-----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, G03HNxN2eUaGF4dU8tBPohpCh+bytXNsBD1RTPiWV6oSJ3HywdgMdl3FHetLBeTK 7aiTnp0x33fhrb0r5HUyKQ== /in/edgar/work/0000912057-00-044688/0000912057-00-044688.txt : 20001016 0000912057-00-044688.hdr.sgml : 20001016 ACCESSION NUMBER: 0000912057-00-044688 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000901 FILED AS OF DATE: 20001013 FILER: COMPANY DATA: COMPANY CONFORMED NAME: 3COM CORP CENTRAL INDEX KEY: 0000738076 STANDARD INDUSTRIAL CLASSIFICATION: [3576 ] IRS NUMBER: 942605794 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-34726 FILM NUMBER: 739710 BUSINESS ADDRESS: STREET 1: 5400 BAYFRONT PLZ CITY: SANTA CLARA STATE: CA ZIP: 95052-8145 BUSINESS PHONE: 4087645000 MAIL ADDRESS: STREET 1: 5400 BAYFRONT PLAZA CITY: SANTA CLARA STATE: CA ZIP: 95052-8145 10-Q 1 a2027699z10-q.txt 10-Q - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 1, 2000 COMMISSION FILE NO. 0-12867 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO -------------- 3COM CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 94-2605794 - -------------------------------- ------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5400 BAYFRONT PLAZA SANTA CLARA, CALIFORNIA 95052 - ---------------------------------------- --------- (Address of principal executive offices) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 326-5000 FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT: N/A INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES ....XX.... NO ............ AS OF SEPTEMBER 29, 2000, 350,076,909 SHARES OF THE REGISTRANT'S COMMON STOCK WERE OUTSTANDING. THIS REPORT CONTAINS A TOTAL OF 39 PAGES OF WHICH THIS PAGE IS NUMBER 1. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 3COM CORPORATION TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page ---- ITEM 1. Financial Statements Condensed Consolidated Statements of Operations THREE MONTHS ENDED SEPTEMBER 1, 2000 AND AUGUST 27, 1999 3 Condensed Consolidated Balance Sheets SEPTEMBER 1, 2000 AND JUNE 2, 2000 4 Condensed Consolidated Statements of Cash Flows THREE MONTHS ENDED SEPTEMBER 1, 2000 AND AUGUST 27, 1999 5 Notes to Condensed Consolidated Financial Statements 6 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 34 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings 34 ITEM 2. Changes in Securities and Use of Proceeds 35 ITEM 3. Defaults Upon Senior Securities 35 ITEM 4. Submission of Matters to a Vote of Security Holders 35 ITEM 5. Other Information 35 ITEM 6. Exhibits and Reports on Form 8-K 36 Signatures 39
3Com, AirConnect, CommWorks, SuperStack and Total Control are registered trademarks of 3Com Corporation or its subsidiaries. Kerbango is a trademark of 3Com Corporation or its subsidiaries. U.S. Robotics is a registered trademark of U.S. Robotics Corporation. Courier is a trademark of U.S. Robotics Corporation. 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS 3COM CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited)
Three Months Ended -------------------------------------- September 1, August 27, 2000 1999 ----------------- ---------------- Sales $ 933,764 $ 1,213,196 Cost of sales 593,036 638,100 --------------- ---------------- Gross margin 340,728 575,096 --------------- ---------------- Operating expenses: Sales and marketing 236,315 232,414 Research and development 145,828 148,359 General and administrative 57,543 53,993 Amortization of goodwill and acquired intangibles 7,493 4,974 Purchased in-process technology 29,406 - Merger-related credits, net (212) (2,105) Business realignment costs 9,901 - --------------- ---------------- Total operating expenses 486,274 437,635 --------------- ---------------- Operating income (loss) (145,546) 137,461 Gains on investments, net 16,736 23,551 Interest and other income, net 45,630 15,977 --------------- ---------------- Income (loss) from continuing operations before income taxes and equity interests (83,180) 176,989 Income tax provision (benefit) (20,795) 49,660 Other interests in loss of consolidated joint venture - (975) Equity interest in loss of unconsolidated investee 1,352 - --------------- ---------------- Net income (loss) from continuing operations (63,737) 128,304 Net income from discontinued operations 4,537 9,187 --------------- ---------------- Net income (loss) $ (59,200) $ 137,491 =============== ================ Net income (loss) per share: Basic: Continuing operations $ (0.18) $ 0.36 Discontinued operations 0.01 0.03 --------------- ---------------- $ (0.17) $ 0.39 =============== =============== Diluted: Continuing operations $ (0.18) $ 0.36 Discontinued operations 0.01 0.02 --------------- --------------- $ (0.17) $ 0.38 =============== =============== Shares used in computing per share amounts: Basic 353,777 353,243 Diluted 353,777 357,703
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 3 3COM CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except par value)
September 1, June 2, 2000 2000 --------------- ---------------- (Unaudited) ASSETS Current assets: Cash and equivalents $ 965,089 $ 1,700,420 Short-term investments 1,736,619 1,369,520 Accounts receivable, net 467,214 355,540 Inventories 273,246 285,942 Investments and other 857,984 655,772 Net assets of discontinued operations - 1,058,237 --------------- ---------------- Total current assets 4,300,152 5,425,431 Property and equipment, net 697,688 705,824 Goodwill, intangibles, deposits and other assets 356,107 361,699 --------------- ---------------- Total assets $ 5,353,947 $ 6,492,954 =============== ================ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 396,335 $ 363,497 Other accrued liabilities 578,440 607,316 Income taxes payable 92,344 169,887 Deferred income taxes 74,992 27,317 Current portion of long-term debt 2,255 14,459 --------------- ---------------- Total current liabilities 1,144,366 1,182,476 --------------- ---------------- Long-term debt 2,740 14,740 Deferred income taxes 67,907 71,336 Other long term obligations 7,707 7,377 Equity interest in consolidated entity - 1,173,961 Stockholders' equity: Preferred stock, $.01 par value, 10,000 shares authorized; none outstanding - - Common stock, $.01 par value, 990,000 shares authorized; shares issued: 365,789 and 365,825, respectively 2,294,942 2,101,242 Treasury stock, at cost, 17,438 and 12,371 shares, respectively (331,538) (312,428) Unamortized stock-based compensation (25,760) (6,450) Retained earnings 1,855,129 1,982,079 Accumulated other comprehensive income 338,454 278,621 --------------- ---------------- Total stockholders' equity 4,131,227 4,043,064 --------------- ---------------- Total liabilities and stockholders' equity $ 5,353,947 $ 6,492,954 =============== ================
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 4 3COM CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
Three Months Ended ------------------------------------- September 1, August 27, 2000 1999 ------------- ------------- Cash flows from operating activities: Net income (loss) from continuing operations $ (63,737) $ 128,304 Adjustments to reconcile net income (loss) from continuing operations to net cash provided by (used in) operating activities: Depreciation and amortization 67,589 79,717 Loss on disposal of fixed assets 8,622 2,434 Gains on investments, net (16,736) (23,551) Deferred income taxes (2,871) 23,423 Purchased in-process technology 29,406 - Merger-related credits, net (212) (2,105) Business realignment costs 9,901 - Other interests in loss of consolidated joint venture - (975) Equity interest in loss of unconsolidated investee 1,352 - Changes in assets and liabilities, net of acquisition: Accounts receivable (111,673) 156,190 Inventories 12,974 22,658 Investments and other assets (20,367) 18,600 Accounts payable 32,095 52,780 Accrued liabilities and other (26,474) (54,887) Income taxes payable (28,218) 24,390 ------------- ------------- Net cash provided by (used in) operating activities (108,349) 426,978 ------------- ------------- Cash flows from investing activities: Purchase of investments (598,118) (168,461) Proceeds from maturities and sales of investments 179,034 180,373 Purchase of property and equipment (59,148) (38,902) Proceeds from sale of property and equipment - 6,790 Business acquired in purchase transaction, net of cash acquired (51,741) - Other, net 2,348 8,100 ------------- ------------- Net cash used in investing activities (527,625) (12,100) ------------- ------------- Cash flows from financing activities: Issuance of common stock 145,075 23,436 Repurchase of common stock (250,176) (391,744) Repayments of long-term borrowings (24,204) (12,000) Other, net (343) 1,302 ------------- ------------- Net cash used in financing activities (129,648) (379,006) ------------- ------------- Net cash provided by (used in) discontinued operations 30,291 (21,506) Increase (decrease) in cash and equivalents (735,331) 14,366 Cash and equivalents, beginning of period 1,700,420 951,771 ------------- ------------- Cash and equivalents, end of period $ 965,089 $ 966,137 ============= =============
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 5 3COM CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. Basis of Presentation The unaudited condensed consolidated financial statements have been prepared by 3Com Corporation ("3Com"), pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, these unaudited condensed consolidated financial statements include all adjustments necessary for a fair presentation of 3Com's financial position as of September 1, 2000, results of operations for the three months ended September 1, 2000 and August 27, 1999, and cash flows for the three months ended September 1, 2000 and August 27, 1999. Certain amounts from the prior period have been reclassified to conform to the current period presentation. Such reclassifications had no effect on net income as previously reported. 3Com uses a 52 or 53 week fiscal year ending on the Friday nearest to May 31. Accordingly, fiscal 2001 will end on June 1, 2001, resulting in a 52-week fiscal year, compared to 53 weeks included in fiscal 2000. The results of operations for the three months ended September 1, 2000 may not be indicative of the results to be expected for the fiscal year ending June 1, 2001. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included in 3Com's Annual Report on Form 10-K for the fiscal year ended June 2, 2000. REVENUE RECOGNITION 3Com generally recognizes a sale when the product has been shipped, risk of loss has passed to the customer, and collection of the resulting receivable is probable. 3Com accrues related product return reserves, warranty, other post-contract support obligations, and royalty expenses at the time of sale. A limited warranty is provided on 3Com products for periods ranging from 90 days to the lifetime of the product, depending upon the product. Service and maintenance sales are recognized over the contract term. 3Com provides limited product return and price protection rights to certain distributors and resellers. Product return rights are generally limited to a percentage of sales over a one to three month period. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998 and June 1999, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended, which requires 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. 3Com is in the process of determining the impact that adoption will have on its consolidated financial statements. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements." The guidance in SAB 101 must be adopted during our fourth quarter of fiscal 2001 and the effects, if any, are required to be recorded through a retroactive, cumulative-effect adjustment as of the beginning of the fiscal year, with a restatement of all prior interim quarters in the year. Management has not completed its evaluation of the effects, if any, that SAB 101 will have on 3Com's income statement presentation, operating results, or financial position. 6 2. Discontinued Operations On September 13, 1999, 3Com announced a plan to conduct an initial public offering ("IPO") of its Palm, Inc. ("Palm") subsidiary. On March 2, 2000, 3Com sold 4.7% of Palm's stock to the public and 1.0% of Palm's stock in private placements, resulting in net proceeds of $1.2 billion, which were retained by Palm. On May 8, 2000, 3Com's Board of Directors declared a special dividend of 3Com's remaining interest in Palm to 3Com's shareholders of record on July 27, 2000. On July 27, 2000, 3Com distributed its Palm common stock to 3Com shareholders. The distribution ratio was 1.4832 shares of Palm for each outstanding share of 3Com common stock. No gain was recorded as a result of these transactions. The decrease in the intrinsic value of 3Com's employee stock plans attributable to the distribution of Palm was restored in accordance with the methodology set forth in FASB Emerging Issues Task Force Issue 90-9, "Changes to Fixed Employee Stock Option Plans as a Result of Equity Restructuring." Prior to the Palm distribution, there were approximately 35 million employee options outstanding. As a result of the Palm distribution, these converted to approximately 169 million employee options outstanding, of which approximately 60 million were vested and immediately exercisable. The historical consolidated financial statements of 3Com have been restated to account for Palm as a discontinued operation for all periods presented. The financial data of Palm reflects the historical results of operations and cash flows of the businesses that comprised the handheld computing business segment of 3Com during each respective period; they do not reflect many significant changes that will occur and have occurred in the operations and funding of Palm as a result of the separation from 3Com and the IPO. The Palm financial data restated as a discontinued operation reflects the assets and liabilities transferred to Palm in accordance with the terms of a master separation agreement to which Palm and 3Com are parties. Discontinued operations include Palm net sales which totaled $188.9 million and $174.2 million for the period from June 3, 2000 to July 27, 2000 and the three months ended August 27, 1999, respectively. Net income from Palm discontinued operations was reported net of income tax expense of $2.7 million, and $6.9 million for the period from June 3, 2000 to July 27, 2000 and three months ended August 27, 1999, respectively. Allocated corporate expenses that ceased after the Palm distribution were included in net income from discontinued operations. 3. Business Realignment Costs On March 20, 2000, 3Com announced plans to refocus its business strategy, change its growth profile, and streamline its operations. The first phase of 3Com's business realignment separated the operations of Palm and made Palm an independent company. The second phase realigned 3Com's strategy to focus on high-growth markets, technologies, and products. In connection with the separation of Palm, 3Com incurred business realignment costs, which consisted primarily of incremental third party costs related to legal and accounting services, strategic business planning, information systems separation, development of compensation and benefits strategies, and costs to recruit certain key Palm management. For the three months ended September 1, 2000, 3Com incurred $0.2 million in realignment charges resulting from the separation of Palm. During fiscal 2000 and continuing through the three months ended September 1, 2000, 3Com realigned its strategy to focus on high-growth markets, technologies, and products. Operations were restructured around two distinct business models: 1) Commercial and Consumer Networks Business and 2) Carrier Networks Business. In support of this new strategy, 3Com exited its analog-only modem and high-end Local Area Network (LAN) and Wide Area Network (WAN) chassis product lines. For the three months ended September 1, 2000, 3Com incurred $9.7 million in realignment charges related to implementing its change in strategic focus. Components of accrued business realignment costs and changes in accrued amounts as of September 1, 2000 were as follows (in thousands): 7
Balance at Balance at June 2, Provision September 1, 2000 (Benefit) Deductions 2000 --------------- ---------------- --------------- --------------- Facilities lease terminations $ 8,300 $ (3,115) $ (125) $ 5,060 Long-term asset write-downs 16,494 12,359 (15,381) 13,472 Severance and outplacement 34,212 (2,847) (15,200) 16,165 Other restructuring costs 5,673 3,324 (6,017) 2,980 --------------- ---------------- --------------- --------------- $ 64,679 $ 9,721 $ (36,723) $ 37,677 =============== ================ =============== ===============
Severance and outplacement costs related to the termination of approximately 2,800 employees. Employee separation costs include severance, medical, and other benefits. Employee groups impacted by the realignment include personnel involved in duplicate corporate services, manufacturing and logistics, product organizations, sales, and customer support. As of September 1, 2000, approximately 1,400 employees had begun the separation process, resulting in $40.9 million of employee separation payments. Remaining cash expenditures associated with employee separations are estimated to be approximately $16.2 million. Employee separations are expected to be substantially complete by November 2000, and include 1,200 3Com employees transferred to Manufacturers' Services Ltd. (see note 12). 3Com has substantially completed its realignment initiatives. There can be no assurance that the estimated costs of 3Com's business realignment activities will not change. Remaining cash expenditures relating to the realignment are estimated to be $24.2 million, related primarily to employee severance, facility closure, and payments to suppliers. Remaining non-cash charges relating to the realignment are estimated to be $13.5 million, primarily related to the impairment of capital assets associated with the business activities that have been exited. 4. Business Combination During the first quarter of fiscal 2001, 3Com acquired Kerbango, Inc. ("Kerbango"), developer of the Kerbango-TM- Internet radio, radio tuning system, and radio web site. The total purchase consideration, including $0.3 million of direct transaction costs, was $73.5 million, consisting of cash paid to Kerbango of $52.2 million, issuance of restricted stock with a fair value of $17.2 million and stock options assumed with a fair value of $3.8 million. In addition, deferred cash payments to founders and certain former employees totaling $7.7 million are contingent upon certain events through July 2002. Accordingly, the effect of the deferred cash payments will be recorded as the contingent events have been satisfied. For financial reporting purposes, the aggregate purchase price, excluding deferred cash payments, was reduced by the intrinsic value of unvested stock options and restricted stock totaling $20.2 million which was recorded as deferred stock-based compensation and is being amortized over the respective vesting periods. Approximately $29.4 million of the aggregate purchase price represented purchased in-process technology that had not yet reached technological feasibility and had no alternative future use, and accordingly, was charged to operations in the first quarter of fiscal 2001. Net tangible liabilities acquired, including cash of $0.4 million, were approximately $1.7 million at the acquisition date. This purchase resulted in $25.6 million of goodwill and other intangible assets that are being amortized over estimated useful lives of three to five years. 8 5. Comprehensive Income The components of comprehensive income, net of tax, are as follows (in thousands):
Three Months Ended ------------------------------ September 1, August 27, 2000 1999 ------------- --------------- Net income (loss) $ (59,200) $ 137,491 Other comprehensive income: Change in unrealized gain on available- for-sale securities 60,176 251,743 Change in accumulated translation adjustments (343) 144 ------------- ------------- Total comprehensive income $ 633 $ 389,378 ============= ============= 6. Net Income (Loss) Per Share The following table presents the calculation of basic and diluted earnings per share (in thousands, except per share data): Three Months Ended ------------------------------ September 1, August 27, 2000 1999 ------------- ------------- Net income (loss) from continuing operations $ (63,737) $ 128,304 Net income from discontinued operations 4,537 9,187 ------------- ------------- $ (59,200) $ 137,491 ============= ============= Weighted average shares-Basic 353,777 353,243 Effect of dilutive securities: Employee stock options - 4,279 Restricted stock - 181 ------------- ------------- Weighted average shares-Diluted 353,777 357,703 ============= ============= Net income (loss) per share-Basic: Continuing operations $ (0.18) $ 0.36 Discontinued operations 0.01 0.03 ------------ ------------- $ (0.17) $ 0.39 ============ ============= Net income (loss) per share-Diluted: Continuing operations $ (0.18) $ 0.36 Discontinued operations 0.01 0.02 ------------ ------------- $ (0.17) $ 0.38 ============ =============
Employee stock options and restricted stock totaling 74.3 million shares were not included in the diluted weighted average shares calculation for the three months ended September 1, 2000, as the effects of these securities were antidilutive. 9 7. Inventories Inventories consist of (in thousands):
September 1, June 2, 2000 2000 ------------- ------------- Finished goods $ 129,987 $ 174,420 Work-in-process 43,846 31,863 Raw materials 99,413 79,659 ------------- ------------- $ 273,246 $ 285,942 ============= =============
8. Commitments and Contingencies 3Com has purchase commitments pertaining to a patent license agreement. These purchase commitments extend through the end of calendar 2005 and increase from $135 million for calendar 2001 to $180 million for calendar 2005. In the event that 3Com does not meet a calendar year purchase commitment, penalties due increase from approximately one percent to three percent of the annual commitment. In July 2000, 3Com committed to purchase certain components from a vendor through December 2002. The purchase agreement provides for cash penalties to the vendor in the event that minimum purchases are not met on a calendar quarter basis. The agreement included a warrant issued to 3Com to purchase common stock of the vendor. Since the vendor was subsequently acquired by another company ("acquirer"), the shares of common stock of the vendor were replaced by 992,000 shares of common stock of the acquirer under the warrant agreement. The fair value of the warrant at the inception of the agreement was fixed at approximately $244 million, since the agreement contains significant disincentives for nonperformance. The effect of such warrants will be recorded as a credit to cost of sales as purchases are made. Future minimum purchase commitments, excluding the effect of warrants, are as follows (in thousands):
Purchase Fiscal Year Commitment ----------- ------------- 2001 $ 117,307 2002 158,288 2003 84,975 ------------- Total $ 360,570 =============
10 9. Stock Repurchase and Option Programs During the fourth quarter of fiscal 2000, the Board of Directors authorized a stock repurchase program in the amount of up to one billion dollars. Such repurchases may be used to offset the issuance of additional shares resulting from employee stock option exercises and the sale of shares under the employee stock purchase plan. The Board has authorized a two-year time limit on the repurchase authorizations. This new program replaces previous authorizations totaling 45 million shares between June 1998 and September 1999. During the three months ended September 1, 2000, 16.1 million shares of common stock were repurchased for a cumulative purchase price of $250.2 million. In July 2000, 3Com initiated a program of selling put options and purchasing call options on its common stock. The put options entitle the holders to sell shares of 3Com common stock to 3Com on certain dates at specified prices. The call options entitle 3Com to purchase its common stock on certain dates at specified prices. As of September 1, 2000, 16.5 million put options were outstanding and 13.0 million call options were outstanding. The put options and call options expire between January 2001 and August 2002, with prices ranging from $12.95 to $22.17 per share. The option contracts give 3Com the choice of net cash settlement or settlement in its own shares of common stock. These options are accounted for as permanent equity instruments. 10. Business Segment Information The following tables display information on our reportable segments (in thousands):
Three Months Ended ------------------------------ September 1, August 27, 2000 1999 ------------- ------------- Sales: Commercial and Consumer Networks $ 639,106 $ 790,008 Carrier Networks 167,243 129,614 Exited Product Lines 127,415 293,574 ------------- ------------- $ 933,764 $ 1,213,196 ============= ============= Contribution Margin: Commercial and Consumer Networks $ 100,784 $ 289,277 Carrier Networks 26,234 21,466 Exited Product Lines (12,650) 31,542 ------------- ------------- $ 114,368 $ 342,285 ============= =============
11 A reconciliation of the totals reported for the operating segments to the applicable line items in the consolidated financial statements is set forth below (in thousands):
Three Months Ended ------------------------------ September 1, August 27, 2000 1999 ------------- ------------- Total contribution margin from operating segments $ 114,368 $ 342,285 Indirect operating expenses (1) 220,819 206,929 Purchased in-process technology 29,406 - Merger-related credits, net (212) (2,105) Business realignment costs 9,901 - ------------- ------------- Total operating income (loss) (145,546) 137,461 Gains on investments, net 16,736 23,551 Interest and other income, net 45,630 15,977 ------------- ------------- Income (loss) from continuing operations before income taxes and equity interests $ (83,180) $ 176,989 ============= =============
(1) Indirect operating expenses include expenses that are not directly attributable to an operating segment, such as field sales, corporate marketing, and general and administrative expenses. 11. Litigation We are a party to lawsuits in the normal course of our business. Litigation in general, and intellectual property and securities litigation in particular, can be expensive and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict. We believe that we have defenses in each of the cases set forth below and are vigorously contesting each of these matters. An unfavorable resolution of one or more of the following lawsuits could adversely affect our business, results of operations, or financial condition. SECURITIES LITIGATION On March 24 and May 5, 1997, securities class action lawsuits, captioned HIRSCH V. 3COM CORPORATION, ET AL., Civil Action No. CV764977 (HIRSCH), and KRAVITZ V. 3COM CORPORATION, ET AL., Civil Action No. CV765962 (KRAVITZ), respectively, were filed against 3Com and certain of its officers and directors in the California Superior Court, Santa Clara County. The complaints allege violations of Sections 25400 and 25500 of the California Corporations Code and seek unspecified damages on behalf of a class of purchasers of 3Com common stock during the period from September 24, 1996 through February 10, 1997. In late 1999, these cases were stayed by the Court, pending resolution of proceedings in the EUREDJIAN V. 3COM CORPORATION matter, discussed below. Because the EUREDJIAN case has been dismissed, the HIRSCH and KRAVITZ cases are no longer stayed. They are in discovery. No trial date has been scheduled. On February 10, 1998, a securities class action, captioned EUREDJIAN V. 3COM CORPORATION, ET AL., Civil Action No. C-98-00508CRB (EUREDJIAN), was filed against 3Com and several of its present and former officers and directors in United States District Court for the Northern District of California asserting the same class period and factual allegations as the HIRSCH and KRAVITZ actions. The complaint alleges violations of the federal securities laws, specifically Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and seeks unspecified damages. In May 2000, at the request of plaintiffs, the Court dismissed the EUREDJIAN case with prejudice. 12 In December 1997, a securities class action, captioned REIVER V. 3COM CORPORATION, ET AL., Civil Action No. C-97-21083JW (REIVER), was filed in the United States District Court for the Northern District of California. Several similar actions have been consolidated into this action, including FLORIDA STATE BOARD OF ADMINISTRATION AND TEACHERS RETIREMENT SYSTEM OF LOUISIANA V. 3COM CORPORATION, ET AL., Civil Action No. C-98-1355. On August 17, 1998, the plaintiffs filed a consolidated amended complaint which alleges violations of the federal securities laws, specifically Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934, and which seeks unspecified damages on behalf of a purported class of purchasers of 3Com common stock during the period from April 23, 1997 through November 5, 1997. 3Com has answered an amended complaint and the case is now in discovery. No trial date has been scheduled. In October 1998, a securities class action lawsuit, captioned ADLER V. 3COM CORPORATION, ET AL., Civil Action No. CV777368 (ADLER), was filed against 3Com and certain of its officers and directors in the California Superior Court, Santa Clara County, asserting the same class period and factual allegations as the REIVER action. The complaint alleges violations of Sections 25400 and 25500 of the California Corporations Code and seeks unspecified damages. By agreement of the parties, this case will be stayed to allow the REIVER case to proceed. On May 11, 1999, a securities class action, captioned GAYLINN V. 3COM CORPORATION, ET AL., Civil Action No. C-99-2185 MMC (Gaylinn), was filed against 3Com and several of its present and former officers and directors in United States District Court for the Northern District of California. Several similar actions have been consolidated into the GAYLINN action. On September 10, 1999, the plaintiffs filed a consolidated complaint which alleges violations of the federal securities laws, specifically Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and seeks unspecified damages on behalf of a purported class of purchasers of 3Com common stock during the period from September 22, 1998 through March 2, 1999. In January 2000, the Court dismissed the complaint. In February 2000, plaintiffs filed an amended complaint. In June 2000, the Court dismissed the amended complaint without prejudice. Plaintiffs filed another amended complaint. On July 24, 2000, the Company filed a motion to dismiss the latest amended complaint. In September 2000, the Court dismissed the amended complaint with prejudice. INTELLECTUAL PROPERTY 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 Number 97-CV-6182T). The Complaint alleged willful infringement of United States Patent Number 5,596,656, entitled "Unistrokes for Computerized Interpretation of Handwriting." The Complaint sought to permanently enjoin the defendants from infringing the patent in the future. In an Order entered by the Court on June 6, 2000, the Court granted the defendants' motion for summary judgment of non-infringement, and the case was dismissed in its entirety. Xerox has appealed the dismissal to the U.S. Court of Appeals for the Federal Circuit. On May 26, 2000 3Com Corporation filed a patent infringement lawsuit against Xircom, Inc. The lawsuit, filed in the United States District Court for the District of Utah (2:00CV-0436G), alleges infringement of 3Com's patent numbers 6,012,953, 5,532,898 and 5,777,836. On September 21, 2000 in the United States District Court for the Central District of California (00-10198 WJR), Xircom Corporation filed suit against 3Com Corporation alleging infringement of Xircom's U.S. Patent Numbers 5,773,332, 5,940,275, 6,115,257 and 6,095,851. 3Com is currently investigating the lawsuit filed by Xircom. 13 12. Subsequent Events On September 5, 2000, 3Com finalized the sale of a 39-acre parcel of undeveloped land in San Jose, California to Palm, Inc., who simultaneously assigned its rights under the land purchase and sale agreement to a third party. 3Com expects to record a gain of approximately $175 million related to this sale in its second fiscal quarter. On September 30, 2000, 3Com finalized the sale of its manufacturing and distribution operations, located in Mt. Prospect, Illinois to Manufacturers' Services Ltd. ("MSL"). In this transaction, 3Com received approximately $60 million in cash and 1.5 million shares of common stock of MSL valued at approximately $18 million. For the next two years, 3Com has committed to purchase a minimum level of manufacturing volume from MSL. On September 30, 2000, the manufacturing and distribution operations, including approximately 1,200 3Com employees, were transferred to MSL. 3Com expects to record a loss of approximately $11 million related to this sale in its second fiscal quarter. 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This report on Form 10-Q contains forward-looking statements, including statements concerning our expectation that employee separations will be substantially complete by November 2000, our plan to invest a significant portion of our financial resources towards developing products for our targeted emerging growth markets, our estimate of expenses in connection with the completion of acquired research and development projects, our plans to make strategic investments, our belief that our cash and cash equivalents, short-term investments, and cash generated from operations will be sufficient to satisfy our anticipated cash requirements for at least the next 12 months, our expectation that both sales and operating income will continue to be negatively impacted and that we will report operating losses in fiscal 2001, our expectation that our high growth emerging product lines will account for a higher percentage of our sales over time, our expectation that gross margins for our high growth emerging product lines on a stand-alone basis may be significantly lower than gross margins for networking products traditionally sold to larger businesses, our expectation that we will increase our commitment to and become increasingly reliant upon our two-tiered distribution model as well as sales to OEMs, our plans to develop our carrier channel through expanded partnerships with Internet and other competitive service providers, our expectation that significant returns or order cancellations will not occur beyond the second quarter of fiscal 2001, and our expectation that international markets will continue to account for a significant portion of our sales. These statements are subject to certain risks and uncertainties. Some of the factors that could cause future events or results to materially differ from those projected in the forward-looking statements are discussed below. STRATEGIC FOCUS On March 20, 2000, we announced plans to realign our strategy to focus on high-growth markets, technologies, and products. We have now substantially completed our business transformation. In our commercial market, we have exited from our high-end LAN and WAN chassis product lines, and in our consumer market we have exited from our analog-only modem product line. We now focus on specific sectors of the commercial, consumer, and carrier markets, and have structured our operations around two distinct business models: 1) Commercial and Consumer Networks Business and 2) Carrier Networks Business. The Commercial and Consumer Networks Business is implementing a web-enabled business model to deliver our products and services to millions of customers. The focus of our Commercial and Consumer Networks Business is on targeted sectors within the commercial and consumer markets. The consumer market comprises individuals and families who we believe want user-friendly connections at home and on the go. Building upon our market position in consumer broadband access, we will concentrate on home networks and Internet appliances, a new consumer-oriented product category we intend to define and lead. Our commercial market includes all businesses with small to midsize networked sites. Since these customers do not typically have their own onsite Information Technology (IT) group, they look to us for simple solutions that give them connectivity without burdening them with technical complexity and high costs. We are continuing to provide large enterprises with products and solutions for their small to midsize locations. The Carrier Networks Business uses a targeted, direct sales business model to create service delivery solutions for our carrier and network service provider customers. The focus of our Carrier Networks Business is on carrier-class access infrastructures and Internet Protocol (IP) services platforms for the network service provider market. We offer our carrier customers robust, scalable multi-service platforms that allow them to deploy revenue-enhancing services over dial-up, Integrated Services Digital Network (ISDN), broadband, and wireless access infrastructures. 15 RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the percentage of total sales represented by the line items reflected in 3Com's condensed consolidated income statements:
Quarter Ended ------------- September 1, June 2, August 27, 2000 2000 1999 ------------ ---------- ----------- Sales 100.0 % 100.0 % 100.0 % Cost of sales 63.5 74.2 52.6 ------ ------- ------ Gross margin 36.5 25.8 47.4 Operating expenses: Sales and marketing 25.3 32.1 19.2 Research and development 15.6 20.3 12.2 General and administrative 6.2 7.0 4.5 Amortization of goodwill and acquired intangibles 0.8 1.1 0.4 Purchased in-process technology 3.1 1.4 - Merger-related credits, net - - (0.2) Business realignment costs 1.1 8.4 - ------ ------- ------ Total operating expenses 52.1 70.3 36.1 ------ ------- ------ Operating income (loss) (15.6) (44.5) 11.3 Gains on investments, net 1.8 11.7 2.0 Interest and other income, net 4.9 5.4 1.3 ------ ------- ------ Income (loss) from continuing operations before income taxes and equity interests (8.9) (27.4) 14.6 Income tax provision (benefit) (2.2) (6.8) 4.1 Other interests in loss of consolidated joint venture - - (0.1) Equity interest in loss of unconsolidated investee 0.1 0.3 - ------ ------- ------ Net income (loss) from continuing operations (6.8) (20.9) 10.6 Net income from discontinued operations 0.5 1.7 0.7 ------ ------- ------ Net income (loss) (6.3)% (19.2)% 11.3 % ====== ===== ====== Pro forma: Operating expenses 47.1 % 59.4 % 35.8 % Operating income (loss) (10.6) (33.6) 11.6 Net income (loss) (4.4) (21.4) 9.4
Pro forma results exclude the following, net of taxes: amortization of goodwill and acquired intangibles, purchased in-process technology, merger-related credits, net, business realignment costs, gains on investments, net, and net income from discontinued operations. 16 The following discussion should be read in conjunction with the consolidated financial statements and notes thereto. SALES Sales in the first quarter of fiscal 2001 totaled $933.8 million, a decrease of $279.4 million, or 23 percent, compared to the same quarter one year ago, and an increase of $170.1 million or 22 percent sequentially from the fourth quarter of fiscal 2000. COMMERCIAL AND CONSUMER NETWORKS. Commercial and consumer network systems products include traditional access products (desktop Network Interface Cards (NICs), advanced access products (gigabit NICs, server NICs, mobile NICs, wireless LAN products), LAN/WAN infrastructure products (LAN switches, LAN hubs, Internet access products, network management products), LAN telephony products, services, broadband connections, home networking products, and Internet appliances. Sales of commercial and consumer networks products in the first quarter of fiscal 2001 decreased 19 percent compared to the same quarter one year ago and increased 24 percent sequentially, compared to the fourth quarter of fiscal 2000. We do not believe that meaningful comparisons can be made to the same quarter a year ago because of dramatic changes caused by our business realignment. Likewise, we believe that meaningful sequential comparisons cannot be made as the growth rate was substantially impacted by the stabilization and recovery of our business in the first quarter of fiscal 2001. The decline in sales from the same quarter one year ago was due primarily to competitive pressures in the LAN Workgroup Systems market and lower average selling prices for our desktop NIC products due to an increase in the proportion of sales of these products to Original Equipment Manufacturers (OEMs). These declines were partially offset by increased sales of our high-growth emerging technology products. The sequential sales increase from the fourth quarter of fiscal 2000 was due to the stabilization and recovery of the business as well as increased sales of our high growth emerging technology products. During the fourth quarter of fiscal 2000, sales were depressed due to uncertainty caused by our business realignment and our efforts to reduce channel inventory. Sales of commercial and consumer network products in the first quarter of fiscal 2001 represented 68 percent of total sales compared to 65 percent in the first quarter of fiscal 2000 and 68 percent in the fourth quarter of fiscal 2000. CARRIER NETWORKS. Carrier networks products include enhanced data services (remote access services (RAS)) and new technologies (IP telephony, wireless, cable access and Digital Subscriber Line (DSL) access) and customer service and support. Sales of carrier network products in the first quarter of fiscal 2001 increased 29 percent compared to the same quarter one year ago and 7 percent sequentially from the fourth quarter of fiscal 2000. Sales of carrier network products during the first quarter of fiscal 2001 represented 18 percent of total sales compared to 11 percent of total sales in the first quarter of fiscal 2000, and 21 percent of total sales in the fourth quarter of fiscal 2000. The increase in sales, both sequentially and compared to the same period one year ago, was due primarily to a continuing shift in our product mix from traditional RAS products towards new technologies. EXITED PRODUCT LINES. Sales of exited product lines (analog-only modems and high-end LAN and WAN chassis products) in the first quarter of fiscal 2001 decreased 57 percent compared to the same quarter one year ago and increased 42 percent sequentially from the fourth quarter of fiscal 2000. The decrease in sales of exited product lines as compared to the same period one year ago was due to the impact of our business realignment and change in strategic focus. The sequential increase was principally due to an increase in sales of our exited products as customers made final purchases, partially offset by product returns. 17 GEOGRAPHIC. In the first quarter of fiscal 2001, U.S. sales decreased 27 percent and international sales decreased 18 percent compared to the same period one year ago. The year-over-year decrease in international sales was primarily due to weaker sales in Europe, reflecting a 30 percent decrease, partially offset by stronger sales in the Asia Pacific and Latin American regions. U.S. sales in the first quarter of fiscal 2001 represented 50 percent of total sales, compared to 53 percent of total sales in the first quarter of fiscal 2000 and 48 percent of total sales in the fourth quarter of fiscal 2000. U.S. sales and international sales increased by 27 percent and 17 percent, respectively, sequentially from the fourth quarter of fiscal 2000. GROSS MARGIN Gross margin as a percentage of sales was 37 percent in the first quarter of fiscal 2001, compared to 47 percent in the first quarter of fiscal 2000 and 26 percent in the fourth quarter of fiscal 2000. The year-over-year decrease in the gross margin percentage was affected by significantly lower gross margins on sales of exited product lines. The sequential increase in the gross margin percentage was due to one-time charges of $55.5 million dollars within cost of sales in the fourth quarter of fiscal 2000, primarily related to excess and obsolete inventory, warranty reserves, and return and rebate programs in connection with the exited product lines. These one-time charges were not as significant in the first quarter of fiscal 2001. OPERATING EXPENSES Operating expenses in the first quarter of fiscal 2001 were $486.3 million, or 52 percent of sales, compared to $437.6 million, or 36 percent of sales in the first quarter of fiscal 2000 and $536.9 million, or 70 percent of sales in the fourth quarter of fiscal 2000. Operating expenses in the first quarter of fiscal 2001 included amortization of goodwill and acquired intangibles of $7.5 million, purchased in-process technology of $29.4 million, net merger-related credits of $0.2 million, and business realignment costs of $9.9 million. Operating expenses in the first quarter of fiscal 2000 included amortization of goodwill and acquired intangibles of $5.0 million and net merger-related credits of $2.1 million. Operating expenses in the fourth quarter of fiscal 2000 included amortization of goodwill and acquired intangibles of $8.6 million, purchased in-process technology of $10.6 million, net merger-related credits of $0.2 million, and business realignment costs of $64.2 million. Excluding these unusual items, operating expenses for the first quarter of fiscal 2001 were $439.7 million, or 47 percent of sales, compared to $434.8 million, or 36 percent of sales in the first quarter of fiscal 2000 and $453.7 million, or 59 percent of sales in the fourth quarter of fiscal 2000. SALES AND MARKETING. Sales and marketing expenses in the first quarter of fiscal 2001 increased $3.9 million, or two percent, compared to the first quarter of fiscal 2000, and increased to 25 percent of total sales for the first quarter of fiscal 2001, compared to 19 percent of total sales for the first quarter of fiscal 2000. Sales and marketing expenses in the first quarter of fiscal 2001 decreased $8.6 million, or four percent sequentially, from the fourth quarter of fiscal 2000, and decreased to 25 percent of total sales in the first quarter of fiscal 2001, compared to 32 percent of total sales for the fourth quarter of fiscal 2000. The year-over-year increase was due significantly to brand advertising and marketing campaigns to promote a new 3Com brand identity, partially offset by lower sales force expenses. The sequential decrease was significantly attributable to lower sales force expenses that were partially offset by increased spending on our new brand advertising and marketing campaigns. RESEARCH AND DEVELOPMENT. Research and development expenses in the first quarter of fiscal 2001 decreased $2.5 million, or two percent, compared to the first quarter of fiscal 2000, and increased to 16 percent of sales in the first quarter of fiscal 2001 compared to 12 percent of total sales in the first quarter of fiscal 2000. Research and development expenses in the first quarter of fiscal 2001 decreased $9.5 million, or six percent, from the fourth quarter of fiscal 2000, and decreased to 16 percent of total sales in the first quarter of fiscal 2001 compared to 20 percent of total sales in the fourth quarter of fiscal 2000. As a result of our exit from our analog-only modem and high-end LAN and WAN chassis product lines, we have substantially reduced our research and development activities for these products. Nevertheless, we are continuing to invest heavily in research and development, placing a strong focus on our targeted emerging growth markets. We plan to continue to invest a significant proportion of our financial resources towards developing products for these markets. 18 GENERAL AND ADMINISTRATIVE. General and administrative expenses in the first quarter of fiscal 2001 increased $3.6 million, or seven percent, compared to the first quarter of fiscal 2000, and increased to six percent of total sales in the first quarter of fiscal 2001 compared to four percent of total sales in the first quarter of fiscal 2000. General and administrative expenses in the first quarter of fiscal 2001 increased $4.1 million, or eight percent, from the fourth quarter of fiscal 2000, and decreased to six percent of total sales in the first quarter of fiscal 2001 compared to seven percent of total sales in the fourth quarter of fiscal 2000. The increase in general and administrative expenses compared to the same period one year ago was due primarily to increased consulting costs associated with our business realignment activities, partially offset by lower spending for employee incentive programs. The sequential increase in general and administrative expenses was due significantly to an increase in the general allowance for bad debts, partially offset by lower spending for employee incentive programs. AMORTIZATION OF GOODWILL AND ACQUIRED INTANGIBLES. Amortization of goodwill and acquired intangibles in the first quarter of fiscal 2001 increased $2.5 million, or 51 percent, compared to the first quarter of fiscal 2000 and decreased $1.1 million, or 13 percent, sequentially from the fourth quarter of fiscal 2000. Amortization of goodwill and acquired intangibles includes the amortization of goodwill, assembled workforce, customer relationships, developed technology and licenses and non-compete agreements acquired in purchase business combinations. PURCHASED IN-PROCESS TECHNOLOGY. During the first quarter of fiscal 2001, 3Com acquired Kerbango, Inc. ("Kerbango"), the developer of the Kerbango Internet radio, radio tuning system, and radio web site. In connection with this acquisition, 3Com recorded a charge for purchased in-process technology of approximately $29.4 million. During the fourth quarter of fiscal 2000, 3Com recorded a charge of $10.6 million for purchased in-process technology related to the acquisition of Call Technologies, Inc ("Call Technologies"). As of the acquisition dates, purchased-in-process technology was approximately 75% and 50-75% complete for Kerbango and Call Technologies projects, respectively. We are continuing development of four projects, and have spent approximately $8.0 million as of September 1, 2000. As of September 1, 2000, we estimate that approximately $3.5 million will be spent to complete acquired research and development projects. We estimate that all projects currently in process will be completed by March 2001. MERGER-RELATED CREDITS, NET. During the first quarter of fiscal 2001, we recorded a net pre-tax credit of approximately $0.2 million related to reductions in the estimates for remaining charges associated with the U.S. Robotics merger. During the first quarter of fiscal 2000, we recorded a net pre-tax credit of approximately $2.1 million, associated with the U.S. Robotics merger. During the fourth quarter of fiscal 2000, we recorded a net pre-tax credit of approximately $0.2 million, associated with the U.S. Robotics merger. BUSINESS REALIGNMENT COSTS. Business realignment costs in the first quarter of fiscal 2001 were $9.9 million, and represented costs related to steps we took to refocus our business strategy, change our growth profile and streamline our operations. These costs included $0.2 million related to the separation of Palm and $9.7 million related to the realignment of our strategy to focus on high growth markets, technologies and products. During the first quarter of fiscal 2000, we did not record any business realignment costs. During the fourth quarter of fiscal 2000, business realignment costs of $64.2 million were recorded, of which $5.2 million related to the separation of Palm from 3Com and $59.0 million related to implementing our change in strategic focus. GAINS ON INVESTMENTS, NET Gains on investments, net, in the first quarter of fiscal 2001 were $16.7 million, due primarily to gains from investments in limited partnership venture capital funds. During the first quarter of fiscal 2000, gains on investments, net were $23.5 million due to sales of investments in equity securities, and during the fourth quarter of fiscal 2000 gains on investments, net were $89.0 million due primarily to sales of investments in equity securities. 19 INTEREST AND OTHER INCOME, NET Interest and other income, net, in the first quarter of fiscal 2001 increased $29.6 million compared to the first quarter of fiscal 2000. Interest and other income, net, in the first quarter of fiscal 2001 increased $4.1 million compared to the fourth quarter of fiscal 2000. The increase in interest and other income, net compared to the same period one year ago was due primarily to higher interest income as a result of higher cash and investment balances. The increase in interest and other income sequentially from the fourth quarter of fiscal 2000 was primarily due to a shift in investment mix from tax exempt to taxable agency instruments that provide higher nominal yields and reduction in interest expense due to the repayment of long-term debt. INCOME TAX PROVISION Our effective income tax rate was a 25.0 percent benefit for the first quarter of fiscal 2001, compared to a 28.1 percent expense for the first quarter of fiscal 2000. The change in the tax rate compared to the same period one year ago was primarily attributable to changes in our market focus, increased tax exempt investment income and the relative mix of income (or loss) in jurisdictions taxed at rates greater than (or less than) the U.S. rate. OTHER INTERESTS IN LOSS OF CONSOLIDATED JOINT VENTURE In January 1999, we entered into a joint venture named ADMTek, Inc. ("ADMTek"), and began consolidating the joint venture with our results, due to our ability to exercise significant influence over operating and financial policies of the joint venture. In September 1999, we sold a portion of our existing interest in ADMTek to our joint venture partner. As a result of this sale, our ownership interest was reduced to 19 percent and we no longer have the ability to exercise significant influence over the joint venture. During the second quarter of fiscal 2000, we began accounting for this investment using the cost method. For the first quarter of fiscal 2000, the pro-rata share of the joint venture loss allocated to other investors was $1.0 million. EQUITY INTEREST IN LOSS OF UNCONSOLIDATED INVESTEE In August 1999, we invested $7.5 million in OmniSky Corporation ("OmniSky"). We currently control approximately 22 percent of the equity interests in OmniSky. We are accounting for this investment using the equity method. For the first quarter of fiscal 2001, we recorded $1.4 million as our equity interest in the loss of Omnisky. NET INCOME (LOSS) FROM CONTINUING OPERATIONS Net loss from continuing operations for the first quarter of fiscal 2001 was ($63.7) million, or ($0.18) per share, compared to net income of $128.3 million or $0.36 per share for the first quarter of fiscal 2000 and a net loss of ($159.4) million or ($0.45) per share for the fourth quarter of fiscal 2000. NET INCOME FROM DISCONTINUED OPERATIONS Net income from discontinued operations includes the results of operations of Palm. Net income from discontinued operations for the period from June 3, 2000 through July 27, 2000 was $ 4.5 million, or $0.01 per share, compared to $9.2 million, or $0.02 per share for the first quarter of fiscal 2000 and net income of $12.5 million, or $0.03 per share for the fourth quarter of fiscal 2000. NET INCOME (LOSS) AND NET INCOME (LOSS) PER SHARE Net loss for the first quarter of fiscal 2001 was ($59.2) million, or ($0.17) per share, compared to net income of $137.5 million, or $0.38 per share for the first quarter of fiscal 2000 and a net loss of ($146.8) million, or ($0.42) per share, for the fourth quarter of fiscal 2000. Excluding amortization of goodwill and purchased intangibles, purchased in-process technology, merger-related credits, business realignment costs, net gains on investments and net income from discontinued operations, pro forma net income (loss) was ($41.3) million, or ($0.12) per share for the first quarter of fiscal 2001; $113.7 million, or $0.32 per share for the first quarter of fiscal 2000; and ($163.7) million, or ($0.47) per share for the fourth quarter of fiscal 2000. 20 LIQUIDITY AND CAPITAL RESOURCES Cash and equivalents and short-term investments at September 1, 2000 were $2.7 billion, a decrease of $.4 billion, or 13 percent, compared to the balance of $3.1 billion at June 2, 2000. For the first quarter of fiscal 2001, net cash used in operating activities was $108.3 million. Accounts receivable at September 1, 2000 increased $111.7 million from June 2, 2000 to $467.2 million. Days sales outstanding in receivables increased to 45 days at September 1, 2000, compared to 42 days at June 2, 2000, primarily due to a higher percentage of sales in the last month of the quarter. Inventory levels at September 1, 2000 decreased $12.7 million from June 2, 2000 to $273.2 million. Annualized inventory turnover improved to 8.5 turns for the first quarter of fiscal 2001, compared to 8.0 turns for the fourth quarter of fiscal 2000. During the first quarters of fiscal 2001 and 2000, we made investments totaling $598.1 million and $168.5 million, respectively, comprised primarily of investments in municipal and corporate bonds and government agency instruments. For the first quarters of fiscal 2001 and 2000, proceeds from maturities and sales of investments were $179.0 million and $180.4 million, respectively, related primarily to the maturities of investments in municipal and corporate bonds and government agency instruments. As part of our 3Com Ventures initiative, we selectively make strategic investments in the equity securities of privately held companies and limited partnership venture capital funds. We believe these investments will complement our business opportunities and research and development activities. We have established 3Com Ventures II, which has made strategic investments of $42 million and plans to make additional investments of $208 million. During the first quarter of fiscal 2001, 3Com made $59.1 million in capital expenditures. Major capital expenditures included upgrades and expansion of our facilities and purchases and upgrades of software and computer equipment. As of September 1, 2000, we had approximately $5.8 million in capital expenditure commitments outstanding primarily associated with the expansion of our facilities and purchases and upgrades of software and computer equipment. In addition, we have commitments related to operating lease arrangements in the U.S., under which we have an option to purchase the properties for an aggregate of $322.2 million, or arrange for the sale of the properties to a third party. If the properties are sold to a third party at less than the option price, 3Com retains an obligation for the shortfall, subject to certain provisions of the lease. During the first quarter of fiscal 2001, we used cash of $51.7 million, net of cash acquired, in the purchase of Kerbango, Inc. During the fourth quarter of fiscal 2000, our Board of Directors authorized a stock repurchase program of up to one billion dollars. Such repurchases could be used to offset the issuance of additional shares resulting from employee stock option exercises and the sale of shares under the employee stock purchase plan. The Board has authorized a two-year time limit on the repurchase authorizations. This new program replaces previous authorizations totaling 45 million shares between June 1998 and September 1999. During the first quarter of fiscal 2001, we repurchased 16.1 million shares of our common stock at a total purchase price of $250.2 million. During the first quarter of fiscal 2001, we initiated a program of selling put options and purchasing call options on our common stock. The put options entitle the holders to sell shares of 3Com common stock to us on certain dates at specified prices. The call options entitle us to purchase our common stock on certain dates at specified prices. As of September 1, 2000, 16.5 million put options were outstanding and 13.0 million call options were outstanding. The put options and call options expire between January 2001 and August 2002, with prices ranging from $12.95 to $22.17 per share. The option contracts give us the choice of net cash settlement or settlement in shares of our own common stock. These options are accounted for as permanent equity instruments. 21 During the first quarter of fiscal 2001, we received net cash of $145.1 million from the sale of our common stock to employees through our employee stock purchase and option plans. During the same quarter one year ago, we received net cash of $23.4 million from the sale of our common stock to employees through our employee stock purchase and option plans. During the first quarter of fiscal 2001, we recorded a tax benefit on stock option transactions of $49.3 million. During the same quarter one year ago, we recorded a tax benefit on stock option transactions totaling $14.6 million. During the first quarter of fiscal 2001, we repaid the remaining debt balance of $24 million under the 7.52% Unsecured Senior Notes agreement. Based on current plans and business conditions, we believe that our existing cash and equivalents, short-term investments, and cash generated from operations will be sufficient to satisfy anticipated cash requirements for at least the next twelve months. EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS In June 1998 and June 1999, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended, which requires 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 3Com's fiscal year ending May 31, 2002. 3Com is in the process of determining the impact that adoption will have on its consolidated financial statements. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements." The guidance in SAB 101 must be adopted during 3Com's fourth quarter of fiscal 2001 and the effects, if any, are required to be recorded through a retroactive, cumulative-effect adjustment as of the beginning of the fiscal year, with a restatement of all prior interim quarters in the year. Management has not completed its evaluation of the effects, if any, that SAB 101 will have on 3Com's income statement presentation, operating results, or financial position. 22 BUSINESS ENVIRONMENT AND RISK FACTORS Our future results may be affected by industry trends and specific risks in our business. Some of the factors that could cause future results to materially differ from past results or those described in forward-looking statements include those discussed below. STRATEGIC FOCUS AND COMPLETION OF BUSINESS TRANSITION Since announcing our realignment plans on March 20, 2000, we have been transitioning our business and realigning our strategic focus towards high-growth markets, technologies, and products. We have exited our analog-only modem and high-end LAN and WAN chassis product lines. These product lines presented characteristics for revenue growth and profitability that did not meet our target financial model. Our new strategic focus requires re-allocation of resources, investing in new technologies, partnering with other companies, and establishing leadership positions in new high-growth markets. Proper timing and execution in identifying key product lines and market opportunities, developing products and technology and commercializing products are essential for us to be successful in our new strategic focus. Many factors may impact our ability to implement this new strategic focus, including our ability to sustain the productivity of our workforce and recruit and retain talented personnel, to introduce innovative new products in a timely manner, to successfully adopt a business model appropriate for these high-growth and emerging product lines, to adequately secure component supply for these high-growth and emerging product lines, to reduce operating expenses, and to quickly respond to and recover from unforeseen events associated with our business transformation. Internal and external changes resulting from our business transformation are still on-going and may disrupt our customers, partners, distributors, and employees and create a prolonged period of uncertainty, which could have a material adverse affect on our business. As a result of our business transition and realignment, it continues to be difficult to forecast our financial performance. However, we expect that both sales and operating income will continue to be negatively impacted, and we expect to report operating losses in fiscal 2001. As we implement the transformation of 3Com, our goal will be to post operating profits by our fourth fiscal quarter of fiscal 2001 and to make further improvements during fiscal 2002. NEW PRODUCT LINES AND MARKETS Our financial performance and future growth depend upon the rapid growth of new markets, and our ability to establish a leadership position in those markets. We are investing a significant proportion of our resources in several emerging product lines in markets that are expected to grow at a significantly higher rate than the networking industry average. We expect these product lines to account for a higher percentage of our sales over time. We are focused on the following products and solutions, leveraging our investments in broadband, wireless, IP telephony and digital home technologies: - LAN Telephony and Voice over IP Services - Broadband (cable and DSL) modems and headend equipment - Wireless LAN and Code Division Multiple Access (CDMA) Solutions - Home Networking - Internet Appliances At the present time, the markets for these products and solutions are still emerging. Industry standards for these technologies are yet to be widely adopted and the market potential remains unproven. If these markets do not grow at a significant rate or if we do not increase our sales in these product lines, our financial results could be adversely affected. 23 Additionally, we expect that the business models for these high-growth and emerging product lines, especially product lines which are more consumer and retail-oriented, may be different from the business model for our traditional networking products. We anticipate that gross margins for such products on a standalone basis may be significantly lower than gross margins for networking products traditionally sold to larger businesses. Therefore, 3Com must successfully adopt business models for such product lines that incorporate additional revenue generators, such as selling or bundling other higher margin services or products along with sales of these products, and that incorporate continued improvement in the cost of sales for these products. If we are not able to adopt or implement successful business models for these product lines, our overall gross margins may be negatively impacted which could adversely affect our financial results. ABILITY TO DEVELOP AND INTRODUCE NEW PRODUCTS Products in the markets in which we compete have short life cycles. Therefore, our success depends on our ability to identify new market and product opportunities, to develop and introduce new products in a timely manner, and to gain market acceptance of new products, particularly in our targeted high-growth, emerging markets. For example, timely introductions of the following products are important to our success: - a next-generation carrier-class platform for certain applications in IP Telephony and third-generation (3G) wireless solutions for our carrier customers - a new line of Gigabit-on-Copper LAN solutions primarily for commercial enterprises - a new line of broadband modems (both cable and DSL) that support data and voice - new standards-based wireless LAN solutions, including our AirConnect-Registered Trademark- wireless LAN, for both commercial and consumer markets - a new generation of residential Internet appliances - a next generation SuperStack-Registered Trademark- workgroup solution for commercial enterprises Any delay in new product introductions, lower than anticipated demand for our new products or higher manufacturing costs could have an adverse affect on our operating results or financial condition, particularly in those product markets we have identified as emerging high-growth opportunities. SUPPLY CHAIN MANAGEMENT 3Com has a long-term objective to become best-in-class at managing its supply chain. Significant progress has been made in balancing the resources and operations required to achieve the highest levels of customer satisfaction and on-time delivery. The balancing of customer requirements and financial metrics reflects an equilibrium between dynamic elements. Such factors may include external conditions such as component shortages, fluctuations in worldwide demand, and industry consolidation. Some key components of our products and some services, which we rely on, are currently available only from single or limited sources. In addition, some of our suppliers are also our competitors. While we generally have been able to obtain adequate supplies of components from existing sources, we cannot be certain that in the future our suppliers will be able to meet our demand for components in a timely and cost-effective manner. For example, due to strong worldwide demand, the electronics industry is facing shortages on electronic components such as various memory devices and passive components. Due to these shortages, our ability to procure these components and meet our on-time delivery requirements in a cost-effective manner could be impacted. Our operating results, financial condition, or customer relationships could be adversely affected by these shortages. These adverse effects could result from an inability to fulfill customer demand or increased costs to acquire key components or services. Increasingly, we have been sourcing a greater number of components from a select number of vendors to obtain better pricing through higher volumes. Also, there has recently been a trend toward consolidation of vendors of electronic components. This greater reliance on a smaller number of suppliers increases our risk of experiencing unfavorable price fluctuations or a disruption in supply, particularly in a supply constrained environment. 24 Optimal performance of the supply chain requires accurate forecasting of demand, which may be more challenging in the case of emerging technologies and products. If demand for such products and growth of these markets are significantly different from our forecasting and planning, we may face inadequate component supply due to shortages or order lead-time requirements. This would adversely affect our revenues and financial results. The cost, quality, and availability of third party manufacturing operations are essential to the successful production and sale of many of our products. The inability of any third party manufacturer to meet our cost, quality, and availability standards could adversely impact our financial condition or results of operations. In addition we have entered into outsourcing arrangements for manufacturing services. For example, on September 30, 2000 we sold our Mt. Prospect, Illinois manufacturing and distribution operation to Manufacturers' Services Ltd. (MSL). MSL will manufacture broadband access, LAN telephony and carrier networks products for us. The sale, transfer, or consolidation of manufacturing facilities, if not properly executed, could lead to supply disruptions, an inability to satisfy demand, higher costs, or quality issues across our various businesses which could be costly to remedy. Any of these scenarios could have a significant negative impact on our financial results. Improvements in our supply chain management have enabled us to reduce our channel inventory model by two weeks on average. We have been operating within our existing channel inventory model of between five to seven weeks of supply on hand for the past two fiscal years. If we are unable to sustain the improvements we have made in our supply chain capabilities or encounter external supply chain disruptions, we may experience product stock-outs or shortages, which could adversely impact our financial results. COMPETITION FOR KEY PERSONNEL; RETENTION AND RECRUITING Our success depends to a significant extent upon retention and recruitment of a number of key employees and management. Changes associated with realignment of our business operations and strategy may impact retention of existing employees. Over the past year, we have experienced an increased rate of employee turnover compared to historical levels. The loss of the services of key employees and management could adversely affect our product introduction schedules, customer relationships, operating results, or financial condition. The ability to recruit employees, both to replace attrition and to grow our emerging businesses, may be a significant challenge due to the increasingly competitive marketplace for needed skills. Recruiting and retaining skilled personnel, including engineers, continues to be highly competitive. There has been a dramatic increase of technology start-up companies recruiting for the same talent that we require. If we cannot successfully recruit and retain skilled personnel, our ability to compete may be adversely affected. In addition, we must carefully balance the growth in our employee base commensurate with our anticipated sales growth. If our sales growth or attrition levels vary significantly, our results of operations or financial condition could be adversely affected. RELIANCE ON DISTRIBUTORS, RESELLERS, PC OEMS AND SERVICE PROVIDERS We distribute many of our products through two-tiered distribution channels that include distributors, systems integrators, value-added resellers, and retailers. We also sell to PC OEMs, large enterprises and service providers. Under our new strategic focus, we will increase our commitment to and become increasingly reliant upon our two-tiered distribution model as well as sales to OEMs. We will also be developing our Carrier channel through expanded partnerships with Internet and other competitive service providers. Our future results and financial condition are partially dependent on a number of factors relating to this distribution model, including the impact of our business realignment, issues associated with competition among and within our channels, selling to PC OEMs, and channel inventory and customer concentration. 25 BUSINESS REALIGNMENT. The activities surrounding our business realignment may adversely impact our ongoing relationships with our channel partners and the perception of us among end customers: - We have exited our analog-only modem and high-end LAN and WAN chassis product lines. In the past, through our channel partners, we have been able to present end-to-end networking solutions and complementary products to end customers, whom we believe synergistically generated sales. As a result of the business realignment, there may be a negative effect on sales of ongoing products, since these products may not be perceived to be part of a larger integrated or complementary solution. - As part of our business realignment, we reduced our direct, large account sales resources, which were primarily dedicated to promoting the now-discontinued high-end LAN and WAN chassis products. We will still be targeting such customers for our continuing high-volume products. However, the reduction in our large account sales force may result in our sales being adversely impacted. - Customers and channel partners may attempt to return products they have already purchased or cancel orders recently placed. Due to our business realignment, we have recently experienced a higher level of such returns and cancellations. We do not anticipate significant returns or order cancellations beyond the second quarter of fiscal 2001. Therefore, we may have declining levels of business through our traditional distribution channels as a result of impaired relationships with partners and end customers. There can be no guarantee that we can re-establish such relationships or forge new channel and end customer relationships in a timely manner to overcome any loss of business to existing customers or channel disruptions for sell-through of our new products. INVENTORY LEVELS IN CHANNEL. Our distributors and resellers maintain inventories of our products. As part of our efforts to optimize our supply chain, we have reduced the number of our distributors through whom we sell our products as well as the levels of inventory held by those distributors. We work closely with our distributors and resellers to monitor inventory levels and ensure that appropriate levels of products are available to end-users. Notwithstanding such efforts, if channel partners 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. RELIANCE ON A SMALL NUMBER OF DISTRIBUTORS. Significant portions of our sales are made to a few customers. For the first quarter of fiscal year 2001, Ingram Micro represented approximately 17 percent of our total sales and Tech Data represented approximately 12 percent of our total sales. Ingram Micro and Tech Data are both distributors primarily of our commercial and consumer networking products. We cannot be certain that these customers will continue to purchase our products at current levels. Additionally, consolidation among distributors is reducing the number of distributors in the North American market. Because our sales are becoming more concentrated among a smaller number of customers, our results of operations, financial condition, or market share could be adversely affected if our customers: - stop purchasing our products or focus more on selling our competitors' products; - reduce, delay, or cancel their orders; - become unable to sell our products because we do not ship the products to them in a timely manner; or - experience competitive, operational, or financial difficulties, impairing our ability to collect payments from them. 26 PC OEMs. PC-related networking products such as NICs and PC Cards are increasingly being sold through the PC OEM channel rather than the distribution channel. We derive a significant portion of our personal connectivity product sales from PC OEMs such as Dell Computer, Toshiba, Gateway, Hewlett-Packard, and IBM, manufacturers that incorporate our NICs, PC Cards, or chipsets into their products. While sales to PC OEMs are important, products sold through the PC OEM channel typically have lower average selling prices than those sold through other channels. Therefore, our sales and margins may be adversely impacted if sales to PC OEMs continue to become a larger percentage of our business. E-BUSINESS/WEB-ENABLEMENT INITIATIVE A key initiative for us is to drive broad web-enablement of sales, supply chain, and internal processes. We are building in-house capabilities to sell directly to end-user customers (B2C) and distribution partners (B2B) over the Internet (e-Business). This e-Business initiative could cause conflict with our current indirect channels of distribution. If we are unsuccessful in selling through our e-Business channel, we could also lose market share to competitors who have more successfully developed these capabilities. These changes in the pattern of distribution of networking products could have a material adverse effect on our sales and financial results. We have also invested substantial time and resources into deploying the web as the primary medium and platform for internal applications and processes across 3Com. This involves redesigning some of our core business processes, including forecasting, supply chain operations, and order fulfillment. Implementing this initiative will require enhanced information systems, substantial training, and disciplined execution. We believe that the successful web-enablement of 3Com is critical to our long-term competitive position. There can be no assurances, however, that this initiative will be implemented successfully or that disruptions in operations will not occur in the process. CHANGES IN OUR INDUSTRY; ROLE OF ACQUISITIONS The networking business is highly competitive, and as such, our growth is dependent upon market growth and our ability to enhance existing products and introduce new products on a timely basis. Our new strategic focus on emerging and high-growth product lines mandates that we act quickly and effectively to enter into new markets. One of the ways we will address this need is through acquisitions of and minority equity investments in companies with promising technology and products and/or proven market access and position. For example, the acquisition of Call Technologies enhances the service capabilities for our CommWorks-Registered Trademark- architecture and our Total Control-Registered Trademark- multi-service access platform. In addition, our acquisition of Kerbango will allow us to offer consumers a rich Internet experience by providing a complete Internet audio solution for the home and office. Acquisitions involve numerous risks, including the following: - difficulties in integration of the operations, technologies, and products of the acquired companies; - the risk of diverting management's attention from normal daily operations of the business; - potential difficulties in completing projects associated with purchased in-process research and development; - risks of entering markets in which we have no or limited direct prior experience and where competitors in such markets have stronger market positions; - the potential loss of key employees of the acquired company; and - an uncertain sales and earnings stream from the acquired entity, which may result in unexpected dilution to our earnings. Mergers and acquisitions of high-technology companies are inherently risky, and no assurance can be given that our previous or future acquisitions will be successful and will not have a material adverse affect on our business, operating results, or financial condition. We must also focus on our ability to manage and integrate any such acquisition. Failure to manage growth effectively and successfully integrate acquired companies could adversely affect our business and operating results. 27 In general, there have been many mergers and acquisitions in the networking industry in the past several years. There have been mergers between telecommunications equipment providers and networking companies, as well as between networking companies and computer component suppliers. In the last 12 months, we completed four acquisitions and our competitors, including Lucent Technologies, Cisco Systems, Nortel Networks, Alcatel, Siemens, and Intel have also engaged in numerous transactions. Future changes in the networking industry may result in more companies with greater resources and stronger competitive positions and products than us. Furthermore, companies may be created that are able to respond more rapidly to market opportunities. Continued changes in our industry may adversely affect our operating results or financial condition. MANAGEMENT OF STRATEGIC RELATIONSHIPS AND INVESTMENTS In addition to mergers and acquisitions, technology companies are continually entering into strategic relationships. For example, over the past 12 months, we announced or expanded strategic relationships with numerous companies including the following: - AT&T - Accton Technology - Apropos Technology - Bell Atlantic - Broadcom - CAIS Internet - Copper Mountain Networks - Dell Computer - Extreme Networks - F5 Networks - Gateway - Hewlett-Packard - Hitachi - IBM - Inktomi - marchFIRST (formerly USWeb/CKS) - Microsoft - NatSteel Electronics - Samsung Electronics - SonicWALL - Symbol Technologies If successful, these relationships will be mutually beneficial and result in industry and market growth. However, these alliances carry an element of risk since, in most cases, we must compete in some business areas with companies with which we have strategic alliances and, at the same time, cooperate with such companies in other business areas. If these companies fail to perform, or if these relationships fail to materialize as expected, we could suffer delays in product or market development or other operational difficulties. Furthermore, our results of operations or financial condition could be adversely impacted if we experience difficulties managing relationships with our partners or if projects with partners are unsuccessful. In addition, if our competitors enter into successful strategic relationships, they could increase the competition that we face. 28 In support of our business operations and overall strategy, we have made direct and indirect strategic investments in other technology companies and component suppliers. These investments may drive industry and market growth, strengthen supplier relationships, enhance our internal research and development efforts, accelerate the time to market of our new products, and complement our acquisition strategy. Some of these investments have significantly appreciated in value. If there is a substantial decline in the value of these investments, our financial condition could be adversely impacted. Our acquisition of technology, products, or market access through equity investments is usually coupled with a strategic commercial relationship. Our investments tend to be in very early stage technology companies with unproven technology and products. There can be no assurances that we can successfully form appropriate commercial relationships to gain and integrate such products or technology into our technology or product lines or that such companies will not be subsequently acquired by third parties, including competitors of ours. TRANSFER OF ANALOG-ONLY MODEM PRODUCT LINE On September 2, 2000 we completed the transfer of our analog-only modem product lines to U.S. Robotics Corporation ("New USR"), the new joint venture company formed with our partners Accton Technology and NatSteel Electronics. 3Com holds a minority equity position in New USR. Although we have transferred our analog-only modem business to New USR, we will continue to have sales related to the manufacture of certain analog-only modem products for New USR in the second quarter of fiscal 2001. In addition, we entered into transitional service agreements with New USR in the areas of information technology systems, supply chain management, buildings and services, and certain treasury/finance functions. We began such services prior to the transfer and will continue such services for a period of up to one year afterwards. If we do not satisfactorily perform our obligations under these agreements we may be held liable for any resulting losses. PALM SEPARATION On July 27, 2000 3Com completed the spin-off of Palm, Inc. ("Palm"), our handheld computer business, by distributing our remaining ownership of outstanding Palm common stock to 3Com shareholders. As part of the separation, we entered into certain transitional service agreements with Palm to support ongoing Palm operations relating to information technology systems, supply chain management, human resources administration, product order administration, customer service, buildings and facilities, treasury management, and legal, finance, and accounting. These transitional service agreements generally have terms of less than two years following the separation. If we do not satisfactorily perform our obligations under these agreements, we may be held liable for any resulting losses allegedly suffered by Palm. To enable our distribution of Palm common stock to our shareholders, we received a ruling from the Internal Revenue Service that the distribution will be not be taxable. Such ruling requires 3Com and Palm, for up to two years following the distribution date, not to engage in certain business combinations that would constitute a change of more than 50 percent of the equity interest in either company. If either 3Com or Palm fail to conform to requirements set forth in the ruling, there would be material adverse consequences, potentially including making the distribution taxable. Finally, at the time of the distribution of Palm shares to our shareholders, an adjustment was made to stock options held by our employees to preserve the intrinsic value of these options and the ratio of the exercise price to the market price. As of July 27, 2000 there were approximately 35 million employee options outstanding. Immediately after the Palm distribution, there were approximately 169 million employee options outstanding, of which approximately 60 million were vested and immediately exercisable. The exercise of stock options by employees may potentially result in a dilution in the ownership interest of our current shareholders. 29 COMPETITION AND PRICING PRESSURE We participate in a highly volatile industry characterized by vigorous competition for market share as well as rapid product and technology development and maturation. Our competition comes from both small to medium sized companies and start-up companies that have a narrow product or technology focus, and from well-capitalized computer systems, data communications and telecommunications companies that compete across a broad spectrum of networking technologies. The larger, well-established competitors include Intel, Lucent, Nortel, Cisco, Alcatel, Siemens, and Hewlett-Packard. Some of the smaller or more narrowly focused competitors in our industry, along with new start-ups include Alteon, Com21, Clarent, Efficient Networks, NETGEAR, Redback Networks, Juniper Networks, Sonus Networks, Terayon, VocalTec, and Xircom. Our industry continues to undergo rapid change resulting in new competitors who may have greater financial, marketing, and technical resources than we do or who may have a greater competitive edge due to technology innovation. For example, technology innovations are driving the convergence of voice, video, and data traffic onto a single network infrastructure, resulting in new entrants to the market with whom we may compete. In addition, both we and our competitors sometimes lower product prices in order to gain market share or create more demand. For example, in the first quarter of fiscal 2001 we experienced pricing pressure in the market for our broadband modem products, and continue to experience price competition in the markets for our workgroup systems products, as well as for our more mature carrier products which tend to have a higher degree of price sensitivity. Intense pricing competition in our industry may adversely affect our business, operating results, or financial condition. We are also selling products into new markets where we are new entrants to the market ourselves and may compete with different companies than in the past. This is especially true in our high-growth emerging markets such as the wireless, IP telephony, home networking and broadband markets. Our principal competitors in these emerging markets include both traditional competitors such as Intel, Xircom, Cisco, Lucent and Alcatel, as well as new competitors such as Alteon, Com21, Clarent, Efficient Networks, Motorola, NETGEAR, Redback Networks, Juniper Networks, Sonus Networks, Terayon, Toshiba, and VocalTec. These competitors may be able to respond more rapidly than us to new or emerging technologies, changing market dynamics or changes in customer requirements. In addition, we expect intense price competition in these new markets since manufacturers may set low product prices to increase technology and product acceptance and adoption. We expect that these products, especially in the consumer and retail-oriented product lines such as home networking and internet appliances, will be very price sensitive and therefore our sales of these products and gross margins on these products may be adversely affected by competitive pressures. Our failure to compete successfully against current or future competitors could harm our business, operating results, or financial condition. Semiconductor manufacturers, such as Intel, are increasingly integrating more NIC and modem functionality onto a single chip on the motherboard. This trend may offer PC OEMs and other networking customers less costly alternatives to our solutions. If integration of networking and computer processing functionality on a reduced number of components increases, our future sales growth and profitability could be adversely affected. Furthermore, some of these semiconductor manufacturers may be our current suppliers of components; therefore, we may be competing directly with our vendors in certain future situations. 30 UNCERTAINTIES OF INTERNATIONAL MARKETS We operate internationally and expect that international markets will continue to account for a significant percentage of our sales. Some international markets are characterized by economic and political instability and currency fluctuations that can adversely affect our operating results or financial condition. The level of international sales in different regions will be positively or negatively impacted by unforeseen conditions and events. For example, high oil prices and increased transportation costs may adversely impact shipments to certain markets and the admission of China to the World Trade Organization and granting of Permanent Normalized Trade Relations status may stimulate sales to China. Should international regions experience economic or political instability, our results of operations may be adversely affected. INDUSTRY STANDARDS AND REGULATIONS Our success also depends on: - the timely adoption and market acceptance of industry standards; - resolution of conflicting U.S. and international standards requirements created by the convergence of technology such as voice onto data networks; - the timely introduction of new standards-compliant products; and - a favorable regulatory environment. Slow market acceptance of new technologies and industry standards could adversely affect our results of operations or financial condition. In addition, if we fail to achieve timely certification of compliance to industry standards for our products, our sales of such products could be adversely affected. There are a number of new product initiatives, particularly in the area of wireless access, IP telephony, and broadband access that could be impacted by new or revised regulations, which in turn could adversely affect our results of operations or financial condition. For example, development of a new global "third generation" standard for wireless Internet access is underway and expected to be based on CDMA. However, several technologies including Global System for Mobile Communication (GSM), Personal Digital Cellular (PDC), and Time Division Multiple Access (TDMA) are competing for the standard, which will ultimately be determined by the International Telecommunications Union (ITU). CUSTOMER ORDER FULFILLMENT The timing and amount of our sales depend on a number of factors that make estimating operating results prior to the end of any period uncertain. For example, we do not typically maintain a significant backlog and sales are dependent on our ability to appropriately forecast product demand. In addition, our customers historically request fulfillment of orders in a short period of time, resulting in limited visibility to sales trends. Consequently, our operating results depend on the volume and timing of orders and our ability to fulfill orders in a timely manner. Historically, sales in the third month of the quarter have been higher than sales in each of the first two months of the quarter. Recently this pattern has become more pronounced, which may increase the risk of unforeseen events negatively impacting our financial results. Non-linear sales patterns make business planning difficult, and increase the risk that our quarterly results will fluctuate due to disruptions in functions such as manufacturing, order management, information systems, and shipping. WARRANTIES AND INTERNATIONAL REQUIREMENTS Because our products are often covered by warranties, we may be subject to contractual and/or legal commitments to perform under such warranties. If our products fail to perform as warranted and we do not resolve product quality or performance issues in a timely manner, our operating results or financial condition could be adversely affected. Likewise, we could be subject to claims for business disruption or consequential damages if a network implementation is not completed successfully or in a timely manner. 31 Our products are sold and marketed in many countries, and as such, our products must function in and meet the requirements of many different telecommunications environments and be compatible with various telecommunications systems and products. If our products fail to meet the requirements of international telecommunication environments, our sales could be negatively impacted. Our business realignment actions include transition of certain business lines to third parties, such as analog-only modems, or obsolescence of certain product lines such as high-end LAN and WAN chassis products. To the extent that third parties do not assume or fulfill our warranty obligations, we will remain obligated to provide warranty support, including repair services and spare parts for the duration of contracts or statutory legal requirements. Any failure to perform such commitments could subject us to claims, which may have a material adverse impact on our business and financial results. COMMERCIAL COMMITMENTS We enter into minimum quantity or other non-cancelable commitments as needed. For example, we have committed to minimum purchases of product components from a vendor through the end of calendar year 2002. These types of agreements subject us to risk depending on future events. If, for example, sales volumes of certain products fluctuate significantly, we may be unable to meet our commitments. This may result in us incurring liabilities that adversely affect our financial results. INTELLECTUAL PROPERTY RIGHTS Many of our competitors, such as telecommunications and computer equipment manufacturers, have large intellectual property portfolios, including patents that may cover technologies that are relevant to our business. In addition, many smaller companies, universities, and individual inventors have obtained or applied for patents in areas of technology that may relate to our business. The industry is moving towards aggressive assertion, licensing, and litigation of patents and other intellectual property rights. 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, protocols, or specifications in our products. If we are unable to obtain and maintain licenses on favorable terms for intellectual property rights required for the manufacture, sale, and use of our products, particularly those which must comply with industry standard protocols and specifications to be commercially viable, our business, results of operations, or financial condition could be adversely impacted. In addition to disputes relating to the validity or alleged infringement of other parties' rights, we may become involved in disputes relating to our assertion of our intellectual property rights. Whether we are defending the assertion of intellectual property rights against us or asserting our intellectual property rights against others, intellectual property litigation can be complex, costly, protracted, and highly disruptive to business operations by diverting the attention and energies of management and key technical personnel. Further, plaintiffs in intellectual property cases often seek injunctive relief and the measures of damages in intellectual property litigation are complex and often subjective or uncertain. Thus, the existence of or any adverse determinations in this litigation could subject us to significant liabilities and costs. In addition, if we are the alleged infringer, we could be required to seek licenses from others or be prevented from manufacturing or selling our products, which could cause disruptions to our operations or the markets in which we compete. If we are asserting our intellectual property rights, we could be prevented from stopping others from manufacturing or selling competitive products. Any one of these factors could adversely affect our results of operations or financial condition. 32 FLUCTUATIONS IN QUARTERLY RESULTS; VOLATILITY OF STOCK PRICE Our quarterly operating results are difficult to predict and may fluctuate significantly. In addition to factors discussed above, a wide variety of factors can cause these fluctuations, including: - component shortages; - seasonality; - the introduction and acceptance of new products and technologies; - price competition; - general conditions and trends in the networking industry and technology sector; - internal reorganizations or realignments; - disruption in international markets; - general economic conditions; - industry consolidations and acquisitions; - disruption in the distribution channel; - timing of orders received within the quarter; and - non-linear sales within the quarter. In recent years, we have experienced fluctuations in our quarterly results due to some of the factors listed above. These factors, and accompanying fluctuations in periodic operating results, could have a significant adverse impact on the market price of our common stock. Additionally, we anticipate that the activities surrounding our business realignment and the transition to our new strategic focus will contribute significantly to fluctuations in our quarterly operating results for the next several quarters. Our stock price has historically experienced substantial price volatility and we expect that this will continue, particularly due to fluctuations in quarterly operating results as outlined above, variations between our actual or anticipated financial results and the published analysts' expectations, and as a result of announcements by our competitors. In addition, the stock market has experienced extreme price and volume fluctuations that have affected the market price of many technology companies. These market price fluctuations have often been unrelated to the operating performance of these companies. These factors, as well as general economic and political conditions, may materially adversely affect the market price of our stock in the future. PROPOSED CHANGES IN ACCOUNTING FOR BUSINESS COMBINATIONS AND INTANGIBLE ASSETS The Financial Accounting Standards Board ("FASB") began deliberation of revisions to the rules for business combinations and intangible assets in 1996. Some of these deliberations have included accounting rule-making bodies from other nations as the financial communities attempt to develop global consistency where possible. Business combination rules govern the accounting for mergers and acquisitions used in either a purchase or a pooling-of-interests combination. Business combinations may generate intangible assets (including goodwill) which represent the excess purchase price of an acquired enterprise over net identifiable assets. Tentative conclusions of the FASB will prohibit the use of pooling-of-interests and will establish new accounting standards and financial presentation for intangible assets resulting from business combinations. The FASB expects to issue a final standard by the end of calendar year 2000. The final standard is not expected to address accounting for in-process research and development costs. Changes to the current accounting rules for business combinations and intangible assets will not preclude mergers or acquisitions but may increase the earnings dilution associated with future transactions. In addition, if pooling-of-interests accounting is no longer available, we may use cash more often than our common stock to pay for acquisitions of other companies. 33 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 3Com holds a substantial portfolio of marketable-equity traded securities that have a short trading history and are highly subject to market price volatility. Equity security price fluctuations of plus or minus 15 percent would have a $112.9 million impact on the value of these securities as of the end of the first quarter of fiscal 2001. Equity security price fluctuations of plus or minus 50 percent would have a $376.4 million impact on the value of these securities as of the end of the first quarter of fiscal 2001. For interest rate sensitivity and foreign currency exchange risk, reference is made to Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in our Annual Report on Form 10-K for the year ended June 2, 2000. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS We are a party to lawsuits in the normal course of our business. Litigation in general, and intellectual property and securities litigation in particular, can be expensive and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict. We believe that we have defenses in each of the cases set forth below and are vigorously contesting each of these matters. An unfavorable resolution of one or more of the following lawsuits could adversely affect our business, results of operations, or financial condition. SECURITIES LITIGATION On March 24 and May 5, 1997, securities class action lawsuits, captioned HIRSCH V. 3COM CORPORATION, ET AL., Civil Action No. CV764977 (HIRSCH), and KRAVITZ V. 3COM CORPORATION, ET AL., Civil Action No. CV765962 (KRAVITZ), respectively, were filed against 3Com and certain of its officers and directors in the California Superior Court, Santa Clara County. The complaints allege violations of Sections 25400 and 25500 of the California Corporations Code and seek unspecified damages on behalf of a class of purchasers of 3Com common stock during the period from September 24, 1996 through February 10, 1997. In late 1999, these cases were stayed by the Court, pending resolution of proceedings in the EUREDJIAN V. 3COM CORPORATION matter, discussed below. Because the EUREDJIAN case has been dismissed, the HIRSCH AND KRAVITZ cases are no longer stayed. They are in discovery. No trial date has been scheduled. On February 10, 1998, a securities class action, captioned EUREDJIAN V. 3COM CORPORATION, ET AL., Civil Action No. C-98-00508CRB (EUREDJIAN), was filed against 3Com and several of its present and former officers and directors in United States District Court for the Northern District of California asserting the same class period and factual allegations as the HIRSCH AND KRAVITZ actions. The complaint alleges violations of the federal securities laws, specifically Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and seeks unspecified damages. In May 2000, at the request of plaintiffs, the Court dismissed the EUREDJIAN case with prejudice. In December 1997, a securities class action, captioned REIVER V. 3COM CORPORATION, ET AL., Civil Action No. C-97-21083JW (REIVER), was filed in the United States District Court for the Northern District of California. Several similar actions have been consolidated into this action, including FlORIDA STATE BOARD OF ADMINISTRATION AND TEACHERS RETIREMENT SYSTEM OF LOUISIANA V. 3COM CORPORATION, ET AL., Civil Action No. C-98-1355. On August 17, 1998, the plaintiffs filed a consolidated amended complaint which alleges violations of the federal securities laws, specifically Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934, and which seeks unspecified damages on behalf of a purported class of purchasers of 3Com common stock during the period from April 23, 1997 through November 5, 1997. 3Com has answered an amended complaint and the case is now in discovery. No trial date has been scheduled. 34 In October 1998, a securities class action lawsuit, captioned ADLER V. 3COM CORPORATION, ET AL., Civil Action No. CV777368 (ADLER), was filed against 3Com and certain of its officers and directors in the California Superior Court, Santa Clara County, asserting the same class period and factual allegations as the REIVER action. The complaint alleges violations of Sections 25400 and 25500 of the California Corporations Code and seeks unspecified damages. By agreement of the parties, this case will be stayed to allow the REIVER case to proceed. On May 11, 1999, a securities class action, captioned GAYLINN V. 3COM CORPORATION, ET AL., Civil Action No. C-99-2185 MMC (GAYLINN), was filed against 3Com and several of its present and former officers and directors in United States District Court for the Northern District of California. Several similar actions have been consolidated into the GAYLINN action. On September 10, 1999, the plaintiffs filed a consolidated complaint which alleges violations of the federal securities laws, specifically Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and seeks unspecified damages on behalf of a purported class of purchasers of 3Com common stock during the period from September 22, 1998 through March 2, 1999. In January 2000, the Court dismissed the complaint. In February 2000, plaintiffs filed an amended complaint. In June 2000, the Court dismissed the amended complaint without prejudice. Plaintiffs filed another amended complaint. On July 24, 2000, the Company filed a motion to dismiss the latest amended complaint. In September 2000, the Court dismissed the amended complaint with prejudice. INTELLECTUAL PROPERTY 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 Number 97-CV-6182T). The Complaint alleged willful infringement of United States Patent Number 5,596,656, entitled "Unistrokes for Computerized Interpretation of Handwriting." The Complaint sought to permanently enjoin the defendants from infringing the patent in the future. In an Order entered by the Court on June 6, 2000, the Court granted the defendants' motion for summary judgment of non-infringement, and the case was dismissed in its entirety. Xerox has appealed the dismissal to the U.S. Court of Appeals for the Federal Circuit. On May 26, 2000 3Com Corporation filed a patent infringement lawsuit against Xircom, Inc. The lawsuit, filed in the United States District Court for the District of Utah (2:00CV-0436G), alleges infringement of 3Com's patent numbers 6,012,953, 5,532,898 and 5,777,836. On September 21, 2000 in the United States District Court for the Central District of California (00-10198 WJR), Xircom Corporation filed suit against 3Com Corporation alleging infringement of Xircom's U.S. Patent Numbers 5,773,332, 5,940,275, 6,115,257 and 6,095,851. 3Com is currently investigating the lawsuit filed by Xircom. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. 35 Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 2.1 Master Separation and Distribution Agreement between the registrant and Palm, Inc. effective as of December 13, 1999, as amended (15) 2.2 General Assignment and Assumption Agreement between the registrant and Palm, Inc., as amended (15) 2.3 Master Technology Ownership and License Agreement between the registrant and Palm, Inc. (15) 2.4 Master Patent Ownership and License Agreement between the registrant and Palm, Inc. (15) 2.5 Master Trademark Ownership and License Agreement between the registrant and Palm, Inc. (15) 2.6 Employee Matters Agreement between the registrant and Palm, Inc. (15) 2.7 Tax Sharing Agreement between the registrant and Palm, Inc. (15) 2.8 Master Transitional Services Agreement between the registrant and Palm, Inc. (15) 2.9 Real Estate Matters Agreement between the registrant and Palm, Inc. (15) 2.10 Master Confidential Disclosure Agreement between the registrant and Palm, Inc. (15) 2.11 Indemnification and Insurance Matters Agreement between the registrant and Palm, Inc. (15) 3.1 Certificate of Incorporation (11) 3.2 Certificate of Correction Filed to Correct a Certain Error in the Certificate of Incorporation (11) 3.3 Certificate of Merger (11) 3.4 Corrected Certificate of Merger (14) 3.5 Bylaws of 3Com Corporation, As Amended (12) 4.1 Amended and Restated Rights Agreement dated December 31, 1994 (Exhibit 10.27 to Form 10-Q) (4) 4.2 Amended and Restated Senior Notes Agreement between U.S. Robotics Corporation, Metropolitan Life Insurance Company, The Northwestern Mutual Life Insurance Company, and Metropolitan Property and Casualty Insurance Company (5) 4.3 Amendment to amended and restated note agreements between 3Com Corporation, Metropolitan Life Insurance Company, The Northwestern Mutual Life Insurance Company, and Metropolitan Property and Casualty Insurance Company (13) 4.4 Second amendment to amended and restated note agreements between 3Com Corporation, Metropolitan Life Insurance Company, The Northwestern Mutual Life Insurance Company, and Metropolitan Property and Casualty Insurance Company (14) 10.1 1983 Stock Option Plan, as amended (14)* 10.2 Amended and Restated Incentive Stock Option Plan (2)* 10.3 License Agreement dated March 19, 1981 (1) 10.4 Second Amended and Restated 1984 Employee Stock Purchase Plan (Exhibit 10.5 to Form 10-Q) (6)* 10.5 3Com Corporation Director Stock Option Plan, as amended (Exhibit 19.3 to Form 10-Q) (3)* 10.6 Amended 3Com Corporation Director Stock Option Plan (Exhibit 10.8 to Form 10-Q) (6)* 10.7 3Com Corporation Restricted Stock Plan, as amended (Exhibit 10.17 to Form 10-Q) (6)* 36 10.8 1994 Stock Option Plan, as amended (14)* 10.9 Lease Agreement between BNP Leasing Corporation, as Landlord, and 3Com Corporation, as Tenant, effective as of November 20, 1996 (Exhibit 10.37 to Form 10-Q) (8) 10.10 Purchase Agreement between BNP Leasing Corporation, and 3Com Corporation, effective as of November 20, 1996 (Exhibit 10.38 to Form 10-Q) (8) 10.11 Agreement and Plan of Reorganization among 3Com Corporation, OnStream Acquisition Corporation and OnStream Networks, Inc. dated as of October 5, 1996 (Exhibit 2.1 to Form S-4) (7) 10.12 Lease Agreement between BNP Leasing Corporation, as Landlord, and 3Com Corporation, as Tenant, effective as of February 3, 1997 for the Combined Great America Headquarters site (Exhibit 10.19 to Form 10-Q) (10) 10.13 Purchase Agreement between BNP Leasing Corporation, and 3Com Corporation, effective as of February 3, 1997 for the Combined Great America Headquarters site (Exhibit 10.20 to Form 10-Q) (10) 10.14 Credit Agreement dated as of December 20, 1996 among 3Com Corporation, Bank of America National Trust and Savings Association, as Agent, and the Other Financial Institutions Party Hereto Arranged by BA Securities, Inc. (Exhibit 10.21 to Form 10-Q) (10) 10.15 Amended and Restated Agreement and Plan of Merger by and among 3Com Corporation, TR Acquisitions Corporation, 3Com (Delaware) Corporation, and U.S. Robotics Corporation, dated as of February 26, 1997 and amended as of March 14, 1997 (9) 10.16 Lease Agreement between BNP Leasing Corporation, as Landlord, and 3Com Corporation, as Tenant, effective as of July 25, 1997 for the Great America Phase III (PAL) site (11) 10.17 Purchase Agreement between BNP Leasing Corporation and 3Com Corporation, effective as of July 25, 1997 for the Great America Phase III (PAL) site (11) 10.18 Lease Agreement between BNP Leasing Corporation, as Landlord, and 3Com Corporation, as Tenant, effective as of July 29, 1997 for the Marlborough site (11) 10.19 Purchase agreement between BNP Leasing Corporation and 3Com Corporation, effective as of July 29, 1997 for the Marlborough site (11) 10.20 Lease Agreement between BNP Leasing Corporation, as Landlord, and 3Com Corporation, as Tenant, effective as of August 11, 1997 for the Rolling Meadows site (11) 10.21 Purchase Agreement between BNP Leasing Corporation, and 3Com Corporation, effective as of August 11, 1997 for the Rolling Meadows site (11) 10.22 First Amendment to Credit Agreement (11) 10.23 Form of Management Retention Agreement, effective as of June 2, 1999, with attached list of parties.* (16) 10.24 Form of Management Retention Agreement, with attached list of parties and effective dates.* (16) 10.25 Agreement for Purchase and Sale of Land at Highway 237 and North First Street, San Jose, California entered into as of May 22, 2000 by and between the registrant and Palm, Inc. 27.1 Financial Data Schedule - -------------------------------------------------------------------------------- * Indicates a management contract or compensatory plan. (1) Incorporated by reference to the corresponding Exhibit previously filed as an Exhibit to Registrant's Registration Statement on Form S-1 filed on January 25, 1984 (File No. 2-89045) 37 (2) Incorporated by reference to Exhibit 10.2 to Registrant's Registration Statement on Form S-4 filed on August 31, 1987 (File No. 33-16850) (3) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 10-Q filed on January 10, 1992 (File No. 0-12867) (4) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 10-Q filed on January 13, 1995 (File No. 0-12867) (5) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 10-Q filed on May 16, 1995 (File No. 0-19550) (6) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 10-Q filed on January 15, 1996 (File No. 0-12867) (7) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Registration Statement on Form S-4 filed on October 11, 1996 (File No. 333-13993) (8) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 10-Q filed on January 13, 1997 (File No. 0-12867) (9) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Registration Statement on Form S-4 filed on March 17, 1997 (File No. 333-23465) (10) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 10-Q filed on April 11, 1997 (File No. 0-12867) (11) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 10-Q filed on October 14, 1997 (File No. 0-12867) (12) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 10-Q filed on January 11, 1999 (File No. 0-12867) (13) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 10-K filed on August 17, 1999 (File No. 0-12867) (14) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 10-Q filed on October 8, 1999 (File No. 0-12867) (15) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 10-Q filed on April 4, 2000 (File No. 0-12867) (16) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 10-K filed on August 17, 2000 (File No. 0-12867) (b) Reports on Form 8-K None 38 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. 3Com Corporation (Registrant) Dated: October 13, 2000 By: /s/ Michael E. Rescoe ---------------------------- ------------------------------------- Michael E. Rescoe Senior Vice President, Finance and Chief Financial Officer (Principal Financial and Accounting Officer) 39 EX-10.25 2 a2027699zex-10_25.txt EXHIBIT 10.25 TABLE OF CONTENTS
PAGE ARTICLE I BASIC DEFINITIONS.......................................................................................1 Section 1.1 CLOSING DATE................................................................................1 Section 1.2 CONTINGENCY PERIOD..........................................................................1 Section 1.3 EFFECTIVE DATE..............................................................................1 Section 1.4 ENVIRONMENTAL LAWS..........................................................................1 Section 1.5 HANDLING....................................................................................1 Section 1.6 HAZARDOUS MATERIALS.........................................................................1 Section 1.7 INTANGIBLE PROPERTY.........................................................................3 Section 1.8 LAND........................................................................................3 Section 1.9 LIMITATIONS PERIOD..........................................................................3 Section 1.10 PERMITTED EXCEPTIONS........................................................................3 Section 1.11 PRELIMINARY REPORTS.........................................................................3 Section 1.12 PROPERTY....................................................................................3 Section 1.13 RELEASED PARTIES............................................................................3 Section 1.14 TITLE COMPANY...............................................................................3 Section 1.15 WASTE MATERIALS.............................................................................3 ARTICLE II PURCHASE AND SALE......................................................................................4 Section 2.1 PURCHASE AND SALE...........................................................................4 Section 2.2 PURCHASE PRICE..............................................................................4 Section 2.3 INTANGIBLE PROPERTY.........................................................................4 Section 2.4 DEPOSIT.....................................................................................4 Section 2.5 APPLICATION OF DEPOSIT......................................................................5 ARTICLE III CONDITIONS PRECEDENT..................................................................................5 Section 3.1 BUYER'S CONDITIONS PRECEDENT................................................................5 Section 3.2 SELLER'S CONDITIONS PRECEDENT...............................................................6 Section 3.3 FAILURE OR WAIVER OF CONDITIONS PRECEDENT...................................................7 Section 3.4 BUYER'S REVIEW AND SELLER'S DISCLAIMER......................................................7 Section 3.5 BUYER'S RELEASE.............................................................................8 ARTICLE IV WARRANTIES AND REPRESENTATIONS AND COVENANTS...........................................................9 Section 4.1 SELLER'S WARRANTIES AND REPRESENTATIONS.....................................................9 Section 4.2 BUYER'S REPRESENTATIONS AND WARRANTIES.....................................................10 Section 4.3 RESTATEMENT AT CLOSING.....................................................................11 Section 4.4 LIMITATIONS................................................................................11 Section 4.5 COVENANT NOT TO SUE........................................................................11 Section 4.6 BUYER'S INDEMNITY..........................................................................12 Section 4.7 SELLER'S COVENANTS.........................................................................12 ARTICLE V CONDITIONS OF TITLE....................................................................................13 Section 5.1 CONDITION OF TITLE.........................................................................13 Section 5.2 CURE OF TITLE DEFECTS......................................................................13
i TABLE OF CONTENTS
Page ARTICLE VI ESCROW AND CLOSING....................................................................................13 Section 6.1 ESCROW ARRANGEMENTS........................................................................13 Section 6.2 CLOSING....................................................................................14 Section 6.3 PRORATIONS AND CREDITS.....................................................................15 Section 6.4 OTHER CLOSING COSTS........................................................................15 ARTICLE VII MISCELLANEOUS........................................................................................16 Section 7.1 DAMAGE OR DESTRUCTION......................................................................16 Section 7.2 BROKERAGE COMMISSIONS AND FINDER'S FEES....................................................16 Section 7.3 SUCCESSORS AND ASSIGNS.....................................................................16 Section 7.4 NOTICES....................................................................................17 Section 7.5 TIME.......................................................................................18 Section 7.6 INCORPORATION BY REFERENCE.................................................................18 Section 7.7 ATTORNEYS' FEES............................................................................18 Section 7.8 CONSTRUCTION...............................................................................18 Section 7.9 NO MERGER..................................................................................18 Section 7.10 CONFIDENTIALITY AND RETURN OF DOCUMENTS....................................................18 Section 7.11 GOVERNING LAW..............................................................................19 Section 7.12 COUNTERPARTS...............................................................................19 Section 7.13 ENTIRE AGREEMENT...........................................................................19 Section 7.14 LIMITATION OF SELLER'S LIABILITY...........................................................19 Section 7.15 NO WAIVER..................................................................................19 Section 7.16 SEVERABILITY...............................................................................19 Section 7.17 WAIVER OF JURY TRIAL.......................................................................19 Section 7.18 FURTHER ASSURANCES.........................................................................20
EXHIBITS Exhibit A _ Description of Land Exhibit B - Form of Assignment of Intangible Property Exhibit C - Form of Deposit Escrow Instructions Exhibit D - [Reserved] Exhibit E - Form of Release Agreement and Covenant Not To Sue Exhibit F - Form of Grant Deed Exhibit G - Form of Non-Foreign Affidavit Exhibit H - Form of Designation Agreement Exhibit I - Preliminary Title Report Exhibit J - Form of Confidentiality Agreement AGREEMENT FOR PURCHASE AND SALE OF LAND AT HIGHWAY 237 AND NORTH FIRST STREET SAN JOSE, CALIFORNIA THIS AGREEMENT FOR PURCHASE AND SALE ("AGREEMENT") is made and entered into as of May 22, 2000 by and between 3COM CORPORATION, a Delaware corporation ("SELLER"), and PALM, INC, a Delaware corporation ("BUYER"). ARTICLE I BASIC DEFINITIONS Section 1.1 CLOSING DATE. "CLOSING DATE" shall mean the date for the close of Escrow (as defined in Section 6.1 below) and the recording of the deed conveying the Property to Buyer. The Closing Date shall be not later than August 7, 2000, subject to extension until September 5, 2000 under the terms of Section 6.1 below. Section 1.2 CONTINGENCY PERIOD. "CONTINGENCY PERIOD" shall mean the period commencing on the Effective Date and expiring 5:00 p.m. PDST July 6, 2000. Section 1.3 EFFECTIVE DATE. "EFFECTIVE DATE" shall mean the date set forth in the preamble to this Agreement. Section 1.4 ENVIRONMENTAL LAWS. "ENVIRONMENTAL LAWS" shall mean any applicable foreign, federal, state, or local law, statute, regulation, rule, ordinance, permit, prohibition, restriction, license, requirement, agreement, consent, or approval, or any determination, directive, judgment, decree or order of any executive, administrative or judicial authority at any federal, state or local level (whether now existing or subsequently adopted or promulgated) relating to pollution or the protection of the environment, natural resources or public health and safety. Section 1.5 HANDLING. "HANDLING" shall mean, at any time and to any extent and in any manner whatsoever, any presence of or any handling, storing, transferring, transporting, treating, using, recycling, separating, sorting, incinerating, transforming, reconstituting, containing, containerizing, packaging, manufacturing, generating, abandoning, covering, capping, dumping, closing, maintaining, disposing, placing, discarding, encapsulating, filling, landfilling, investigating, monitoring, remediating, removing, responding to, reporting on, testing, releasing, contamination resulting from, spilling, leaking, pouring, emitting, emptying, discharging, injecting, escaping, migrating, or leaching. Section 1.6 HAZARDOUS MATERIALS. "HAZARDOUS MATERIALS" shall mean any material, waste, chemical, compound, substance, mixture, or byproduct that is identified, defined, designated, listed, restricted or otherwise regulated under Environmental Laws as a "hazardous 1 constituent," "hazardous substance," "hazardous material," "extremely hazardous material," "hazardous waste," "acutely hazardous waste," "hazardous waste constituent," "infectious waste," medical waste," "biohazardous waste," "extremely hazardous waste," "pollutant," "toxic pollutant," or "contaminant," or any other formulation intended to classify substances by reason of properties that are deleterious to the environment, natural resources or public health or safety including, without limitation, ignitability, corrosiveness, reactivity, carcinogenicity, toxicity, and reproductive toxicity. The term "HAZARDOUS MATERIALS" shall include, without limitation, the following: (a) A "Hazardous Substance," "Hazardous Material," "Hazardous Waste," or "Toxic Substance" under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. Section 9601, et seq., the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq. or the Solid Waste Disposal Act, 42 U.S.C. Section 6901, et seq., including any regulations promulgated thereunder, as any of the foregoing may be amended; (b) An "Acutely Hazardous Waste," "Extremely Hazardous Waste," "Hazardous Waste," or "Restricted Hazardous Waste," under Section 25110.02, 25115, 25117 or 25122.7 of the California Health and Safety Code, or is listed pursuant to Section 25140 of the California Health and Safety Code, as any of the foregoing may be amended; (c) A "Hazardous Material," "Hazardous Substance" or "Hazardous Waste" under Section 25281, 25316, 25501, or 25501.1 of the California Health and Safety Code, as any of the foregoing may be amended; (d) "Oil" or a "Hazardous Substance" under Section 311 of the Federal Water Pollution Control Act, 33 U.S.C. Section 1321, as may be amended, as well as any other hydrocarbonic substance, fraction, distillate or by-product; (e) Any substance or material defined, identified or listed as an "Acutely Hazardous Waste," "Extremely Hazardous Material," "Extremely Hazardous Waste," "Hazardous Constituent," "Hazardous Material," "Hazardous Waste," "Hazardous Waste Constituent," or "Toxic Waste" pursuant to Division 4.5, Chapters 10 or 11 of Title 22 of the California Code of Regulations, as may be amended; (f) Any substance or material listed by the State of California as a chemical known by the State to cause cancer or reproductive toxicity pursuant to Section 25249.8 of the California Health and Safety Code, as may be amended; (g) A "Biohazardous Waste" or "Medical Waste" under Section 25020.5 or 25023.2 of the California Health and Safety Code, as may be amended; (h) Asbestos and any asbestos containing material; and/or (i) A substance that, due to its characteristics or interaction with one or more other materials, wastes, chemicals, compounds, substances, mixtures, or byproducts, damages or threatens to damage the environment, natural resources or public health or safety, or is required 2 by any law or public entity to be remediated, including remediation which such law or public entity requires in order for property to be put to any lawful purpose. Section 1.7 INTANGIBLE PROPERTY. "INTANGIBLE PROPERTY" shall mean that certain intangible property owned by Seller and used in connection with the Land consisting of reports, permits, and licenses, relating to the ownership and potential development of the Property. Section 1.8 LAND. "LAND" shall mean the real property, including all easements and other rights and interests appurtenant thereto, described in EXHIBIT A. Section 1.9 LIMITATIONS PERIOD. "LIMITATIONS PERIOD" shall mean one hundred eighty (180) days following the Closing Date. Section 1.10 PERMITTED EXCEPTIONS. "PERMITTED EXCEPTIONS" shall have the meaning set forth in Article V below. Section 1.11 PRELIMINARY REPORTS. "PRELIMINARY REPORTS" shall mean those certain Preliminary Title Reports with respect to the Property issued by the Title Company under Order Nos. 517718 and 517719, dated February 28, 2000, copies of which are attached as EXHIBIT I. Section 1.12 PROPERTY. "PROPERTY" shall mean collectively the Land, and the Intangible Property. Section 1.13 RELEASED PARTIES. "RELEASED PARTIES" shall mean Seller and its and their affiliates, parent business organizations, subsidiary business organizations, lenders who hold or held a security interest in all or a portion of the Property, shareholders, officers, directors, partners, employees, servants, heirs, executors, and successors. Section 1.14 TITLE COMPANY. "TITLE COMPANY" shall mean First American Title Company, 1737 North First Street, San Jose, CA 95112. Section 1.15 WASTE MATERIALS. "WASTE MATERIALS" shall mean any putrescible or nonputrescible solid, semisolid, liquid or gaseous waste of any type whatsoever, including, without limitation: (a) Any garbage, trash, refuse, paper, rubbish, ash, industrial or commercial or residential waste, demolition or construction wastes, abandoned vehicles or parts thereof, discarded home and industrial appliances, sewage, sewage sludge, manure, vegetable or animal solid and semisolid waste, and any other item intended to be or actually dumped, abandoned, discarded, treated, transformed, incinerated, disposed of or recycled; (b) Any "solid waste" as defined in the Solid Waste Disposal Act, 42 U.S.C. Section 6901, et seq., including any regulations promulgated thereunder, as any of the foregoing may be amended; 3 (c) Any "solid waste," as defined in the California Integrated Waste Management Act of 1989, California Public Resources Code Section 40000, et seq., including any regulations promulgated thereunder, as any of the foregoing may be amended; and/or (d) Any "waste" as defined in the Porter-Cologne Water Quality Control Act, California Water Code Section 13000 et seq., including any regulations promulgated thereunder, as any of the foregoing may be amended. ARTICLE II PURCHASE AND SALE Section 2.1 PURCHASE AND SALE. Seller agrees to sell the Property to Buyer, and Buyer agrees to purchase the Property from Seller, upon all of the terms, covenants and conditions set forth in this Agreement. Section 2.2 PURCHASE PRICE. The purchase price for the Property (the "PURCHASE PRICE") shall be Two Hundred Sixteen Million Dollars ($216,000,000) which shall be paid by Buyer to Seller in cash through Escrow on the Closing Date. Section 2.3 INTANGIBLE PROPERTY. Upon the close of Escrow, Seller shall deliver to Buyer Seller's interest in the Intangible Property pursuant to an Assignment of Intangible Property in the form of EXHIBIT B hereto (the "ASSIGNMENT OF INTANGIBLE PROPERTY"). Section 2.4 DEPOSIT. (a) Within two (2) business days following full execution and delivery of this Agreement to Buyer, Buyer shall deposit in Escrow with the Title Company the sum of Two Million Five Hundred Thousand Dollars ($2,500,000) (the "INITIAL DEPOSIT"). At the same time the Initial Deposit is made into Escrow, Buyer and Seller shall execute and deliver to the Title Company Deposit Escrow Instructions in the form of EXHIBIT C. (b) If Buyer has not terminated this Agreement prior to such time, then on or before the end of the Investigation Period, Buyer shall deposit into Escrow with the Title Company as an increase to the Initial Deposit the additional sum of Three Million Five Hundred Thousand Dollars ($3,500,000). These funds, together with the Initial Deposit, shall be, collectively, the "DEPOSIT." (c) Buyer may cause the Deposit to be invested at interest while in Escrow using short term debt obligations subject to Seller's consent which shall not unreasonably be withheld. Any and all interest earned on the Deposit during the time it is held in Escrow shall belong to, and be paid to Buyer. 4 Section 2.5 APPLICATION OF DEPOSIT. In the event that the purchase and sale transaction is consummated as contemplated by this Agreement, then the entire amount of the Deposit received by Seller shall be credited against the Purchase Price. The Deposit shall be returned immediately to Buyer in the event that (a) any of the conditions precedent set forth in Sections 3.1 or 3.2 below are not fulfilled or waived by the party intended to be benefited thereby and this Agreement is terminated in accordance with Section 3.3 below, or (b) the conditions precedent set forth in Sections 3.1 and 3.2 shall have been satisfied or waived by the party intended to be benefited thereby, (ii) Buyer shall have performed fully or tendered performance of its obligations under this Agreement, and (iii) Seller shall be unable or fail to perform its obligations under this Agreement. IF BUYER DEFAULTS IN ITS OBLIGATION TO PURCHASE THE PROPERTY IN ACCORDANCE WITH THE TERMS OF THIS AGREEMENT, THE ENTIRE AMOUNT OF THE DEPOSIT SHALL BE PAID TO AND RETAINED BY SELLER AS LIQUIDATED DAMAGES. BUYER AND SELLER HEREBY ACKNOWLEDGE AND AGREE THAT SELLER'S DAMAGES IN THE EVENT OF SUCH A BREACH OF THIS AGREEMENT BY BUYER WOULD BE DIFFICULT OR IMPOSSIBLE TO DETERMINE, THAT THE AMOUNT OF THE DEPOSIT IS THE PARTIES' BEST AND MOST ACCURATE ESTIMATE OF THE DAMAGES SELLER WOULD SUFFER IN THE EVENT BUYER FAILS TO PURCHASE THE PROPERTY PURSUANT TO THIS AGREEMENT, AND THAT SUCH ESTIMATE IS REASONABLE UNDER THE CIRCUMSTANCES EXISTING ON THE DATE OF THIS AGREEMENT. BUYER AND SELLER AGREE THAT SELLER'S RIGHT TO RETAIN THE DEPOSIT SHALL BE THE SOLE REMEDY OF SELLER FOR BUYER'S FAILURE TO PURCHASE THE PROPERTY AS A RESULT OF BUYER'S BREACH OF THIS AGREEMENT. THE PARTIES ACKNOWLEDGE THAT THE PAYMENT OF SUCH AMOUNTS AS LIQUIDATED DAMAGES IS NOT INTENDED AS A FORFEITURE OR PENALTY WITHIN THE MEANING OF CALIFORNIA CIVIL CODE SECTIONS 3275 OR 3369, BUT IS INTENDED TO CONSTITUTE LIQUIDATED DAMAGES TO SELLER PURSUANT TO CALIFORNIA CIVIL CODE SECTIONS 1671, 1676 AND 1677. ACCEPTED AND AGREED TO: ________________________________ ___________________________________ Seller Buyer ARTICLE III CONDITIONS PRECEDENT Section 3.1 BUYER'S CONDITIONS PRECEDENT. Notwithstanding anything in this Agreement to the contrary, Buyer's obligation to purchase the Property shall be subject to and contingent upon the satisfaction or timely waiver by Buyer of each of the following conditions precedent: 5 (a) On or before the Closing Date, the timely performance by Seller of each and every material covenant and undertaking to be performed by Seller pursuant to this Agreement and the continued truth or accuracy as of the Closing Date of the representations and warranties of Seller made as of the Effective Date. If Seller becomes aware that any representation or warranty of Seller should be modified due to changes in circumstances or additional information which becomes available following the Effective Date, Seller shall deliver to Buyer a statement correcting such representation or warranty. Seller shall not be liable to Buyer for, or be deemed to be in default under this Agreement by reason of, any breach of a representation or warranty which results from any change that (A) occurs between the Effective Date and the Closing Date, and (B) is not prohibited under this Agreement or is beyond the reasonable control of Seller to prevent (including the discovery by Buyer or Seller of additional information prior to the Closing Date). Notwithstanding the foregoing, if the breach of such representation or warranty is adverse to Buyer, Buyer may treat such event as a failure of its condition precedent and may terminate this Agreement under Section 3.3 below or if such breach arises from a change which is a result of Seller's breach of its obligations under this Agreement or an intentional act or omission which makes a Seller's representation or warranty untrue, then Buyer may treat such event as a default of Seller. (b) Prior to the expiration of the Investigation Period, Buyer's inspection and approval, in Buyer's sole discretion, of all physical, environmental, economic and legal matters relating to the Property pursuant to and subject to the limitations in Section 3.4 below. (c) The willingness of Title Company or some other reputable title insurer reasonably acceptable to Buyer to issue, upon the sole condition of the payment of its regularly scheduled premium, its standard American Land Title Association owner's extended coverage form policy of title insurance ("BUYER'S TITLE POLICY"), with such endorsements and reinsurance agreements as Buyer reasonably shall require, insuring Buyer in the amount of the Purchase Price that title to the Land is vested of record in Buyer on the Closing Date, subject only to the printed conditions and exceptions of such policy, and the Permitted Exceptions described in Section 5.1 below. Section 3.2 SELLER'S CONDITIONS PRECEDENT. Notwithstanding anything in this Agreement to the contrary, Seller's obligation to sell the Property shall be subject to and contingent upon the satisfaction or waiver by Seller of the following conditions precedent: (a) The entire Deposit shall have been timely deposited into Escrow under Section 2.5 above. (b) On or before the Closing Date, the due and timely performance by Buyer of each and every material covenant and undertaking to be performed by Buyer pursuant to this Agreement, and the continued truth or accuracy as of the Closing Date of the representations and warranties of Buyer as made as of the Effective Date. If Buyer becomes aware that any representation or warranty of Buyer should be modified due to changes in circumstances or additional information which becomes available following the Effective Date, Buyer shall deliver to Seller a statement correcting such representation or warranty. Buyer shall not be liable to Seller for, or be deemed to be in default under this Agreement by reason of, any breach of a representation or warranty which results from any change that (i) occurs between the Effective 6 Date and the Closing Date, and (ii) is not prohibited under this Agreement or is beyond the reasonable control of Buyer to prevent, or is the result of the discovery by Buyer or Seller of additional information. Notwithstanding the foregoing, if the breach of such representation or warranty is materially adverse to Seller, Seller may treat such event as a failure of its condition precedent and may terminate this Agreement under Section 3.3 below or if such breach arises from a change which is a result of Buyer's breach of its obligations under this Agreement or an intentional act or omission which makes a Buyer's representation or warranty untrue, then Seller may treat such event as a default of Buyer. (c) Approval of this Agreement and the transaction contemplated herein by Buyer's Board of Directors on or before 5:00 p.m. PDST on May 22, 2000. (d) Approval of this Agreement and the transaction contemplated herein by Seller's Board of Directors on or before 5:00 p.m. PDST on June 2, 2000. Section 3.3 FAILURE OR WAIVER OF CONDITIONS PRECEDENT. In the event any of the conditions set forth in Sections 3.1 or 3.2 are not fulfilled or waived by the party intended to be benefited thereby, this Agreement shall terminate and all rights and obligations hereunder of each party shall be at an end; provided that such termination shall not affect Seller's right to pursue recovery of liquidated damages or any claims for indemnification and attorneys' fees and Buyer's legal and equitable remedies and recovery of attorneys' fees to which each of them may be entitled under this Agreement, which rights shall survive such termination. If a party does not give timely notice to the other of its approval of a condition precedent for its benefit, that party shall be deemed to have disapproved such condition and such condition shall be deemed not to have been fulfilled. The provisions of Section 2.5 shall govern the application of the Deposit. Either party may, at its election, at any time or times on or before the date specified for the satisfaction of the condition, waive in writing the benefit of any of the conditions set forth in Sections 3.1 and 3.2 above. The close of Escrow for the purchase of the Property pursuant to this Agreement shall be deemed the waiver by each party of any remaining unfulfilled conditions in favor of such party to the extent such party was aware that such conditions remained unfulfilled at such time. Section 3.4 BUYER'S REVIEW AND SELLER'S DISCLAIMER. (a) Buyer's increase of the Deposit on or prior to the end of the Investigation Period shall constitute Buyer's acknowledgement that Buyer has been permitted to make a complete physical inspection of the Property and to review and copy at the Seller's office all documents and information in Seller's possession regarding the physical condition of the Property which Buyer deems material to the purchase of the Property. Such documents will have included, to the extent such are in Seller's possession, all drawings, specifications, soils reports, engineering and architectural studies, hazardous unit studies, hydrology reports, topographical maps, grading plans and similar data. Seller shall permit Buyer reasonable access to the Property, shall cooperate with Buyer in the making of its investigations but shall not be obligated to incur any out-of-pocket expense in connection therewith. Buyer shall not perform any invasive or destructive testing or sampling of any portion of the Property without Seller's prior consent to the proposed work plan for such testing or sampling and of the contractor(s) which are 7 to perform such work, which consent shall not unreasonably be withheld or delayed. By proceeding to increase the Deposit and to purchase the Property, Buyer acknowledges that Seller has given Buyer every opportunity to consider, inspect and review to its satisfaction the physical, environmental, economic and legal condition of the Property and all documents and information in Seller's possession which Buyer deems material to the purchase of the Property. (b) Buyer shall indemnify and defend Seller against and hold Seller harmless from any and all loss, cost, liability and expense (including reasonable attorneys' fees) arising out of the activities of Buyer, its employees, contractors and agents on the Property prior to the close of escrow. This indemnification shall survive the closing of Buyer's purchase of the Property or the termination of this Agreement. Prior to any entry onto the Property by Buyer or its agents, Buyer shall deliver to Seller evidence of Buyer's commercial general liability insurance, which may be provided under a blanket policy, with blanket contractual obligations endorsement, and a minimum limit of at least Five Million Dollars ($5,000,000), endorsed to name Seller as additional insured and to provide Seller with at least thirty (30) days' written notice prior to cancellation or material reduction in coverage. (c) Other than as expressly set forth herein, Seller disclaims the making of any representations or warranties, express or implied, regarding the Property or matters affecting the Property including, without limitation, the physical condition of the Property, title to or the boundaries of the Property, pest control matters, soil condition, the use, presence or release of Hazardous Materials as defined, other environmental matters, compliance with building, health, safety, land use and zoning laws, regulations and orders, structural and other engineering characteristics, traffic patterns and all other information pertaining to the Property. Buyer acknowledges that Buyer has not and shall not rely on any of the studies, reports, maps or other documents, if any, made available by Seller to Buyer, and to the extent that Seller has delivered or made available to Buyer any such documents, it has done so strictly as an accommodation to Buyer and without any representation or warranty, express or implied, concerning the accuracy or completeness of the information contained in such documents. Buyer acknowledges and agrees that (i) Buyer has entered into this Agreement with the intention of relying upon its own investigation of the physical, environmental, economic and legal condition of the Property, and (ii) other than those representations and warranties expressly set forth herein or in any instrument delivered by Seller at closing, Buyer is not relying upon any representations or warranties made by Seller or anyone acting or claiming to act on Seller's behalf concerning the Property. Subject to the representations, warranties and covenants of Seller expressly set forth herein, Buyer shall purchase the Property in its "AS IS" condition, "WITH ALL FAULTS" on the Closing Date and assumes the risk that adverse physical, environmental, economic or legal conditions may not have been revealed by its investigation. Section 3.5 BUYER'S RELEASE. The release of Claims (as defined below) set forth in this Section 3.5 shall be referred to as the "RELEASE." Buyer hereby for itself and each and all of its successors-in-interest in chain of title to the Property and each and all of their respective heirs, executors, successors and assigns (collectively, the "WAIVER PARTIES") hereby forever, absolutely, unconditionally and completely releases and discharges the Released Parties from and against any and all actual, threatened or potential claims, suits, proceedings, actions, causes of action, demands, liabilities, losses, obligations, orders, requirements or restrictions, liens, penalties, 8 fines, charges, debts, damages, costs, and expenses of every kind and nature, whether now known or unknown, whether foreseeable or unforeseeable, whether under any foreign, federal, state or local law (both statutory and nonstatutory), and, whether asserted or demanded by a third party against any of the Waiver Parties or incurred directly or indirectly by any of the Waiver Parties themselves, that any of the Waiver Parties may now or hereafter have against any of the Released Parties (collectively, "CLAIMS"), and that arise in connection with or in any way are related to (i) any Handling of any Waste Materials or Hazardous Materials at, beneath, to, from or about the Property, (ii) any compliance or non-compliance with Environmental Laws regarding any Waste Materials, Hazardous Materials or any Handling related thereto at, beneath, to, from or about the Property, (iii) any acts, omissions, services or other conduct related to any of the foregoing items "(i)" or "(ii)," inclusive, and/or (iv) any condition, activity or other matter respecting the Property that is not addressed by any of the foregoing items "(i)" - "(iii)," inclusive and that is related to pollution or protection of the environment, natural resources, or public health and safety. BUYER HEREBY SPECIFICALLY WAIVES THE PROVISIONS OF SECTION 1542 OF THE CALIFORNIA CIVIL CODE ("SECTION 1542") AND ANY SIMILAR LAW OF ANY OTHER STATE, TERRITORY OR JURISDICTION. SECTION 1542 PROVIDES: A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR. BUYER HEREBY SPECIFICALLY ACKNOWLEDGES THAT BUYER HAS CAREFULLY REVIEWED THIS SUBSECTION AND DISCUSSED ITS IMPORT WITH LEGAL COUNSEL AND THAT THE PROVISIONS OF THIS SUBSECTION ARE A MATERIAL PART OF THIS AGREEMENT. _____________________________ Buyer ARTICLE IV WARRANTIES AND REPRESENTATIONS AND COVENANTS Section 4.1 SELLER'S WARRANTIES AND REPRESENTATIONS. Seller hereby makes the following representations and warranties to Buyer which, subject to the limitations set forth in this Agreement, shall survive the close of Escrow and the recording of the Deed. (a) Seller is a corporation, duly existing and organized under the laws of the State of Delaware and in good standing under the laws of the State of Delaware and has full power and 9 lawful authority to enter into and carry out the terms and provisions of this Agreement and to execute and deliver all documents which are contemplated by this Agreement, and all actions necessary to confer such power and authority upon the persons executing this Agreement and all documents which are contemplated by this Agreement to be executed on behalf of Seller have been taken. Seller's execution, delivery and performance of this Agreement will not result in any violation of, or default under, any document by which Seller is organized, any agreement to which Seller is a party or by which Seller or the Property is bound. When Seller gives notice to Buyer that this Agreement has been approved by Seller's Board of Directors, then this Agreement will have been, and the documents contemplated to be delivered by Seller at closing will be, duly authorized, executed and delivered by Seller and is and will be the legal, valid and binding obligations of Seller. (b) Seller is not a foreign person, foreign corporation, foreign partnership, foreign trust or foreign estate, as those terms are defined in the Internal Revenue Code Section 1445 and any related regulations. (c) Other than approval by Seller's Board of Directors and other than the City of San Jose with respect to the Development Agreement other than the Site Development Permit which affect the Land, no approval, consent, waiver, filing, registration or qualification with any third party, including, but not limited to, any governmental bodies, agencies or instrumentalities, is required to be made, obtained or given for the execution, delivery and performance of this Agreement or any of the Seller Closing Documents by Seller. (d) There are no leases executed by Seller or its predecessors in title or other rights of occupancy or use granted by Seller or its predecessors in title of any portion of the Property which would become an obligation of Buyer upon close of escrow. (e) There is no litigation, including any arbitration or other proceeding by or before any court, arbitrator or governmental or regulatory official, body or authority which is pending against Seller or of which Seller has received written notice directed to Seller relating to the Property or the sale contemplated hereunder. (f) Seller has not received any written notice directed to Seller from any governmental authority having jurisdiction over the Property of, any violation of any law, ordinance, order or regulation (including ADA) affecting the Property, or any portion thereof, which has not heretofore been complied with. (g) Copies of current real estate tax bills with respect to the Property have been delivered or made available to Buyer. No portion of the Property comprises part of a tax parcel which includes property other than property comprising all or a portion of the Property. (h) Seller has made available for inspection all documents in its possession pertaining to the physical condition of and potential for development of the Property. Section 4.2 BUYER'S REPRESENTATIONS AND WARRANTIES. Buyer hereby makes the following representations and warranties to Seller which, subject to the limitations set forth in this Agreement, shall survive the close of Escrow and the recording of the deeds. Buyer is a 10 corporation, duly existing and organized under the laws of the State of Delaware and in good standing under the laws of the State of Delaware and has full power and lawful authority to enter into and carry out the terms and provisions of this Agreement and to execute and deliver all documents which are contemplated by this Agreement, and all actions necessary to confer such power and authority upon the persons executing this Agreement and all documents which are contemplated by this Agreement to be executed on behalf of Buyer have been taken. Buyer's execution, delivery and performance of this Agreement will not result in any violation of, or default under, any document by which Buyer is organized, any agreement to which Buyer is a party or by which Buyer or the Property is bound. This Agreement has been, and the documents contemplated to be delivered by Buyer at closing will be, duly authorized, executed and delivered by Buyer and is and will be the legal, valid and binding obligations of Buyer. Section 4.3 RESTATEMENT AT CLOSING. The foregoing warranties and representations of Seller and Buyer shall be deemed restated and remade by Seller and Buyer in their entirety as of the Closing Date. If at any time after the Effective Date and prior to the Closing Date, there is a change in circumstances or either Seller or Buyer acquires any information or knowledge which would, without disclosure, make any of the warranties or representations made by either of the parties materially untrue or materially misleading, then the party obtaining such knowledge shall immediately notify the other party and such event shall be governed by the provisions of paragraphs 3.1(a) and 3.2(b). Section 4.4 LIMITATIONS. The parties agree that (a) Seller's warranties and representations contained in this Agreement and in any document (including any estoppel or other certificate) executed by Seller pursuant to this Agreement shall survive Buyer's purchase of the Property only for the Limitation Period, and (b) Buyer shall within the Limitation Period provide written notice to Seller of any breach of such warranties or representations and shall allow Seller thirty (30) days following the giving of such notice within which to cure such breach, or, if such breach cannot reasonably be cured within thirty (30) days, an additional reasonable time period not to exceed one hundred eighty (180) days, so long as such cure has been commenced within such thirty (30) days and diligently pursued. If Seller fails to cure such breach after actual notice and within such cure period, Buyer's sole remedy shall be an action at law for damages as a consequence thereof, which must be commenced, if at all, within ninety (90) days after the last day Seller was entitled to cure such breach hereunder or after Seller provides Buyer with notice of termination of such cure effort. The Limitation Period referred to herein shall apply to known as well as unknown breaches of such warranties or representations. Notwithstanding the foregoing, no representation or warranty shall survive the close of Escrow if, at the time of closing, the party intended to be benefited knew of a breach of such representation or warranty as of such closing. Section 4.5 COVENANT NOT TO SUE. Buyer, on its own behalf and on behalf of each of the other Waiver Parties, covenants and agrees never to sue or otherwise commence, or prosecute any action or other proceeding against any of the Released Parties, for a claim released pursuant to the Release (collectively, "COVENANT NOT TO SUE"). If any of the Waiver Parties asserts a claim that is contrary to the Release, said Waiver Party shall indemnify, defend and hold harmless the Released Parties against whom such claim is asserted for all liabilities, including 11 court costs and reasonable attorneys, fees, which are asserted against any of the Released Parties in connection with such action or proceeding. The parties hereto agree that this Covenant Not to Sue may be pleaded by a Released Party as a full and complete defense to any action or proceeding by a Waiver Party that is contrary to the terms of the Release, and may be asserted as a basis for abatement of, or injunction against, said action or proceeding and as a basis for a cross-complaint for damages therein. In the event a Waiver Party breaches the Covenant Not To Sue, any Released Party damaged thereby shall be entitled to recover not only the amount of any judgment which may be awarded in favor of such damaged Released Party, but also for such other damages, costs, and expenses as may be incurred by such damaged Released Party, including court costs, reasonable attorneys' fees and all other costs and expenses, taxable or otherwise, in preparing the defense of, defending against, or seeking and obtaining abatement of, or injunction against, such action or proceeding, and establishing and maintaining the applicability of the Release and the Covenant (as defined below) or any provision thereof. Section 4.6 BUYER'S INDEMNITY. At closing, Buyer shall execute, acknowledge and deliver through recordation to Seller a Release Agreement and Covenant Not to Sue in the form of EXHIBIT E hereto (the "Covenant"). Section 4.7 SELLER'S COVENANTS. (a) Between the Effective Date and the Closing Date (or termination of this Agreement) Seller shall: (i) maintain the Property in the ordinary course of Seller's business, and substantially in accordance with present practice; (ii) not transfer or enter into any contract to transfer the Property which is not conditioned upon Buyer's failure to purchase the Property or create on the Property any easements, liens, mortgages, encumbrances or other interests which will survive the closing; and not apply for any changes in the zoning classification of the Property; and (iii) not enter into any contract pertaining to the use or occupancy of the Property or enter into any agreement pertaining to the maintenance of the Property which is not terminable upon thirty (30) days' notice. (b) Seller shall pay the cost of an ALTA/ASTM survey of the Land but only with such certifications as Buyer reasonably may require. (c) Upon or prior to the close of escrow Seller shall cause to be removed of record all deeds of trust, mechanics' liens, the liens of delinquent property taxes and assessments and similar monetary liens created by, through or under Seller. (d) Upon or prior to the close of escrow, Seller shall terminate any and all contracts, leases and other agreements affecting the Property. 12 ARTICLE V CONDITIONS OF TITLE Section 5.1 CONDITION OF TITLE. Buyer shall accept title to the Property subject to the following matters: (i) as of Closing Date, the lien for current real property taxes not yet due and payable including any supplementary taxes which may be imposed as a result of Buyer's purchase of the Property from Seller; (ii) exceptions 1, 2 (as to taxes and assessments accruing following the Closing Date) and 3 through 19, as shown on the Preliminary Report issued under Order No. 517718 and exceptions 1, 2 (as to taxes and assessments accruing following the Closing Date) and 3 through 15, as shown on the Preliminary Report issued under Order No. 517719, as well as the Development Agreement among City, Seller and BNP Leasing, dated August 5, 1997 (the "Development Agreement"); (iii) such amendments of the Site Development Permit described in exception Nos. 18 and 19 in the Preliminary Report issued under Order No. 517718 and of the Development Agreement as shall have been applied for by Seller and not disapproved by Buyer on or before the end of the Investigation Period; and (iv) matters created by, through or under Buyer. All of the foregoing shall be, collectively, the "PERMITTED EXCEPTIONS." Section 5.2 CURE OF TITLE DEFECTS. If, prior to the Closing Date, the Title Company discloses any title exceptions other than the Permitted Exceptions, then Seller, at its sole option, shall have thirty (30) days from the giving of notice by Buyer or the Title Company to Seller to cause to be removed as exceptions or insured over at no expense to Buyer such exceptions. If such 30-day period extends beyond the scheduled Closing Date, the Closing Date shall be extended until the first business day following the expiration of such 30-day period. ARTICLE VI ESCROW AND CLOSING Section 6.1 ESCROW ARRANGEMENTS. (a) An escrow for the purchase and sale contemplated by this Agreement has been opened by Seller with Title Company (the "ESCROW"). On or before the Closing Date, Seller and Buyer shall each deliver escrow instructions to the Title Company consistent with this Article VI and the parties shall deposit in the Escrow the funds and documents described below. (b) Buyer may cause the Closing Date to be delayed until September 5, 2000 by payment directly to Seller on or before 5:00 p.m. PDST on July 5, 2000 of One Million Five Hundred Thousand Dollars ($1,500,000) in immediately available funds, which amount shall not be credited against the Purchase Price. (c) Seller shall deposit into Escrow: 13 (i) a duly executed and acknowledged deed to Buyer and/or permitted assignees of Buyer's rights under this Agreement in the form attached to this Agreement as EXHIBIT F (the "GRANT DEED"); (ii) two (2) duly executed and acknowledged counterparts of the Covenant; (iii) a duly executed counterpart of the Assignment of Intangible Property; (iv) a duly executed Affidavit of Non-foreign Status in the form attached to this Agreement as EXHIBIT G (the "AFFIDAVIT"); (v) a duly executed California Franchise Tax Board Form 590 (the "FORM 590"); (vi) three (3) executed counterparts of a Designation Agreement in the form attached hereto as EXHIBIT H (the "DESIGNATION AGREEMENT"); and (vii) Seller's escrow instructions and preliminary closing statements consistent with the terms of this Agreement. (d) Buyer shall deposit into Escrow: (i) cash in the amount of the Purchase Price as adjusted for prorations, less the Deposit ("SELLER'S FUNDS"), plus sufficient additional cash to pay Buyer's share of all Escrow costs and closing expenses; (ii) two (2) duly executed and acknowledged counterparts of the Covenant; (iii) an executed counterpart of the Assignment of Intangible Property (iv) three (3) duly executed counterparts of the Designation Agreement; and (v) Buyer's escrow instructions and preliminary closing statements consistent with the terms of this Agreement. Section 6.2 CLOSING. Title Company shall close the Escrow by: (a) executing three (3) counterparts of the Designation Agreement; (b) recording in the Official Records of Santa Clara County the Grant Deed and an executed counterpart of the Covenant; (c) issuing Buyer's Title Policy to Buyer; 14 (d) delivering to Buyer the Affidavit, the Form 590, a complete counterpart of the Assignment of Intangible Property, the Designation Agreement and the Covenant; and (e) delivering to Seller Seller's Funds (after adjusting for prorations, Escrow costs and closing expenses as described below), a counterpart of each of the Assignment of Intangible Property and the Designation Agreement and, through recordation, a counterpart of the Covenant. Section 6.3 PRORATIONS AND CREDITS. (a) The following shall be apportioned with respect to the Property as of 12:01 a.m. on the Closing Date, as if Buyer were vested with title to the Property during the entire day of the Closing Date: (i) taxes and assessments (including, without limitation, personal property taxes on the Personal Property) and assessments levied against the Property ("PROPERTY TAXES"). Buyer and Seller shall prorate real estate taxes and assessments for the period for which such taxes are assessed, regardless of when payable. Any taxes paid at or prior to the Closing Date shall be prorated based upon the amounts actually paid. If taxes and assessments for the current year have been determined but have not been paid before closing, Seller shall be charged and Buyer credited at closing an amount equal to that portion of such taxes and assessments which relates to the period before the Closing Date and Buyer shall pay the taxes and assessments prior to their becoming delinquent. If the actual taxes and assessments are not known at closing, the proration shall be based upon the most recent assessed values and tax rates. To the extent that the actual taxes and assessments paid differ from the amount apportioned at closing, the parties shall make all necessary adjustments by appropriate payments between themselves within thirty (30) days of the issuance of final tax bills. Seller shall pay any supplemental Property Taxes which relate to the period prior to the Closing Date. The foregoing obligation shall survive the close of Escrow. (ii) Gas, electricity and other utility charges for which Seller is responsible, if any; such charges to be apportioned at Closing on the basis of the most recent meter reading occurring prior to the Closing Date (dated not more than two (2) days prior to the Closing Date) or, if unmetered, on the basis of a current bill for each such utility; and (b) The obligations under this Section shall survive the close of Escrow. Section 6.4 OTHER CLOSING COSTS. Buyer and Seller shall each pay one-half of the Escrow fees and recording fees for the Deed and the Covenant and one-half of City transfer taxes. Seller shall pay County transfer taxes and the premium for a California Land Title Association standard coverage owner's policy in the amount of the Purchase Price. Buyer shall pay all additional premiums for Buyer's Title Policy, including without limitation, the cost of any endorsements thereto requested by Buyer. All other costs of Escrow and closing of this transaction shall be apportioned in accordance with custom in the County of Santa Clara. 15 ARTICLE VII MISCELLANEOUS Section 7.1 DAMAGE OR DESTRUCTION. If there shall be damage to or destruction of the Personal Property during the period from the Effective Date through the Closing Date (the "CONTRACT PERIOD"), then Seller shall promptly notify Buyer and the provisions of this Section shall be applicable. (a) Buyer shall proceed to purchase the Property pursuant to this Agreement notwithstanding such damage or destruction. Seller shall promptly conclude the loss adjustment under any insurance which Seller may have related to such damage or destruction. Any casualty insurance proceeds for damage or destruction during the Contract Period received by Seller prior to the Closing Date and not expended on restoration of the Property before the Closing Date shall be delivered by Seller to Buyer on the Closing Date. Any casualty insurance proceeds received by Seller after the Closing Date for damage or destruction during the Contract Period and not expended by Seller on restoration of the Property shall be promptly delivered by Seller to Buyer. (b) Seller shall cooperate fully with all reasonable requests of Buyer in the processing of such insurance claims and shall keep Buyer reasonably informed as to the status thereof. Subject to the consent of its insurance carriers and the holder of any lien on the Property, upon the close of Escrow, Seller shall assign to Buyer all of Seller's rights under any policy or policies of casualty covering losses to the Property occurring during the Contract Period and not expended prior to the close of Escrow for repair or reconstruction. Section 7.2 BROKERAGE COMMISSIONS AND FINDER'S FEES. Each party to this Agreement warrants to the other that other than Cornish & Carey Commercial ("SELLER'S BROKER") no person or entity can properly claim a right to a real estate commission, real estate finder's fee, real estate acquisition fee or other real estate brokerage-type compensation (collectively, "REAL ESTATE COMPENSATION") based upon the acts of that party with respect to the transaction contemplated by this Agreement. Seller shall pay any Real Estate Compensation due under its agreement with Seller's Broker. Each party hereby agrees to indemnify and defend the other against and to hold the other harmless from any and all loss, cost, liability or expense (including but not limited to attorneys' fees and returned commissions) resulting from any claim for Real Estate Compensation by any person or entity based upon such acts or from payment of Real Estate Compensation to any person by the indemnifying party. This indemnification and defense obligation shall survive the close of the Escrow contemplated herein and, if such Escrow does not close, the termination of this Agreement. Section 7.3 SUCCESSORS AND ASSIGNS. The terms, covenants, and conditions of this Agreement shall be binding upon and inure to the benefit of the parties and their respective heirs, successors, and assigns. Buyer shall not assign any of Buyer's rights or duties hereunder (a) except to an entity which is directly or indirectly wholly-owned by Buyer or (b) otherwise with 16 respect to an assignment which is effective simultaneous with the close of Escrow without the prior written consent of Seller which shall not unreasonably be withheld. In all events, no such assignment shall be effective unless such assignee explicitly assumes, for the benefit of Seller, Buyer's obligations under this Agreement pursuant to an instrument delivered to Seller. Seller shall not convey the Property except to an entity which explicitly assumes, for the benefit of Seller, Buyer's obligations under this Agreement pursuant to an instrument delivered to Seller and which executes, acknowledges and delivers the Covenant. Upon such assignment, assumption and conveyance, Palm, Inc. shall be released from all obligations and liability to Seller other than those arising out of: (a) Buyer's obligations under paragraph 3.4(b), (b) the release set forth in Section 3.5, (c) the covenant not to sue in Section 4.5, (d) the actions of Buyer or those for whom it is liable, or (e) Buyer's breach of this Agreement occurring prior to such release. Section 7.4 NOTICES. All notices or other communications required or permitted hereunder shall be in writing, and shall be personally delivered, sent by facsimile, reputable overnight courier, or sent by registered or certified mail, postage prepaid, return receipt requested, and shall be deemed received upon the earlier of (a) if personally delivered, the date of delivery to the address of the person to receive such notice, (b) if mailed, two (2) business days after the date of posting by the United States post office, (c) if delivered by Federal Express or other overnight courier for next business day delivery, the next business day or (d) if sent by facsimile, with the original sent on the same day by overnight courier, the date on which the facsimile is received, provided it is before 5:00 P.M. Pacific Time. Notice of change of address shall be given by written notice in the manner detailed in this Section 7.4. Rejection or other refusal to accept or the inability to deliver because of a change in address of which no notice was given shall be deemed to constitute receipt of the notice, demand, request or communication sent. Unless changed in accordance herewith, the addresses for notices given pursuant to this Agreement shall be as follows: If to Seller: 3Com Corporation 5400 Bayfront Plaza Santa Clara, CA 95052 Attn: Abe Darwish Tel: (408) 326-5000 Fax: (408) 326-5718 with a copy to: Thelen Reid & Priest LLP 101 Second Street, Suite 1800 San Francisco, CA 94105 Attn: Richard Shapiro Tel: (415) 369-7117 Fax: (415) 371-1211
17 If to Buyer: Palm, Inc. 5400 Bayfront Plaza Santa Clara, CA 95052 Attn: John Igoe Tel: (408) 326-9805 Fax: (408) 326-9998 with a copy to: Gray Carey Ware & Freidenrich LLP 400 Hamilton Avenue Palo Alto, CA 94301 Attn: Jeffrey Trant Tel: (650) 833-2023 Fax: (650) 328-3029
Section 7.5 TIME. Time is of the essence of every provision contained in this Agreement. Section 7.6 INCORPORATION BY REFERENCE. All of the exhibits attached to this Agreement or referred to herein and all documents in the nature of such exhibits, when executed, are by this reference incorporated in and made a part of this Agreement. Section 7.7 ATTORNEYS' FEES. In the event any dispute between Buyer and Seller should result in arbitration or litigation, the prevailing party, if any, as determined by the court or arbitrator, shall be reimbursed for all reasonable costs incurred in connection with such litigation, including, without limitation, reasonable attorneys' fees. The obligations of the parties under this Section shall survive the close of Escrow or the termination of this Agreement. Section 7.8 CONSTRUCTION. The parties acknowledge that each party and its counsel have reviewed and revised this Agreement and that the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Agreement or any amendments or exhibits hereto. The captions preceding the text of each Section are included for convenience of reference only and shall be disregarded in the construction and interpretation of this Agreement. Section 7.9 NO MERGER. The provisions of this Agreement shall not merge with the delivery of the Grant Deed contemplated in this Agreement but shall, except as otherwise provided in this Agreement, survive the close of Escrow. Section 7.10 CONFIDENTIALITY AND RETURN OF DOCUMENTS. (a) Buyer and Seller shall each maintain as confidential this Agreement and any and all documents and information obtained about the other or, in the case of Buyer, about the Property and prior to Buyer's purchase of the Property shall not disclose such information to any third party, except to their respective agents partners, directors, officers, employees, advisers, counsel, accountants, lenders, potential lenders, members and shareholders, with a legitimate 18 need to know such information, and except to the extent required by law or court order. Prior to receiving a copy of this Agreement or any confidential information described above, all of Buyer's representatives shall execute and deliver a confidentiality agreement in the form attached as EXHIBIT J. The foregoing obligations shall not apply to information or materials which is or otherwise becomes available to the public. (b) In the event the transaction contemplated hereunder is not consummated, Buyer shall deliver to Seller all drawings, permits, applications, reports, engineering data, and any other documents, instruments, or information of any kind relating to the Property (other than financial projections and marketing reports prepared by or for Buyer) including drawings for potential development of the Property, provided by Seller, its agents and contractors to Buyer, and all of the foregoing shall immediately become the property of Seller. This Section 7.10 shall survive the close of Escrow or termination of this Agreement. Section 7.11 GOVERNING LAW. This Agreement shall be construed and interpreted in accordance with and shall be governed and enforced in all respects according to the laws of the State of California. Section 7.12 COUNTERPARTS. This Agreement may be executed in one or more counterparts. All counterparts so executed shall constitute one contract, binding on all parties, even though all parties are not signatory to the same counterpart. Section 7.13 ENTIRE AGREEMENT. This Agreement and the attached exhibits, which are by this reference incorporated herein and all documents in the nature of such exhibits, when executed, contain the entire understanding of the parties and supersede any and all other written or oral understanding. This Agreement may be amended only by a written agreement so specifying, executed by both parties. Section 7.14 LIMITATION OF SELLER'S LIABILITY. The aggregate liability of Seller to Buyer and all those claiming by or through Buyer for claims, demands, damages, expenses (including attorneys' fees), suits, awards, judgments and liabilities asserted, awarded or otherwise recovered against Seller in connection with this Agreement or the Property (all of the foregoing are, collectively, "LIABILITIES") shall not exceed the proceeds, if any, of insurance received by Seller in connection with such Liabilities plus One Million Dollars ($1,000,000) (plus, if the transaction does not close, a return of the Deposit). Section 7.15 NO WAIVER. The failure by either party to enforce against the other any term of this Agreement shall not be deemed a waiver of such party's right to enforce against the other party the same or any other term in the future. Section 7.16 SEVERABILITY. If any one or more of the provisions hereof shall be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision hereof and this Agreement shall be construed as if such invalid, illegal or unenforceable provision were not herein contained. Section 7.17 WAIVER OF JURY TRIAL. EACH OF SELLER AND BUYER HEREBY WAIVES ANY AND ALL RIGHTS THAT EACH MAY NOW OR HEREAFTER 19 HAVE UNDER THE LAWS OF THE UNITED STATES OF AMERICA OR ANY STATE, TO A TRIAL BY JURY OF ANY AND ALL ISSUES ARISING DIRECTLY OR INDIRECTLY IN ANY ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY TRANSACTIONS CONTEMPLATED THEREBY OR RELATED THERETO. IT IS INTENDED THAT THIS WAIVER SHALL APPLY TO ANY AND ALL CAUSES OF ACTION, DEFENSES, RIGHTS, CLAIMS AND/OR COUNTERCLAIMS, WHETHER IN CONTRACT, TORT OR OTHERWISE, IN ANY SUCH ACTION OR PROCEEDING. EACH OF SELLER AND BUYER UNDERSTAND THAT THIS WAIVER IS A WAIVER OF A CONSTITUTIONAL SAFEGUARD, AND EACH OF SELLER AND BUYER INDIVIDUALLY BELIEVES THAT THERE ARE SUFFICIENT ALTERNATE PROCEDURAL AND SUBSTANTIVE SAFEGUARDS, INCLUDING, WITHOUT LIMITATION, A TRIAL BY AN IMPARTIAL JUDGE, THAT ADEQUATELY OFFSET THE WAIVER CONTAINED HEREIN. Section 7.18 FURTHER ASSURANCES. Each party agrees to perform, execute and deliver, on or after the Closing, such further actions and documents as may be reasonably necessary or requested to more fully effectuate the purposes, terms and intent of this Agreement and the conveyances contemplated herein. IN WITNESS WHEREOF, Seller and Buyer have executed this Agreement as of the date first written above. BUYER: SELLER: PALM, INC. 3COM CORPORATION, a Delaware corporation, a Delaware corporation By: /s/ John Igoe By: /s/ Abe Darwish -------------------------- ------------------------- Name: John Igoe Name: Abe Darwish ------------------------ ------------------------ Its: Vice President, Real Its: Vice President, Real Estate and Site Services Estate and Site Services ------------------------ ------------------------ 20 EXHIBIT A DESCRIPTION OF LAND All of that certain real property in the County of Santa Clara, State of California, described as follows: A-1 EXHIBIT B FORM OF ASSIGNMENT OF INTANGIBLE PROPERTY THIS ASSIGNMENT OF INTANGIBLE PROPERTY, made as of _______________, 2000, by and between 3COM CORPORATION, a Delaware corporation ("ASSIGNOR"), and _______________, a ____________________ ("ASSIGNEE"), W I T N E S S E T H FOR GOOD AND VALUABLE CONSIDERATION, receipt of which is hereby acknowledged, Assignor and Assignee agree as follows: 1. ASSIGNMENT AND ASSUMPTION. (a) Assignor hereby assigns and transfers to Assignee all right, title and interest of Assignor in and to the intangible property which consists of reports regarding the physical condition of that certain real property (the "Land") described in EXHIBIT A hereto and to the extent applicable to the Land, Seller's rights under those certain documents listed in EXHIBIT B hereto, to the extent transferable (the "Intangible Property"). (b) Assignee hereby accepts the foregoing assignment, and assumes and agrees to perform all of the covenants and agreements in the Intangible Property to be performed by the owner of the Land, which accrue from and after the date hereof. 2. "AS-IS". This assignment is made by Assignor "as-is" without warranties, express or implied, other than that to the extent Assignor assigns any rights to reports prepared by third parties for Assignor, Assignor shall have paid all amounts due from Assignor to the preparers of such reports. 3. FURTHER ASSURANCES. Assignor and Assignee agree to execute such other documents and perform such other acts as may be reasonably necessary or proper and usual to effect this Assignment. 4. GOVERNING LAW. This Assignment shall be governed by and construed in accordance with the laws of the State of California. 5. SUCCESSORS AND ASSIGNS. This Assignment shall be binding upon and shall inure to the benefit of Assignor and Assignee and their respective personal representatives, heirs, successors and assigns. 6. COUNTERPARTS. This Assignment may be executed in counterparts, and all counterparts so executed shall constitute one agreement, binding on all parties, even though all parties are not signatory to the same counterpart. B-1 IN WITNESS WHEREOF, Assignor and Assignee have executed this Assignment as of the date first hereinabove written. ASSIGNOR: 3COM CORPORATION, a Delaware corporation By: ------------------------ Name: ---------------------- Its: ----------------------- ASSIGNEE: [--------------------------] a -------------------------- By: ------------------------ Name: ---------------------- Its: ----------------------- By: ------------------------ Name: ---------------------- Its: ----------------------- B-2 Exhibit A to Assignment of Intangible Property DESCRIPTION OF THE LAND B-3 Exhibit B To Assignment of Intangible Property LIST OF PERMITS Development Agreement by and between the City of San Jose and 3Com Corporation relative to the Development of Property in North San Jose, dated August 5, 1997, as amended. Site Development Permit HSH 96-12-089, as amended. B-4 EXHIBIT C FORM OF DEPOSIT ESCROW INSTRUCTIONS May 22, 2000 First American Title Company 1737 North First Street San Jose, CA 95112 Attn: Carol Weir Re: Purchase and Sale of Land at Highway 237 and North First Street, San Jose, California Your Escrow No. 518350 Ladies/Gentlemen: 3Com Corporation, a Delaware corporation ("SELLER"), and Palm, Inc., a Delaware corporation ("BUYER") have entered into that certain Agreement for Purchase and Sale of Land at Highway 237 and North First Street, San Jose, California, dated as of May 22, 2000 (the "AGREEMENT"), pursuant to which Seller has agreed to sell and convey to Buyer certain real property situated in San Jose, California (as more particularly described in the Agreement, the "PROPERTY"), and Buyer has agreed to purchase the Property from Seller. You have opened the above-referenced escrow (the "ESCROW") in connection with the transaction contemplated by the Agreement. Pursuant to the terms of the Agreement, Buyer is herewith depositing into Escrow the sum of $2,500,000 ("INITIAL DEPOSIT") which amount shall be credited against the purchase price for the Property to be purchased by Buyer from Seller. If on or before July 6, 2000, Buyer gives notice to you demanding return of the Initial Deposit, you are to do so promptly and without further notice from Seller. If you receive additional funds from Buyer as an increase to the Initial Deposit, all amounts held by you shall be the "DEPOSIT." After July 6, 2000, you shall not make any disbursements from Escrow except upon the joint instructions of both Seller and Buyer. Any amounts held by you in this Escrow as the Deposit may, at Buyer's direction, be invested initially for Buyer's account. Buyer's tax identification number is ________________. All such investments shall be subject to Seller's consent, which Seller agrees shall not unreasonably be withheld. C-1 These deposit escrow instructions may be executed in one or more counterparts. All counterparts so executed shall constitute one set of instructions, binding on all parties, even though all parties are not signatories to the same counterpart. By signing below you hereby acknowledge the terms contained herein and agree to proceed strictly in accordance herewith. Time is of the essence of these instructions. Sincerely, SELLER: 3Com Corporation, a Delaware corporation By: --------------------------- Name: ------------------------- Its: -------------------------- BUYER: PALM, INC., a Delaware corporation By: --------------------------- Name: ------------------------- Its: -------------------------- By: --------------------------- Name: ------------------------- Its: -------------------------- AGREED AND ACKNOWLEDGED: FIRST AMERICAN TITLE COMPANY By: Dated: ---------------------------- -------------------------- Name: -------------------------- Its: --------------------------- C-2 EXHIBIT D [RESERVED] D-1 EXHIBIT E FORM OF RELEASE AGREEMENT AND COVENANT NOT TO SUE WHEN RECORDED, RETURN TO: Thelen Reid & Priest LLP 101 Second Street, Suite 1800 San Francisco, CA 94105 Attention: Richard Shapiro RELEASE AGREEMENT AND COVENANT NOT TO SUE THIS RELEASE AGREEMENT AND COVENANT NOT TO SUE ("RELEASE AGREEMENT") is dated ____________________, 2000 ("AGREEMENT DATE"), and is made and entered into by and among _______________________, a _____________, ("Buyer"), and 3Com Corporation, a Delaware corporation ("SELLER"). R E C I T A L S This Release Agreement is made with reference to the following facts and intentions of the parties: A. A Purchase and Sale Agreement dated as of May 22, 2000 has been entered into by and between Palm, Inc., a Delaware corporation, Buyer's predecessor-in-interest, and Seller ("PURCHASE AGREEMENT"), for the purchase and sale of certain real property described in EXHIBIT A attached hereto (the "PROPERTY"). B. Pursuant to and as a condition of Seller's obligations under the Purchase Agreement, Buyer has agreed to execute and record this Release Agreement in the Official Records of the City and County of Santa Clara, California, on the Closing Date (as that term is defined in the Purchase Agreement) immediately following the recording therein of the grant deed pursuant to the Purchase Agreement and prior to the recording of any other matters or liens that would affect title in order to set forth the agreement of the parties herein. C. This Agreement is intended to provide a full and complete release, waiver of rights, and covenant not to sue, for the benefit of the Released Parties (as defined in Section 3 below) concerning matters relating to Hazardous Materials, Waste Materials and environmental matters concerning the Property, as more fully set forth below. D. Seller would not have agreed to enter into the Purchase Agreement and become obligated to convey the Property to Buyer without a condition thereto being the entry into this Release Agreement by the parties hereto. E-1 A G R E E M E N T NOW, THEREFORE, in consideration of the foregoing recitals and as a material part of the consideration for the entering into the Purchase Agreement, the conveyance of the Property to Buyer and for other valuable consideration receipt of which is hereby acknowledged, the parties hereto agree to the provisions hereinafter set forth, as follows: 1. RELEASE. The release of Claims (as defined below) set forth in this Section 1 shall be referred to as the "RELEASE". Buyer hereby for itself and each and all of its successors-in-interest in chain of fee title to the Property and each and all of their respective heirs, executors, successors and assigns (collectively, the "WAIVER PARTIES") hereby forever, absolutely, unconditionally and completely releases and discharges the Released Parties (as defined in Section 3 hereof) from and against any and all actual, threatened or potential claims, suits, proceedings, actions, causes of action, demands, liabilities, losses, obligations, orders, requirements or restrictions, liens, penalties, fines, charges, debts, damages, costs, and expenses of every kind and nature, whether now known or unknown, whether foreseeable or unforeseeable, whether under any foreign, federal, state or local law (both statutory and nonstatutory), whether asserted or demanded by a third party against any of the Waiver Parties or incurred directly or indirectly by any of the Waiver Parties themselves, that any of the Waiver Parties may now or hereafter have against any of the Released Parties (collectively, "CLAIMS"), and that arise in connection with or in any way are related to (i) any Handling (as defined in Section 3 hereof) of any Waste Materials or Hazardous Materials at, beneath, to, from or about the Property, (ii) any compliance or non-compliance with Environmental Laws (as defined in Schedule 3 below) regarding any Waste Materials, Hazardous Materials or any Handling related thereto at, beneath, to, from or about the Property, (iii) any acts, omissions, services or other conduct related to any of the foregoing items "(i)" or "(ii)," inclusive, and/or (iv) any condition, activity or other matter respecting the Property that is not addressed by any of the foregoing items "(i)" - "(iii)," inclusive and that is related to pollution or protection of the environment, natural resources, or public health and safety. 2. CIVIL CODE SECTION 1542 RELEASE. In furtherance of the intentions set forth herein, Buyer acknowledges that it is familiar with Section 1542 of the California Civil Code, which provides as follows: A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR. Buyer, on behalf of itself and the other Waiver Parties, waives and relinquishes any right or benefit which it has or may have under California Civil Code Section 1542 or any similar provision of the statutory or nonstatutory law of any other jurisdiction, pertaining to the Released Matters. Buyer acknowledges that in connection with such waiver and relinquishment, it is aware that it or its attorneys, accountants, consultants or other experts or representatives or contractors may hereafter discover facts, liabilities, claims or other matters in addition to or E-2 different from those which it now knows to believe to exist with respect to the Released Matters, but that it is Buyer's intention to hereby fully, finally and forever to release all of the Released Matters as set forth herein. In furtherance of this intention, the Release shall be and remain in effect as full and complete notwithstanding the discovery or existence of any such additional or different claim or fact. 3. DEFINITIONS. (a) ENVIRONMENTAL LAWS. The term "ENVIRONMENTAL LAWS" means any applicable foreign, federal, state or local law, statute, regulation, rule, ordinance, permit, prohibition, restriction, license, requirement, agreement, consent, or approval, or any determination, directive, judgment, decree or order of any executive, administrative or judicial authority at any federal, state or local level (whether now existing or subsequently adopted or promulgated) relating to pollution or the protection of the environment, natural resources or public health and safety. (b) HANDLING. The term "HANDLING" means, at any time and to any extent and in any manner whatsoever, any presence of or any handling, storing, transferring, transporting, treating, using, recycling, separating, sorting, incinerating; transforming, reconstituting, containing, containerizing, packaging, manufacturing, generating, abandoning, covering, capping, dumping, closing, maintaining, disposing, placing, discarding, encapsulating, filling, landfilling, investigating, monitoring, remediating, removing, responding to, reporting on, testing, releasing, contamination resulting from, spilling, leaking, pouring, emitting, emptying, discharging, injecting, escaping, migrating, or leaching. (c) HAZARDOUS MATERIALS. The term "HAZARDOUS MATERIALS" means any material, waste, chemical, compound, substance, mixture, or byproduct that is identified, defined, designated, listed, restricted or otherwise regulated under Environmental laws as a "hazardous constituent," "hazardous substance," "hazardous material," "extremely hazardous material," "hazardous waste," "acutely hazardous waste," "hazardous waste constituent," "infectious waste," "medical waste," "biohazardous waste," "extremely hazardous waste," pollutant," "toxic pollutant," or "contaminant," or any other formulation intended to classify substances by reason of properties that are deleterious to the environment, natural resources or public health or safety including, without limitation, ignitability, corrosiveness, reactivity, carcinogenicity, toxicity, and reproductive toxicity. The term "HAZARDOUS MATERIALS," shall include, without limitation, the following: i. A "Hazardous Substance," "Hazardous Material," "Hazardous Waste," or "Toxic Substance" under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. Section 9601, et seq., the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq. or the Solid Waste Disposal Act, 42 U.S.C. Section 6901, et seq., including any regulations promulgated thereunder, as any of the foregoing may be amended; ii. An "Acutely Hazardous Waste," "Extremely Hazardous Waste," "Hazardous Waste," or "Restricted Hazardous Waste," under Section 25110.02, 25115, 25117 or E-3 25122.7 of the California Health and Safety Code, or listed pursuant to Section 25140 of the California Health and Safety Code, as any of the foregoing may be amended; iii. A "Hazardous Material," "Hazardous Substance" or "Hazardous Waste" under Section 25281, 25316, 25501, or 25501.1 of the California Health and Safety Code, as any of the foregoing may be amended; iv. "Oil" or a "Hazardous Substance" under Section 311 of the Federal Water Pollution Control Act, 33 U.S.C. Section 1321, as may be amended; as well as any other hydrocarbonic substance, fraction, distillate or by-product; v. Any substance or material defined, identified or listed as an "Acutely Hazardous Waste," Extremely Hazardous Material," "Extremely Hazardous Waste," "Hazardous Constituent," Hazardous Material," Hazardous Waste," "Hazardous Waste Constituent," or "Toxic Waste" pursuant to Division 4.5, Chapters 10 or 11 of Title 22 of the California code of Regulations, as may be amended; vi. Any substance or material listed by the State of California as a chemical known by the State to cause cancer or reproductive toxicity pursuant to Section 25249.8 of the California Health and Safety Code, as may be amended; vii. A "Biohazardous Waste" or "Medical Waste" under Section 25020.5 of the California Health and Safety Code, as may amended; viii. Asbestos and any asbestos containing material; and/or ix. A substance that, due to its characteristics or interaction with one or more other materials, wastes, chemicals, compounds, substances, mixtures, or byproducts, damages or threatens to damage the environment, natural resources or public health or safety, or is required by any law or public entity to be remediated, including remediation which such law or public entity requires in order for property to be put to any lawful purpose. (d) RELEASED PARTIES. The term "RELEASED PARTIES" means Seller, any other partners or co-venturers of Seller, any entity or person which is controlled by, under common control with or controls Seller or has a beneficial interest in common with Seller, parent business organizations, subsidiary business organizations, lenders who hold or held a security interest in all or a portion of the Property, the entity from which Seller acquired the Property, and its and their respective shareholders, officers, directors, partners, employees, servants, trustees, heirs and executors. (e) WASTE MATERIALS. The term "WASTE MATERIALS" means any putrescible or nonputrescible solid, semisolid, liquid or gaseous waste of any type whatsoever, including, without limitation; i. Any garbage, trash, refuse, paper, rubbish, ash, industrial or commercial or residential waste, demolition or construction wastes, abandoned vehicles or parts thereof, discarded home and industrial appliances, sewage, sewage sludge, manure, vegetable or E-4 animal solid and semisolid waste, and any other item intended to be or actually dumped, abandoned, discarded, treated, transformed, incinerated, disposed of or recycled; ii. Any "solid waste" as defined in the Solid Waste Disposal Act, 42 U.S.C. Section 6901, et seq., including any regulations promulgated thereunder, as any of the foregoing may be amended; iii. Any "solid waste" as defined in the California Integrated Waste Management Act of 1989, California Public Resources Code Section 40000, et seq., including any regulations promulgated thereunder, as any of the foregoing may be amended. iv. Any "waste" as defined in the Porter Cologne Water Quality Control Act, California Water Code Section 13000 et seq., including any regulations promulgated thereunder, as any of the foregoing may be amended. 4. COVENANT NOT TO SUE. Buyer, on its own behalf and on behalf of each of the other Waiver Parties, covenants and agrees never to sue or otherwise commence, or prosecute any action or other proceeding against any of the Released Parties for a Claim released pursuant to the Release (collectively, "COVENANT NOT TO SUE"). If any of the Waiver Parties asserts a claim that is contrary to the Release, said Waiver Party shall indemnify and hold harmless the Released Parties against whom such claim is asserted for all liabilities, including court costs and attorneys' fees, which are asserted against any of the Released Parties in connection with such action or proceeding. The parties hereto agree that this Release Agreement may be pleaded by a Released Party as a full and complete defense to any action or proceeding by a Waiver Party that is contrary to the terms of the Release, and may be asserted as a basis for abatement of, or injunction against, said action or proceeding and as a basis for a cross-complaint for damages therein. In the event a Waiver Party breaches the Covenant Not to Sue, any Released Party damaged thereby shall be entitled to recover not only the amount of any judgment which may be awarded in favor of such damaged Released Party but also for such other damages, costs, and expenses as may be incurred by such Released Party, including court costs, attorneys' fees and all other costs and expenses, taxable or otherwise, in preparing the defense of, defending against, or seeking and obtaining abatement of, or injunction against, such action or proceeding, and establishing and maintaining the applicability of the Release and this Release Agreement or any provision thereof. 5. INDEMNITY. Buyer shall indemnify, defend and hold the Released Parties harmless from and against any and all Claims (as such term is defined in Section 1(a)) to the extent caused by (i) any Handling of any Waste Materials or Hazardous Materials at, beneath, to, from or about the Property from and after the date of this Agreement and during the period Buyer owns the Property, (ii) any compliance or noncompliance with Environmental Laws from and after the date of this Agreement and during the period Buyer owns the Property regarding any Waste Materials, or Hazardous Materials related thereto which becomes located at or discharged or released from the Property during the period Buyer owns the Property, (iii) any acts, omissions, services or other conduct related to any of the foregoing items "(i)" or "(ii)," inclusive, and/or (iv) any condition, activity or other matter respecting the Property that is not addressed by any of the foregoing items "(i)" - "(iii)," inclusive and that is related to pollution or protection of the E-5 environmental, natural resources, or public health and safety and which occurs or accrues on or after the date of this Agreement. 6. RECORDATION. It is the intention of the parties hereto that the provisions of this Release Agreement shall run with the land described in EXHIBIT A, and that this Release Agreement shall be recorded in the Official Records of the County of Santa Clara, California, as set forth in Recital Paragraph "A," above. 7. EFFECTIVE DATE. This Release Agreement shall become effective immediately upon filing for record in the Official Records of Santa Clara, California. 8. NOTICE. Any notice or other communication required or desired to be given hereunder shall be in writing and shall be personally delivered, or delivered by commercial courier or by United States Mail, registered or certified, postage prepaid, return receipt requested, and shall be deemed delivered only upon actual receipt by the addressee or refusal to accept delivery. Mailed notices to the Buyer or the shall be addressed as set forth below: If to Seller: 3Com Corporation 5400 Bayfront Plaza Santa Clara, CA 95052 Attn: Abe Darwish Tel: (408) 326-5000 Fax: (408) 326-5718 with a copy to: Thelen Reid & Priest LLP 101 Second Street, Suite 1800 San Francisco, CA 94105 Attn: Richard Shapiro Tel: (415) 369-7117 Fax: (415) 371-1211 If to Buyer: Attn: Tel: ( ) Fax: ( ) with a copy to: ____________________________ ____________________________ ____________________________ Tel: _______________________ Fax: ______________________ 9. MISCELLANEOUS. a. This Release Agreement constitutes the entire understanding between the parties hereto respecting the subject matter hereof, and no additions to, or modifications of, any E-6 term or provision of this Release Agreement shall be effective unless set forth in writing and signed by all of the parties hereto, and appropriately recorded in the Official Records of Santa Clara County. b. Without limiting the rights remedies of the Released Parties as provided in Section 4 hereof regarding the Covenant Not to Sue, in the event of any controversy, claim or dispute between the parties arising out of or relating to this Release Agreement or the breach thereof, the prevailing party shall be entitled to recover from the other party reasonable expenses, attorneys, fees, and costs. "PREVAILING PARTY" within the meaning of this Section shall include, without limitation, a party who brings an action against the other party after the other party is in breach or default, if such action is dismissed upon the other party's payment of the sums allegedly due or performance of the covenant allegedly breached, or if the party commencing such action or proceeding obtains substantially the relief sought by it in such action whether or not such action proceeds to a final judgment or determination. c. All captions and headings in this Release Agreement are for purposes of reference and convenience only and shall not limit or expand the meaning of the provisions hereof. d. This Release Agreement and each provision hereof shall be interpreted in accordance with their fair meaning and not against or in favor of any party. e. This Release Agreement shall in all respects be governed by and construed in accordance with the laws of the State of California applicable to instruments, persons and transactions which have legal contacts and relationships solely within the State of California. If any provisions of this Release Agreement shall be invalid, unenforceable, or ineffective for any reason whatsoever, all other provisions hereof shall be and remain in full force and effect. E-7 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. SELLER: 3Com Corporation, a Delaware corporation By:___________________________ Name:_________________________ Its:__________________________ BUYER: [____________________________], a_____________________________ By:___________________________ Name:_________________________ Its:__________________________ By:___________________________ Name:_________________________ Its:__________________________ E-8 Exhibit A to Release Agreement and Covenant Not To Sue PROPERTY DESCRIPTION All of that certain real property in the County of Santa Clara, State of California, described as follows: E-9 STATE OF CALIFORNIA ) ) ss. City and County of ____________) On _______________, 2000, before me _________________________, a Notary Public in and for the State of California, personally appeared ____________________, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person whose name is subscribed to the within instrument, and acknowledged to me that he executed the within instrument in his authorized capacity and that, by his signature on the within instrument, the person or entity upon behalf of which he acted executed the within instrument. WITNESS my hand and official seal. Signature ____________________________________ (Seal) STATE OF CALIFORNIA ) ) ss. City and County of ____________) On _______________, 2000, before me _________________________, a Notary Public in and for the State of California, personally appeared ____________________, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person whose name is subscribed to the within instrument, and acknowledged to me that he executed the within instrument in his authorized capacity and that, by his signature on the within instrument, the person or entity upon behalf of which he acted executed the within instrument. WITNESS my hand and official seal. Signature ____________________________________ (Seal) E-10 EXHIBIT F FORM OF GRANT DEED Recorded at Request of and When Recorded Mail to: __________________________________ __________________________________ __________________________________ Attention:________________________ Mail Tax Statement to: __________________________________ __________________________________ __________________________________ __________________________________ GRANT DEED For valuable consideration, receipt of which is acknowledged, 3Com Corporation, a Delaware corporation, hereby grants to ___________________________________, a ____________________, the real property in the County of Santa Clara, State of California, described in EXHIBIT A attached hereto and made a part hereof, subject to all matters of record. Dated: ____________________, 2000. 3Com Corporation, a Delaware corporation By:_________________________ Name:_______________________ Title:______________________ F-1 Exhibit A to Grant Deed PROPERTY DESCRIPTION All of that certain real property in the County of Santa Clara, State of California, described as follows: F-2 STATE OF CALIFORNIA ) ) ss. City and County of ____________) On _______________, 2000, before me _________________________, a Notary Public in and for the State of California, personally appeared ____________________, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person whose name is subscribed to the within instrument, and acknowledged to me that he executed the within instrument in his authorized capacity and that, by his signature on the within instrument, the person or entity upon behalf of which he acted executed the within instrument. WITNESS my hand and official seal. Signature ____________________________________ (Seal) F-3 EXHIBIT G FORM OF AFFIDAVIT CERTIFICATE OF NON-FOREIGN STATUS Section 1445 of the Internal Revenue Code provides that a buyer of a U.S. real property interest must withhold tax if the transferor is a foreign person. To inform __________________ ("BUYER") that a withholding of tax is not required upon the disposition of a U.S. real property interest by 3Com Corporation, a Delaware corporation ("SELLER"), the undersigned hereby certifies the following on behalf of Seller: 1. Seller is not a foreign corporation, foreign partnership, foreign trust or foreign estate (as those terms are defined in the Internal Revenue Code and Income Tax Regulations); 2. Seller's U.S. employer identification number is ___________; and 3. Seller's office address is 5400 Bayfront Plaza, Santa Clara, CA 95052. Seller understands that this certification may be disclosed to the Internal Revenue Service by the Buyer and that any false statement contained herein could be punished by fine, imprisonment, or both. Under penalties of perjury I declare that I have examined this certificate and to the best of my knowledge and belief it is true, correct and complete, and I further declare that I have authority to sign this document on behalf of Seller. Dated: ___________________, 2000. 3Com Corporation, a Delaware corporation By:___________________________ Name:_________________________ Title:________________________ G-1 EXHIBIT H FORM OF DESIGNATION AGREEMENT (Escrow No. ______________) THIS DESIGNATION AGREEMENT (the "AGREEMENT"), dated as of _____________, 2000, is entered into by and between 3Com Corporation, a Delaware corporation (the "SELLER"), and ____________________________ ("BUYER"), and ___________________________, ("TITLE COMPANY"). I. RECITALS A. Pursuant to that certain Agreement for Purchase and Sale entered into by and between Seller and Palm, Inc., dated as of May 22, 2000 (the "PURCHASE AGREEMENT"), Seller has agreed to sell to Buyer, and Buyer has agreed to buy from Seller, an undivided interest in that certain real property located in the County of Santa Clara, State of California, and described more fully on attached EXHIBIT A (the "PROPERTY"). The purchase and sale of the Property pursuant to the Purchase Agreement is sometimes referred to below as the "TRANSACTION." B. Section 6045(e) of the United States Internal Revenue Code and the regulations promulgated thereunder (collectively, the "REPORTING REQUIREMENTS") require an information return to be made to the United States Internal Revenue Service, and a statement to be furnished to Seller, in connection with the Transaction. C. Pursuant to the Purchase Agreement, an escrow has been opened with Title Company through which the Transaction will be or is being closed. Title Company is either (i) the person responsible for closing the Transaction (as described in the Reporting Requirements) or (ii) the disbursing title or escrow company that is most significant in terms of gross proceeds disbursed in connection with the Transaction (as described in the Reporting Requirements). D. Seller, Buyer and Title Company desire to designate Title Company as the "REPORTING PERSON" (as defined in the Reporting Requirements) with respect to the Transaction as permitted by Treas. Reg. Section 1.6045-4(e)(5). II. AGREEMENT NOW, THEREFORE, for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Seller, Buyer and Title Company agree as follows: 1. Title Company is hereby designated as the Reporting Person for the Transaction. Title Company shall perform all duties that are required by the Reporting Requirements to be performed by the Reporting Person for the Transaction. H-1 2. Title Company hereby requests Seller to furnish to Title Company Seller's correct taxpayer identification number. Pursuant to such request, Seller hereby certifies to Title Company, under penalties of perjury, that Seller's correct taxpayer identification number is ___________. Seller acknowledges that any failure by to provide Title Company with Seller's correct taxpayer identification number may subject to civil or criminal penalties imposed by law. 3. The names and addresses of the parties hereto are as follows: SELLER: 3Com Corporation 5400 Bayfront Plaza Santa Clara, CA 95052 Attn: Abe Darwish or Bill Skibitzke BUYER: ______________________________ ______________________________ ______________________________ Attn:_________________________ TITLE COMPANY: First American Title Company 1737 North First Street San Jose, CA 95112 Attn: Carol Weir 4. Each of the parties hereto shall retain this Agreement for a period of four (4) years following the calendar year during which the date of closing of the Transaction occurs. H-2 IN WITNESS WHEREOF, the parties have entered into this Agreement. 3Com Corporation, a Delaware corporation By:_________________________ Name:_______________________ Title:______________________ [___________________________] By:_________________________ Name:_______________________ Title:______________________ By:_________________________ Name:_______________________ Title:______________________ First American Title Company By:_________________________ Name:_______________________ Title:______________________ H-3 Exhibit A to Designation Agreement PROPERTY DESCRIPTION All of that certain real property in the County of Santa Clara, State of California, described as follows: H-4 EXHIBIT I PRELIMINARY TITLE REPORT I-1 EXHIBIT J FORM OF CONFIDENTIALITY AGREEMENT May 22, 2000 Palm, Inc. 5400 Bayfront Plaza Santa Clara, CA 95052 Re: CONFIDENTIALITY AGREEMENT Ladies and Gentlemen: 3Com Corporation ("SELLER") is the owner or the lessee of certain real property within the City of San Jose, California, identified as approximately 36.43 acres of vacant land at Highway 237 and North First Street, San Jose (the "PROPERTY"). The undersigned is the prospective buyer of the Property, or its employee, consultant, prospective lender or investor ("RECIPIENT"). To induce Seller to permit the Recipient to review and inspect certain documents, files and other information relating to the Property and/or to perform tests or inspections of the Property ("CONFIDENTIAL INFORMATION," more fully defined below), and in consideration of Seller permitting such review and inspection, by signing where indicated below, Recipient, on behalf of itself, its employees, agents and representatives, hereby agrees and covenants as follows: AGREEMENT 1. PURPOSE. Recipient agrees that its review and inspection of the Confidential Information shall be solely to conduct due diligence, on its own behalf and not as an agent, representative or broker of any undisclosed party, to enable Recipient, or the prospective buyer to which it provides counsel and which has been identified to Seller to determine whether or not to purchase the Property ("EVALUATION"). Recipient shall indemnify Seller and the agents, attorneys, and advisors of Seller (collectively, the "INDEMNIFIED PARTIES") and hold such Indemnified Parties harmless against all costs and expenses of any kind, including but not limited to attorneys' fees or claims by third parties of any right to brokerage commissions or fees, incurred by or on behalf of any Indemnified Party arising out of the Recipient's use or disclosure of the Confidential Information except as expressly permitted by the terms hereof. 2. INFORMATION TO BE KEPT IN STRICT CONFIDENCE. The Recipient will use the Confidential Information solely for the purpose of the Evaluation and will keep the Confidential Information strictly confidential. The Recipient will not disclose Confidential Information to others, or take or use Confidential Information for its own purposes or the purposes of others; PROVIDED, HOWEVER, that the Recipient may disclose Confidential Information to attorneys, accountants, architects, engineers, consultants and/or financial advisers of Recipient that: (a) for purposes of the Evaluation, need to know the specific Confidential Information so disclosed in J-1 order to assist in the Evaluation; and (b) have executed and delivered to Seller an agreement in a form such as this. "CONFIDENTIAL INFORMATION" shall consist of any information, whether written (including information that is stored on machine-readable media) or oral, regarding the Property, the operation thereof and assets related thereto, that previously has not been publicly released by a duly authorized representative of Seller; including but not limited to proprietary information, any summary of information provided by Seller, leases, rent roll, operating statements, plans and specifications, engineering reports, Phase I report, survey of the Property, asbestos reports, permits, licenses, and contracts affecting the Property, or any information relating to the environmental condition of the Property or compliance by the buildings thereon with ADA, or any market analyses or lease proposals prepared by the property manager or others on behalf of Seller. 3. NON-DISCLOSURE OF NEGOTIATIONS. That the fact that Seller and Recipient or the principal to which it reports have entered into negotiations with respect to a potential purchase and sale of the Property and that Confidential Information has been provided to the Recipient shall also be kept strictly confidential by the Recipient and shall be deemed to be "CONFIDENTIAL INFORMATION" for purposes of this Agreement. 4. MAINTENANCE OF RECORDS. Recipient will maintain a record of the specific individuals to whom Confidential Information has been provided (each, an "INFORMED INDIVIDUAL") and will be responsible for any breach of any of the agreements contained herein by any Informed Individual. No Informed Individual shall disclose to any other person the fact that the Confidential Information has been made available to such Informed Individual. 5. DISCLOSURE REQUIRED BY LAW. If disclosure of Confidential Information is compelled by deposition, interrogatory, subpoena, civil investigative demand or similar legal process, Recipient shall give prompt notice to Seller so that Seller may seek an appropriate protective order and/or take any other action. In the event that a protective order is not obtained, or that Seller waives compliance with the agreements contained herein, Recipient: (a) may disclose to the tribunal or other person the specific Confidential Information or other information that, in the written opinion of counsel for Recipient (a copy of which shall be promptly delivered to Seller), Recipient or an Informed Individual is legally required to disclose; and (b) shall exercise best efforts to obtain assurance that confidential treatment will be accorded to any such disclosed Confidential Information. 6. RETURN OF CONFIDENTIAL INFORMATION. Immediately upon the request by Seller, Recipient shall: (a) deliver to Seller all copies of any Confidential Information, including all copies of Confidential Information delivered to, reproduced or discovered by the Recipient or an Informed Individual; (b) deliver to Seller or destroy all notes, reports, analyses and other records that include, incorporate or are based on any of the Confidential Information (collectively, "CONFIDENTIAL NOTES"); and (c) certify to Seller in writing that all copies of Confidential Information and Confidential Notes have been delivered to Seller or destroyed. Any copy of Confidential Information that is not in a physical form shall continue to be subject to the agreements set forth herein. J-2 7. NO REPRESENTATION OR WARRANTY. Neither Seller, nor its agents or employees makes any representation or warranty as to the accuracy or completeness of the Confidential Information and shall have no liability to Recipient or any Informed Individual relating to or resulting from the use of the Confidential Information, or any errors therein or omissions therefrom. 8. MONEY DAMAGES INADEQUATE REMEDY. Recipient acknowledges that it would be difficult to measure damage to Seller from any breach of any of the agreements contained herein, that injury to Seller from any such breach would be difficult to calculate, and that money damages therefore would be an inadequate remedy for any such breach. Accordingly, if Recipient or any Informed Individual breaches any of the agreements herein, Seller shall be entitled, in addition to any other remedies it may have, to equitable relief, including injunctions, specific performance or other appropriate orders to restrain any such breach, without showing or proving any actual damage sustained. 9. GENERAL. 9.1 SEVERABILITY. If any agreement set forth herein, or any word, phrase, clause or sentence or the application thereof to any person or circumstance shall be invalid or unenforceable to any extent, such agreement, word, phrase, clause or sentence shall be modified or deleted in such a manner so as to make the agreement valid and enforceable under applicable laws, if possible, and the application of such provision to other persons or circumstances and the remainder of the agreements set forth herein shall not be affected and shall be enforced to the greatest extent permitted by law. 9.2 SUCCESSORS AND ASSIGNS. The agreements set forth herein shall be binding upon the Recipient and its affiliates, successors and assigns and shall inure to the benefit of Seller and its affiliates, successors and assigns. 9.3 INTERPRETATION. As used herein where required by the context, the singular shall include the plural, and the plural shall include the singular. 9.4 ENTIRE AGREEMENT. The agreements herein represent the entire agreement between Recipient and Seller with respect to the subject matter hereof, superseding all previous oral or written communications, representations or agreements, if any. Any modifications to the agreements set forth herein must be made in writing and executed by a duly authorized officer of Seller. 9.5 ATTORNEYS' FEES. In the event of any litigation between the parties, the prevailing party shall be entitled to recover its attorneys' fees and costs as part of the judgment. 9.6 WAIVER. No failure or delay by Seller in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof or the exercise of any other right, power or privilege hereunder so operate as a waiver. 9.7 CAPTIONS. Titles or captions herein are inserted only as a matter of convenience and for reference, and in no way define, limit, extend or describe the scope of the agreements herein or the intent of any provision hereof. J-3 9.8 SURVIVAL. The foregoing commitments shall survive any termination of the discussions between Seller and Recipient or any transaction between Seller and Recipient. 10. GOVERNING LAW. The agreements set forth herein shall be governed by the laws of the State of California, which state shall have jurisdiction of the subject matter hereof and over Recipient and Seller. Very truly yours, 3Com Corporation, a Delaware Corporation By:________________________ Name:______________________ Title:_____________________ Accepted and Agreed, as of May __, 2000 PALM, INC. a Delaware corporation By:_____________________________ Name:___________________________ Title:__________________________ By:_____________________________ Name:___________________________ Title:__________________________ J-4 EX-27.1 3 a2027699zex-27_1.txt EX-27.1
5 1,000 3-MOS JUN-01-2001 SEP-01-2000 965,089 1,736,619 628,625 161,411 273,246 4,300,152 1,519,330 821,642 5,353,947 1,144,366 2,740 0 0 2,294,942 1,836,285 5,353,947 933,764 933,764 593,036 593,036 486,274 4,224 312 (83,180) (20,795) (63,737) 4,537 0 0 (59,200) (0.17) (0.17)
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