SECURITIES AND
EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Fiscal Year Ended May 31, 1994 Commission File No. 0-12867
3Com Corporation
(Exact name of registrant as specified in its charter)
California 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) 764-5000
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value.
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
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of Registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the Registrant's Common Stock held
by non-affiliates on July 31, 1994 (based upon the average of the
high and low sale prices of such stock as of such date) was
$1,668,633,772.
As of July 31, 1994, 32,289,110 shares of the Registrant's Common
Stock were outstanding.
The Registrant's definitive Proxy Statement for the Annual
Meeting of Shareholders to be held on September 29, 1994 is
incorporated by reference in Part III of this Form 10-K to the
extent stated herein.
3Com Corporation
Form 10-K
For the Fiscal Year Ended May 31, 1994
Table of Contents
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Executive Officers of the Registrant
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder
Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of 3Com
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Exhibit Index
Signatures
Financial Statement Schedules
3Com, LANplex, TokenLink, EtherLink, LinkBuilder, NETBuilder,
NETBuilder II and CardBoard are registered trademarks of 3Com
Corporation. Transcend, AccessBuilder, FDDILink, SuperStack,
Parallel Tasking, FMS, MSH, LinkSwitch, and 3ComFacts are
trademarks of 3Com Corporation. MicroChannel is a registered
trademark of International Business Machines Corporation. TROPIC
is a trademark of National Semiconductor Corporation. All other
trademarks belong to their respective organizations.
PART I
ITEM 1. Business
3Com Corporation (referred to herein as "3Com," "Registrant"
or the "Company") was founded on June 4, 1979 and pioneered the
networking industry. The Company evolved from a supplier of
discrete networking products to a supplier of networking systems
for five types of connectivity environments: building/campus
backbone, wide-area backbone, workgroup, remote office and
personal office. Today, 3Com is a Fortune 500 company offering
customers a broad range of ISO 9000-compliant global data
networking solutions that includes routers, hubs, remote access
servers, switches and adapters for Ethernet, Token Ring, fiber
distributed data interface (FDDI) and other high speed networks.
The Company's products are distributed and serviced worldwide
through 3Com and its partners: principally systems integrators,
value-added resellers, national resellers and dealers,
distributors and original equipment manufacturers.
3Com's name is derived from its focus on computer
communication compatibility. With its long-standing commitment
to multi-vendor interoperability, the Company has been a leader
in defining, shaping and promoting the growth of networking
infrastructures that transmit data to all parts of the world
quickly and efficiently. Underlying this commitment is a focus
on simplicity in the way we design and manufacture products, as
well as in the way we work with customers; scalability of
products to allow customers to purchase networking components
that meet their requirements today, with the assurance that 3Com
has cost-effective migration and upgrade paths as customers'
networking needs change; and value by providing high-performance
products, managed through a single, powerful network management
application, that lower the overall cost of the network
ownership.
During fiscal 1992 and 1993, 3Com focused on rebuilding its
product portfolio with the introduction of new adapter, hub and
internetworking platforms, retraining its sales force to sell
connectivity systems and solutions, and expanding its global
presence with new sales offices, service centers, and "parts
banks" worldwide. The acquisition of the data networking
products business of U.K.-based BICC Group, plc (BICC) in January
1992 strengthened the Company's position in the structured wiring
hub market and expanded 3Com's position in the Europe. In
January 1993, the Company enhanced its Token Ring technology base
with the acquisition of Star-Tek, Inc., a Massachusetts-based
Token Ring hub manufacturer. Further, in September 1993, the
Company began full-scale operations at its 60,000 square foot
manufacturing facility in Blanchardstown, Ireland.
During fiscal 1994, 3Com introduced its High Performance
Scalable Networking (HPSN) architecture with Transcend network
management, demonstrating the Company's ability to deliver
complete connectivity systems with a full breadth of products,
and providing customers with a framework for building and
managing scalable, high-performance networking infrastructures.
During the year, the Company enhanced its product offerings under
HPSN with two strategic acquisitions:
o In January 1994, 3Com acquired Synernetics, Inc.
(Synernetics), the Company's long-term development partner and
the revenue leader in the local area network (LAN) switching
market. The switching products of Synernetics are marketed under
the LANplex name and include the LANplex 5000/3GH and LANplex
6000 switches.
o In February 1994, 3Com completed the purchase of Centrum
Communications, Inc. (Centrum), an innovator in remote access
internetworking technology. The Centrum remote access servers
for Ethernet and Token Ring networks are marketed under the 3Com
trade name AccessBuilder.
The aggregate purchase price of the two acquisitions
consisted of $140.0 million plus $3.3 million of costs attributed
to the exchange of Synernetics options for 3Com options and $13.1
million of costs directly attributable to the completion of the
acquisitions. Approximately $132.1 million of the aggregate
purchase price represented in-process technology and was charged
to the Company's operations during the third fiscal quarter of
1994.
Additionally, in December 1993, the Company entered into a
technology licensing agreement with Pacific Monolithics, Inc., a
wireless communications developer, that will allow the Company to
offer 10 megabits-per second (Mbps) wireless products for local
area networks. The cost of the license was $2.5 million,
substantially all of which was charged to the Company's
operations during the third fiscal quarter as purchased in-
process technology. Fiscal 1994 results included a $134.5
million pre-tax charge to operations for the combined effect of
purchased in-process technology related to the acquisitions and
licensing agreement.
Also during the year, 3Com expanded the breadth and depth of
its product offerings with new and enhanced adapter,
internetworking and stackable hub products, extended its
worldwide presence with sales offices in five additional
countries, expanded its major accounts sales force and added new
production lines at its manufacturing facilities in both the U.S.
and Ireland.
3Com believes that its principal competitive advantages lie
primarily in the depth and breadth of technologically innovative,
industry-leading product it offers and a strong yet flexible
business infrastructure. The Company has strong brand
recognition in Ethernet adapters, which we believe is
transferable to other product and technology areas, as well as a
leadership position in stackable networking systems, LAN
switching, remote office and personal office internetworking
platforms. Additionaloly, 3Com believes its low-cost
manufacturing, worldwide presence, flexible distribution
strategy, and comprehensive service and support capabilities are
allowing the Company to take advantage of market trends that are
extending the reach, scope and performance of today's data
networks.
INDUSTRY SEGMENT INFORMATION
3Com operates in one industry segment as described above.
PRODUCTS
3Com's High Performance Scalable Networking architecture
with Transcend network management provides customers with a
blueprint for building and managing networking infrastructures
using both current and emerging technologies, and for cost-
effectively migrating to higher performance networks using
existing platforms. HPSN defines five connectivity environments
and delivers cost-effective, scalable systems solutions for each,
using the full breadth of 3Com products. HPSN encourages
customers to build networks to meet their current business
objectives, while offering the assurance that their networks will
scale as they add more users and new applications and migrate to
emerging high performance technologies such as 100 (Mbps)
Ethernet and Asynchronous Transfer Mode (ATM). The five types of
connectivity environments defined by HPSN are:
o Workgroup. Early data networks were installed as a means of
connecting individual members of a workgroup to share files and
other computing resources, such as printers, using Ethernet or
Token Ring technology. While this remains true today, the trend
toward mission-critical applications and client/server topologies
has created a need for more sophisticated workgroup connectivity
with higher bandwidth capabilities, enhanced resilience, and a
more powerful and flexible feature set. 3Com's industry-leading
EtherLink, TokenLink and FDDILink adapters provide the desktop
connection to the LAN, while 3Com LinkBuilder stackable and
chassis-based hubs concentrate and redirect network traffic PCs,
workstations and servers. The SuperStack network system, which
includes hubs, bridge/routers, switches and an SDLC converter for
IBM SNA connectivity, allows network administrators to add
functionality as needed and build in fault tolerance with an
optional redundany power system.
o Building/Campus backbone. As the number and complexity of
workgroup networks has increased, the need for sophisticated
inter- and intranetworking has led to the creation of building-
and campus-wide "collapsed backbone" networks to transmit data
quickly and efficiently within a single site. Collapsed backbone
networks condense network traffic from workgroup and floor-based
hubs along the backplane of a single powerful device. Working as
collapsed backbone devices, 3Com's LANplex family of intelligent
switches and NETBuilder II routers simplify wiring complexity,
centralize management, boost performance and lower costs.
Furthermore, the HPSN framework provides for an economical, step-
by-step migration to even greater performance through 100 Mbps
Ethernet and ATM using existing routing and switching platforms.
o WAN backbone. The WAN backbone is the nerve center for wide-
area data communications. 3Com's high-performance NETBuilder II
routers connect to wide-area resources ranging from leased lines
and dial-up connections to packet-switched and digital telephone
services. Transcend applications deliver self-managing
intelligence, putting wide-area bridge/router administration
within the power of a centrally located manager.
o Remote Office. The remote office is a specialized type of
workgroup environment, one with all the connectivity needs of a
workgroup located at the corporate headquarters, but because
networking experts are scarce in the remote office, all products
must have plug-and-play simplicity. 3Com's SuperStack system
provides hubbing, switching, and routing in a single stackable
system that meets the special needs of the remote office for
simple, easy to maintain high-performance connectivity. 3Com's
innovative Boundary Routing software, running on the NETBuilder
Remote Office router "slice" of the SuperStack system, simplifies
remote access to the corporate network and allows managers to
maximize their resources and reduce expenses by consolidating
complex operations at headquarters. Further, the Transcend
network management software centralizes the network management
function as well.
o Personal Office. The current trend toward "virtual"
corporations has resulted in widely dispersed teleworkers at home
and in small offices. There are also millions of business
travelers and nomadic users with computers but no fixed network
connections. 3Com's AccessBuilder remote access servers give
these peripheral users simplified dial-up access to the network.
Available for Ethernet and Token Ring networks, AccessBuilder
offers higher performance and more flexibility than less
sophisticated connection devices, and includes a superior suite
of security measures to block unauthorized access.
3Com offers a broad range of connectivity products for the
five environments, which can be grouped into two major
categories:
Network Adapters: Network adapters, also known as network
interface cards, are add-in printed circuit boards that allow
personal computers, laptop computers, workstations and personal
digital assistance (PDAs) to connect to the local area network.
3Com is the world's largest supplier of Ethernet adapters, with
more than 11 million adapters installed worldwide. In fiscal
1994, adapters accounted for 57 percent of total sales and
increased 31 percent from fiscal 1993 sales. The increase in
network adapter sales represented an increase in unit volume,
partially offset by continuation of the industry-wide trend
toward decreasing average selling prices.
In fiscal 1993, the Company began shipping its family of
EtherLink III Parallel Tasking adapters, based on a 3Com-designed
custom application-specific integrated circuit (ASIC). Parallel
Tasking is an innovative architecture that speeds data transfers
by allowing separate tasks to be performed in parallel, resulting
in higher overall adapter efficiency and performance than would
otherwise be possible. The Company has applied for patents on
this technology. In fiscal 1994, the Company introduced Ethernet
PCMCIA adapters for laptop and other portable computers, further
extending the EtherLink III family. 3Com's EtherLink III
adapters include 16-bit ISA, 32-bit EISA, MicroChannel and Combo
adapters as well as the recently introduced PCMCIA adapter. All
are designed around 3Com's custom ASIC, which results in products
that are inherently more reliable, easier to install and
configure, and less expensive to manufacture.
In addition to Ethernet adapters, 3Com offers Token Ring and
FDDI adapters. Based on the IBM-designed TROPIC chipset, 3Com's
TokenLink III 16/4 family of ISA, EISA and MicroChannel adapters
is designed to work seamlessly with IBM drivers and applications
while offering enhanced installation and network management
features. In calendar 1993, its first full year of shipments,
the TokenLink III adapters garnered 4.5 market share points.
3Com's FDDILink family of adapters connects devices to the
network via copper wiring and fiber at 100 Mbps. When combined
with the Company's FDDI Concentrator (hub), FDDILink adapters
offer workstation and high-end PC users a cost-effective solution
for high-bandwidth applications. All 3Com adapters carry 3Com's
standard adapter limited lifetime warranty.
Network Systems Products: 3Com's network systems products
include hubs, internetworking bridge/routers, LAN switches and
remote access servers. When combined within the HPSN framework,
they create a network infrastructure that delivers scalable, cost-
effective solutions for each of the five connectivity
environments. Network systems sales represented 37 percent of
total sales and increased 49 percent from fiscal 1993. The
increase was led primarily by LinkBuilder FMS stackable hubs, the
high-performance NETBuilder II bridge/router and the LANplex
family of switching products. Similar to network adapters, the
increase in systems product sales represented an increase in unit
volume which was partially offset by a decrease in average
selling prices.
Internetworking Products: 3Com's internetworking products
include the high-performance NETBuilder II bridge/router for
collapsed backbone and wide-area network environments and the
NETBuilder Remote Office family of remote and access routers.
Additionally, the AccessBuilder remote access server provides
Ethernet and Token Ring dial-up connectivity for individual
remote users. The NETBuilder Remote Office family of
bridge/routers supports Ethernet, Token Ring and Integrated
Services Digital Network (ISDN) network technologies and can be
operated as either conventional stand-alone routers or using
3Com's Boundary Routing system. Additionally, both the
NETBuilder Remote Office family and the AccessBuilder remote
access server are available as part of the SuperStack network
system.
Shortly after the end of fiscal 1994, 3Com introduced the
NETBuilder II MultiProcessor (MP) bridge/router, a high-density,
high-performance router using a RISC multiprocessor design, which
offers performance improvements. The MP modules are backward
compatible with earlier NETBuilder II 4- and 8-slot chassis,
demonstrating 3Com's commitment to scalability and value through
continued product enhancements that protect customers'
investments in networking hardware.
LAN Switches: LAN switches provide cost-effective, high-
speed links between multiple network segments, simplifying
network design and reducing network latency in client/server
networks. 3Com offers a full range of LAN switches, from the
high density LANplex 6000 to the floor-based LinkSwitch Ethernet-
to-FDDI switch. The LinkSwitch can operate as a stand-alone
switch, as a module for the LinkBuilder Multi-Service Hub (MSH)
chassis-based hub, or as part of the SuperStack network system.
In July 1994, 3Com announced its Intelligent Switching
Engine (ISE) custom ASIC. Essentially a switch on a chip, ISE
integrates field-proven hardware and software functions from
today's LANplex products, which the Company believes will
dramatically improve performance and reliability while reducing
costs. The Company plans to incorporate ISE into both existing
and new switching products.
Hubs: 3Com designs, manufactures and markets a full range
of Ethernet, Token Ring and FDDI hubs in either stackable or
chassis-based configurations. The Company's stackable hubs,
including the LinkBuilder FMS for Ethernet and Token Ring
networks, provide users a highly reliable, cost effective
solution for networking workgroups and remote offices.
In fiscal 1994, 3Com expanded its hub offerings with the 24-
port LinkBuilder FMS stackable hub, the LinkBuilder FDDI
workgroup hub and a re-engineered 12-port LinkBuilder TP. In
addition, the Company enriched its chassis hub, the LinkBuilder
MSH, with Ethernet-to-FDDI switching, FDDI concentration and
advanced Token Ring technology. The powerful backplane of the
LinkBuilder MSH supports Ethernet, Token Ring and FDDI
connectivity today and ATM connectivity in the future.
Network Management: In September 1993, 3Com introduced
Transcend, a family of network management applications that
represents a significant advance in simplified and logical
management of local and wide area networks. Using Transcend
applications on the network management platform of their choice,
network administrators are able to create logical groups of hubs,
routers, servers and desktop devices, regardless of physical
location, to obtain correlated management information and
control. To keep network administration down, Transcend products
also leverage administrative resources by consolidating
repetitive tasks, such as downloading router software, into a
single command.
Other products include communication servers, which provide
terminal-to-host connectivity for terminals and workstations over
the network, protocol software and worldwide service and support
programs.
PRODUCT DEVELOPMENT
The Company's product development efforts are focused
exclusively on its strategic product lines: adapters and network
systems, including internetworking platforms, switches, hubs and
network management. 3Com's ownership of core networking
technologies creates opportunities to leverage its engineering
investments and develop more integrated products for simpler,
more innovative networking solutions for customers. The Company
plans to invest in emerging technologies for use in existing and
future products, and as well as to improve and enhance existing
products to extend their lifecycles, reduce manufacturing costs
and increase functionality. In addition to the development of
custom ASICs to improve performance, increase reliability and
reduce manufacturing costs, 3Com is investing in the following
areas:
o 100 Mbps Ethernet
o Wireless local area network communications
o Asynchronous Transfer Mode (ATM) capabilities
o LAN switching
o Integrated Services Digital Network (ISDN)
o Enhanced connectivity in IBM environments
o Remote access for single and mobile users
The industry in which the Company competes is subject to
rapid technological developments, evolving industry standards,
changes in customer requirements and frequent new product
introductions and enhancements. As a result, 3Com's success in
part depends upon its ability, on a cost-effective and timely
basis, to continue to enhance its existing products and to
develop and introduce new products that take advantages of
technological advances. There can be no assurance that the
Company will be able to successfully develop new products to
address new industry transmission standards and technological
changes or to respond to new product announcements by others or
that such products will achieve market acceptance.
During fiscal 1992, 1993, and 1994, research and development
expenses were $48.2 million, $64.3 million, and $76.5 million,
respectively.
MARKETS AND CUSTOMERS
3Com's customers are represented among the world's leading
industries, including finance, health care, manufacturing,
government, education, and service organizations. In fiscal 1994,
the Company began targeting specific vertical markets, including
health care, education, finance and government, through an
expanded major accounts sales force.
Around the world, 3Com serves its customers through a
variety of sales channels including direct and indirect channels.
Indirect channels include systems integrators, value-added
resellers, distributors, national dealers and resellers, and
original equipment manufacturers (OEMs). The Company's multi-
channel sales strategy encourages broad market coverage, by
allowing 3Com sales personnel to create demand for 3Com products
while giving customers the flexibility to choose the most
appropriate delivery option.
International Operations: The Company distinguishes itself
from many of its competitors with its dedicated research and
development, manufacturing, sales and service organizations
outside the United States. 3Com maintains sales offices in 21
countries, including new offices opened in fiscal 1994 in Japan,
Brazil, Mexico, South Africa and China. Sales outside the United
States continue to be the fastest growing segment of the
Company's business and accounted for approximately 47 percent, 50
percent and 52 percent of the Company's sales in fiscal 1992,
1993 and 1994, respectively. The Company primarily markets its
products internationally through subsidiaries, sales offices and
partnerships with local distributors in Europe, Canada,
Asia/Pacific and Latin America. (See Note 14 relating to
geographic area information in the Notes to Consolidated
Financial Statements in the Financial Statements Section (Item 8)
of Part II.)
Customer Service: Because global data networking
infrastructures are becoming increasingly complex, customers
require vendors to help them manage and support their networks as
well as design and build them. Additionally, as customers'
networking purchases transition from point product to
connectivity systems, a more solutions-oriented approach to
service and support is required. 3Com recognized these trends
early and invested in a comprehensive worldwide service and
support organization.
Worldwide logistics include support and repair centers in
the United States, dedicated service organizations at most
subsidiaries, parts stock at more than 25 locations, and
electronic bulletin boards throughout the world. In addition to
on-site training, the Company also provides computer-based
courses that allow customers to learn networking technologies at
their own pace in their own environments. During fiscal 1994,
the Company handled more than 300,000 direct support calls and
more than 125,000 calls to the automated 3ComFacts fax-back
systems and CardBoard electronic bulletin board.
BACKLOG
3Com manufactures its products based upon its forecast of
the demand of its customers worldwide and maintains inventories
of finished products in advance of receipt of firm orders from
its customers. Orders are generally placed by the customer on an
as-needed basis and products are usually shipped within one to
four weeks after receipt of an order. Such orders generally may
be cancelled or rescheduled by the customer without significant
penalty. Accordingly, 3Com does not maintain a substantial
backlog, and backlog as of any particular date may not be
indicative of 3Com's actual sales in any succeeding period.
MANUFACTURING AND SUPPLIERS
3Com's primary production activities are conducted at its
Santa Clara, California and Blanchardstown, Ireland facilities.
Purchasing, mechanical assembly, burn-in, testing, final
assembly, and quality assurance functions are performed at both
of these facilities. The Company also manufactures certain
produdts and subassemblies through subcontractors. Over the past
several years, the Company has been investing in automating its
manufacturing capabilities, decreasing the costs and increasing
the quality of both manufacturing design and production. To meet
increased demand for its global data networking products, in
fiscal 1994 the Company added new automated production lines in
both its California and Ireland plants.
The Company is committed to being an environmentally
conscious manufacturer and pioneered implementation of a
chlorofluorocarbon (CFC)-free semi-aqueous cleaning process at
its California plant with DuPont and Corpane Corporations. The
same process is used at the Ireland facility and 3Com met its
goal of being CFC-free by the end of calendar year 1993.
Components purchased by 3Com are generally available from
multiple suppliers. However, certain components may be available
from sole sources. The inability of 3Com to obtain certain
components could require the Company to redesign or delay
shipments of several of its data networking products. The
Company has sought to establish close relationships with sole-
source suppliers and/or to build up inventory of such components;
however, there can be no assurance that production will not be
interrupted due to the unavailability of components. 3Com
believes that its inventory levels of these components, combined
with finished components held by the Company's suppliers, are
adequate for its presently forecasted needs.
COMPETITION
Data networking is an emerging field within the information
systems industry encompassing both on-premises (e.g., desktop
connectivity devices, internetworking platforms and wiring hubs)
and off-premises (e.g., wide-area networking) technologies. 3Com
participates exclusively in designing, manufacturing and
marketing on-premises equipment. The Company's primary
competitors are often single product companies who typically
compete in one segment of the on-premises sector of the data
networking market. These companies are using their resources and
technical expertise to improve and expand their product lines in
an effort to gain market share. Several are extending their
product offerings beyond a single market segment and pursue
strategies more closely resembling 3Com's global data networking
strategy. The industry recently has witnessed a wave of merger,
acquisition and strategic partnering activity as many of these
companies seek to provide broader networking solutions.
Network Adapters: The market for network adapters is highly
competitive, with companies offering products that support a
range of Ethernet, Token Ring and FDDI media. Principal
competitors in the adapter market include Intel Corporation,
Standard Microsystems Corporation, IBM Corporation, Madge N.V.,
Olicom A/S, and Xircom. According to International Data
Corporation (IDC), a leading market research firm, the Company
gained seven market share points in calendar 1993 and is the
worldwide leader in Ethernet network adapters with 29 percent
market share. This gain reflects the strength of the Company's
technology, strong distribution franchise and commitment to
increasing manufacturing efficiencies. Nonetheless, competitors
are likely to continue to use their resources and technical
expertise to continue to improve products and drive down prices
in an effort to gain market share.
Network Systems Products: Competition in the network
systems business, formerly characterized by niche-based
competitors focused on a single industry segment, is shifting
toward more broad-based suppliers offering multiple product
lines. This has been achieved through mergers and acquistions,
through joint marketing agreements, and through internally
developed products. For example, Cisco Systems, which had
focused exclusively on routers, is now offering customers both
routers and switches and has formed alliances with both Cabletron
Systems and Chipcom Corporation, two, a hub vendors. SynOptics,
a hub vendor, and Wellfleet Communications, a router vendor,
recently announced a merger agreement. Additionally, Cisco
Systems, SynOptics Communications, Chipcom Corporation and others
have announced acquisitions of smaller networking companies,
Crescendo Communications, Coral Networks, and David Systems,
respectively, in an effort to strengthen their positions in the
emerging and fast-growing markets for LAN switching, remote
access, and high-speed networking. This industry consolidation,
and the convergence of hub, switching and routing technologies on
single platforms, will likely continue, intensifying competition
among a small group of companies with broad product offerings.
The Company believes it competes favorably in the data
networking market by providing customers with a full breadth of
products based on leading technologies, which when combined under
the HPSN framework, address connectivity needs for each of the
connectivity environments and provide cost-effective migration
paths to higher performance technologies. Additionally, 3Com
products typically offer excellent price-performance and enjoy a
reputation for both high quality and reliability. The Company
also believes its multichannel sales strategy and comprehensive
service and support programs will continue to enhance its
success.
PATENTS, LICENSES AND RELATED MATTERS
The Company relies on U.S. and foreign patents, copyright,
trademark and trade secrets to establish and maintain proprietary
rights in its technology and products. The Company has an active
program to file applications for and obtain patents in the United
States and in selected foreign countries where a potential market
for the Company's products exists. The Company's general policy
has been to seek patent protection for those inventions and
improvements likely to be incorporated in its products or
otherwise expected to be of value. The Company has been issued
16 utility patents and one design patent in the U.S., and has
been issued two foreign patents. Numerous other patent
applications are currently pending which relate to the Company's
research and development, including U.S. and foreign patent
applications related to the Company's LAN Security Architecture,
Boundary Routing internetworking technology, and Parallel Tasking
Ethernet adapter inventions.
There can be no assurance that any of these patents would be
upheld as valid if litigated. While the Company believes that
its patents and applications have value, it also believes that
its competitive position depends primarily on the innovative
skills, technological expertise and management abilities of its
employees.
The Company has been granted licenses by others, including a
fully paid, perpetual, non-exclusive license to a patent held by
Xerox covering a portion of the Ethernet technology.
The Company has registered 36 trademarks in the United
States and has registered 11 trademarks in one or more of 33
foreign countries. Numerous applications for registration of
domestic and foreign trademarks are currently pending.
Many of the Company's products are designed to include
software or other intellectual property licensed from third
parties. The Company actively seeks to license software that
promotes the compatibility of its products with industry
standards, including standard protocols and architectures. The
loss of rights in software or other intellectual property
licensed from a third party and designed into a particular
product might disrupt or delay the Company's distribution of that
product. While it may be necessary in the future to seek or
renew licenses relating to various aspects of its products, the
Company believes that, based upon past experience and standard
industry practice, such licenses generally could be obtained on
commercially reasonable terms.
EMPLOYEES
As of May 31, 1994, 3Com had 2,306 full-time employees, of
whom 510 were employed in engineering, 738 in sales, marketing
and customer service, 729 in manufacturing, and 329 in finance
and administration. None of 3Com's employees is represented by a
labor organization and 3Com considers its employee relations to
be excellent.
ITEM 2. Properties
3Com's headquarters facility consists of a 495,000 square
foot office, manufacturing and research and development campus in
Santa Clara, California. The facility is leased from a limited
partnership in which a subsidiary of 3Com is a partner. The
lease expires in January 2000 with options to renew for up to 15
years. 3Com also has an option to purchase the facility.
3Com leases approximately 50,000 square feet of office space
near its headquarters site for its Customer Services Operations.
The facility is scheduled to be occupied in September 1994. The
lease expires in August 1997. 3Com has two one-year renewals to
extend the lease.
As a result of its acquisition of Synernetics, Inc., 3Com
leases 30,000 square feet of office, manufacturing and
distribution space in North Billerica, Massachusetts. The lease
expires in March 1995 with an option to renew for an additional 3
years. 3Com also leases a 30,000 square foot office,
manufacturing and distribution facility in Northboro,
Massachusetts for its Star-Tek Division. The lease expires in
March 1996 with an option to renew for an additional 3 years.
3Com leases several facilities in England including a 47,000
foot manufacturing and research and development facility in Hemel-
Hempstead, Hertfordshire. The lease expires in December 1996.
The Company also leases 13,000 square feet of office space in
Bourne End, Buckinghamshire. The lease expires in December 1996.
3Com's European headquarters consists of 17,000 square feet of
office space in Marlow-on-Thames, Buckinghamshire. The lease
expires in December 2013.
In July 1992, 3Com Ireland, a wholly owned subsidiary of the
Company, completed, occupied and began operations in its
Blanchardstown, Ireland manufacturing facility. The 60,000
square foot facility, including approximately 9.5 acres of land,
is owned by 3Com Ireland which also has an option to purchase an
additional 3.5 acres of land adjoining the facility.
3Com also leases various sales and service offices
throughout the United States, Canada, Europe, Australia, Latin
America, and Asia. All of 3Com's facilities are well maintained
and are adequate to conduct 3Com's current business.
In July 1994, the Company signed a five-year lease for
225,000 square feet of office and manufacturing space to be built
on land adjacent to its existing headquarters in Santa Clara.
The Company estimates that it will commence occupancy of portions
of the facility in early fiscal 1996 but lease payments are
required to begin no later than April 1996.
ITEM 3. Legal Proceedings
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
Executive Officers of the Registrant
The following table lists the names, ages and positions held
with the Registrant of all executive officers of the Registrant.
There are no family relationships between any director or
executive officer and any other director or executive officer of
the Registrant. Executive officers serve at the discretion of
the Board of Directors.
Name Age Position
Eric A. Benhamou 39 Chairman, President
and Chief Executive Officer
Debra J. Engel 42 Vice President,
Corporate Services
Robert J. Finocchio, Jr. 43 Executive Vice
President and General
Manager,Network Systems
Operations
Ralph B. Godfrey 54 Vice President, Channel
Sales-Americas
John H. Hart 48 Vice President and
Chief Technical Officer
Richard W. Joyce 38 Vice President, Sales
Europe and Asia/Pacific Rim
Alan J. Kessler 37 Vice President,
Systems Sales-Americas
Christopher B. Paisley 42 Vice President, Finance
and Chief Financial Officer
Janice M. Roberts 38 Vice President, Marketing
Douglas C. Spreng 50 Vice President and
General Manager, Network
Adapter Division
Eric A. Benhamou has been the Company's President and Chief
Executive Officer since April 1990 and September 1990,
respectively. Mr. Benhamou became Chairman of the Board of
Directors of the Company in July 1994. Mr. Benhamou served as
the Company's Chief Operating Officer from April 1990 through
September 1990. From October 1987 through April 1990, Mr.
Benhamou held various general management positions within the
Company. Prior to that, Mr. Benhamou was one of the founders of
Bridge Communications, Inc., in September 1981, and held various
executive positions in that company in the field of engineering
and product development, most recently as Vice President of
Engineering, until that company merged with 3Com in September
1987. Mr. Benhamou serves as a Director of Cypress
Semiconductor, Inc. Mr. Benhamou is also a member of the Board
of Directors of Smart Valley, Inc., and serves as a member of the
Board of Trustees of the Leavy School of Business, Santa Clara
University.
Debra J. Engel has been Vice President, Corporate Services
since March 1990. From the time Ms. Engel joined the Company in
November 1983 until March 1990, she was Vice President, Human
Resources. Prior to that, she was with Hewlett-Packard Company
for seven years, most recently as Corporate Staffing Manager at
Hewlett-Packard's Corporate Headquarters.
Robert J. Finocchio, Jr. has been Executive Vice President
and General Manager, Network Systems Operations since June 1993.
From January 1990 through May 1993, Mr. Finocchio served as
Executive Vice President, Field Operations. Mr. Finocchio joined
the Company in December 1988 as Vice President of Sales,
Marketing and Services, a position he held through January 1990.
Prior to joining the Company, Mr. Finocchio was with Rolm, Inc.
for nine years, where he held various executive positions in
sales and service. Most recently he was Vice President of Rolm
Systems Marketing.
Ralph B. Godfrey has been Vice President, Channel Sales-
Americas since June 1993. Mr. Godfrey joined the Company in June
1990 as Vice President of 3Com USA, a position he held through
May 1993. Prior to joining the Company, Mr. Godfrey was with
Unisys, Inc. for two years, where he held several executive
positions in sales, most recently as President of the Value-Added
Marketing Division. Prior to Unisys, Mr. Godfrey was with
Hewlett-Packard Company for 20 years where he held several field
sales management positions, the most recent as National Sales
Manager for Business Systems.
John H. Hart has been Vice President and Chief Technical
Officer since joining the Company in September 1990. Prior to
joining the Company, Mr. Hart worked for Vitalink Communications
Corporation for seven years, where he held various executive
positions in product engineering and development. Mr. Hart's
final position with Vitalink was Vice President of Network
Products.
Richard W. Joyce has been Vice President, Sales Europe and
Asia/Pacific Rim (APR) since June 1993. Since January 1990, Mr.
Joyce has also served as President, 3Com Europe Limited. Mr.
Joyce joined the Company in November 1987 as Sales Manager of
3Com (UK) Limited, a position he held until September 1988. From
September 1988 until January 1990, Mr. Joyce served as Managing
Director of 3Com (UK) Limited. Most recently prior to joining
the Company, Mr. Joyce held the position of Managing Director
Europe for State Street Trade Development Corporation from 1985
through 1987. Prior to this, Mr. Joyce held several different
positions with a variety of data networking and communications
companies.
Alan J. Kessler has been Vice President, Systems Sales-
Americas since June 1993. From May 1991 through May 1993, Mr.
Kessler served as Vice President and General Manager, Network
Systems Division. From April 1990 until May 1991, Mr. Kessler
served as Vice President and General Manager, Distributed Systems
Division. Previously, he served as Product Marketing Manager of
the Distributed Systems Division from November 1988 through April
1990 and as Product Line Manager from October 1985 through
November 1988.
Christopher B. Paisley has served as the Company's Vice
President, Finance and Chief Financial Officer since September
1985. Prior to joining the Company, Mr. Paisley was Vice
President, Finance of Ridge Computers from May 1982 to September
1985. Previously, Mr. Paisley was employed by Hewlett-Packard
Company for five years in a variety of accounting and finance
positions.
Janice M. Roberts has been Vice President, Marketing since
June 1992, and has also served as General Manager, Personal
Office Division since February 1994. From February 1992 until
June 1992, Ms. Roberts was Vice President and General Manager of
the Premises Distribution Division. During the period January
1989 to February 1992, Ms. Roberts served as Director of BICC
Technologies Limited and President of BICC Technologies, Inc. and
BICC Communications, Inc. She was also Chairman and Managing
Director of BICC Data Networks Limited. From December 1986
through January 1989, Ms. Roberts was Manager of Sales and
Marketing of STC Components Ltd. located in Harlowe, United
Kingdom.
Douglas C. Spreng has been Vice President and General
Manager of the Company's Network Adapter Division since March
1992. Prior to joining the Company, Mr. Spreng was President and
Chief Operations Officer of Domestic Automation Company, a
private communications system start-up company based in San
Carlos, California. Previously, Mr. Spreng spent 23 years with
Hewlett-Packard Company (H-P) in a variety of key marketing,
manufacturing and general management positions, including General
Manager of H-P's Commercial Systems Group. Most recently he
served as General Manager of H-P's Manufacturing Applications
Group.
PART II
ITEM 5. Market for Registrant's Common Stock and Related
Stockholder Matters
Fiscal 1994 High Low Fiscal 1993 High Low
First Quarter $29 1/4 $19 5/8 First Quarter $13 3/8 $ 9 5/8
Second Quarter 37 24 1/8 Second Quarter 24 11 1/4
Third Quarter 63 1/4 35 3/8 Third Quarter 34 5/8 21 3/8
Fourth Quarter 63 3/4 46 7/16 Fourth Quarter 40 25 7/8
3Com Corporation common stock has been traded in the over-
the-counter market under the symbol COMS since the company's
initial public offering on March 21, 1984. The preceding table
sets forth the high and low sales prices as reported on the over-
the-counter Nasdaq Stock Market System during the last two years.
As of May 31, 1994, the company had approximately 1,240
shareholders of record. 3Com has not paid and does not
anticipate it will pay cash dividends on its common stock. Also
see Note 10 of Notes to Consolidated Financial Statements.
The current financial information does not reflect a two-for-
one split of its common stock that was effective as of close of
business on August 16, 1994. The common stock will begin trading
at the split value on September 1, 1994.
ITEM 6. Selected Financial Data
The following selected financial information has been
derived from the Consolidated Financial Statements that have been
audited by Deloitte & Touche LLP, independent auditors. The
information set forth below is not necessarily indicative of
results of future operations, and should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial
statements and related notes thereto included elsewhere in this
Form 10-K.
Years ended May 31,
(Dollars in thousands, except per share and employee data)
1994 1993 1992 1991 1990
Sales $826,995 $617,168 $423,801 $413,239 $430,283
Net income (loss) (28,694) 38,561 7,958 (23,831) 23,229
Net income (loss)
per share:
Primary (0.92) 1.22 0.27 (0.79) 0.75
Fully-diluted (0.92) 1.20 0.26 (0.79) 0.75
Total assets $444,343 $367,578 $298,306 $275,056 $298,002
Working capital 198,543 196,231 144,564 149,930 173,376
Long-term
obligations 1,058 1,134 7,807 8,128 834
Retained earnings 61,326 103,163 71,354 73,206 113,525
Shareholders'
equity 280,756 258,263 202,425 193,667 235,412
Number of
employees 2,306 1,971 1,963 1,731 2,008
Notes: Net loss for fiscal 1994 included a charge of
approximately $134.5 million ($3.84 per share) for purchased in-
process technology (see Notes 3 and 4 to the consolidated
financial statements) and a gain of $17.7 million ($.34 per
share) on the sale of an investment. Net income for fiscal 1993
included a charge of approximately $1.3 million ($.04 per share)
for non-recurring items (see Note 5 to the consolidated financial
statements). Net income for fiscal 1992 included a charge of
approximately $10.4 million ($.30 per share) for purchased in-
process technology (see Note 3 to the consolidated financial
statements). Net loss for fiscal 1991 included a charge of
approximately $67.0 million ($1.43 per share) for restructuring
costs. Net income for fiscal 1990 included a charge of
approximately $2.5 million ($.05 per share) accrued for the
relocation in fiscal 1991 of the Company's corporate facilities.
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion should be read in conjunction with
the Consolidated Financial Statements and Notes thereto.
Acquisitions
During the fiscal year ended May 31, 1994, 3Com Corporation
enhanced its High Performance Scalable Networking architecture
with two strategic acquisitions (see Note 3 of Notes to
Consolidated Financial Statements). The Company completed the
acquisitions of Synernetics, Inc. ("Synernetics"), a market
leader in LAN switching products, on January 14, 1994, and
Centrum Communications, Inc. ("Centrum"), an innovator of remote
access products, on February 2, 1994. Both acquisitions were
accounted for as purchases. The aggregate purchase price
consisted of $140.0 million plus $3.3 million of costs attributed
to the exchange of Synernetics options for 3Com options and $13.1
million of costs directly attributable to the completion of the
acquisitions. Approximately $132.1 million of the aggregate
purchase price represented in-process technology and was charged
to the Company's operations during the third fiscal quarter of
1994. In December 1993, the Company also entered into a
technology licensing agreement with Pacific Monolithics, Inc., a
developer of wireless communications (see Note 4 of Notes to
Consolidated Financial Statements). The cost of the license
agreement was $2.5 million, substantially all of which was
charged to the Company's operations during the third fiscal
quarter as purchased in-process technology. Fiscal 1994 results
included a $134.5 million pre-tax charge to operations for the
combined effect of purchased in-process technology related to the
acquisitions and the license agreement. The Company's
consolidated results of operations for the fiscal year ended May
31, 1994 include the operating results of Synernetics and Centrum
from the respective dates of acquisition.
In fiscal 1993, 3Com acquired Star-Tek, Inc. ("Star-Tek"), a
company specializing in Token Ring technology (see Note 3 of
Notes to Consolidated Financial Statements), in a pooling-of-
interests transaction. References to the Company herein refer to
3Com Corporation and its subsidiaries.
Results of Operations
Orders for the Company's products totaled $819.5 million in
fiscal 1994, an increase of 31 percent from $626.4 million in
fiscal 1993. Fiscal 1992 orders were $422.3 million. Fiscal
1994 sales increased 34 percent to $827.0 million from $617.2
million in fiscal 1993. This followed a 46 percent increase in
sales in fiscal 1993 from fiscal 1992 sales of $423.8 million.
The Company believes that the increase in fiscal 1994 orders
and sales from those of fiscal years 1993 and 1992 reflects the
actions the Company has taken during the past years to establish
itself as a leader in the emerging global data networking
environment. In addition to the acquisitions of Synernetics and
Centrum in fiscal 1994 and Star-Tek in fiscal 1993, significant
actions taken by the Company included acquiring the data
networking products business of U.K.-based BICC Group, plc
("BICC") in fiscal 1992, formulating the Company's High
Performance Scalable Networking architecture to meet the demands
of growing networks and advanced network applications, and
opening new markets in Latin America, Asia and Europe.
Furthermore, general market strength in the data networking
market, rapid growth in sales outside the U.S., revenues from
sales of key data networking products such as the EtherLink III
Parallel Tasking network adapter, the NETBuilder II bridge/router
and the LinkBuilder FMS stackable hub, and the Company's ability
to deliver complete data networking solutions for different
connectivity environments also contributed to increased sales.
Revenue from businesses acquired during the year did not account
for a material portion of the year-over-year increase. Sales
from products introduced in the last 12 months represented 32
percent of sales in fiscal 1994, compared to 48 percent of total
sales in fiscal 1993 as several high volume products such as the
EtherLink III network adapter and LinkBuilder FMS stackable hub
met their one-year anniversary in the first half of fiscal 1994.
Sales of network adapters in fiscal 1994 represented 57
percent of total sales and increased 31 percent from fiscal 1993
sales. Sales of network adapters in fiscal years 1993 and 1992
represented 58 percent and 57 percent of total sales,
respectively. The increase in network adapter sales represented
an increase in unit volume partially offset by continuation of
the industry-wide trend toward decreasing average selling prices
and a shift in demand towards the lower-priced EtherLink III
network adapter. The increase in unit volume resulted from sales
of the EtherLink III and the TokenLink III network adapters.
Sales of systems products (internetworking, hub and
switching products) in fiscal 1994 represented 37 percent of
total sales and increased 49 percent from fiscal 1993. This
followed an 84 percent increase in system sales in fiscal 1993
from fiscal 1992. The increase was led primarily by the
LinkBuilder FMS stackable hub, the high-performance NETBuilder II
bridge/router and the LANplex family of switching products.
Similar to network adapters, the increase in systems products
sales represented an increase in unit volume which was partially
offset by a decrease in average selling prices. During the year,
the industry has experienced a trend towards demand for fully
functional, lower cost, lower price hubs and routers, such as
3Com's family of LinkBuilder stackable hubs and NETBuilder remote
office products.
Sales of other products (terminal servers, customer service,
protocols, operating systems, file servers and other products)
represented six percent of fiscal 1994 sales and continued to
decrease from levels in fiscal 1993 and fiscal 1992.
Sales outside of the United States comprised 52 percent of
total sales in fiscal 1994 compared to 50 percent in fiscal 1993
and 47 percent in fiscal 1992. The growth of international sales
was particularly strong in Europe and the Latin America region in
fiscal 1994. The Company believes that the increase in
international sales reflected the same factors that affect the
Company as a whole, including the results of the Company's
continued expansion globally, continued increases in revenue from
the data networking products acquired from U.K.-based BICC, the
worldwide expansion of service and support programs, and the
opening of new sales offices.
Cost of sales as a percentage of sales was 49.1 percent in
fiscal 1994, compared to 51.9 percent in fiscal 1993 and 52.9
percent in fiscal 1992. The 2.8 percentage point improvement in
gross margin in fiscal 1994 primarily resulted from improved
efficiency of manufacturing operations, a favorable shipment mix
with higher volume shipments of the lower-cost and higher-margin
EtherLink III network adapter, lower freight and duties which
resulted from an increase in the volume of products manufactured
in the Ireland plant, and reduction in product material costs.
The 1.0 percentage point improvement in gross margin in fiscal
1993 from fiscal 1992 was due primarily to a favorable shipment
mix of EtherLink III network adapters, as well as LinkBuilder FMS
and LinkBuilder ECS hub products. The trend noted above towards
demand for lower cost, lower price systems products allows the
Company to further leverage its manufacturing infrastructure.
Total operating expenses in fiscal 1994 were $418.1 million
compared to $235.9 million in fiscal 1993 and $187.8 million in
fiscal 1992. Excluding non-recurring charges, operating expenses
increased $49.1 million or 21 percent from fiscal 1993 to fiscal
1994, but decreased as a percentage of sales from 38.0 percent of
sales in fiscal 1993 to 34.3 percent of sales in fiscal 1994.
The increase in operating expenses from fiscal 1993 reflected
increased selling costs associated with higher sales, the cost of
developing and promoting the Company's systems products,
increased cooperative advertising expenses, and growth in the
number of employees to support the higher volume of business.
Research and development expenses as a percentage of sales in
fiscal 1994 decreased from fiscal 1993 and 1992, but increased in
absolute dollars. The increase in spending reflected the
Company's continued commitment to develop and introduce high
quality, innovative products. Operating expenses increased $57.1
million or 32 percent from fiscal 1992 to fiscal 1993, excluding
non-recurring charges. The increase in operating expenses
reflected the cost of developing and promoting new products, and
growth in the number of employees and spending due to the
acquisition of the data networking products business of BICC in
January 1992.
Summary of Operating Expenses
Fiscal Percent Fiscal Percent Fiscal Percent
(Dollars in thousands) 1994 of Sales 1993 of Sales 1992 of Sales
Sales and marketing $171,799 20.8% $137,021 22.2% $97,997 23.1%
Research and
development 76,467 9.2 64,346 10.4 48,220 11.4
General and 35,379 4.3 33,176 5.4 31,190 7.4
administrative
Non-recurring charges:
Purchased in-process
technology 134,481 16.3 - - 10,404 2.4
Non-recurring
items - - 1,316 0.2 - -
Total operating
expenses 418,126 50.6 235,859 38.2 187,811 44.3
Total operating expenses
excluding non-
recurring charges $283,645 34.3% $234,543 38.0% $177,407 41.9%
In the third quarter of fiscal 1994, the Company recorded a
$134.5 million pre-tax charge to operations for the combined
effect of purchased in-process technology related to the
acquisitions of Synernetics and Centrum and the technology
license agreement with Pacific Monolithics, Inc. Fiscal 1993
results included a non-recurring charge of $1.3 million which
consisted of the net cost of a litigation settlement of $3.6
million, merger costs of $1.0 million related to the acquisition
of Star-Tek, offset by a reduction in accrued restructuring costs
of $3.3 million based on revised estimates of future costs.
Fiscal 1992 results included a $10.4 million pre-tax charge to
operations for purchased in-process technology related to the
acquisition of the data networking products business of BICC.
Other expenses (net) were $1.2 million in fiscal 1994,
compared to $0.7 million in fiscal 1993 and $0.3 million in
fiscal 1992. The increase in other expenses (net) in fiscal 1994
from fiscal 1993 resulted primarily from a higher provision for
doubtful accounts partially offset by more favorable foreign
exchange results and higher interest income. The increase in
other expenses (net) in fiscal 1993 from fiscal 1992 resulted
primarily from lower interest income and higher foreign exchange
costs, partially offset by a lower provision for doubtful
accounts.
The Company provided $48.2 million for income taxes in
fiscal 1994 on income before income taxes of $19.5 million
because a significant portion of the purchased in-process
technology charge was not tax deductible. Excluding the effect
of the purchased in-process technology charge, the effective tax
rate would have been 35.0 percent. The Company's effective tax
rate in fiscal 1993 was 36.0 percent, as compared to 43.0 percent
in fiscal 1992. In fiscal 1992, as in fiscal 1994, a portion of
the purchased in-process technology charge was not tax
deductible, which increased the effective tax rate.
Net loss for fiscal 1994 was $28.7 million, or $0.92 per
share, compared to net income for fiscal 1993 of $38.6 million,
or $1.20 per share. Net loss for fiscal 1994 included the
aforementioned $134.5 million pre-tax charge associated with
purchased in-process technology, a $17.7 million pre-tax gain
from the sale of the Company's investment in Madge N.V. and a
$1.2 million tax benefit due to retroactive changes and the
effect of changes in federal statutory rates of the Revenue
Reconciliation Act of 1993. Excluding these one-time charges and
gains, the Company would have realized net income of $86.9
million, or $2.54 per share in fiscal 1994. Excluding the effect
of non-recurring items in fiscal 1993, the Company would have
realized net income of $39.8 million, or $1.24 per share. Net
income for fiscal 1992 was $8.0 million, or $0.26 per share.
Excluding the effect of the purchased in-process technology
charge in fiscal 1992, the Company would have realized net income
of $17.1 million, or $0.56 per share.
Business Environment and Risk Factors
The Company's future operating results may be affected by various
trends and factors which the Company must successfully manage in
order to achieve favorable operating results. In addition, there
are trends and factors beyond the Company's control which affect
its operations. Such trends and factors include adverse changes
in general economic conditions, governmental regulation or
intervention affecting communications or data networking,
fluctuations in foreign exchange rates, and other factors listed
below. The data networking industry has become increasingly
competitive, and the Company's results may be adversely affected
by the actions of existing or future competitors. Such actions
may include the development or acquisition of new technologies,
the introduction of new products, the assertion by third parties
of patent or similar intellectual property rights, and the
reduction of prices by competitors to gain or retain market
share. Industry consolidation or alliances may also affect the
competitive environment.
The market for the Company's products is characterized by
rapidly changing technology. An unexpected change in one or more
of the technologies affecting data networking could have a
material adverse effect on the Company's operating results. For
instance, a large portion of the Company's revenues is comprised
of sales of products based on the Ethernet technology. The
Company's operating results could be adversely affected if there
is an unexpected change in such technology or if the Company does
not respond timely and effectively to expected changes. The
Company is engaged in research and development activities in
certain emerging high-speed technologies, such as the 100 Mbps
Ethernet, ATM and FDDI. If the industry standardizes on high-
speed technologies which are different from the technology in
which the Company has invested, this may have a material adverse
effect on the Company's ability to compete in the marketplace.
While the Company continues to introduce new products and
technology to the marketplace, the success of the new products is
dependent on many factors, including timely introduction and
market acceptance, the Company's ability to manage the risks
associated with product transitions, the Company's ability to
manage future inventory levels in line with anticipated product
demand and to manufacture its products in appropriate quantities
to meet anticipated demand.
Some key components of the Company's products are currently
available only from single sources. There can be no assurance
that in the future the Company's suppliers will be able to meet
the Company's demand for such components in a timely and cost
effective manner. The Company's operating results and customer
relationships could be adversely affected by either an increase
in prices for, or an interruption or reduction in supply of, any
key components.
The market price of the Company's common stock has been, and
may continue to be, extremely volatile. Factors such as new
product announcements by the Company or its competitors,
quarterly fluctuations in the Company's operating results and
general conditions in the data networking market may have a
significant impact on the market price of the Company's common
stock. These conditions, as well as factors which generally
affect the market for stocks of high technology companies, could
cause the price of the Company's stock to fluctuate substantially
over short periods.
The Company's corporate headquarters and a large portion of
its research and development activities and other critical
business operations are located near major earthquake faults.
Operating results could be materially adversely affected in the
event of a major earthquake. Because of the foregoing factors,
as well as other factors affecting the Company's operating
results, past trends should not be used by investors to
anticipate future results or trends. Further, the Company's
prior performance should not be presumed to be an accurate
indicator of future performance.
Liquidity and Capital Resources
Cash, cash equivalents and temporary cash investments at May
31, 1994 were $129.7 million as compared to $117.2 million and
$79.4 million at the end of fiscal 1993 and 1992, respectively.
Net cash generated from operations was $127.9 million in
fiscal 1994 and $51.7 million in fiscal 1993. Trade receivables
at May 31, 1994 increased $35.2 million from May 31, 1993 due
primarily to higher sales in the fourth quarter of fiscal 1994 as
compared to the comparable prior-year period. Days sales
outstanding decreased from 45 days in fiscal 1993 to 44 days in
fiscal 1994. Inventory levels increased $3.3 million from May
31, 1993 and inventory turnover improved from 5.3 turns at May
31, 1993 to 6.5 turns at May 31, 1994.
Investing activities for fiscal 1994 included $18.1 million
of proceeds from the sale of the Company's investment in Madge
N.V., offset by $36.5 million used for capital expenditures.
Major capital expeditures in fiscal 1994 included the addition of
a new line in the Ireland manufacturing plant, worldwide
implementation of a new network operating system and electronic
mail infrastruture, and upgrades of desktop systems and servers
necessitated by the new network operating system. The Company
spent $98.1 million in net cash for the acquisitions of
Synernetics and Centrum which were funded through cash balances
and the liquidation of temporary cash investments. As of May 31,
1994, the Company has an outstanding obligation of $14.3 million
related to the Centrum acquisition which is payable in August
1994.
During fiscal 1994, the Company repurchased 700,000 shares
of its common stock at an average price of $23.78, for a total
cash outlay of $16.6 million. The Company received cash of $22.7
million from sale of its common stock to employees through its
employee stock purchase and option plans. As of May 31, 1994,
the Board of Directors has authorized the Company to repurchase
up to an additional 1.8 million shares of its common stock in the
open market.
In January 1994, the Company increased its revolving bank
credit agreement from $20 million to $40 million and extended the
expiration date to December 31, 1996. No amount is outstanding
under the credit agreement. Based on current plans and business
conditions, the Company believes that its existing cash balances,
together with cash generated from operations, the established
revolving credit agreement and other reasonable sources of
capital, are sufficient to satisfy anticipated operating cash
requirements through fiscal 1995.
ITEM 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements and Financial Statement Schedules
Financial Statements:
Independent Auditors' Report - Deloitte & Touche LLP
Independent Auditors' Report - Levine, Zeidman & Daitch, P.C.
Consolidated Statements of Operations for the years ended May 31, 1994,
1993 and 1992
Consolidated Balance Sheets at May 31, 1994 and 1993
Consolidated Statements of Shareholders' Equity for the years ended May 31,
1994, 1993 and 1992
Consolidated Statements of Cash Flows for the years ended May 31, 1994,
1993 and 1992
Notes to Consolidated Financial Statements
Quarterly Results of Operations (Unaudited)
Financial Statement Schedules:
Schedule I - Temporary Cash Investments S-1
Schedule II - Amounts Receivable from Related Parties and Underwriters,
Promoters and Employees other than Related Parties
Schedule VIII - Valuation and Qualifying Accounts and Reserves
Schedule X - Supplementary Income Statement Information
All other schedules are omitted, because they are not
required, are not applicable, or the information is included in
the consolidated financial statements and notes thereto.
Independent Auditors' Report
To the Shareholders and Board of Directors of 3Com Corporation:
We have audited the accompanying consolidated balance sheets of
3Com Corporation and its subsidiaries as of May 31, 1994 and
1993, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the three years
in the period ended May 31, 1994. Our audits also included the
financial statement schedules listed in the accompanying Index to
Consolidated Financial Statements and Financial Statement
Schedules at Item 8. These financial statements and financial
statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements and financial statement schedules based on
our audits. The consolidated financial statements give
retroactive effect to the fiscal 1993 merger of 3Com Corporation
and Star-Tek, Inc., which has been accounted for as a pooling of
interests as described in Note 3 to the consolidated financial
statements. We did not audit the statements of income,
shareholders' equity and cash flows of Star-Tek, Inc. for the
year ended December 31, 1991, which statements reflect sales of
$15,413,000 and net income of $5,914,000. Those statements were
audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to the amounts included
for Star-Tek, Inc., is based solely on the report of such other
auditors.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other
auditors, the accompanying consolidated financial statements
present fairly, in all material respects, the financial position
of 3Com Corporation and its subsidiaries at May 31, 1994 and
1993, and the results of their operations and their cash flows
for each of the three years in the period ended May 31, 1994 in
conformity with generally accepted accounting principles. Also,
in our opinion, such financial statement schedules, when
considered in relation to the basic consolidated financial
statements taken as a whole, present fairly in all material
respects the information set forth therein.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
San Jose, California
June 15, 1994
Independent Auditors' Report
To the Board of Directors
Star-Tek, Inc.
Northboro, Massachusetts
We have audited the accompanying statements of income, and
retained earning and of cash flows for the year ended December
31, 1991 of Star-Tek, Inc. (a Massachusetts corporation). These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audit provides a reasonable basis of our opinion.
In our opinion, the financial statements of Star-Tek, Inc.
referred to above present fairly, in all material respects, the
results of its operations and its cash flows for the year ended
December 31, 1991 in conformity with generally accepted
accounting principles.
/s/ Levine, Zeidman & Daitch, P.C.
LEVINE, ZEIDMAN & DAITCH, P.C.
Wellesley Hills, Massachusetts
February 24, 1992
Consolidated Statements of Operations
Years Ended May 31,
(In thousands, except per share data) 1994 1993 1992
Sales $826,995 $617,168 $423,801
Costs and Expenses:
Cost of sales 405,927 320,386 224,309
Sales and marketing 171,799 137,021 97,997
Research and development 76,467 64,346 48,220
General and administrative 35,379 33,176 31,190
Purchased in-process
technology 134,481 - 10,404
Non-recurring items - 1,316 -
Total 824,053 556,245 412,120
Operating income 2,942 60,923 11,681
Gain on sale of investment 17,746 - -
Other expense-net (1,150) (677) (347)
Income before income taxes 19,538 60,246 11,334
Income tax provision 48,232 21,685 4,874
Income (loss) before
minority interest (28,694) 38,561 6,460
Minority interest in net loss of
consolidated subsidiary - - 1,498
Net income (loss) $(28,694) $ 38,561 $ 7,958
Net income (loss) per common and
equivalent share:
Primary $ (0.92) $ 1.22 $ 0.27
Fully-diluted $ (0.92) $ 1.20 $ 0.26
Common and equivalent
shares used in computing
per share amount:
Primary 31,310 31,624 29,929
Fully-diluted 31,310 32,146 30,287
See notes to consolidated financial statements.
Consolidated Balance Sheets
Years Ended May 31,
(Dollars in thousands) 1994 1993
ASSETS
Current Assets:
Cash and cash equivalents $ 66,284 $ 40,046
Temporary cash inves 63,413 77,184
Trade receivables, less allowance
for doubtful accounts ($10,402
in 1994 and $6,498 in 1993) 118,653 83,481
Inventories 71,352 68,061
Deferred income taxes 31,236 19,805
Other 10,134 15,835
Total current assets 361,072 304,412
Property and equipment-net 67,001 55,248
Other assets 16,270 7,918
Total $444,343 $367,578
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 51,827 $ 40,212
Accrued and other liabilities 91,130 58,311
Income taxes payable 19,090 8,637
Current portion of long-term
obligations 482 1,021
Total current liabilities 162,529 108,181
Long-term obligations 1,058 1,134
Shareholders' Equity:
Preferred stock, no par value,
3,000,000 shares authorized;
none outstanding - -
Common stock, no par value, 100,000,000 shares
authorized; shares outstanding:
1994--32,526,450; 1993--30,850,377 219,937 154,958
Unamortized restricted stock grants (202) -
Retained earnings 61,326 103,163
Accumulated translation adjustments (305) 142
Total shareholders' equity 280,756 258,263
Total $444,343 $367,578
See notes to consolidated financial statements.
Consolidated Statements of Shareholders' Equity
Unamortized
Restricted
Stock Grants
and Notes
Receivable Accumulated
Common Stock From Sale of Retained Transition
(In thousands) Shares Amount Common Stock Earnings Adjustments Total
Balances,
June 1, 1991 27,203 $119,760 $(24) $73,206 $ 725 $193,667
Common stock
issued under
stock plans 1,393 10,876 (131) 10,745
Stock warrants
issued 1,400 1,400
Repurchase of
common stock (991) (4,477) (6,102) (10,579)
Repayment of
note receivable 21 21
Tax benefit from
employee stock
transactions 1,504 1,504
Amortization of
restricted
stock grants 11 11
Stock dividend
pooled entity 1,733 -
Pro forma tax
provision of
pooled entity 2,092 2,092
Equity distributions
of pooled entity (5,800) (5,800)
Interest accrued on
notes receivable 3 3
Accumulated translation
adjustments 1,403 1,403
Net income 7,958 7,958
Balances,
June 1, 1992 29,338 129,063 (120) 71,354 2,128 202,425
Common stock
issued under
stock plans 2,382 19,413 19,413
Stock warrants
buyback (1,300) (1,300)
Repurchase of
common stock (860) (4,042) (5,340) (9,382)
Tax benefit from
employee stock
transactions 11,955 11,955
Cancellation of
restricted
stock grants (10) (131) 120 (11)
Pro forma tax
provision of
pooled entity 1,604 1,604
Equity distributions
of pooled entity (5,179) (5,179)
Adjustment to conform
fiscal year of
pooled entity 2,163 2,163
Accumulated translation
adjustments (1,986) (1,986)
Net income 38,561 38,561
Balance,
June 1, 1993 30,850 154,958 - 103,163 142 258,263
Common stock
issued under
stock plans 2,376 22,917 (255) 22,662
Repurchase of
common stock (700) (3,501) (13,143) (16,644)
Tax benefit
from employee
stock transactions 24,474 24,474
Amortization of
restricted
stock grants 53 53
Stock options
assumed in
connection with
acquisitions 21,089 21,089
Accumulated
translation
adjustments (447) (447)
Net loss (28,694) (28,694)
Balances,
May 31, 1994 32,526 $219,937 $(202) $61,326 $(305) $280,756
See notes to consolidated financial statements.
Consolidated Statements of Cash Flows
Years Ended May 31,
(Dollars in thousands) 1994 1993 1992
Cash flows from operations:
Net income (loss) $(28,694) $ 38,561 $ 7,958
Adjustments to reconcile net income
(loss) to cash provided by operations:
Depreciation and amortization 30,610 25,135 21,660
Gain on sale of investment (17,746) - -
Deferred income taxes (9,865) (3,523) 1,581
Purchased in-process technology 134,481 - 10,404
Minority interest - - (1,498)
Adjustment to conform fiscal year
of pooled entity - 2,163 -
Pro forma provision for income taxes - 1,604 2,092
Non-cash restructuring costs - (3,346) -
Changes in assets and liabilities
net of effects of acquisitions:
Trade receivables (30,045) (20,991) (432)
Inventories 1,637 (19,139) (9,982)
Other current assets 6,190 (3,889) (1,480)
Accounts payable 8,886 11,525 5,573
Accrued and other liabilities (2,461) 6,016 (11,140)
Income taxes payable 34,927 17,618 3,487
Net cash provided by operations 127,920 51,734 28,223
Cash flows from investment activities:
Proceeds from sale of investment 18,066 - -
Purchase of property and equipment (36,474) (22,263) (21,783)
Purchase of temporary cash investments (76,841) (72,962) (33,423)
Proceeds from temporary cash investments 90,612 40,496 67,815
Acquisition of businesses and related
purchase-price adjustment (98,128) 2,946 (25,000)
Other-net (3,020) 908 528
Net cash used for investment activities (105,785) (50,875) (11,863)
Cash flows from financing activities:
Sale of stock 22,662 19,413 10,769
Repurchase of common stock (16,644) (9,382) (10,579)
Repurchase of stock warrants - (1,300) -
Notes payable - 3,326 4,795
Repayments of notes payable and capital
lease obligations (1,462) (513) (429)
Equity distributions of pooled entity - (5,179) (5,800)
Other-net (453) (1,872) 268
Net cash provided by (used for)
financing activities 4,103 4,493 (976)
Increase in cash and cash equivalents 26,238 5,352 15,384
Cash and cash equivalents at
beginning of year 40,046 34,694 19,310
Cash and cash equivalents at end of year $ 66,284 $ 40,046 $ 34,694
Other cash flow information:
Interest paid $ 66 $ 254 $ 245
Income taxes paid (refunded) 21,614 5,910 (7,267)
Non-cash investing and financing activities-
Property and equipment acquired under
capital leases - - 2,062
In connection with the acquisitions in fiscal 1994 (see Note 3),
the Company paid cash, net of cash acquired, of $98.1 million
plus $14.3 million payable in August 1994, and recorded non-cash
value of options assumed of $21.1 million. The fair value of
assets acquired, excluding the $132.1 million purchased in-
process technology charged to operations, was $35.6 million, and
liabilities of $11.3 million were assumed.
In connection with the acquisition in fiscal 1992 (see Note 3),
the Company paid cash of $25 million (subsequently adjusted to
$22 million), issued stock warrants with an estimated value of
$1.4 million (subsequently repurchased) and assumed liabilities
of $13.9 million.
See notes to consolidated financial statements.
Notes to Consolidated Financial Statements
Note 1: Description Of Business
Founded in 1979, 3Com Corporation pioneered the data
networking industry and is committed to providing customers
global access to information. Today, 3Com offers a broad range
of ISO 9000-compliant global data networking solutions that
include routers, hubs, switches and adapters for Ethernet, Token
Ring, FDDI and ATM networks. Headquartered in Santa Clara,
California, 3Com is a Fortune 500 company with worldwide research
and development, manufacturing, marketing, sales and support
capabilities.
Note 2: Significant Accounting Policies
Principles of consolidation. The consolidated financial
statements include the accounts of 3Com Corporation and its
wholly- and majority-owned subsidiaries. All significant
intercompany balances and transactions are eliminated in
consolidation.
Cash equivalents are highly liquid debt investments acquired with
a maturity of three months or less.
Temporary cash investments consist of short-term investments
stated at cost.
Financial instruments. The Company has not yet adopted Statement
of Financial Accounting Standards No. 115, "Accounting for
Investments: Debt and Equity Securities". The Company believes
that the carrying values of its financial instruments approximate
their fair value, and the adoption of this new standard in the
first quarter of fiscal 1995 will not have a significant impact
on the consolidated financial position or results of operations.
Concentrations of credit risk. Financial instruments which
potentially subject the Company to concentrations of credit risk
consist principally of investments and trade receivables. The
Company invests in instruments with an investment credit rating
of AA and better. The Company also places its investments for
safekeeping with a high-credit-quality financial institution.
Credit risk with respect to trade receivables is generally
diversified due to the large number of entities comprising the
Company's customer base and their dispersion across many
different industries and geographies. The Company often sells
its products through third-party distributors, and, as a result,
may maintain individually significant receivable balances with
major distributors. The Company believes that its credit
evaluation, approval and monitoring processes substantially
mitigate potential credit risks.
Inventories are stated at the lower of standard cost (which
approximates first-in, first-out cost) or market.
Property and equipment is stated at cost. Equipment under
capital leases is stated at the lower of fair market value or the
present value of the minimum lease payments at the inception of
the lease.
Purchased technology is included in other assets and is amortized
over 2-4 years.
Depreciation and amortization are computed over the shorter of
the estimated useful lives, lease terms, or terms of license
agreements of the respective assets, on a straight-line basis -
generally 2-7 years with buildings at 25 years.
Revenue recognition. The Company recognizes revenue and accrues
related royalty and warranty expenses upon shipment. Revenue
from variable royalties pursuant to license agreements is
recognized upon receipt. Service and subscription revenue is
recognized over the term of the related contractual period.
Development costs. Development costs incurred in the research
and development of new software products and enhancements to
existing software products are expensed as incurred until
technological feasibility has been established. The Company
believes its current process for developing software is
essentially completed concurrently with the establishment of
technological feasibility; accordingly, software costs incurred
after the establishment of technological feasibility have not
been material and therefore have been expensed.
Income taxes. The Company accounts for income taxes under
Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" which requires an asset and liability approach
to account for income taxes.
Foreign currency translations. For foreign operations with the
local currency as the functional currency, assets and liabilities
are translated at year-end exchange rates, and statements of
operations are translated at the average exchange rates during
the year. Gains or losses resulting from foreign currency
translation are accumulated as a separate component of
shareholders' equity.
For foreign operations with the U.S. dollar as the
functional currency, assets and liabilities are translated at the
year-end exchange rates except for inventories, prepaid expenses,
and property and equipment, which are translated at historical
exchange rates. Statements of operations are translated at the
average exchange rates during the year except for those expenses
related to balance sheet amounts that are translated using
historical exchange rates. Gains or losses resulting from
foreign currency translation are included in other expense - net
in the statements of operations.
Net income (loss) per common and equivalent share is computed
using the weighted average number of common shares outstanding
and the dilutive effects of stock options, using the treasury
stock method.
Reclassifications. Certain prior year amounts have been
reclassified to conform to the current year presentation.
Note 3: Business Combinations
On January 14, 1994, the Company acquired all of the outstanding
shares of Synernetics, Inc. ("Synernetics") and assumed all
outstanding Synernetics stock options. The purchase price
consisted of approximately $104.0 million plus $3.3 million of
stock options. A substantial portion of the purchase price was
paid using funds from the Company's working capital. Synernetics
is engaged in the development, manufacturing and marketing of LAN
switching products.
On February 2, 1994, the Company acquired all of the
outstanding shares of Centrum Communications, Inc. ("Centrum")
and assumed all outstanding Centrum stock options. The purchase
price consisted of approximately $36.0 million of which $16.0
million was paid in cash and $14.3 million is payable in August
1994 and the remainder was associated with the value of the
assumed stock options. Centrum is engaged in the development,
manufacturing and marketing of remote access products and
technology.
The acquisitions were accounted for as purchases and,
accordingly, the acquired assets and liabilities were recorded at
their estimated fair values at the dates of acquisition. The
aggregate purchase price of $143.3 million plus $13.1 million of
costs directly attributable to the completion of the acquisitions
has been allocated to the assets and liabilities acquired.
Approximately $132.1 million of the total purchase price
represented in-process technology that had not yet reached
technological feasibility and was charged to the Company's
operations.
The Company's consolidated results of operations include the
operating results of the acquired companies since their
acquisition dates.
The following table summarizes the unaudited pro forma
combined results of operations for the years ended May 31, 1994
and 1993 as if the acquisitions had occurred at the beginning of
each of the periods presented:
(Unaudited)
Years Ended May 31,
(In thousands, except per share amounts) 1994 1993
Sales $838,953 $628,546
Net income $ 96,033 $ 33,623
Net income per share:
Primary $ 2.85 $ 1.05
Fully-dilute $ 2.81 $ 1.04
Shares used in computing per share amounts:
Primary 33,717 32,066
Fully-diluted 34,180 32,309
The above table includes, on a pro forma basis, the
Company's consolidated financial information for the year ended
May 31, 1994 combined with the financial information of
Synernetics and Centrum for the same twelve months. The
Company's consolidated financial information for the year ended
May 31, 1993 is combined with the financial information of
Synernetics and Centrum for the twelve months ended June 30,
1993. The above table excludes the one-time $132.1 million
charge for purchased in-process technology arising from these
acquisitions as it was a material non-recurring charge. This
charge is included in the actual consolidated statement of
operations for the year ended May 31, 1994.
The unaudited pro forma combined results of operations are
presented for illustrative purposes only and are not necessarily
indicative of the operating results that would have occurred had
the acquisitions been consummated at the beginning of the periods
presented, nor are they necessarily indicative of future
operating results.
On January 29, 1993, the Company acquired Star-Tek, Inc.
("Star-Tek") by issuing approximately 1.74 million shares of
common stock for all of the outstanding shares of Star-Tek.
Star-Tek designs, manufactures and markets a range of Token
Ring products focused primarily on the connectivity needs of
larger organizations with IBM mainframe, mid-range and Token Ring
LAN-based information systems. The acquisition was accounted for
by the pooling-of-interests method. Star-Tek maintained its
financial records on a fiscal year ending December 31. The
consolidated statements of operations and cash flows for the year
ended May 31, 1992 include the Star-Tek statements of operations
and cash flows for the year ended December 31, 1991.
The results of operations of Star-Tek for the five-month
period ended May 31, 1992 reflected net income of $1.6 million
and pro-forma tax adjustment of $595,000, the sum of which has
been reported as an increase in the Company's fiscal 1993
retained earnings.
In January 1992, the Company acquired the data networking
products business of U.K.-based BICC Group, plc. This
acquisition has been accounted for as a purchase and,
accordingly, the acquired assets and liabilities were recorded at
their estimated fair values at the date of acquisition. The
acquisition price consisted of approximately $22 million in cash
and a warrant to purchase 500,000 shares of the Company's common
stock. The stock warrant was subsequently repurchased by the
Company. Approximately $10.4 million of the purchase price
represented in-process technology that had not yet reached
technological feasibility and was charged to the Company's
operations. The Company's consolidated results of operations
include the operating results of the acquired business from the
January 31, 1992 date of acquisition.
Note 4: License
In the third quarter of fiscal 1994, the Company licensed
certain in-process wireless technology from Pacific Monolithics,
Inc. This technology is still under development and,
accordingly, $2.4 million of the $2.5 million cost of obtaining
this license represented in-process technology and was charged to
operations in the third quarter of fiscal 1994.
Note 5: Non-recurring Items
Non-recurring items for the year ended May 31, 1993 consists
of the net cost of a litigation settlement of $3.6 million (see
Note 15), and merger costs of $1.0 million related to the
acquisition of Star-Tek (see Note 3), offset by a reduction in
accrued restructuring costs of $3.3 million in the fourth quarter
of fiscal 1993 based on revised estimates of future costs.
Note 6: Foreign Exchange Contracts
The Company enters into foreign exchange contracts to hedge
certain balance sheet exposures and intercompany balances against
future movements in foreign exchange rates. Gains and losses on
the foreign exchange contracts are included in other expense -
net, which offset foreign exchange gains or losses from
revaluation of foreign currency-denominated balance sheet items
and intercompany balances.
At May 31, 1994 and 1993, the Company had outstanding
foreign exchange contracts of $14.6 million and $14.0 million,
respectively. The contracts require the Company to exchange
foreign currencies for U.S. dollars or vice versa, and generally
mature in one month.
Note 7: Inventories
Inventories at May 31 consist of:
(Dollars in thousands) 1994 1993
Finished goods $44,770 $41,331
Work-in-process 8,232 4,912
Raw materials 18,350 21,818
Total $71,352 $68,061
Note 8: Property And Equipment
Property and equipment at May 31 consists of:
(Dollars in thousands) 1994 1993
Land $ 1,303 $ 1,303
Building 7,372 7,372
Machinery and equipment 122,892 89,830
Furniture and fixtures 14,591 12,476
Leasehold improvements 15,446 14,604
Construction in progress - 756
Total 161,604 126,341
Accumulated depreciation and
amortization (94,603) (71,093)
Property and equipment - net $ 67,001 $55,248
Note 9: Accrued And Other Liabilities
Accrued and other liabilities at May 31 consist of:
(Dollars in thousands) 1994 1993
Accrued payroll and related
expenses $ 21,387 $16,671
Accrued product warranty 13,686 10,553
Accrued cooperative advertising 11,544 7,885
Accrued payment to Centrum
shareholders 14,267 -
Other accrued liabilities 30,246 23,202
Accrued and other liabilities $ 91,130 $58,311
Note 10: Borrowing Arrangements And Commitments
The Company has a $40 million revolving bank credit
agreement which expires on December 31, 1996. Under the
agreement, the Company may select among various interest rate
options, including borrowing at the bank's prime rate. The
agreement requires that the Company maintain certain financial
ratios and minimum net worth and restricts payment of cash
dividends. At May 31, 1994, all such requirements were met and
there were no outstanding borrowings under the agreement.
The Company has guaranteed borrowings of its former Japanese
joint venture, 3Com K.K., of 450 million Yen or approximately
$4.3 million as of May 31, 1994.
3Com Development Corporation, a wholly-owned subsidiary of
3Com, is a limited partner in a lease/joint venture arrangement
to acquire and develop the Company's corporate offices in Santa
Clara, which were initially occupied in the first quarter of
fiscal 1991. Future minimum lease payments are included in the
table below.
The Company has signed an agreement with a third party to
lease the buildings to be built on land adjacent to the Company's
existing corporate offices in Santa Clara. The estimated date of
occupancy is April 1996. Future minimum lease payments are
included in the table below.
The Company leases its facilities and certain equipment
under operating leases. Leases expire at various dates from 1995
to 2013 and certain facility leases have renewal options with
rentals based upon changes in the Consumer Price Index or the
fair market rental value of the property.
Future operating lease commitments are as follows:
(Dollars in thousands)
Fiscal year
1995 $14,302
1996 13,471
1997 12,230
1998 10,261
1999 10,145
Thereafter 16,984
Total $77,393
Rent expense was $13.5 million, $13.4 million, and $13.8
million for fiscal 1994, 1993, and 1992, respectively.
Note 11: Common Stock
Shareholder Rights Plan. In September 1989, the Company's Board
of Directors approved a stock purchase rights plan and declared a
dividend distribution of one common stock purchase right for each
outstanding share of its common stock. The rights become
exercisable based on certain limited conditions related to
acquisitions of stock, tender offers and certain business
combination transactions of the Company. Initially, each right
entitles the shareholder to buy one-half share of the Company's
common stock at an exercise price of $50. The rights are
redeemable at the Company's option for $.01 per right and expire
on September 19, 1999.
Stock Option Plans. The Company has stock option plans under
which employees and directors may be granted options to purchase
common stock. Options are generally granted at not less than the
fair market value at grant date, vest over a four-year period,
and expire ten years after the grant date.
A summary of option transactions under the plans follows:
Years ended May 31,
(In thousands except price per share) 1994 1993 1992
Number of option shares:
Granted and assumed 2,350 2,055 1,836
Exercised (1,859) (1,828) (912)
Cancelled (211) (321) (673)
Outstanding at end of year 6,150 5,870 5,964
Option price per share:
Granted and assumed $0.87-61.75 $10.00-39.38 $7.00-14.38
Exercised 0.87-51.75 5.63-35.00 6.00-11.75
Cancelled 0.89-56.38 6.63-35.10 6.00-19.88
Outstanding at end of year $0.87-61.75 $ 5.63-39.38 $5.63-14.38
In connection with the Synernetics and Centrum acquisitions
discussed in Note 3, the Company assumed certain outstanding
options to purchase common stock of the acquired companies and
exchanged them for options to acquire 429,000 shares of the
Company's common stock at exercise prices of $0.87 to $23.26 per
share.
At May 31, 1994, options for 2.3 million shares were
exercisable, 1.9 million shares were available for future grants,
and 8.1 million shares were reserved for issuance under the stock
option plans.
Employee Stock Purchase Plan. The Company has an employee stock
purchase plan, under which eligible employees may authorize
payroll deductions of up to 10 percent of their compensation (as
defined) to purchase common stock at a price equal to 85 percent
of the lower of the fair market values as of the beginning or the
end of the offering period. At May 31, 1994, 645,000 shares of
common stock were reserved for issuance under this plan.
Restricted Stock Plan. The Company has a Restricted Stock Plan,
under which 100,000 shares of common stock were reserved for
issuance at no cost to key employees. The shares are issued at
the fair market value on the date of the grant. The fair market
value of shares granted to an eligible participant cannot exceed
50 percent of the base salary of the eligible participant and any
compensation expense is recognized as the granted shares vest
over a one to four year period. In fiscal 1994, 5,000 shares of
common stock were issued under this plan. At May 31, 1994,
95,000 shares were reserved for future issuance.
Stock Repurchase Program. The Board of Directors has authorized
the Company to repurchase up to 7.5 million shares of common
stock. Under this authorization, 5.7 million shares have been
repurchased and the Company may repurchase up to an additional
1.8 million shares of common stock.
Note 12: Other Expense - Net
Other Expense - net consists of:
(Dollars in thousands) 1994 1993 1992
Interest income $ 3,954 $ 3,602 $ 5,080
Provision for doubtful accounts (4,459) (1,995) (3,683)
Other (645) (2,284) (1,744)
Total $(1,150) $ (677) $ (347)
Other includes gains, losses and transaction costs from
foreign exchange transactions and property and equipment
dispositions.
Note 13: Income Taxes
The provision for income taxes consists of:
(Dollars in thousands) 1994 1993 1992
Current:
Federal $31,761 $13,786 $ 2,721
State 7,862 3,110 623
Foreign 16,771 8,293 (39)
Total current 56,394 25,189 3,305
Deferred:
Federal (9,266) (1,658) 3,109
Foreign 1,104 (1,846) (1,540)
Total deferred (8,162) (3,504) 1,569
Total $48,232 $21,685 $ 4,874
Deferred and prepaid income taxes, which result from
temporary differences in the recognition of revenue and expense
for tax and financial reporting purposes, consist of:
(Dollars in thousands) 1994 1993 1992
Tax depreciation and
operating lease expenses $ (397) $(1,354) $(1,228)
Reserves not recognized
for tax purposes (8,538) (1,323) 4,132
DISC commission - (194) (209)
Alternative minimum tax credits (363) 573 (936)
Other 1,136 (1,206) (190)
Total $(8,162) $(3,504) $ 1,569
The components of the net deferred tax asset consist of:
(Dollars in thousands) 1994 1993
Deferred tax assets:
Depreciation and amortization $ 5,686 $ 5,117
Reserves not recognized for tax purposes 31,483 21,699
Deferred tax assets of acquired businesses 1,703 -
Other (87) 815
Alternative minimum tax credits - 363
Valuation allowance (6,097) (5,171)
Total deferred tax asset $32,688 $22,823
Deferred tax liabilities-Other (25) (25)
Net deferred tax asset $32,663 $22,798
Valuation allowance relates primarily to expenses, the
deduction of which is not assured on future state income tax
returns. The net increase in the valuation allowance in fiscal
1994, 1993, and 1992 was $926,000, $1.1 million and $408,000,
respectively.
Tax carryforwards of acquired businesses consist of $4.6
million and $739,000 of net operating loss and tax credit
carryforwards, respectively, that expire in 2004 through 2008.
The provision for income taxes differs from the amount
computed by applying the federal statutory income tax rate to
income before taxes as follows:
1994 1993 1992
Tax computed at federal statutory rate 35.0% 34.0% 34.0%
State income taxes, net
of federal effect 3.0 3.4 3.6
Foreign sales corporation (5.2) (1.3) (3.6)
Tax exempt investment income (5.7) (1.5) (13.0)
Foreign losses without benefits
of carryovers or carrybacks - - 11.8
Difference between federal
statutory rate and foreign
effective rates (7.5) (0.4) (1.8)
Research tax credits (8.7) (0.2) (6.9)
Non-deductible purchased
in-process technology 241.5 - 18.7
Effect of tax law changes (6.4) - -
Other .9 2.0 0.2
Total 246.9% 36.0% 43.0%
Income before income taxes for the years ended 1994, 1993,
and 1992 include income (loss) of $58.2 million, $18.7 million
and $(10.9 million) from the Company's foreign subsidiaries. The
Company has not provided for federal income taxes on $27.9
million of undistributed earnings of foreign subsidiaries, which
the Company intends to reinvest in subsidiary operations
indefinitely. If such undistributed earnings were to be
remitted, the related tax liability would be approximately $1.9
million.
Note 14: Geographic Area Information
The Company operates in a single industry segment: the
design, manufacture, marketing, and support of data networking
systems. The Company's foreign operations consist of central
distribution and order administration, manufacturing and research
and development facilities in Western Europe, and sales and
marketing activities conducted through sales subsidiaries
throughout the world.
Sales, operating income and identifiable assets, classified
by the major geographic areas in which the Company operates, are
as follows:
(Dollars in thousands) 1994 1993 1992
Revenues from unaffiliated customers:
United States $399,836 $308,879 $223,947
Export sales from United States 103,127 69,237 94,305
Europe 324,032 224,891 98,650
Other - 14,161 6,899
Total $826,995 $617,168 $423,801
Transfers from geographic areas
(eliminated in consolidation):
United States $112,418 $101,570 $ 56,690
Europe 52,595 39,920 12,567
Other - 23,354 4,356
Total $165,013 $164,844 $ 73,613
Operating income (loss):
United States $(57,025) $ 40,811 $ 22,736
Europe 55,890 17,370 2,255
Other 8,679 6,467 (12,396)
Eliminations (4,602) (3,725) (914)
Total $ 2,942 $ 60,923 $ 11,681
Identifiable assets:
United States $332,651 $268,254
Europe 121,019 102,054
Other 4,623 4,492
Eliminations (13,950) (7,222)
Total $444,343 $367,578
Transfers between geographic areas are accounted for at
prices representative of unaffiliated party transactions.
Note 15: Litigation
In August 1989, four class action lawsuits were filed in the
United States District Court for the Northern District of
California naming the Company and certain of its directors and
officers as defendants. The suits, which were consolidated into
a single action, alleged that defendants misrepresented or failed
to disclose material facts about the Company's operations and
financial results, which plaintiffs contended artificially
inflated the price of the Company's securities during the period
December 6, 1988 to August 7, 1989.
In April 1993, the Company and plaintiffs reached an
agreement to settle the consolidated action in its entirety.
Although the Company believed that the claims asserted in the
class action were without merit, the Company believed it was in
the best interest of its shareholders to settle the case due to
the continuing costs of defense, the distraction of management's
attention and the uncertainties inherent in any litigation. The
principal terms of the agreement called for a settlement of $9.9
million, a substantial portion of which was paid by the Company's
insurance carrier.
<TABLE>
Quarterly Results of Operations (Unaudited)
(Dollars in thousands, except per share data)
<CAPTION>
Fiscal 1994 Quarters Ended Fiscal 1993 Quarters Ended
May 31 Feb. 28 Nov. 30 Aug. 31 May 31 Feb. 28 Nov. 30 Aug.31
1994 1994 1993 1993 1993 1993 1992 1992
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales $241,463 $218,166 $205,275 $162,091 $167,458 $161,396 $152,697 $135,617
Gross
<S> <C> <C> <C> <C> <C> <C> <C> <C>
margin 124,605 113,183 102,865 80,415 83,093 78,396 73,809 61,484
Gross
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
margin % 51.6% 51.9% 50.1% 49.6% 49.6% 48.6% 48.3% 45.3%
Operating
income
<C> <C> <C> <C> <C> <C> <C> <C> <C>
(loss) 41,755 (93,203) 33,512 20,878 20,534 17,475 14,624 8,290
Net
income
<C> <C> <C> <C> <C> <C> <C> <C> <C>
(loss) 27,189 (103,460) 21,463 26,114 13,271 10,160 9,280 5,850
Net
income
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(loss) % 11.3% (47.4%) 10.5% 16.1% 7.9% 6.3% 6.1% 4.3%
Net
income
(loss)
per
<S> <C> <C> <C> <C> <C> <C> <C> <C>
share $0.78 $(3.28) $0.65 $0.80 $0.40 $0.31 $0.29 $0.20
</TABLE>
Notes: Net loss for the quarter ended February 28, 1994
included a charge of approximately $134.5 million ($4.00 per
share) for purchased in-process technology (see Notes 3 and 4 to
the consolidated financial statements). Net income for the
quarter ended August 31, 1993 included a gain of approximately
$17.7 million ($.35 per share) related to the sale of an
investment. Net income for the quarter ended February 28, 1993
included a charge of approximately $1.6 million ($.06 per share)
for merger costs associated with the Company's acquisition of
Star-Tek, Inc. (see Notes 3 and 5 to the consolidated financial
statements).
ITEM 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
Not applicable.
PART III
ITEM 10. Directors and Executive Officers of 3Com
The information required by Item 10 of Form 10-K with
respect to identification of directors is incorporated by
reference to the information contained in the section captioned
"Election of Directors" in 3Com's definitive Proxy Statement for
the Annual Meeting of Shareholders to be held September 29, 1994
(the "Proxy Statement"), a copy of which has been filed with the
Securities and Exchange Commission. For information with respect
to the executive officers of the Registrant, see "Executive
Officers of the Registrant" at the end of Part I of this report.
ITEM 11. Executive Compensation
The information required by Item 11 of Form 10-K is
incorporated by reference to the information contained in the
section captioned "Executive Compensation and Other Matters" in
the Proxy Statement.
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management
The information required by Item 12 of Form 10-K is
incorporated by reference to the information contained in the
section captioned "General Information" in the Proxy Statement.
ITEM 13. Certain Relationships and Related Transactions
The information required by Item 13 of Form 10-K is
incorporated by reference to the information contained in the
section captioned "Compensation Committee Interlocks and Insider
Participation" in the Proxy Statement.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
(a) (1) Financial Statements_See Index to Financial Statements and
Financial Statement Schedules
(2) Financial Statement Schedules-See Index to Financial Statements
and Financial Statement Schedules
(3) Exhibits-See Exhibit Index
(b) The Registrant did not file any reports on Form 8-K during the last
quarter of the fiscal year ended May 31, 1994.
(c) See Exhibit Index at page 36 of this Form 10-K.
(d) See Index to Financial Statements and Financial Statement Schedules
EXHIBIT INDEX
Exhibit
Number Description
3.1 Amended and Restated Articles of Incorporation
(Exhibit 19.1 to Form 10-Q) (8)
3.2 Certificate of Amendment of the Amended and Restated Articles of
Incorporation
3.3 Bylaws, as amended and restated (Exhibit 3.2 to Form 10-K) (10)
4.1 Reference is made to Exhibit 3.1
10.1 1983 Stock Option Plan, as amended (Exhibit 10.1 to Form 10-K)
(10)
10.2 Amended and Restated Incentive Stock Option Plan (4)
10.3 License Agreement dated March 19, 1981 (1)
10.4 First Amended and Restated 1984 Employee Stock Purchase Plan,
as amended (Exhibit 19.1 to Form 10-Q) (11)
10.5 License Agreement dated as of June 1, 1986 (Exhibit 10.16 to
Form 10-K) (3)
10.6 3Com Corporation Director Stock Option Plan, as amended (Exhibit
19.3 to Form 10-Q) (11)
10.7 Bridge Communications, Inc. 1983 Stock Option Plan, as amended
(Exhibit 4.7 to Form S-8) (2)
10.8 3Com Headquarters Lease dated December 1, 1988, as amended
(Exhibit 10.14 to Form 10-K) (10)
10.9 Ground Lease dated July 5, 1989 (Exhibit 10.19 to Form 10-K) (5)
10.10 Sublease Agreement dated February 9, 1989 (Exhibit 10.20 to Form
10-K) (5)
10.11 Credit Agreement dated April 21, 1993
10.12 Asset Purchase Agreement dated as of January 24, 1992 (Exhibit
2.1 to Form 8-K) (12)
10.13 3Com Corporation Restricted Stock Plan dated July 9, 1991
(Exhibit 19.2 to Form 10-Q) (11)
10.14 Agreement and Plan of Merger dated December 16, 1992 (Exhibit 3
to Form 8-K) (13)
10.15 Form of Indemnity Agreement for Directors and Officers (Exhibit
10.15 to Form 10-Q) (13)
10.16 Agreement and Plan of Reorganization dated December 16, 1993
among 3Com Corporation, 3Sub Corporation and Synernetics, Inc.
(Exhibit 7.1 to Form 8-K) (14)
10.17 Side Agreement Regarding Agreement and Plan of Reorganization
dated January 14, 1993 among 3Com Corporation, 3Sub Corporation
and Synernetics, Inc. (Exhibit 7.2 to Form 8-K) (14)
10.18 Agreement and Plan of Reorganization dated January 18, 1994
(Exhibit 7.2 to Form 8-K) (15)
10.19 Indemnity and Escrow Agreement dated February 2, 1994. (Exhibit
7.3 to Form 8-K) (15)
10.20 Amendment to Credit Agreement
10.21 Second Amendment to Credit Agreement
10.22 1994 Stock Option Plan
21.1 Subsidiaries of the Registrant
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Levine, Zeidman & Daitch, P.C.
99.1 Descriptive List of Exhibits and Schedules to the Agreement and
Plan of Reorganization dated December 16, 1993 by and among 3Com
Corporation, 3Sub Corporation and Synernetics, Inc.
99.2 Descriptive List of Exhibits and Schedules to the Agreement and
Plan of Reorganization dated January 18, 1994 by and among
3Com Corporation, 3Sub Acquisition Corporation and Centrum
Communications, Inc.
(1) Incorporated by reference to the corresponding Exhibit
previously filed as an Exhibit to Registrant's Registration
Statement on Form S-1 filed January 25, 1984 (File No. 2-89045).
(2) Incorporated by reference to the Exhibit identified in
parentheses previously filed as an Exhibit to Registrant's
Registration Statement on Form S-8 filed October 13, 1987 (File
No. 33-17848).
(3) Incorporated by reference to the corresponding Exhibit
or the Exhibit identified in parentheses previously filed as
an Exhibit to Registrant's Form 10-K filed August 29, 1987 (File
No. 0-12867).
(4) 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).
(5) Incorporated by reference to the corresponding Exhibit or the
Exhibit identified in parentheses previously filed as an Exhibit
to Registrant's Form 10-K filed on August 28, 1989
(File No. 0-12867).
(6) Incorporated by reference to Exhibit 19.1 to Registrant's Form 10-Q
filed on April 14, 1990 (File No. 0-12867).
(7) Incorporated by reference to the corresponding Exhibit or the
Exhibit identified in parentheses previously filed as
an Exhibit to Registrant's Form 10-K filed on August 28, 1990
(File No. 0-12867).
(8) Incorporated by reference to the Exhibit identified in
parentheses previously filed as an Exhibit to Registrant's Form
10-Q filed on January 2, 1991 (File No. 0-12867).
(9) Incorporated by reference to the Exhibit identified in
parentheses previously filed as an Exhibit to Registrant's Form
10-Q filed on April 15, 1991 (File No. 0-12867).
(10) Incorporated by reference to the Exhibit identified in
parentheses previously filed as an Exhibit to Registrant's Form
10-K filed on August 27, 1991 (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 January 10, 1992 (File No. 0-12867).
(12) Incorporated by reference to the Exhibit identified in
parentheses previously filed as an Exhibit to Registrant's Form 8-
K filed on February 18, 1992 (File No. 0-12867).
(13) Incorporated by reference to the Exhibit identified in
parentheses previously filed as an Exhibit to Registrant's Form 8-
K filed on February 12, 1993 (File No. 0-12867).
(14) Incorporated by reference to the Exhibit identified in
parentheses previously filed as an Exhibit to Registrant's Form 8-
K filed on January 31, 1994 (File No. 0-12867).
(15) Incorporated by reference to the Exhibit identified in
parentheses previously filed as an Exhibit to Registrant's Form 8-K
filed on February 11, 1994 (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 27, 1993 (File No. 0-12867).
(17) Incorporated by reference to the Exhibit identified in
parentheses previously filed as an Exhibit to Registrant's Form 10-
Q filed on April 13, 1994 (File No. 0-12867).
(18) Incorporated by reference to the Exhibit identified in parentheses
previously filed as an Exhibit to Registrant's Form 10-Q filed on
January 14, 1994 (File No. 0-12867).
DESCRIPTIVE LIST OF EXHIBITS AND SCHEDULES TO THE
AGREEMENT AND PLAN OF REORGANIZATION
Dated December 16, 1993 By and Among
3COM CORPORATION, 3SUB CORPORATION
AND SYNERNETICS, INC.
Exhibit A: The Agreement of Merger as filed with the Secretaries
of State of Delaware and California setting forth the
terms of the Merger (consistent with the terms in the
Agreement)
Exhibit B-1: Form of Key Employee Agreement
Exhibit B-2: Scheduled Employees of Synernetics
Exhibit C: Disclosure Schedule stating exceptions from representations
Exhibit D: Disclosure Schedule stating exceptions from representations
Exhibit F: Opinion of Gray Cary Ware & Freidenrich
Exhibit G: Opinion of Testa, Hurwitz & Thibeault
DESCRIPTIVE LIST OF EXHIBITS AND SCHEDULES TO THE
AGREEMENT AND PLAN OF REORGANIZATION
Dated January 18, 1994 By and Among
3COM CORPORATION, 3SUB ACQUISITION CORPORATION
AND CENTRUM COMMUNICATIONS, INC.
Exhibit A: The Agreement of Merger as filed with the Secretary of State
of California setting forth the terms of the Merger
(consistent with the terms in the Agreement)
Exhibit B: Disclosure Schedule stating exceptions from representations
Exhibit C: List of Option Holders
Exhibit D: Disclosure Schedule stating exceptions from representations
Exhibit F: Opinion of Counsel to 3Com
Exhibit G: Opinion of Counsel to Centrum
Exhibit H-1: Non-compete Agreement with Mr. Gilbert Hu
Exhibit H-2: Employment and Non-competition Agreement with Vincent Liu
Exhibit H-3: Employment and Non-competition Agreement with Ann Zeichner
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
Date: August 26, 1994 By /s/ Eric A. Benhamou
Eric A. Bhamou
Chairman, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on
the dates indicated.
Signature Title Date
Chairman of the Board
/s/ Eric A. Benhamou President, and August 26, 1994
Chief Executive Officer
(Eric A. Benhamou) Principal Executive Officer)
Vice President, Finance and
/s/ Christopher B. Paisley Chief Financial Officer August 26, 1994
(Principal Financial and
(Christopher B. Paisley) Accounting Officer)
/s/ James L. Barksdale Director August 26, 1994
(James L. Barksdale)
/s/ Gordon A. Campbell Director August 26, 1994
(Gordon A. Campbell)
/s/ Jean-Louis Gassee Director August 26, 1994
(Jean-Louis Gassee)
/s/ Stephen C. Johnson Director August 26, 1994
(Stephen C. Johnson)
/s/ Philip C. Kantz Director August 26, 1994
(Philip C. Kantz)
/s/ William F. Zuendt Director August 26, 1994
(William F. Zuendt)
/s/ Jack L. Hancock Director August 26, 1994
(Jack L. Hancock)
SCHEDULE I
3Com Corporation
TEMPORARY CASH INVESTMENTS
May 31, 1994
(in thousands)
Amount at Which Carried
Description Par Value Cost Market Value in Balance Sheet
Various Tax
Exempt
municipal
bonds(1) $59,860 $63,413 $63,208 $63,413
(1) Municipal obligations consist primarily of prerefunded general
obligations and revenue bonds carried at cost. No individual issue
exceeds 2% of total assets.
SCHEDULE II
3Com Corporation
AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS,
PROMOTERS, AND EMPLOYEES OTHER THAN RELATED PARTIES
For the Years Ended May 31, 1992, 1993, and 1994
(in thousands)
Year Balance Balance at
ended beginning end of
May 31 Name of debtor of period Additions Collections period-
current
1992 J. Koch - $225 (1) - $225
1993 J. Koch $225 - $225 -
1994 M. Kapp - $567 (2) - $567
(1) Consists of a promissory note issued on May 28, 1992 and paid in full on
July 7, 1992. The note bore interest at 5.5% and was interest free for the
first 90 days. The note was paid within the 90-day interest free period.
(2) Represents a one-year, interest-free bridge loan granted in November 1993.
SCHEDULE VIII
3Com Corporation
<TABLE>
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
For the Years Ended May 31, 1992, 1993 and 1994
(in thousands)
<CAPTION>
Reclassi-
Additions fications
Balance at charged to and charges Pooled Balance
beginning costs and to other Business at end
of period expenses accounts Deductions -Net(1) of period
DESCRIPTION
Year ended
May 31, 1992:
Allowance
for
doubtful
<S> <C> <C> <C> <C> <C> <C> <C>
accounts $ 5,129 $ 3,683 $ 306(3) $ 2,019(2) - $ 7,099
Product
return
<S> <C> <C> <C> <C> <C> <C>
reserve 3,040 2,080 308(3) 1,421 - 4,007
Accrued
product
<S> <C> <C> <C> <C> <C> <C>
warranty 5,370 6,587 - 4,392 - 7,565
Restructuring
reserves:
Inventory
<S> <C> <C> <C> <C> <C> <C>
reserve 2,974 - - 1,794 - 1,180
Property
and
equipment
<S> <C> <C> <C> <C> <C> <C> <C>
reserve 2,633 - 3,123 (4) 1,598 - 4,158
Accrued
restruc-
turing
<S> <C> <C> <C> <C> <C> <C>
costs 29,915 - (3,123)(4) 14,219 - 12,573
Total
restruc-
turing
<S> <C> <C> <C> <C> <C> <C>
reserves 35,522 - - 17,611 - 17,911
YEAR ENDED
MAY 31, 1993:
Allowance
for
doubtful
<S> <C> <C> <C> <C> <C> <C>
accounts $ 7,099 $ 1,995 - $ 2,636(2) $40 $ 6,498
Product
return
<S> <C> <C> <C> <C> <C> <C>
reserve 4,007 2,088 - 2,716 53 3,432
Accrued
product
<S> <C> <C> <C> <C> <C> <C>
warranty 7,565 9,494 - 6,546 40 10,553
Restructuring
reserves:
Inventory
<S> <C> <C> <C> <C> <C> <C> <C>
reserve 1,180 - 1,834 (4) 1,315 - 1,699
Property
and
equipment
<S> <C> <C> <C> <C> <C> <C>
reserve 4,158 (1,844)(5) 25 (4) 2,246 - 93
Accrued
restructuring
<S> <C> <C> <C> <C> <C> <C>
costs 12,573 (1,502)(5) (1,859)(4) 5,155 - 4,057
Total
restructuring
<S> <C> <C> <C> <C> <C> <C>
reserve 17,911 (3,346) - 8,716 - 5,849
YEAR ENDED
MAY 31, 1994:
Allowance
for
doubtful
<S> <C> <C> <C> <C> <C> <C> <C>
accounts $ 6,498 $ 4,459 $ 168 (3) 723(2) - $10,402
Product
return
<S> <C> <C> <C> <C> <C> <C>
reserve 3,432 1,759 - 1,422 - 3,769
Accrued
product
<S> <C> <C> <C> <C> <C> <C>
warranty 10,553 11,776 863 9,506 - 13,686
Restructuring
reserves:
Inventory
<S> <C> <C> <C> <C> <C> <C>
reserve 1,699 - - 774 - 925
Property
and
equipment
<S> <C> <C> <C> <C> <C> <C>
reserve 93 - - - - 93
Accrued
restructuring
<S> <C> <C> <C> <C> <C> <C>
costs 4,057 - - 1,321 - 2,736
Total
restructuring
<S> <C> <C> <C> <C> <C> <C>
reserves 5,849 - - 2,095 - 3,754
</TABLE>
<F1>
(1) Pooled business - net represents activity of Star-Tek for the period of
January 1, 1992 through May 31, 1992 (see Note 3 to the Consolidated
Financial Statements).
<F2>
(2) Accounts written off - net of recoveries.
<F3>
(3) Adjustments relating to purchased businesses.
<F4>
(4) Accrued restructuring costs reclassified to other restructuring reserves.
<F5>
(5) Reduction in restructuring reserves based on current estimates of future
costs.
SCHEDULE X
3Com Corporation
SUPPLEMENTARY INCOME STATEMENT INFORMATION
For the Years Ended May 31, 1992, 1993 and 1994
(in thousands)
Charged to Costs and Expenses
Item 1992 1993 1994
Advertising costs $15,918 $40,014 $53,288
The amounts for maintenance and repairs, depreciation and
amortization of intangible assets, preoperating costs and
similiar deferrals, taxes other than payroll and income taxes and
royalties are not presented, as these items did not exceed 1% of
total sales in each of the three periods presented.
EXHIBIT 3.2
CERTIFICATE OF AMENDMENT
OF THE AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
3COM CORPORATION
The undersigned, Eric A. Benhamou and Mark D. Michael,
hereby certify
that:
1. They are the duly elected and acting President and
Secretary, respectively, of 3Com Corporation, a California
corporation (the "Corporation").
2. Article III of the Amended and Restated Articles of
Incorporation of the Corporation is hereby amended to read in
full as follows:
"ARTICLE III
STOCK
This corporation is authorized to issue two classes of
shares, designated respectively "Common Stock" and "Preferred
Stock." Upon amendment of this Article to read as herein set
forth, the number of shares of Common Stock which this
corporation is authorized to issue is 200,000,000, the number of
shares of Preferred Stock, which this corporation is authorized
to issue is 3,000,000, and each share of outstanding Common Stock
is converted into and reconstituted as two (2) shares of Common
Stock.
The Preferred Stock may be issued from time to time in one
or more series. The Board of Directors of this corporation is
authorized to determine the designation of any series, to fix the
number of shares of any series, to determine or alter the rights,
preferences, privileges and restrictions granted to or imposed
upon any wholly unissued series of Preferred Stock, and within
the limits or restrictions stated in any resolution of
resolutions of the Board of Directors originally fixing the
number of shares constituting any series, to increase or decrease
(but not below the number of shares of any such series then
outstanding) the number of shares of any such series subsequent
to the issue of shares of that series."
3. The foregoing amendment of the Amended and Restated
Articles of Incorporation has been duly approved by the Board of
Directors of the Corporation in accordance with section 902(c) of
the California Corporations Code. The Corporation has only one
class of shares outstanding. Executed at Santa Clara, California
on the 8th day of August 1994.
/S/ Eric A. Benhamou
Eric A. Benhamou, President
/S/ Mark D. Michael
Mark D. Michael, Secretary
The undersigned declare under penalty of perjury that the
matters setforth in the foregoing certificate are true and correct of
their own knowledge.
Executed at Santa Clara, California on the 8th day of August 1994.
/S/ Eric A. Benhamou
Eric A. Benhamou, President
/S/ Mark D. Michael
Mark D. Michael, Secretary
EXHIBIT 21.1
3COM CORPORATION
SUBSIDIARIES
3Com Asia Limited (Hong Kong)
3Com Benelux B.V. (The Netherlands)
3Com Canada Inc. (Canada)
3Com Credit Corporation (California, U.S.A.)
3Com do Brasil Servicos Ltda. (Brazil)
3Com de Mexico, S.A. de C.V. (Mexico)
3Com Development Corporation (California, U.S.A.)
3Com Engineering Limited (United Kingdom)
3Com Europe Limited (United Kingdom)
3Com GmbH (Germany)
3Com Holdings Limited (Cayman Islands)
3Com International, Inc. (Delaware, U.S.A.)
3Com Ireland (Cayman Islands)
3Com Ireland Technologies Limited (Ireland)
3Com Limited (United Kingdom)
3Com Japan K.K. (Japan)
3Com Mediteraneo S.r.l. (Italy)
3Com Nordic AB (Sweden)
3Com S.A.R.L. (France)
3Com Technologies Limited (Cayman Islands)
3Com U.K. Holdings Limited (United Kingdom)
3Com (U.K.) Limited (United Kingdom)
3Com World Trade, Inc. (U.S. Virgin Islands)
Synernetics, Inc. (Delaware, U.S.A.)
EXHIBIT 23.1
CONSENT OF DELOITE & TOUCHE LLP
3Com Corporation:
We consent to the incorporation by reference in Registration
Statements Nos. 2-92053, 33-2171, 33-17848, 33-33803, 33-33807,
33-36911, 33-45176, 33-45233, 33-56952, 33-58708 and 33-72158 on
Form S-8 of our report dated June 15, 1994 appearing in this
Annual Report on Form 10-K of 3Com Corporation for the year ended
May 31, 1993.
DELOITTE & TOUCHE LLP
San Jose, California
August 23, 1994
EXHIBIT 23.2
CONSENT OF LEVINE, ZEIDMAN & DAITCH, P.C.
3Com Corporation
We consent to the incorporation by reference in 3Com Corporation
Registration Statements Nos. 2-92053, 33-2171, 33-17848, 33-
33803, 33-33807, 33-39323, 33-36911, 33-45176, 33-45231, 33-
45233, 33-56952, 33-58708 and 33-72158 on Form S-8 of our report
dated February 24, 1992 relating to the financial statement of
Star-Tek, Inc. for the year ended December 31, 1991 appearing in
this Annual Report on Form 10-K of 3Com Corporation for the year
ended May 31, 1993.
LEVINE, ZEIDMAN & DAITCH, P.C.
Wellesley Hills, Massachusetts
August 23, 1994
EXHIBIT 10.2.2
3COM CORPORATION
1994 STOCK OPTION PLAN
1. Purpose. The 3Com Corporation 1994 Stock Option Plan
(the "Plan") is established to create additional incentive for
eligible employees of 3Com Corporation and any successor
corporation thereto (collectively referred to as the "Company"),
and any present or future parent and/or subsidiary corporations
of such corporation (all of whom along with the Company being
individually referred to as a "Participating Company" and
collectively referred to as the "Participating Company Group"),
to promote the financial success and progress of the
Participating Company Group. For purposes of the Plan, a parent
corporation and a subsidiary corporation shall be as defined in
sections 424(e) and 424(f) of the Internal Revenue Code of 1986,
as amended (the "Code").
2. Administration.
(a) General. The Plan shall be administered by
the Board of Directors of the Company (the "Board") and/or by a
duly appointed committee of the Board having such powers as shall
be specified by the Board. Any subsequent references herein to
the Board shall also mean the committee if such committee has
been appointed and, unless the powers of the committee have been
specifically limited, the committee shall have all of the powers
of the Board granted herein, including, without limitation, the
power to terminate or amend the Plan at any time, subject to the
terms of the Plan and any applicable limitations imposed by law.
All questions of interpretation of the Plan or of any options
granted under the Plan (an "Option") shall be determined by the
Board, and such determinations shall be final and binding upon
all persons having an interest in the Plan and/or any Option.
(b) Options Authorized. Options may be only
nonqualified stock options, that is, options which are not
incentive stock options as defined in section 422 of the Code.
(c) Authority of Officers. Any officer of a
Participating Company shall have the authority to act on behalf
of the Company with respect to any matter, right, obligation, or
election which is the responsibility of or which is allocated to
the Company herein, provided the officer has apparent authority
with respect to such matter, right, obligation, or election.
3. Eligibility. The Options may be granted only to
employees of the Participating Company Group; provided, however,
that no Option may be granted to (i) a person who, at the time of
such grant, is an officer or director of the Company or a
beneficial owner of more than ten percent (10%) of any class of
equity securities of the Company registered pursuant to section
12 of the Securities Exchange Act of 1934, as amended, or (ii)
any person whose eligibility to participate in the Plan would
require the Company to obtain shareholder approval of the Plan
pursuant to the Bylaws of the National Association of Securities
Dealers (and any schedules thereto) or the provisions contained
in the New York Stock Exchange Listed Company Manual. For
purposes of the foregoing sentence, "employees" shall include
prospective employees to whom Options are granted in connection
with written offers of employment with the Participating Company
Group. The Board shall, in the Board's sole discretion,
determine which eligible persons shall be granted Options (an
"Optionee"). An Optionee may, if otherwise eligible, be granted
additional Options.
4. Shares Subject to Option. Options shall be options
for the purchase of the authorized but unissued common stock of
the Company (the "Stock"), subject to adjustment as provided in
paragraph 9 below. The maximum number of shares of Stock which
may be issued under the Plan shall be One Million Nine Hundred
Thousand (1,900,000) shares. In the event that any outstanding
Option for any reason expires or is terminated or canceled and/or
shares of Stock subject to repurchase are repurchased by the
Company, the shares allocable to the unexercised portion of such
Option, or such repurchased shares, may again be subjected to an
Option.
5. Time for Granting Options. The Plan shall continue
until terminated by the Board or until all of the shares of Stock
reserved for issuance under the Plan have been issued, whichever
shall first occur.
6. Terms, Conditions and Form of Options. Subject to
the provisions of the Plan, the Board shall determine for each
Option (which need not be identical) the number of shares of
Stock for which the Option shall be granted, the exercise price
of the Option, the exercisability of the Option, and all other
terms and conditions of the Option not inconsistent with the
Plan. Options granted pursuant to the Plan shall be evidenced by
written agreements specifying the number of shares of Stock
covered thereby, in such form as the Board shall from time to
time establish, and shall comply with and be subject to the
following terms and conditions:
(a) Exercise Price. The exercise price for each
Option shall be established in the sole discretion of the Board;
provided, however, that the exercise price per share shall not be
less than the fair market value, as determined by the Board, of a
share of Stock on the date of the granting of the Option.
Notwithstanding the foregoing, an Option may be granted with an
exercise price lower than the minimum exercise price set forth
above if such Option is granted pursuant to an assumption or
substitution for another option in a manner qualifying with the
provisions of section 424(a) of the Code.
(b) Exercise Period of Options. The Board shall
have the power to set the time or times within which each Option
shall be exercisable or the event or events upon the occurrence
of which all or a portion of each Option shall be exercisable and
the term of each Option; provided, however, that no Option shall
be exercisable after the expiration of ten (10) years after the
date such Option is granted.
(c) Payment of Exercise Price. Payment of the
exercise price for the number of shares of Stock being purchased
pursuant to any Option shall be made (i) in cash, by check, or
cash equivalent, (ii) by tender to the Company of shares of the
Company's stock owned by the Optionee having a value, as
determined by the Board (but without regard to any restrictions
on transferability applicable to such stock by reason of federal
or state securities laws or agreements with an underwriter for
the Company), not less than the exercise price, (iii) by the
assignment of the proceeds of a sale of some or all of the shares
being acquired upon the exercise of an Option (including, without
limitation, through an exercise complying with the provisions of
Regulation T as promulgated from time to time by the Board of
Governors of the Federal Reserve System), or (iv) by any
combination thereof. The Board may at any time or from time to
time, by adoption of or by amendment to the form of Standard
Option Agreement described in paragraph 7 below, or by other
means, grant Options which do not permit all of the foregoing
forms of consideration to be used in payment of the exercise
price and/or which otherwise restrict one (1) or more forms of
consideration. Notwithstanding the foregoing, an Option may not
be exercised by tender to the Company of shares of the Company's
stock to the extent such tender of stock would constitute a
violation of the provisions of any law, regulation and/or
agreement restricting the redemption of the Company's stock.
(x) Unless otherwise provided by the Board, an
Option may not be exercised by tender to the Company of the
Company's stock unless such shares of the Company's stock either
have been owned by the Optionee for more than one (1) year or
were not acquired, directly or indirectly, from the Company.
(y) The Company reserves, at any and all times,
the right, in the Company's sole and absolute discretion, to
establish, decline to approve and/or terminate any program and/or
procedures for the exercise of Options by means of an assignment
of the proceeds of a sale of some or all of the shares of Stock
to be acquired upon such exercise.
7. Standard Form of Stock Option Agreement.
(a) Nonqualified Stock Options. Unless otherwise
provided for by the Board at the time an Option is granted, an
Option shall comply with and be subject to the terms and
conditions set forth in the form of nonqualified stock option
agreement attached hereto as Exhibit A and incorporated herein by
reference.
(b) Standard Term for Options. Unless otherwise
provided for by the Board in the grant of an Option, any Option
granted hereunder shall be exercisable for a term of ten (10)
years.
8. Authority to Vary Terms. The Board shall have the
authority from time to time to vary the terms of the Standard
Option Agreement described in paragraph 7 above either in
connection with the grant of an individual Option or in
connection with the authorization of a new standard form or
forms; provided, however, that the terms and conditions of such
revised or amended standard form or forms of stock option
agreement shall be in accordance with the terms of the Plan.
Such authority shall include, but not by way of limitation, the
authority to grant Options which are immediately exercisable.
9. Effect of Change in Stock Subject to Plan.
Appropriate adjustments shall be made in the number and class of
shares of Stock subject to the Plan and to any outstanding
Options and in the exercise price of any outstanding Options in
the event of a stock dividend, stock split, reverse stock split,
combination, reorganization, reclassification, or like change in
the capital structure of the Company.
10. Transfer of Control. For purposes hereof, "Control
Company" shall mean the Participating Company whose stock is
subject to the Option. An "Ownership Change" shall be deemed to
have occurred in the event any of the following occurs with
respect to the Control Company.
(a) a direct or indirect sale or exchange by the
shareholders of the Control Company of all or substantially all
of the stock of the Control Company;
(b) a merger in which the Control Company is a
party; or
(c) the sale, exchange, or transfer of all or
substantially all of the Control Company's assets (other than a
sale, exchange, or transfer to one (1) or more corporations where
the shareholders of the Control Company before such sale,
exchange, or transfer retain, directly or indirectly, at least a
majority of the beneficial interest in the voting stock of the
corporation(s) to which the assets were transferred).
A "Transfer of Control" shall mean an Ownership
Change in which the shareholders of the Control Company before
such Ownership Change do not retain, directly or indirectly, at
least a majority of the beneficial interest in the voting stock
of the Control Company. In the event of a Transfer of Control,
any unexercisable and/or unvested portion of the outstanding
Options shall be immediately exercisable and vested as of 30 days
prior to the Transfer of Control unless the surviving,
continuing, successor, or purchasing corporation, as the case may
be (the "Acquiring Corporation") assumes the Company's rights and
obligations under outstanding stock option agreements or
substitutes options for the Acquiring Corporation's stock for
such outstanding Options. The exercise and/or vesting of any
Option that was permissible solely by reason of this paragraph 10
shall be conditioned upon the consummation of the Transfer of
Control. Any Options which are neither assumed by the Acquiring
Corporation nor exercised as of the date of the Transfer of
Control shall terminate effective as of the date of the Transfer
of Control.
11. Provision of Information. Each Optionee shall be
given access to information concerning the Company equivalent to
that information generally made available to the Company's common
shareholders.
12. Options Non-Transferable. Unless otherwise provided
by the Board, during the lifetime of the Optionee, the Option
shall be exercisable only by the Optionee, and no Option shall be
assignable or transferable by the Optionee, except by will or by
the laws of descent and distribution.
13. Termination or Amendment of Plan or Options. The
Board, including any duly appointed committee of the Board, may
terminate or amend the Plan or any Option at any time. In any
event, no amendment may adversely affect any then outstanding
Option or any unexercised portion thereof, without the consent of
the Optionee.
IN WITNESS WHEREOF, the undersigned Assistant Secretary of
the Company certifies that the foregoing 3Com Corporation 1994
Stock Option Plan was duly adopted by the Board of Directors of
the Company on July 13, 1994.
/S/ Ronald B. Friedman
3COM CORPORATION
1994 STOCK OPTION PLAN
PLAN HISTORY
July 13, 1994 1994 Stock Option Plan adopted by Board with share
reserve of 1,900,000 shares.
EXHIBIT A
STANDARD FORM OF
3COM CORPORATION
NONQUALIFIED STOCK OPTION AGREEMENT
3COM CORPORATION
NONQUALIFIED STOCK OPTION AGREEMENT
3Com Corporation (the "Company"), granted to the individual
named below an option to purchase certain shares of common stock
of the Company, in the manner and subject to the provisions of
this Option Agreement and the 3Com Corporation 1994 Stock Option
Plan (the "Plan"), all of the terms of which are incorporated by
reference herein.
1. Definitions:
(a) "Notice" shall mean the "3Com Corporation
NOTICE OF GRANT OF STOCK OPTIONS AND GRANT AGREEMENT" which is
attached hereto.
(b) "Optionee" shall mean the individual whose
name is set forth in the Notice.
(c) "Date of Option Grant" shall mean the "Date
of Grant" set forth in the Notice.
(d) "Number of Option Shares" shall mean the
"Total Number of Shares Granted" as set forth in the Notice.
Such number of shares of common stock of the Company may be
adjusted from time to time pursuant to paragraph 9 below.
(e) "Exercise Price" shall mean the "Option Price
per Share" set forth in the Notice. Such price per share as
adjusted from time to time pursuant to paragraph 9 below.
(f) "Initial Exercise Date" shall be the Initial
Vesting Date.
(g) "Initial Vesting Date" shall be the latter of
(i) the date occurring one (1) month after the Date of Option
Grant, or (ii) the date occurring six (6) months after the date
on which the employee commenced employment with the Company.
(h) Determination of "Vested Ratio":
Prior to Initial Vesting Date
0
On Initial Vesting Date, for each full
1/48
month of the Optionee's continuous
employment by a Participating Company
from the Date of Option Grant until
the Initial Vesting Date
Plus
For each full month of the Optionee's
1/48
continuous employment by a Participating
Company from the Initial Vesting Date
In no event shall the Vested Ratio exceed
1/1.
(i) "Option Term Date" shall mean the date ten
(10) years after the Date of Option Grant.
(j) "Code" shall mean the Internal Revenue Code
of 1986, as amended.
(k) "Company" shall mean 3Com Corporation, a
California corporation, and any successor corporation thereto.
(l) "Participating Company" shall mean (i) the
Company and (ii) any present or future parent and/or subsidiary
corporation of the Company while such corporation is a parent or
subsidiary of the Company. For purposes of this Option
Agreement, a parent corporation and a subsidiary corporation
shall be as defined in sections 424(e) and 424(f) of the Code.
(m) "Participating Company Group" shall mean at
any point in time all corporations collectively which are then a
Participating Company.
2. Status of the Option. This Option is intended to be
a nonqualified stock option and shall not be treated as an
incentive stock option as described in Section 422 of the Code.
3. Administration. All questions of interpretation
concerning this Option Agreement shall be determined by the Board
of Directors of the Company (the "Board") and/or by a duly
appointed committee of the Board having such powers as shall be
specified by the Board. Any subsequent references herein to the
Board shall also mean the committee if such committee has been
appointed and, unless the powers of the committee have been
specifically limited, the committee shall have all of the powers
of the Board granted in the Plan, including, without limitation,
the power to terminate or amend the Plan at any time, subject to
the terms of the Plan and any applicable limitations imposed by
law. All determinations by the Board shall be final and binding
upon all persons having an interest in the Option. Any officer
of a Participating Company shall have the authority to act on
behalf of the Company with respect to any matter, right,
obligation, or election which is the responsibility of or which
is allocated to the Company herein, provided the officer has
apparent authority with respect to such matter, right,
obligation, or election.
4. Exercise of the Option.
(a) Right to Exercise. The Option shall first
become exercisable on the Initial Exercise Date. The Option
shall be exercisable on and after the Initial Exercise Date and
prior to the termination of the Option in the amount equal to the
Number of Option Shares multiplied by the Vested Ratio as set
forth in paragraph 1 above less the number of shares previously
acquired upon exercise of the Option. In no event shall the
Option be exercisable for more shares than the Number of Option
Shares.
(b) Method of Exercise. The Option may be
exercised by written notice to the Company which must state the
election to exercise the Option, the number of shares for which
the Option is being exercised and such other representations and
agreements as to the Optionee's investment intent with respect to
such shares as may be required pursuant to the provisions of this
Option Agreement. The written notice must be signed by the
Optionee and must be delivered in person or by certified or
registered mail, return receipt requested, to the Chief Financial
Officer of the Company, or other authorized representative of the
Participating Company Group, prior to the termination of the
Option as set forth in paragraph 6 below, accompanied by full
payment of the exercise price for the number of shares being
purchased.
(c) Form of Payment of Exercise Price. Such
payment shall be made (i) in cash, by check, or cash equivalent,
(ii) by tender to the Company of shares of the Company's common
stock owned by the Optionee having a value not less than the
exercise price, which either have been owned by the Optionee for
more than one (1) year or were not acquired, directly or
indirectly, from the Company, (iii) by Immediate Sales Proceeds,
as defined below, or (iv) by any combination of the foregoing.
Notwithstanding the foregoing, the Option may not be exercised by
tender to the Company of shares of the Company's common stock to
the extent such tender of stock would constitute a violation of
the provisions of any law, regulation and/or agreement
restricting the redemption of the Company's common stock.
"Immediate Sales Proceeds" shall mean the assignment in form
acceptable to the Company of the proceeds of a sale of some or
all of the shares acquired upon the exercise of the Option
pursuant to a program and/or procedure approved by the Company
(including, without limitation, through an exercise complying
with the provisions of Regulation T as promulgated from time to
time by the Board of Governors of the Federal Reserve System).
The Company reserves, at any and all times, the right, in the
Company's sole and absolute discretion, to decline to approve any
such program and/or procedure.
(d) Tax Withholding. At the time the Option is
exercised, in whole or in part, or at any time thereafter as
requested by the Company, the Optionee hereby authorizes payroll
withholding and otherwise agrees to make adequate provision for
foreign, federal and state tax withholding obligations of the
Company, if any, which arise in connection with the Option,
including, without limitation, obligations arising upon (i) the
exercise, in whole or in part, of the Option, (ii) the transfer,
in whole or in part, of any shares acquired on exercise of the
Option, or (iii) the lapsing of any restriction with respect to
any shares acquired on exercise of the Option.
(e) Certificate Registration. The certificate or
certificates for the shares as to which the Option shall be
exercised shall be registered in the name of the Optionee, or, if
applicable, the heirs of the Optionee.
(f) Restrictions on Grant of the Option and
Issuance of Shares. The grant of the Option and the issuance of
the shares upon exercise of the Option shall be subject to
compliance with all applicable requirements of federal or state
law with respect to such securities. The Option may not be
exercised if the issuance of shares upon such exercise would
constitute a violation of any applicable federal or state
securities laws or other law or regulations. In addition, no
Option may be exercised unless (i) a registration statement under
the Securities Act of 1933, as amended (the "Securities Act"),
shall at the time of exercise of the Option be in effect with
respect to the shares issuable upon exercise of the Option or
(ii) in the opinion of legal counsel to the Company, the shares
issuable upon exercise of the Option may be issued in accordance
with the terms of an applicable exemption from the registration
requirements of the Securities Act. THE OPTIONEE IS CAUTIONED
THAT THE OPTION MAY NOT BE EXERCISABLE UNLESS THE FOREGOING
CONDITIONS ARE SATISFIED. ACCORDINGLY, THE OPTIONEE MAY NOT BE
ABLE TO EXERCISE THE OPTION WHEN DESIRED EVEN THOUGH THE OPTION
IS VESTED. As a condition to the exercise of the Option, the
Company may require the Optionee to satisfy any qualifications
that may be necessary or appropriate, to evidence compliance with
any applicable law or regulation and to make any representation
or warranty with respect thereto as may be requested by the
Company.
(g) Fractional Shares. The Company shall not be
required to issue fractional shares upon the exercise of the
Option.
5. Non-Transferability of the Option. The Option may be
exercised during the lifetime of the Optionee only by the
Optionee and may not be assigned or transferred in any manner
except by will or by the laws of descent and distribution.
6. Termination of the Option. The Option shall
terminate and may no longer be exercised on the first to occur of
(a) the Option Term Date as defined above, (b) the last date for
exercising the Option following termination of employment as
described in paragraph 7 below, or (c) upon a Transfer of Control
as described in paragraph 8 below.
7. Termination of Employment.
(a) Termination of the Option. If the Optionee
ceases to be an employee of the Participating Company Group for
any reason except death or disability within the meaning of
section 422(c) of the Code, the Option, to the extent unexercised
and exercisable by the Optionee on the date on which the Optionee
ceased to be an employee, may be exercised by the Optionee within
three (3) months after the date on which the Optionee's
employment terminates, but in any event no later than the Option
Term Date. If the Optionee's employment with the Participating
Company Group is terminated because of the death or disability of
the Optionee within the meaning of section 422(c) of the Code,
the Option, to the extent unexercised and exercisable by the
Optionee on the date on which the Optionee ceased to be an
employee, may be exercised by the Optionee (or the Optionee's
legal representative) at any time prior to the expiration of
twelve (12) months from the date the Optionee's employment
terminated, but in any event no later than the Option Term Date.
The Optionee's employment shall be deemed to have terminated on
account of death if the Optionee dies within three (3) months
after the Optionee's termination of employment.
(b) Termination of Employment Defined. For
purposes of this paragraph 7, the Optionee's employment shall be
deemed to have terminated either upon an actual termination of
employment or upon the Optionee's employer ceasing to be a
Participating Company.
(c) Extension if Exercise Prevented by Law.
Except as provided in this paragraph 7, the Option shall
terminate and may not be exercised after the Optionee's
employment with the Participating Company Group terminates unless
the exercise of the Option in accordance with this paragraph 7 is
prevented by the provisions of paragraph 4(f) above. If the
exercise of the Option is so prevented, the Option shall remain
exercisable until three (3) months after the date the Optionee is
notified by the Company that the Option is exercisable, but in
any event no later than the Option Term Date.
(d) Leave of Absence. For purposes hereof, the
Optionee's employment with the Participating Company Group shall
not be deemed to terminate if the Optionee takes any military
leave, sick leave, or other bona fide leave of absence approved
by the Company of ninety (90) days or less. In the event of a
leave in excess of ninety (90) days, the Optionee's employment
shall be deemed to terminate on the ninety-first (91st) day of
the leave unless the Optionee's right to reemployment with the
Participating Company Group remains guaranteed by statute or
contract. Notwithstanding the foregoing, however, a leave of
absence shall be treated as employment for purposes of
determining the Optionee's Vested Ratio if and only if the leave
of absence is designated by the Company as (or required by law to
be) a leave for which vesting credit is given.
8. Transfer of Control. For purposes hereof, "Control
Company" shall mean the Participating Company whose stock is
subject to the Option. An "Ownership Change" shall be deemed to
have occurred in the event any of the following occurs with
respect to the Control Company.
(a) a direct or indirect sale or exchange by the
shareholders of the Control Company of all or substantially all
of the stock of the Control Company;
(b) a merger in which the Control Company is a
party; or
(c) the sale, exchange, or transfer of all or
substantially all of the Control Company's assets (other than a
sale, exchange, or transfer to one (1) or more corporations where
the shareholders of the Control Company before such sale,
exchange, or transfer retain, directly or indirectly, at least a
majority of the beneficial interest in the voting stock of the
corporation(s) to which the assets were transferred).
A "Transfer of Control" shall mean an Ownership
Change in which the shareholders of the Control Company before
such Ownership Change do not retain, directly or indirectly, at
least a majority of the beneficial interest in the voting stock
of the Control Company. In the event of a Transfer of Control,
any unexercisable and/or unvested portion of the Option shall be
immediately exercisable and vested as of 30 days prior to the
Transfer of Control unless the surviving, continuing, successor,
or purchasing corporation, as the case may be (the "Acquiring
Corporation") assumes the Company's rights and obligations under
this Option Agreement or substitutes options for the Acquiring
Corporation's stock for the Option. The exercise and/or vesting
of any Option that was permissible solely by reason of this
paragraph 8 shall be conditioned upon the consummation of the
Transfer of Control. The Option shall terminate effective as of
the date of the Transfer of Control to the extent that the Option
is neither assumed or substituted for by the Acquiring
Corporation nor exercised as of the date of the Transfer of
Control.
9. Effect of Change in Stock Subject to the Option.
Appropriate adjustments shall be made in the number, exercise
price and class of shares of stock subject to the Option in the
event of a stock dividend, stock split, reverse stock split,
combination, reorganization, reclassification, or like change in
the capital structure of the Company. In the event a majority of
the shares which are of the same class as the shares that are
subject to the Option are exchanged for, converted into, or
otherwise become shares of another corporation (the "New
Shares"), the Company may unilaterally amend the Option to
provide that the Option is exercisable for New Shares. In the
event of any such amendment, the number of shares and the
exercise price shall be adjusted in a fair and equitable manner.
10. Rights as a Shareholder or Employee. The Optionee
shall have no rights as a shareholder with respect to any shares
covered by the Option until the date of the issuance of a
certificate or certificates for the shares for which the Option
has been exercised. No adjustment shall be made for dividends or
distributions or other rights for which the record date is prior
to the date such certificate or certificates are issued, except
as provided in paragraph 9 above. Nothing in the Option shall
confer upon the Optionee any right to continue in the employ of a
Participating Company or interfere in any way with any right of
the Participating Company Group to terminate the Optionee's
employment at any time.
11. Legends. The Company may at any time place legends
referencing any applicable federal or state securities law
restrictions on all certificates representing shares of stock
subject to the provisions of this Option Agreement. The Optionee
shall, at the request of the Company, promptly present to the
Company any and all certificates representing shares acquired
pursuant to the Option in the possession of the Optionee in order
to effectuate the provisions of this paragraph.
12. Binding Effect. This Option Agreement shall inure to
the benefit of and be binding upon the parties hereto and their
respective heirs, executors, administrators, successors and
assigns.
13. Termination or Amendment. The Board, including any
duly appointed committee of the Board, may terminate or amend the
Plan and/or the Option at any time; provided, however, that no
such termination or amendment may adversely affect the Option or
any unexercised portion hereof without the consent of the
Optionee.
14. Integrated Agreement. This Option Agreement
constitutes the entire understanding and agreement of the
Optionee and the Participating Company Group with respect to the
subject matter contained herein, and there are no agreements,
understandings, restrictions, representations, or warranties
among the Optionee and the Company other than those as set forth
or provided for herein. To the extent contemplated herein, the
provisions of this Option Agreement shall survive any exercise of
the Option and shall remain in full force and effect.
15. Applicable Law. This Option Agreement shall be
governed by the laws of the State of California.
3COM CORPORATION
By:
Title:
The Optionee represents that the Optionee is familiar with
the terms and provisions of this Option Agreement and hereby
accepts the Option subject to all of the terms and provisions
thereof. The Optionee hereby agrees to accept as binding,
conclusive and final all decisions or interpretations of the
Board upon any questions arising under this Option Agreement.
Date:
