indemnitee to enforce or interpret this Agreement, if a court of competent jurisdiction determines that each of the material assertions made by Indemnitee in such proceeding was not made in good faith or was frivolous; or (d) Claims Under Section 16(b). To indemnify Indemnitee for expenses -------------------------- and the payment of profits arising from the purchase and sale by Indemnitee of securities in violation of Section 16(b) of the Securities Exchange Act of 1934, as amended, or any similar successor statute. 9. Period of Limitations. No legal action shall be brought and no cause --------------------- of action shall be asserted by or in the right of the Company against Indemnitee, Indemnitee's estate, spouse, heirs, executors or personal or legal representatives after the expiration of two years from the date -6- of accrual of such cause of action, and any claim or cause of action of the Company shall be extinguished and deemed released unless asserted by the timely filing of a legal action within such two-year period; provided, however, that if -------- ------- any shorter period of limitations is otherwise applicable to any such cause of action, such shorter period shall govern. 10. Construction of Certain Phrases. ------------------------------- (a) For purposes of this Agreement, references to the "Company" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, employees, agents or fiduciaries, so that if Indemnitee is or was a director, officer, employee, agent or fiduciary of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee, agent or fiduciary of another corporation, partnership, joint venture, employee benefit plan, trust or other enterprise, Indemnitee shall stand in the same position under the provisions of this Agreement with respect to the resulting or surviving corporation as Indemnitee would have with respect to such constituent corporation if its separate existence had continued. (b) For purposes of this Agreement, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on Indemnitee with respect to an employee benefit plan; and references to "serving at the request of the Company" shall include any service as a director, officer, employee, agent or fiduciary of the Company which imposes duties on, or involves services by, such director, officer, employee, agent or fiduciary with respect to an employee benefit plan, its participants or its beneficiaries; and if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan, Indemnitee shall be deemed to have acted in a manner "not opposed to the best interests of the Company" as referred to in this Agreement. (c) For purposes of this Agreement a "Change in Control" shall be deemed to have occurred if (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company or a corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company, (A) who is or becomes the beneficial owner, directly or indirectly, of securities of the Company representing 10% or more of the combined voting power of the Company's then outstanding Voting Securities, increases his beneficial ownership of such securities by 5% or more over the percentage so owned by such person, or (B) becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing more than 20% of the total voting power represented by the Company's then outstanding Voting Securities, (ii) during any period of two consecutive years, -7- individuals who at the beginning of such period constitute the Board of Directors of the Company and any new director whose election by the Board of Directors or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof, or (iii) the stockholders of the Company approve 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 80% 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 the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of (in one transaction or a series of transactions) all or substantially all of the Company's assets. (d) For purposes of this Agreement, "Independent Legal Counsel" shall mean an attorney or firm of attorneys, selected in accordance with the provisions of Section 1(c) hereof, who shall not have otherwise performed services for the Company or Indemnitee within the last three years (other than with respect to matters concerning the rights of Indemnitee under this Agreement, or of other indemnitees under similar indemnity agreements). (e) For purposes of this Agreement, a "Reviewing Party" shall mean any appropriate person or body consisting of a member or members of the Company's Board of Directors or any other person or body appointed by the Board of Directors who is not a party to the particular Claim for which Indemnitee are seeking indemnification, or Independent Legal Counsel. (f) For purposes of this Agreement, "Voting Securities" shall mean any securities of the Company that vote generally in the election of directors. 11. Counterparts. This Agreement may be executed in one or more ------------ counterparts, each of which shall constitute an original. 12. Binding Effect; Successors and Assigns. This Agreement shall be -------------------------------------- binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors, assigns, including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business and/or assets of the Company, spouses, heirs, and personal and legal representatives. The Company shall require and cause any successor (whether direct or indirect by purchase, merger, consolidation or otherwise) to all, substantially all, or a substantial part, of the business and/or assets of the Company, by written agreement in form and substance satisfactory to Indemnitee, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no -8- such succession had taken place. This Agreement shall continue in effect with respect to Claims relating to Indemnifiable Events regardless of whether Indemnitee continues to serve as a director, officer, employee, agent or fiduciary of the Company or of any other enterprise at the Company's request. 13. Attorneys' Fees. In the event that any action is instituted by --------------- Indemnitee under this Agreement or under any liability insurance policies maintained by the Company to enforce or interpret any of the terms hereof or thereof, Indemnitee shall be entitled to be paid all Expenses incurred by Indemnitee with respect to such action, regardless of whether Indemnitee is ultimately successful in such action, and shall be entitled to the advancement of Expenses with respect to such action, unless, as a part of such action, a court of competent jurisdiction over such action determines that each of the material assertions made by Indemnitee as a basis for such action was not made in good faith or was frivolous. In the event of an action instituted by or in the name of the Company under this Agreement to enforce or interpret any of the terms of this Agreement, Indemnitee shall be entitled to be paid all Expenses incurred by Indemnitee in defense of such action (including costs and expenses incurred with respect to Indemnitee counterclaims and cross-claims made in such action), and shall be entitled to the advancement of Expenses with respect to such action, unless, as a part of such action, a court having jurisdiction over such action determines that each of Indemnitee material defenses to such action was made in bad faith or was frivolous. 14. Notice. All notices and other communications required or permitted ------ hereunder shall be in writing, shall be effective when given, and shall in any event be deemed to be given (a) five (5) days after deposit with the U.S. Postal Service or other applicable postal service, if delivered by first class mail, postage prepaid, (b) upon delivery, if delivered by hand, (c) one business day after the business day of deposit with Federal Express or similar overnight courier, freight prepaid, or (d) one day after the business day of delivery by facsimile transmission, if delivered by facsimile transmission, with copy by first class mail, postage prepaid, and shall be addressed if to Indemnitee, at the Indemnitee address as set forth beneath Indemnitee signatures to this Agreement and if to the Company at the address of its principal corporate offices (attention: Secretary) or at such other address as such party may designate by ten days' advance written notice to the other party hereto. 15. Consent to Jurisdiction. The Company and Indemnitee each hereby ----------------------- irrevocably consent to the jurisdiction of the courts of the State of Delaware for all purposes in connection with any action or proceeding which arises out of or relates to this Agreement and agree that any action instituted under this Agreement shall be commenced, prosecuted and continued only in the Court of Chancery of the State of Delaware in and for New Castle County, which shall be the exclusive and only proper forum for adjudicating such a claim. 16. Severability. The provisions of this Agreement shall be severable in ------------ the event that any of the provisions hereof (including any provision within a single section, paragraph or -9- sentence) are held by a court of competent jurisdiction to be invalid, void or otherwise unenforceable, and the remaining provisions shall remain enforceable to the fullest extent permitted by law. Furthermore, to the fullest extent possible, the provisions of this Agreement (including, without limitations, each portion of this Agreement containing any provision held to be invalid, void or otherwise unenforceable, that is not itself invalid, void or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable. 17. Choice of Law. This Agreement shall be governed by and its provisions ------------- construed and enforced in accordance with the laws of the State of Delaware, as applied to contracts between Delaware residents, entered into and to be performed entirely within the State of Delaware, without regard to the conflict of laws principles thereof. 18. Subrogation. In the event of payment under this Agreement, the ----------- Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee who shall execute all documents required and shall do all acts that may be necessary to secure such rights and to enable the Company effectively to bring suit to enforce such rights. 19. Amendment and Termination. No amendment, modification, termination or ------------------------- cancellation of this Agreement shall be effective unless it is in writing signed by both the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver. 20. Integration and Entire Agreement. This Agreement sets forth the -------------------------------- entire understanding between the parties hereto and supersedes and merges all previous written and oral negotiations, commitments, understandings and agreements relating to the subject matter hereof between the parties hereto. 21. No Construction as Employment Agreement. Nothing contained in this --------------------------------------- Agreement shall be construed as giving Indemnitee any right to be retained in the employ of the Company or any of its subsidiaries. [Remainder of page intentionally left blank; signature page follows immediately hereafter] -10- IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. PALM, INC. ______________________________________ By: ______________________________________ Title: Address:______________________________ ______________________________ AGREED TO AND ACCEPTED BY: Signature: _______________________ Name: _______________________ Address: _______________________ -11- EX-10.11 15 COMMON STOCK PURCHASE AGREEMENT - AOL EXHIBIT 10.11 PALM COMPUTING, INC. COMMON STOCK PURCHASE AGREEMENT December 13, 1999 TABLE OF CONTENTS
Page ---- 1. Agreement To Sell and Purchase................................................. 1 1.1 Authorization Of Shares............................................... 1 1.2 Sale And Purchase Of Common Stock..................................... 1 1.3 Hart-Scott-Rodino Compliance.......................................... 2 2. Closing, Delivery And Payment.................................................. 2 3. Representations and Warranties Of The Company.................................. 3 3.1 Organization, Good Standing And Qualification......................... 3 3.2 Authorization; Binding Obligations.................................... 3 3.3 Compliance With Other Instruments..................................... 3 3.4 Valid Issuance of Shares.............................................. 4 3.5 Litigation, Etc....................................................... 4 3.6 Governmental Consent, Etc............................................. 4 3.7 Intellectual Property Rights.......................................... 4 4. Representations And Warranties Of Purchaser.................................... 4 4.1 Requisite Power And Authority......................................... 4 4.2 Consents.............................................................. 5 4.3 Investment Representations............................................ 5 4.4 Legends............................................................... 6 4.5 Removal of Legend and Transfer Restrictions........................... 6 5. Conditions To Closing.......................................................... 6 5.1 Conditions To Purchaser's Obligations At The Closing.................. 6 5.2 Conditions To Obligations Of The Company.............................. 7 6. Rule 144 Reporting............................................................. 8 7. Covenants...................................................................... 8 7.1 "Stand-Off"Agreement.................................................. 8 7.2 Right of First Offer.................................................. 9 8. Miscellaneous.................................................................. 10 8.1 Governing Law......................................................... 10 8.2 Survival.............................................................. 10 8.3 Successors And Assigns................................................ 10 8.4 Separability.......................................................... 10
-i- TABLE OF CONTENTS (continued)
Page ---- 8.5 Amendment And Waiver................................................. 10 8.6 Notices.............................................................. 11 8.7 Expenses............................................................. 11 8.8 Attorneys' Fees...................................................... 11 8.9 Titles And Subtitles................................................. 11 8.10 Counterparts......................................................... 11 8.11 Broker's Fees........................................................ 11 8.12 Termination.......................................................... 11 8.13 Subsequent, Consents, Permits and Waivers............................ 11 8.14 Most Favored Nations................................................. 11
List of Exhibits: Annex 1 - Formula Annex 2 - Company Schedule of Exceptions Exhibit A - Form of Legal Opinion -ii- PALM COMPUTING, INC. COMMON STOCK PURCHASE AGREEMENT This Common Stock Purchase Agreement (the "Agreement") is entered into as of December 13, 1999, by and between Palm Computing, Inc., a California corporation (the "Company"), and America Online, Inc., a Delaware corporation ("Purchaser"). RECITALS Whereas, the Company intends to reincorporate by merger into Palm, Inc., a Delaware corporation being formed for the purpose of the reincorporation and that will be the surviving entity; the "Company" as used in this Agreement refers to, prior to such merger, the California corporation and, after such merger, the Delaware corporation; the Delaware corporation will assume this Agreement; and Whereas, Purchaser desires to purchase shares of the Company's common stock ("Common Stock"), such purchase to be made in a private placement to close concurrently with, but not before, the closing of the initial public offering of the Company (the "IPO") pursuant to a Registration Statement to be filed on Form S-1 with the Securities and Exchange Commission (the "Commission") (such registration statement, as amended, shall be referred to herein as the "Registration Statement"); and Whereas, the Company desires to issue and sell the Shares (as defined below) to Purchaser on the terms and conditions set forth herein. Now, Therefore, in consideration of the foregoing recitals and the mutual promises hereinafter set forth, the parties hereto agree as follows: 1. Agreement To Sell and Purchase. 1.1 Authorization Of Shares. On or prior to the Closing (as defined in Section 2 below), the Company shall have authorized the sale and issuance to Purchaser of the Shares. Prior to the Closing the Company will have adopted and filed a Certificate of Incorporation (the "Certificate of Incorporation") with the Secretary of State of the State of Delaware authorizing sufficient shares of Common Stock to cover the sale and issuance of the Shares to be purchased hereunder. 1.2 Sale And Purchase Of Common Stock. Subject to the terms and conditions hereof, the Company hereby agrees to issue and sell to Purchaser and Purchaser agrees to purchase from the Company, at the Closing, the lesser of: (a) that whole number of shares of Common Stock equal to -1- the quotient determined by dividing $80 million by the per share Price to Public (as defined below) and rounding down to the nearest whole number or (b) that whole number of shares of Common Stock determined by multiplying the number of shares of Post-Money Outstanding Capital Stock of the Company by .015 and rounding down to the nearest whole number. For purposes of this Agreement, the term "Post-Money Outstanding Capital Stock" shall mean the number of shares of Common Stock outstanding immediately following the closing of the IPO and including (i) the number of shares of Common Stock issuable pursuant to then outstanding options or warrants for Common Stock (including those options issued at the time of the IPO and excluding specifically options to purchase 3Com common stock which may be converted into options to purchase the Company's Common Stock at the time 3Com distributes its shares of the Company's Common Stock to 3Com stockholders), (ii) any Common Stock issuable pursuant to any then outstanding class or series of stock convertible into Common Stock and (iii) the Private Placement Shares (as defined on Annex 1 attached to this Agreement). The shares of Common Stock to be purchased hereunder are referred to as the "Shares". The per share purchase price for the Shares purchased hereunder shall be the per share Price to Public. For purposes of this Agreement, the term "Price to Public" shall mean the Price to Public set forth on the cover page of the final Prospectus (as defined below). For purposes of this Agreement, the term "Prospectus" means the prospectus, as amended, on file with the Commission at the time the Registration Statement becomes effective, including the information deemed to be part of the Registration at the time of effectiveness pursuant to Rule 430A, if applicable, except that if the Prospectus filed by the Company pursuant to Rule 424(b) differs from the prospectus on file at the time the Registration Statement becomes effective, the term "Prospectus" shall refer to the Rule 424(b) Prospectus from and after the time it was filed with the Commission or transmitted to the Commission for filing. 1.3 Hart-Scott-Rodino Compliance. Notwithstanding anything else in this Agreement, if the sale and issuance of the Shares is subject to the premerger notification requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), it shall be a condition to the Closing that any waiting period under the HSR Act applicable to the purchase of the Shares shall have expired or been terminated and any approvals required thereunder shall have been obtained, and the parties shall cooperate in promptly filing premerger reports and in taking all steps reasonably necessary to obtain early termination of any applicable HSR Act waiting periods. If any such waiting period shall not have expired or been subject to early termination on or before the date ninety (90) days from the date of this Agreement, either party may terminate this Agreement by giving written notice to the other. 2. Closing, Delivery And Payment Subject to the terms of Section 5, the closing of the sale and purchase of the Shares under this Agreement (the "Closing") shall take place concurrently with, but not before, the closing of the IPO at the offices of Wilson Sonsini Goodrich & Rosati, Professional Corporation, 650 Page Mill Road, Palo Alto, California 94304. The date of the Closing is referred to as the "Closing Date." At the -2- Closing, subject to the terms and conditions hereof, the Company will deliver to Purchaser a certificate representing the number of Shares to be purchased at the Closing against payment by or on behalf of Purchaser of the purchase price therefor by cash, wire transfer, or by such other means as shall be mutually agreeable to Purchaser and the Company. 3. Representations and Warranties Of The Company. The Company represents and warrants to Purchaser that, as of the effective date of the underwriting agreement entered into with the managing underwriters of the IPO (the "Underwriting Agreement"), the representations and warranties set forth in such underwriting agreement will be true and correct in all respects and incorporated by reference herein. Except as set forth in the Schedule of Exceptions attached hereto as Annex 2, the Company hereby additionally represents and warrants to Purchaser as of the date hereof as follows: 3.1 Organization, Good Standing And Qualification. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of California. The Company has full power and authority to own and operate its properties and assets, and to carry on its business as presently conducted. The Company is duly qualified, is authorized to do business and is in good standing as a foreign corporation in all jurisdictions in which the nature of its activities and of its properties (both owned and leased) makes such qualification necessary, except for those jurisdictions, in the aggregate, in which failure to do so would not have a material adverse effect on the Company or its business. 3.2 Authorization; Binding Obligations. All corporate action on the part of the Company, its officers, directors and shareholders necessary for the authorization, execution and delivery of this Agreement and the Certificate of Incorporation, for the sale and issuance of the Shares pursuant hereto and for the performance of the Company's obligations hereunder has been taken or will be taken prior to the Closing. This Agreement, when executed and delivered, will be a valid and binding obligation of the Company enforceable in accordance with its terms. The sale of the Shares is not and will not be subject to any preemptive rights or rights of first refusal that have not been properly waived or complied with. When issued in compliance with the provisions of this Agreement and the Certificate of Incorporation, the Shares will be validly issued, fully paid and nonassessable, and will be free of any liens or encumbrances; provided, however, that the Shares may be subject to restrictions on transfer under this Agreement and under state and/or federal securities laws as set forth herein or as otherwise required by such laws at the time a transfer is proposed. 3.3 Compliance With Other Instruments. The execution, delivery and performance of and compliance with this Agreement and the issuance and sale of the Shares pursuant hereto will not (i) materially conflict with, or result in a material breach or violation of, or constitute a material default under, or result in the creation or imposition of any material lien, (ii) violate, conflict with or result in the breach of any material terms of, or result in the material modification of, any material contract or otherwise give any other contracting party the right to terminate a material contract, or constitute (or with notice or lapse of time both constitute) a material default under any material -3- contract to which the Company is a party or by or to which it or any of its assets or properties may be bound or subject or (iii) result in any violation, or be in conflict with or constitute a default under any term, of its charter or bylaws. 3.4 Valid Issuance of Shares. The Shares which will be purchased by Purchaser hereunder, when issued, sold and delivered in accordance with the terms hereof for the consideration expressed herein, will be duly and validly authorized and issued, fully paid and nonassessable. 3.5 Litigation, Etc. There is no action, suit, proceeding nor, to the Company's knowledge, any investigation pending or currently threatened against the Company, that questions the validity of this Agreement or the right of the Company to enter into such agreements, or which might result, either individually or in the aggregate, in any material adverse change in the assets, condition, affairs or prospects of the Company, financial or otherwise. 3.6 Governmental Consent, Etc. No consent, approval or authorization of, or designation, declaration or filing with, any governmental authority on the part of the Company is required in connection with the valid execution, delivery, and performance of this Agreement or the offer, sale or issuance of the Shares, or the consummation of any other transaction contemplated by this Agreement except certain filings as may be required under the Securities Act and state securities laws and regulations, which filings will be made timely in accordance with the applicable law or regulation. 3.7 Intellectual Property Rights. To the knowledge of the Company, the Company or its subsidiaries own and possess or are licensed under all patents, patent applications, licenses, trademarks, trade secrets, trade names, brand names, inventions and copyrights or other proprietary rights ("Intellectual Property") employed in the operation of their respective businesses as currently conducted, and, to the knowledge of the Company, with no infringement of or conflict with the rights or others respecting any of the same. Neither the Company nor any subsidiary has received any communications alleging that the Company or any subsidiary has violated any of the Intellectual Property of any other person or entity. Reasonable security measures have been taken by the Company and its subsidiaries to protect the secrecy, confidentiality and value of the Company's and its subsidiaries' trade secrets, including their respective know-how, technology, concepts and other technical data for the development, processing, manufacture and sale of its products. Each employee of and consultant to the Company or its subsidiaries has executed an invention assignment and confidentiality agreement with the Company or its subsidiaries. 4. Representations And Warranties Of Purchaser Purchaser hereby represents and warrants to the Company as follows: 4.1 Requisite Power And Authority. Purchaser has all necessary power and authority under all applicable provisions of law to execute and deliver this Agreement and to carry out the provisions of this Agreement. All action on Purchaser's part required for the lawful execution and -4- delivery of this Agreement has been or will be effectively taken prior to the Closing. This Agreement, when executed and delivered, will be a valid and binding obligation of Purchaser, enforceable in accordance with its terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application affecting enforcement of creditors' rights and (ii) general principles of equity that restrict the availability of equitable remedies. 4.2 Consents. All consents, approvals, orders, authorizations, registrations, qualifications, designations, declarations or filings with any governmental or banking authority on the part of Purchaser required in connection with the consummation of the transactions contemplated in this Agreement have been or shall have been obtained prior to and be effective as of the Closing. 4.3 Investment Representations. Purchaser understands that the Shares have not been registered under the Securities Act. Purchaser also understands that the Shares are being offered and sold pursuant to an exemption from registration contained in the Securities Act based in part upon Purchaser's representations contained in the Agreement. Purchaser hereby represents and warrants as follows: (a) Purchaser Is An Accredited Investor. Purchaser represents that Purchaser is an "accredited investor" within the meaning of Rule 501(a) of Regulation D under the Securities Act. (b) Purchaser Bears Economic Risk. Purchaser must bear the economic risk of this investment indefinitely unless the Shares are registered pursuant to the Securities Act, or an exemption from registration is available. Purchaser understands that it will have no registration rights with respect to the Shares. Purchaser also understands that there is no assurance that any exemption from registration under the Securities Act will be available and that, even if available, such exemption may not allow Purchaser to transfer all or any portion of the Shares under the circumstances, in the amounts or at the times Purchaser might propose. (c) Acquisition For Own Account. Purchaser is acquiring the Shares for Purchaser's own account for investment only, and not with a view towards their distribution within the meaning of the Securities Act. (d) Purchaser Can Protect Its Interest. Purchaser represents that by reason of its, or of its management's, business or financial experience, Purchaser has the capacity to protect its own interests in connection with the transactions contemplated in this Agreement. Purchaser is not a corporation, trust or partnership specifically formed for the purpose of consummating these transactions. (e) Company Information. Purchaser has had an opportunity to discuss the Company's business, management and financial affairs with directors, officers and management of the Company and has had the opportunity to review the Company's operations and facilities. -5- Purchaser has also had the opportunity to ask questions of and receive answers from, the Company and its management regarding the terms and conditions of this investment. 4.4 Legends. Each certificate representing the Shares may be endorsed with the following legends: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND ARE "RESTRICTED SECURITIES" AS DEFINED IN RULE 144 PROMULGATED UNDER THE ACT. THE SECURITIES MAY NOT BE SOLD OR OFFERED FOR SALE OR OTHERWISE DISTRIBUTED EXCEPT (I) IN CONJUNCTION WITH AN EFFECTIVE REGISTRATION STATEMENT FOR THE SHARES UNDER THE ACT, OR (II) IN COMPLIANCE WITH RULE 144 OR (III) PURSUANT TO AN OPINION OF COUNSEL TO THE CORPORATION THAT SUCH REGISTRATION OR COMPLIANCE IS NOT REQUIRED AS TO SUCH SALE, OFFER OR DISTRIBUTION." "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO, AND MAY BE TRANSFERRED ONLY IN ACCORDANCE WITH, THE TERMS OF CERTAIN AGREEMENTS AMONG THE COMPANY AND THE STOCKHOLDER, WHICH INCLUDE, WITHOUT LIMITATION, 180 DAY MARKET STANDOFF RESTRICTIONS AND OBLIGATIONS OF RIGHTS OF FIRST OFFER, COPIES OF WHICH ARE ON FILE WITH THE SECRETARY OF THE COMPANY." The Company need not register a transfer of any Shares, and may also instruct its transfer agent not to register the transfer of the Shares, unless the conditions specified in the foregoing legends are satisfied. 4.5 Removal of Legend and Transfer Restrictions. Any legend endorsed on a certificate pursuant to subsection 4.4 and the stop transfer instructions with respect to such Shares shall be removed and the Company shall issue a certificate without such legend to the holder thereof if such legend may be properly removed under the terms of Rule 144 promulgated under the Securities Act or if such holder provides the Company with an opinion of counsel for such holder, reasonably satisfactory to legal counsel for the Company, to the effect that a sale, transfer or assignment of such Shares may be made without registration. 5. Conditions To Closing. 5.1 Conditions To Purchaser's Obligations At The Closing. Purchaser's obligation to purchase the Shares identified in Section 1.2 of the Agreement at the Closing are subject to the satisfaction, at or prior to the Closing, of the following conditions: -6- (a) Concurrent Closing of IPO. The Closing shall occur concurrently with, and not before, the closing of the IPO. (b) Representations And Warranties True; Performance Of Obligations. The representations and warranties made by the Company in Section 3 (except for Section 3.5 and 3.7) and the representations and warranties which are incorporated by reference from the Underwriting Agreement shall be true and correct as of the Closing, and the Company shall have performed and complied with all obligations and conditions herein required to be performed or complied with by it on or prior to the Closing and shall have delivered an officer's certificate as to the matters set forth in this Section 5.1(b). (c) Legal Investment. At the time of the Closing, the sale and issuance of the Shares shall be legally permitted by all laws and regulations to which Purchaser and the Company are subject. (d) Consents, Permits, And Waivers. The Company shall have obtained any and all authorizations, approvals, consents, permits and waivers necessary or appropriate for consummation of the transactions contemplated by this Agreement (except for such as may be properly obtained subsequent to the Closing, and such items shall be effective on and as of the Closing). (e) Legal Opinion. The Company shall have delivered an opinion of counsel to the Purchaser in substantially the form attached hereto as Exhibit A. --------- (f) Transfer Agent Instructions. The Company shall have delivered to Purchaser a copy of a letter to the Company's transfer agent, dated the Closing Date, and instructing the transfer agent to issue the Shares. 5.2 Conditions To Obligations Of The Company. The Company's obligation to issue and sell the Shares at the Closing is subject to the satisfaction, on or prior to the Closing of the following conditions: (a) Concurrent Closing of IPO. The closing of the IPO shall occur concurrently with, but not before, the Closing. (b) Representations And Warranties True. The representations and warranties made by Purchaser in Section 4 hereof shall be true and correct in all material respects at the date of the Closing, with the same force and effect as if they had been made on and as of said date. (c) Performance Of Obligations. Purchaser shall have performed and complied with all agreements and conditions herein required to be performed or complied with by Purchaser on or before the Closing. -7- (d) Payment of Purchase Price. Purchaser shall deliver to the Company payment for the Shares to be acquired by such Purchase in the amounts set forth in Section 1.2 hereto pursuant to the wire instructions provided by the company. 6. Rule 144 Reporting With a view to making available to Purchaser the benefits of certain rules and regulations of the SEC which may permit the sale of the Shares to the public without registration, the Company agrees at all times after the effective date of the Registration Statement to: (a) make and keep public information available, as those terms are understood and defined in SEC Rule 144. (b) file with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and the Securities Exchange Act of 1934, as amended (the "Exchange Act"). (c) so long as Purchaser owns any Shares, to furnish to Purchaser within a reasonable time upon a written request by Purchaser, a written statement by the Company as to its compliance with the reporting requirements of said Rule 144 (at any time after ninety (90) days after the effective date of the first registration statement filed by the Company for an offering of its securities to the general public) and of the Exchange Act (at any time after it has become subject to such reporting requirements), a copy of the most recent annual or quarterly report of the Company, and such other reports and documents so filed by the Company as Purchaser may reasonably request in complying with any rule or regulation of the SEC allowing Purchaser to sell any such securities without registration. 7. Covenants 7.1 "Stand-Off" Agreement. The Purchaser agrees not to (1) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly any of the Shares or any shares of Common Stock of the Company or any securities convertible into or exercisable or exchangeable for Shares or Common Stock of the Company (whether such shares or any such securities are now owned by the undersigned or are hereafter acquired, or (2) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Shares or Common Stock of the Company, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of Shares or Common Stock or such other securities, in cash or otherwise, for 180 days following the Closing. The provisions of this Section 7.1 shall be for the benefit of and enforceable by the underwriters of the IPO, acting through the managing underwriter. -8- 7.2 Right of First Offer. For so long as Purchaser holds any Shares, if the Purchaser joins in a partnership, limited partnership, syndicate, or otherwise acts in concert or alone for the purpose of disposing of more than 5% of the Shares (as adjusted for stock splits or similar events after the date hereof) to a single person or transferee or any group of affiliated persons or transferees but specifically excluding any hedging or similar transactions, the Purchaser shall give the Company the opportunity to purchase such stock, in the following manner: (a) The Purchaser shall give notice (the "Transfer Notice") to the Company in writing of such intention, specifying the number and kind of securities proposed to be sold or transferred, the proposed price per share therefor (the "Transfer Price") and the other material terms, upon which such disposition is proposed to be made, including the names of the proposed purchasers or transferees if such persons have been identified. (b) The Company shall have the right, exercisable by written notice given by the Company to the Purchaser within ten calendar days of receipt of the Transfer Notice to purchase all of the shares specified in such Transfer Notice upon the terms specified in such Transfer Notice. Notwithstanding the foregoing, the Company shall have twenty-five calendar days from the receipt of the Transfer Notice (regardless of the date of the Transfer Notice) to notify Purchaser of the Company's election to purchase the shares pursuant to this Section 7.2 if the Company shall furnish a certificate signed by the President or Chief Executive Officer of the Company within ten calendar days of receipt of the Transfer Notice stating that, in the good faith judgment of the management of the Company, it would be detrimental to the Company and its stockholders to decide whether to elect to purchase the Shares within the ten day period provided for pursuant to this Section 7.2 (it being understood that the mere election of Purchaser to sell such Shares in a transaction triggering the provisions of this Section 7.2 shall not constitute such an event). The purchase of the shares by the Company must be completed within 60 calendar days from the receipt of the Transfer Notice. The Company and Purchaser shall use their best efforts to secure during such period any approvals required on their respective parts in connection therewith. The Company shall have the right to pay for such shares specified in the Transfer Notice: (a) the same amount in cash, if the consideration to be paid consists of cash, or (b) to the extent that the consideration to be paid does not consist of cash, consideration per share equivalent to that set forth in the Transfer Notice, or an amount of cash having equivalent value, as determined in good faith by mutual agreement of the Company and the Purchaser. (c) If the Company (or its assignees) does not exercise its right of first offer hereunder within the time specified for such exercise, the Seller(s) shall be free, during the period of 120 days following the date of the Transfer Notice, to sell the shares specified in such Transfer Notice for such consideration and on such other material terms as shall be no more favorable to the purchaser of the shares than the terms specified in such Transfer Notice. (d) The provisions of this Section 7.2 shall terminate upon the earlier to occur of: (i) such time as 3Com Corporation distributes its shares of the Company's Common Stock to the shareholders of 3Com Corporation or (ii) one year following the Closing Date. -9- 8. Miscellaneous 8.1 Governing Law. This Agreement shall be governed in all respects by the laws of the State of California. 8.2 Survival. The representations, warranties, covenants and agreements made herein shall survive any investigation made by Purchaser and the closing of the transactions contemplated hereby. All statements as to factual matters contained in any certificate or other instrument delivered by or on behalf of the Company pursuant hereto in connection with the transactions contemplated hereby shall be deemed to be representations and warranties by the Company hereunder solely as of the date of such certificate or instrument, except as expressly provided otherwise in such certificate or instrument. 8.3 Successors And Assigns. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto and shall inure to the benefit of and be enforceable by each person who shall be a holder of the Shares from time to time; provided, however, that prior to the receipt by the Company of adequate written notice of the transfer of any Shares specifying the full name and address of the transferee, the Company may deem and treat the person listed as the holder of such Shares in its records as the absolute owner and holder of such Shares for all purposes, the payment of any dividends or any redemption price. 8.4 Separability. In case any provision of the Agreement shall be invalid, illegal or unenforceable, such provision shall, to the extent practicable, be modified so as to make it valid, legal and enforceable and to maintain as nearly as practicable the intent of the parties, and the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 8.5 Amendment And Waiver. (a) This Agreement may be amended or modified only upon the written consent of the parties hereto. (b) The obligations of the Company and the rights of the holder of the Shares under this Agreement may be waived only with the written consent of the parties hereto. (c) Except to the extent provided in this Section 8.5, neither this Agreement nor any provision hereof may be changed, waived, discharged or terminated, except by a statement in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought. (d) Any amendment or waiver effected in accordance with this Section 8.5 shall be binding upon any future holder of some or all of the Shares. -10- 8.6 Notices. All notices and other communications required or permitted hereunder shall be in writing and shall be deemed effectively given and received (a) upon personal delivery, (b) on the fifth day following mailing sent by registered or certified mail, return receipt requested, postage prepaid, (c) upon confirmed delivery by means of a nationally recognized overnight courier service or (d) upon confirmed transmission of facsimile addressed: (i) if to Purchaser, at Purchaser's address as set forth on the Company's records, or at such other address as Purchaser shall have furnished to the Company in writing or (ii) if to the Company, at its address as set forth at the end of this Agreement, or at such other address as the Company shall have furnished to Purchaser in writing. 8.7 Expenses. The Company shall pay all costs and expenses that it incurs with respect to the negotiation, execution, delivery and performance of the Agreement, and Purchaser shall pay all costs and expenses that it incurs with respect to the negotiation, execution, delivery and performance of this Agreement. 8.8 Attorneys' Fees. If legal action is brought to enforce or interpret this Agreement, the prevailing party shall be entitled to recover its reasonable attorneys' fees and legal costs in connection therewith. 8.9 Titles And Subtitles. The titles of the paragraphs and subparagraphs of the Agreement are for convenience of reference only and are not to be considered in construing this Agreement. 8.10 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one instrument. 8.11 Broker's Fees. Each party hereto represents and warrants that no agent, broker, investment banker, person or firm acting on behalf of or under the authority of such party hereto is or will be entitled to any broker's or finder's fee or any other commission directly or indirectly in connection with the transactions contemplated herein. Each party hereto further agrees to indemnify each other party for any claims, losses or expenses incurred by such other party as a result of the representation in this Section 8.11 being untrue. 8.12 Termination. If the Registration Statement for the IPO has not become effective by June 1, 2000, Purchaser in its discretion may elect to terminate this Agreement by providing written notice to the Company at any time thereafter. 8.13 Subsequent, Consents, Permits and Waivers. The Company shall obtain promptly after the Closing all authorizations, approvals, consents, permits and waivers that are necessary or applicable for consummation of the transactions contemplated by this Agreement and that were not obtained prior to the Closing because they may be properly obtained subsequent to the Closing. 8.14 Most Favored Nations. Except for the maximum number of shares being purchased, the Company agrees that the material terms (including, without limitation, the terms of Section 3 -11- hereof) of this Agreement will be no less favorable to Purchaser than the terms given to other investors (including investors that may enter into such agreements after the date hereof, if any) that are purchasing shares of the Company's capital stock in private placements that are closing concurrently with the closing of the IPO. [Remainder of Page Intentionally Left Blank] -12- In Witness Whereof, the parties hereto have executed this Agreement as of the date set forth in the first paragraph hereof. Company: Palm Computing, Inc. 5400 Bayfront Plaza Santa Clara, CA 95052-8145 By: /s/ PALM COMPUTING, INC. ---------------------------- Purchaser: By: /s/ AMERICA ONLINE, INC. --------------------------- -13- Annex 1 In connection with that certain Common Stock Purchase Agreement dated as of December 13, 1999, by and between the Company and the Purchaser (the "Agreement"), the appropriate formula set forth herein shall be used to determine the number of "Private Placement Shares" pursuant to Section 1.2 of the Agreement. Capitalized terms not otherwise defined herein shall have the meaning ascribed to them in the Agreement. For purposes of this Annex 1, the term Pre-Money Outstanding Capital Stock shall mean the number of shares of Common Stock outstanding immediately following the closing of the IPO and including (i) the number of shares of Common Stock issuable pursuant to then outstanding options or warrants for Common Stock (including those options issued at the time of the IPO and excluding specifically options to purchase 3Com common stock which may be converted into options to purchase the Company's Common Stock at the time 3Com distributes its shares of the Company's Common Stock to 3Com stockholders) and (ii) any Common Stock issuable pursuant to any then outstanding class or series of stock convertible into Common Stock. Background By way of background, the Company is issuing shares of Common Stock to one or more investors (including the Purchaser) pursuant to private placements that are to close concurrently with (but not before) the IPO. Such investors (including the Purchaser) have agreed to purchase the lesser of (a) a maximum dollar amount of shares of Common Stock or (b) a certain percentage of the Company's Post-Money Capital Stock as shown below. The aggregate of the investment amounts is contemplated to be equal to or less than 4.5% of the Company's Post-Money Outstanding Capital Stock, allocated as follows: Nokia--the lesser of 1 1/2% of the Post-Money Outstanding Capital Stock or $80 million; America Online, Inc.--the lesser of 1 1/2% of the Post-Money Outstanding Capital Stock or $80 million; Motorola, Inc.--the lesser of 1 1/2% of the Post-Money Outstanding Capital Stock or $65 million. For the purposes of the formulas below, the Pre-Money Value shall be equal to the Pre-Money Outstanding Capital Stock multiplied by the per share Price to Public. Formulas (a) Subject to the limitations of Section 1.2, in the event the Pre-Money Value is less than $4,138,333,333.33 based upon the final valuation of the Company upon the closing of -14- IPO, then the number of Private Placement Shares shall be determined by the following formula where "X" equals the Private Placement Shares: X = .045(Pre-Money Outstanding Capital Stock + X) (b) Subject to the limitations of Section 1.2, in the event the Pre- Money Value is equal to or greater than $4,138,333,333.33 and less than $5,108,333,333.33 based upon the final valuation of the Company upon the closing of the IPO, then the number of Private Placement Shares shall be determined by the following formula where "X" equals the Private Placement Shares: X = .03(Pre-Money Outstanding Capital Stock + X) + Y Where "Y" is equal to ($65,000,000/per share Price to Public) (c) Subject to the limitations of Section 1.2, in the event the Pre- Money Value is equal to or greater than $5,108,333,333.33 based upon the final valuation of the Company upon the closing of the IPO, then the number of Private Placement Shares shall be determined by the following formula where "X" equals the Private Placement Shares: X = $225,000,000/per share Price to Public In the case of (b) above, Y shall be rounded down to the nearest whole number. In the case of (a), (b) and (c) above, X shall be rounded down to the nearest whole number. -2- Annex 2 ------- PALM COMPUTING, INC. COMPANY SCHEDULE OF EXCEPTIONS ------------------------------ Pursuant to Section 3 of the Common Stock Purchase Agreement (the " Agreement ") dated as of December __, 1999, by and between the Company and the Purchaser, the Company hereby delivers this Schedule of Exceptions to the representations and warranties of the Company given in the Agreement. Each section number in this Schedule of Exceptions corresponds to the section numbers in the Agreement; however, any information disclosed herein under any section number shall be deemed to be disclosed and incorporated in any other section number of the Agreement where such disclosure would be appropriate. Any capitalized terms not otherwise defined herein shall have the meaning ascribed to them in the Agreement. 3.1 Organization; Good Standing and Qualification --------------------------------------------- No Exceptions. 3.2 Authorization; Binding Obligations ---------------------------------- No Exceptions. 3.3 Compliance with Other Instruments --------------------------------- No Exceptions. 3.4 Valid Issuance of Shares ------------------------ No Exceptions. 3.5 Litigation, Etc. ---------------- 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, 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 -3- 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 24, 1999, the court stayed the action pending 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 contemplate that 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 us to substantial damages and require us to indemnify our licensees for damages that they may suffer. Moreover, if there is an adverse determination, a license may be necessary to continue using the Graffiti 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. 3.6 Governmental Consent, Etc. ------------------------- No Exceptions. 3.7 Intellectual Property Rights ---------------------------- 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, 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 24, 1999, the court stayed the action pending 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 contemplate that 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 us to substantial damages and require us to indemnify our licensees for damages that they may suffer. Moreover, if there is an adverse determination, a license may be necessary to continue using the Graffiti 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. -4- EXHIBIT A --------- _________, 2000 To the Purchasers of Common Stock of Palm, Inc. pursuant to the Common Stock Purchase Agreement dated as of the date hereof Ladies and Gentlemen: Reference is made to the Common Stock Purchase Agreement dated as of December __, 1999 (the "Purchase Agreement") by and among Palm, Inc., a Delaware corporation (the "Company"), and the purchasers to the Purchase Agreement (the "Purchasers"), which provides for the issuance and sale by the Company to the Purchasers of an aggregate of up to [____________] shares of Common Stock (the "Shares") at a purchase price of $[____] per share for an aggregate purchase price of up to approximately $[_________]. This opinion is rendered to you pursuant to Section 5.1(e) of the Purchase Agreement and all terms used herein have the meanings defined for them in the Purchase Agreement unless otherwise defined herein. We have acted as counsel for the Company in connection with the negotiation, execution and delivery of the Purchase Agreement and the issuance of the Shares to the Purchasers as contemplated by the Purchase Agreement. As such counsel, we have made such legal and factual examinations and inquiries as we have deemed advisable or necessary for the purpose of rendering this opinion, and we have examined originals or copies of the following: (a) The Certificate of Incorporation (the "Certificate"); (b) The Bylaws of the Company; (c) The resolutions adopted by the Board of Directors of the Company and the stockholders of the Company with respect to the transactions contemplated by the Purchase Agreement; (d) The certificates representing the shares of the Company's Common Stock issued to the Purchasers on the date hereof; (e) Executed counterparts of the Purchase Agreement; -5- (f) The Compliance Certificate dated the date hereof delivered to you; (g) The certified or official bank checks or evidence of wire transfers payable to the Company delivered by the Purchasers on the date hereof as consideration for the sale of the Shares; and (h) The certificates of certain state authorities and filing officers, copies of which are being delivered to you on the date hereof. As used in this opinion, the expressions "to our knowledge," "known to us," and "of which we are aware" with reference to matters of fact means that, after an examination of documents made available to us by the Company and after inquiries of officers of the Company, we find no reason to believe that the opinions expressed herein are factually incorrect. Further, the expressions "to our knowledge," "known to us," "of which we are aware" or similar language with reference to matters of fact refers to the current actual knowledge of the attorneys of this firm who have worked on matters for the Company solely in connection with the Purchase Agreement. We have not undertaken any independent investigation to determine the existence or absence of any fact, and no inference as to our knowledge of the existence or absence of any fact should be drawn from our representation of the Company or the rendering of the opinions set forth below. For purposes of this opinion, we are assuming that each party (other than the Company) to the Purchase Agreement has all requisite power and authority, and has taken any and all necessary corporate or partnership action, to execute and deliver the Purchase Agreement to which it is a party and to effect any and all transactions related or contemplated thereby, and that each of you duly and validly executed and delivered the Purchase Agreement. We are also assuming that the representations and warranties made by each Purchaser and the Company under the Purchase Agreement are true and correct, and that the Purchasers have purchased the Shares for value, in good faith and without notice of adverse claims within the meaning of the Delaware Uniform Commercial Code. The opinions, hereinafter expressed are subject to the following additional exceptions, qualifications, limitations and assumptions: We express no opinion as to (i) the effect of applicable bankruptcy, insolvency, reorganization, liquidation, conservatorship, readjustment of debt, moratorium or other similar laws affecting the rights of creditors or (ii) the provisions of the Purchase Agreement relating to indemnity or contribution. We express no opinion as to the effect of rules of law governing specific performance, injunctive relief or other equitable remedies (regardless of whether any such remedy is considered in a proceeding at law or in equity) or as to the effects of public policy on the enforceability of any provision of any agreement; -6- We express no opinion as to compliance with applicable anti-fraud provisions of federal or state securities laws. We have assumed the genuineness of all signatures on original documents, the authenticity of all documents submitted to us as originals, the conformity to original documents of all copies submitted to us as copies thereof, the legal capacity of natural persons, and the due execution and delivery of all documents (except as to due execution and delivery by the Company) where due execution and delivery are a prerequisite to the effectiveness thereof. Our opinion set forth in paragraph 1 below is based solely on the certificate referenced above as to the legal existence and corporate and tax good standing of the Company in the state of Delaware. This opinion is subject to the effect of statutes, principles of equity and court decisions providing (i) that certain covenants and provisions of agreements are unenforceable where enforcement of such covenants or provisions under the circumstances would violate the enforcing party's implied covenant of good faith and fair dealing, and (ii) that a court may refuse to enforce, or may limit the application of, a contract or any clause thereof that the court finds to be unconscionable or contrary to public policy. We have not reviewed, and express no opinion on, (i) financial covenants or similar provisions requiring financial calculations or determinations to ascertain whether there is any such conflict, (ii) provisions relating to the occurrence of a "material adverse event" or words of similar import or (iii) parol evidence bearing on interpretation or construction. The opinions expressed herein are limited in all respects to existing laws, rules and regulations of the State of California, the General Corporation Law of the State of Delaware, as amended (the "DGCL") and applicable United States federal laws, rules and regulations. Furthermore, we have made no inquiry into, and express no opinion with respect to, any federal or state statute, rule or regulation relating to any tax, antitrust, land use, safety, environmental, hazardous material, patent, copyright, trademark or trade name matter, as to the statutes, regulations, treaties or common laws of any other nation, state or jurisdiction, or the effect on the transactions contemplated in the Purchase Agreement of noncompliance under any such statutes, regulations, treaties or common laws. We further disclaim any opinion as to any statute, rule, regulation, ordinance, order or other promulgation of any regional or local governmental body or as to any related judicial or administrative opinion. Our opinions relate solely to the express provisions of the Purchase Agreement and the exhibits referred to therein and attached thereto and we express no opinion as to any other oral or written agreements or understandings between the Company or any of the Purchasers. Provisions of the Purchase Agreement requiring that waivers must be in writing may not be binding or enforceable if a non-executory oral agreement has been created modifying any -7- such provision or an implied agreement by trade practice or course of conduct has given rise to a waiver. Based upon and subject to the foregoing, and subject in all respects to the disclosure on the Disclosure Schedule attached to the Purchase Agreement, we are of the opinion that: 1. The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware. The Company has the requisite corporate power to own the properties and assets owned by it and to carry on its business as presently conducted. 2. The Company has all requisite legal and corporate power to execute and deliver the Purchase Agreement, to sell and issue the shares of Common Stock to the Purchasers as contemplated by the Purchase Agreement and to carry out and perform its obligations under the terms of the Purchase Agreement. 3. The authorized capital stock of the Company consists of [________] shares of Common Stock, [________] of which are issued and outstanding, and [_________] shares of Preferred Stock, none of which is outstanding. All issued and outstanding shares have been duly authorized, validly issued, fully paid, and nonassessable and have been issued in compliance with the registration and qualifications requirements of all applicable securities laws. Upon the issuance, sale, and delivery for the consideration stated in the Purchase Agreement, the shares of Common Stock being issued and sold to the Purchasers on the date hereof shall be duly authorized, validly issued, fully paid, and nonassessable, shall have been issued in compliance with the registration or qualification requirements of all applicable securities laws (but excluding jurisdictions outside the United States); provided, however, that the shares of Common Stock may be subject to restrictions on transfer under state and/or federal securities laws. To our knowledge, except for rights described in the Purchase Agreement (including the Disclosure Schedule) or in the Prospectus and the Restated Certificate, there are no other options, warrants, conversion privileges or other rights presently outstanding to purchase or otherwise acquire any authorized but unissued shares of capital stock or other securities of the Company, or any other agreements to issue any such securities or rights. 4. All corporate action on the part of the Company, its directors and stockholders necessary for the authorization, execution, delivery and performance of the Purchase Agreement by the Company, and the authorization, sale, issuance and delivery of the Common Stock to the Purchasers pursuant to the Purchase Agreement and the Certificate, and the performance of the Company's obligations under the Purchase Agreement has been taken. The Purchase Agreement, when executed and delivered by the parties thereto, shall constitute a valid and binding obligation of the Company, enforceable against the Company in accordance with its terms. -8- 5. The execution, delivery and performance of the terms of the Purchase Agreement and the issuance of the Common Stock to the Purchasers pursuant to the Purchase Agreement do not violate (i) any provision of the Company's Certificate or Bylaws, or (ii) to our knowledge, any law, statute, rule or regulation of the United States, the State of California. 6. Subject to the accuracy of the Purchaser's representations in Section 4 of the Purchase Agreement, we are of the opinion that the offer, sale and issuance of the Common Stock to the Purchasers in conformity with the terms of the Purchase Agreement and the Certificate constitute transactions exempt from the registration and qualification requirements of Section 5 of the Securities Act of 1933, as amended, the laws of the State of California, and the DGCL. This opinion is furnished to the Purchasers solely for your benefit in connection with the purchase of the Shares and is not to be made available to or relied upon by any other person, firm or entity for any purpose without our express prior written consent. Very truly yours, WILSON SONSINI GOODRICH & ROSATI -9- EX-10.12 16 COMMON STOCK PURCHASE AGREEMENT - MOTOROLA EXHIBIT 10.12 PALM COMPUTING, INC. COMMON STOCK PURCHASE AGREEMENT December 13, 1999 TABLE OF CONTENTS
Page ---- 1. Agreement To Sell and Purchase........................................ 1 1.1 Authorization Of Shares...................................... 1 1.2 Sale And Purchase Of Common Stock............................ 1 1.3 Hart-Scott-Rodino Compliance................................. 2 2. Closing, Delivery And Payment......................................... 2 3. Representations and Warranties Of The Company......................... 3 3.1 Organization, Good Standing And Qualification................ 3 3.2 Authorization; Binding Obligations........................... 3 3.3 Compliance With Other Instruments............................ 3 3.4 Valid Issuance of Shares..................................... 4 3.5 Litigation, Etc.............................................. 4 3.6 Governmental Consent, Etc.................................... 4 3.7 Intellectual Property Rights................................. 4 4. Representations And Warranties Of Purchaser........................... 4 4.1 Requisite Power And Authority................................ 4 4.2 Consents..................................................... 5 4.3 Investment Representations................................... 5 4.4 Legends...................................................... 6 4.5 Removal of Legend and Transfer Restrictions.................. 6 5. Conditions To Closing................................................. 6 5.1 Conditions To Purchaser's Obligations At The Closing......... 6 5.2 Conditions To Obligations Of The Company..................... 7 6. Rule 144 Reporting.................................................... 8 7. Covenants............................................................. 8 7.1 "Stand-Off" Agreement........................................ 8 7.2 Right of First Offer......................................... 9 8. Miscellaneous......................................................... 10 8.1 Governing Law................................................ 10 8.2 Survival..................................................... 10 8.3 Successors And Assigns....................................... 10 8.4 Separability................................................. 10
-i- TABLE OF CONTENTS (continued)
Page ---- 8.5 Amendment And Waiver......................................... 10 8.6 Notices...................................................... 11 8.7 Expenses..................................................... 11 8.8 Attorneys' Fees.............................................. 11 8.9 Titles And Subtitles......................................... 11 8.10 Counterparts................................................. 11 8.11 Broker's Fees................................................ 11 8.12 Termination.................................................. 11 8.13 Subsequent, Consents, Permits and Waivers.................... 11 8.14 Most Favored Nations......................................... 11
List of Exhibits: Exhibit A - Preliminary Prospectus Exhibit B - Legal Opinion -ii- PALM COMPUTING, INC. COMMON STOCK PURCHASE AGREEMENT This Common Stock Purchase Agreement (the "Agreement") is entered into as of December 13, 1999, by and between Palm Computing, Inc., a California corporation (the "Company"), and Motorola, Inc., a Delaware corporation ("Purchaser"). RECITALS Whereas, the Company intends to reincorporate by merger into Palm, Inc., a Delaware corporation being formed for the purpose of the reincorporation and that will be the surviving entity; the "Company" as used in this Agreement refers to, prior to such merger, the California corporation and, after such merger, the Delaware corporation; the Delaware corporation will assume this Agreement; and Whereas, Purchaser desires to purchase shares of the Company's common stock ("Common Stock"), such purchase to be made in a private placement to close concurrently with, but not before, the closing of the initial public offering of the Company (the "IPO") pursuant to a Registration Statement to be filed on Form S-1 with the Securities and Exchange Commission (the "Commission") (such registration statement, as amended, shall be referred to herein as the "Registration Statement"); and Whereas, the Company desires to issue and sell the Shares (as defined below) to Purchaser on the terms and conditions set forth herein. Now, Therefore, in consideration of the foregoing recitals and the mutual promises hereinafter set forth, the parties hereto agree as follows: 1. Agreement To Sell and Purchase. 1.1 Authorization Of Shares. On or prior to the Closing (as defined in Section 2 below), the Company shall have authorized the sale and issuance to Purchaser of the Shares. Prior to the Closing the Company will have adopted and filed a Certificate of Incorporation (the "Certificate of Incorporation") with the Secretary of State of the State of Delaware authorizing sufficient shares of Common Stock to cover the sale and issuance of the Shares to be purchased hereunder. 1.2 Sale And Purchase Of Common Stock. Subject to the terms and conditions hereof, the Company hereby agrees to issue and sell to Purchaser and Purchaser agrees to purchase from the Company, at the Closing, the lesser of: (a) that whole number of shares of Common Stock equal to -1- the quotient determined by dividing $65 million by the per share Price to Public (as defined below) and rounding down to the nearest whole number or (b) that whole number of shares of Common Stock determined by multiplying the number of shares of Post-Money Outstanding Capital Stock of the Company by .015 and rounding down to the nearest whole number. For purposes of this Agreement, the term "Post-Money Outstanding Capital Stock" shall mean the number of shares of Common Stock outstanding immediately following the closing of the IPO and including (i) the number of shares of Common Stock issuable pursuant to then outstanding options or warrants for Common Stock (including those options issued at the time of the IPO and excluding specifically options to purchase 3Com common stock which may be converted into options to purchase the Company's Common Stock at the time 3Com distributes its shares of the Company's Common Stock to 3Com stockholders), (ii) any Common Stock issuable pursuant to any then outstanding class or series of stock convertible into Common Stock and (iii) the Private Placement Shares (as defined on Annex 1 attached to this Agreement). The shares of Common Stock to be purchased hereunder are referred to as the "Shares". The per share purchase price for the Shares purchased hereunder shall be the per share Price to Public. For purposes of this Agreement, the term "Price to Public" shall mean the Price to Public set forth on the cover page of the final Prospectus (as defined below). For purposes of this Agreement, the term "Prospectus" means the prospectus, as amended, on file with the Commission at the time the Registration Statement becomes effective, including the information deemed to be part of the Registration at the time of effectiveness pursuant to Rule 430A, if applicable, except that if the Prospectus filed by the Company pursuant to Rule 424(b) differs from the prospectus on file at the time the Registration Statement becomes effective, the term "Prospectus" shall refer to the Rule 424(b) Prospectus from and after the time it was filed with the Commission or transmitted to the Commission for filing. 1.3 Hart-Scott-Rodino Compliance. Notwithstanding anything else in this Agreement, if the sale and issuance of the Shares is subject to the premerger notification requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), it shall be a condition to the Closing that any waiting period under the HSR Act applicable to the purchase of the Shares shall have expired or been terminated and any approvals required thereunder shall have been obtained, and the parties shall cooperate in promptly filing premerger reports and in taking all steps reasonably necessary to obtain early termination of any applicable HSR Act waiting periods. If any such waiting period shall not have expired or been subject to early termination on or before the date ninety (90) days from the date of this Agreement, either party may terminate this Agreement by giving written notice to the other. 2. Closing, Delivery And Payment. Subject to the terms of Section 5, the closing of the sale and purchase of the Shares under this Agreement (the "Closing") shall take place concurrently with, but not before, the closing of the IPO at the offices of Wilson Sonsini Goodrich & Rosati, Professional Corporation, 650 Page Mill Road, Palo Alto, California 94304. The date of the Closing is referred to as the "Closing Date." At the -2- Closing, subject to the terms and conditions hereof, the Company will deliver to Purchaser a certificate representing the number of Shares to be purchased at the Closing against payment by or on behalf of Purchaser of the purchase price therefor by cash, wire transfer, or by such other means as shall be mutually agreeable to Purchaser and the Company. 3. Representations and Warranties Of The Company. The Company represents and warrants to Purchaser that, as of the effective date of the underwriting agreement entered into with the managing underwriters of the IPO (the "Underwriting Agreement"), the representations and warranties set forth in such underwriting agreement will be true and correct in all respects and incorporated by reference herein. Except as set forth in the Schedule of Exceptions attached hereto as Annex 2, the Company hereby additionally represents and warrants to Purchaser as of the date hereof as follows: 3.1 Organization, Good Standing And Qualification. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of California. The Company has full power and authority to own and operate its properties and assets, and to carry on its business as presently conducted. The Company is duly qualified, is authorized to do business and is in good standing as a foreign corporation in all jurisdictions in which the nature of its activities and of its properties (both owned and leased) makes such qualification necessary, except for those jurisdictions, in the aggregate, in which failure to do so would not have a material adverse effect on the Company or its business. 3.2 Authorization; Binding Obligations. All corporate action on the part of the Company, its officers, directors and shareholders necessary for the authorization, execution and delivery of this Agreement and the Certificate of Incorporation, for the sale and issuance of the Shares pursuant hereto and for the performance of the Company's obligations hereunder has been taken or will be taken prior to the Closing. This Agreement, when executed and delivered, will be a valid and binding obligation of the Company enforceable in accordance with its terms. The sale of the Shares is not and will not be subject to any preemptive rights or rights of first refusal that have not been properly waived or complied with. When issued in compliance with the provisions of this Agreement and the Certificate of Incorporation, the Shares will be validly issued, fully paid and nonassessable, and will be free of any liens or encumbrances; provided, however, that the Shares may be subject to restrictions on transfer under this Agreement and under state and/or federal securities laws as set forth herein or as otherwise required by such laws at the time a transfer is proposed. 3.3 Compliance With Other Instruments. The execution, delivery and performance of and compliance with this Agreement and the issuance and sale of the Shares pursuant hereto will not (i) materially conflict with, or result in a material breach or violation of, or constitute a material default under, or result in the creation or imposition of any material lien, (ii) violate, conflict with or result in the breach of any material terms of, or result in the material modification of, any material contract or otherwise give any other contracting party the right to terminate a material contract, or constitute (or with notice or lapse of time both constitute) a material default under any material -3- contract to which the Company is a party or by or to which it or any of its assets or properties may be bound or subject or (iii) result in any violation, or be in conflict with or constitute a default under any term, of its charter or bylaws. 3.4 Valid Issuance of Shares. The Shares which will be purchased by Purchaser hereunder, when issued, sold and delivered in accordance with the terms hereof for the consideration expressed herein, will be duly and validly authorized and issued, fully paid and nonassessable. 3.5 Litigation, Etc. There is no action, suit, proceeding nor, to the Company's knowledge, any investigation pending or currently threatened against the Company, that questions the validity of this Agreement or the right of the Company to enter into such agreements, or which might result, either individually or in the aggregate, in any material adverse change in the assets, condition, affairs or prospects of the Company, financial or otherwise. 3.6 Governmental Consent, Etc. No consent, approval or authorization of, or designation, declaration or filing with, any governmental authority on the part of the Company is required in connection with the valid execution, delivery, and performance of this Agreement or the offer, sale or issuance of the Shares, or the consummation of any other transaction contemplated by this Agreement except certain filings as may be required under the Securities Act and state securities laws and regulations, which filings will be made timely in accordance with the applicable law or regulation. 3.7 Intellectual Property Rights. To the knowledge of the Company, the Company or its subsidiaries own and possess or are licensed under all patents, patent applications, licenses, trademarks, trade secrets, trade names, brand names, inventions and copyrights or other proprietary rights ("Intellectual Property") employed in the operation of their respective businesses as currently conducted, and, to the knowledge of the Company, with no infringement of or conflict with the rights or others respecting any of the same. Neither the Company nor any subsidiary has received any communications alleging that the Company or any subsidiary has violated any of the Intellectual Property of any other person or entity. Reasonable security measures have been taken by the Company and its subsidiaries to protect the secrecy, confidentiality and value of the Company's and its subsidiaries' trade secrets, including their respective know-how, technology, concepts and other technical data for the development, processing, manufacture and sale of its products. Each employee of and consultant to the Company or its subsidiaries has executed an invention assignment and confidentiality agreement with the Company or its subsidiaries. 4. Representations And Warranties Of Purchaser Purchaser hereby represents and warrants to the Company as follows: 4.1 Requisite Power And Authority. Purchaser has all necessary power and authority under all applicable provisions of law to execute and deliver this Agreement and to carry out the provisions of this Agreement. All action on Purchaser's part required for the lawful execution and -4- delivery of this Agreement has been or will be effectively taken prior to the Closing. This Agreement, when executed and delivered, will be a valid and binding obligation of Purchaser, enforceable in accordance with its terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application affecting enforcement of creditors' rights and (ii) general principles of equity that restrict the availability of equitable remedies. 4.2 Consents. All consents, approvals, orders, authorizations, registrations, qualifications, designations, declarations or filings with any governmental or banking authority on the part of Purchaser required in connection with the consummation of the transactions contemplated in this Agreement have been or shall have been obtained prior to and be effective as of the Closing. 4.3 Investment Representations. Purchaser understands that the Shares have not been registered under the Securities Act. Purchaser also understands that the Shares are being offered and sold pursuant to an exemption from registration contained in the Securities Act based in part upon Purchaser's representations contained in the Agreement. Purchaser hereby represents and warrants as follows: (a) Purchaser Is An Accredited Investor. Purchaser represents that Purchaser is an "accredited investor" within the meaning of Rule 501(a) of Regulation D under the Securities Act. (b) Purchaser Bears Economic Risk. Purchaser must bear the economic risk of this investment indefinitely unless the Shares are registered pursuant to the Securities Act, or an exemption from registration is available. Purchaser understands that it will have no registration rights with respect to the Shares. Purchaser also understands that there is no assurance that any exemption from registration under the Securities Act will be available and that, even if available, such exemption may not allow Purchaser to transfer all or any portion of the Shares under the circumstances, in the amounts or at the times Purchaser might propose. (c) Acquisition For Own Account. Purchaser is acquiring the Shares for Purchaser's own account for investment only, and not with a view towards their distribution within the meaning of the Securities Act. (d) Purchaser Can Protect Its Interest. Purchaser represents that by reason of its, or of its management's, business or financial experience, Purchaser has the capacity to protect its own interests in connection with the transactions contemplated in this Agreement. Purchaser is not a corporation, trust or partnership specifically formed for the purpose of consummating these transactions. (e) Company Information. Purchaser has had an opportunity to discuss the Company's business, management and financial affairs with directors, officers and management of the Company and has had the opportunity to review the Company's operations and facilities. -5- Purchaser has also had the opportunity to ask questions of and receive answers from, the Company and its management regarding the terms and conditions of this investment. 4.4 Legends. Each certificate representing the Shares may be endorsed with the following legends: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND ARE "RESTRICTED SECURITIES" AS DEFINED IN RULE 144 PROMULGATED UNDER THE ACT. THE SECURITIES MAY NOT BE SOLD OR OFFERED FOR SALE OR OTHERWISE DISTRIBUTED EXCEPT (I) IN CONJUNCTION WITH AN EFFECTIVE REGISTRATION STATEMENT FOR THE SHARES UNDER THE ACT, OR (II) IN COMPLIANCE WITH RULE 144 OR (III) PURSUANT TO AN OPINION OF COUNSEL TO THE CORPORATION THAT SUCH REGISTRATION OR COMPLIANCE IS NOT REQUIRED AS TO SUCH SALE, OFFER OR DISTRIBUTION." "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO, AND MAY BE TRANSFERRED ONLY IN ACCORDANCE WITH, THE TERMS OF CERTAIN AGREEMENTS AMONG THE COMPANY AND THE STOCKHOLDER, WHICH INCLUDE, WITHOUT LIMITATION, 180 DAY MARKET STANDOFF RESTRICTIONS AND OBLIGATIONS OF RIGHTS OF FIRST OFFER, COPIES OF WHICH ARE ON FILE WITH THE SECRETARY OF THE COMPANY." The Company need not register a transfer of any Shares, and may also instruct its transfer agent not to register the transfer of the Shares, unless the conditions specified in the foregoing legends are satisfied. 4.5 Removal of Legend and Transfer Restrictions. Any legend endorsed on a certificate pursuant to subsection 4.4 and the stop transfer instructions with respect to such Shares shall be removed and the Company shall issue a certificate without such legend to the holder thereof if such legend may be properly removed under the terms of Rule 144 promulgated under the Securities Act or if such holder provides the Company with an opinion of counsel for such holder, reasonably satisfactory to legal counsel for the Company, to the effect that a sale, transfer or assignment of such Shares may be made without registration. 5. Conditions To Closing. 5.1 Conditions To Purchaser's Obligations At The Closing. Purchaser's obligation to purchase the Shares identified in Section 1.2 of the Agreement at the Closing are subject to the satisfaction, at or prior to the Closing, of the following conditions: -6- (a) Concurrent Closing of IPO. The Closing shall occur concurrently with, and not before, the closing of the IPO. (b) Representations And Warranties True; Performance Of Obligations. The representations and warranties made by the Company in Section 3 (except for Section 3.5 and 3.7) and the representations and warranties which are incorporated by reference from the Underwriting Agreement shall be true and correct as of the Closing, and the Company shall have performed and complied with all obligations and conditions herein required to be performed or complied with by it on or prior to the Closing and shall have delivered an officer's certificate as to the matters set forth in this Section 5.1(b). (c) Legal Investment. At the time of the Closing, the sale and issuance of the Shares shall be legally permitted by all laws and regulations to which Purchaser and the Company are subject. (d) Consents, Permits, And Waivers. The Company shall have obtained any and all authorizations, approvals, consents, permits and waivers necessary or appropriate for consummation of the transactions contemplated by this Agreement (except for such as may be properly obtained subsequent to the Closing, and such items shall be effective on and as of the Closing). (e) Legal Opinion. The Company shall have delivered an opinion of counsel to the Purchaser in substantially the form attached hereto as Exhibit ------- A. - -- (f) Transfer Agent Instructions. The Company shall have delivered to Purchaser a copy of a letter to the Company's transfer agent, dated the Closing Date, and instructing the transfer agent to issue the Shares. 5.2 Conditions To Obligations Of The Company. The Company's obligation to issue and sell the Shares at the Closing is subject to the satisfaction, on or prior to the Closing of the following conditions: (a) Concurrent Closing of IPO. The closing of the IPO shall occur concurrently with, but not before, the Closing. (b) Representations And Warranties True. The representations and warranties made by Purchaser in Section 4 hereof shall be true and correct in all material respects at the date of the Closing, with the same force and effect as if they had been made on and as of said date. (c) Performance Of Obligations. Purchaser shall have performed and complied with all agreements and conditions herein required to be performed or complied with by Purchaser on or before the Closing. -7- (d) Payment of Purchase Price. Purchaser shall deliver to the Company payment for the Shares to be acquired by such Purchase in the amounts set forth in Section 1.2 hereto pursuant to the wire instructions provided by the company. 6. Rule 144 Reporting With a view to making available to Purchaser the benefits of certain rules and regulations of the SEC which may permit the sale of the Shares to the public without registration, the Company agrees at all times after the effective date of the Registration Statement to: (a) make and keep public information available, as those terms are understood and defined in SEC Rule 144. (b) file with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and the Securities Exchange Act of 1934, as amended (the "Exchange Act") . (c) so long as Purchaser owns any Shares, to furnish to Purchaser within a reasonable time upon a written request by Purchaser, a written statement by the Company as to its compliance with the reporting requirements of said Rule 144 (at any time after ninety (90) days after the effective date of the first registration statement filed by the Company for an offering of its securities to the general public) and of the Exchange Act (at any time after it has become subject to such reporting requirements), a copy of the most recent annual or quarterly report of the Company, and such other reports and documents so filed by the Company as Purchaser may reasonably request in complying with any rule or regulation of the SEC allowing Purchaser to sell any such securities without registration. 7. Covenants 7.1 "Stand-Off" Agreement. The Purchaser agrees not to (1) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly any of the Shares or any shares of Common Stock of the Company or any securities convertible into or exercisable or exchangeable for Shares or Common Stock of the Company (whether such shares or any such securities are now owned by the undersigned or are hereafter acquired, or (2) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Shares or Common Stock of the Company, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of Shares or Common Stock or such other securities, in cash or otherwise, for 180 days following the Closing. The provisions of this Section 7.1 shall be for the benefit of and enforceable by the underwriters of the IPO, acting through the managing underwriter. -8- 7.2 Right of First Offer. For so long as Purchaser holds any Shares, if the Purchaser joins in a partnership, limited partnership, syndicate, or otherwise acts in concert or alone for the purpose of disposing of more than 5% of the Shares (as adjusted for stock splits or similar events after the date hereof) to a single person or transferee or any group of affiliated persons or transferees but specifically excluding any hedging or similar transactions, the Purchaser shall give the Company the opportunity to purchase such stock, in the following manner: (a) The Purchaser shall give notice (the "Transfer Notice") to the Company in writing of such intention, specifying the number and kind of securities proposed to be sold or transferred, the proposed price per share therefor (the "Transfer Price") and the other material terms, upon which such disposition is proposed to be made, including the names of the proposed purchasers or transferees if such persons have been identified. (b) The Company shall have the right, exercisable by written notice given by the Company to the Purchaser within ten calendar days of receipt of the Transfer Notice to purchase all of the shares specified in such Transfer Notice upon the terms specified in such Transfer Notice. Notwithstanding the foregoing, the Company shall have twenty-five calendar days from the receipt of the Transfer Notice (regardless of the date of the Transfer Notice) to notify Purchaser of the Company's election to purchase the shares pursuant to this Section 7.2 if the Company shall furnish a certificate signed by the President or Chief Executive Officer of the Company within ten calendar days of receipt of the Transfer Notice stating that, in the good faith judgment of the management of the Company, it would be detrimental to the Company and its stockholders to decide whether to elect to purchase the Shares within the ten day period provided for pursuant to this Section 7.2 (it being understood that the mere election of Purchaser to sell such Shares in a transaction triggering the provisions of this Section 7.2 shall not constitute such an event). The purchase of the shares by the Company must be completed within 60 calendar days from the receipt of the Transfer Notice. The Company and Purchaser shall use their best efforts to secure during such period any approvals required on their respective parts in connection therewith. The Company shall have the right to pay for such shares specified in the Transfer Notice: (a) the same amount in cash, if the consideration to be paid consists of cash, or (b) to the extent that the consideration to be paid does not consist of cash, consideration per share equivalent to that set forth in the Transfer Notice, or an amount of cash having equivalent value, as determined in good faith by mutual agreement of the Company and the Purchaser. (c) If the Company (or its assignees) does not exercise its right of first offer hereunder within the time specified for such exercise, the Seller(s) shall be free, during the period of 120 days following the date of the Transfer Notice, to sell the shares specified in such Transfer Notice for such consideration and on such other material terms as shall be no more favorable to the purchaser of the shares than the terms specified in such Transfer Notice. (d) The provisions of this Section 7.2 shall terminate upon the earlier to occur of: (i) such time as 3Com Corporation distributes its shares of the Company's Common Stock to the shareholders of 3Com Corporation or (ii) one year following the Closing Date. -9- 8. Miscellaneous 8.1 Governing Law. This Agreement shall be governed in all respects by the laws of the State of California. 8.2 Survival. The representations, warranties, covenants and agreements made herein shall survive any investigation made by Purchaser and the closing of the transactions contemplated hereby. All statements as to factual matters contained in any certificate or other instrument delivered by or on behalf of the Company pursuant hereto in connection with the transactions contemplated hereby shall be deemed to be representations and warranties by the Company hereunder solely as of the date of such certificate or instrument, except as expressly provided otherwise in such certificate or instrument. 8.3 Successors And Assigns. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto and shall inure to the benefit of and be enforceable by each person who shall be a holder of the Shares from time to time; provided, however, that prior to the receipt by the Company of adequate written notice of the transfer of any Shares specifying the full name and address of the transferee, the Company may deem and treat the person listed as the holder of such Shares in its records as the absolute owner and holder of such Shares for all purposes, the payment of any dividends or any redemption price. 8.4 Separability. In case any provision of the Agreement shall be invalid, illegal or unenforceable, such provision shall, to the extent practicable, be modified so as to make it valid, legal and enforceable and to maintain as nearly as practicable the intent of the parties, and the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 8.5 Amendment And Waiver. (a) This Agreement may be amended or modified only upon the written consent of the parties hereto. (b) The obligations of the Company and the rights of the holder of the Shares under this Agreement may be waived only with the written consent of the parties hereto. (c) Except to the extent provided in this Section 8.5, neither this Agreement nor any provision hereof may be changed, waived, discharged or terminated, except by a statement in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought. (d) Any amendment or waiver effected in accordance with this Section 8.5 shall be binding upon any future holder of some or all of the Shares. -10- 8.6 Notices. All notices and other communications required or permitted hereunder shall be in writing and shall be deemed effectively given and received (a) upon personal delivery, (b) on the fifth day following mailing sent by registered or certified mail, return receipt requested, postage prepaid, (c) upon confirmed delivery by means of a nationally recognized overnight courier service or (d) upon confirmed transmission of facsimile addressed: (i) if to Purchaser, at Purchaser's address as set forth on the Company's records, or at such other address as Purchaser shall have furnished to the Company in writing or (ii) if to the Company, at its address as set forth at the end of this Agreement, or at such other address as the Company shall have furnished to Purchaser in writing. 8.7 Expenses. The Company shall pay all costs and expenses that it incurs with respect to the negotiation, execution, delivery and performance of the Agreement, and Purchaser shall pay all costs and expenses that it incurs with respect to the negotiation, execution, delivery and performance of this Agreement. 8.8 Attorneys' Fees. If legal action is brought to enforce or interpret this Agreement, the prevailing party shall be entitled to recover its reasonable attorneys' fees and legal costs in connection therewith. 8.9 Titles And Subtitles. The titles of the paragraphs and subparagraphs of the Agreement are for convenience of reference only and are not to be considered in construing this Agreement. 8.10 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one instrument. 8.11 Broker's Fees. Each party hereto represents and warrants that no agent, broker, investment banker, person or firm acting on behalf of or under the authority of such party hereto is or will be entitled to any broker's or finder's fee or any other commission directly or indirectly in connection with the transactions contemplated herein. Each party hereto further agrees to indemnify each other party for any claims, losses or expenses incurred by such other party as a result of the representation in this Section 8.11 being untrue. 8.12 Termination. If the Registration Statement for the IPO has not become effective by June 1, 2000, Purchaser in its discretion may elect to terminate this Agreement by providing written notice to the Company at any time thereafter. 8.13 Subsequent, Consents, Permits and Waivers. The Company shall obtain promptly after the Closing all authorizations, approvals, consents, permits and waivers that are necessary or applicable for consummation of the transactions contemplated by this Agreement and that were not obtained prior to the Closing because they may be properly obtained subsequent to the Closing. 8.14 Most Favored Nations. Except for the maximum number of shares being purchased, the Company agrees that the material terms (including, without limitation, the terms of Section 3 -11- hereof) of this Agreement will be no less favorable to Purchaser than the terms given to other investors (including investors that may enter into such agreements after the date hereof, if any) that are purchasing shares of the Company's capital stock in private placements that are closing concurrently with the closing of the IPO. [Remainder of Page Intentionally Left Blank] -12- In Witness Whereof, the parties hereto have executed this Agreement as of the date set forth in the first paragraph hereof. Company: Palm Computing, Inc. 5400 Bayfront Plaza Santa Clara, CA 95052-8145 By: /s/ PALM COMPUTING, INC. ----------------------------- Purchaser: By: /s/ MOTOROLA, INC. ------------------------------ -13- Annex 1 In connection with that certain Common Stock Purchase Agreement dated as of December 13, 1999, by and between the Company and the Purchaser (the "Agreement"), the appropriate formula set forth herein shall be used to determine the number of "Private Placement Shares" pursuant to Section 1.2 of the Agreement. Capitalized terms not otherwise defined herein shall have the meaning ascribed to them in the Agreement. For purposes of this Annex 1, the term Pre-Money Outstanding Capital Stock shall mean the number of shares of Common Stock outstanding immediately following the closing of the IPO and including (i) the number of shares of Common Stock issuable pursuant to then outstanding options or warrants for Common Stock (including those options issued at the time of the IPO and excluding specifically options to purchase 3Com common stock which may be converted into options to purchase the Company's Common Stock at the time 3Com distributes its shares of the Company's Common Stock to 3Com stockholders) and (ii) any Common Stock issuable pursuant to any then outstanding class or series of stock convertible into Common Stock. Background By way of background, the Company is issuing shares of Common Stock to one or more investors (including the Purchaser) pursuant to private placements that are to close concurrently with (but not before) the IPO. Such investors (including the Purchaser) have agreed to purchase the lesser of (a) a maximum dollar amount of shares of Common Stock or (b) a certain percentage of the Company's Post-Money Capital Stock as shown below. The aggregate of the investment amounts is contemplated to be equal to or less than 4.5% of the Company's Post-Money Outstanding Capital Stock, allocated as follows: Nokia--the lesser of 1 1/2% of the Post-Money Outstanding Capital Stock or $80 million; America Online, Inc.--the lesser of 1 1/2% of the Post-Money Outstanding Capital Stock or $80 million; Motorola, Inc.--the lesser of 1 1/2% of the Post-Money Outstanding Capital Stock or $65 million. For the purposes of the formulas below, the Pre-Money Value shall be equal to the Pre-Money Outstanding Capital Stock multiplied by the per share Price to Public. Formulas (a) Subject to the limitations of Section 1.2, in the event the Pre- Money Value is less than $4,138,333,333.33 based upon the final valuation of the -14- IPO, then the number of Private Placement Shares shall be determined by the following formula where "X" equals the Private Placement Shares: X = .045(Pre-Money Outstanding Capital Stock + X) (b) Subject to the limitations of Section 1.2, in the event the Pre-Money Value is equal to or greater than $4,138,333,333.33 and less than $5,108,333,333.33 based upon the final valuation of the Company upon the closing of the IPO, then the number of Private Placement Shares shall be determined by the following formula where "X" equals the Private Placement Shares: X = .03(Pre-Money Outstanding Capital Stock + X) + Y Where "Y" is equal to ($65,000,000/per share Price to Public) (c) Subject to the limitations of Section 1.2, in the event the Pre-Money Value is equal to or greater than $5,108,333,333.33 based upon the final valuation of the Company upon the closing of the IPO, then the number of Private Placement Shares shall be determined by the following formula where "X" equals the Private Placement Shares: X = $225,000,000/per share Price to Public In the case of (b) above, Y shall be rounded down to the nearest whole number. In the case of (a), (b) and (c) above, X shall be rounded down to the nearest whole number. -15- Annex 2 ------- PALM COMPUTING, INC. COMPANY SCHEDULE OF EXCEPTIONS ------------------------------ Pursuant to Section 3 of the Common Stock Purchase Agreement (the " Agreement ") dated as of December __, 1999, by and between the Company and the Purchaser, the Company hereby delivers this Schedule of Exceptions to the representations and warranties of the Company given in the Agreement. Each section number in this Schedule of Exceptions corresponds to the section numbers in the Agreement; however, any information disclosed herein under any section number shall be deemed to be disclosed and incorporated in any other section number of the Agreement where such disclosure would be appropriate. Any capitalized terms not otherwise defined herein shall have the meaning ascribed to them in the Agreement. 3.1 Organization; Good Standing and Qualification --------------------------------------------- No Exceptions. 3.2 Authorization; Binding Obligations ---------------------------------- No Exceptions. 3.3 Compliance with Other Instruments --------------------------------- No Exceptions. 3.4 Valid Issuance of Shares ------------------------ No Exceptions. 3.5 Litigation, Etc. ---------------- 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, 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 -16- 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 24, 1999, the court stayed the action pending 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 contemplate that 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 us to substantial damages and require us to indemnify our licensees for damages that they may suffer. Moreover, if there is an adverse determination, a license may be necessary to continue using the Graffiti 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. 3.6 Governmental Consent, Etc. ------------------------- No Exceptions. 3.7 Intellectual Property Rights ---------------------------- 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, 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 24, 1999, the court stayed the action pending 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 contemplate that 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 us to substantial damages and require us to indemnify our licensees for damages that they may suffer. Moreover, if there is an adverse determination, a license may be necessary to continue using the Graffiti 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. -17- EXHIBIT A --------- ____________, 2000 To the Purchasers of Common Stock of Palm, Inc. pursuant to the Common Stock Purchase Agreement dated as of the date hereof Ladies and Gentlemen: Reference is made to the Common Stock Purchase Agreement dated as of December __, 1999 (the "Purchase Agreement") by and among Palm, Inc., a Delaware corporation (the "Company"), and the purchasers to the Purchase Agreement (the "Purchasers"), which provides for the issuance and sale by the Company to the Purchasers of an aggregate of up to [____________] shares of Common Stock (the "Shares") at a purchase price of $[____] per share for an aggregate purchase price of up to approximately $[_________]. This opinion is rendered to you pursuant to Section 5.1(e) of the Purchase Agreement and all terms used herein have the meanings defined for them in the Purchase Agreement unless otherwise defined herein. We have acted as counsel for the Company in connection with the negotiation, execution and delivery of the Purchase Agreement and the issuance of the Shares to the Purchasers as contemplated by the Purchase Agreement. As such counsel, we have made such legal and factual examinations and inquiries as we have deemed advisable or necessary for the purpose of rendering this opinion, and we have examined originals or copies of the following: (a) The Certificate of Incorporation (the "Certificate"); (b) The Bylaws of the Company; (c) The resolutions adopted by the Board of Directors of the Company and the stockholders of the Company with respect to the transactions contemplated by the Purchase Agreement; (d) The certificates representing the shares of the Company's Common Stock issued to the Purchasers on the date hereof; (e) Executed counterparts of the Purchase Agreement; (f) The Compliance Certificate dated the date hereof delivered to you; -18- (g) The certified or official bank checks or evidence of wire transfers payable to the Company delivered by the Purchasers on the date hereof as consideration for the sale of the Shares; and (h) The certificates of certain state authorities and filing officers, copies of which are being delivered to you on the date hereof. As used in this opinion, the expressions "to our knowledge," "known to us," and "of which we are aware" with reference to matters of fact means that, after an examination of documents made available to us by the Company and after inquiries of officers of the Company, we find no reason to believe that the opinions expressed herein are factually incorrect. Further, the expressions "to our knowledge," "known to us," "of which we are aware" or similar language with reference to matters of fact refers to the current actual knowledge of the attorneys of this firm who have worked on matters for the Company solely in connection with the Purchase Agreement. We have not undertaken any independent investigation to determine the existence or absence of any fact, and no inference as to our knowledge of the existence or absence of any fact should be drawn from our representation of the Company or the rendering of the opinions set forth below. For purposes of this opinion, we are assuming that each party (other than the Company) to the Purchase Agreement has all requisite power and authority, and has taken any and all necessary corporate or partnership action, to execute and deliver the Purchase Agreement to which it is a party and to effect any and all transactions related or contemplated thereby, and that each of you duly and validly executed and delivered the Purchase Agreement. We are also assuming that the representations and warranties made by each Purchaser and the Company under the Purchase Agreement are true and correct, and that the Purchasers have purchased the Shares for value, in good faith and without notice of adverse claims within the meaning of the Delaware Uniform Commercial Code. The opinions, hereinafter expressed are subject to the following additional exceptions, qualifications, limitations and assumptions: We express no opinion as to (i) the effect of applicable bankruptcy, insolvency, reorganization, liquidation, conservatorship, readjustment of debt, moratorium or other similar laws affecting the rights of creditors or (ii) the provisions of the Purchase Agreement relating to indemnity or contribution. We express no opinion as to the effect of rules of law governing specific performance, injunctive relief or other equitable remedies (regardless of whether any such remedy is considered in a proceeding at law or in equity) or as to the effects of public policy on the enforceability of any provision of any agreement; -19- We express no opinion as to compliance with applicable anti-fraud provisions of federal or state securities laws. We have assumed the genuineness of all signatures on original documents, the authenticity of all documents submitted to us as originals, the conformity to original documents of all copies submitted to us as copies thereof, the legal capacity of natural persons, and the due execution and delivery of all documents (except as to due execution and delivery by the Company) where due execution and delivery are a prerequisite to the effectiveness thereof. Our opinion set forth in paragraph 1 below is based solely on the certificate referenced above as to the legal existence and corporate and tax good standing of the Company in the state of Delaware. This opinion is subject to the effect of statutes, principles of equity and court decisions providing (i) that certain covenants and provisions of agreements are unenforceable where enforcement of such covenants or provisions under the circumstances would violate the enforcing party's implied covenant of good faith and fair dealing, and (ii) that a court may refuse to enforce, or may limit the application of, a contract or any clause thereof that the court finds to be unconscionable or contrary to public policy. We have not reviewed, and express no opinion on, (i) financial covenants or similar provisions requiring financial calculations or determinations to ascertain whether there is any such conflict, (ii) provisions relating to the occurrence of a "material adverse event" or words of similar import or (iii) parol evidence bearing on interpretation or construction. The opinions expressed herein are limited in all respects to existing laws, rules and regulations of the State of California, the General Corporation Law of the State of Delaware, as amended (the "DGCL") and applicable United States federal laws, rules and regulations. Furthermore, we have made no inquiry into, and express no opinion with respect to, any federal or state statute, rule or regulation relating to any tax, antitrust, land use, safety, environmental, hazardous material, patent, copyright, trademark or trade name matter, as to the statutes, regulations, treaties or common laws of any other nation, state or jurisdiction, or the effect on the transactions contemplated in the Purchase Agreement of noncompliance under any such statutes, regulations, treaties or common laws. We further disclaim any opinion as to any statute, rule, regulation, ordinance, order or other promulgation of any regional or local governmental body or as to any related judicial or administrative opinion. Our opinions relate solely to the express provisions of the Purchase Agreement and the exhibits referred to therein and attached thereto and we express no opinion as to any other oral or written agreements or understandings between the Company or any of the Purchasers. Provisions of the Purchase Agreement requiring that waivers must be in writing may not be binding or enforceable if a non-executory oral agreement has been created modifying any -20- such provision or an implied agreement by trade practice or course of conduct has given rise to a waiver. Based upon and subject to the foregoing, and subject in all respects to the disclosure on the Disclosure Schedule attached to the Purchase Agreement, we are of the opinion that: 1. The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware. The Company has the requisite corporate power to own the properties and assets owned by it and to carry on its business as presently conducted. 2. The Company has all requisite legal and corporate power to execute and deliver the Purchase Agreement, to sell and issue the shares of Common Stock to the Purchasers as contemplated by the Purchase Agreement and to carry out and perform its obligations under the terms of the Purchase Agreement. 3. The authorized capital stock of the Company consists of [________] shares of Common Stock, [________] of which are issued and outstanding, and [_________] shares of Preferred Stock, none of which is outstanding. All issued and outstanding shares have been duly authorized, validly issued, fully paid, and nonassessable and have been issued in compliance with the registration and qualifications requirements of all applicable securities laws. Upon the issuance, sale, and delivery for the consideration stated in the Purchase Agreement, the shares of Common Stock being issued and sold to the Purchasers on the date hereof shall be duly authorized, validly issued, fully paid, and nonassessable, shall have been issued in compliance with the registration or qualification requirements of all applicable securities laws (but excluding jurisdictions outside the United States); provided, however, that the shares of Common Stock may be subject to restrictions on transfer under state and/or federal securities laws. To our knowledge, except for rights described in the Purchase Agreement (including the Disclosure Schedule) or in the Prospectus and the Restated Certificate, there are no other options, warrants, conversion privileges or other rights presently outstanding to purchase or otherwise acquire any authorized but unissued shares of capital stock or other securities of the Company, or any other agreements to issue any such securities or rights. 4. All corporate action on the part of the Company, its directors and stockholders necessary for the authorization, execution, delivery and performance of the Purchase Agreement by the Company, and the authorization, sale, issuance and delivery of the Common Stock to the Purchasers pursuant to the Purchase Agreement and the Certificate, and the performance of the Company's obligations under the Purchase Agreement has been taken. The Purchase Agreement, when executed and delivered by the parties thereto, shall constitute a valid and binding obligation of the Company, enforceable against the Company in accordance with its terms. -21- 5. The execution, delivery and performance of the terms of the Purchase Agreement and the issuance of the Common Stock to the Purchasers pursuant to the Purchase Agreement do not violate (i) any provision of the Company's Certificate or Bylaws, or (ii) to our knowledge, any law, statute, rule or regulation of the United States, the State of California. 6. Subject to the accuracy of the Purchaser's representations in Section 4 of the Purchase Agreement, we are of the opinion that the offer, sale and issuance of the Common Stock to the Purchasers in conformity with the terms of the Purchase Agreement and the Certificate constitute transactions exempt from the registration and qualification requirements of Section 5 of the Securities Act of 1933, as amended, the laws of the State of California, and the DGCL. This opinion is furnished to the Purchasers solely for your benefit in connection with the purchase of the Shares and is not to be made available to or relied upon by any other person, firm or entity for any purpose without our express prior written consent. Very truly yours, WILSON SONSINI GOODRICH & ROSATI -22- EX-10.13 17 COMMON STOCK PURCHASE AGREEMENT - NOKIA EXHIBIT 10.13 PALM COMPUTING, INC. COMMON STOCK PURCHASE AGREEMENT December 13, 1999 TABLE OF CONTENTS
Page ---- 1. Agreement To Sell and Purchase.................................. 1 1.1 Authorization Of Shares.................................... 1 1.2 Sale And Purchase Of Common Stock.......................... 1 1.3 Hart-Scott-Rodino Compliance............................... 2 2. Closing, Delivery And Payment................................... 2 3. Representations and Warranties Of The Company................... 3 3.1 Organization, Good Standing And Qualification.............. 3 3.2 Authorization; Binding Obligations......................... 3 3.3 Compliance With Other Instruments.......................... 3 3.4 Valid Issuance of Shares................................... 4 3.5 Litigation, Etc............................................ 4 3.6 Governmental Consent, Etc.................................. 4 3.7 Intellectual Property Rights............................... 4 4. Representations And Warranties Of Purchaser..................... 4 4.1 Requisite Power And Authority.............................. 4 4.2 Consents................................................... 5 4.3 Investment Representations................................. 5 4.4 Legends.................................................... 6 4.5 Removal of Legend and Transfer Restrictions................ 6 5. Conditions To Closing........................................... 6 5.1 Conditions To Purchaser's Obligations At The Closing....... 6 5.2 Conditions To Obligations Of The Company................... 7 6. Rule 144 Reporting.............................................. 8 7. Covenants....................................................... 8 7.1 "Stand-Off" Agreement...................................... 8 7.2 Right of First Offer....................................... 9 8. Miscellaneous................................................... 10 8.1 Governing Law.............................................. 10 8.2 Survival................................................... 10 8.3 Successors And Assigns..................................... 10 8.4 Separability............................................... 10
-i- TABLE OF CONTENTS (continued) PAGE ---- 8.5 Amendment And Waiver....................................... 10 8.6 Notices.................................................... 11 8.7 Expenses................................................... 11 8.8 Attorneys' Fees............................................ 11 8.9 Titles And Subtitles....................................... 11 8.10 Counterparts............................................... 11 8.11 Broker's Fees.............................................. 11 8.12 Termination................................................ 11 8.13 Subsequent, Consents, Permits and Waivers.................. 11 8.14 Most Favored Nations....................................... 11
List of Exhibits: Exhibit A - Preliminary Prospectus Exhibit B - Legal Opinion ii PALM COMPUTING, INC. COMMON STOCK PURCHASE AGREEMENT This Common Stock Purchase Agreement (the "Agreement") is entered into as of December 13, 1999, by and between Palm Computing, Inc., a California corporation (the "Company"), and Nokia [AB Ojy], a Finland company ("Purchaser"). RECITALS Whereas, the Company intends to reincorporate by merger into Palm, Inc., a Delaware corporation being formed for the purpose of the reincorporation and that will be the surviving entity; the "Company" as used in this Agreement refers to, prior to such merger, the California corporation and, after such merger, the Delaware corporation; the Delaware corporation will assume this Agreement; and Whereas, Purchaser desires to purchase shares of the Company's common stock ("Common Stock"), such purchase to be made in a private placement to close concurrently with, but not before, the closing of the initial public offering of the Company (the "IPO") pursuant to a Registration Statement to be filed on Form S-1 with the Securities and Exchange Commission (the "Commission") (such registration statement, as amended, shall be referred to herein as the "Registration Statement"); and Whereas, the Company desires to issue and sell the Shares (as defined below) to Purchaser on the terms and conditions set forth herein. Now, Therefore, in consideration of the foregoing recitals and the mutual promises hereinafter set forth, the parties hereto agree as follows: 1. Agreement To Sell and Purchase. 1.1 Authorization Of Shares. On or prior to the Closing (as defined in Section 2 below), the Company shall have authorized the sale and issuance to Purchaser of the Shares. Prior to the Closing the Company will have adopted and filed a Certificate of Incorporation (the "Certificate of Incorporation") with the Secretary of State of the State of Delaware authorizing sufficient shares of Common Stock to cover the sale and issuance of the Shares to be purchased hereunder. 1.2 Sale And Purchase Of Common Stock. Subject to the terms and conditions hereof, the Company hereby agrees to issue and sell to Purchaser and Purchaser agrees to purchase from the Company, at the Closing, the lesser of: (a) that whole number of shares of Common Stock equal to -1- the quotient determined by dividing $80 million by the per share Price to Public (as defined below) and rounding down to the nearest whole number or (b) that whole number of shares of Common Stock determined by multiplying the number of shares of Post-Money Outstanding Capital Stock of the Company by .015 and rounding down to the nearest whole number. For purposes of this Agreement, the term "Post-Money Outstanding Capital Stock" shall mean the number of shares of Common Stock outstanding immediately following the closing of the IPO and including (i) the number of shares of Common Stock issuable pursuant to then outstanding options or warrants for Common Stock (including those options issued at the time of the IPO and excluding specifically options to purchase 3Com common stock which may be converted into options to purchase the Company's Common Stock at the time 3Com distributes its shares of the Company's Common Stock to 3Com stockholders), (ii) any Common Stock issuable pursuant to any then outstanding class or series of stock convertible into Common Stock and (iii) the Private Placement Shares (as defined on Annex 1 attached to this Agreement). The shares of Common Stock to be purchased hereunder are referred to as the "Shares". The per share purchase price for the Shares purchased hereunder shall be the per share Price to Public. For purposes of this Agreement, the term "Price to Public" shall mean the Price to Public set forth on the cover page of the final Prospectus (as defined below). For purposes of this Agreement, the term "Prospectus" means the prospectus, as amended, on file with the Commission at the time the Registration Statement becomes effective, including the information deemed to be part of the Registration at the time of effectiveness pursuant to Rule 430A, if applicable, except that if the Prospectus filed by the Company pursuant to Rule 424(b) differs from the prospectus on file at the time the Registration Statement becomes effective, the term "Prospectus" shall refer to the Rule 424(b) Prospectus from and after the time it was filed with the Commission or transmitted to the Commission for filing. 1.3 Hart-Scott-Rodino Compliance. Notwithstanding anything else in this Agreement, if the sale and issuance of the Shares is subject to the premerger notification requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), it shall be a condition to the Closing that any waiting period under the HSR Act applicable to the purchase of the Shares shall have expired or been terminated and any approvals required thereunder shall have been obtained, and the parties shall cooperate in promptly filing premerger reports and in taking all steps reasonably necessary to obtain early termination of any applicable HSR Act waiting periods. If any such waiting period shall not have expired or been subject to early termination on or before the date ninety (90) days from the date of this Agreement, either party may terminate this Agreement by giving written notice to the other. 2. Closing, Delivery And Payment. Subject to the terms of Section 5, the closing of the sale and purchase of the Shares under this Agreement (the "Closing") shall take place concurrently with, but not before, the closing of the IPO at the offices of Wilson Sonsini Goodrich & Rosati, Professional Corporation, 650 Page Mill Road, Palo Alto, California 94304. The date of the Closing is referred to as the "Closing Date." At the -2- Closing, subject to the terms and conditions hereof, the Company will deliver to Purchaser a certificate representing the number of Shares to be purchased at the Closing against payment by or on behalf of Purchaser of the purchase price therefor by cash, wire transfer, or by such other means as shall be mutually agreeable to Purchaser and the Company. 3. Representations and Warranties Of The Company. The Company represents and warrants to Purchaser that, as of the effective date of the underwriting agreement entered into with the managing underwriters of the IPO (the "Underwriting Agreement"), the representations and warranties set forth in such underwriting agreement will be true and correct in all respects and incorporated by reference herein. Except as set forth in the Schedule of Exceptions attached hereto as Annex 2, the Company hereby additionally represents and warrants to Purchaser as of the date hereof as follows: 3.1 Organization, Good Standing And Qualification. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of California. The Company has full power and authority to own and operate its properties and assets, and to carry on its business as presently conducted. The Company is duly qualified, is authorized to do business and is in good standing as a foreign corporation in all jurisdictions in which the nature of its activities and of its properties (both owned and leased) makes such qualification necessary, except for those jurisdictions, in the aggregate, in which failure to do so would not have a material adverse effect on the Company or its business. 3.2 Authorization; Binding Obligations. All corporate action on the part of the Company, its officers, directors and shareholders necessary for the authorization, execution and delivery of this Agreement and the Certificate of Incorporation, for the sale and issuance of the Shares pursuant hereto and for the performance of the Company's obligations hereunder has been taken or will be taken prior to the Closing. This Agreement, when executed and delivered, will be a valid and binding obligation of the Company enforceable in accordance with its terms. The sale of the Shares is not and will not be subject to any preemptive rights or rights of first refusal that have not been properly waived or complied with. When issued in compliance with the provisions of this Agreement and the Certificate of Incorporation, the Shares will be validly issued, fully paid and nonassessable, and will be free of any liens or encumbrances; provided, however, that the Shares may be subject to restrictions on transfer under this Agreement and under state and/or federal securities laws as set forth herein or as otherwise required by such laws at the time a transfer is proposed. 3.3 Compliance With Other Instruments. The execution, delivery and performance of and compliance with this Agreement and the issuance and sale of the Shares pursuant hereto will not (i) materially conflict with, or result in a material breach or violation of, or constitute a material default under, or result in the creation or imposition of any material lien, (ii) violate, conflict with or result in the breach of any material terms of, or result in the material modification of, any material contract or otherwise give any other contracting party the right to terminate a material contract, or constitute (or with notice or lapse of time both constitute) a material default under any material -3- contract to which the Company is a party or by or to which it or any of its assets or properties may be bound or subject or (iii) result in any violation, or be in conflict with or constitute a default under any term, of its charter or bylaws. 3.4 Valid Issuance of Shares. The Shares which will be purchased by Purchaser hereunder, when issued, sold and delivered in accordance with the terms hereof for the consideration expressed herein, will be duly and validly authorized and issued, fully paid and nonassessable. 3.5 Litigation, Etc. There is no action, suit, proceeding nor, to the Company's knowledge, any investigation pending or currently threatened against the Company, that questions the validity of this Agreement or the right of the Company to enter into such agreements, or which might result, either individually or in the aggregate, in any material adverse change in the assets, condition, affairs or prospects of the Company, financial or otherwise. 3.6 Governmental Consent, Etc. No consent, approval or authorization of, or designation, declaration or filing with, any governmental authority on the part of the Company is required in connection with the valid execution, delivery, and performance of this Agreement or the offer, sale or issuance of the Shares, or the consummation of any other transaction contemplated by this Agreement except certain filings as may be required under the Securities Act and state securities laws and regulations, which filings will be made timely in accordance with the applicable law or regulation. 3.7 Intellectual Property Rights. To the knowledge of the Company, the Company or its subsidiaries own and possess or are licensed under all patents, patent applications, licenses, trademarks, trade secrets, trade names, brand names, inventions and copyrights or other proprietary rights ("Intellectual Property") employed in the operation of their respective businesses as currently conducted, and, to the knowledge of the Company, with no infringement of or conflict with the rights or others respecting any of the same. Neither the Company nor any subsidiary has received any communications alleging that the Company or any subsidiary has violated any of the Intellectual Property of any other person or entity. Reasonable security measures have been taken by the Company and its subsidiaries to protect the secrecy, confidentiality and value of the Company's and its subsidiaries' trade secrets, including their respective know-how, technology, concepts and other technical data for the development, processing, manufacture and sale of its products. Each employee of and consultant to the Company or its subsidiaries has executed an invention assignment and confidentiality agreement with the Company or its subsidiaries. 4. Representations And Warranties Of Purchaser Purchaser hereby represents and warrants to the Company as follows: 4.1 Requisite Power And Authority. Purchaser has all necessary power and authority under all applicable provisions of law to execute and deliver this Agreement and to carry out the provisions of this Agreement. All action on Purchaser's part required for the lawful execution and -4- delivery of this Agreement has been or will be effectively taken prior to the Closing. This Agreement, when executed and delivered, will be a valid and binding obligation of Purchaser, enforceable in accordance with its terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application affecting enforcement of creditors' rights and (ii) general principles of equity that restrict the availability of equitable remedies. 4.2 Consents. All consents, approvals, orders, authorizations, registrations, qualifications, designations, declarations or filings with any governmental or banking authority on the part of Purchaser required in connection with the consummation of the transactions contemplated in this Agreement have been or shall have been obtained prior to and be effective as of the Closing. 4.3 Investment Representations. Purchaser understands that the Shares have not been registered under the Securities Act. Purchaser also understands that the Shares are being offered and sold pursuant to an exemption from registration contained in the Securities Act based in part upon Purchaser's representations contained in the Agreement. Purchaser hereby represents and warrants as follows: (a) Purchaser Is An Accredited Investor. Purchaser represents that Purchaser is an "accredited investor" within the meaning of Rule 501(a) of Regulation D under the Securities Act. (b) Purchaser Bears Economic Risk. Purchaser must bear the economic risk of this investment indefinitely unless the Shares are registered pursuant to the Securities Act, or an exemption from registration is available. Purchaser understands that it will have no registration rights with respect to the Shares. Purchaser also understands that there is no assurance that any exemption from registration under the Securities Act will be available and that, even if available, such exemption may not allow Purchaser to transfer all or any portion of the Shares under the circumstances, in the amounts or at the times Purchaser might propose. (c) Acquisition For Own Account. Purchaser is acquiring the Shares for Purchaser's own account for investment only, and not with a view towards their distribution within the meaning of the Securities Act. (d) Purchaser Can Protect Its Interest. Purchaser represents that by reason of its, or of its management's, business or financial experience, Purchaser has the capacity to protect its own interests in connection with the transactions contemplated in this Agreement. Purchaser is not a corporation, trust or partnership specifically formed for the purpose of consummating these transactions. (e) Company Information. Purchaser has had an opportunity to discuss the Company's business, management and financial affairs with directors, officers and management of the Company and has had the opportunity to review the Company's operations and facilities. -5- Purchaser has also had the opportunity to ask questions of and receive answers from, the Company and its management regarding the terms and conditions of this investment. 4.4 Legends. Each certificate representing the Shares may be endorsed with the following legends: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND ARE "RESTRICTED SECURITIES" AS DEFINED IN RULE 144 PROMULGATED UNDER THE ACT. THE SECURITIES MAY NOT BE SOLD OR OFFERED FOR SALE OR OTHERWISE DISTRIBUTED EXCEPT (I) IN CONJUNCTION WITH AN EFFECTIVE REGISTRATION STATEMENT FOR THE SHARES UNDER THE ACT, OR (II) IN COMPLIANCE WITH RULE 144 OR (III) PURSUANT TO AN OPINION OF COUNSEL TO THE CORPORATION THAT SUCH REGISTRATION OR COMPLIANCE IS NOT REQUIRED AS TO SUCH SALE, OFFER OR DISTRIBUTION." "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO, AND MAY BE TRANSFERRED ONLY IN ACCORDANCE WITH, THE TERMS OF CERTAIN AGREEMENTS AMONG THE COMPANY AND THE STOCKHOLDER, WHICH INCLUDE, WITHOUT LIMITATION, 180 DAY MARKET STANDOFF RESTRICTIONS AND OBLIGATIONS OF RIGHTS OF FIRST OFFER, COPIES OF WHICH ARE ON FILE WITH THE SECRETARY OF THE COMPANY." The Company need not register a transfer of any Shares, and may also instruct its transfer agent not to register the transfer of the Shares, unless the conditions specified in the foregoing legends are satisfied. 4.5 Removal of Legend and Transfer Restrictions. Any legend endorsed on a certificate pursuant to subsection 4.4 and the stop transfer instructions with respect to such Shares shall be removed and the Company shall issue a certificate without such legend to the holder thereof if such legend may be properly removed under the terms of Rule 144 promulgated under the Securities Act or if such holder provides the Company with an opinion of counsel for such holder, reasonably satisfactory to legal counsel for the Company, to the effect that a sale, transfer or assignment of such Shares may be made without registration. 5. Conditions To Closing. 5.1 Conditions To Purchaser's Obligations At The Closing. Purchaser's obligation to purchase the Shares identified in Section 1.2 of the Agreement at the Closing are subject to the satisfaction, at or prior to the Closing, of the following conditions: -6- (a) Concurrent Closing of IPO. The Closing shall occur concurrently with, and not before, the closing of the IPO. (b) Representations And Warranties True; Performance Of Obligations. The representations and warranties made by the Company in Section 3 (except for Section 3.5 and 3.7) and the representations and warranties which are incorporated by reference from the Underwriting Agreement shall be true and correct as of the Closing, and the Company shall have performed and complied with all obligations and conditions herein required to be performed or complied with by it on or prior to the Closing and shall have delivered an officer's certificate as to the matters set forth in this Section 5.1(b). (c) Legal Investment. At the time of the Closing, the sale and issuance of the Shares shall be legally permitted by all laws and regulations to which Purchaser and the Company are subject. (d) Consents, Permits, And Waivers. The Company shall have obtained any and all authorizations, approvals, consents, permits and waivers necessary or appropriate for consummation of the transactions contemplated by this Agreement (except for such as may be properly obtained subsequent to the Closing, and such items shall be effective on and as of the Closing). (e) Legal Opinion. The Company shall have delivered an opinion of counsel to the Purchaser in substantially the form attached hereto as Exhibit ------- A. - - (f) Transfer Agent Instructions. The Company shall have delivered to Purchaser a copy of a letter to the Company's transfer agent, dated the Closing Date, and instructing the transfer agent to issue the Shares. 5.2 Conditions To Obligations Of The Company. The Company's obligation to issue and sell the Shares at the Closing is subject to the satisfaction, on or prior to the Closing of the following conditions: (a) Concurrent Closing of IPO. The closing of the IPO shall occur concurrently with, but not before, the Closing. (b) Representations And Warranties True. The representations and warranties made by Purchaser in Section 4 hereof shall be true and correct in all material respects at the date of the Closing, with the same force and effect as if they had been made on and as of said date. (c) Performance Of Obligations. Purchaser shall have performed and complied with all agreements and conditions herein required to be performed or complied with by Purchaser on or before the Closing. -7- (d) Payment of Purchase Price. Purchaser shall deliver to the Company payment for the Shares to be acquired by such Purchase in the amounts set forth in Section 1.2 hereto pursuant to the wire instructions provided by the company. 6. Rule 144 Reporting. With a view to making available to Purchaser the benefits of certain rules and regulations of the SEC which may permit the sale of the Shares to the public without registration, the Company agrees at all times after the effective date of the Registration Statement to: (a) make and keep public information available, as those terms are understood and defined in SEC Rule 144. (b) file with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and the Securities Exchange Act of 1934, as amended (the "Exchange Act"). (c) so long as Purchaser owns any Shares, to furnish to Purchaser within a reasonable time upon a written request by Purchaser, a written statement by the Company as to its compliance with the reporting requirements of said Rule 144 (at any time after ninety (90) days after the effective date of the first registration statement filed by the Company for an offering of its securities to the general public) and of the Exchange Act (at any time after it has become subject to such reporting requirements), a copy of the most recent annual or quarterly report of the Company, and such other reports and documents so filed by the Company as Purchaser may reasonably request in complying with any rule or regulation of the SEC allowing Purchaser to sell any such securities without registration. 7. Covenants 7.1 "Stand-Off" Agreement. The Purchaser agrees not to (1) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly any of the Shares or any shares of Common Stock of the Company or any securities convertible into or exercisable or exchangeable for Shares or Common Stock of the Company (whether such shares or any such securities are now owned by the undersigned or are hereafter acquired, or (2) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Shares or Common Stock of the Company, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of Shares or Common Stock or such other securities, in cash or otherwise, for 180 days following the Closing. The provisions of this Section 7.1 shall be for the benefit of and enforceable by the underwriters of the IPO, acting through the managing underwriter. -8- 7.2 Right of First Offer. For so long as Purchaser holds any Shares, if the Purchaser joins in a partnership, limited partnership, syndicate, or otherwise acts in concert or alone for the purpose of disposing of more than 5% of the Shares (as adjusted for stock splits or similar events after the date hereof) to a single person or transferee or any group of affiliated persons or transferees but specifically excluding any hedging or similar transactions, the Purchaser shall give the Company the opportunity to purchase such stock, in the following manner: (a) The Purchaser shall give notice (the "Transfer Notice") to the Company in writing of such intention, specifying the number and kind of securities proposed to be sold or transferred, the proposed price per share therefor (the "Transfer Price") and the other material terms, upon which such disposition is proposed to be made, including the names of the proposed purchasers or transferees if such persons have been identified. (b) The Company shall have the right, exercisable by written notice given by the Company to the Purchaser within ten calendar days of receipt of the Transfer Notice to purchase all of the shares specified in such Transfer Notice upon the terms specified in such Transfer Notice. Notwithstanding the foregoing, the Company shall have twenty-five calendar days from the receipt of the Transfer Notice (regardless of the date of the Transfer Notice) to notify Purchaser of the Company's election to purchase the shares pursuant to this Section 7.2 if the Company shall furnish a certificate signed by the President or Chief Executive Officer of the Company within ten calendar days of receipt of the Transfer Notice stating that, in the good faith judgment of the management of the Company, it would be detrimental to the Company and its stockholders to decide whether to elect to purchase the Shares within the ten day period provided for pursuant to this Section 7.2 (it being understood that the mere election of Purchaser to sell such Shares in a transaction triggering the provisions of this Section 7.2 shall not constitute such an event). The purchase of the shares by the Company must be completed within 60 calendar days from the receipt of the Transfer Notice. The Company and Purchaser shall use their best efforts to secure during such period any approvals required on their respective parts in connection therewith. The Company shall have the right to pay for such shares specified in the Transfer Notice: (a) the same amount in cash, if the consideration to be paid consists of cash, or (b) to the extent that the consideration to be paid does not consist of cash, consideration per share equivalent to that set forth in the Transfer Notice, or an amount of cash having equivalent value, as determined in good faith by mutual agreement of the Company and the Purchaser. (c) If the Company (or its assignees) does not exercise its right of first offer hereunder within the time specified for such exercise, the Seller(s) shall be free, during the period of 120 days following the date of the Transfer Notice, to sell the shares specified in such Transfer Notice for such consideration and on such other material terms as shall be no more favorable to the purchaser of the shares than the terms specified in such Transfer Notice. (d) The provisions of this Section 7.2 shall terminate upon the earlier to occur of: (i) such time as 3Com Corporation distributes its shares of the Company's Common Stock to the shareholders of 3Com Corporation or (ii) one year following the Closing Date. -9- 8. Miscellaneous 8.1 Governing Law. This Agreement shall be governed in all respects by the laws of the State of California. 8.2 Survival. The representations, warranties, covenants and agreements made herein shall survive any investigation made by Purchaser and the closing of the transactions contemplated hereby. All statements as to factual matters contained in any certificate or other instrument delivered by or on behalf of the Company pursuant hereto in connection with the transactions contemplated hereby shall be deemed to be representations and warranties by the Company hereunder solely as of the date of such certificate or instrument, except as expressly provided otherwise in such certificate or instrument. 8.3 Successors And Assigns. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto and shall inure to the benefit of and be enforceable by each person who shall be a holder of the Shares from time to time; provided, however, that prior to the receipt by the Company of adequate written notice of the transfer of any Shares specifying the full name and address of the transferee, the Company may deem and treat the person listed as the holder of such Shares in its records as the absolute owner and holder of such Shares for all purposes, the payment of any dividends or any redemption price. 8.4 Separability. In case any provision of the Agreement shall be invalid, illegal or unenforceable, such provision shall, to the extent practicable, be modified so as to make it valid, legal and enforceable and to maintain as nearly as practicable the intent of the parties, and the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 8.5 Amendment And Waiver. (a) This Agreement may be amended or modified only upon the written consent of the parties hereto. (b) The obligations of the Company and the rights of the holder of the Shares under this Agreement may be waived only with the written consent of the parties hereto. (c) Except to the extent provided in this Section 8.5, neither this Agreement nor any provision hereof may be changed, waived, discharged or terminated, except by a statement in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought. (d) Any amendment or waiver effected in accordance with this Section 8.5 shall be binding upon any future holder of some or all of the Shares. -10- 8.6 Notices. All notices and other communications required or permitted hereunder shall be in writing and shall be deemed effectively given and received (a) upon personal delivery, (b) on the fifth day following mailing sent by registered or certified mail, return receipt requested, postage prepaid, (c) upon confirmed delivery by means of a nationally recognized overnight courier service or (d) upon confirmed transmission of facsimile addressed: (i) if to Purchaser, at Purchaser's address as set forth on the Company's records, or at such other address as Purchaser shall have furnished to the Company in writing or (ii) if to the Company, at its address as set forth at the end of this Agreement, or at such other address as the Company shall have furnished to Purchaser in writing. 8.7 Expenses. The Company shall pay all costs and expenses that it incurs with respect to the negotiation, execution, delivery and performance of the Agreement, and Purchaser shall pay all costs and expenses that it incurs with respect to the negotiation, execution, delivery and performance of this Agreement. 8.8 Attorneys' Fees. If legal action is brought to enforce or interpret this Agreement, the prevailing party shall be entitled to recover its reasonable attorneys' fees and legal costs in connection therewith. 8.9 Titles And Subtitles. The titles of the paragraphs and subparagraphs of the Agreement are for convenience of reference only and are not to be considered in construing this Agreement. 8.10 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one instrument. 8.11 Broker's Fees. Each party hereto represents and warrants that no agent, broker, investment banker, person or firm acting on behalf of or under the authority of such party hereto is or will be entitled to any broker's or finder's fee or any other commission directly or indirectly in connection with the transactions contemplated herein. Each party hereto further agrees to indemnify each other party for any claims, losses or expenses incurred by such other party as a result of the representation in this Section 8.11 being untrue. 8.12 Termination. If the Registration Statement for the IPO has not become effective by June 1, 2000, Purchaser in its discretion may elect to terminate this Agreement by providing written notice to the Company at any time thereafter. 8.13 Subsequent, Consents, Permits and Waivers. The Company shall obtain promptly after the Closing all authorizations, approvals, consents, permits and waivers that are necessary or applicable for consummation of the transactions contemplated by this Agreement and that were not obtained prior to the Closing because they may be properly obtained subsequent to the Closing. 8.14 Most Favored Nations. Except for the maximum number of shares being purchased, the Company agrees that the material terms (including, without limitation, the terms of Section 3 -11- hereof) of this Agreement will be no less favorable to Purchaser than the terms given to other investors (including investors that may enter into such agreements after the date hereof, if any) that are purchasing shares of the Company's capital stock in private placements that are closing concurrently with the closing of the IPO. [Remainder of Page Intentionally Left Blank] -12- In Witness Whereof, the parties hereto have executed this Agreement as of the date set forth in the first paragraph hereof. Company: Palm Computing, Inc. 5400 Bayfront Plaza Santa Clara, CA 95052-8145 By: /s/ PALM COMPUTING, INC. ----------------------------------- Purchaser: By: /s/ NOKIA CORPORATION ----------------------------------- Annex 1 In connection with that certain Common Stock Purchase Agreement dated as of December 13, 1999, by and between the Company and the Purchaser (the "Agreement"), the appropriate formula set forth herein shall be used to determine the number of "Private Placement Shares" pursuant to Section 1.2 of the Agreement. Capitalized terms not otherwise defined herein shall have the meaning ascribed to them in the Agreement. For purposes of this Annex 1, the term Pre-Money Outstanding Capital Stock shall mean the number of shares of Common Stock outstanding immediately following the closing of the IPO and including (i) the number of shares of Common Stock issuable pursuant to then outstanding options or warrants for Common Stock (including those options issued at the time of the IPO and excluding specifically options to purchase 3Com common stock which may be converted into options to purchase the Company's Common Stock at the time 3Com distributes its shares of the Company's Common Stock to 3Com stockholders) and (ii) any Common Stock issuable pursuant to any then outstanding class or series of stock convertible into Common Stock. Background By way of background, the Company is issuing shares of Common Stock to one or more investors (including the Purchaser) pursuant to private placements that are to close concurrently with (but not before) the IPO. Such investors (including the Purchaser) have agreed to purchase the lesser of (a) a maximum dollar amount of shares of Common Stock or (b) a certain percentage of the Company's Post-Money Capital Stock as shown below. The aggregate of the investment amounts is contemplated to be equal to or less than 4.5% of the Company's Post-Money Outstanding Capital Stock, allocated as follows: Nokia--the lesser of 1 1/2% of the Post-Money Outstanding Capital Stock or $80 million; America Online, Inc.--the lesser of 1 1/2% of the Post-Money Outstanding Capital Stock or $80 million; Motorola, Inc.--the lesser of 1 1/2% of the Post-Money Outstanding Capital Stock or $65 million. For the purposes of the formulas below, the Pre-Money Value shall be equal to the Pre-Money Outstanding Capital Stock multiplied by the per share Price to Public. Formulas (a) Subject to the limitations of Section 1.2, in the event the Pre-Money Value is less than $4,138,333,333.33 based upon the final valuation of the Company upon the closing of the IPO, then the number of Private Placement Shares shall be determined by the following formula where "X" equals the Private Placement Shares: X = .045(Pre-Money Outstanding Capital Stock + X) (b) Subject to the limitations of Section 1.2, in the event the Pre-Money Value is equal to or greater than $4,138,333,333.33 and less than $5,108,333,333.33 based upon the final valuation of the Company upon the closing of the IPO, then the number of Private Placement Shares shall be determined by the following formula where "X" equals the Private Placement Shares: X = .03(Pre-Money Outstanding Capital Stock + X) + Y Where "Y" is equal to ($65,000,000/per share Price to Public) (c) Subject to the limitations of Section 1.2, in the event the Pre-Money Value is equal to or greater than $5,108,333,333.33 based upon the final valuation of the Company upon the closing of the IPO, then the number of Private Placement Shares shall be determined by the following formula where "X" equals the Private Placement Shares: X = $225,000,000/per share Price to Public In the case of (b) above, Y shall be rounded down to the nearest whole number. In the case of (a), (b) and (c) above, X shall be rounded down to the nearest whole number. -2- Annex 2 ------- PALM COMPUTING, INC. COMPANY SCHEDULE OF EXCEPTIONS ------------------------------ Pursuant to Section 3 of the Common Stock Purchase Agreement (the " Agreement ") dated as of December __, 1999, by and between the Company and the Purchaser, the Company hereby delivers this Schedule of Exceptions to the representations and warranties of the Company given in the Agreement. Each section number in this Schedule of Exceptions corresponds to the section numbers in the Agreement; however, any information disclosed herein under any section number shall be deemed to be disclosed and incorporated in any other section number of the Agreement where such disclosure would be appropriate. Any capitalized terms not otherwise defined herein shall have the meaning ascribed to them in the Agreement. 3.1 Organization; Good Standing and Qualification --------------------------------------------- No Exceptions. 3.2 Authorization; Binding Obligations ---------------------------------- No Exceptions. 3.3 Compliance with Other Instruments --------------------------------- No Exceptions. 3.4 Valid Issuance of Shares ------------------------ No Exceptions. 3.5 Litigation, Etc. ---------------- 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, 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 -3- 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 24, 1999, the court stayed the action pending 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 contemplate that 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 us to substantial damages and require us to indemnify our licensees for damages that they may suffer. Moreover, if there is an adverse determination, a license may be necessary to continue using the Graffiti 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. 3.6 Governmental Consent, Etc. ------------------------- No Exceptions. 3.7 Intellectual Property Rights ---------------------------- 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, 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 24, 1999, the court stayed the action pending 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 contemplate that 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 us to substantial damages and require us to indemnify our licensees for damages that they may suffer. Moreover, if there is an adverse determination, a license may be necessary to continue using the Graffiti 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. -4- EXHIBIT A --------- ____________, 2000 To the Purchasers of Common Stock of Palm, Inc. pursuant to the Common Stock Purchase Agreement dated as of the date hereof Ladies and Gentlemen: Reference is made to the Common Stock Purchase Agreement dated as of December __, 1999 (the "Purchase Agreement") by and among Palm, Inc., a Delaware corporation (the "Company"), and the purchasers to the Purchase Agreement (the "Purchasers"), which provides for the issuance and sale by the Company to the Purchasers of an aggregate of up to [____________] shares of Common Stock (the "Shares") at a purchase price of $[____] per share for an aggregate purchase price of up to approximately $[_________]. This opinion is rendered to you pursuant to Section 5.1(e) of the Purchase Agreement and all terms used herein have the meanings defined for them in the Purchase Agreement unless otherwise defined herein. We have acted as counsel for the Company in connection with the negotiation, execution and delivery of the Purchase Agreement and the issuance of the Shares to the Purchasers as contemplated by the Purchase Agreement. As such counsel, we have made such legal and factual examinations and inquiries as we have deemed advisable or necessary for the purpose of rendering this opinion, and we have examined originals or copies of the following: (a) The Certificate of Incorporation (the "Certificate"); (b) The Bylaws of the Company; (c) The resolutions adopted by the Board of Directors of the Company and the stockholders of the Company with respect to the transactions contemplated by the Purchase Agreement; (d) The certificates representing the shares of the Company's Common Stock issued to the Purchasers on the date hereof; (e) Executed counterparts of the Purchase Agreement; -5- (f) The Compliance Certificate dated the date hereof delivered to you; (g) The certified or official bank checks or evidence of wire transfers payable to the Company delivered by the Purchasers on the date hereof as consideration for the sale of the Shares; and (h) The certificates of certain state authorities and filing officers, copies of which are being delivered to you on the date hereof. As used in this opinion, the expressions "to our knowledge," "known to us," and "of which we are aware" with reference to matters of fact means that, after an examination of documents made available to us by the Company and after inquiries of officers of the Company, we find no reason to believe that the opinions expressed herein are factually incorrect. Further, the expressions "to our knowledge," "known to us," "of which we are aware" or similar language with reference to matters of fact refers to the current actual knowledge of the attorneys of this firm who have worked on matters for the Company solely in connection with the Purchase Agreement. We have not undertaken any independent investigation to determine the existence or absence of any fact, and no inference as to our knowledge of the existence or absence of any fact should be drawn from our representation of the Company or the rendering of the opinions set forth below. For purposes of this opinion, we are assuming that each party (other than the Company) to the Purchase Agreement has all requisite power and authority, and has taken any and all necessary corporate or partnership action, to execute and deliver the Purchase Agreement to which it is a party and to effect any and all transactions related or contemplated thereby, and that each of you duly and validly executed and delivered the Purchase Agreement. We are also assuming that the representations and warranties made by each Purchaser and the Company under the Purchase Agreement are true and correct, and that the Purchasers have purchased the Shares for value, in good faith and without notice of adverse claims within the meaning of the Delaware Uniform Commercial Code. The opinions, hereinafter expressed are subject to the following additional exceptions, qualifications, limitations and assumptions: We express no opinion as to (i) the effect of applicable bankruptcy, insolvency, reorganization, liquidation, conservatorship, readjustment of debt, moratorium or other similar laws affecting the rights of creditors or (ii) the provisions of the Purchase Agreement relating to indemnity or contribution. We express no opinion as to the effect of rules of law governing specific performance, injunctive relief or other equitable remedies (regardless of whether any such remedy is considered in a proceeding at law or in equity) or as to the effects of public policy on the enforceability of any provision of any agreement; -6- We express no opinion as to compliance with applicable anti-fraud provisions of federal or state securities laws. We have assumed the genuineness of all signatures on original documents, the authenticity of all documents submitted to us as originals, the conformity to original documents of all copies submitted to us as copies thereof, the legal capacity of natural persons, and the due execution and delivery of all documents (except as to due execution and delivery by the Company) where due execution and delivery are a prerequisite to the effectiveness thereof. Our opinion set forth in paragraph 1 below is based solely on the certificate referenced above as to the legal existence and corporate and tax good standing of the Company in the state of Delaware. This opinion is subject to the effect of statutes, principles of equity and court decisions providing (i) that certain covenants and provisions of agreements are unenforceable where enforcement of such covenants or provisions under the circumstances would violate the enforcing party's implied covenant of good faith and fair dealing, and (ii) that a court may refuse to enforce, or may limit the application of, a contract or any clause thereof that the court finds to be unconscionable or contrary to public policy. We have not reviewed, and express no opinion on, (i) financial covenants or similar provisions requiring financial calculations or determinations to ascertain whether there is any such conflict, (ii) provisions relating to the occurrence of a "material adverse event" or words of similar import or (iii) parol evidence bearing on interpretation or construction. The opinions expressed herein are limited in all respects to existing laws, rules and regulations of the State of California, the General Corporation Law of the State of Delaware, as amended (the "DGCL") and applicable United States federal laws, rules and regulations. Furthermore, we have made no inquiry into, and express no opinion with respect to, any federal or state statute, rule or regulation relating to any tax, antitrust, land use, safety, environmental, hazardous material, patent, copyright, trademark or trade name matter, as to the statutes, regulations, treaties or common laws of any other nation, state or jurisdiction, or the effect on the transactions contemplated in the Purchase Agreement of noncompliance under any such statutes, regulations, treaties or common laws. We further disclaim any opinion as to any statute, rule, regulation, ordinance, order or other promulgation of any regional or local governmental body or as to any related judicial or administrative opinion. Our opinions relate solely to the express provisions of the Purchase Agreement and the exhibits referred to therein and attached thereto and we express no opinion as to any other oral or written agreements or understandings between the Company or any of the Purchasers. Provisions of the Purchase Agreement requiring that waivers must be in writing may not be binding or enforceable if a non-executory oral agreement has been created modifying any -7- such provision or an implied agreement by trade practice or course of conduct has given rise to a waiver. Based upon and subject to the foregoing, and subject in all respects to the disclosure on the Disclosure Schedule attached to the Purchase Agreement, we are of the opinion that: 1. The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware. The Company has the requisite corporate power to own the properties and assets owned by it and to carry on its business as presently conducted. 2. The Company has all requisite legal and corporate power to execute and deliver the Purchase Agreement, to sell and issue the shares of Common Stock to the Purchasers as contemplated by the Purchase Agreement and to carry out and perform its obligations under the terms of the Purchase Agreement. 3. The authorized capital stock of the Company consists of [________] shares of Common Stock, [________] of which are issued and outstanding, and [_________] shares of Preferred Stock, none of which is outstanding. All issued and outstanding shares have been duly authorized, validly issued, fully paid, and nonassessable and have been issued in compliance with the registration and qualifications requirements of all applicable securities laws. Upon the issuance, sale, and delivery for the consideration stated in the Purchase Agreement, the shares of Common Stock being issued and sold to the Purchasers on the date hereof shall be duly authorized, validly issued, fully paid, and nonassessable, shall have been issued in compliance with the registration or qualification requirements of all applicable securities laws (but excluding jurisdictions outside the United States); provided, however, that the shares of Common Stock may be subject to restrictions on transfer under state and/or federal securities laws. To our knowledge, except for rights described in the Purchase Agreement (including the Disclosure Schedule) or in the Prospectus and the Restated Certificate, there are no other options, warrants, conversion privileges or other rights presently outstanding to purchase or otherwise acquire any authorized but unissued shares of capital stock or other securities of the Company, or any other agreements to issue any such securities or rights. 4. All corporate action on the part of the Company, its directors and stockholders necessary for the authorization, execution, delivery and performance of the Purchase Agreement by the Company, and the authorization, sale, issuance and delivery of the Common Stock to the Purchasers pursuant to the Purchase Agreement and the Certificate, and the performance of the Company's obligations under the Purchase Agreement has been taken. The Purchase Agreement, when executed and delivered by the parties thereto, shall constitute a valid and binding obligation of the Company, enforceable against the Company in accordance with its terms. -8- 5. The execution, delivery and performance of the terms of the Purchase Agreement and the issuance of the Common Stock to the Purchasers pursuant to the Purchase Agreement do not violate (i) any provision of the Company's Certificate or Bylaws, or (ii) to our knowledge, any law, statute, rule or regulation of the United States, the State of California. 6. Subject to the accuracy of the Purchaser's representations in Section 4 of the Purchase Agreement, we are of the opinion that the offer, sale and issuance of the Common Stock to the Purchasers in conformity with the terms of the Purchase Agreement and the Certificate constitute transactions exempt from the registration and qualification requirements of Section 5 of the Securities Act of 1933, as amended, the laws of the State of California, and the DGCL. This opinion is furnished to the Purchasers solely for your benefit in connection with the purchase of the Shares and is not to be made available to or relied upon by any other person, firm or entity for any purpose without our express prior written consent. Very truly yours, WILSON SONSINI GOODRICH & ROSATI -9- EX-21.1 18 SUBSIDIARIES OF PALM, INC. EXHIBIT 21.1 Subsidiaries of Palm, Inc. January 2000 Subsidiaries of Palm, Inc. - --------------------------- Palm Mexico Sales S.A. de C.V. Palm Computing K.K. Palm Sales Canada Inc. Palm Technology Investment Holdings Limited Palm International Holdings Ltd. Palm Computing Europe SARL Subsidiaries of Palm International Holdings Ltd. - ------------------------------------------------- Palm Manufacturing Technologies Limited Palm Europe Ltd. Subsidiaries of Palm Europe Ltd. - -------------------------------- Palm Australia Sales Pty Limited Palm France Palm Germany Gmblt Palm Sales Netherlands BV Palm Hong Kong Limited Palm Italy Branch Palm Singapore Sales Pte. Ltd. Palm Sweden Aktiebolag Palm Europe Limited, London (UK), Zurich Branch EX-23.1 19 INDEPENDENT AUDITORS CONSENT AND REPORT ON SCHEDUL EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE We consent to the use in Amendment No. 2 to Registration Statement No. 333- 92657 of Palm, Inc. on Form S-1 of our report dated November 29, 1999 (January 24, 2000 as to the third, fourth and fifth paragraphs of Note 13 and all of Note 15) appearing in the Prospectus, which is part of this Registration Statement. We also consent to the references to us under the headings "Selected Consolidated Financial Data" and "Experts" in such Prospectus. Our audit of the consolidated financial statements referred to in our aforementioned report also included the financial statement schedule of Palm, Inc., listed in Item 15(b). This financial statement schedule is the responsibility of the management of Palm, Inc. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ DELOITTE & TOUCHE LLP San Jose, California January 26, 2000 EX-27.1 20 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS JUN-02-2000 MAY-29-1999 NOV-26-1999 29,568 0 134,867 5,141 36,695 224,308 16,294 6,018 247,369 220,543 0 0 0 0 26,431 247,369 435,060 435,060 246,342 398,315 0 0 0 36,959 14,439 22,520 0 0 0 22,520 .04 .04
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