<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 28, 1995.
REGISTRATION NO. 33-58203
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
3COM CORPORATION
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
CALIFORNIA 3577 94-2605794
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Number) Identification No.)
incorporation or
organization)
</TABLE>
5400 BAYFRONT PLAZA
SANTA CLARA, CALIFORNIA 95052-8145
(408) 764-5000
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
------------------------
ERIC A. BENHAMOU
PRESIDENT AND CHIEF EXECUTIVE OFFICER
3COM CORPORATION
5400 BAYFRONT PLAZA
SANTA CLARA, CALIFORNIA 95052-8145
(408) 764-5000
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
------------------------
COPIES TO:
<TABLE>
<S> <C>
J. HOWARD CLOWES CRAIG S. ANDREWS
MATT KIRMAYER FAYE H. RUSSELL
HEAYOON J. WOO Brobeck, Phleger & Harrison
Gray Cary Ware & Freidenrich 550 West C Street, Suite 1300
A Professional Corporation San Diego, California 92101
400 Hamilton Avenue
Palo Alto, California 94301
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
UPON CONSUMMATION OF THE MERGER DESCRIBED HEREIN.
------------------------
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
AMOUNT TO MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF BE OFFERING PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED (1) PER SHARE (2) PRICE (2) FEE
<S> <C> <C> <C> <C>
Common Stock (no par value) 3,073,000 Shs. $61.16 $170,000,000 $4,118
</TABLE>
(1) Based upon an estimate of the maximum number of shares of the Common Stock
of the Registrant, no par value per share, issuable in the merger described
herein.
(2) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(f)(2) under the Securities Act of 1933, as amended.
The book value of the securities to be received by the Registrant as of
February 28, 1995 was $11,940,011. 1/29 of 1% of $11,940,011 is $4,118.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
3COM CORPORATION
CROSS-REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS
OF INFORMATION REQUIRED BY ITEMS OF FORM S-4
<TABLE>
<CAPTION>
FORM S-4 REGISTRATION STATEMENT
ITEM AND HEADING LOCATION IN PROSPECTUS
- ------------------------------------------- -----------------------------------
<C> <S> <C>
(Information about the Transaction)
1. Forepart of the Registration
Statement and Outside Front Cover
Page of Prospectus................ Outside Front Cover Page
2. Inside Front and Outside Back Cover
Pages of Prospectus............... Inside Front and Outside Back Cover
Pages
3. Risk Factors, Ratio of Earnings to
Fixed Charges and Other
Information....................... Summary; The Merger and Related
Transactions; Terms of the Merger;
Risk Factors; Information
Concerning Primary Access;
Description of 3Com Capital Stock;
Index to Financial Statements
4. Terms of the Transaction........... Summary; The Merger and Related
Transactions; Terms of the Merger;
Comparison of Rights of Holders of
3Com Common Stock and Holders of
Primary Access Common Stock
5. Pro Forma Financial Information.... Unaudited Pro Forma Combined
Financial Statements
6. Material Contracts with the Company
Being Acquired.................... The Merger and Related Transactions
7. Additional Information Required for
Reoffering by Persons and Parties
Deemed to be Underwriters......... *
8. Interests of Named Experts and
Counsel........................... Experts; Legal Matters
9. Disclosure of Commission Position
on Indemnification for Securities
Act Liabilities................... *
(Information about the Registrant)
10. Information with Respect to S-3
Registrants....................... *
11. Incorporation of Certain
Information by Reference.......... *
12. Information with Respect to S-2 or
S-3 Registrants................... *
13. Incorporation of Certain
Information by Reference.......... *
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FORM S-4 REGISTRATION STATEMENT
ITEM AND HEADING LOCATION IN PROSPECTUS
- ------------------------------------------- -----------------------------------
<C> <S> <C>
14. Information with Respect to
Registrants Other Than S-2 or S-3
Registrants....................... Summary; Risk Factors; The Merger
and Related Transactions; Terms of
the Merger; 3Com Management's
Discussion and Analysis of
Financial Condition and Results of
Operations; Information Concerning
3Com; Description of 3Com Capital
Stock; Index to Financial
Statements
(Information about the Company being Acquired)
15. Information with Respect to S-3
Companies......................... *
16. Information with Respect to S-2 or
S-3 Companies..................... *
17. Information with Respect to
Companies other than S-3 or S-2
Companies......................... Summary; Risk Factors; Consent of
Shareholders of Primary Access;
The Merger and Related
Transactions; Terms of the Merger;
Information Concerning Primary
Access; Index to Financial
Statements
(Voting and Management Information)
18. Information if Proxies, Consents or
Authorizations are to be
Solicited......................... Outside Front Cover Page; Summary;
Consent of Shareholders of Primary
Access; The Merger and Related
Transactions; Terms of the Merger;
Information Concerning 3Com;
Information Concerning Primary
Access
19. Information if Proxies, Consents or
Authorizations are not to be
Solicited in an Exchange Offer.... *
<FN>
- ------------------------
*Not Applicable.
</TABLE>
<PAGE>
PRIMARY ACCESS CORPORATION
12230 WORLD TRADE DRIVE
SAN DIEGO, CALIFORNIA 92128
Dear Shareholder:
You will find enclosed a written consent of the shareholders of Primary
Access Corporation, a California corporation ("Primary Access"). The written
consent ("Consent") requests your approval of (i) the Agreement and Plan of
Reorganization dated March 21, 1995 (the "Reorganization Agreement") among
Primary Access, 3Com Corporation, a California corporation ("3Com"), and Anuinui
Acquisition Corporation, a California corporation and a wholly-owned subsidiary
of 3Com ("Sub"), pursuant to which Sub will be merged with and into Primary
Access (the "Merger"), resulting in Primary Access becoming a wholly-owned
subsidiary of 3Com, (ii) the related Agreement of Merger to be filed with the
California Secretary of State in order to effect the Merger, and (iii) the
establishment of an escrow fund pursuant to which claims for indemnification may
be made by 3Com following consummation of the Merger (the "Escrow Fund").
The Merger will become effective as soon as practicable after all necessary
regulatory and shareholder approvals are obtained, and certain other conditions
are satisfied (the "Effective Date"). On the Effective Date, the shareholders of
Primary Access will receive that number of shares of common stock of 3Com, no
par value ("3Com Common Stock") for each share of Primary Access capital stock
determined by dividing $170.0 million (minus certain adjustments) by a value
ranging from $55.34 to $61.16 and then dividing such foregoing quotient by the
sum of (i) the total number of issued and outstanding shares of common stock of
Primary Access, no par value (the "Primary Access Common Stock"), plus (ii) the
total number of shares of Primary Access Common Stock issuable upon conversion
of all issued and outstanding shares of preferred stock of Primary Access, plus
(iii) the total number of shares of Primary Access Common Stock issuable upon
exercise of outstanding options and warrants to purchase Primary Access Common
Stock (the "Exchange Ratio"). At the Effective Date, each option and warrant to
acquire shares of Primary Access Common Stock will be assumed by 3Com and
converted into an option or warrant, respectively, to purchase 3Com Common
Stock. The number of shares and exercise price of each option and warrant will
be appropriately adjusted. The range of values, from $55.34 to $61.16, is based
on a multiple of the closing price of 3Com Common Stock on March 13, 1995. The
actual value to be used in calculating the Exchange Ratio will not be greater
nor less than the limits of the range discussed above; within that range, the
value will fluctuate based on the average of the closing sale prices of 3Com
Common Stock for the 10 trading days immediately preceding (but not including)
the closing of the Merger. Thus, the value of the shares of 3Com Common Stock
and the number of such shares to be received by the Primary Access shareholders
will not be determined until the closing of the Merger.
The Escrow Fund will consist of 10% of the shares of 3Com Common Stock
issued to the shareholders of Primary Access in the Merger and 10% of the shares
of 3Com Common Stock issued upon exercise of any option to purchase Primary
Access stock (which will become an option to purchase 3Com Common Stock as a
result of the Merger) prior to the termination of the Escrow Fund. Such shares
will be deposited with The First National Bank of Boston (the "Escrow Agent") on
the Effective Date or on the date of exercise. The Escrow Fund will be
maintained by the Escrow Agent for a period of one year after the Effective
Date, subject to a reserve beyond that date for unresolved claims, and will be
used to indemnify 3Com for any loss it incurs as a result of any breach by
Primary Access of the representations, warranties or covenants contained in the
Reorganization Agreement or arising from the claims raised in certain litigation
currently pending against Primary Access. Any disputes regarding indemnification
claims made by 3Com will be resolved by 3Com and the three agents appointed to
represent the interests of Primary Access shareholders pursuant to the
Reorganization Agreement. It is possible that Primary Access shareholders will
not receive any of the shares deposited in the Escrow Fund upon termination of
the escrow. See "Certain Federal Income Tax Considerations" for a discussion of
the treatment of the Escrow Fund, and any distributions thereof, for federal
income tax purposes.
3Com is registering the issuance of the shares of 3Com Common Stock in the
Merger under the Securities Act of 1933, as amended. The number of shares of
3Com Common Stock issued to Primary
<PAGE>
Access shareholders will be determined according to the Exchange Ratio. The
Merger is intended to be a tax-free reorganization which will not result in
recognition of any gain or loss by Primary Access, Primary Access shareholders
or 3Com.
Your Board of Directors has carefully considered the terms and conditions of
the proposed Merger and has determined that the Merger is in the best interests
of Primary Access and its shareholders. THE BOARD OF DIRECTORS HAS UNANIMOUSLY
RECOMMENDED THAT THE SHAREHOLDERS OF PRIMARY ACCESS APPROVE THE MERGER.
In the material accompanying this letter you will find a Consent and a
Prospectus/Consent Solicitation Statement relating to the actions to be taken by
the Primary Access shareholders pursuant to the Consent. The Prospectus/Consent
Solicitation Statement more fully describes the proposed Merger and includes
information about Primary Access and 3Com. I urge you to read and consider these
materials carefully. PLEASE COMPLETE, SIGN, DATE AND RETURN YOUR CONSENT IN THE
ENCLOSED ENVELOPE.
The Merger is scheduled to be consummated on , 1995. In order to assure
that your shares are voted on this important matter, you are requested to be
complete and sign your consent and return it in the enclosed envelope on or
before , 1995.
On behalf of your Board of Directors, thank you for your continued support.
Sincerely,
[sig]
William R. Stensrud
PRESIDENT AND CHIEF EXECUTIVE OFFICER
<PAGE>
3COM CORPORATION PROSPECTUS/
PRIMARY ACCESS CORPORATION
CONSENT SOLICITATION STATEMENT
3Com Corporation, a California corporation ("3Com"), has filed a
Registration Statement on Form S-4 (the "Registration Statement") with the
Securities and Exchange Commission (the "SEC") pursuant to the Securities Act of
1933, as amended, covering up to 3,073,000 shares of its Common Stock, no par
value ("3Com Common Stock"), to be issued in connection with the proposed merger
(the "Merger") of Anuinui Acquisition Corporation, a California corporation and
a wholly-owned subsidiary of 3Com ("Sub"), with and into Primary Access
Corporation, a California corporation ("Primary Access"), pursuant to the terms
set forth in the Agreement and Plan of Reorganization entered into by and among
3Com, Sub and Primary Access dated as of March 21, 1995 (the "Reorganization
Agreement").
Pursuant to the Reorganization Agreement, upon the consummation of the
Merger, Primary Access will become a wholly-owned subsidiary of 3Com, and
Primary Access Stock (as defined below) will be converted into shares of 3Com
Common Stock. As used herein, "Primary Access Stock" includes all shares of
issued and outstanding Common Stock, no par value, of Primary Access ("Primary
Access Common Stock") and all shares of issued and outstanding Preferred Stock,
no par value, of Primary Access ("Primary Access Preferred Stock"), other than
those shares held by holders who perfect their dissenters' rights under the
California General Corporation Law, as amended (the "CGCL"). Based on an Average
Price (as defined herein) of $58.25 per share of 3Com Common Stock, which price
is subject to a range from $53.34 to $61.16, and assuming that (i) 12,059,229
shares of Primary Access Common Stock are issued and outstanding, or issuable
upon exercise of Primary Access Options and Primary Access Warrants (each as
defined herein), (ii) fees and expenses included by Primary Access and its
shareholders in connection with the Merger do not exceed $1,750,000 and (iii)
there are no litigation costs or settlement costs incurred by Primary Access
between the date of the Reorganization Agreement and the Closing Date which are
related to the DataNet Litigation (as defined herein), the Exchange Ratio will
be .2420. Accordingly, based upon the foregoing assumptions, at the Effective
Date (as defined herein), by virtue of the Merger and without any action on the
part of the holder of Primary Access Stock, each share of Primary Access Stock
will be converted into .2420 shares of 3Com Common Stock. See "Terms of the
Merger -- Manner and Basis of Converting Shares."
Pursuant to the Reorganization Agreement and in connection with their
indemnification of 3Com and certain of its affiliates, (i) at the Effective
Date, 3Com will deposit into escrow certificates representing 10% of the shares
of 3Com Common Stock issued to the holders of Primary Access Stock in the
Merger, on a pro rata basis, and (ii) 10% of the shares of 3Com Common Stock
issued upon each exercise during the period between the Effective Date and one
year after the Effective Date of 3Com Options (as defined herein) that are
issued in the Merger to holders of Primary Access Options. See "Terms of the
Merger -- Escrow and Indemnification."
This 3Com Corporation Prospectus/Primary Access Corporation Consent
Solicitation Statement ("Prospectus/Consent Solicitation Statement") constitutes
(a) the Prospectus of 3Com filed as part of the Registration Statement, and (b)
the Consent Solicitation Statement of Primary Access relating to the
solicitation of Consents (as defined herein) of the shareholders of Primary
Access. All information herein with respect to Primary Access has been furnished
by Primary Access and all information herein with respect to 3Com and Sub has
been furnished by 3Com. This Prospectus/Consent Solicitation Statement is first
being mailed to shareholders of Primary Access on or about May , 1995.
SEE "RISK FACTORS" FOR A DISCUSSION OF CERTAIN FACTORS WHICH SHOULD BE
CONSIDERED BY PRIMARY ACCESS SHAREHOLDERS BEFORE CONSENTING TO THE
REORGANIZATION AGREEMENT.
NEITHER THIS TRANSACTION NOR THE SECURITIES OF 3COM OFFERED HEREBY HAVE BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS/CONSENT SOLICITATION STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
The date of this Prospectus/Consent Solicitation Statement is May , 1995.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
AVAILABLE INFORMATION...................................................................................... 4
INFORMATION PROVIDED BY 3COM AND PRIMARY ACCESS............................................................ 4
SUMMARY.................................................................................................... 5
The Companies............................................................................................ 5
Solicitation of Consents of Shareholders of Primary Access............................................... 6
The Merger............................................................................................... 6
MARKET PRICE DATA.......................................................................................... 11
SELECTED HISTORICAL AND UNAUDITED PRO FORMA COMBINED FINANCIAL DATA........................................ 12
COMPARATIVE PER SHARE DATA................................................................................. 16
RISK FACTORS............................................................................................... 18
CONSENT OF SHAREHOLDERS OF PRIMARY ACCESS.................................................................. 21
General.................................................................................................. 21
Record Date and Outstanding Shares....................................................................... 21
Consent Required......................................................................................... 21
Expenses................................................................................................. 22
Procedure................................................................................................ 22
THE MERGER AND RELATED TRANSACTIONS........................................................................ 22
Background of the Merger................................................................................. 22
Joint Reasons for the Merger............................................................................. 24
Further 3Com Background and Reasons for the Merger....................................................... 24
Further Primary Access Reasons for the Merger............................................................ 25
Conduct of Primary Access if Merger Not Consummated...................................................... 26
TERMS OF THE MERGER........................................................................................ 26
Effective Date of the Merger............................................................................. 26
Manner and Basis of Converting Shares.................................................................... 26
Voting Agreements........................................................................................ 28
Company Option Agreement................................................................................. 29
Assumption of Primary Access Options..................................................................... 30
Assumption of Primary Access Warrants.................................................................... 31
Escrow and Indemnification............................................................................... 31
Conduct of the Business of the Combined Companies Following the Merger................................... 34
Employee Benefits........................................................................................ 34
Indemnification of Primary Access Directors and Officers................................................. 34
Conduct of Primary Access' and 3Com's Businesses Prior to the Merger..................................... 34
Conditions to the Merger................................................................................. 37
Termination or Amendment of Reorganization Agreement..................................................... 38
Certain Federal Income Tax Considerations................................................................ 39
Affiliates Agreements.................................................................................... 41
Governmental and Regulatory Approvals.................................................................... 41
Non-Compete and Severance Agreements..................................................................... 42
Accounting Treatment..................................................................................... 42
Dissenters' Rights....................................................................................... 42
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS.......................................................... 45
INFORMATION CONCERNING 3COM................................................................................ 62
Business................................................................................................. 62
3Com Management's Discussion and Analysis of Financial Condition and Results of Operations............... 70
Management............................................................................................... 76
Stock Ownership of Certain Beneficial Owners and Management.............................................. 79
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
Executive Compensation and Other Matters................................................................. 81
<S> <C>
INFORMATION CONCERNING PRIMARY ACCESS...................................................................... 84
Business................................................................................................. 84
Primary Access Management's Discussion and Analysis of Financial Condition and Results of Operations..... 87
Executive Officers and Directors......................................................................... 90
Principal Shareholders................................................................................... 92
DESCRIPTION OF 3COM CAPITAL STOCK.......................................................................... 95
Common Stock............................................................................................. 95
Certain Charter Provisions............................................................................... 95
Preferred Stock.......................................................................................... 95
Rights Plan.............................................................................................. 95
COMPARISON OF RIGHTS OF HOLDERS OF 3COM COMMON STOCK AND HOLDERS OF PRIMARY ACCESS STOCK................... 96
EXPERTS.................................................................................................... 99
LEGAL MATTERS.............................................................................................. 99
INDEX TO FINANCIAL STATEMENTS.............................................................................. F-1
APPENDIX A: AGREEMENT AND PLAN OF REORGANIZATION
APPENDIX B: CHAPTER 13 OF CALIFORNIA GENERAL CORPORATION LAW
</TABLE>
3
<PAGE>
AVAILABLE INFORMATION
As permitted by the rules and regulations of the Securities and Exchange
Commission (the "SEC"), this Prospectus/Consent Solicitation Statement omits
certain information contained in the Registration Statement. For such
information, reference is made to the Registration Statement and the exhibits
thereto. In addition, 3Com is subject to the information reporting requirements
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, information statements and other information
with the SEC. Such reports, information statements and other information may be
inspected and copied at the Public Reference Room of the SEC, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the SEC's regional offices at 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and 7 World Trade
Center, New York, New York 10048. Copies of such material may be obtained from
the Public Reference Section of the SEC, 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates. 3Com Common Stock is quoted on the Nasdaq
National Market, and certain of 3Com's proxy statements, reports and other
information concerning 3Com may be available for inspection at the offices of
the National Association of Securities Dealers, Inc., 1735 K Street, N.W.,
Washington, D.C. 20006.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN AS CONTAINED HEREIN IN CONNECTION WITH THESE MATTERS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY 3COM OR PRIMARY ACCESS. NEITHER THE DELIVERY
HEREOF NOR ANY DISTRIBUTION OF SECURITIES MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE FACTS
HEREIN SET FORTH SINCE THE DATE HEREOF. THIS PROSPECTUS/ CONSENT SOLICITATION
STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY THE SECURITIES OFFERED BY THIS PROSPECTUS/CONSENT SOLICITATION STATEMENT OR
A SOLICITATION OF A CONSENT IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM,
IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION.
INFORMATION PROVIDED BY 3COM AND PRIMARY ACCESS
The information set forth in this Prospectus/Consent Solicitation Statement
concerning 3Com and Sub has been furnished by 3Com and has not been
independently investigated or verified by Primary Access, and the information
set forth in this Prospectus/Consent Solicitation Statement concerning Primary
Access has been furnished by Primary Access and has not been independently
investigated or verified by 3Com or Sub.
3Com, Cardboard, EtherLink, FDDI Link, LANplex, Link Builder, NETBuilder,
Parallel Tasking and TokenLink are registered trademarks of 3Com. 3Com Facts,
AccessBuilder, Boundary Routing, HPSN, LinkSwitch, MSH, SuperStack and Transcend
are trademarks of 3Com. Aperture is a trademark of Primary Access. All rights
are fully reserved. This Prospectus/Consent Solicitation Statement also includes
trademarks and trade names of companies other than 3Com and Primary Access.
4
<PAGE>
SUMMARY
THE FOLLOWING IS A BRIEF SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE
IN THIS PROSPECTUS/ CONSENT SOLICITATION STATEMENT. THIS SUMMARY DOES NOT
CONTAIN A COMPLETE STATEMENT OF ALL MATERIAL FEATURES OF THE PROPOSALS TO BE
AUTHORIZED AND APPROVED BY THE SHAREHOLDERS OF PRIMARY ACCESS AND IS QUALIFIED
IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION APPEARING ELSEWHERE IN THIS
PROSPECTUS/ CONSENT SOLICITATION STATEMENT AND IN THE INFORMATION AND DOCUMENTS
INCORPORATED BY REFERENCE HEREIN. SHAREHOLDERS OF PRIMARY ACCESS ARE URGED TO
REVIEW THE ENTIRE PROSPECTUS/CONSENT SOLICITATION STATEMENT CAREFULLY,
PARTICULARLY THE MATTERS REFERRED TO UNDER THE CAPTIONS "RISK FACTORS" AND "THE
MERGER AND RELATED TRANSACTIONS."
THE COMPANIES
3COM CORPORATION. 3Com designs, develops, manufactures, markets and
supports a broad range of ISO 9000-compliant global data networking connectivity
solutions for building/campus backbone, wide-area network ("WAN") backbone,
workgroup, remote office and personal office environments. 3Com offers virtually
all the necessary components to build and manage these networking
infrastructures, including routers, hubs, remote access servers, switches,
adapters and network management for Ethernet, Token Ring, FDDI, ATM and other
high-speed data networks. As data networks have grown in size and importance and
have become the primary computing environment for many organizations, customers
are demanding increased performance, scalability and network access. 3Com's
architecture for scaling performance and extending the reach of customers' data
networks is called High Performance Scalable Networking ("HPSN"). HPSN
encompasses the full breadth of 3Com's products and provides a blueprint for
planning, implementing and managing customers' connectivity systems
requirements. With an emphasis on industry standards, interoperability and
investment protection, 3Com solutions are designed to reduce the overall cost of
network ownership.
3Com's products are marketed worldwide through multiple indirect channels,
such as systems integrators, value-added resellers, distributors and original
equipment manufacturers, as well as directly to large customers. 3Com maintains
sales offices in 22 countries, service and support centers on three continents
and manufacturing and distribution centers in the U.S. and Europe. 3Com sells
its products to a wide range of customers in a variety of markets, including
financial services, education, government, healthcare, manufacturing and
technology.
3Com was incorporated in California in June 1979. 3Com's executive offices
are located at 5400 Bayfront Plaza, Santa Clara, California 95052; its telephone
number at that address is (408) 764-5000.
PRIMARY ACCESS CORPORATION. Primary Access is a supplier of
software-defined remote network access platforms used to link the public
switched telephone networks to backbone computer networks. Primary Access'
Aperture product line is currently being manufactured by Primary Access for
distribution throughout the world. Aperture is an integrated remote access
system for high-speed data transmission over both wireline and cellular
networks. Aperture has been deployed in networks in North America and around the
world. Aperture is used by telecommunications companies (both IXCs and RBOCs),
cellular carriers, Internet access providers, information service providers,
VANs and corporations with large private networks to provide the connection
between users and information.
Primary Access was incorporated in California in 1988. Primary Access'
executive offices are located at 12230 World Trade Drive, San Diego, California
92128; its telephone number at that address is (619) 675-4100.
ANUINUI ACQUISITION CORPORATION. Anuinui Acquisition Corporation, a
California corporation, is a corporation recently organized by 3Com for the
purpose of effecting the acquisition of Primary Access. It has no material
assets and has not engaged in any activities except in connection with the
proposed acquisition. Its executive offices are located at 5400 Bayfront Plaza,
Santa Clara, California 95052; its telephone number at that address is (408)
764-5000.
5
<PAGE>
As used in this Prospectus/Consent Solicitation Statement, unless the
context requires otherwise, "Primary Access" means Primary Access Corporation,
its predecessors and its subsidiaries and "3Com" means 3Com Corporation, its
predecessors and its subsidiaries.
SOLICITATION OF CONSENTS OF SHAREHOLDERS OF PRIMARY ACCESS
PURPOSE. The purpose of the solicitation of the written consent (the
"Consents") from the shareholders of Primary Access is to request approval of
(i) the Reorganization Agreement, pursuant to which Sub will be merged with and
into Primary Access, resulting in Primary Access becoming a wholly-owned
subsidiary of 3Com, (ii) the related Agreement of Merger to be filed with the
California Secretary of State in order to effect the Merger (the "Agreement of
Merger"), and (iii) the establishment of an escrow fund pursuant to which claims
for indemnification may be made by 3Com following consummation of the Merger
(the "Escrow Fund"). Approval of the foregoing matters shall constitute approval
of all of the matters related to the Merger described herein including the
matters described under the heading "Terms of the Merger -- Escrow and
Indemnification."
SHAREHOLDERS ENTITLED TO VOTE AND CONSENT REQUIRED. Only holders of record
at the close of business on the date of this consent solicitation (the
"Solicitation Date") of issued and outstanding shares of Primary Access Common
Stock and Primary Access Preferred Stock are entitled to consent to the
authorization and approval of the Reorganization Agreement, the Agreement of
Merger, the establishment of the Escrow Fund and all of the matters related to
the Merger described herein (the "Merger Proposal"). Approval of the Merger
Proposal requires the consent of holders of (i) a majority of the outstanding
shares of Primary Access Common Stock entitled to vote; (ii) two-thirds of the
outstanding shares of Primary Access Preferred Stock entitled to vote; and (iii)
a majority of the outstanding shares of Primary Access Common Stock and Primary
Access Preferred Stock entitled to vote, voting together as a single class.
Under the terms of the Reorganization Agreement, it is a condition to 3Com's and
Sub's respective obligations to consummate the Merger that the holders of at
least 92% of the outstanding shares of Primary Access Stock consent to the
authorization and approval of the Merger Proposal to assure satisfaction with
relevant requirements for the transaction to receive pooling-of-interests
accounting treatment. 3Com and Sub have the right to waive such condition and to
consummate the Merger without obtaining the consent of 92% of the Primary Access
shareholders, although 3Com and Sub do not presently intend to waive such
condition. 3Com and Sub do not intend to proceed with the transaction if it will
not satisfy the requirements for pooling-of-interests accounting treatment. See
"Terms of the Merger -- Conditions to the Merger."
As of the Solicitation Date, certain directors and executive officers of
Primary Access and certain 5% or greater shareholders held shares of
Primary Access Common Stock, representing % of the outstanding shares of
Primary Access Common Stock. In addition, as of the Solicitation Date, such
individuals held shares of Primary Access Preferred Stock, representing
% of the outstanding shares of Primary Access Preferred Stock. Certain
shareholders holding an aggregate of 83% of the outstanding shares of Primary
Access Stock have entered into agreements with 3Com whereby they have agreed to
consent to the authorization and approval of the Merger Proposal and in
connection therewith, have granted irrevocable proxies to the Board of Directors
of 3Com covering approximately 971,700 shares of Primary Access Common Stock, or
61% of the outstanding Primary Access Common Stock, approximately 7,298,900
shares of Primary Access Preferred Stock, or 87% of the outstanding Primary
Access Preferred Stock for a total of approximately 8,270,600 shares of Primary
Access Stock, or 83%, of the outstanding Primary Access Stock. See "Terms of the
Merger -- Voting Agreements."
THE MERGER
TERMS OF THE MERGER. Pursuant to the Reorganization Agreement, upon the
consummation of the Merger, Primary Access will become a wholly-owned subsidiary
of 3Com, and Primary Access Stock, other than the Dissenting Shares (as defined
herein), will be converted into shares of 3Com Common Stock. Based on an Average
Price (as defined herein) of $58.25 per share of 3Com Common Stock, which price
is subject to a range from $53.34 to $61.16, and assuming that (i) 12,059,229
shares of
6
<PAGE>
Primary Access Common Stock are issued and outstanding, or issuable upon
exercise of Primary Access Options and Primary Access Warrants (each as defined
herein), (ii) fees and expenses included by Primary Access and its shareholders
in connection with the Merger do not exceed $1,750,000 and (iii) there are no
litigation costs or settlement costs incurred by Primary Access between the date
of the Reorganization Agreement and the Closing Date which are related to the
DataNet Litigation (as defined herein), the Exchange Ratio will be .2420.
Accordingly, based upon the foregoing assumptions, at the Effective Date (as
defined herein), by virtue of the Merger and without any action on the part of
the holder of Primary Access Stock, each share of Primary Access Stock would be
converted into .2420 shares of 3Com Common Stock. See "Terms of the Merger --
Manner and Basis of Converting Shares."
The "Exchange Ratio" will be determined by dividing the Aggregate Purchase
Price (as defined herein) by the Average Price (as defined herein) and then
dividing such foregoing quotient by the sum of (i) the total number of shares of
Primary Access Common Stock, plus (ii) the total number of shares of Primary
Access Common Stock issuable upon conversion of the Primary Access Preferred
Stock, plus (iii) the total number of shares issuable upon exercise of Primary
Access Options (as defined herein) and Primary Access Warrants (as defined
herein). The "Aggregate Purchase Price" is equal to $170.0 million less (i) the
amount, if any, of fees and expenses of Primary Access, or its shareholders, in
excess of $1,750,000 and (ii) any amount of litigation costs or settlement costs
incurred by Primary Access between the date of the Reorganization Agreement and
the Closing Date which are related to the DataNet Litigation (as defined
herein). The Aggregate Purchase Price was arrived at through arms-length
negotiations between the parties. The "Average Price" is the average of the
closing sale prices of 3Com Common Stock reported in the WALL STREET JOURNAL, on
the basis of information provided by the Nasdaq National Market for each of the
10 trading days immediately preceding (but not including) the Closing Date (as
defined herein). The Average Price used in determining the Exchange Ratio will
not be greater than $61.16 or less than $55.34. See "Terms of the Merger --
Manner and Basis of Converting Shares." Together with the delivery of 3Com
Common Stock certificates, 3Com will deliver to each Primary Access shareholder
a supplemental lettter setting forth the Aggregate Purchase Price, including the
amount of the Adjustment (as defined herein), if any, and setting forth the
basis for determining the Exchange Ratio.
No fractional shares of 3Com Common Stock will be issued in connection with
the Merger, but in lieu thereof, holders of Primary Access Stock who would
otherwise be entitled to receive a fraction of a share of 3Com Common Stock will
receive from 3Com, promptly after the Effective Date, an amount of cash equal to
the Average Price multiplied by the fraction of a share of 3Com Common Stock to
which such holder would otherwise be entitled.
Based upon the number of shares of 3Com Common Stock outstanding as of the
Record Date and without regard to shares, if any, held by shareholders who have
exercised dissenters' rights and any shares owned by 3Com or Primary Access,
assuming that no outstanding Primary Access Options or Primary Access Warrants
are exercised prior to the Effective Date, and after exchange of the Primary
Access Stock, approximately shares of 3Com Common Stock will be
outstanding immediately after the Effective Date of which approximately
shares, representing % of the total, will be held by former holders of
Primary Access Stock.
Upon consummation of the Merger, Primary Access will be a wholly- owned
subsidiary of 3Com and may, in the future, be operated as either a wholly-owned
subsidiary or separate business division of 3Com.
ASSUMPTION OF PRIMARY ACCESS OPTIONS. At the Effective Date, each option to
purchase shares of Primary Access Common Stock which is outstanding immediately
prior to the Effective Date (other than the "Option" as defined herein)
(collectively, "Primary Access Options") will be assumed by 3Com and converted
into an option (collectively "3Com Options") to purchase that number of shares
of 3Com Common Stock which equals the Exchange Ratio multiplied by the number of
shares of Primary Access Common Stock purchasable under the Primary Access
Option immediately prior to
7
<PAGE>
the Effective Date (with the resulting number of shares rounded up to the
nearest whole number). The exercise price per share of 3Com Common Stock
purchasable under each 3Com Option will be equal to the exercise price of the
Primary Access Option (per share of Primary Access Common Stock) divided by the
Exchange Ratio (with the resulting amount rounded up to the nearest whole cent).
See "Terms of the Merger -- Assumption of Primary Access Options."
ASSUMPTION OF PRIMARY ACCESS WARRANTS. At the Effective Date, each warrant
to purchase Primary Access Common Stock which is outstanding immediately prior
to the Effective Date (collectively, "Primary Access Warrants") will be assumed
by 3Com and converted into a warrant to purchase 3Com Common Stock
(collectively, "3Com Warrants"). The 3Com Warrants will contain the same terms
and conditions set forth in the respective warrant agreements of the Primary
Access Warrants that they replace, except that: (i) each 3Com Warrant shall be
exercisable for a number of shares of 3Com Common Stock equal to the number of
shares of Primary Access Common Stock subject to the Primary Access Warrant
immediately prior to the Effective Date multiplied by the Exchange Ratio (with
the resulting number of shares of 3Com Common Stock rounded up to the nearest
whole number) and (ii) the per share exercise price under each 3Com Warrant
shall be an amount equal to the per share exercise price of the Primary Access
Warrant immediately prior to the Closing Date divided by the Exchange Ratio
(with the resulting amount rounded up to the nearest whole cent). See "Terms of
the Merger -- Assumption of Primary Access Warrants."
ESCROW AND INDEMNIFICATION. At the Effective Date, 3Com will deposit in
escrow certificates representing 10% of the shares of 3Com Common Stock issued
to the holders of Primary Access Stock in the Merger, on a pro rata basis, and
upon each exercise of 3Com Options that are issued in the Merger to holders of
Primary Access Options, if such exercise occurs after the Effective Date and on
or before the final escrow release date, 3Com will deposit in escrow 10% of the
shares of 3Com Common Stock issued upon such exercise. Such shares (the "Escrow
Shares") will be registered in the name of and deposited with the Escrow Agent
pursuant to the Reorganization Agreement to constitute the "Escrow Fund." The
Escrow Fund will be available to indemnify 3Com for any loss, expense, liability
or other damage (collectively "Damages") that 3Com has incurred or reasonably
anticipates incurring by reason of (i) the breach by Primary Access of any
representation, warranty, covenant or agreement of Primary Access contained in
the Reorganization Agreement, or by reason of any misrepresentation by Primary
Access made in or pursuant to Section 3 of the Reorganization Agreement, or (ii)
the claims raised in certain litigation pending against Primary Access. Claims
against the Escrow Fund shall be 3Com's sole remedy for any such breaches and
misrepresentations following the Merger. 3Com's right to receive shares from the
Escrow Fund is subject to certain limitations. See "Terms of the Merger --
Escrow and Indemnification."
REASONS FOR THE MERGER. 3Com and Primary Access have identified several
potential benefits of the Merger that they believe will contribute to the
success of the combined company, including the following: (i) extensive
offerings of data networking and access products; (ii) the technical resources
of Primary Access; (iii) the combined technological resources of 3Com and
Primary Access; (iv) the ability to combine sales and marketing resources of the
two companies; and (v) cost efficiencies and synergies. See "The Merger and
Related Transactions -- Joint Reasons for the Merger."
RECOMMENDATION OF THE PRIMARY ACCESS BOARD OF DIRECTORS. All of the
directors of Primary Access have authorized and approved the Reorganization
Agreement and believe that the Merger is fair and in the best interests of
Primary Access and its shareholders. Such directors recommend that the Primary
Access shareholders consent to the authorization and approval of the Merger
Proposal. In the event that the proposed Merger is not consummated, Primary
Access would continue to operate its business as previously conducted. In
addition, it is anticipated that Primary Access would discuss possible sources
of capital financing with its financial advisors, including the possibility of
an initial public offering or joint venture arrangement with a company
possessing complementary technologies. See "The Merger and Related Transactions
- -- Further Primary Access Background and Reasons for the Merger."
8
<PAGE>
FINANCIAL ADVISORS. 3Com retained Morgan Stanley & Co. ("Morgan Stanley")
to act as its financial advisor in connection with the Merger. Primary Access
retained Montgomery Securities ("Montgomery") to act as its financial advisor in
connection with the Merger and related matters. See "The Merger and Related
Transactions -- Background of the Merger."
CLOSING; EFFECTIVE DATE OF THE MERGER. The closing in respect of the Merger
(the "Closing") shall occur as soon as possible following the satisfaction or
waiver of all conditions set forth in the Reorganization Agreement (the "Closing
Date"). See "Terms of the Merger -- Conditions to the Merger." Simultaneously
with the Closing, the Agreement of Merger, together with all required officers'
certificates, shall be filed with the offices of the Secretary of State of the
State of California. The Merger shall become effective immediately upon the date
stamped by the California Secretary of State upon the Agreement of Merger (such
date is referred to as the "Effective Date"). Assuming all conditions to the
Merger are met or waived prior thereto, it is anticipated that the Effective
Date will occur on or about , 1995.
EXCHANGE OF PRIMARY ACCESS STOCK CERTIFICATES. Within 15 days following the
Effective Date, The First National Bank of Boston (the "Exchange Agent") will
mail a letter of transmittal with instructions to all holders of record of
Primary Access Stock immediately prior to the Effective Date, for use in
exchanging their certificates representing shares of Primary Access Stock for
certificates representing shares of 3Com Common Stock and a cash payment for
fractional shares, if any. CERTIFICATES SHOULD NOT BE SURRENDERED BY THE HOLDERS
THEREOF UNTIL THEY RECEIVE THE LETTER OF TRANSMITTAL FROM THE EXCHANGE AGENT.
See "Terms of the Merger -- Manner and Basis of Converting Shares."
CONDITIONS TO THE MERGER; TERMINATION AND AMENDMENT. Consummation of the
Merger is subject to the satisfaction of various conditions which, if not
fulfilled or waived, permit termination of the Reorganization Agreement. The
Reorganization Agreement may be terminated prior to the Closing by the mutual
written consent of the parties or unilaterally by 3Com or Primary Access, if the
conditions to its respective obligations at the Closing have not been fulfilled
at and as of the Closing (if such terminating party is not in breach), or by any
party (if such party is not in material breach) if the Closing has not occurred
by June 30, 1995, or such later date as the parties may agree in writing. Any
party may waive a condition to its respective obligations to consummate the
Merger, in a writing signed by such party, although none of the parties
presently intends to waive any such condition. Any term or provision of the
Reorganization Agreement may be amended, and the observance of any term of the
Reorganization Agreement may be waived, only by an instrument in writing signed
by the parties to be bound thereby. See "Terms of the Merger -- Conditions to
the Merger" and "Terms of the Merger -- Termination or Amendment of
Reorganization Agreement."
COMPANY OPTION AGREEMENT. Primary Access has granted to 3Com an option (the
"Option") to purchase shares of Primary Access Common Stock in an amount equal
to 20% of the fully diluted outstanding shares of Primary Access Stock (assuming
the issuance and exercise of such option) at a purchase price of $14.14 per
share, exercisable following: (i) an offer for at least 20% of the fully diluted
capital stock of Primary Access shall have been made or proposed and accepted by
holders of at least 20% of the fully diluted capital stock of Primary Access
(other than by 3Com), (ii) an acquisition of at least 20% of the outstanding
shares of Primary Access Stock (other than by 3Com, its affiliates or a 5%
shareholder of Primary Access as of the date of the Reorganization Agreement);
or (iii) an agreement between Primary Access and a third party or parties (other
than with 3Com or its affiliates) for the acquisition of Primary Access or a
controlling interest therein. See "Terms of the Merger -- Company Option
Agreement."
VOTING AGREEMENTS. Certain directors, executive officers and shareholders
of Primary Access holding an aggregate of approximately 971,700 shares of
Primary Access Common Stock, or 61% of the outstanding shares of Primary Access
Common Stock, and an aggregate of approximately 7,298,900 shares of Primary
Access Preferred Stock, or 87% of the outstanding shares of Primary Access
Preferred Stock entered into Voting Agreements with 3Com whereby they agreed
that until the
9
<PAGE>
earliest to occur of the Effective Date or the termination of the Reorganization
Agreement, such persons shall at every meeting and on every written consent
solicited, vote in favor of approval of the Merger Proposal and against approval
of any proposal made in opposition to or in competition with consummation of the
Merger. Each such Primary Access shareholder has delivered to 3Com's Board of
Directors an irrevocable proxy permitting 3Com's Board of Directors to vote such
shares in such manner. See "The Merger and Related Transactions -- Voting
Agreements."
NON-COMPETE AND SEVERANCE AGREEMENTS. William Stensrud, President, Chief
Executive Officer, director and a principal shareholder of Primary Access, and
James Dunn, Chief Technical Officer, Vice President, Advanced Development,
director and a principal shareholder of Primary Access, will execute non-compete
and severance agreements with 3Com prior to Closing. See "Terms of the Merger --
Conditions to the Merger" and "Terms of Merger -- Non-Compete and Severance
Agreements."
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS. The Merger is intended to
qualify as a reorganization under Section 368 of the Internal Revenue Code of
1986, as amended (the "Code"). If it does so qualify, no gain or loss should
generally be recognized by the shareholders of Primary Access on the exchange of
their shares of Primary Access Stock for shares of 3Com Common Stock. In
connection with the Merger, Gray Cary Ware & Freidenrich and Brobeck, Phleger &
Harrison, counsel to 3Com and Primary Access, respectively, are delivering their
opinions to the effect that the Merger will constitute a "reorganization" within
the meaning of Section 368(a) of the Code. See "Terms of the Merger -- Certain
Federal Income Tax Considerations."
ACCOUNTING TREATMENT. The Merger is expected to meet all of the conditions
for treatment as a pooling of interests for accounting purposes. Prior to the
execution of the Reorganization Agreement, 3Com and Primary Access received from
Deloitte & Touche LLP and KPMG Peat Marwick LLP, their respective independent
accountants, determination letters to the effect that they know of nothing that
would prohibit the Merger from being treated as a pooling of interests for
accounting purposes. See "Terms of Merger -- Accounting Treatment."
GOVERNMENTAL AND REGULATORY APPROVALS. 3Com and Primary Access are aware of
no governmental or regulatory approvals required for consummation of the Merger,
other than compliance with applicable "blue sky" laws of the various states. The
consummation of the Merger is also subject to the expiration and termination of
the relevant waiting period under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended (the "HSR Act"). The parties have obtained early
termination of the relevant waiting period.
DISSENTERS' RIGHTS. Holders of Primary Access Stock who object to the
Merger may, under certain circumstances and by following procedures prescribed
by the CGCL, exercise dissenters' rights and receive cash for their shares of
Primary Access Stock in an amount equal to the fair value of the Primary Access
Stock as determined pursuant to such procedures. The failure of a dissenting
shareholder of Primary Access to follow the appropriate procedures may result in
the termination or waiver of such rights. In the event that a Primary Access
shareholder who attempts to exercise dissenters' rights should fail to make a
proper demand for payment or otherwise loses his status as a dissenting
shareholder, such Primary Access shareholder shall be entitled to receive from
3Com the same number of shares of 3Com Common Stock and cash payment in lieu of
any fractional share that such Primary Access shareholder would have received in
the Merger if he had not attempted to exercise dissenters' rights. See "Terms of
the Merger -- Dissenters' Rights."
COMPARISON OF SHAREHOLDERS' RIGHTS. The Articles of Incorporation and
Bylaws of 3Com and Primary Access contain differences, some of which could
materially affect the rights of shareholders of Primary Access after
consummation of the Merger. See "Comparison of Rights of Holders of 3Com Common
Stock and Holders of Primary Access Stock."
10
<PAGE>
ACQUISITION OF SONIX COMMUNICATIONS LIMITED. On March 22, 1995, 3Com
entered into and announced an agreement with the shareholders of Sonix
Communications Limited ("Sonix") pursuant to which 3Com will acquire 100% of the
outstanding stock of Sonix. The transaction is expected to close on May 1, 1995,
and the unaudited pro forma combined financial statements contained herein give
effect to the anticipated combination of Sonix with 3Com on a pooling of
interests basis. See "Information Concerning 3Com -- Business -- Introduction --
Recent Developments."
MARKET PRICE DATA
Neither Primary Access Common Stock nor Primary Access Preferred Stock is
traded in an established public market.
The Common Stock of 3Com has been traded in the over-the-counter market and
quoted on the Nasdaq National Market under the Nasdaq symbol "COMS" since 3Com's
initial public offering on March 21, 1984. The following table sets forth the
range of high and low sale prices for the Common Stock of 3Com for the periods
indicated (adjusted to reflect a 2-for-1 stock split effective September 1,
1994), all as reported by Nasdaq:
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
FISCAL YEAR ENDED MAY 31, 1993
First Quarter............................................. $ 6 11/16 $ 4 13/16
Second Quarter............................................ 12 5 5/8
Third Quarter............................................. 17 5/16 10 11/16
Fourth Quarter............................................ 20 12 15/16
FISCAL YEAR ENDED MAY 31, 1994
First Quarter............................................. $14 5/8 $ 9 13/16
Second Quarter............................................ 18 1/2 12 1/16
Third Quarter............................................. 31 5/8 17 11/16
Fourth Quarter............................................ 31 7/8 23 7/32
FISCAL YEAR ENDING MAY 31, 1995
First Quarter............................................. $34 9/16 $20 1/8
Second Quarter............................................ 46 31 1/2
Third Quarter............................................. 52 5/8 40 1/8
Fourth Quarter (through April 27, 1995)................... 59 3/4 51 3/8
</TABLE>
On March 21, 1995, the last trading day prior to the announcement by 3Com
and Primary Access that they had reached an agreement concerning the Merger, the
closing price of 3Com Common Stock as reported on the Nasdaq National Market was
$56 1/16 per share. As of February 28, 1995, there were approximately 1,280
shareholders of record of 3Com Common Stock.
Because the market price of 3Com Common Stock is subject to fluctuation, the
market value of the shares of 3Com Common Stock that the Primary Access
shareholders will receive in the Merger may increase or decrease prior to the
Merger. Primary Access shareholders are urged to obtain a current market
quotation for 3Com Common Stock.
Following the Merger, 3Com Common Stock will continue to be traded on the
Nasdaq National Market under the symbol "COMS."
Neither 3Com nor Primary Access has ever paid cash dividends. If the Merger
is not consummated, the Board of Directors of Primary Access presently intends
to continue a policy of retaining all earnings to finance the expansion of its
business. Following the Merger, it is expected that the Board of Directors of
3Com will continue the policy of not paying cash dividends in order to retain
earnings for reinvestment in the business of the combined companies.
11
<PAGE>
SELECTED HISTORICAL AND UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The historical selected consolidated financial data of 3Com and the
historical selected financial data of Primary Access on pages 13 and 14 have
been derived from their respective historical financial statements and should be
read in conjunction with such financial statements and notes thereto of the
separate companies, included elsewhere in this Prospectus/Consent Solicitation
Statement. The historical selected financial data of Sonix Communications
Limited (Sonix) on page 14 have been derived from their historical financial
statements not included herein. The historical selected unaudited financial data
for 3Com, Primary Access and Sonix for the nine months ended February 28, 1995,
three months ended January 1, 1995 and nine months ended December 31, 1994,
respectively, reflect, in the opinion of the managements of 3Com, Primary Access
and Sonix, respectively, all adjustments, consisting only of normal recurring
accruals, necessary for a fair presentation of the results for such interim
periods.
The unaudited selected pro forma combined financial data on page 15 is
calculated after giving effect to the Merger of 3Com and Primary Access and the
merger of 3Com and Sonix on a pooling of interests basis. The pro forma combined
balance sheet data assumes that the mergers took place on February 28, 1995 and
combines 3Com's February 28, 1995 unaudited consolidated balance sheet with
Primary Access' April 2, 1995 unaudited balance sheet and with Sonix' December
31, 1994 unaudited balance sheet. The pro forma combined statements of
operations data assume that the mergers took place as of the beginning of the
periods presented and combines the results of operations of 3Com for the nine
months ended February 28, 1995 and for the years ended May 31, 1994, 1993 and
1992 with the results of operations of Primary Access for the nine months ended
April 2, 1995 and the years ended July 3, 1994, June 27, 1993 and June 28, 1992,
respectively, and the results of operations for Sonix for the nine months ended
December 31, 1994 and the year ended March 31, 1994 and for the period from May
1, 1992 (date of incorporation) to March 31, 1993. The unaudited pro forma
combined financial data is not necessarily indicative of future financial
position or operations or the actual results that would have occurred had the
mergers been consummated as of the beginning of the periods presented above. The
unaudited pro forma combined financial data is derived from the unaudited pro
forma financial statements appearing elsewhere herein and should be read in
conjunction with those statements. See "Unaudited Pro Forma Combined Financial
Statements".
12
<PAGE>
3COM
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FEBRUARY 28, YEAR ENDED MAY 31,
-------------------- -----------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Historical consolidated statement of
operations data:
Sales............................. $ 892,764 $ 585,532 $ 826,995 $ 617,168 $ 423,801 $ 413,239 $ 430,283
Operating income (loss)........... 116,379 (42,844) (1,517) 58,928 7,998 (42,010) 35,170
Net income (loss)(1).............. 76,403 (55,883) (28,694) 38,561 7,958 (23,831) 23,229
Net income (loss) per common and
equivalent share(1).............. 1.06 (0.90) (0.46) 0.60 0.13 (0.40) 0.38
Common and equivalent shares used
in computing per share amounts... 71,758 61,924 62,620 64,292 60,574 60,162 61,846
Historical consolidated balance
sheet data (end of period):
Working capital................... $ 368,525 $ 198,543 $ 196,231 $ 144,564 $ 149,930 $ 173,376
Total assets...................... 714,251 444,343 367,578 298,306 275,056 298,002
Long-term obligations............. 110,870 1,058 1,134 7,807 8,128 834
Shareholders' equity.............. 382,073 280,756 258,263 202,425 193,667 235,412
</TABLE>
- ------------------------
(1) Net income for the nine months ended February 28, 1995 included a charge of
approximately $60.8 million ($.53 per share) for purchased in-process
technology primarily associated with the acquisition of NiceCom, Ltd. and a
credit of $1.1 million ($.01 per share) for a reduction in accrued
restructuring costs.
Net loss for the nine months ended February 28, 1994 included a charge of
approximately $134.5 million ($1.96 per share) for purchased in-process
technology resulting from the Company's acquisitions of Synernetics, Inc.
and Centrum Communications, Inc. and an exclusive technology licensing
agreement with Pacific Monolithics, Inc., a gain of approximately $17.7
million ($.17 per share) relating to the sale of an investment and a tax
benefit of $1.2 million ($.02 per share) resulting from retroactive changes
relating to the Revenue Reconciliation Act of 1993.
Net loss for fiscal 1994 included a charge of approximately $134.5 million
($1.92 per share) for purchased in-process technology resulting from the
Company's acquisitions of Synernetics, Inc. and Centrum Communications, Inc.
and an exclusive technology licensing agreement with Pacific Monolithics,
Inc., a gain of approximately $17.7 million ($.17 per share) relating to the
sale of an investment and a tax benefit of $1.2 million ($.02 per share)
resulting from retroactive changes relating to the Revenue Reconciliation
Act of 1993.
Net income for fiscal 1993 included non-recurring items totalling $1.3
million ($.02 per share) 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, Inc., offset by a reduction in accrued
restructuring costs of $3.3 million based on revised estimates of future
costs.
Net income for fiscal 1992 included a charge of $10.4 million ($.15 per
share) for purchased in-process technology resulting from the Company's
acquisition of the data networking products business of BICC Group, plc.
Net loss for fiscal 1991 included a restructuring charge of $67.0 million
($.72 per share) related to the Company's exit from the workgroup systems
business, the sale of the Maxess SNA connectivity product line, the
amendment of the Company's license agreement with Microsoft Corporation
making Microsoft solely responsible for the standard LAN Manager network
operating system, and a reduction in the Company's workforce by
approximately 12 percent.
Net income for fiscal 1990 included a charge of $2.5 million ($.02 per
share) accrued for the relocation in fiscal 1991 of the Company's corporate
facilities.
13
<PAGE>
PRIMARY ACCESS
SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED
-------------------- --------------------------------------------------------
JAN. 1, JAN. 2, OCT. 2, OCT. 3, SEPT. 27, SEPT. 29, SEPT. 30,
1995 1994 1994 1993 1992 1991 1990
--------- --------- --------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Historical statement of operations data:
Sales..................................... $ 7,543 $ 6,034 $ 26,518 $ 24,052 $ 13,798 $5,796 $ 259
Operating income (loss)................... 1,139 688 3,678 4,939 1,285 (3,297) (4,048)
Net income (loss)......................... 874 554 3,000 4,478 1,116 (3,367) (3,909)
Net income (loss) per common and
equivalent share......................... 0.08 0.06 0.26 0.47 0.12 (0.72) (1.12)
Common and equivalent shares used in
computing per share amounts.............. 11,461 9,664 11,331 9,512 9,313 4,692 3,497
Historical balance sheet data (end of
period):
Working capital........................... $ 10,235 $ 10,243 $ 7,770 $ 3,556 $ 487 $ 371
Total assets.............................. 17,364 16,603 12,897 7,285 2,741 1,604
Long-term obligations..................... -- 72 171 233 418 133
Shareholders' equity (deficit)............ 12,693 11,817 8,673 4,103 (172) 695
</TABLE>
SONIX
SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
DECEMBER 31, MARCH 31,
-------------------- ----------------------
1994 1993 1994 1993 (1)
--------- --------- --------- -----------
<S> <C> <C> <C> <C>
Historical statement of operations data: (2)
Sales................................................................ $ 15,268 $ 4,080 $ 7,427 $ 905
Operating income (loss).............................................. 2,923 (354) (457) (2,010)
Net income (loss).................................................... 2,486 (685) (923) (2,111)
Net income (loss) per common and equivalent share.................... 4.14 (1.14) (1.54) (3.52)
Common and equivalent shares used in computing per share amounts..... 600 600 600 600
Historical balance sheet data: (2)
Working capital...................................................... $ 2,491 $ 221 $ 490 $ 197
Total assets......................................................... 8,566 3,688 5,316 2,263
Long-term obligations................................................ 2,825 2,743 3,275 1,960
Shareholders' equity (deficit)....................................... 292 (1,992) (2,245) (1,279)
<FN>
- ------------------------------
(1) For the period from May 1, 1992 (date of incorporation) to March 31, 1993.
(2) Sonix maintains its accounting records in pounds Sterling. Historical statement of operations data has been
translated into U.S. dollars at the average exchange rates during the periods presented and the historical
balance sheet data has been translated into U.S. dollars at the exchange rates in effect at the end of each
period presented.
</TABLE>
14
<PAGE>
3COM, PRIMARY ACCESS AND SONIX
SELECTED PRO FORMA COMBINED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
FEBRUARY 28, YEAR ENDED MAY 31,
------------ -------------------------------
1995 1994 1993 1992
------------ --------- --------- ---------
<S> <C> <C> <C> <C>
Pro forma combined statement of operations data:
Sales............................................................ $ 931,454 $ 860,213 $ 640,351 $ 434,080
Operating income................................................. 122,335 1,608 62,029 6,724
Net income (loss)................................................ 80,057 (27,053) 40,185 7,116
Net income (loss) per common and equivalent share(1)............. 1.06 (0.41) 0.59 0.11
Common and equivalent shares used in computing per share
amounts(1)...................................................... 75,775 66,256 67,834 62,718
Pro forma combined balance sheet data (end of period):
Working capital.................................................. $ 375,420
Total assets..................................................... 743,442
Long-term obligations............................................ 113,695
Shareholders' equity............................................. 389,634
Book value per share(2).......................................... 5.56
<FN>
- ------------------------------
(1) The pro forma combined net income (loss) per common and equivalent share is
based upon the weighted average number of common and equivalent shares
(except where inclusion of common equivalent shares is antidilutive)
outstanding of 3Com, Primary Access, and Sonix for each period assuming an
exchange ratio of .2420 of a share of 3Com Common Stock for each share of
Primary Access Stock and 2.0138 shares of 3Com Common Stock for each share
of Sonix Stock.
(2) Book value per share is computed by dividing pro forma shareholders' equity
by the pro forma number of shares of Common Stock outstanding at the end of
each period assuming an exchange ratio of .2420 of a share of 3Com Common
Stock for each share of Primary Access Stock and 2.0138 shares of 3Com
Common Stock for each share of Sonix Stock.
</TABLE>
15
<PAGE>
COMPARATIVE PER SHARE DATA
(UNAUDITED)
The following table sets forth (1) the historical net income (loss) per
share and the historical book value per share data for 3Com; (2) the historical
net income (loss) per share and the historical book value per share data for
Primary Access; (3) the historical net income (loss) per share and the
historical book value per share data for Sonix; (4) the pro forma net income
(loss) per share and the pro forma book value per share data after giving effect
to the proposed mergers on a pooling of interests basis assuming an exchange
ratio of .2420 of a share of 3Com Common Stock for each share of Primary Access
Stock and an exchange ratio of 2.0138 shares of 3Com Common Stock per share of
Sonix Stock and (5) the pro forma equivalent net income (loss) per share and the
pro forma book value per share for Primary Access. The information presented in
the table should be read in conjunction with the separate financial statements
of 3Com and Primary Access and the notes thereto appearing elsewhere herein.
<TABLE>
<CAPTION>
PRO FORMA
EQUIVALENT
HISTORICAL FOR ONE
------------------------------------- PRIMARY
PRIMARY PRO FORMA ACCESS
3COM ACCESS (1) SONIX (2) COMBINED (3)(4) SHARE (5)
----------- ----------- ----------- --------------- -----------
<S> <C> <C> <C> <C> <C>
NET INCOME (LOSS) PER SHARE
Nine months ended February 28, 1995............... $ 1.06 $ 0.21 $ 4.10 $ 1.06 $ 0.26
Fiscal year
1994............................................ (0.46) 0.27 (1.54) (0.41) (0.10)
1993............................................ 0.60 0.47 (3.52) 0.59 0.14
1992............................................ 0.13 (1.45) -- 0.11 0.03
BOOK VALUE PER SHARE
February 28, 1995 (6)............................. $ 5.75 $ 1.34 $ .49 $ 5.56 $ 1.35
May 31, 1994 (6).................................. 4.32 1.10 (3.74) 4.13 1.00
<FN>
- ------------------------
(1) The historical net income (loss) and book value amounts for Primary Access
reflect all shares of Primary Access Preferred Stock on an as-if-converted
basis, except in loss periods which the effect of the conversion would be
antidilutive. For comparative purposes of this table, the periods presented
for the historical net income (loss) per share of Primary Access are the
nine months ended April 2, 1995 and the fiscal years ended July 3, 1994,
June 27, 1993 and June 28, 1992. The periods presented for the historical
book value per share of Primary Access are April 2, 1995 and July 3, 1994.
(2) For comparative purposes of this table, the periods presented for the
historical net income (loss) per share of Sonix are the nine months ended
December 31, 1994 and the fiscal year ended March 31, 1994 and March 31,
1993. The periods presented for the historical book value per share of
Sonix are December 31, 1994 and March 31, 1994.
(3) Total transaction costs to be incurred by 3Com, Primary Access and Sonix in
connection with the mergers are estimated at approximately $6.1 million.
These costs relate primarily to investment banking, legal and accounting
services. These costs are expected to be charged against income of the
combined company in the quarter and fiscal year ending May 31, 1995.
Accordingly, the effects of these costs have not been reflected in the
above comparative net income (loss) per share data.
(4) The unaudited pro forma combined net income (loss) per common and
equivalent share is based upon the weighted average number of common and
equivalent shares of 3Com, Primary Access and Sonix for each period
assuming an exchange ratio of .2420 of a share of 3Com Common Stock for
each share of Primary Access Stock and an exchange ratio of 2.0138 shares
of 3Com Common Stock for each share of Sonix Stock. Net income of 3Com for
the nine months ended February 28, 1995 has been combined with the net
income of Primary Access for the nine months ended April 2, 1995 and with
the net income of Sonix for the nine months ended December 31, 1994. Net
income (loss) of 3Com for the years ended May 31, 1994, 1993 and 1992 has
been combined with the net income (loss) of Primary Access for the years
ended July 3, 1994, June 27, 1993 and June 28, 1992, and with the net loss
of Sonix for the years ended March 31, 1994 and 1993 respectively, for this
calculation.
</TABLE>
16
<PAGE>
<TABLE>
<S> <C>
(5) The unaudited pro forma equivalent Primary Access per share amounts are
calculated by multiplying the pro forma combined per share amounts by the
exchange ratio of .2420 of a share of 3Com Common Stock for each share of
Primary Access Stock.
(6) Historical book value per share is computed by dividing shareholders'
equity by the number of shares of common stock outstanding at the end of
each period, assuming the conversion of Primary Access Preferred Stock into
Primary Access Common Stock. Pro forma combined book value per share is
computed by dividing pro forma combined shareholders' equity by the pro
forma combined number of shares of common stock outstanding as of February
28, 1995 and May 31, 1994 for 3Com, as of April 2, 1995 and July 3, 1994
for Primary Access and as of December 31, 1994 and March 31, 1994 for
Sonix, respectively.
</TABLE>
17
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION REGARDING 3COM, PRIMARY ACCESS AND THE
MERGER CONTAINED IN THIS PROSPECTUS/CONSENT SOLICITATION STATEMENT, THE
FOLLOWING FACTORS SHOULD BE CONSIDERED CAREFULLY BY THE HOLDERS OF PRIMARY
ACCESS STOCK BEFORE CONSENTING TO THE AUTHORIZATION AND APPROVAL OF THE MERGER
PROPOSAL.
UNCERTAINTIES RELATED TO THE INTEGRATION OF PRIMARY ACCESS' BUSINESS. The
successful combination of companies in the high technology industry may be more
difficult to accomplish than in other industries. There can be no assurance that
3Com will be successful in developing products based on Primary Access'
technology or engineering expertise, that 3Com will be successful in integrating
its own distribution channels with those of Primary Access, that 3Com will be
successful in penetrating Primary Access' installed customer base, that 3Com
will be successful in selling Primary Access' products to its own customer base,
that the combined companies will retain their key personnel or that 3Com will
realize any of the other anticipated benefits of the Merger.
ACQUISITION STRATEGY. Acquisitions of complementary businesses are an
active part of 3Com's overall business strategy. In addition to the Primary
Access acquisition, 3Com has recently consummated acquisitions of several other
businesses, including NiceCom, Ltd. and AccessWorks Communications, Inc., and
announced the acquisition of Sonix. 3Com continually evaluates potential
acquisition and investment opportunities. There can be no assurance that
products, technologies and businesses of acquired companies will be effectively
assimilated into 3Com's business or product offerings. In addition, 3Com may
incur significant expenses to complete acquisitions and investments and to
support the acquired products, technologies or businesses. There can be no
assurance that any acquired products, technologies or businesses will contribute
to 3Com's revenues or earnings to any material extent. Further, the challenge of
managing the integration of several companies simultaneously is significant, and
there can be no assurance that 3Com will be able to successfully manage such
integration.
NEW PRODUCTS AND TECHNOLOGICAL CHANGE. The market for 3Com's products
(including the product lines of Primary Access to be acquired in the Merger) is
characterized by rapid technological developments, evolving industry standards,
changes in customer requirements, frequent new product introduction and
enhancements and short product life cycles. 3Com's success depends in
substantial part 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 advantage of technological advances. An unexpected change in
one or more of the technologies affecting data networking or in market demand
for products based on a particular technology could have a material adverse
effect on 3Com's operating results. For instance, a large portion of 3Com's
revenues is comprised of sales of products based on Ethernet technology. 3Com's
operating results could be adversely affected if there is an unexpected change
in demand for products based on such technology or if 3Com does not respond
timely and effectively to expected changes. 3Com is engaged in research and
development activities in certain emerging LAN and WAN high-speed technologies,
such a 100 Mbps Ethernet, ATM and ISDN. There can be no assurance that 3Com will
be able to timely and 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.
See "Information Concerning 3Com -- Business," "-- 3Com Management's Discussion
and Analysis of Financial Condition and Results of Operations," and "Information
Concerning Primary Access -- Business -- Research and Development."
COMPETITION. Both 3Com and Primary Access experience and expect substantial
additional competition from established and emerging computer, communications,
intelligent network wiring and network management companies. The primary
competitors for 3Com's products are Bay Networks, Inc., Cabletron Systems, Inc.,
Cisco Systems, Intel Corporation and Standard Microsystems Corporation, while
the primary competitors for Primary Access' products are U.S. Robotics Inc. and
18
<PAGE>
Ascend Communications Inc. There can be no assurance that 3Com will be able to
compete successfully in the future with existing competitors or new competitors.
The data networking industry has become increasingly competitive and 3Com'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. In particular,
competitive pressures from existing or new competitors who offer lower prices or
introduce new products could result in delayed or deferred purchasing decisions
by potential customers and price reductions, both of which would adversely
affect 3Com's sales and operating margins. The industry in which the Company
competes is characterized by declining average selling prices, which the Company
anticipates will continue. This trend could adversely impact 3Com's sales and
operating margins. 3Com participates in designing, manufacturing and marketing
on-premises equipment. 3Com's competitors typically compete in one or more
segments 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 to pursue
strategies more closely resembling 3Com's global data networking strategy. See
"Information Concerning 3Com Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business -- Competition" and "Information
Concerning Primary Access -- Management's Discussion and Analysis of Financial
Condition and Results of Operation."
PRODUCT PROTECTION AND INTELLECTUAL PROPERTY. 3Com currently relies upon a
combination of patents, copyrights, trademarks and trade secret laws to
establish and protect its proprietary rights in its products. 3Com maintains as
proprietary the software and other portions of the technology incorporated in
its products. 3Com has been issued and has applied for numerous patents in the
United States on various aspects of its hardware and software products. There
can be no assurance that the steps taken by 3Com to protect its proprietary
rights will be adequate to prevent misappropriation of its technology or that
3Com's competitors will not independently develop technologies that are
substantially equivalent or superior to 3Com's technology. In addition, the laws
of some foreign countries do not protect 3Com's proprietary rights to the same
extent as do the laws of the United States. In addition, no assurance can be
given that any patents currently held or issued to 3Com in the future will not
be challenged, invalidated or circumvented or that the rights granted thereunder
will provide competitive advantages.
From time-to-time 3Com receives communications from third parties asserting
that 3Com's use of trademarks, or that 3Com's products, infringe or may infringe
the rights of third parties. There can be no assurance that any such claims will
not result in protracted and costly litigation, however, based upon general
practice in the industry 3Com believes that such matters can ordinarily be
resolved without any material impact on its results of operations. See
"Information Concerning 3Com -- Business -- Distribution, Marketing and
Customers", " -- Product Development" and "-- Patents, Licenses and Related
Matters."
MERGER EXPENSES. The negotiation and implementation of the Merger is
currently anticipated to result in aggregate expenses (including investment
banking, legal and accounting fees) estimated to be approximately $4.3 million.
In addition, the merger with Sonix is expected to result in aggregate expenses
of approximately $1.8 million. These costs are expected to be charged against
income of 3Com in the fiscal quarter ending May 31, 1995. The Merger may have a
short-term adverse effect on the net income of 3Com due to the aforementioned
expenses. Additional unanticipated expenses may be incurred relating to the
integration of the businesses of 3Com and Primary Access, including integration
of product lines, distribution and administrative functions. Although 3Com
expects that the elimination of duplicative expenses as well as other
efficiencies related to integration of these businesses may offset additional
expenses over time, there can be no assurance that such net benefit will be
achieved in the near term, or at all.
19
<PAGE>
VOLATILITY OF STOCK PRICE; STOCK ESCROW. Based on the trading history of
its stock, 3Com believes factors such as announcements of new products by 3Com
or its competitors, sales of stock into the market by existing holders,
quarterly fluctuations in 3Com's financial results and general conditions in the
data networking market have caused and are likely to continue to cause the
market price of the 3Com Common Stock to fluctuate substantially. In addition,
technology company stocks have experienced extreme price and volume fluctuations
that often have been unrelated to the operating performance of such companies.
This market volatility may adversely affect the market price of 3Com's Common
Stock. See "Market Price Data." Because the market price of 3Com Common Stock is
subject to fluctuation, the market value of the shares of 3Com Common Stock that
the Primary Access shareholders will receive in the Merger may increase or
decrease prior to the Merger. Primary Access shareholders are urged to obtain a
current market quotation for 3Com Common Stock.
In addition, at the Effective Date, 3Com will deposit in escrow certificates
representing 10% of the shares of 3Com Common Stock to be issued to the holders
of Primary Access Stock in the Merger, and upon each exercise of 3Com Options
that are issued in the Merger to holders of Primary Access Options, in
connection with the indemnification obligations of the Primary Access
shareholders. To the extent such escrowed shares are used to satisfy these
obligations, the Primary Access shareholders may receive up to 10% fewer shares
than determined based solely upon the Exchange Ratio. Further, the Primary
Access shareholders and option will be obligated to indemnify the Shareholders'
Agents (as defined herein) for losses, liabilities or expenses they may incur in
connection with fulfilling their duties as the Shareholders' Agents. See "Terms
of the Merger -- Escrow and Indemnification."
SMALL BACKLOG AND POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS. 3Com
customers place orders on an as needed basis and 3Com typically ships products
within one to four weeks after receipt of an order. Accordingly, 3Com does not
maintain a substantial backlog, and most of its revenues in each quarter result
from orders booked in that quarter. 3Com establishes its expenditure levels
based on its expectations as to future revenues, and if revenue levels were
below expectations this could cause expenses to be disproportionately high. As a
result, a drop in near term demand will significantly affect sales, causing a
disproportionate reduction in profits in any quarter. In the future, 3Com's
operating results may fluctuate for this reason or as a result of a number of
other factors, including increased competition, variations in the mix of sales,
announcements of new products by 3Com or its competitors and capital spending
patterns of 3Com's customers. See "Information Concerning 3Com -- 3Com
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
DEPENDENCE UPON SUPPLIERS. Some key components of 3Com's products are
currently available only from single sources. The inability of 3Com to obtain
certain components could require 3Com to redesign or delay shipments of several
of its data networking products. 3Com 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
3Com's suppliers, are adequate for its presently forecasted needs. Although 3Com
has contractual arrangements with certain of its sole-source suppliers, there
can be no assurance that in the future 3Com's suppliers will be able to meet the
demand for components in a timely and cost-effective manner. 3Com'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. See "Information Concerning 3Com -- Business."
CERTAIN CHARTER PROVISIONS. Certain charter provisions and 3Com's
shareholder rights plan could have the effect of delaying, deferring or
preventing a change in control of 3Com. In addition, 3Com's charter eliminates
the personal monetary liability of its directors for breach of their duty of
care, and 3Com has entered into agreements with its officers and directors
indemnifying them against losses they may incur in legal proceedings resulting
from their service to 3Com. See "Information Concerning 3Com -- Management" and
"Description of 3Com Capital Stock."
20
<PAGE>
ACTS OF GOD. 3Com'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.
ATTRACTION AND RETENTION OF KEY EMPLOYEES. Competition for qualified
personnel in the computer and communications industries is intense. The future
success of the combined companies will depend in large part on its ability to
attract and retain key employees. See "Information Concerning 3Com -- Business"
and "Information Concerning 3Com -- Management."
MANUFACTURING FACILITIES. 3Com is currently increasing its manufacturing
facility capabilities in two locations. While 3Com has significant experience in
expanding its manufacturing operations, such expansion may be subject to delay
due to labor issues, adverse weather and construction or other unforeseeable
delays, which could adversely affect 3Com's operating results and customer
relationships. See "Information Concerning 3Com -- Business."
CONSENT OF SHAREHOLDERS OF PRIMARY ACCESS
GENERAL
This Prospectus/Consent Solicitation Statement is being furnished to holders
of Primary Access Stock in connection with the solicitation by Primary Access of
shareholder consent to the authorization and approval of the Merger Proposal.
This Prospectus/Consent Solicitation Statement contains certain information
set forth more fully in the Reorganization Agreement attached hereto as APPENDIX
A and is qualified in its entirety by reference to the Reorganization Agreement,
which is hereby incorporated herein by reference. The Reorganization Agreement
should be read carefully by each Primary Access shareholder in formulating his
or her decision with respect to the proposed Merger.
RECORD DATE AND OUTSTANDING SHARES
Shareholders of record of Primary Access Stock at the close of business on
the Record Date are entitled to authorize and approve the Reorganization
Agreement, Agreement of Merger and establishment of the Escrow Fund. On the
Record Date, there were approximately shareholders of record and approximately
shares of Primary Access Common Stock and approximately shares
of Primary Access Preferred Stock issued and outstanding. Except for the
shareholders identified herein under "Information Concerning Primary Access --
Principal Shareholders," on the Record Date there were no other persons known to
the management of Primary Access to be the beneficial owners of more than 5% of
any outstanding class of Primary Access Stock.
CONSENT REQUIRED
Approval of the Merger Proposal requires the consent of holders of (i) a
majority of the outstanding shares of Primary Access Common Stock entitled to
vote; (ii) two-thirds of the outstanding shares of Primary Access Preferred
Stock entitled to vote; and (iii) a majority of the outstanding shares of
Primary Access Common Stock and Primary Access Preferred Stock entitled to vote,
voting together as a single class. Under the terms of the Reorganization
Agreement, it is a condition to 3Com's and Sub's obligation to consummate the
Merger that the holders of at least 92% of the outstanding shares of Primary
Access Stock consent to the authorization and approval of the Merger Proposal so
as to comply with the requirements of pooling-of-interests accounting. 3Com and
Sub have the right to waive such condition and to consummate the Merger without
obtaining the consent of 92% of the Primary Access shareholders, although 3Com
and Sub do not presently intend to waive such condition. 3Com and Sub do not
intend to proceed with the transaction if it will not satisfy the requirements
for pooling-of-interests accounting treatment. Pursuant to the terms of the
Voting Agreements, directors, executive officers and certain shareholders of
Primary Access holding an aggregate of approximately 83% of the outstanding
shares of Primary Access Stock have agreed to consent to the authorization and
approval of the Merger Proposal and in connection therewith, have granted
irrevocable proxies to the Board of Directors of 3Com covering approximately
971,700 shares of Primary
21
<PAGE>
Access Common Stock, or 61% of the outstanding Primary Access Common Stock,
approximately 7,298,900 shares of Primary Access Preferred Stock, or 87% of the
outstanding Primary Access Preferred Stock, and approximately 8,270,600 shares
of Primary Access Stock, or 83% of the outstanding Primary Access Stock. See
"Terms of the Merger -- Manner and Basis of Converting Shares" and "The Merger
and Related Transactions -- Voting Agreements."
EXPENSES
3Com and Primary Access shall each pay its own costs and expenses incurred
incident to the negotiation, execution and delivery of the Reorganization
Agreement and the preparation and carrying out of the transactions contemplated
by the Reorganization Agreement. In the event the Merger is consummated, all
investment banking, legal and accounting fees incurred by Primary Access and/or
its shareholders in connection with the Merger which exceed $1,750,000 will be
deemed to be expenses of the Primary Access shareholders and such excess amount
shall be deducted from the Aggregate Purchase Price as a part of the Adjustment
and shall not become obligations of Primary Access.
In the event that 3Com or Sub fails to consummate the Merger by June 30,
1995 or because any one or more of the conditions to closing set forth in the
Reorganization Agreement for the benefit of 3Com and Sub were not satisfied,
3Com shall reimburse Primary Access for any reasonable legal and accounting
expenses specifically incurred by Primary Access in connection with the
Reorganization Agreement (but excluding any expenses incurred by Primary Access
in connection with its contemplated initial public offering) in an aggregate
amount not to exceed $250,000. 3Com shall have no such obligation if the Merger
fails to close because of the inaccuracy of any of the representations or
warranties of Primary Access contained in the Reorganization Agreement, due to
3Com's discovery of or Primary Access providing notification of exceptions to
such representations and warranties in addition to the exceptions provided by
Primary Access to 3Com prior to or on the date of the Reorganization Agreement.
PROCEDURE
Shareholders of Primary Access should complete, sign and date the Consent
and return the Consent to Primary Access Corporation, 12230 World Trade Drive,
San Diego, California 92128, Attn: Chief Financial Officer by April , 1995.
CERTIFICATES SHOULD NOT BE SURRENDERED BY THE HOLDERS THEREOF UNTIL THEY
RECEIVE THE LETTER OF TRANSMITTAL FROM THE EXCHANGE AGENT. See "Terms of the
Merger -- Manner and Basis of Converting Shares."
THE MERGER AND RELATED TRANSACTIONS
BACKGROUND OF THE MERGER
During 1994, management of Primary Access began exploring several options to
accomplish the addition of remote LAN access software to the Primary Access
platform. One of those options included the addition of 3Com software. During
September 1994, the technical staff of Primary Access met several times to
determine the feasibility of porting 3Com software to existing and future
products of Primary Access. On September 28, 1994, William R. Stensrud,
President, Chief Executive Officer of Primary Access, and Andrew May, Vice
President, Marketing of Primary Access, met with Eric Benhamou, President and
Chief Executive Officer of 3Com, to discuss the technical aspects of a
combination of the two companies' technologies.
On October 17, 1994, November 18, 1994 and December 15, 1994, the members of
senior management of 3Com and Primary Access met to discuss the possibility of a
joint bid on a proposal for a large customer and the synergies between 3Com and
Primary Access. These meetings also included a discussion of a possible
partnership or merger between the companies.
During December 1994, three telephonic and several face-to-face meetings
took place, during which members of senior management of 3Com and Primary Access
discussed the integration of 3Com
22
<PAGE>
and Primary Access technologies. On December 22, 1994, the companies executed a
letter of intent regarding a potential technology sharing agreement to
facilitate the integration of the technologies of the two companies to
facilitate the customer bid referred to above.
On January 12 and 13, 1995, discussions were held at 3Com concerning the
technology sharing arrangement. On January 17, 1995, representatives of 3Com
discussed with Primary Access management their determination that the costs
associated with the combination of the two companies' technologies would be
substantial and indicated that 3Com would be interested in discussing the
possible acquisition of Primary Access.
At a special meeting held on January 19, 1995, the Board of Directors of
Primary Access considered the discussions of senior management with 3Com to date
and directed Mr. Stensrud to invite an offer from 3Com. In addition, the Board
of Directors instructed management to continue to proceed, as its first
priority, on the path of a potential initial public offering of Primary Access'
capital stock. Finally, the Board of Directors instructed management to bring to
the attention of the Board of Directors any competing offers with respect to a
business combination with Primary Access.
On January 24 and 26, 1995, Primary Access sent various materials to 3Com
for evaluation.
On February 1, 1995, senior management of 3Com attended an all-day meeting
at Primary Access' facilities to conduct due diligence activities. On February
8, 1995, the Board of Directors of Primary Access authorized Primary Access to
engage Montgomery Securities as its financial advisor to assist Primary Access
in its initial public offering and analyzing, structuring, negotiating and
effecting proposed merger and acquisition transactions. On February 14, 1995,
Mr. Stensrud and Marcel Gani, Vice President and Chief Financial Officer of
Primary Access participated in a follow-up discussion with Janice Roberts, Vice
President, Marketing of 3Com, and Montgomery Securities to discuss certain
additional due diligence matters.
Throughout February, management of Primary Access, as directed by the Board
of Directors, continued discussions with another possible business combination
candidate. On February 24, 1995, a preliminary nonbinding indication of interest
to proceed with negotiations concerning a possible acquisition of Primary Access
was executed with this company. On February 26, 1995, following a due diligence
review by the business combination candidate and Primary Access of each others
business, both parties mutually determined that the anticipated synergies of a
business combination with Primary Access were not as high as previously
expected. Discussions were then discontinued with this company.
On February 23, 1995, the Board of Directors of Primary Access received a
letter from Mr. Benhamou proposing a specified aggregate price for the
outstanding shares of Primary Access Stock. Such specified aggregate price was
arrived at by 3Com based upon its preliminary assessment of the value of the
business of Primary Access at that time. At a special meeting of the Board of
Directors of Primary Access held on February 28, 1995, the Board rejected such
proposal because the upper range of the consideration offered to Primary Access
shareholders was deemed to be insufficient by the Board of Directors.
On March 5, 1995, Mr. Stensrud, Mr. Gani and certain other members of
Primary Access' senior management met at 3Com's facilities, together with
certain advisors of the two companies, to continue discussions of a proposed
business combination.
During the week of March 6, 1995, there were numerous discussions held
between 3Com and Primary Access and their respective financial advisors
concerning proposed terms of the Reorganization Agreement and on March 9, 1995,
the parties executed a non-binding letter of intent providing for an aggregate
purchase price of $170 million. The proposed purchase price was the result of
negotiations between the parties. There was no mechanical formula used to
provide the purchase price. Discussions between the parties and their financial,
legal and accounting advisors continued through
23
<PAGE>
the next two weeks. At special meetings of the Board of Directors of Primary
Access held on March 6 and March 13, 1995, Primary Access' financial and legal
advisors updated the Board of Directors on the status of the discussions and
negotiations concerning the proposed business combination.
At a meeting held on March 16, 1995 the Board of Directors of 3Com approved
the terms of the Reorganization Agreement subject to finalization of certain
issues in negotiations between management of 3Com and Primary Access.
Representatives of Morgan Stanley & Co. were present at the meeting and gave a
presentation to the 3Com Board of Directors.
On March 17, 1995, the Board of Directors of Primary Access held a special
meeting to discuss the terms of the Reorganization Agreement and the proposed
Merger with 3Com and approved the final terms, subject to negotiation of several
remaining unresolved issues. Montgomery Securities, the financial advisors to
the Board of Primary Access, did not render an opinion to the Board prior to the
Board's approval of the Merger. The parties and their financial advisors
continued to address the remaining issues related to obtaining the opinions of
the accountants of 3Com and Primary Access regarding accounting for the Merger.
On March 21, 1995, 3Com and Primary Access entered into the Reorganization
Agreement, and on the following day, March 22, 1995, the agreement to merge was
announced.
Primary Access was not contemplating a business combination of the type
proposed by 3Com when Primary Access was first approached by 3Com regarding the
Merger. In considering the proposed Merger, the management and Board of
Directors of Primary Access considered whether alternative strategies might
achieve the anticipated benefits of the Merger to Primary Access' shareholders.
From time to time following the initial contact that led to the Merger, Primary
Access was approached by two other companies concerning a possible business
combination. Prior to Primary Access' entering into a letter of intent with
3Com, and after it received 3Com's February 23 letter, it entered into a letter
of intent with another company and began the due diligence process with that
company. Shortly thereafter, both parties mutually agreed to discontinue their
discussions because the anticipated synergies of that business combination were
not as high as the parties had previously expected. In addition, another company
expressed interest in pursuing discussions concerning a business combination
with Primary Access and minimal discussions were held and discontinued prior to
the acceptance by the Board of Directors of Primary Access of the 3Com proposal.
Following these discussions, Primary Access' Board of Directors determined not
to pursue further discussions of a business combination with such company based
upon a determination that such a business combination would not be likely to be
as advantageous to the Primary Access shareholders as the proposed Merger with
3Com. See "-- Joint Reasons for the Merger" and "Primary Access' Reasons for the
Merger."
JOINT REASONS FOR THE MERGER
3Com and Primary Access have identified several potential benefits of the
Merger that they believe will contribute to the success of the combined company.
These potential benefits include principally the following:
- The extensive offerings of 3Com's and Primary Access' data networking and
access products position the combined company to have one of the broadest
product lines for remote access in the industry.
- The technical resources of Primary Access, primarily in the market for
products providing access to the public switched telephone networks for
backbone computer networks, and its broad base of clients including
leading network services companies worldwide, should enable the combined
company to compete more effectively.
- The combined technological resources of 3Com and Primary Access should
permit the combined company to leverage its development capabilities to
create new products which combine the best aspects of traditional data
computer networks and access networks for the public switched networks.
Customer requirements are driving together the historically separate
worlds of the public switched telephone network ("PSTN") served by Primary
Access and of
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the local and wide area data networks served by 3Com. There is an
increasing demand for delivering end-to-end system solutions that
incorporate terminal server, remote LAN node server, and router
functionality across the PSTN. Furthermore, new technologies such as ISDN
and ATM are expected to emerge as critical components of both the PSTN and
LAN/WAN worlds. Combined, 3Com and Primary Access believe that they can
best deliver these new technologies and system solutions.
- The ability to combine the sales and marketing resources of the two
companies to compete more effectively with greater resources. 3Com's broad
distribution channels for its wide array of networking products and
Primary Access' expertise in and relationships with major network service
providers worldwide will be complementary and should provide the combined
company with the ability to effectively cross-sell each individual
company's existing products.
- The cost efficiencies and synergies that may be obtained from combining
operations.
FURTHER 3COM BACKGROUND AND REASONS FOR THE MERGER
The Board of Directors of 3Com unanimously approved the terms and provisions
of the Reorganization Agreement at its meeting held on March 16, 1995. The Board
of Directors of 3Com believes that consummation of the Merger is in the best
interests of 3Com.
In arriving at its unanimous decision to approve the Reorganization
Agreement, the Board of Directors of 3Com considered a number of factors. Among
the factors that the Board considered were (i) information concerning 3Com's and
Primary Access' respective businesses, historical financial performance,
operations and products, including possible future product releases; (ii) the
anticipated leverage between 3Com's remote access products and those of Primary
Access; (iii) the opportunity for 3Com to distribute its products to a new
category of customers, telecommunications carriers, with whom certain of 3Com's
competitors had established relationships; (iv) the opportunity to significantly
expand 3Com's products to include remote access products; (v) an analysis of the
relative value that Primary Access might contribute to the future business and
prospects of the combined company including pro forma historical and projected
revenue and earnings contribution; (vi) comparative equity valuation and
comparisons of market values and recent acquisition prices for comparable
companies; (vii) the compatibility of management and businesses of 3Com and
Primary Access; (viii) reports from management and legal advisors on specific
terms of the relevant agreements, including the Reorganization Agreement, and
other matters; (ix) the Board's judgment that 3Com was unlikely to identify an
alternative business opportunity that would provide superior benefits to 3Com
and its shareholders in the network access market; (x) 3Com's and Primary
Access' historical and projected financial condition and results of operations
based on 3Com and Primary Access internal projections through 1996 which, in the
judgment of the Board, supported the consideration to be paid by 3Com in the
Merger; and (xi) the technical and marketing knowledge of the Primary Access
employee team, including detailed understanding of product and application
requirements, buying behavior, and key competitor's offerings.
One of 3Com's goals has been to expand its business to include relationships
with telecommunications carriers. Primary Access has and continues to enjoy
excellent relationships with its major clients, including AT&T, MCI, and Sprint.
Also, Primary Access customers have indicated the need for future products to
include router functionality, terminal server functionality, ATM and ISDN
technology, and remote LAN access, which constitute areas of 3Com's product
line.
3Com's Board also believes that the strategic relationships that Primary
Access has established will assist 3Com to achieve its stated goal of increasing
its distribution and technology relationships within the telecommunications
industry. 3Com believes that with the Primary Access products, it will be able
to provide fully integrated access products for the public switched data market.
3Com believes this will strengthen its position with telecommunications service
providers or carriers who are increasingly providing managed data network
service from points of presence.
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FURTHER PRIMARY ACCESS REASONS FOR THE MERGER
The Board of Directors of Primary Access unanimously approved the terms and
provisions of the Reorganization Agreement at its special meeting held on March
17, 1995. The Board of Directors of Primary Access believes that terms of the
Merger are fair and recommends that Primary Access' shareholders vote for
approval and adoption of the Reorganization Agreement and the related matters
set forth in the Consent.
In arriving at its unanimous decision to approve the Reorganization
Agreement, the Board of Directors of Primary Access considered a number of
factors, including: (i) management's view that the networking services industry
is moving toward integrated platforms combining network access products, routers
and terminal server functionality; (ii) the increased access to protocols and
possible TCP/ IP technology which would result from the Merger; (iii) the timing
and inherent risk of a future initial public offering and the Board's view that
it was unlikely to identify an alternative business opportunity that would
provide the same likelihood of return on investment to the Primary Access
shareholders; (iv) the potential increased sales of Primary Access equipment to
commercial customers in cooperation with the 3Com sales force; (v) the potential
for increased sales of Primary Access' products through 3Com's international
sales channels; (vi) the potential for increased sales by providing both ends of
the communications link. Primary Access and 3Com may be in a position to produce
standards-based products for the general market and also pursue opportunities
where proprietary implementation would result in a value-added product offering;
(vii) the potential sale of 3Com's equipment to Primary Access' customers;
(viii) the potential for an increase in revenue attributable to the enhanced
credibility of Primary Access as a subsidiary of 3Com, including technology
assets, stronger balance sheet, industry presence and reputation; (ix) the
potential for gross margin improvement by applying 3Com's volume manufacturing
capabilities, purchasing power and potential custom ASIC design capabilities to
Primary Access' products; (x) the ability to continue necessary research and
development through an enhanced financial position; and (xii) the ability to
respond strongly to industry consolidations, joint ventures and strategic
partnerships.
CONDUCT OF PRIMARY ACCESS IF MERGER NOT CONSUMMATED
In the event that the proposed Merger is not consummated, Primary Access
will continue to operate its business as currently conducted. It is anticipated
that Primary Access would consider other possible sources of capital financing
with its financial advisors, including the possibility of an initial public
offering or a joint venture arrangement with another company possessing
complementary technologies.
TERMS OF THE MERGER
EFFECTIVE DATE OF THE MERGER
The Closing shall occur as soon as possible following the satisfaction or
waiver of all conditions set forth in Sections 9 and 10 of the Reorganization
Agreement. See " -- Conditions to the Merger." Simultaneously with the Closing,
the Agreement of Merger, together with all required officers' certificates,
shall be filed with the offices of the Secretary of State of the State of
California. The Merger shall become effective immediately upon the date stamped
by the California Secretary of State upon the Agreement of Merger and the
officers' certificates. See " -- Conditions to the Merger." It is anticipated
that, if the Reorganization Agreement is authorized and approved by the
shareholders of Primary Access and all other conditions of the Merger have been
fulfilled or waived, the Effective Date will occur on , 1995, or a
date as soon as practicable thereafter.
MANNER AND BASIS OF CONVERTING SHARES
Pursuant to the Reorganization Agreement, at the Effective Date Primary
Access will become a wholly-owned subsidiary of 3Com, and Primary Access Stock
will be converted into shares of 3Com Common Stock. At the Effective Date, by
virtue of the Merger and without any action on the part of the holders of
Primary Access Stock, all shares of Primary Access Stock, other than the
Dissenting Shares, will be converted into shares of 3Com Common Stock. The
number of shares of 3Com
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Common Stock each holder of Primary Access Stock will receive as a result of
this conversion will be determined by multiplying the number of shares of
Primary Access Stock held by such holder by the Exchange Ratio.
The "Exchange Ratio" for the conversion of Primary Access Stock is to be
determined by dividing the Aggregate Purchase Price by the Average Price and
then dividing such foregoing quotient by the sum of (a) the total number of
issued and outstanding shares of Primary Access Common Stock, plus (b) the total
number of shares of Primary Access Common Stock issuable upon conversion of all
issued and outstanding shares of Primary Access Preferred Stock, plus (c) the
total number of shares of Primary Access Common Stock issued upon exercise of
Primary Access Options and Primary Access Warrants outstanding immediately prior
to the Effective Date.
The "Aggregate Purchase Price" equals $170.0 million less the amount of the
Adjustment. The Aggregate Purchase Price was arrived at through arms-length
negotiations between the parties and was not the result of any mechanical
formula or other valuation method. The "Adjustment" is equal to (i) the amount
of any fees which are permitted to and have been paid or accrued by or on
account of Primary Access or any of its shareholders under Section 14.6 of the
Reorganization Agreement, plus (ii) any amount of litigation costs or settlement
costs incurred by Primary Access between the date of the Reorganization
Agreement and the Closing Date which are related to the litigation pending in
the Superior Court of New Jersey, Borgen County, Hackensack, New Jersey entitled
WILCOX & GIBBS V. PRIMARY ACCESS CORPORATION (the "DataNet Litigation"). The
DataNet Litigation involves a dispute between Primary Access and Wilcox & Gibbs
with regard to claims for breach of contract and commissions allegedly due. The
case went to trial in May 1994. The jury found for the plaintiff and awarded
Wilcox & Gibbs $2.8 million. On the basis that there was no evidence to support
the jury verdict, Primary Access was granted a new trial. The Adjustment is
subject to increase by the amount, if any, of fees and expenses of Primary
Access, or its shareholders, in excess of $1,750,000.
The "Average Price" shall mean the average of the closing sale prices of
3Com Common Stock reported in the WALL STREET JOURNAL, on the basis of
information provided by the Nasdaq National Market, for each of the ten trading
days immediately preceding (but not including) the Closing Date. Notwithstanding
the above, if the Average Price is greater than $61.16, then the Exchange Ratio
shall be the number of shares resulting from dividing the Aggregate Purchase
Price by $61.16, and then dividing the foregoing quotient by the sum of (i) the
total number of issued and outstanding shares of Primary Access Common Stock,
plus (ii) the total number of shares of Primary Access Common Stock issuable
upon conversion of all issued and outstanding shares of Primary Access Preferred
Stock, plus (iii) the total number of shares of Primary Access Common Stock
issuable upon exercise of Primary Access Options and Primary Access Warrants
outstanding at the Effective Date. If the Average Price is less than $55.34,
then the Exchange Ratio shall be the number of shares resulting from dividing
the Aggregate Purchase Price by $55.34, and then dividing such quotient by the
sum of subsections (i), (ii) and (iii) above.
In the event that a Primary Access shareholder who attempts to exercise
dissenters' rights under Chapter 13 of the CGCL should fail to make a proper
demand for payment or otherwise loses his status as a dissenting shareholder,
such Primary Access shareholder shall be entitled to receive from 3Com the same
number of shares of 3Com Common Stock and cash payment in lieu of any fractional
share that such Primary Access shareholder would have received in the Merger if
he had not attempted to exercise dissenters' rights. Such shareholder shall then
be subject to the indemnification obligations set forth in Section 13 of the
Reorganization Agreement. See " -- Escrow and Indemnification."
In lieu of receiving shares of 3Com Common Stock upon conversion of their
shares of Primary Access Stock, Primary Access shareholders may elect to
exercise dissenters' rights and to receive cash for their shares of Primary
Access Stock in an amount equal to the fair value of such stock as determined
pursuant to prescribed procedures. See "Terms of the Merger -- Dissenters'
Rights."
Based on an Average Price of $58.25 per share of 3Com Common Stock, which
price is subject to a range from $55.34 to $61.16, and assuming that (i)
12,059,229 shares of Primary Access Common
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Stock are issued and outstanding, or issuable upon exercise of Primary Access
Options and Primary Access Warrants (each as defined herein), (ii) fees and
expenses incurred by Primary Access and its shareholders in connection with the
Merger do not exceed $1,750,000 and (iii) there are no litigation costs or
settlement costs incurred by Primary Access between the date of the
Reorganization Agreement and the Closing Date which are related to the DataNet
Litigation (as defined herein), the Exchange Ratio will be .2420 and at the
Effective Date, by virtue of the Merger and without any action on the part of
the holder of Primary Access Stock, each share of Primary Access Stock will be
converted into .2420 of a share of 3Com Common Stock.
No fractional shares of 3Com Common Stock will be issued in connection with
the Merger, but in lieu thereof, holders of Primary Access Stock who would
otherwise be entitled to receive a fraction of a share of 3Com Common Stock will
receive from 3Com, promptly after the Effective Date, an amount of cash equal to
the Average Price of 3Com Common Stock multiplied by the fraction of a share of
3Com Common Stock to which such holder would otherwise be entitled.
Based upon the number of outstanding shares of 3Com Common Stock as of the
Record Date and without regard to shares, if any, held by shareholders who have
exercised dissenters' rights and any shares owned by 3Com or Primary Access,
assuming that no outstanding Primary Access Options or Primary Access Warrants
are exercised prior to the Effective Date, after exchange of the Primary Access
Stock, approximately shares of 3Com Common Stock will be outstanding
immediately after the Effective Date, of which approximately shares,
representing % of the total, will be held by former holders of Primary Access
Stock. In addition, Primary Access Options and Primary Access Warrants will
become 3Com Options and 3Com Warrants, respectively, to purchase 3Com Common
Stock, as described below.
As soon as practicable after the Effective Date and in no event later than
fifteen (15) days thereafter, the Exchange Agent will mail to each holder of
record of a certificate or certificates that immediately prior to the Effective
Date represented outstanding shares of Primary Access Stock (the
"Certificates"), a letter of transmittal with instructions to be used by such
holder in surrendering their Certificates for exchange into shares of 3Com
Common Stock. The letter of transmittal specifies that delivery will be
effected, and risk of loss and title to the Certificates will pass, only upon
delivery of the Certificates to the Exchange Agent. SHARE CERTIFICATES SHOULD
NOT BE SURRENDERED FOR EXCHANGE PRIOR TO THE APPROVAL AND ADOPTION OF THE
REORGANIZATION AGREEMENT BY THE PRIMARY ACCESS SHAREHOLDERS.
Upon the surrender of a Certificate for cancellation to the Exchange Agent
together with a duly executed letter of transmittal, the holder of such
Certificate will be entitled to receive the number of shares of 3Com Common
Stock to which such holder is entitled pursuant to the provisions of the
Reorganization Agreement. 3Com will make customary provisions for lost stock
certificates. In the event of a transfer of ownership of Primary Access Stock
that is not registered in the transfer records of Primary Access, the
appropriate number of shares of 3Com Common Stock may be delivered to a
transferee if the Certificate representing such Primary Access Stock is
presented to the Exchange Agent and accompanied by all documents required to
evidence and effect such transfer and to evidence that any applicable stock
transfer taxes have been paid.
Until a Certificate has been surrendered to the Exchange Agent, each
Certificate shall be deemed at any time after the Effective Date to represent
the right to receive upon such surrender the number of shares of 3Com Common
Stock to which such holder is entitled under the Reorganization Agreement.
All 3Com Common Stock delivered upon the surrender for exchange of shares of
Primary Access Stock will be deemed to have been delivered in full satisfaction
of all rights pertaining to such shares of Primary Access Stock. There will be
no further registration of transfers on the stock transfer books of the
surviving corporation of the shares of Primary Access Stock that were
outstanding immediately
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prior to the Effective Date. If after the Effective Date, Certificates are
presented to the surviving corporation for any reason, they shall be canceled
and exchanged for shares of 3Com Common Stock as provided in the Reorganization
Agreement.
VOTING AGREEMENTS
In connection with the execution of the Reorganization Agreement, holders of
approximately 971,700 shares of Primary Access Common Stock, or 61% of the total
number of shares of outstanding Primary Access Common Stock, holders of
approximately 7,298,900 shares of Primary Access Preferred Stock, or 87% of the
total number of shares of outstanding Primary Access Preferred Stock, and
holders of approximately 8,270,600 shares of Primary Access Stock, or 83% of the
total number of shares of outstanding Primary Access Stock, have entered into
Voting Agreements pursuant to which they have agreed, subject to certain limited
exceptions, not to transfer, pledge, sell, exchange or offer to transfer or sell
or otherwise dispose of or encumber at any time prior to the Expiration Date (as
defined below) any of the shares of Primary Access Stock owned by them or
acquired by them prior to the Expiration Date (as defined below). Primary Access
shareholders which are entities may transfer shares of Primary Access Stock
owned by them to their shareholders or limited or general partners so long as
the transferee agrees to be bound by the provisions of the Voting Agreement.
Primary Access shareholders who are individuals may transfer up to 30% of the
shares of Primary Access Stock owned by them to members of such shareholder's
immediate family if, prior to any such transfer, 3Com receives advice from its
counsel that such transfer will not affect the treatment of the Merger as a
pooling of interests for accounting purposes and the transferee agrees to be
bound by the provisions of the Voting Agreement. The term "Expiration Date" is
defined in the Voting Agreements as the earliest to occur of (i) such date as
the Merger shall become effective in accordance with the terms and provisions of
the Reorganization Agreement, or (ii) such date as the Reorganization Agreement
shall be terminated in accordance with Section 12 thereof.
At every meeting of the shareholders of Primary Access called (and at any
adjournment thereof) and on every written consent solicited from such
shareholders prior to the Expiration Date with respect to any of the following,
each such Primary Access shareholder has agreed to take such action as may be
required to vote all such shares of Primary Access Stock: (i) in favor of
approval of the Reorganization Agreement and the Merger and any matter which
could reasonably be expected to directly facilitate the Merger and (ii) against
approval of any proposal made directly in opposition to or competition with
consummation of the Merger (including any merger or consolidation other than the
Merger, or any sale of assets, reorganization, recapitalization, liquidation or
winding up of Primary Access). Each such shareholder, as the holder of voting
stock of Primary Access, has agreed to be present, in person or by proxy, at all
meetings of shareholders of Primary Access so that all such shares of Primary
Access Stock are counted for the purposes of determining the presence of a
quorum at such meetings. The Voting Agreements are intended to bind the
shareholders only with respect to the specific matters set forth in such Voting
Agreement, and shall not prohibit such shareholders from acting in accordance
with their fiduciary duties as an officer and/or director of Primary Access.
Concurrently with the execution of each Voting Agreement, each such
shareholder has delivered to 3Com an irrevocable proxy pursuant to which each
shareholder has appointed the 3Com Board of Directors as such shareholder's
proxy to vote all his shares of Primary Access Stock with respect to the matters
specified in the proxy, which matters are consistent with the provisions of the
Voting Agreements.
COMPANY OPTION AGREEMENT
Pursuant to the Company Stock Option Agreement (the "Option Agreement")
between 3Com and Primary Access dated as of March 21, 1995, that was executed in
connection with the Reorganization Agreement, Primary Access granted to 3Com the
Option, which is exclusive and irrevocable, to purchase, subject to the
conditions to exercise and during the period specified in Subsection 3(a) of the
Option Agreement and subject to the conditions to closing set forth in Section 4
thereof, such number of authorized but currently unissued shares of Primary
Access Common Stock as is as nearly equal as
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possible (after rounding to the nearest whole number to eliminate the issuance
of fractional shares of Primary Access Common Stock) to 20% of the shares of
Primary Access Common Stock and all shares of Primary Access Common Stock
issuable upon exercise or conversion of any options, warrants, preferred stock
or other rights to acquire Primary Access Common Stock (collectively, the
"Primary Access Common Stock Equivalents") issued from time to time between the
date of the Option Agreement and the Option Expiration Date (as defined below)
at the exercise price specified below. The shares of Primary Access Common Stock
subject to the Option from time to time are referred to below as the "Option
Shares."
The exercise price per Option Share (the "Per Share Exercise Price") for any
Option Shares with respect to which the Option is exercised (the "Subject Option
Shares") shall, in the absolute discretion of 3Com, be either: (i) $14.14 in
cash; or (ii) the number of fully-paid and nonassessable shares (or fractions
thereof) of 3Com Common Stock having a fair market value equal to $14.14, based
upon the average of the closing prices of 3Com Common Stock on the five trading
days preceding the date on which the Option is exercised (each such date, an
"Option Closing"). The Per Share Exercise Price may, in the absolute discretion
of 3Com, be paid in shares of 3Com Common Stock with respect to some Subject
Option Shares to be purchased at a particular Option Closing and cash with
respect to other such Subject Option Shares
Subject to the conditions to closing set forth in Section 4 of the Option
Agreement, the Option may be exercised, in whole or in part, at any time or from
time to time after March 21, 1995 and prior to the Option Expiration Date (as
defined below) PROVIDED THAT at least one of the following conditions shall have
occurred: (i) an offer, including an exchange offer, for at least 20% of the
outstanding shares of Primary Access Common Stock Equivalents shall have been
made or proposed other than by 3Com or any of its affiliates and accepted by
holders of at least 20% of the outstanding shares of Primary Access Common Stock
Equivalents, (ii) an acquisition shall have been made of beneficial ownership
(within the meaning of Rule 13d-3 promulgated under the Exchange Act) by any
person, other than 3Com or any of its affiliates or by an existing shareholder
of Primary Access holding 5% or more of the outstanding stock of Primary Access
as of the date of the Option Agreement (a "Controlling Shareholder"), of at
least 20% of the outstanding shares of Primary Access Common Stock, except for
between Primary Access shareholders or between Primary Access shareholders and
their affiliates, or (iii) an agreement shall have been entered into by Primary
Access with any person, other than 3Com or any of its affiliates, to acquire
Primary Access or a controlling interest therein by merger, consolidation,
purchase of substantially all of Primary Access' assets, purchase of stock or
other business combination. The "Expiration Date" is the date of the earlier to
occur of (x) the Effective Date, (y) the termination of the Reorganization
Agreement pursuant to the terms thereof, provided however, that if any of the
conditions set forth in items (i), (ii) or (iii), above, shall have occurred
prior to any termination of the Reorganization Agreement, the Option Expiration
Date shall be as determined in item (z), or (z) 5:00 p.m. California time on the
180th day following and excluding the date on which any of the conditions to
exercise of the Option listed above shall have occurred. If 3Com shall have sent
a Notice of Exercise (as defined in the Option Agreement) prior to the Option
Expiration Date, the Option Expiration Date shall be extended during the
pendency of any legal action or proceeding or any other activity the resolution
of which would, or which is reasonably intended to satisfy, any of the
conditions set forth in Subsection 4(a) of the Option Agreement and if such
condition is thereafter satisfied, for a period of fifteen (15) days after the
date such conditions are satisfied.
The respective obligations of 3Com and Primary Access to proceed with any
Option Closing under the Option Agreement are subject to the satisfaction of
certain conditions prior to the Option Closing, whether or not any prior Option
Closing has occurred, including (i) any waiting period(s) under the HSR Act and
the rules and regulations thereunder applicable to the purchase of the Subject
Option Shares by 3Com and/or the issuance of shares of 3Com Common Stock to
Primary Access in payment (in whole or part) of the Per Share Exercise Price for
the Subject Option Shares shall have expired or been terminated, (ii) no order,
statute, rule, regulation, executive order, stay, decree, judgment or
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injunction shall have been enacted, entered, issued, promulgated or enforced by
any court or governmental authority, subsequent to the date of the Option
Agreement, which prohibits or restricts the effectuation of any of the
transactions contemplated by the Option Agreement, or the Reorganization
Agreement, and (iii) the representations and warranties of 3Com contained in the
Option Agreement shall be true and correct in all material respects as of the
date of the Option Agreement, and shall be deemed to have been made again at and
as of each such Option Closing and shall then be true and correct in all
material respects.
ASSUMPTION OF PRIMARY ACCESS OPTIONS
At the Effective Date, each Primary Access Option outstanding immediately
prior to the Effective Date will be assumed by 3Com and converted into a 3Com
Option to purchase that number of shares of 3Com Common Stock which equals the
Exchange Ratio multiplied by the number of shares of Primary Access Common Stock
purchasable under the Primary Access Option immediately prior to the Effective
Date, with the resulting number of shares rounded up to the nearest whole
number. The exercise price per share of 3Com Common Stock purchasable under each
such 3Com Option will be equal to the exercise price of the Primary Access
Option (per share of Primary Access Common Stock) divided by the Exchange Ratio
(with the resulting amount rounded up to the nearest whole cent). At the Record
Date, there were outstanding Primary Access Options to purchase up to 1,951,642
shares of Primary Access Common Stock.
Each optionee who is an employee of Primary Access on the Effective Date
will be credited for continuous employment with Primary Access, whether
occurring before or after the Effective Date, for purposes of determining the
number of shares subject to exercise, vesting or repurchase after the Effective
Date.
After the Effective Date, 3Com will issue to each holder of an outstanding
Primary Access Option a document evidencing the assumption of such Primary
Access Option by 3Com. No fractional shares of 3Com Common Stock will be issued
in connection with the exercise of 3Com Options. All fractional shares which
would otherwise be issuable will be rounded up to the next full share. All of
the other terms of each 3Com Option including, without limitation, the vesting
period, will remain the same as the corresponding assumed Primary Access Option.
The holders of Primary Access Options are urged to consult their own tax
advisors as to the consequences to them of such assumption.
As soon as practicable after the Effective Date, 3Com will file a
registration statement on Form S-8 or another appropriate form with respect to
the shares of 3Com Common Stock subject to such 3Com Options into which Primary
Access Options are converted in the Merger to allow holders of such 3Com Options
to sell the shares of 3Com Common Stock obtained upon exercise without
limitation as to holding period. 3Com will administer the 1988 Primary Access
Stock Option Plan, as amended and restated from time to time, assumed by 3Com in
a manner that complies with Rule 16b-3 promulgated by the SEC under the Exchange
Act.
ASSUMPTION OF PRIMARY ACCESS WARRANTS
At the Effective Date, each Primary Access Warrant outstanding immediately
prior to the Effective Date will be assumed by 3Com and converted into a 3Com
Warrant. The 3Com Warrants will continue to be on the terms and conditions set
forth in the respective warrant agreements of the Primary Access Warrants,
except that: (i) the 3Com Warrants shall be exercisable for a number of shares
of 3Com Common Stock equal to the number of shares of Primary Access Common
Stock subject to the Primary Access Warrant immediately prior to the Effective
Date multiplied by the Exchange Ratio (with the resulting number of shares of
3Com Common Stock rounded up to the nearest whole number), and (ii) the per
share exercise price under each 3Com Warrant shall be an amount equal to the per
share exercise price of the Primary Access Warrant immediately prior to the
Closing Date divided by the Exchange Ratio (with the resulting amount rounded up
to the nearest whole cent). No fractional shares of 3Com Common Stock shall be
issued in connection with the 3Com
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Warrants. All fractional shares which would otherwise be issuable shall be
rounded up to the next full share. As of the close of business on the Record
Date, there were 117,000 shares of Primary Access Common Stock reserved for
issuance upon the exercise of outstanding Primary Access Warrants.
ESCROW AND INDEMNIFICATION
At the Effective Date, (i) 3Com will deposit in escrow certificates
representing 10% of the shares of 3Com Common Stock issued to the holders of
Primary Access Stock in the Merger, on a pro rata basis, and (ii) upon each
exercise of 3Com Options that are issued in the Merger to holders of Primary
Access Options, if such exercise occurs between the Effective Date and on or
before the final escrow release date, 3Com will deposit in escrow certificates
representing 10% of the shares of 3Com Common Stock issued upon such exercise.
Such Escrow Shares will be registered in the name of and deposited with the
Escrow Agent pursuant to the Reorganization Agreement to constitute the Escrow
Fund. The Escrow Fund will be available to indemnify 3Com for any loss
(excluding any consequential damages, such as lost profits, in-house costs of
investigation and in-house attorneys' fees incurred by 3Com), expense, liability
or other damage, including attorneys' fees, to the extent of the amount of such
loss, expense, liability or other damage (collectively, "Damages") that 3Com has
incurred by reason of (i) the breach by Primary Access of any representation,
warranty, covenant or agreement of Primary Access contained in the
Reorganization Agreement, or by reason of any misrepresentation by Primary
Access made in or pursuant to Section 3 of the Reorganization Agreement, or (ii)
the claims raised in the DataNet Litigation, and for which 3Com has not received
reimbursement pursuant to insurance or otherwise. This indemnification
obligation will terminate (i) for those items that would be expected to be
encountered in 3Com's audit process, upon the date of completion of the first
audit of financial statements containing combined operations of 3Com and Primary
Access, and (ii) for all other items, after a period of 12 months after the
Closing.
Notwithstanding the foregoing, 3Com may not receive any shares from the
Escrow Fund unless and until an officer's certificate or certificates of 3Com
identifying the aggregate amount of 3Com's Damages has been delivered by 3Com to
the Shareholders' Agents and to the Escrow Agent, and then, except as provided
in Section 13.13 of the Reorganization Agreement, only to the extent that such
aggregate amount exceeds a deductible of $750,000, provided that Damages from
the DataNet Litigation (including legal fees or settlement costs incurred after
the date of such agreement) shall not be subject to such threshold and
deductible amount. To receive any Escrow Shares, notice of such Damages must be
delivered to the Escrow Agent and Shareholders' Agents and such amount as is
determined pursuant to Section 13 of the Reorganization Agreement to be payable
after application of the $750,000 deductible, if applicable, in which case 3Com
shall receive the number of Escrow Shares equal in value to the full amount of
Damages. For the purpose of compensating 3Com for its Damages, the Escrow Shares
shall be valued at the Average Price. In no event shall 3Com receive more than
the number of Escrow Shares then remaining in the Escrow Fund at the time of
3Com's claim for Damages, and the maximum liability of all Primary Access
shareholders and holders of Primary Access Options under the Reorganization
Agreement shall not exceed the forfeiture of the Escrow Shares in the Escrow
Fund. Damages shall not include any individual Damage items of $10,000 or less
unless such amounts of $10,000 or less exceed $50,000 in the aggregate.
If the Merger is consummated, the Escrow Fund shall be the exclusive remedy
of 3Com for any breaches and misrepresentations and for any claims against any
officer, director, shareholder or employee of Primary Access in connection with
the Merger (other than for any event of willful fraud by Primary Access), and
all items disclosed by Primary Access to 3Com in any disclosure schedule to the
Reorganization Agreement and all matters otherwise actually known to 3Com and
all of Primary Access' unknown business risks shall be assumed by 3Com, except
for any claims arising from the DataNet Litigation or any misrepresentations or
willful fraud made by Primary Access. Any claims against the Escrow Fund shall
be reduced by the amount of any net tax benefit realized by 3Com in connection
with the loss or damage suffered by 3Com which forms the basis of Primary
Access's liability. Further, Damages will exclude any amount considered in
calculating the amount of the Adjustment.
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The Escrow Fund will remain in existence for 12 months after the Effective
Date ("Escrow Period"), provided that the number of Escrow Shares, which, in the
reasonable judgment of 3Com, subject to the objection of the Shareholders'
Agents and the subsequent arbitration of the matter are necessary to satisfy any
unsatisfied claims specified in any officer's certificate theretofore delivered
to the Escrow Agent prior to termination of the Escrow Period with respect to
Damages incurred or litigation pending prior to expiration of the Escrow Period,
shall remain in the Escrow Fund until such claims have been resolved. In no
event will any amount be retained in the Escrow Fund at the end of the Escrow
Period, except as to claims made prior to the end of the Escrow Period that
relate to Damages actually incurred or pending litigation. If the DataNet
Litigation remains unresolved at the end of the Escrow Period, no more than $3.0
million of the Escrow Fund may be retained in escrow to cover any claim arising
from such litigation. Upon the termination of the Escrow Period, the Escrow
Agent will release from escrow to the shareholders of Primary Access and
optionholders, if any, who exercise their respective options prior to
termination of the Escrow Period, their respective pro rata portion of the
Escrow Shares, plus all tax-free dividends paid in stock with respect to Escrow
Shares.
If 3Com makes a claim for indemnification, it will deliver a written notice
of such claim to the Escrow Agent and Tench Coxe, Kathryn Gould and William
Stensrud, as the Shareholders' Agents of Primary Access' shareholders. If the
Shareholders' Agents do not object to such claim within 45 days after delivery
of such notice, then the Escrow Agent will release to 3Com from the Escrow Fund,
as promptly as practicable, shares of 3Com Common Stock valued at the closing
price on the day prior to the date of the Escrow Agent's release of such shares,
or other assets held in the Escrow Fund having a value equal to the Damages
claimed. If the Shareholders' Agents object to such claim, the Shareholders'
Agents and 3Com will first attempt to agree upon the relative rights and
obligations of 3Com and the Primary Access shareholders with respect to such
claim. If no such agreement can be reached after good faith negotiation, the
relative rights and obligations of 3Com and the Primary Access shareholders with
respect to such claim will be settled by binding arbitration held in Santa Clara
or San Mateo County, California, unless the amount of the damage or loss is at
issue in pending litigation with a third party, in which event arbitration will
not be commenced until such amount is ascertained or 3Com and the Shareholders'
Agents agree to arbitration.
The Shareholders' Agents have the discretion to make decisions by majority
and take actions on behalf of, and without the consent of, the Primary Access
shareholders and such decisions and actions of the Shareholders' Agents will be
final, binding and conclusive upon each such Primary Access shareholder. Such
agency may be changed by the holders of a majority in interest of the Escrow
Fund from time to time upon not less than 10 days prior written notice to 3Com.
The Shareholders' Agents will not be personally liable for making such decisions
or taking such actions if the Shareholders' Agents act in good faith and
exercise reasonable judgment. The Escrow Agent and 3Com will be relieved from
any liability to any person for any acts done by them without gross negligence
or wilful misconduct in accordance with any decisions or actions of the
Shareholders' Agents.
If any proceeding is commenced, or if any claim is asserted, in respect of
which a claim for indemnification is made against the Escrow Fund based on any
matters other than (i) the intellectual property of Primary Access, or (ii)
claims made by customers of 3Com or Primary Access, the Shareholders' Agents
may, at their option, elect to defend any such action, proceeding, claim, demand
or assessment with counsel of their own choosing; provided, however, that if
3Com shall reasonably object to such control the Shareholders' Agent and 3Com
shall cooperate in the contesting and defense of such matter; provided, however,
that the Shareholders' Agents shall not admit any liability with respect thereto
or settle, compromise, pay or discharge the same without the prior written
consent of 3Com, which consent shall not be unreasonably withheld. In connection
with the DataNet Litigation, the Shareholders' Agents will have sole control of
the defense of such matter and discretion to admit any liability with respect
thereto or settle the same without the prior written consent of 3Com, except if
any payment is required other than from the Escrow Fund, in which case the prior
written consent of 3Com shall be required. With respect to a claim for
indemnification based on matters relating to the intellectual property of
Primary Access, or customers of 3Com or Primary Access, 3Com will have the
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option to defend any such action, proceeding or claim with counsel of its own
choosing; provided, however, that 3Com shall not admit any liability with
respect thereto or settle, compromise, pay or discharge the same without the
prior written consent of the Shareholders' Agents, which consent shall not be
unreasonably withheld. The Shareholders' Agents or 3Com, whichever is not
controlling the defense of any matter, shall be entitled, at its or their
expense, to participate in such defense.
In the event that 3Com arrives at a good faith and reasonable belief that
there has been a breach by Primary Access with respect to a certain
representation regarding intellectual property matters, and that a claim
regarding such matters is likely to be filed in the foreseeable future by a
person related directly to such representation, 3Com shall, before taking any
action with respect thereto, consult with the Shareholders' Agents regarding
such matter and the reasonable measures to pursue to resolve such matter.
Provided that either the Shareholders' Agents agree that there has been a breach
of such representation and that 3Com has been or is reasonably likely to be
damaged as a result thereof (or in the absence of such agreement and the
submission of the matter to arbitration, that the arbitrator so finds), then,
and only then, 3Com may communicate directly or through a representative with
such person. If Damages are actually incurred by 3Com in connection with a
person so contacted within one year of Closing or are the subject of litigation
pending at the end of one year from the date of Closing, then the provisions of
the Reorganization Agreement regarding the $750,000 deductible notwithstanding,
3Com may receive Escrow Shares to the extent that the aggregate amount of
Damages with respect to each separate such matter exceeds $50,000 and then only
to the extent of one-half of the Damages in excess of $50,000 for each such
matter. If 3Com takes action to precipitate Damages with respect to the matters
described in this paragraph without having followed this procedure, no Escrow
Shares shall be delivered from the Escrow Fund with respect to such Damages. The
holders of Primary Access Warrants are urged to consult their own tax advisors
as to the consequences to them of such assumption and conversion.
CONDUCT OF THE BUSINESS OF THE COMBINED COMPANIES FOLLOWING THE MERGER
Once the Merger is consummated, Sub will cease to exist as a corporation,
and all of the business, assets, liabilities and obligations of Sub will be
merged into Primary Access with Primary Access remaining as the surviving
corporation.
Pursuant to the Reorganization Agreement, the form of Articles of
Incorporation and form of Bylaws of Sub, as in effect immediately prior to the
Effective Date, will become the form of Articles of Incorporation and form of
Bylaws of the surviving corporation. The directors and officers of Sub in office
immediately prior to the Effective Date will be the directors and officers of
the surviving corporation. See "Information Concerning 3Com -- Management."
EMPLOYEE BENEFITS
3Com has agreed to adopt a policy applicable to all Primary Access employees
who were hired prior to the date of execution of the Reorganization Agreement in
order to provide certain protections against certain terminations within a year
of the Merger. The policy will provide that in the event of termination other
than "for cause" as defined in the policy, employees would receive either 3 or 6
months salary and accelerated vesting of any 3Com Options issued in exchange for
Primary Access Options.
3Com has agreed that for a period of one year from the Closing, it shall not
modify or terminate the (i) salaries, (ii) benefits or (iii) bonus plans of
Primary Access in existence prior to the date of the Reorganization Agreement or
otherwise make only 3Com's salaries, benefits or bonus plans available to
Primary Access' continuing employees, unless 3Com's proposed salaries, benefits
or bonus plans are better than the salaries, benefits or bonus plans such
employees enjoyed prior to the date of the Reorganization Agreement, as
determined by the management of Primary Access. At such time as 3Com determines
to transfer benefits offered to Primary Access, 3Com agrees to the extent it is
legally and contractually able to do so to waive any probationary or waiting
periods for participation in such benefit programs.
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INDEMNIFICATION OF PRIMARY ACCESS DIRECTORS AND OFFICERS
For a period of seven years from the Closing, 3Com shall (i) continue to
provide to all officers and directors of Primary Access who held such positions
with Primary Access prior to the date of the Reorganization Agreement the same
rights to indemnification which were available to such officers and directors
under the charter documents of Primary Access in existence prior to the date of
the Reorganization Agreement, (ii) not to terminate or alter any indemnification
agreement in existence prior to the date of the Reorganization Agreement, and
(iii) to perform its obligations thereunder or exercise any discretionary
authority thereunder, to the fullest extent permissible by law to provide each
officer and director with all rights to indemnification available thereunder. If
3Com takes any action which impairs the ability of Primary Access to fulfill its
indemnification obligations with respect to acts or omissions prior to the
Closing under its charter documents or any indemnification agreements to which
it is a party, 3Com shall assume Primary Access' indemnification obligations
under such charter documents and/or indemnification agreements directly.
CONDUCT OF PRIMARY ACCESS' AND 3COM'S BUSINESSES PRIOR TO THE MERGER
Under the Reorganization Agreement, Primary Access has agreed that it will
use its Best Efforts (as defined below) to satisfy or cause to be satisfied all
conditions precedent set forth in Section 10 of the Reorganization Agreement, to
cause the Merger to occur, and, without limiting the generality of the
foregoing, to obtain any and all consents necessary for the assumption of
specified material contracts. Primary Access will advise 3Com promptly in
writing of any events occurring subsequent to the date of the Reorganization
Agreement which would render any representation or warranty of Primary Access
contained in the Reorganization Agreement, if made on or as of the date of such
event or the Closing Date, untrue or inaccurate in any material and adverse
respect. Primary Access has also agreed to provide to 3Com and its agents free
access to information relating to Primary Access. "Best Efforts" is defined in
the Reorganization Agreement as the efforts that a prudent person desirous of
achieving a result would use in similar circumstances to ensure that such result
is achieved as expeditiously as possible; provided, however, that an obligation
to use Best Efforts under the Reorganization Agreement does not require the
person subject to that obligation to take actions that would result in a
material adverse change in the benefits to such person of the Reorganization
Agreement.
Primary Access has also agreed that, until the Closing, it will continue to
conduct its business and maintain its business relationships in the ordinary and
usual course of business. Among other limitations relating to the conduct of its
business, Primary Access has agreed that it will not, except as disclosed to
3Com in the disclosure schedule delivered by Primary Access to 3Com or without
3Com's prior written consent: a) borrow any money which exceeds in the aggregate
$500,000; b) incur or commit to incur any capital expenditures in excess of
$500,000 in the aggregate or as to any individual matter in excess of $100,000;
c) lease, license, sell, transfer or encumber or permit to be encumbered any
asset, intellectual property right or other property associated with the
business of Primary Access (including sales or transfers to affiliates of
Primary Access), except for sales of inventory in the usual and ordinary course
of business and except for cash applied in payment of Primary Access'
liabilities in the usual and ordinary course of its business; d) dispose of any
of its assets, except inventory in the regular and ordinary course of business;
e) enter into any lease or contract for the purchase or sale of any property,
real or personal except in the ordinary course of business; f) fail to maintain
its equipment and other assets in good working condition and repair according to
the standards it has maintained up to the date of the Reorganization Agreement,
subject only to ordinary wear and tear; g) pay any bonus, increased salary, or
special remuneration to any officer or employee, including any amounts for
accrued but unpaid salary or bonuses (other than amounts not in excess of normal
payments made on a regular basis); h) change accounting methods; i) declare, set
aside or pay any cash or stock dividend or other distribution in respect of
capital, or redeem or otherwise acquire any of its capital stock; j) amend or
terminate any material contract, agreement or license to which it is a party
except in the ordinary course of business; k) loan any amount to any person or
entity, or guaranty or act as a surety for any obligation; l) waive or release
any right or claim, except in the ordinary course of business; m) issue or sell
any shares of its capital stock of any class or any other of its securities, or
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issue or create any warrants, obligations, subscriptions, options, convertible
securities, or other commitments to issue shares of capital stock; n) split or
combine the outstanding shares of its capital stock of any class or enter into
any recapitalization affecting the number of outstanding shares of its capital
stock of any class or affecting any other of its securities; o) merge,
consolidate or reorganize with any entity; p) amend its Articles of
Incorporation or Bylaws; q) make or change any election, change any annual
accounting period, adopt or change any accounting method, file any amended tax
return, enter into any closing agreement, settle any tax claim or assessment
relating to Primary Access, surrender any right to claim refund of taxes,
consent to any extension or waiver of the limitation period applicable to any
tax claim or assessment relating to Primary Access, or take any other action or
omit to take any action, if any such election, adoption, change, amendment,
agreement, settlement, surrender, consent or other action or omission would have
the effect of increasing the tax liability of Primary Access or 3Com; r) do
anything that is not contemplated in the Reorganization Agreement or that would
cause there to be material adverse changes in the Primary Access unaudited
balance sheet as of January 1, 1995 and statements of operations, shareholders'
equity and cash flow for the period then-ended and the audited balance sheet as
of October 2, 1994 and statements of operations, shareholders' equity and cash
flow for the period then ended previously delivered to 3Com by Primary Access
(collectively, "Primary Access Financial Statements") (with such Primary Access
Financial Statements analyzed as if they had been prepared according to GAAP,
and including but not limited to cash distributions or material decreases in the
net assets of Primary Access), except as would occur in the ordinary course of
Primary Access' business, between the date of the Primary Access Financial
Statements and the Closing Date; or s) agree to do any of the things described
in the preceding clauses (a) through (r).
Between the date of the Reorganization Agreement and June 30, 1995 (subject
to extension upon mutual agreement), or such earlier date as 3Com and Primary
Access mutually agree to discontinue discussions of the Merger, Primary Access
will not (and it will use its best efforts to assure that its officers,
directors, employees, agents and affiliates do not on its behalf) take any
action to solicit, initiate, seek, encourage or support any inquiry, proposal or
offer from, furnish any information to, or participate in any negotiations with,
any corporation, partnership, person or other entity or group (other than
discussions with 3Com) regarding any acquisition of Primary Access, any merger
or consolidation with or involving Primary Access, or any acquisition of any
material portion of the stock or assets of Primary Access. Primary Access shall
discontinue, and instruct its agents to discontinue, any preparation for a
public offering, including but not limited to consulting in any manner with its
advisors regarding such an offering. Primary Access agrees that any such
negotiations in progress as of the date of the Reorganization Agreement will be
terminated or suspended during such period. In no event will Primary Access
solicit or enter into an agreement concerning any such third party transaction.
If between the date of the Reorganization Agreement and the termination of the
Reorganization Agreement, Primary Access receives from a third party any offer
or indication of interest regarding any of the transactions referred to above,
or any request for information regarding any of such transactions, Primary
Access shall (i) notify 3Com immediately of such offer, indication of interest
or request, including the full terms of any proposal therein, (ii) notify such
third party of Primary Access' obligations under the Reorganization Agreement
and (iii) reject any offer so received.
Except as specifically provided in the Reorganization Agreement and subject
to the provisions regarding the calculation of the Exchange Ratio, until the
Closing, all risk of loss, damage or destruction to Primary Access' assets shall
be borne by Primary Access.
3Com has agreed that it will: a) promptly advise Primary Access in writing
of any event occurring subsequent to the date of Reorganization Agreement which
would render any representation or warranty of 3Com or Sub contained in the
Reorganization Agreement, if made on or as of the date of such event or the
Closing Date, untrue or inaccurate in any material respect; b) reserve for
issuance, out of its authorized but unissued capital stock, the maximum number
of shares of 3Com Common Stock as may be issuable upon consummation of the
Merger; c) use its Best Efforts to satisfy or cause to be satisfied all the
conditions precedent set forth in Section 9 of the Reorganization Agreement, and
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3Com and Sub will use their Best Efforts to cause the Merger to be consummated,
and, without limiting the generality of the foregoing, to obtain all consents
and authorizations of third parties and to make all filings with, and give all
notices to, third parties which may be necessary or reasonably required on its
part in order to effect the transactions contemplated by the Reorganization
Agreement; and d) cause the shares of 3Com Common Stock issuable in the Merger
to holders of Primary Access Stock to be authorized for listing on the Nasdaq
National Market, subject to official notice of issuance.
3Com and Primary Access have further agreed that: a) each party shall keep
confidential all Confidential Information (as defined in the Reorganization
Agreement) received by it from or relating to the other party; b) Primary Access
will discontinue any preparation for a public offering of Primary Access Stock;
c) subject to the terms and conditions of the Reorganization Agreement, Primary
Access and 3Com shall use their Best Efforts to (i) make all necessary filings
with respect to the Merger and the Reorganization Agreement under the HSR Act,
the Securities Act, the Exchange Act and applicable blue sky or similar
securities laws and obtain required approvals and clearances with respect
thereto and shall supply all additional information requested in connection
therewith; (ii) make merger notification or other appropriate filings with
federal, state or local governmental bodies or applicable foreign governmental
agencies and obtain required approvals and clearances with respect thereto and
supply all additional information requested in connection therewith; (iii)
obtain all consents, waivers, approvals, authorizations and orders required in
connection with the authorization, execution and delivery of the Reorganization
Agreement and the consummation of the Merger; and (iv) take, or cause to be
taken, all appropriate action, and do, or cause to be done, all things
necessary, proper or advisable to consummate and make effective as promptly as
practicable, but no later than June 30, 1995, the transactions contemplated by
the Reorganization Agreement; d) 3Com and Primary Access shall each use its Best
Efforts to cause the business combination to be effected by the Merger to be
accounted for as a pooling of interests; e) each of 3Com and Primary Access
shall use its Best Efforts (i) to cause its respective affiliates not to take
any action that would adversely affect the ability of Sub or 3Com to account for
the business combination to be effected by the Merger as a pooling of interests
and (ii) to cause its respective affiliates to sign and deliver to Sub a
customary "Affiliates Agreement" in form and substance agreed upon by 3Com and
Primary Access; and f) Primary Access will cooperate with 3Com to effectuate the
transactions contemplated by the Reorganization Agreement and to fulfill the
conditions to close.
CONDITIONS TO THE MERGER
The respective obligations of Primary Access and 3Com to effect the Merger
are subject to the following conditions, among others: a) the Reorganization
Agreement and the Agreement of Merger shall have been approved by the board of
directors and the shareholders of Primary Access in accordance with applicable
laws and regulatory requirements and the issuance of shares of 3Com Common Stock
shall have been approved by the shareholders of 3Com if required by applicable
law or by any requirement of the National Association of Securities Dealers; b)
the Reorganization Agreement and the Agreement of Merger shall have been duly
and validly approved and authorized by the board of directors of 3Com and Sub,
respectively, and the shareholder of Sub; c) shareholders of Primary Access
holding no more than 8% of the outstanding shares of Primary Access Stock shall,
or might be able to perfect, dissenters' rights in connection with the Merger;
d) the Registration Statement shall have become effective and shall not be the
subject of a stop order or proceedings; e) on and as of the Closing, no
litigation or proceeding shall be threatened or pending against Primary Access
or 3Com for the purpose or with the probable effect (in the reasonable opinion
of 3Com's counsel and Primary Access' counsel) (other than the DataNet
Litigation) of enjoining or preventing the consummation of any of the
transactions contemplated by Reorganization Agreement, or which would have a
material adverse effect on the business, liabilities, income, property,
operations or prospects of Primary Access subsequent to the Closing, and no
judgment, decree, injunction, rule or order of any court, governmental
department, commission, agency, instrumentality or arbitrator shall be
outstanding against Primary Access; f) William Stensrud and James Dunn shall
have entered into
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non-compete and non-solicitation agreements, substantially in the form
satisfactory to 3Com Corporation; g) there shall not have been any material
adverse changes in the financial condition, results of operations, assets
liabilities, business or prospects of Primary Access since the date of the
Reorganization Agreement; h) 3Com shall have received all written consents,
assignments, waivers, authorizations or other certificates reasonably deemed
necessary by 3Com's legal counsel to provide for the continuation in full force
and effect or assignment or termination of any and all contracts and leases of
Primary Access; i) at least 90% of the employees of Primary Access employed on
the date of Reorganization Agreement shall remain employed by Primary Access,
and there shall have been no resignations or other statements by employees of
Primary Access expressing an intention to terminate employment with 3Com or
Primary Access following the Closing in numbers inconsistent with the foregoing
(excluding for all such purposes persons previously disclosed to 3Com); j) there
shall have been obtained at or prior to the date of Closing such permits or
authorizations and there shall have been taken such other action, as may be
required by any regulatory authority having jurisdiction over the parties and
the subject matter and the actions proposed to be taken in the Reorganization
Agreement; k) Brobeck, Phleger & Harrison, counsel to Primary Access, and Gray
Cary Ware & Freidenrich, counsel to 3Com, to the extent that either of such
counsel can render such opinion, shall have rendered an opinion to the effect
that, when the Merger is consummated in accordance with the terms of the
Reorganization Agreement, for Federal income tax purposes it will be treated as
a reorganization within the meaning of Section 368(a) of the Code; l) the
representations and warranties set forth in the Reorganization Agreement, as to
3Com shall be true and correct when made and, as to Primary Access, shall be
true on the Closing with the same force and effect as if they had been made on
the Closing, provided that Primary Access has the right to provide 3Com with one
or more supplements to its initial disclosure schedule prior to the Closing, and
Primary Access shall use its Best Efforts to provide any such supplements at the
earliest possible date prior to Closing; m) the performance and compliance in
all material respects of all covenants and obligations of the other party
required to be performed under the Reorganization Agreement; n) the Closing
shall occur on or before June 30, 1995 or such later date as the parties may
mutually agree; o) 3Com and Primary Access shall each have received an opinion
from counsel for the other party regarding certain matters; and p) the shares of
3Com Common Stock issuable in the Merger shall have been approved for listing on
the Nasdaq National Market. In addition, it is a condition to the obligation of
Primary Access to effect the Merger that any dispute regarding the amount, if
any, of the Adjustment shall have been resolved and it is a condition to the
obligation of 3Com to effect the Merger that Primary Access and its shareholders
shall not have taken any action after the date of the Reorganization Agreement,
which in the reasonable opinion of Deloitte & Touche LLP would prevent the
Merger being accounted for as a pooling of interests. Any party may waive a
condition to its respective obligations to consummate the Merger, in a writing
signed by such party, although none of the parties presently intends to waive
any such condition.
TERMINATION OR AMENDMENT OF REORGANIZATION AGREEMENT
The Reorganization Agreement may be terminated at any time prior to the
Closing by the mutual written consent of 3Com, Sub and Primary Access. The
Reorganization Agreement may also be terminated and abandoned (a) by 3Com if any
of the conditions precedent to 3Com's obligations pursuant to Section 10 of the
Reorganization shall not have been fulfilled at and as of the Closing and 3Com
has not misrepresented or breached any of its warranties or covenants under the
Reorganization Agreement; or (b) by Primary Access if any of the conditions
precedent to Primary Access' obligations pursuant to Section 9 of the
Reorganization Agreement shall not have been fulfilled at and as of the Closing
and Primary Access has not misrepresented or breached any of its warranties or
covenants under the Reorganization Agreement.
If 3Com or Sub fails to consummate the Merger by June 30, 1995 or because
any one of the closing conditions in Section 10 of the Reorganization Agreement
were not satisfied, 3Com shall reimburse Primary Access for any reasonable legal
and accounting expenses specifically incurred by Primary Access in connection
with the Reorganization Agreement (but excluding any expenses incurred by
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Primary Access in connection with Primary Access' contemplated initial public
offering) in an aggregate amount of up to $250,000. Notwithstanding the
foregoing, 3Com shall have no obligation to reimburse Primary Access for such
expenses if the Merger is not consummated because of the failure of Primary
Access to satisfy the condition that the representations and warranties of
Primary Access contained in the Reorganization Agreement be true on and as of
the Closing, due to 3Com's discovery of or Primary Access' providing notice to
3Com of exceptions to Primary Access' representations and warranties in addition
to the exceptions provided by Primary Access to 3Com prior to or on the date of
the Reorganization Agreement.
In the event the Reorganization Agreement is terminated by either Primary
Access or 3Com as described above, each party shall continue to abide by the
provisions of the Mutual Nondisclosure Agreement between 3Com and Primary Access
entered into as of September 8, 1994.
Neither Primary Access nor 3Com is limited to the termination right
described above in the event that any condition to such party's closing
obligations is not fulfilled, but may, in the alternative, elect to do one of
the following: (a) proceed to close despite the nonfulfillment of any closing
condition, it being understood that consummation of the transactions
contemplated by the Reorganization Agreement shall be deemed a waiver of any
misrepresentation or breach of warranty or covenant and of any party's rights
and remedies with respect thereto (except for the remedies provided in the
indemnification and escrow provisions of the Reorganization Agreement) to the
extent that the other party shall have actual knowledge of such
misrepresentation or breach and the Closing shall nonetheless take place; or (b)
decline to close, terminate the Reorganization Agreement as provided above, and
thereafter seek damages to the extent permitted by the Reorganization Agreement
as described below.
If the Reorganization Agreement is terminated pursuant to the provisions
described above, neither party shall have any claim against the other except for
fees, if any, payable under Section 12.2 of the Reorganization Agreement, except
if the circumstances giving rise to such termination were caused by the other
party's willful failure to comply with a material covenant contained in the
Reorganization Agreement, in which event termination shall not be deemed or
construed as limiting or denying any legal or equitable right or remedy of said
party, and said party shall be entitled to recover its costs and expenses which
are incurred in pursuing its rights and remedies (including reasonable
attorneys' fees).
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes certain of the federal income tax
considerations of the Merger that are generally applicable to 3Com, Sub, Primary
Access and holders of Primary Access Stock. This discussion does not deal with
all federal income tax considerations that may be relevant to particular Primary
Access shareholders in light of their particular circumstances, such as
shareholders who are dealers in securities, foreign persons or shareholders who
acquired their shares in connection with stock option plans or in other
compensatory transactions. In addition, the following discussion generally does
not address the tax consequences of other transactions effectuated prior to, at
the time of or after the Merger (whether or not such transactions are in
connection with the Merger) including, without limitation, the exercise of
options, warrants or similar rights to purchase stock, the release of 3Com
Common Stock to 3Com from the Escrow Fund, or the exchange, assumption or
substitution of options, warrants or similar rights to purchase Primary Access
Stock for rights to purchase 3Com Common Stock. Furthermore, no foreign, state
or local tax considerations are addressed herein. This discussion is based on
legal authorities in existence as of the date hereof. No assurances can be given
that future legislation, regulations, administrative pronouncements or court
decisions will not significantly change the law and materially affect the
conclusions expressed herein. Any such change, even though made after
consummation of the Merger, could be applied retroactively. ACCORDINGLY, ALL
PRIMARY ACCESS SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO
THE SPECIFIC FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF THE MERGER TO
THEM.
39
<PAGE>
Subject to the limitations and qualifications described herein, and assuming
the Merger qualifies as a reorganization within the meaning of the Code, then
the following tax consequences should generally result:
(a) No gain or loss should be recognized by holders of Primary Access
Stock upon their receipt in the Merger of 3Com Common Stock (except to the
extent of cash received in lieu of a fractional share thereof) in exchange
therefor;
(b) The aggregate tax basis of the 3Com Common Stock received in the
Merger (including any fractional share that is treated as issued and sold
pursuant to paragraph (d) below) should be the same as the aggregate tax
basis of Primary Access Stock surrendered in exchange therefor;
(c) The holding period of the 3Com Common Stock received in the Merger
should include the period for which the Primary Access Stock surrendered in
exchange therefor was held, provided that the Primary Access Stock is held
as a capital asset at the Effective Date;
(d) The Primary Access shareholders will be treated as the owners of the
shares of 3Com Common Stock which will be held in the escrow as of the date
of the Merger and their adjusted basis and holding period for such shares
will be determined in the same manner as for all other shares of 3Com Common
Stock received in the Merger. The Primary Access shareholders will not
recognize any gain when escrowed shares are released to them from the
escrow. In addition, the return of escrowed shares to 3Com pursuant to the
terms of the escrow agreement will not be a taxable event. In such case, the
basis initially allocated to the escrowed shares will be reallocated amongst
all other shares of 3Com Common Stock received by the Primary Access
shareholders in the Merger.
(e) Cash received by a Primary Access shareholder in lieu of a
fractional share of 3Com Common Stock should be treated as received for a
fractional share of 3Com Common Stock that had been issued in the Merger and
then sold by such Primary Access shareholder. A Primary Access shareholder
receiving such cash should generally recognize gain or loss upon such
payment equal to the difference (if any) between such shareholder's basis in
the fractional share and the amount of cash received. Such gain or loss
should be a capital gain or loss if, at the Effective Date, the Primary
Access Stock is held as a capital asset;
(f) A shareholder who exercises appraisal rights with respect to a share
of Primary Access Stock and receives payment for such share in cash will
generally recognize capital gain or capital loss (if such share was held as
a capital asset at the Effective Date), measured by the difference between
the holder's basis in such share and the amount of cash received, provided,
however, the payment is neither essentially equivalent to a dividend within
the meaning of Section 302 of the Code nor has the effect of a distribution
of a dividend within the meaning of Section 356(a)(2) of the Code
(collectively a "Dividend Equivalent Transaction"). A sale of shares
pursuant to an exercise of appraisal rights will generally not be a Dividend
Equivalent Transaction if, as a result of such exercise, the shareholder
exercising appraisal rights owns no shares of 3Com Common Stock (either
actually or constructively within the meaning of Section 318 of the Code);
and
(g) Neither 3Com, Primary Access nor Sub should recognize gain or loss
solely as a result of the Merger.
The parties are not requesting a ruling from the Internal Revenue Service
("IRS") regarding the consequences of the Merger. To the extent that such
counsel can render an opinion, both parties shall receive an opinion of Gray
Cary Ware & Freidenrich and Brobeck, Phleger & Harrison, respectively, to the
effect that the Merger will constitute a "reorganization" within the meaning of
Section 368(a) of the Code. Such opinions (collectively the "Tax Opinions")
neither bind the IRS nor preclude the IRS from adopting a contrary position. In
addition, this discussion and the Tax Opinions will be subject to certain
assumptions and qualifications and will be based on the truth and accuracy of
certain representations and warranties made by 3Com, Sub, Primary Access and
certain shareholders of Primary Access.
40
<PAGE>
Of particular importance, the above discussion and the Tax Opinions will be
based on certain assumptions, representations and warranties relating to the
satisfaction of the "continuity of interest" requirement for reorganization
treatment. To satisfy the continuity of interest requirement, Primary Access
shareholders must not, pursuant to a plan or intent existing at or prior to the
Merger,
dispose of or transfer so much of either (i) their Primary Access Stock in
anticipation of the Merger or (ii) the 3Com Common Stock to be received in the
Merger (collectively "Planned Dispositions"), such that the Primary Access
shareholders, as a group, would no longer have a meaningful continuing equity
interest in 3Com after the Merger. Planned Dispositions include, among other
things, disposition of shares pursuant to the exercise of dissenters' rights.
Irrespective of the reorganization status of the Merger, a recipient of
shares of 3Com Common Stock would recognize income or gain to the extent such
shares were considered to be received in exchange for services or property other
than solely Primary Access Stock. Gain would also be recognized to the extent a
Primary Access shareholder was treated as receiving (directly or indirectly)
consideration other than 3Com Common Stock in exchange for his Primary Access
Stock.
A successful IRS challenge to the reorganization status of the Merger (as a
result of a failure of the "continuity of interest" requirement or otherwise)
would result in a Primary Access shareholder recognizing gain or loss with
respect to each share of Primary Access Stock equal to the difference between
the shareholder's basis in such share and the fair market value, as of the
Effective Date, of the 3Com Common Stock received in exchange therefor. A
shareholder's aggregate basis in the 3Com Common Stock so received would equal
its fair market value and his holding period for such stock would begin the day
after the Merger.
AFFILIATES AGREEMENTS
The shares of 3Com Common Stock to be issued in the Merger have been
registered under the Securities Act by a Registration Statement on Form S-4,
thereby allowing such securities to be traded without restriction by all former
holders of Primary Access Common Stock who are not deemed to be "affiliates" (as
such term is defined for purposes of Rule 145 under the Securities Act) of
Primary Access at the time the transaction is submitted for a vote to the
Primary Access shareholders and do not become affiliates (as such term is
defined for purposes of Rule 145 under the Securities Act) of 3Com. Primary
Access shareholders who may be deemed to be affiliates of Primary Access or 3Com
will be so advised prior to the Effective Date.
Pursuant to the terms of the Affiliates Agreement, each affiliate of Primary
Access will agree not to make any sale of 3Com Common Stock received upon
consummation of the Merger in violation of the Securities Act or the rules and
regulations promulgated thereunder. Generally this will require that such sales
be made in accordance with Rule 145(d) under the Securities Act promulgated by
the SEC, which in turn requires that, for specified periods, such sales be made
in compliance with the volume limitations, manner of sale provisions and current
information requirements of Rule 144 under the Securities Act. The volume
limitations should not pose any material limitations on any Primary Access
shareholder who owns less than 1% of 3Com's outstanding Common Stock after the
Merger, unless, pursuant to Rule 144, such shareholder's shares are required to
be aggregated with those of another shareholder.
In addition, each affiliate of Primary Access has agreed (i) not to sell,
exchange, transfer, pledge, dispose of or otherwise reduce his risk relative to
shares of Primary Access Stock owned by such affiliate for 30 days prior to the
Effective Date; (ii) not to sell, exchange, transfer, pledge, dispose or
otherwise reduce his risk relative to 3Com Common Stock until such time as
financial results covering at least 30 days of the combined operations of 3Com
and Primary Access after the Effective Date have been filed with the SEC or
published by 3Com; and (iii) not to offer, sell, exchange, transfer, pledge or
otherwise dispose of any 3Com Common Stock except as permitted by Rule 145
promulgated under the Securities Act by the SEC or pursuant to a registration
statement under, or an exemption from, the Securities Act.
41
<PAGE>
Each affiliate of 3Com has signed an Affiliates Agreement pursuant to which
such affiliate has agreed not to sell, exchange, transfer, pledge, dispose of or
otherwise reduce his risk relative to the 3Com Common Stock during the period
beginning 30 days prior to consummation of the Merger until such time as
financial results covering at least 30 days of the combined operations of 3Com
and Primary Access after the Effective Date have been filed with the SEC or
published by 3Com.
GOVERNMENTAL AND REGULATORY APPROVALS
3Com and Primary Access are aware of no governmental or regulatory approvals
required for consummation of the Merger, other than registration of the shares
of 3Com Common Stock that are issuable in the Merger pursuant to the Securities
Act and compliance with applicable securities and "blue sky" laws of the various
states. The Merger is also subject to the HSR Act, and the regulations
thereunder, which provide that certain acquisition transactions (including the
Merger) may not be consummated until certain information has been furnished to
the Antitrust Division (the "Antitrust Division") and the Federal Trade
Commission (the "FTC"), and certain waiting period requirements have ben
satisfied. 3Com and Primary Access have filed the required information with the
Antitrust Division and the FTC, and have obtained early termination of the
applicable waiting period. Termination of the waiting period does not preclude
the Antitrust Division, the FTC or any other party from challenging or seeking
to delay or enjoin the Merger on antitrust or other grounds. There can be no
assurance that any such challenge, if made, would not be successful; however,
neither 3Com nor Primary Access believes that the Merger will violate the
antitrust laws. Any such action taken or threatened prior to the Effective Date
could relieve 3Com or Primary Access of their respective obligations under the
Reorganization Agreement to consummate the Merger.
NON-COMPETE AND SEVERANCE AGREEMENTS
William Stensrud, President, Chief Executive Officer, director and a
principal shareholder of Primary Access, and James Dunn, Chief Technical
Officer, Vice President, Advanced Development, director and a principal
shareholder of Primary Access, will execute non-compete and severance agreements
with 3Com prior to the Closing which provide that for a period of two years from
the Effective Date, and for so long as such officer is employed by or serves as
a consultant to 3Com, he will not directly or indirectly: (i) participate in the
ownership, management, operation, sales or control of, or be connected in any
manner with any business that competes with the business of Primary Access; (ii)
solicit employees of 3Com for the purpose of recruitment; nor (iii) disclose or
use any confidential information of 3Com. The non-compete and severance
agreements also include a severance provision which provides that if the officer
is terminated, other than "for cause", within the above two year period, such
officer shall be entitled to a severance payment equal to six (6) months salary
and the immediate vesting of all unexpired Primary Access stock options then
held by the officer. For purposes of these agreements, "3Com" refers to 3Com and
its majority owned direct and indirect subsidiaries.
ACCOUNTING TREATMENT
The Merger is expected to meet all of the conditions for treatment as a
pooling of interests for accounting purposes. Prior to the execution of the
Reorganization Agreement, 3Com and Primary Access each received from Deloitte &
Touche LLP and KPMG Peat Marwick LLP, their respective independent accountants,
determination letters to the effect that they know of nothing that would
prohibit the Merger from being treated as a pooling of interests transaction for
accounting purposes.
Under the pooling of interests method of accounting, 3Com's prior period
consolidated financial statements will be restated to include Primary Access on
a combined basis, with all significant intercompany accounts being eliminated
and all expenses relating to the combination being deducted from combined income
for the period during which such expenses are incurred.
42
<PAGE>
DISSENTERS' RIGHTS
THE FOLLOWING SUMMARY OF APPRAISAL RIGHTS UNDER CALIFORNIA LAW IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO CHAPTER 13 OF THE CALIFORNIA GENERAL CORPORATION
LAW, THE COMPLETE TEXT OF WHICH IS ATTACHED HERETO AS APPENDIX B.
FAILURE TO STRICTLY FOLLOW THE PROCEDURES SET FORTH IN CHAPTER 13 OF THE
CALIFORNIA GENERAL CORPORATION LAW MAY RESULT IN THE LOSS, TERMINATION OR WAIVER
OF APPRAISAL RIGHTS. A PRIMARY ACCESS SHAREHOLDER WHO SIGNS A CONSENT APPROVING
AND AUTHORIZING THE REORGANIZATION AGREEMENTS OR WHO RETURNS A BLANK EXECUTED
PROXY WILL NOT HAVE A RIGHT TO DISSENT FROM THE REORGANIZATION AGREEMENT.
Under the CGCL each Primary Access shareholder as of , 1995 is
entitled to demand and receive payment of the fair value of all or any portion
of such holder's shares of Primary Access Stock pursuant to Chapter 13 of the
CGCL owned by such holder if the Merger is consummated. The fair value of such
shares is determined as of March 21, 1995, the last trading day before the first
announcement of the terms of the Merger. Any Primary Access shareholder who
elects to perfect such holder's dissenters' rights and demands payment of the
fair value of such holder's shares of Primary Access Stock must strictly comply
with Chapter 13 of the CGCL. The following summary does not purport to be
complete and is qualified in its entirety by reference to Chapter 13 of the
CGCL, the text of which is attached as APPENDIX B and is incorporated hereby
reference. Any holder of shares of Primary Access Stock considering demanding
dissenters' rights is advised to consult legal counsel. Dissenting rights will
not be available unless and until the Merger (or a similar business combination)
is consummated. To perfect the right to dissent and receive the fair value of
such holder's shares, the shareholder must neither vote for the Merger nor
return an executed Consent that is left blank. A dissenting shareholder must
either vote against the Merger or abstain from voting. A Consent returned
without voting instructions will be voted in favor of the Merger and as a result
such Primary Access shareholder will lose such holder's dissenters' rights.
Within 10 days after the date of approval of the Merger, Primary Access will
mail to each Primary Access shareholder who did not vote for the Merger notice
(the "Notice") of the approval of the merger by the Primary Access shareholders,
accompanied by a copy of Sections 1300-1304 of the CGCL. The Notice shall also
state the price determined by Primary Access to be the fair market value of the
Dissenting Shares and a brief description of the procedure to be followed by a
shareholder who elects to dissent.
Any dissenting Primary Access shareholder who desires that Primary Access
purchase his shares of Primary Access Stock must make written demand upon
Primary Access for the purchase of such shares. The demand must be made no later
than 30 days after the Notice was mailed to the shareholder. The Primary Access
shareholder's demand must state the number and class of shares held of record by
the Primary Access shareholder which the shareholder demands that Primary Access
purchase, as well as a statement by the Primary Access shareholder as to what
such holder thinks the fair market value of such share was as of the day prior
to the announcement of the Merger. The statements of fair market value
constitutes an offer by the Primary Access shareholder to sell the shares at
such price. Neither voting against, abstaining from voting nor failing to vote
on the Merger constitutes such written demand.
Within the same 30-day period following the mailing of the Notice, the
dissenting shareholder must submit to Primary Access for endorsement
certificates for any shares which the Primary Access shareholder demands Primary
Access purchase. If Primary Access and the Primary Access shareholder agree upon
the price of the Dissenting Shares, the dissenting Primary Access shareholder is
entitled to the agreed price with interest at the legal rate on judgments from
the date of such
43
<PAGE>
agreement. Payment must be made within 30 days of the later of the date of the
agreement between the Primary Access shareholder and Primary Access or the date
the contractual conditions to the Merger are satisfied.
If Primary Access and the shareholder cannot agree as to the fair market
value or as to the fact that such shares are Dissenting Shares, such Primary
Access shareholder may file within six months of the date of mailing of the
Notice a complaint with the California Superior Court for the County of San
Diego demanding judicial determination of such matters. Primary Access will then
be required to make any payments in accordance with such judicial determination.
If the complaint is not filed within the specified six-month period, the Primary
Access shareholder's rights as a dissenter are lost.
Dissenting shares lose their status as such if (i) Primary Access abandons
the Merger; (ii) the shares are transferred or are surrendered for conversion
into shares of another class; (iii) the Primary Access shareholder and Primary
Access do not agree as to the fair market value of such shares and a complaint
is not filed within six months of the date of the Notice was mailed; or (iv) the
dissenting Primary Access shareholder withdraws, with the consent of Primary
Access, his demand for purchase of the dissenting shares.
At the Effective Date, the shares of Primary Access held by a Primary Access
shareholder exercising his dissenters' rights will be canceled, and such
shareholder will be entitled to no further rights except the right to receive
payment of the fair value of such holder's shares of Primary Access Stock.
However, if the Primary Access shareholder fails to perfect or withdraws or
loses such holder's rights as a dissenter with respect to such holder's shares
of Primary Access Stock, such holder's shares of Primary Access Stock will be
exchanged for 3Com Common Stock as provided in the Reorganization Agreement.
44
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma combined financial statements give effect
to the proposed Merger of 3Com and Primary Access and the merger of 3Com and
Sonix on a pooling of interests basis. Under this method of accounting, the
historical book values of the assets, liabilities and shareholders' equity of
Primary Access and Sonix, as reported in their respective balance sheets, will
be carried over and combined with the consolidated balance sheet of 3Com and no
goodwill or other intangible assets will be recorded. 3Com will include in its
consolidated statement of operations the results of operations for Primary
Access and Sonix for the entire fiscal year in which the mergers occur and will
combine and restate its results of operations for prior periods to include the
reported results of operations of Primary Access and Sonix for prior periods.
The pro forma combined balance sheets assume that the mergers took place on
February 28, 1995 and combine 3Com's February 28, 1995 unaudited consolidated
balance sheet with Primary Access' April 2, 1995 unaudited balance sheet and
Sonix' December 31, 1994 unaudited balance sheet. The pro forma combined
statements of operations assume that the mergers took place as of the beginning
of the periods presented and combine 3Com's consolidated results of operations
for the nine months ended February 28, 1995 and for the years ended May 31,
1994, 1993 and 1992 with Primary Access' results of operations for the nine
months ended April 2, 1995 and for the years ended July 3, 1994, June 27, 1993
and June 28, 1992, respectively, and 3Com's results of operations for the nine
months ended February 28, 1995 and for the years ended May 31, 1994 and 1993
with Sonix' results of operations for the nine months ended December 31, 1994,
for the year ended March 31, 1994 and the period from May 1, 1992 (date of
incorporation) to March 31, 1993. Certain reclassifications have been made to
the historical data to make classifications for similar items consistent between
the companies on a pro forma combined basis.
The accompanying unaudited pro forma financial information reflects an
equivalent per Primary Access Stock value based on an Exchange Ratio of .2420 of
a share of 3Com Common Stock for each one share of Primary Access Stock and an
equivalent per Sonix Common Stock value based on an exchange ratio of 2.0138
shares of 3Com Common Stock for each one share of Sonix Common Stock.
This unaudited pro forma financial information is based on the estimates and
assumptions set forth in the notes to such statements. The pro forma adjustments
made in connection with the development of the pro forma information are
preliminary and have been made solely for purposes of developing such pro forma
information as necessary to comply with the disclosure requirements of the
Securities and Exchange Commission. The unaudited pro forma combined financial
statements do not purport to be indicative of the combined financial position or
results of operations of future periods or indicative of the results that
actually would have been realized had the entities been a single entity during
these periods.
These unaudited pro forma combined financial statements should be read in
conjunction with the historical consolidated financial statements and the
related notes thereto of 3Com and Primary Access included elsewhere herein. See
"Index to Financial Statements."
45
<PAGE>
3COM AND PRIMARY ACCESS
UNAUDITED PRO FORMA COMBINED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
3COM AT PRIMARY ACCESS
FEB. 28, AT APRIL 2, PRO FORMA PRO FORMA
1995 1995 ADJUSTMENTS* COMBINED
------------ --------------- ------------- ------------
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.......................... $116,859 $ 7,853 $ 124,712
Temporary cash investments......................... 146,620 -- 146,620
Trade receivables.................................. 187,628 8,904 196,532
Inventories........................................ 89,562 651 90,213
Deferred income taxes.............................. 31,608 -- 31,608
Other.............................................. 17,556 352 17,908
------------ --------------- ------------
Total current assets............................. 589,833 17,760 607,593
Property & equipment - net........................... 91,127 2,108 93,235
Other assets......................................... 33,291 757 34,048
------------ --------------- ------------
Total................................................ $714,251 $20,625 $ 734,876
------------ --------------- ------------
------------ --------------- ------------
LIABILITIES & SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................... $ 81,068 $ 2,305 $ 83,373
Accrued and other liabilities...................... 100,085 4,499 $ 4,300(1) 108,884
Income taxes payable............................... 39,936 452 40,388
Current portion of long-term obligations........... 219 -- 219
------------ --------------- ------------- ------------
Total current liabilities........................ 221,308 7,256 4,300 232,864
Long-term debt....................................... 110,000 -- 110,000
Other long-term obligations.......................... 870 -- 870
Shareholders' Equity:
Preferred stock (Primary Access: 8,404,000
shares)........................................... -- 11,974 (11,974)(2) --
Common stock (3Com: 66,481,000 shares; Primary
Access: 1,587,000 shares; and 68,899,000 shares on
a pro forma combined basis)....................... 263,728 227 11,974(2) 275,929
Unamortized restricted stock grants................ (2,205) -- (2,205)
Retained earnings.................................. 120,813 1,168 (4,300)(1) 117,681
Accumulated translation adjustment................. (263) -- (263)
------------ --------------- ------------- ------------
Total shareholders' equity....................... 382,073 13,369 (4,300) 391,142
------------ --------------- ------------- ------------
Total................................................ $714,251 $20,625 -- $ 734,876
------------ --------------- ------------- ------------
------------ --------------- ------------- ------------
</TABLE>
*See the accompanying Notes to Unaudited Pro Forma Combined Financial Statements
of 3Com and Primary Access
46
<PAGE>
3COM AND PRIMARY ACCESS
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
3COM
NINE PRIMARY ACCESS
MONTHS NINE MONTHS
ENDED FEB. ENDED APRIL 2, PRO FORMA PRO FORMA
28, 1995 1995 ADJUSTMENTS* COMBINED
---------- -------------- ------------ ----------
<S> <C> <C> <C> <C>
Sales................................................................. $892,764 $23,565 $916,329
Costs and Expenses:
Cost of sales....................................................... 415,427 10,224 425,651
Sales and marketing................................................. 174,809 4,625 179,434
Research and development............................................ 88,779 4,273 93,052
General and administrative.......................................... 37,674 1,383 39,057
Purchased in-process technology..................................... 60,796 -- 60,796
Non-recurring items................................................. (1,100) -- (1,100)
---------- -------------- ----------
Total................................................................. 776,385 20,505 796,890
---------- -------------- ----------
Operating income...................................................... 116,379 3,060 119,439
Other income - net.................................................... 3,001 281 3,282
---------- -------------- ----------
Income before income taxes............................................ 119,380 3,341 122,721
Provision for income taxes............................................ 42,977 915 $ 421(3) 44,313
---------- -------------- ------------ ----------
Net income............................................................ $ 76,403 $ 2,426 $ (421) $ 78,408
---------- -------------- ------------ ----------
---------- -------------- ------------ ----------
Net income per common and equivalent share:
Primary............................................................. $ 1.08 $ 0.21 $ 1.06
Full diluted........................................................ $ 1.06 $ 0.21 $ 1.05
Common and equivalent shares used in computing per share amounts:
Primary............................................................. 70,981 11,555 (8,759)(4) 73,777
Fully diluted....................................................... 71,758 11,608 (8,799)(4) 74,567
</TABLE>
*See the accompanying Notes to Unaudited Pro Forma Combined Financial Statements
of 3Com and Primary Access
47
<PAGE>
3COM AND PRIMARY ACCESS
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
3COM YEAR PRIMARY ACCESS
ENDED MAY YEAR ENDED PRO FORMA PRO FORMA
31, 1994 JULY 3, 1994 ADJUSTMENTS* COMBINED
--------- -------------- ------------ ---------
<S> <C> <C> <C> <C>
Sales................................................................. $ 826,995 $25,791 $ 852,786
Costs and Expenses:
Cost of sales....................................................... 405,927 10,587 416,514
Sales and marketing................................................. 171,799 5,449 177,248
Research and development............................................ 76,467 4,495 80,962
General and administrative.......................................... 39,838 1,678 41,516
Purchased in-process technology..................................... 134,481 -- 134,481
--------- -------------- ---------
Total................................................................. 828,512 22,209 850,721
--------- -------------- ---------
Operating income (loss)............................................... (1,517) 3,582 2,065
Gain on sale of investment............................................ 17,746 -- 17,746
Other income - net.................................................... 3,309 185 3,494
--------- -------------- ---------
Income before income taxes............................................ 19,538 3,767 23,305
Provision for income taxes............................................ 48,232 666 $ 841(3) 49,739
--------- -------------- ------ ---------
Net income (loss)..................................................... $ (28,694) $ 3,101 $ (841) $ (26,434)
--------- -------------- ------ ---------
--------- -------------- ------ ---------
Net income (loss) per common and equivalent share:
Primary............................................................. $ (0.46) $ 0.27 $ (0.41)
Fully diluted....................................................... $ (0.46) $ 0.27 $ (0.41)
Common and equivalent shares used in computing per share amounts:
Primary............................................................. 62,620 11,449 (9,021)(4) 65,048
Fully diluted....................................................... 62,620 11,697 (9,269)(4) 65,048
</TABLE>
*See the accompanying Notes to Unaudited Pro Forma Combined Financial Statements
of 3Com and Primary Access
48
<PAGE>
3COM AND PRIMARY ACCESS
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
3COM YEAR PRIMARY ACCESS
ENDED MAY YEAR ENDED PRO FORMA PRO FORMA
31, 1993 JUNE 27, 1993 ADJUSTMENTS* COMBINED
--------- -------------- ------------- ---------
<S> <C> <C> <C> <C>
Sales................................................................. $ 617,168 $22,278 $ 639,446
Costs and Expenses:
Cost of sales....................................................... 320,386 9,312 329,698
Sales and marketing................................................. 137,021 3,428 140,449
Research and development............................................ 64,346 2,867 67,213
General and administrative.......................................... 35,171 1,560 36,731
Non-recurring items................................................. 1,316 -- 1,316
--------- -------------- ---------
Total................................................................. 558,240 17,167 575,407
--------- -------------- ---------
Operating income...................................................... 58,928 5,111 64,039
Other income (expense) - net.......................................... 1,318 (48) 1,270
--------- -------------- ---------
Income before income taxes............................................ 60,246 5,063 65,309
Provision for income taxes............................................ 21,685 522 $ 1,503(3) 23,710
--------- -------------- ------------- ---------
Net income............................................................ $ 38,561 $ 4,541 $(1,503) $ 41,599
--------- -------------- ------------- ---------
--------- -------------- ------------- ---------
Net income per common and equivalent share:
Primary............................................................. $ 0.61 $ 0.47 $ 0.63
Fully diluted....................................................... $ 0.60 $ 0.47 $ 0.62
Common and equivalent shares used in computing per share amounts:
Primary............................................................. 63,248 9,644 (7,310)(4) 65,582
Fully diluted....................................................... 64,292 9,644 (7,310)(4) 66,626
</TABLE>
*See the accompanying Notes to Unaudited Pro Forma Combined Financial Statements
of 3Com and Primary Access
49
<PAGE>
3COM AND PRIMARY ACCESS
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
3COM YEAR PRIMARY ACCESS
ENDED MAY YEAR ENDED PRO FORMA PRO FORMA
31, 1992 JUNE 28, 1992 ADJUSTMENTS* COMBINED
--------- -------------- ------------ ---------
<S> <C> <C> <C> <C>
Sales................................................................. $ 423,801 $10,279 $ 434,080
Costs and Expenses:
Cost of sales....................................................... 224,309 5,812 230,121
Sales and marketing................................................. 97,997 2,033 100,030
Research and development............................................ 48,220 2,478 50,698
General and administrative.......................................... 34,873 1,230 36,103
Purchased in-process technology..................................... 10,404 -- 10,404
--------- -------------- ---------
Total................................................................. 415,803 11,553 427,356
--------- -------------- ---------
Operating income (loss)............................................... 7,998 (1,274) 6,724
Other income (expense) - net.......................................... 3,336 (129) 3,207
--------- -------------- ---------
Income (loss) before income taxes..................................... 11,334 (1,403) 9,931
Provision for income taxes............................................ 4,874 29 $ (590)(3) 4,313
--------- -------------- ------ ---------
Net income (loss) before minority interest............................ 6,460 (1,432) 590 5,618
Minority interest in net loss of consolidated subsidiary.............. 1,498 -- 1,498
--------- -------------- ------ ---------
Net income (loss)..................................................... $ 7,958 $(1,432) $ 590 $ 7,116
--------- -------------- ------ ---------
--------- -------------- ------ ---------
Net income (loss) per common and equivalent share:
Primary............................................................. $ 0.13 $ (1.45) $ 0.11
Fully diluted....................................................... $ 0.13 $ (1.45) $ 0.11
Common and equivalent shares used in computing per share amounts:
Primary............................................................. 59,858 990 1,154(4) 62,002
Fully diluted....................................................... 60,574 990 1,154(4) 62,718
</TABLE>
*See the accompanying Notes to Unaudited Pro Forma Combined Financial Statements
of 3Com and Primary Access
50
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
OF 3COM AND PRIMARY ACCESS
(1) The estimated costs associated with the Merger of $4.3 million include
investment banking, legal and accounting fees. All of these costs are expected
to be charged against operations of the combined company in the period in which
the Merger is consummated. Accordingly, the effects of these costs have not been
reflected in the unaudited pro forma combined statements of operations, but are
reflected in the unaudited pro forma combined balance sheet.
(2) Entry reflects the issuance of approximately 2,418,000 shares of 3Com
Common Stock in exchange for all outstanding shares of Primary Access Stock
based on the exchange ratio of .2420 of a share of 3Com Common Stock for each
share of Primary Access Stock.
(3) Entry reflects a pro forma adjustment to the provision for income taxes
of Primary Access to the statutory rate of 40% of income before income taxes.
(4) The unaudited pro forma combined income (loss) per common and equivalent
share is based upon the weighted average number of common and equivalent shares
outstanding of 3Com and Primary Access for each period assuming an exchange
ratio of .2420 of a share of 3Com Common Stock for each share of Primary Access
Stock, except in loss periods when common stock equivalent shares are excluded
as their effect would be antidilutive.
51
<PAGE>
3COM AND SONIX
UNAUDITED PRO FORMA COMBINED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
3COM AT SONIX
FEB. 28, AT DEC. 31, PRO FORMA PRO FORMA
1995 1994 ADJUSTMENTS* COMBINED
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents....................... $ 116,859 -- $ 116,859
Temporary cash investments...................... 146,620 -- 146,620
Trade receivables............................... 187,628 $ 4,348 191,976
Inventories..................................... 89,562 3,550 93,112
Deferred income taxes........................... 31,608 -- 31,608
Other........................................... 17,556 42 17,598
------------ ----------- ------------
Total current assets.......................... 589,833 7,940 597,773
Property & equipment - net........................ 91,127 626 91,753
Other assets...................................... 33,291 -- 33,291
------------ ----------- ------------
Total............................................. $ 714,251 $ 8,566 $ 722,817
------------ ----------- ------------
------------ ----------- ------------
LIABILITIES & SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable................................... -- $ 622 $ 622
Accounts payable................................ $ 81,068 3,146 84,214
Accrued and other liabilities................... 100,085 1,681 $ 1,800(1) 103,566
Income taxes payable............................ 39,936 -- 39,936
Current portion of long-term obligations........ 219 -- 219
------------ ----------- ------------ ------------
Total current liabilities..................... 221,308 5,449 1,800 228,557
Long-term debt.................................... 110,000 2,825 112,825
Other long-term obligations....................... 870 870
Shareholders' Equity:
Common stock (3Com: 66,481,000 shares; Sonix:
600,000 shares; and 67,689,000 shares on a pro
forma combined basis).......................... 263,728 11 844(2) 264,583
Paid-in-capital................................. -- 844 (844)(2) --
Unamortized restricted stock grants............. (2,205) -- (2,205)
Retained earnings (deficit)..................... 120,813 (418) (1,800)(1) 118,595
Accumulated translation adjustment.............. (263) (145) (408)
------------ ----------- ------------ ------------
Total shareholders' equity.................... 382,073 292 (1,800) 380,565
------------ ----------- ------------ ------------
Total............................................. $ 714,251 $ 8,566 -- $ 722,817
------------ ----------- ------------ ------------
------------ ----------- ------------ ------------
</TABLE>
*See the accompanying Notes to Unaudited Pro Forma Combined Financial Statements
of 3Com and Sonix
52
<PAGE>
3COM AND SONIX
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SONIX
3COM NINE MONTHS
NINE MONTHS ENDED
ENDED FEB. DEC. 31, PRO FORMA PRO FORMA
28, 1995 1994 ADJUSTMENTS* COMBINED
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales............................................. $ 892,764 $ 15,125 $ 907,889
Costs and Expenses:
Operating expenses before research and
development.................................... -- 11,015 $(11,015)(3) --
Cost of sales................................... 415,427 -- 8,274(3) 423,701
Sales and marketing............................. 174,809 -- 2,044(3) 176,853
Research and development........................ 88,779 1,214 89,993
General and administrative...................... 37,674 -- 697(3) 38,371
Purchased in-process technology................. 60,796 -- 60,796
Non-recurring items............................. (1,100) -- (1,100)
------------ ------------ ------------ ------------
Total............................................. 776,385 12,229 -- 788,614
------------ ------------ ------------ ------------
Operating income.................................. 116,379 2,896 119,275
Other income (expense) - net...................... 3,001 (434) 2,567
------------ ------------ ------------ ------------
Income before income taxes........................ 119,380 2,462 121,842
Provision for income taxes........................ 42,997 -- 813(4) 43,790
------------ ------------ ------------ ------------
Net income........................................ $ 76,403 $ 2,462 $ (813) $ 78,052
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Net income per common and equivalent share:
Primary......................................... $ 1.08 $ 4.10 $ 1.08
Full diluted.................................... $ 1.06 $ 4.10 $ 1.07
Common and equivalent shares used in computing per
share amounts:
Primary......................................... 70,981 600 608(5) 72,189
Fully diluted................................... 71,758 600 608(5) 72,966
</TABLE>
*See the accompanying Notes to Unaudited Pro Forma Combined Financial Statements
of 3Com and Sonix
53
<PAGE>
3COM AND SONIX
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
3COM YEAR SONIX YEAR
ENDED MAY ENDED MARCH PRO FORMA PRO FORMA
31, 1994 31, 1994 ADJUSTMENTS* COMBINED
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales............................................. $ 826,995 $ 7,427 $ 834,422
Costs and Expenses:
Operating expenses before research and
development.................................... -- 6,212 $ (6,212 )(3) --
Cost of sales................................... 405,927 -- 3,913 (3) 409,840
Sales and marketing............................. 171,799 -- 1,609 (3) 173,408
Research and development........................ 76,467 1,672 78,139
General and administrative...................... 39,838 -- 690 (3) 40,528
Purchased in-process technology................. 134,481 -- 134,481
------------ ------------ ------------ ------------
Total............................................. 828,512 7,884 -- 836,396
------------ ------------ ------------ ------------
Operating loss.................................... (1,517) (457 ) (1,974)
Gain on sale of investment........................ 17,746 -- 17,746
Other income (expense) - net...................... 3,309 (465 ) 2,844
------------ ------------ ------------ ------------
Income (loss) before income taxes................. 19,538 (922 ) 18,616
Provision for income taxes........................ 48,232 1 (304 )(4) 47,929
------------ ------------ ------------ ------------
Net loss.......................................... $ (28,694) $ (923 ) $ 304 $ (29,313)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Net loss per common and equivalent share:
Primary......................................... $ (0.46) $ (1.54 ) $ (0.46)
Fully diluted................................... $ (0.46) $ (1.54 ) $ (0.46)
Common and equivalent shares used in computing per
share amounts:
Primary......................................... 62,620 600 608 (5) 63,828
Fully diluted................................... 62,620 600 608 (5) 63,828
</TABLE>
*See the accompanying Notes to Unaudited Pro Forma Combined Financial Statements
of 3Com and Sonix
54
<PAGE>
3COM AND SONIX
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SONIX MAY 1,
1992 (DATE
OF
3COM YEAR INCORPORATION)
ENDED MAY TO MARCH 31, PRO FORMA PRO FORMA
31, 1993 1993 ADJUSTMENTS* COMBINED
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales............................................. $ 617,168 $ 905 $ 618,073
Costs and Expenses:
Operating expenses before research and
development.................................... -- 2,009 $ (2,009 )(3) --
Cost of sales................................... 320,386 -- 995 (3) 321,381
Sales and marketing............................. 137,021 -- 609 (3) 137,630
Research and development........................ 64,346 906 65,252
General and administrative...................... 35,171 -- 405 (3) 35,576
Non-recurring items............................. 1,316 -- 1,316
------------ ------------ ------------ ------------
Total............................................. 558,240 2,915 -- 561,155
------------ ------------ ------------ ------------
Operating income (loss)........................... 58,928 (2,010 ) 56,918
Other income (expense) - net...................... 1,318 (101 ) 1,217
------------ ------------ ------------ ------------
Income (loss) before income taxes................. 60,246 (2,111 ) 58,135
Provision for income taxes........................ 21,685 -- (697 )(4) 20,988
------------ ------------ ------------ ------------
Net income (loss)................................. $ 38,561 $ (2,111 ) $ 697 $ 37,147
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Net income (loss) per common and equivalent share:
Primary......................................... $ 0.61 $ (3.52 ) $ 0.58
Fully diluted................................... $ 0.60 $ (3.52 ) $ 0.57
Common and equivalent shares used in computing per
share amounts:
Primary......................................... 63,248 600 608 (5) 64,456
Fully diluted................................... 64,292 600 608 (5) 65,500
</TABLE>
*See the accompanying Notes to Unaudited Pro Forma Combined Financial Statements
of 3Com and Sonix
55
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
OF 3COM AND SONIX
Sonix maintains its accounting records in pounds Sterling. Statement of
operations data has been translated into U.S. dollars at the average exchange
rates during the periods presented and balance sheet data has been translated
into U.S. dollars at the exchange rate in effect at the balance sheet date (1.55
US Dollar per pound Sterling). The average exchange rates for the nine months
ended December 31, 1994, for the year ended March 31, 1994 and the period from
May 1, 1992 (date of incorporation) to March 31, 1993 were 1.58, 1.51 and 1.68
US Dollar per pound Sterling, respectively).
(1) The estimated costs associated with the merger of $1.8 million include
investment banking, legal and accounting fees. All of these costs are expected
to be charged against operations of the combined company in the period in which
the merger is consummated. Accordingly, the effects of these costs have not been
reflected in the unaudited pro forma combined statements of operations, but are
reflected in the unaudited pro forma combined balance sheet.
(2) Entry reflects the issuance of approximately 1,208,000 shares of 3Com
Common Stock in exchange for all shares of Sonix Stock based on the exchange
ratio of 2.0138 shares of 3Com Common Stock for each share of Sonix Stock.
(3) Entry reflects an estimated allocation of cost of sales and operating
expenses to be comparable to the 3Com presentation. The allocation was
determined based on the financial statements of Sonix, which included standard
material costs and expenses by natural account and department. Expenses which
could not be specifically identified to a functional expense category were
allocated based on headcount. The method was determined to be reasonable.
(4) Entry reflects a pro forma adjustment to the provision for income taxes
of Sonix to the statutory rate of 33% of income before income taxes.
(5) The unaudited pro forma combined income (loss) per common and equivalent
share is based upon the weighted average number of common and equivalent shares
outstanding of 3Com and Sonix for each period assuming an exchange ratio of
2.0138 shares of 3Com Common Stock for each share of Sonix Stock, except in loss
periods when common stock equivalent shares are excluded as their effect would
be antidilutive.
56
<PAGE>
3COM, PRIMARY ACCESS AND SONIX
UNAUDITED PRO FORMA COMBINED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRIMARY SONIX
3COM AT ACCESS AT DEC.
FEB. 28, AT APR. 2, 31, PRO FORMA PRO FORMA
1995 1995 1994(6) ADJUSTMENTS* COMBINED
---------- ---------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............. $ 116,859 $ 7,853 -- $ 124,712
Temporary cash investments............ 146,620 -- -- 146,620
Trade receivables..................... 187,628 8,904 $ 4,348 200,880
Inventories........................... 89,562 651 3,550 93,763
Deferred income taxes................. 31,608 -- -- 31,608
Other................................. 17,556 352 42 17,950
---------- ---------- ---------- ----------
Total current assets................ 589,833 17,760 7,940 615,533
Property & equipment - net.............. 91,127 2,108 626 93,861
Other assets............................ 33,291 757 -- 34,048
---------- ---------- ---------- ----------
Total................................... $ 714,251 $ 20,625 $ 8,566 $ 743,442
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
LIABILITIES & SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable......................... -- -- $ 622 $ 622
Accounts payable...................... $ 81,068 $ 2,305 3,146 86,519
Accrued and other liabilities......... 100,085 4,499 1,681 $ 6,100(1) 112,365
Income taxes payable.................. 39,936 452 -- 40,388
Current portion of long-term
obligations.......................... 219 -- -- 219
---------- ---------- ---------- ------------ ----------
Total current liabilities........... 221,308 7,256 5,449 6,100 240,113
Long-term debt.......................... 110,000 -- 2,825 112,825
Other long-term obligations............. 870 870
Shareholders' Equity:
Preferred stock (Primary Access:
8,404,000 shares).................... 11,974 -- (11,974)(2) --
Common stock (3Com: 66,481,000 shares;
Primary Access: 1,587,000 shares;
Sonix: 600,000 shares; and 70,107,000
shares on a pro forma combined
basis)............................... 263,728 227 11 12,818(2) 276,784
Paid-in-capital....................... -- -- 844 (844)(2) --
Unamortized restricted stock grants... (2,205) -- -- (2,205)
Retained earnings (deficit)........... 120,813 1,168 (418 ) (6,100)(1) 115,463
Accumulated translation adjustment.... (263) -- (145 ) (408)
---------- ---------- ---------- ------------ ----------
Total shareholders' equity
(deficit).......................... 382,073 13,369 292 (6,100) 389,634
---------- ---------- ---------- ------------ ----------
Total................................... $ 714,251 $ 20,625 $ 8,566 -- $ 743,442
---------- ---------- ---------- ------------ ----------
---------- ---------- ---------- ------------ ----------
</TABLE>
*See the accompanying Notes to Unaudited Pro Forma Combined Financial Statements
of 3Com, Primary Access and Sonix
57
<PAGE>
3COM, PRIMARY ACCESS AND SONIX
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRIMARY SONIX
3COM ACCESS NINE
NINE NINE MONTHS
MONTHS MONTHS ENDED
ENDED FEB. ENDED APR. DEC. 31, PRO FORMA PRO FORMA
28, 1995 2, 1995 1994(6) ADJUSTMENTS* COMBINED
---------- ---------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Sales................................... $ 892,764 $ 23,565 $ 15,125 $ 931,454
Costs and Expenses:
Operating expenses before research and
development.......................... 11,015 $(11,015)(3)
Cost of sales......................... 415,427 10,224 -- 8,274(3) 433,925
Sales and marketing................... 174,809 4,625 -- 2,044(3) 181,478
Research and development.............. 88,779 4,273 1,214 94,266
General and administrative............ 37,674 1,383 -- 697(3) 39,754
Purchased in-process technology....... 60,796 -- -- 60,796
Non-recurring items................... (1,100 ) -- -- (1,100)
---------- ---------- ---------- ------------ ----------
Total................................... 776,385 20,505 12,229 809,119
---------- ---------- ---------- ------------ ----------
Operating income........................ 116,379 3,060 2,896 122,335
Other income (expense) - net............ 3,001 281 (434 ) 2,848
---------- ---------- ---------- ------------ ----------
Income before income taxes.............. 119,380 3,341 2,462 125,183
Provision for income taxes.............. 42,977 915 -- 1,234(4) 45,126
---------- ---------- ---------- ------------ ----------
Net income.............................. $ 76,403 $ 2,426 $ 2,462 $ (1,234) $ 80,057
---------- ---------- ---------- ------------ ----------
---------- ---------- ---------- ------------ ----------
Net income per common and equivalent
share:
Primary............................... $ 1.08 $ 0.21 $ 4.10 $ 1.07
Full diluted.......................... $ 1.06 $ 0.21 $ 4.10 $ 1.06
Common and equivalent shares used in
computing per share amounts:
Primary............................... 70,981 11,555 600 (8,151)(5) 74,985
Fully diluted......................... 71,758 11,608 600 (8,191)(5) 75,775
</TABLE>
*See the accompanying Notes to Unaudited Pro Forma Combined Financial Statements
of 3Com, Primary Access and Sonix
58
<PAGE>
3COM, PRIMARY ACCESS AND SONIX
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRIMARY
ACCESS SONIX
3COM YEAR YEAR ENDED YEAR ENDED
ENDED MAY JULY 3, MARCH 31, PRO FORMA PRO FORMA
31, 1994 1994 1994(6) ADJUSTMENTS* COMBINED
---------- ---------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Sales................................... $ 826,995 $ 25,791 $ 7,427 $ 860,213
Costs and Expenses:
Operating expenses before research and
development.......................... -- -- 6,212 $ (6,212)(3) --
Cost of sales......................... 405,927 10,587 -- 3,913(3) 420,427
Sales and marketing................... 171,799 5,449 -- 1,609(3) 178,857
Research and development.............. 76,467 4,495 1,672 82,634
General and administrative............ 39,838 1,678 -- 690(3) 42,206
Purchased in-process technology....... 134,481 -- -- 134,481
---------- ---------- ---------- ------------ ----------
Total................................... 828,512 22,209 7,884 -- 858,605
---------- ---------- ---------- ------------ ----------
Operating income (loss)................. (1,517) 3,582 (457) 1,608
Gain on sale of investment.............. 17,746 -- -- 17,746
Other income (expense) - net............ 3,309 185 (465) 3,029
---------- ---------- ---------- ------------ ----------
Income (loss) before income taxes....... 19,538 3,767 (922) 22,383
Provision for income taxes.............. 48,232 666 1 537(4) 49,436
---------- ---------- ---------- ------------ ----------
Net income (loss)....................... $ (28,694) $ 3,101 $ (923) $ (537) $ (27,053)
---------- ---------- ---------- ------------ ----------
---------- ---------- ---------- ------------ ----------
Net income (loss) per common and
equivalent share:
Primary............................... $ (0.46) $ 0.27 $ (1.54) $ (0.41)
Fully diluted......................... $ (0.46) $ 0.27 $ (1.54) $ (0.41)
Common and equivalent shares used
in computing per share amounts:
Primary............................... 62,620 11,449 600 (8,413)(5) 66,256
Fully diluted......................... 62,620 11,697 600 (8,661)(5) 66,256
</TABLE>
*See the accompanying Notes to Unaudited Pro Forma Combined Financial Statements
of 3Com, Primary Access and Sonix
59
<PAGE>
3COM, PRIMARY ACCESS AND SONIX
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SONIX
MAY 1,
1992
PRIMARY (DATE OF
ACCESS INCORPORATION)
3COM YEAR YEAR ENDED TO
ENDED MAY JUNE 27, MARCH 31, PRO FORMA PRO FORMA
31, 1993 1993 1993(6) ADJUSTMENTS* COMBINED
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Sales................................... $ 617,168 $ 22,278 $ 905 $ 640,351
Costs and Expenses:
Operating expenses before research and
development.......................... -- -- 2,009 $(2,009 (3) --
Cost of sales......................... 320,386 9,312 -- 995(3) 330,693
Sales and marketing................... 137,021 3,428 -- 609(3) 141,058
Research and development.............. 64,346 2,867 906 68,119
General and administrative............ 35,171 1,560 -- 405(3) 37,136
Non-recurring items................... 1,316 -- -- 1,316
---------- ---------- ---------- ---------- ----------
Total................................... 558,240 17,167 2,915 -- 578,322
---------- ---------- ---------- ---------- ----------
Operating income (loss)................. 58,928 5,111 (2,010 ) 62,029
Other income (expense) - net............ 1,318 (48 ) (101 ) 1,169
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes....... 60,246 5,063 (2,111 ) 63,198
Provision for income taxes.............. 21,685 522 -- 806(4) 23,013
---------- ---------- ---------- ---------- ----------
Net income (loss)....................... $ 38,561 $ 4,541 $ (2,111 ) $ (806 ) $ 40,185
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Net income (loss) per common and
equivalent share:
Primary............................... $ 0.61 $ 0.47 $ (3.52 ) $ 0.60
Fully diluted......................... $ 0.60 $ 0.47 $ (3.52 ) $ 0.59
Common and equivalent shares used in
computing per share amounts:
Primary............................... 63,248 9,644 600 (6,702 (5) 66,790
Fully diluted......................... 64,292 9,644 600 (6,702 (5) 67,834
</TABLE>
*See the accompanying Notes to Unaudited Pro Forma Combined Financial Statements
of 3Com, Primary Access and Sonix
60
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS OF 3COM, PRIMARY
ACCESS AND SONIX
(1) The estimated costs associated with the mergers of $6.1 million include
investment banking, legal and accounting fees. All of these costs are expected
to be charged against operations of the combined company in the period in which
the mergers are consummated. Accordingly, the effects of these costs have not
been reflected in the unaudited pro forma combined statements of operations, but
are reflected in the unaudited pro forma combined balance sheet.
(2) Entry reflects the issuance of approximately 2,418,000 shares of 3Com
Common Stock in exchange for all outstanding shares of Primary Access Stock
based on the exchange ratio of .2420 of a share of 3Com Common Stock for each
share of Primary Access Stock and the issuance of approximately 1,208,000 shares
of 3Com Common Stock in exchange for all shares of Sonix Stock based on the
exchange ratio of 2.0138 shares of 3Com Common Stock for each share of Sonix
Stock.
(3) Entry reflects an estimated allocation of cost of sales and operating
expenses to be comparable to the 3Com presentation. The allocation was based on
the financial statements of Sonix, which included standard material costs and
expenses by natural account and department. Expenses which could not be
specifically identified to a functional expense category were allocated based on
headcount. The method was determined to be reasonable.
(4) Entry reflects a pro forma adjustment to the provision for income taxes
of Primary Access and Sonix to the statutory rates of 40% and 33%, respectively,
of income before income taxes.
(5) The unaudited pro forma combined income (loss) per common and equivalent
share is based upon the weighted average number of common and equivalent shares
outstanding of 3Com, Primary Access and Sonix for each period assuming an
exchange ratio of .2420 of a share of 3Com Common Stock for each share of
Primary Access Stock and an exchange ratio of 2.0138 shares of 3Com Common Stock
for each share of Sonix Stock, except in loss periods when common stock
equivalent shares are excluded as their effect would be antidilutive.
(6) Sonix maintains its accounting records in pounds Sterling. Statement of
operations data has been translated into U.S. dollars at the average exchange
rates during the periods presented and balance sheet data has been translated
into U.S. dollars at the exchange rate in effect at the balance sheet date.
61
<PAGE>
INFORMATION CONCERNING 3COM
BUSINESS
INTRODUCTION
3Com was founded on June 4, 1979 and pioneered the networking industry. 3Com
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 1000 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. 3Com'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, 3Com 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 3Com designs and manufactures products, as well as in the
way 3Com works with customers; SCALABILITY of products to allow customers to
purchase networking components that meet their current requirements, with the
assurance that 3Com has cost-effective migration and upgrade paths as their
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.
Following a disappointing first quarter in fiscal 1990, 3Com began the shift
from client-server computing, in which the company had focused on network
operating software and computing platforms, to a new strategy of global data
networking with a primary focus on developing standards-based products and
systems used to create data networking infrastructures. At the same time 3Com
reorganized its sales force under a territory management system to avoid
conflict with channel partners and transitioned to a new management team. This
strategy, with its focus on systems comprised of network adapters,
internetworking platforms, hubs and switches, continues to drive 3Com's business
today.
In fiscal 1991, 3Com announced several actions to accelerate the transition
to global data networking. These included: (i) the decision to wind down the
operations of the workgroup systems business, which had focused on developing
computing platforms optimized for data networks (network servers, workstations
and operating software), (ii) the amendment of 3Com's license agreement with
Microsoft Corporation, making Microsoft solely responsible for the LAN Manager
network operating software and (iii) a reduction in 3Com's workforce of
approximately 12%.
3Com recorded a restructuring charge to operating income of $67.0 million
related to these actions in the third quarter of fiscal 1991.
With the restructuring completed, 3Com embarked on an aggressive product
development program, coupled with strategic acquisitions, to rebuild its product
portfolio and increase its market share in the rapidly growing data networking
market.
During fiscal 1992 and 1993, 3Com introduced new adapter, hub and
internetworking platforms, retrained its sales force to sell connectivity
systems and solutions, and expanded 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 3Com's position in the structured wiring hub market and
expanded 3Com's position in the Europe. In January 1993, 3Com enhanced its Token
Ring technology base with the acquisition of Star-Tek, Inc., a
Massachusetts-based Token Ring hub manufacturer. Further, to meet increased
demand for its network adapter products, in September 1993, 3Com began
full-scale operations at its 60,000 square foot manufacturing facility in
Blanchardstown, Ireland.
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In fiscal 1994, 3Com introduced its HPSN architecture with Transcend network
management, demonstrating 3Com'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, 3Com enhanced its product offerings under HPSN
with two strategic acquisitions. First, in January 1994, 3Com acquired
Synernetics, Inc. ("Synernetics"), 3Com's long-term development partner and the
then 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 6000 backbone switch and LANplex 2000 family of departmental
switches. Second, in February 1994, 3Com acquired 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 trademark AccessBuilder.
Additionally, in December 1993, 3Com entered into a technology licensing
agreement with Pacific Monolithics, Inc., a wireless communications developer,
that will allow 3Com 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 3Com's operations during the third fiscal quarter of
1994 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 fiscal 1994, 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.
In the first three quarters of fiscal 1995, customer migration toward higher
performance and geographically dispersed networks, which 3Com had identified
early in fiscal 1994, began to accelerate. 3Com had expanded its product line to
address these trends with high performance adapters, enhanced remote access
products, new LAN and ATM switches and higher density internetworking platforms.
Additionally, during the second quarter of fiscal 1995, 3Com acquired
substantially all the assets of Israeli-based NiceCom, Ltd., an innovator in ATM
technology, and also acquired a company developing advanced network adapter
technology. The aggregate purchase price of the two acquisitions was
approximately $55.5 million plus $6.1 million of costs attributed to the
exchange of the acquired companies' stock options for 3Com stock options and
$2.0 million of costs directly attributable to the completion of the
acquisitions. Approximately $60.8 million of the total purchase price
represented in-process technology and was charged to 3Com's operations during
the quarter. In the third quarter of fiscal 1995, 3Com also acquired Integrated
Services Digital Network ("ISDN") innovator and development partner, New
Jersey-based AccessWorks Communications.
3Com believes that its principal competitive advantages lie primarily in the
depth and breadth of its product line and a strong yet flexible business
infrastructure. 3Com has strong brand recognition in Ethernet adapters, which it
believes is transferable to other product and technology areas, as well as in
stackable networking systems, LAN switching and remote office and personal
office internetworking platforms. Additionally, 3Com believes its low-cost
manufacturing, worldwide presence, flexible distribution strategy, and
comprehensive service and support capabilities are allowing 3Com to take
advantage of market trends that are extending the reach, scope and performance
of today's data networks.
RECENT DEVELOPMENTS
On March 22, 1995, 3Com entered into and announced an agreement with the
shareholders of Sonix pursuant to which the 3Com will acquire 100% of the
outstanding stock of Sonix in exchange for 1,208,279 shares of 3Com Common Stock
(with a market value of approximately $70,000,000 as of March 22, 1995, the date
of the agreement). The transaction is expected to close on May 1, 1995, and will
be accounted for as a pooling of interests. The pro forma unaudited combined
financial statements contained herein give effect to the anticipated combination
of 3Com with Sonix on a pooling of interest basis. Sonix is a market leader in
ISDN in the United Kingdom, and manufactures and markets a
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portfolio of network access products specifically designed for data and voice.
Sonix had calendar 1994 revenues of approximately $20 million. Sonix products
are targeted at the simple connectivity requirements for WAN groups, such as
retail and financial entities. Sonix products include low-cost Ethernet to ISDN,
leased-line or dial-up bridges and routers. Sonix products provide connectivity
among small dispersed workgroups and simple, high-performance, low-end, low-cost
connectivity between central sites and remote offices.
INDUSTRY SEGMENT INFORMATION
3Com operates in one industry segment as described above.
PRODUCTS
3Com's HPSN 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
providing 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 ATM. The five types of connectivity environments
defined by HPSN are:
- 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 connectivity is still needed 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 and LinkSwitch workgroup switches
concentrate and redirect network traffic within the Workgroup or to the
corporate backbone. 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 redundant power system.
- BUILDING/CAMPUS BACKBONE. As the number and complexity of workgroup
networks has increased, the need for sophisticated inter- and
intra-networking 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 and switches 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 technologies using existing routing and switching
platforms.
- 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 network
management applications deliver self-managing intelligence, putting
wide-area bridge/router administration within the power of a centrally
located manager.
- 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
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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 applications centralizes the
network management function as well.
- 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 mobile users simplified dial-up access to the
network. Available for Ethernet and Token Ring networks and in stackable
or stand-alone versions, AccessBuilder servers offer 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 1993, 3Com 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. 3Com has applied for and received patents on certain
aspects of this technology. In fiscal 1994, 3Com introduced Ethernet PCMCIA ("PC
Card") 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 PC Card
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. 3Com's FDDILink family of adapters connects devices to the
network via copper wiring and fiber at 100 Mbps. When combined with 3Com'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 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.
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 ISDN network technologies and can be operated as
either conventional stand-
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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 bridge/routers, 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-Services 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 3Com
believes will dramatically improve performance and reliability while
reducing costs. 3Com 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. 3Com'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, 3Com 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
3Com'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. 3Com plans to invest in emerging
technologies for use in existing and future products, as well as to improve and
enhance existing products to extend their lifecycles, reduce
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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:
- 100 Mbps Ethernet
- Wireless local area network communications
- ATM capabilities
- LAN switching
- ISDN
- Enhanced connectivity in IBM environments
- Remote access for single and mobile users
The industry in which 3Com 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 3Com 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.
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, 3Com 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). 3Com'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: 3Com 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 22 countries, including new offices opened in fiscal 1994 in Japan,
Brazil, Mexico, South Africa and China. 3Com 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 of the Notes to Consolidated Financial
Statements.)
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 in Europe and Asia/Pacific Rim, parts stock at
more than 25 locations, and electronic bulletin boards throughout the world. In
addition to on-site training, 3Com also provides computer-based courses that
allow customers to learn networking technologies at their own pace in their own
environments. During fiscal 1994, 3Com 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.
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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 canceled 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. 3Com also manufactures certain products
and subassemblies through subcontractors. Over the past several years, 3Com 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,
3Com added new automated production lines in both its California and Ireland
plants.
3Com 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 3Com to redesign or
delay shipments of several of its data networking products. 3Com 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 3Com'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. 3Com's competitors typically
compete in one or more segments 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.
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 acquisitions, 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
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switches and has formed alliances with both Cabletron Systems and Chipcom
Corporation, two hub vendors. SynOptics Communications, a hub vendor, and
Wellfleet Communications, a router vendor, recently merged to form Bay Networks,
Inc. Additionally, Cisco Systems, Bay Networks, Inc., Chipcom Corporation and
others have completed acquisitions of smaller networking companies in an effort
to strengthen their positions in the emerging and fast-growing markets. 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.
3Com 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 enjoy a reputation for both high quality and reliability.
PATENTS, LICENSES AND RELATED MATTERS
3Com relies on U.S. and foreign patents, copyright, trademark and trade
secrets to establish and maintain proprietary rights in its technology and
products. 3Com 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 3Com's products exists. 3Com'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. 3Com has been issued 26
utility patents and one design patent in the U.S., and has been issued one
foreign patent. Numerous other patent applications are currently pending which
relate to 3Com's research and development, including U.S. and foreign patent
applications related to 3Com'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 3Com 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.
3Com 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.
3Com has registered 42 trademarks in the United States and has registered 15
trademarks in one or more of 34 foreign countries. Numerous applications for
registration of domestic and foreign trademarks are currently pending.
Many of 3Com's products are designed to include software or other
intellectual property licensed from third parties. 3Com 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 3Com'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, 3Com believes that, based upon past
experience and standard industry practice, such licenses generally could be
obtained on commercially reasonable terms.
EMPLOYEES
As of February 28, 1995, 3Com had 2,768 full-time employees, of whom 637
were employed in engineering, 995 in sales, marketing and customer service, 747
in manufacturing, and 389 in finance and administration. None of 3Com's
employees is represented by a labor organization and 3Com considers its employee
relations to be excellent.
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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 lease expires in
August 1997. 3Com has two one-year options to renew the lease.
3Com leases 30,000 square feet of office, manufacturing and distribution
space for its Switching Division (formerly Synernetics) in North Billerica,
Massachusetts. The lease expires in March 1995 with an option to renew for an
additional three 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 three 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 3Com, 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. 3Com 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.
3COM MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
NINE MONTHS ENDED FEBRUARY 28, 1995 AND FEBRUARY 28, 1994
ACQUISITIONS. During the nine months ended February 28, 1995, 3Com enhanced
its HPSN solutions with the strategic acquisition of substantially all of the
assets of NiceCom (see Note 6 of Notes to 3Com Condensed Consolidated Financial
Statements For the Nine Months Ended February 28, 1995), an innovator of ATM
technology. 3Com also acquired a company developing network adapter technology.
The acquisitions were accounted for as purchases and, accordingly, the acquired
assets and liabilities were recorded at their estimated fair market values at
the dates of acquisition. The aggregate purchase price consisted of
approximately $55.5 million paid using funds from the Company's working capital
and issuance of common stock. In addition, the Company assumed stock options
with an associated value of $6.1 million attributed to the exchange of the
acquired companies' stock options and incurred $2.0 million of costs directly
attributable to the completion of the acquisitions. Approximately $60.8 million
of the total purchase price represented in-process technology and was charged to
3Com's operations during the second quarter. 3Com's consolidated results of
operations for the nine months period ended February 28, 1995 included the
operating results of the acquired companies from the dates of acquisition.
References to 3Com herein refer to 3Com and its subsidiaries.
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RESULTS OF OPERATIONS. 3Com achieved sales for the first nine months of
fiscal 1995 totaling $892.8 million, an increase of $307.2 million or 52% from
the corresponding period a year ago.
3Com believes that the year-over-year increase in the first nine months of
fiscal 1995 sales is due to several factors, including strong market acceptance
of the Company's new products, continued strength in the data networking market,
increases in personal computer sales, rapid growth in sales outside the U.S.,
the breadth of 3Com's product offerings and its ability to deliver complete data
networking solutions for different connectivity environments. Sales from
products introduced in the last 12 months represented 47% of sales in the first
nine months of fiscal 1995, an increase from 37% of sales in the corresponding
period a year ago.
Sales of network adapters in the first nine months of fiscal 1995
represented 55% of total sales and increased 46% from the corresponding period
in fiscal 1994. 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, particularly in the token ring market. The
increase in unit volume primarily resulted from sales of the EtherLink III
network adapter, but was also favorably impacted by sales of the PC Card adapter
(formerly PCMCIA).
Sales of systems products (internetworking, remote access server, hub and
switching products) in the first nine months of fiscal 1995 represented 41% of
total sales and increased 70% from the corresponding period a year ago. The
increase was led primarily by the LinkBuilder FMS II stackable hub, a component
of 3Com's SuperStack family of network system products, the LANplex family of
switching products, and the NETBuilder Remote Office internetworking system.
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. 3Com believes there is an industry- wide trend towards demand
for fully-functional, fault-tolerant, lower- priced network systems in a
stackable format. 3Com is currently delivering many components of its SuperStack
network system including stackable hubs, remote office routers, LAN switching
products and a redundant power system.
Sales of other products (terminal servers, customer service, protocols and
other products) represented 4% of the sales in the first nine months of fiscal
1995. Sales of other products increased 8% from the corresponding period a year
ago, although they continued to represent a decreasing percentage of 3Com's
total sales, as expected.
Sales outside the United States provided 54% of sales in the first nine
months of fiscal 1995, compared to 51% for the same period last year.
International sales grew in all geographic regions, especially in the Asia
Pacific and Latin American regions. 3Com believes that this increase reflected
3Com's continued expansion globally through the opening of new sales offices in
Latin America, Asia and Europe, and the expansion of worldwide service and
support programs. The Company's operations were not significantly impacted by
fluctuations in foreign currency exchange rates in the nine months ended
February 28, 1995 and 1994.
Cost of sales as a percentage of sales was 46.5% for the first nine months
of fiscal 1995, compared to 49.4% for the corresponding period a year ago. The
2.9 percentage points improvement in gross margin from the year-ago period
resulted primarily from a favorable shipment mix towards the lower-cost
EtherLink III network adapter and the higher-margin switching products and lower
inventory obsolescence costs.
Total operating expenses in the first nine months of fiscal 1995 were $361.0
million compared to 339.3 million in the first nine months of fiscal 1994.
Excluding the charge of $60.8 million for purchased in-process technology and
the non-recurring credit of $1.1 million for the reduction in accrued costs
relating to the fiscal 1991 restructuring, total operating expenses in the first
nine months of fiscal 1995 would have been $301.3 million, or 33.7% of sales.
Excluding the charge of $134.5 million for purchased in-process technology
resulting from the acquisitions of Synernetics, Inc. and Centrum Communications,
Inc., and the technology licensing agreement with Pacific Monolithics, Inc.,
total operating expenses in the first nine months of fiscal 1994 would have been
$204.8 million, or
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35.0% of sales. The increase in continuing operating expenses of $96.5 million,
or 47%, reflected increased selling costs related to higher sales volume, the
cost of developing and promoting 3Com's products and an average headcount
increase of 22% over the first nine months of fiscal 1994.
Nonoperating income was favorably impacted during the first nine months of
fiscal 1994, as 3Com realized a gain of $17.7 million from the sale of 3Com's
investment in Madge N.V.
Other income (net) was $3.0 million for the first nine months of fiscal
1995, compared with income of $2.8 million for the same period a year ago. Such
amounts consist primarily of interest income which has increased significantly
in fiscal 1995 due to larger cash and investment balances and rising interest
rates and was offset by the interest expense associated with the $110.0 million
of convertible subordinated notes issued in the second quarter of fiscal 1995.
3Com's effective income tax rate was 36% in the first nine months of fiscal
1995. Despite the net loss reported, the Company provided $33.6 million for
income taxes in the first nine months of fiscal 1994 because of a significant
portion of the charge taken for purchased in-process technology was not tax
deductible. In addition, the income tax rate in the prior year period reflected
the recognition of a net benefit of $1.2 million which resulted from retroactive
changes to the Revenue Reconciliation Act of 1993. The tax rate associated with
continuing operations was 35% for the first nine months of fiscal 1994.
Net income for the first nine months of fiscal 1995 was $76.4 million, or
$1.06 per share, compared to a net loss of $55.9 million, or $.90 per share, for
the first nine months of fiscal 1994. Excluding the charge for purchased
in-process technology and the non-recurring credit, 3Com would have realized net
income of $113.1 million or $1.58 per share for the first nine months of fiscal
1995. Excluding the charge for purchased in-process technology, the gain from
the sale of an investment and the tax benefit, net income for the first nine
months of fiscal 1994 would have been $59.7 million, or $.87 per share. Net loss
per share for the first nine months of fiscal 1994 has been restated to reflect
the two-for-one stock split on September 1, 1994 for shareholders of record on
August 16, 1994.
FISCAL YEARS MAY 31, 1994, 1993 AND 1992
ACQUISITIONS. During the fiscal year ended May 31, 1994, 3Com enhanced its
HPSN architecture with two strategic acquisitions (see Note 3 of Notes to
Consolidated Financial Statements for Years Ended May 31, 1994, 1993 and 1992).
3Com 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
March 3, 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 3Com's operations during the third fiscal quarter of 1994. In
December 1993, 3Com 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 for Years Ended May 31, 1994). The
cost of the license agreement was $2.5 million, substantially all of which was
charged to 3Com'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 for Years Ended May 31, 1994, 1993 and 1992), in a pooling
of interests transaction.
RESULTS OF OPERATIONS. Fiscal 1994 sales increased 34% to $827.0 million
from $617.2 million in fiscal 1993. This followed a 46% increase in sales in
fiscal 1993 from fiscal 1992 sales of $423.8 million.
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3Com believes that the increase in fiscal 1994 sales from fiscal years 1993
and 1992 reflects the actions 3Com took 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 3Com included acquiring
the data networking products business of U.K.-based BICC Group, plc ("BICC") in
fiscal 1992, formulating 3Com's HPSN 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 3Com'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% of sales in fiscal 1994, compared to 48% 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% of total sales and
increased 31% from fiscal 1993 sales. Sales of network adapters in fiscal years
1993 and 1992 represented 58% and 57% 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% of total sales and increased 49% from fiscal 1993.
This followed an 84% 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 6% of fiscal
1994 sales and continued to decrease from levels in fiscal 1993 and fiscal 1992.
Sales outside of the United States comprised 52% of total sales in fiscal
1994 compared to 50% in fiscal 1993 and 47% in fiscal 1992. The growth of
international sales was particularly strong in Europe and the Latin America
region in fiscal 1994. 3Com believes that the increase in international sales
reflected the same factors that affect 3Com as a whole, including the results of
3Com'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. The
Company's operations were not significantly impacted by fluctuations in foreign
currency exchange rates in fiscal years 1994, 1993 and 1992.
Cost of sales as a percentage of sales was 49.1% in fiscal 1994, compared to
51.9% in fiscal 1993 and 52.9% 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
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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 3Com to further leverage its manufacturing
infrastructure.
Total operating expenses in fiscal 1994 were $422.6 million compared to
$237.9 million in fiscal 1993 and $191.5 million in fiscal 1992. Excluding
non-recurring charges, operating expenses increased $51.6 million or 22% from
fiscal 1993 to fiscal 1994, but decreased as a percentage of sales from 38.3% of
sales in fiscal 1993 to 34.8% 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 3Com'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
3Com's continued commitment to develop and introduce high quality, innovative
products. Operating expenses increased $55.4 million or 31% 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
<TABLE>
<CAPTION>
PERCENT PERCENT PERCENT
OF OF OF
FISCAL 1994 SALES FISCAL 1993 SALES FISCAL 1992 SALES
----------- ------- ----------- ------- ----------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
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 administrative................... 39,838 4.8 35,171 5.7 34,873 8.2
Non-recurring charges:
Purchased in-process technology.............. 134,481 16.3 -- -- 10,404 2.5
Non-recurring items.......................... -- -- 1,316 0.2 -- --
----------- ------- ----------- ------- ----------- -------
Total operating expenses..................... 422,585 51.1 237,854 38.5 191,494 45.2
----------- ------- ----------- ------- ----------- -------
Total operating expenses excluding
non-recurring charges....................... $ 288,104 34.8% $ 236,538 38.3% $ 181,090 42.7%
----------- ------- ----------- ------- ----------- -------
----------- ------- ----------- ------- ----------- -------
</TABLE>
In the third quarter of fiscal 1994, 3Com 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 income (net) was $3.3 million in fiscal 1994, compared to $1.3 million
in fiscal 1993 and $3.3 million in fiscal 1992. The increase in other income in
fiscal 1994 from fiscal 1993 resulted primarily from more favorable foreign
exchange results and higher interest income. The decrease in other income in
fiscal 1993 from fiscal 1992 resulted primarily from lower interest income and
higher foreign exchange costs.
3Com 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%. 3Com's effective tax rate in fiscal 1993 was 36.0%, as compared to 43.0%
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.
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Net loss for fiscal 1994 was $28.7 million, or $0.46 per share, compared to
net income for fiscal 1993 of $38.6 million, or $0.60 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 3Com'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,
3Com would have realized net income of $86.9 million, or $1.27 per share in
fiscal 1994. Excluding the effect of non-recurring items in fiscal 1993, 3Com
would have realized net income of $39.8 million, or $0.62 per share. Net income
for fiscal 1992 was $8.0 million, or $0.13 per share. Excluding the effect of
the purchased in-process technology charge in fiscal 1992, 3Com would have
realized net income of $17.1 million, or $0.28 per share.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and temporary cash investments at February 28, 1995
were $263.5 million, increasing $133.8 million from May 31, 1994. During the
nine months ended February 28, 1995, 3Com received net proceeds of $107.3
million from the issuance of convertible subordinated notes and spent
approximately $48.7 million in net cash for acquisitions (see Note 6 of Notes to
Condensed Consolidated Financial Statements For Nine Months Ended February 28,
1995 and 1994).
For the nine months ended February 28, 1995, net cash generated from
operating activities was $126.0 million. Net cash generated from operating
activities was offset by the final payment of $14.3 million to Centrum
shareholders in the first quarter of fiscal 1995 for the acquisition of Centrum
Communications in February 1994. Inventory levels increased $18.2 million from
the prior fiscal year end, with inventory turnover improving from 6.5 turns at
May 31, 1994 to 7.6 turns at February 28, 1995. Trade receivables at February
28, 1995 increased $69.0 million from May 31, 1994 due primarily to an increase
in sales and the shortened accounting period in February which has historically
increased days sales outstanding in receivables. Days sales outstanding in
receivables was 50 days at the end of the third quarter, compared to 44 days at
May 31, 1994 and 50 days at February 28, 1994. Other non-current assets
increased primarily due to an increase in non-current deferred taxes of $20.1
million associated with the acquisition of NiceCom and related charge for
purchased in-process technology.
For the nine months ended February 28, 1995, 3Com made $48.8 million in
capital expenditures. Major capital expenditures included upgrades and additions
to manufacturing product lines, facility relocations, development of a new
worldwide accounting and information system, and upgrades of desktop systems.
During the nine months ended February 28, 1995, 3Com repurchased 785,000
shares of common stock with a cash outlay of $19.6 million. As of February 28,
1995, 3Com was authorized by its Board of Directors to repurchase up to an
additional 2.7 million shares of its common stock in the open market.
During the first quarter of fiscal 1995, 3Com 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. Under such arrangement,
3Com has committed to fund up to a maximum of $33.5 million for the construction
of the buildings. 3Com is obligated to purchase the property or cause a third
party to purchase the property at a future date. 3Com estimates that it will
commence occupancy of portions of the facility in early fiscal 1996, with
payments on the lease to start no later than April 1996.
3Com has a $40 million revolving bank credit agreement which expires
December 31, 1996. No amount is outstanding under the credit agreement and 3Com
is in compliance with all financial ratio and minimum net worth requirements.
3Com believes that its existing cash balances, cash generated from
operations and the available revolving credit agreement will be sufficient to
satisfy operating cash requirements through calendar 1995.
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MANAGEMENT
The directors and executive officers of 3Com and their ages as of February
28, 1995 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------- --- -----------------------------------------------------------
<S> <C> <C>
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, Network Systems Operations
Ralph B. Godfrey 54 Vice President, Channel Sales -- North America
John H. Hart 49 Vice President and Chief Technical Officer
Richard W. Joyce 39 Vice President, Sales Europe and Asia/Pacific Rim
Alan J. Kessler 37 Vice President, Systems Sales -- North America
Christopher B. Paisley 42 Vice President, Finance and Chief Financial Officer
Janice M. Roberts 39 Vice President, Marketing, General Manager, Personal Office
Division
Douglas C. Spreng 51 Vice President and General Manager, Network Adapter
Division
James L. Barksdale 52 Director
Gordon A. Campbell 50 Director
Jean-Louis Gassee 50 Director
Jack L. Hancock 64 Director
Stephen C. Johnson 52 Director
Philip C. Kantz 51 Director
William F. Zuendt 48 Director
</TABLE>
Eric A. Benhamou has been 3Com's President and Chief Executive Officer since
April 1990 and September 1990, respectively. Mr. Benhamou became Chairman of the
Board of Directors of 3Com in July 1994. Mr. Benhamou served as 3Com's Chief
Operating Officer from April 1990 through September 1990. From October 1987
through April 1990, Mr. Benhamou held various general management positions
within 3Com. 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 3Com 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, Network Systems
Operations since June 1993. From January 1990 through May 1993, Mr. Finocchio
served as Executive Vice President, Field Operations. Mr. Finocchio joined 3Com
in December 1988 as Vice President of Sales, Marketing and Services, a position
he held through January 1990. Prior to joining 3Com, 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-North America since
June 1993. Mr. Godfrey joined 3Com in June 1990 as Vice President of 3Com USA, a
position he held through
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May 1993. Prior to joining 3Com, 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 3Com in September 1990. Prior to joining 3Com, 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 3Com 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 3Com, 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-North America 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 3Com's Vice President, Finance and
Chief Financial Officer since September 1985. Prior to joining 3Com, 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
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 3Com's
Network Adapter Division since March 1992. Prior to joining 3Com, 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 (HP) in a
variety of key marketing, manufacturing and general management positions,
including General Manager of HP's Commercial Systems Group. Most recently he
served as General Manager of HP's Manufacturing Applications Group.
Mr. Barksdale has served on the Board of Directors since 1987. Mr. Barksdale
has been employed as President and CEO of Netscape Communications Corporation
since January 1995. Previously, Mr. Barksdale had been President and Chief
Executive Officer of AT&T Wireless Services since September 1994. Prior to
September 1994, Mr. Barksdale had been employed as the President and Chief
Operating officer of McCaw Cellular Communications, Inc. since January 1992 and
by Federal Express Corporation since 1979. Mr. Barksdale served as a director of
Bridge Communications, Inc.
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from April 1986 until that company combined with 3Com in 1987. Mr. Barksdale
also serves as a director of McCaw Cellular Communications, Inc., The Promus
Companies, Inc., LIN Broadcasting Corporation and Netscape Communications
Corporation.
Mr. Campbell has served on the Board of Directors since 1990. He was a
founder and since 1993 has been President of Techfarm, Inc., a new company
formed to launch technology based start-up companies. Mr. Campbell was a founder
of Chips and Technologies, Inc. ("Chips"), a company that designs and
distributes very large scale integrated circuit products, and has served as a
director of Chips since December 1984 and as Chairman of the Board of Chips
since 1993. Mr. Campbell also served as the President and Chief Executive
Officer of Chips from January 1985 to July 1993. Mr. Campbell was also a founder
of Seeq Technology, Inc., and, from January 1981 to October 1984, he served as
that company's President and Chief Executive Officer. Mr. Campbell also serves
as a director of Bell Microproducts, Inc., Reply Corporation and as Chairman of
the Board of Exponential Technology, Inc. and Summit Systems.
Mr. Gassee has served on the Board of Directors since 1993. He is the
Chairman of the Board and Chief Executive Officer of Be Incorporated, a personal
computing technology company in the development stage, which he founded in
October 1990. Previously, Mr. Gassee was associated with Apple Computer, Inc.
("Apple") for 10 years. He served as the president of Apple Products, the
research and development and manufacturing division of Apple, from August 1988
to February 1990. From June 1987 to August 1988, and from June 1985 to June
1987, Mr. Gassee served, respectively, as Apple's Senior Vice President of
research and development and Vice President of Product Development. Mr. Gassee
founded and was general manager of Apple's French sales subsidiary, Apple
Computer France SARL, from February 1981 to June 1985. Prior to joining Apple,
Mr. Gassee was President and General Manager of the French subsidiary of Exxon
Corp., held several management positions with Data General Corporation, and
spent six years at Hewlett-Packard Company. Mr. Gassee is currently also a
member of the board of directors of Cray Computer, Electronics For Imaging, Inc.
and Logitech, Inc.
Mr. Hancock has served on the Board of Directors since 1993. He retired as
Executive Vice President of the Product and Technology Support Group of Pacific
Bell in August 1993, after serving in that capacity since August 1990. Mr.
Hancock joined Pacific Bell in 1988 as Vice President for Systems Technology.
Prior to that, he was Executive Vice President for Information Systems,
Strategic Planning and Human Resources at Wells Fargo Bank. Before that, he was
Senior Vice President for Management Information Systems at Chemical Bank, where
he began work in 1978 after retiring from the United States Army with the rank
of Major General. Mr. Hancock also serves as a director of Pyramid Technology
Corporation, Union Bank and Whittaker Corporation.
Mr. Johnson has served on the Board of Directors since 1989. He has been
President and Chief Executive Officer of Komag, Incorporated, a manufacturer of
Winchester disk media, since 1983. Mr. Johnson served as a director of 3Com from
June 1982 to September 1987; he stepped down from the Board when 3Com combined
with Bridge Communications, Inc. and returned to the Board in 1989. Mr. Johnson
also serves as a director of Komag, Incorporated and Uniphase Corporation.
Mr. Kantz has served on the Board of Directors since 1992. From February
1994 to January 1995, he served as President, Chief Executive Officer and a
director of Transcisco Industries, Inc., an industrial services company. From
October 1992 through September 1993, Mr. Kantz served as President and Chief
Executive Officer of Genetrix, Inc., a biotechnology services company. Mr. Kantz
was President and Chief Executive Officer of Itel Containers International
Corporation from 1988 through 1991. Previously, Mr. Kantz was President of
Transportation and Industrial Funding Corporation and Senior Vice President and
General Manager of GE Capital from 1986 to 1988. In 1988, Mr. Kantz instigated
the start up of an integrated waste management corporation, Mine Reclamation
Corporation, and currently serves as Chairman of that company's board of
directors. Mr. Kantz also serves as a director of Blue Cross of California,
Genetrix, Inc. and Trans Ocean Ltd.
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<PAGE>
Mr. Zuendt has served on the Board of Directors since 1988. He is President
of Wells Fargo & Company, a bank holding company. He has been responsible for
Wells Fargo Bank's California branch system, credit card products, electronic
banking, and consumer systems and operations since 1980, its real estate,
commercial and corporate lending since 1991, and its trust and investment
activities since 1993. He joined Wells Fargo in 1973. Mr. Zuendt is also a
director of MasterCard International and a trustee of Golden Gate University.
During the fiscal year ended May 31, 1994, the Board held seven (7)
meetings. No director listed above who served on the Board in fiscal year 1994
attended fewer than 75% of the meetings of the Board and the Committees on which
he served. The Board does not have a standing Nominating Committee, but does
have an Audit Committee and a Compensation Committee.
During the fiscal year ended May 31, 1994, 3Com's Audit Committee met five
(5) times. Its current members are Stephen C. Johnson and William F. Zuendt. The
Audit Committee makes recommendations to the Board regarding engagement of
3Com's independent public accountants, approves services rendered by such
accountants, reviews the activities and recommendations of 3Com's internal audit
department, and reviews and evaluates 3Com's accounting systems, financial
controls and financial personnel.
During the fiscal year ended May 31, 1994, the Compensation Committee met
four (4) times. Its current members are Gordon A. Campbell, Jack L. Hancock and
Philip C. Kantz. Eric A. Benhamou serves as an ex officio member of the
Compensation Committee. The Compensation Committee review salaries and other
administration of 3Com's stock option and stock purchase plans, and advises the
Board on general aspects of 3Com's compensation and benefit policies.
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information, as of February 28, 1995,
with respect to the beneficial ownership of 3Com Common Stock by (i) each
director and director-nominee of 3Com, (ii) the Chief Executive Officer and the
four other most highly compensated executive officers of 3Com as of May 31, 1994
whose salary and bonus for the year ended May 31, 1994 exceeded $100,000, and
(iii) all executive officers and directors of 3Com as a group.
<TABLE>
<CAPTION>
PERCENT
OF
AMOUNT AND NATURE OF COMMON
BENEFICIAL OWNERSHIP STOCK PERCENT AFTER
NAME (1) OUTSTANDING MERGER
- ------------------------------ ------------------------ -------- -----------------
<S> <C> <C> <C>
James L. Barksdale 60,000 * *
Gordon A. Campbell 32,000 * *
Jean-Louis Gassee 30,000 * *
Jack L. Hancock 42,200 * *
Stephen C. Johnson 132,000 * *
Philip C. Kantz 67,002 * *
William F. Zuendt 166,000 * *
Eric A. Benhamou 628,190 * *
Robert J. Finocchio, Jr. 170,611 * *
Ralph B. Godfrey 59,400 * *
Douglas C. Spreng 105,475 * *
Richard W. Joyce 32,682 * *
All directors and executive
officers as a group (17
persons) 1,925,731 2.9 % 2.7 %
<FN>
- ------------------------
* Less than 1%.
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
(1) Except as indicated in the footnotes to this table, to the Company's
knowledge, the persons or entities named in the table have sole voting and
investment power with respect to all shares of Common Stock shown as
beneficially owned by them, subject to community property laws where
applicable.
Includes shares of 3Com Common Stock issuable pursuant to options
exercisable within 60 days of February 28, 1995, including options to
acquire 60,000 shares of 3Com Common Stock held by Mr. Barksdale, options
to acquire 32,000 shares held by Mr. Campbell, options to acquire 30,000
shares held by Mr. Gassee, options to acquire 42,000 shares held by Mr.
Hancock, options to acquire 92,000 shares held by Mr. Johnson, options to
acquire 57,474 shares held by Mr. Kantz, options to acquire 102,000 shares
held by Mr. Zuendt, options to acquire 418,377 shares held by Mr. Benhamou,
options to acquire 140,441 shares held by Mr. Finocchio, options to acquire
48,118 shares held by Mr. Godfrey, options to acquire 99,583 shares held by
Mr. Spreng, options to acquire 32,188 shares held by Mr. Joyce, and options
to acquire 346,273 shares of 3Com Common Stock held by directors and
executive officers of 3Com as a group.
</TABLE>
The following table sets forth certain information, as of December 31, 1994,
with respect to the beneficial ownership of 3Com Common Stock by all persons
known by 3Com to be the beneficial owners of more than 5% of the outstanding
3Com Common Stock.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT
BENEFICIAL PERCENT OF COMMON AFTER
NAME OWNERSHIP (1) STOCK OUTSTANDING MERGER
- ---------------------------------------------------------------- ---------------------- ----------------- -----------
<S> <C> <C> <C>
FMR Corporation ................................................ 9,438,540 14.1%
82 Devonshire Street
Boston, MA 02109
Investors Research Corporation ................................. 6,600,000 9.9%
450 Main Street
Kansas City, MO 64111
<FN>
- ------------------------
(1) To 3Com's knowledge, the entities named in the table have sole voting and
investment power with respect to all shares of 3Com Common Stock shown as
beneficially owned by them.
This information is based upon a review of 13G filings made with the SEC
during 1994.
</TABLE>
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<PAGE>
EXECUTIVE COMPENSATION AND OTHER MATTERS
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation of
the Chief Executive Officer of 3Com and the four other most highly compensated
executive officers of 3Com as of May 31, 1994 whose total salary and bonus for
the fiscal year ended May 31, 1994 exceeded $100,000:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
-------------
AWARDS
-------------
ANNUAL COMPENSATION SECURITIES
FISCAL ---------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS (1) OPTIONS COMPENSATION (2)
- ----------------------------------- --------- ----------- --------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
Eric A. Benhamou 1994 $ 451,629 $ 25,372 200,000 572
President and Chief 1993 $ 375,000 $ 22,966 220,060 447
Executive Officer 1992 375,000 4,431 160,270 429
Robert J. Finocchio, Jr. 1994 318,499 18,599 120,000 629
Executive Vice President 1993 300,000 18,373 139,920 519
Network Systems Operations 1992 300,000 4,431 101,740 510
Ralph B. Godfrey 1994 324,404 -- 18,000 302
Vice President Channel Sales, 1993 278,270 -- 31,260 750
North America (3) 1992 274,428 -- 30,370 790
Douglas C. Spreng 1994 272,664 15,890 120,000 1,068
Vice President and General 1993 225,457 13,780 20,000 615
Manager Network Adapter 1992 56,250 18 220,000 229
Division
Richard W. Joyce 1994 276,824 -- 44,400 --
Vice President, Europe and 1993 233,584 -- 47,660 --
Asia/Pacific Rim and 1992 277,393 -- 34,370 --
President of 3Com Europe (4)
<FN>
- ------------------------
(1) Entire amount is for payments made under 3Com-wide profit-sharing plan
known as 3SHARE. Under that plan, 3Com distributed approximately 6% of its
income before taxes, after adjustment, at six month intervals to all
employees worldwide (other than those who are paid commissions), including
executive officers, with the individual payments determined pro rata based
on salary level. Unusual or non-operations related income or expenses were
excluded in determining income before taxes for purposes of 3SHARE.
(2) Represents life insurance premiums.
(3) Mr. Godfrey's salary for 1992, 1993 and 1994 include commission payments in
the amount of $99,428, $103,270 and $148,864, respectively.
(4) Mr. Joyce's salary for 1992, 1993 and 1994 include commission payments in
the amount of $34,526, $34,046 and $72,610, respectively. Compensation is
paid to Mr. Joyce in pounds sterling. Amounts shown here reflect the
foreign exchange rate in effect at the end of the respective fiscal year.
</TABLE>
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<PAGE>
The following table provides information concerning grants of options to
purchase 3Com's Common Stock made during the fiscal year ended May 31, 1994 to
the persons named in the Summary Compensation Table.
OPTION GRANTS IN FISCAL YEAR 1994
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
NUMBER OF % OF TOTAL ASSUMED ANNUAL RATES OF
SECURITIES OPTIONS STOCK PRICE APPRECIATION FOR
UNDERLYING GRANTED EXERCISE OPTION TERM (3)
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION -----------------------------
NAME GRANTED (1) FISCAL 1994 SHARE (2) DATE 5% 10%
- ---------------------- ----------- ------------- ----------- ----------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Eric A. Benhamou 200,000 5.04% $ 12.938 06-01-03 $ 1,627,265 $ 4,123,809
Robert J. Finocchio, 120,000 3.03% 12.938 06-01-03 976,359 2,474,285
Jr.
Ralph B. Godfrey 18,000 0.45% 12.938 06-01-03 146,454 371,143
Douglas C. Spreng 120,000 3.03% 12.938 06-01-03 976,359 2,474,285
Richard W. Joyce 44,400 1.12% 12.938 06-01-03 361,253 915,486
All Shareholders (4) N/A N/A N/A N/A $ 961,418,353 $2,436,422,869
<FN>
- ------------------------------
(1) All of the above options are subject to the terms of 3Com's 1983 Stock
Option Plan (the "1983 Option Plan") and are exercisable only as they vest.
The options granted to each officer vest and become exercisable in equal
annual increments over a four (4) year period provided the optionee
continues to be employed by 3Com.
(2) All options were granted at an exercise price equal to the fair market
value of 3Com's Common Stock as determined by the Board of Directors of
3Com on the date of grant.
(3) Potential realizable values are net of exercise price, but before taxes
associated with exercise. These amounts represent certain assumed rates of
appreciation only, based on the Securities and Exchange Commission rules.
No gain to an optionee is possible without an increase in stock price,
which will benefit all shareholders commensurably. A 0% gain in stock price
will result in zero dollars for the optionee. Actual realizable values, if
any, on stock option exercises are dependent on the future performance of
the Common Stock, overall market conditions and the optionholders'
continued employment through the vesting period.
(4) Represents potential appreciation in aggregate shareholder value at the
assume annual rates of stock price appreciation over a ten-year period
beginning May 31, 1994 based on the number of shares then outstanding, and
using as a base value the $23.50 per share closing price of 3Com common
stock on that date.
</TABLE>
The following table provides the specified information concerning option
exercises during fiscal year 1994 and the exercisable and unexercisable options
held as of May 31, 1994, by the persons named in the Summary Compensation Table:
AGGREGATED OPTION EXERCISES IN FISCAL
YEAR 1994 AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SHARES UNEXERCISED OPTIONS AT VALUE OF UNEXERCISED IN-THE-
ACQUIRED 5/31/94 MONEY OPTIONS AT 5/31/94 (1)
ON VALUE -------------------------- ----------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------- --------- ------------- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Eric A. Benhamou 90,000 $ 1,708,125 319,710 498,764 $ 6,040,686 $ 7,516,500
Robert J. Finocchio, Jr. 120,000 2,391,500 181,818 304,018 3,421,078 4,587,328
Ralph B. Godfrey 48,000 1,013,000 72,380 44,002 1,329,217 675,882
Douglas C. Spreng 66,000 1,319,250 34,166 235,834 585,145 3,250,480
Richard W. Joyce 37,000 725,238 42,000 73,430 652,692 1,031,321
<FN>
- ------------------------
(1) Based on a fair market value of $23.50 per share as of May 31, 1994, the
closing sale price of 3Com's Common Stock on that date as reported by the
NASDAQ National Market System.
</TABLE>
STOCK OPTION PLAN INFORMATION
In July 1994, the Board of Directors of 3Com adopted a new stock option plan
and established a share reserve of 3,800,000, solely for the grant of
nonqualified stock options to employees and consultants who are not executive
officers or directors of 3Com. 3Com continues to maintain the 1983
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<PAGE>
Option Plan, which permits option grants to all employees, including executive
officers. For the future, 3Com anticipates that option grants under the 1983
Option Plan will be made exclusively to executive officers. As of July 31, 1994,
approximately 2,650,818 shares of Common Stock were available for future option
grants under the 1983 Option Plan.
EMPLOYMENT AND CHANGE OF CONTROL ARRANGEMENTS
Options granted under the 1983 Option Plan contain provisions pursuant to
which outstanding options must either become fully vested and immediately
exercisable prior to a "transfer of control" transaction or must be assumed in
the transaction, and all unexercised options terminate to the extent they are
not assumed upon such "transfer of control" as defined under the 1983 Option
Plan.
Options granted under the 3Com Corporation Director Stock Option Plan (the
"Director Plan") contain provisions pursuant to which outstanding options
granted under the Director Plan will become fully vested and immediately
exercisable upon a merger or acquisition of 3Com where 3Com is not the survivor
or upon the sale of substantially all of the assets of 3Com.
COMPENSATION OF DIRECTORS
Members of the Board who are not employees of 3Com received an annual
retainer during fiscal 1994 as follows: Audit Committee members, $13,000;
Compensation Committee members, $12,000; others, $9,000; plus reimbursement of
travel expenses for travel by members of the Board who reside out of the local
area.
Outside directors receive options to purchase Common Stock pursuant to the
Director Plan. The Director Plan provides for the initial automatic grant of an
option to purchase 20,000 shares of 3Com's Common Stock to each director of 3Com
who is not an employee of 3Com ("Outside Director"). In addition, each Outside
Director is automatically granted an option to purchase 12,000 shares of 3Com's
Common Stock upon becoming a member of the Audit or Compensation Committee. All
options have a five year term, are immediately exercisable and vest over two
years so long as the option holder continues to serve on the Board or the
Committee. An additional option to purchase the same number of shares of 3Com's
Common Stock is automatically granted to each Outside Director following the
vesting in full of the option previously received.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal 1994, Messrs. Campbell, Hancock, Kantz and L. William Krause
served as members of the Compensation Committee of 3Com's Board of Directors.
Mr. Hancock replaced Mr. Krause on the Compensation Committee in September 1993.
Mr. Krause was formerly an officer of 3Com.
In October 1993, 3Com invested approximately $2 million to purchase stock in
a corporation (the "subsidiary") founded and controlled by a company of which
Mr. Campbell is the controlling shareholder, Chairman of the Board and
President. In October 1994, 3Com bought all remaining stock in the subsidiary
from Mr. Campbell's company at a price of $2.2 million, and 3Com became the sole
owner of the subsidiary. During the intervening year, 3Com paid the subsidiary
approximately $1.0 million under an arms-length agreement for 3Com to buy
products and provide related funding. Mr. Campbell served as acting Chief
Executive Officer and a member of the Board of Directors of the subsidiary
during that year, and the subsidiary paid Mr. Campbell's company a $15,000 per
month management fee, plus reimbursement of costs.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Exchange Act requires 3Com's executive officers,
directors and persons who beneficially own more than 10% of 3Com's Common Stock
to file initial reports of ownership and reports of changes in ownership with
the SEC. Such persons are required by SEC regulations to furnish 3Com with
copies of all Section 16(a) forms filed by such persons.
Based solely on 3Com's review of such forms furnished to 3Com and written
representations from certain reporting persons, 3Com believes that all filing
requirements applicable to 3Com's executive officers, directors and more than
10% shareholders were complied with during fiscal 1994.
83
<PAGE>
INFORMATION CONCERNING PRIMARY ACCESS
BUSINESS
GENERAL
Primary Access is a supplier of software-defined remote network access
platforms used to link the public switched telephone networks to backbone
computer networks.
Primary Access' product line, Aperture, is currently being manufactured by
Primary Access for distribution throughout the world. Aperture is an integrated
remote access system for high-speed data transmission over both wireline and
cellular networks. Aperture has been deployed in networks in North America and
around the world. Aperture is used by phone companies (both IXCs and RBOCs),
cellular carriers, Internet access providers, information service provides, VANs
and corporations with large private networks to provide the connection between
users and information.
The six key features of the Aperture system are: (i) software defined
flexibility; (ii) scalable platform; (iii) shared resources; (iv) intelligent
centralized management; (v) public network service independence; and (vi)
application independence.
- SOFTWARE DEFINED FLEXIBILITY. Aperture software supports adding new
features or enhancing existing capabilities. Downloading software,
remotely and without changing hardware, enables network providers to
introduce new services faster.
- SCALABLE PLATFORM. A single all-digital Aperture system can be configured
to support from 24 to over 240 ports. Aperture's scalability allows
network providers to engineer multiple applications on a single system and
add new applications where there is spare capacity. Aperture's different
functional elements allow flexibility by letting the same functional
elements service many different applications.
- SHARED RESOURCES. Aperture's interconnection among its functional
elements means flexibility and cost-effectiveness for growing networks.
For example, a new shelf of modem ports can connect with a T1 interface on
another Aperture shelf or a X.25 PAD on yet another shelf. Aperture's
architecture does not limit communication to a functional device on just
one shelf.
- INTELLIGENT CENTRALIZED MANAGEMENT. Aperture is provisioned, configured
and monitored in real-time from a management system at the customer's
network control center. Centralized management and configuration can
eliminate costly, time-consuming maintenance trips by field engineers to
the installation site.
- PUBLIC NETWORK SERVICE INDEPENDENCE. Aperture provides the flexibility to
interface with digital T1/E1 trunks and analog lines. Aperture's T1/E1
interface allows network providers to mix multiple services, such as dial
and leased lines, over the same physical connection. If sites require
analog, they can upgrade their Aperture platform when digital service
becomes available.
- APPLICATION INDEPENDENCE. A single Aperture platform can be
software-configured to support multiple data applications, including
Internet access, e-mail, database inquiries, on-line customer and other
high-speed interactive applications, mobile database inquiries, mobile
e-mail, package tracking, other wireless data applications, credit/debit
authorization and healthcare verifications.
Primary Access believes its software-based approach to network access has
certain advantages when compared with separate fixed-function hardware devices
such as channel banks, modems, DSUs, PADS and terminal and LAN access servers.
Primary Access' products are used in three main networking applications:
- HIGH-SPEED DATA NETWORK ACCESS. Aperture is used for
interactive data networks where high-speed data transmission is
essential to cut processing time, reduce
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<PAGE>
telephone network costs and transmit information to people
quickly. Typical high-speed data network access uses are
providing access to the Internet, e-mail, host databases or
packet-data networks.
- WIRELESS DATA NETWORK ACCESS. Aperture is also used to provide
high-speed, reliable transmission of data over analog
circuit-switched cellular networks, where the system is
installed at mobile switching offices to provide a transparent
connection between mobile workers' cellular modems and
traditional landline modems at host computer sites.
- TRANSACTION PROCESSING NETWORK ACCESS. Aperture is also
installed in those transaction networks which handle many of
the point-of-sale transactions over circuit-switched networks
in the United States. Aperture is able to cut transaction
processing times by up to 10 seconds.
RESEARCH AND PRODUCT DEVELOPMENT
Primary Access believes its future success will depend in part on its
ability, on a cost-effective and timely basis, to continue to enhance the
Aperture system, to develop and introduce new products for the remote access
market and other markets, to meet new industry standards and changing customer
needs and to achieve broad market acceptance for its products.
Product line extensions require Primary Access to work closely with its
current and potential customers. Using feedback received from such customers,
Primary Access identifies and then develops new products and enhancements to its
existing products that Primary Access believes will increase their usefulness or
extend their application. In addition, Primary Access continually seeks to
reduce the manufacturing cost of its products by taking advantage of advances in
hardware and software technology. There can be no assurance that Primary Access
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.
See "Competition."
In 1992, 1993 and 1994, and for the three months ended January 2, 1994 and
January 1, 1995, Primary Access' research and development expenses were
$2,648,000, $3,193,000, $4,782,000, $991,000 and $1,335,000, respectively, which
represented 19%, 13%, 18%, 16% and 18% of sales for those respective periods.
All of Primary Access's development expenditures have been expensed as incurred.
MANUFACTURING AND SUPPLIERS
Primary Access' manufacturing operations consist primarily of material
planning and procurement, final assembly, system testing, burn-in, final system
testing and quality control. Primary Access procures all components from outside
manufacturers. All final assembly and tests are completed by Primary Access at
its production facility. Primary Access utilizes contract manufacturing (both
consignment and turnkey operations) for the assembly of certain sub-assemblies.
Primary Access also purchases sub-assemblies that have been modified to Primary
Access' specifications from original equipment manufacturers. Primary Access
uses third-party subcontractors for the manufacture of its products. This
reliance on third-party subcontractors involves several risks, including the
potential absence of adequate capacity, the unavailability of or interruption in
access to certain process technologies and reduced control over product quality,
delivery schedules, manufacturing yields and costs.
To procure adequate supplies of certain components, Primary Access must make
advance commitments to purchase relatively large quantities of such components
in a number of circumstances. For instance, under a manufacturing services
agreement with a principal supplier, Primary Access had a commitment to purchase
$2.8 million of inventory during the period from October 2, 1994 through March
1, 1995. A large portion of Primary Access' purchase commitments consist of
custom
85
<PAGE>
parts, some of which are sole source, for which there is no alternative use or
application. The inability of Primary Access to incorporate such components in
its products could have a material adverse effect on Primary Access' business,
operating results and financial condition.
MARKETING, SALES AND CUSTOMER SUPPORT
Primary Access markets its Aperture system to its customers through an
experienced direct sales force that works closely with the senior management as
well as the network marketing, engineering and operations departments of these
customers as part of the sales effort. All service, repair and technical support
of Primary Access' products are performed in-house. Primary Access also provides
comprehensive on-site field support to its customers. Primary Access offers
technical support to its customers on a 24-hours-a-day, 7-days-a-week basis.
Primary Access's current hardware warranty is two years.
COMPETITION
The market for remote access solutions is highly competitive. In this
market, Primary Access competes primarily with USRobotics and Ascend
Communications, Inc. Primary Access expects other competitors to enter this
market. Many of Primary Access' competitors or potential competitors have
substantial technical, financial and marketing resources and long-established
relationships with telephone companies. There can be no assurance that Primary
Access will have the technical expertise or marketing, distribution and support
capabilities to compete successfully in the future.
PROPRIETARY RIGHTS
Primary Access relies on a combination of technical leadership, trade
secret, copyright and trademark protection and non-disclosure agreements to
protect its proprietary rights. Although Primary Access has pursued patent
protection of inventions that it considers important and for which such
protection is available, Primary Access believes its success will be largely
dependent on its reputation for technology, product innovation, affordability,
marketing ability and response to customer's needs. As of February 28, 1995,
Primary Access had one pending U.S. patent application covering a certain aspect
of its products. There can be no assurance that Primary Access will be granted
any patents or that, if any patents are granted, they will provide Primary
Access with significant protection or will not be challenged.
Availability of proprietary devices, knowledge and experience of Primary
Access' personnel, new product development, market recognition and product
support are key factors in the protection of Primary Access' proprietary
position. As part of its confidentiality procedures, Primary Access generally
enters into non-disclosure agreements with its employees and suppliers, and
limits access to and distribution of its proprietary information. Despite these
precautions, it may be possible for a third party to copy or otherwise obtain
and use Primary Access' technology without authorization. Accordingly, there can
be no assurance that Primary Access will be successful in protecting its
proprietary technology or that Primary Access' proprietary rights will preclude
competitors from developing products or technology equivalent or superior to
that of Primary Access.
The industry in which Primary Access competes is characterized by the
existence of a large number of patents and frequent litigation based on
allegations on patent infringement. Primary Access is not aware of any
infringement by its products or technology of the proprietary rights of others.
There can be no assurance that third parties will not assert infringement claims
against Primary Access in the future or that any such assertions will not result
in costly litigation or require Primary Access to obtain a license to
intellectual property rights of such parties. There can be no assurance that any
such licenses would be available on terms acceptable to Primary Access, if at
all. Further, litigation, regardless of outcome, could result in substantial
cost to and diversion of efforts by Primary Access. Any infringement claims or
litigation against Primary Access could materially and adversely affect Primary
Access' business, results of operations and financial condition. Moreover, the
laws of some foreign countries do not protect Primary Access' proprietary rights
in the products to the same extent as do the laws of the United States.
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<PAGE>
EMPLOYEES
As of February 28, 1995, Primary Access had 115 employees, including 40 in
research and development, 29 in marketing and sales, 16 in customer support, 15
in manufacturing and 15 in administration. Primary Access believes that the
success of its business will depend, in part, on its ability to attract and
retain qualified personnel. There can be no assurance that Primary Access will
be able to attract and retain the qualified personnel or develop the expertise
needed for its business. Primary Access currently has a small research and
management group. The loss of the services of one or more members of the
research or management group or the inability to hire additional personnel and
develop expertise as needed would have an adverse effect on Primary Access.
Primary Access believes that it has a good relationship with its employees.
FACILITIES
Primary Access currently maintains its headquarters in a 62,000 square foot
leased facility in San Diego, California, which contain all development,
engineering, assembly, marketing and administrative functions. Primary Access'
current lease expires in March 1997, and provides Primary Access with the option
to renew. Primary Access believes that its existing facilities will be adequate
to meets its needs through 1997.
PRIMARY ACCESS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following should be read in conjunction with selected historical
financial data and Primary Access' Financial Statements and notes thereto
appearing elsewhere in this document.
GENERAL
Primary Access was incorporated in June 1988 to design, manufacture and
market remote access networking systems to assist certain users in managing
their telecommunication networks. Shipments of Primary Access' first product,
the Aperture system, began in 1990. Primary Access did not generate significant
revenue until June 1991. Primary Access' revenue growth subsequent to 1991 and
its profitability beginning in the second quarter of 1992 are attributable to
market acceptance of the Aperture system. All of Primary Access' revenue to date
has been derived from the sale of the Aperture systems. Primary Access also
generates revenue from installation and software maintenance of its systems.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JANUARY 1, 1995 COMPARED WITH JANUARY 2, 1994
Sales grew 25.0%, from $6,034,000 for three months ended January 2, 1994 to
$7,543,000 for the same period in 1995. Sales of equipment and software grew 27%
from $5,225,000 for the three months ended January 2, 1994 to $6,634,000 for the
same period in 1995. The increase is attributable to an increase in the sale of
software products, including an amount received under a software development
contract with a major customer, and an increase in the number of system shelves
shipped to customers. Sales from customer support maintenance and installation
grew 12% from $809,000 for the three months ended January 2, 1994 to $909,000
for the same period in 1995. This increase is directly attributable to the
increase in the installed base of systems under annual maintenance contracts.
Primary Access' gross margin increased 20.6% from $3,520,000 in the three
months ended January 2, 1994 to $4,245,000 in the three months ended January 1,
1995. Gross margin on equipment and software sales decreased, as a percent of
sales, in 1995 from 1994 primarily because of the introduction of Primary
Access' new line of high-performance V.34 capable products, and the resulting
products and inventory transition. Gross margin on customer support sales
improved as a percent of sales as a result of an increase in the installed base
of systems under maintenance contracts.
Research and development expenses increased 34.7% from $991,000 in the three
months ended January 2, 1994 to $1,335,000 in the same period in 1995, due
primarily to the addition of full-time personnel, the purchase of equipment and
the increased use of consultants in connection with the development of new
products.
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<PAGE>
General and administrative expenses decreased 3.8% from $1,841,000 in the
three months ended January 2, 1994 to $1,771,000 in the same period in 1995. The
decrease was primarily the result of a decrease in relocation, trade shows,
legal expenses and effective cost controls to reduce travel and consultant
expenses.
Other income for the three months ended January 2, 1994 and January 1, 1995
is primarily interest income earned on Primary Access' cash balances.
FISCAL 1994 COMPARED WITH FISCAL 1993
Sales grew 10.3%, from $24,052,000 for 1993 to $26,518,000 for 1994. Sales
of equipment and software remained relatively flat at $23,214,000 for 1994 from
$23,020,000 for 1993. Sales from customer support increased 220% from $1,032,000
in 1993 to $3,304,000 in 1994. This increase is attributable to an increase in
the number of contracts for software maintenance and installation.
Primary Access' gross margin increased 13.3% from $13,999,000 in 1993 to
$15,858,000 in 1994, primarily because of increased sales in 1994 over 1993, and
significant cost reductions achieved in the manufacturing of the Aperture
platform. Gross margin on equipment and software sales increased to 61.6% in
1994 from 60.8% in 1993, primarily due to cost reductions achieved in the
manufacturing of Primary Access' products. Gross margin on customer support
increased to 47.4% in 1994 from a break even level in 1993 as a result of the
increase in the installed base of systems under maintenance contracts and the
increase in the number of system installations performed by the customer support
organization within Primary Access.
Research and development expenses increased 49.8% from $3,193,000 in 1993 to
$4,782,000 in 1994, due primarily to the additional of full-time personnel, the
purchase of equipment and prototypes, and the increased use of consultants in
connection with the development of new products. Primary Access believes that
its future success depends on its ability to maintain its technological
leadership through enhancement of its existing products and development of
innovative new products that meet customer needs. Therefore, Primary Access
intends to continue to make significant investments in research and product
development. See "-- Liquidity and Capital Resources."
General and administrative expenses increased 26.1% from $5,867,000 in 1993
to $7,398,000 in 1994. The increase in 1994 was primarily the result of an
increase of the sales force and related expenses as Primary Access expanded its
sales force with the goal of further penetrating the market. Primary Access
expects that selling and marketing expenses will continue to increase in
absolute dollars as Primary Access continues to hire additional sales and
marketing personnel.
Other expenses for 1993 and 1994 are primarily the net of interest income
and expense.
Primary Access was required to pay federal income taxes starting in 1992.
Primary Access' tax rate increased from 9.4% in 1993 to 22.4% in 1994 as Primary
Access reached limitations in the use of its net operating loss carryforwards as
a result of ownership changes associated with an equity financing in September
1990.
At October 2, 1994, Primary Access had federal income tax-loss carryforwards
of approximately $1,233,000 which begin to expire in 2004, and California state
income tax-loss carryforwards of approximately $1,292,000 which begin to expire
in 1995. Primary Access has available research and experimentation credit
carryforwards of approximately $432,000 which begin to expire in 2004.
Primary Access adopted the Statement of Financial Accounting Standards No.
109 "Accounting for Income Taxes" ("SFAS No. 109") for the year ended October 2,
1994 and applied the provisions of SFAS No. 109 retroactively to September 30,
1991. The adoption of SFAS No. 109 did not have a material effect on Primary
Access' financial position or results of operations. See Notes 1 and 7 of Notes
to the Financial Statements.
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<PAGE>
FISCAL 1993 COMPARED WITH FISCAL 1992
Sales grew 74.3%, from $13,798,000 for 1992 to $24,052,000 for 1993. Sales
of equipment and software increased 74.6% from $13,185,000 for 1992 to
$23,020,000 for 1993. Sales from customer support grew 68.4% from $613,000 for
1992 to $1,032,000 for 1993. The increase is attributable to increased
acceptance of the Aperture platform and customers entering into new software
maintenance and installation agreements.
Primary Access' gross margin increased 94% from $7,199,000 in 1992 to
$13,999,000 in 1993. Gross margin on system sales increased, as a percent of
sales, in 1993 from 1992 from 53.5% to 60.8%, primarily because of increased
sales of equipment and software which allowed Primary Access to spread its
manufacturing costs over a larger revenue base. Gross margin on customer support
sales decreased as a percent of sales from 23.8% in 1992 to approximately
breakeven in 1993 as Primary Access made a significant investment to build its
customer support infrastructure.
Research and development expenses increased 20.6% from $2,648,000 in 1992 to
$3,193,000 in 1993, due primarily to the addition of full-time personnel, the
purchase of equipment and the increased use of consultants in connection with
the development of new products.
General and administrative expenses increased 79.6% from $3,266,000 in 1992
to $5,867,000 in 1993. The increase in 1993 was primarily the result of an
increase of the sales force and related expenses as Primary Access expanded its
sales force with the goal of further penetrating the market.
Other income (expense) for 1992 and 1993 consisted primarily of interest
expense incurred under Primary Access' line of credit arrangements to enable
Primary Access to finance its working capital requirements. The majority of
expenditures were for purchase of furniture, computers, capital manufacturing
equipment and other necessary equipment. Primary Access expects to continue to
purchase such equipment and Primary Access expects that capital expenditures in
fiscal 1995 will exceed fiscal 1994 levels.
LIQUIDITY AND CAPITAL RESOURCES
Primary Access has funded its operations through cash flow provided from
operations since the second quarter of 1992. From its incorporation in 1988
through 1992, Primary Access relied primarily upon private financing of equity
securities, which provided aggregate proceeds of approximately $11,974,000, and
borrowings under an accounts receivable line of credit. Proceeds were used
primarily for working capital. As of January 1, 1995, Primary Access had
$7,828,000 in cash and cash equivalents, $10,235,000 in working capital, and no
obligations outstanding under its line of credit arrangements.
Working capital increased to $10,235,000 at January 1, 1995 from $8,306,000
at January 2, 1994 primarily because of an increase in cash, cash equivalents
and prepaid assets. Cash and cash equivalents increased to $7,828,000 at January
1, 1995 from $6,002,000 at January 2, 1994.
Cash used for capital expenditures was $994,000 in fiscal 1994 and $464,000
in fiscal 1993. In the three months ended January 1, 1995, cash used for capital
expenditures was $225,000. In connection with material planning and procurement
processes for its manufacturing processes, Primary Access enters into purchase
commitments to acquire custom parts. Primary Access had a commitment to purchase
$2.8 million of inventory during the period from October 2, 1994 through March
1, 1995.
Primary Access has available to it a secured revolving line of credit of
$2,000,000, and a line of credit for equipment purchase and additions of
$1,000,000. Primary Access acquired property and equipment totalling $77,000 in
fiscal 1993 and $115,000 in fiscal 1992 through its line of credit. Primary
Access had no borrowings against either line of credit at January 1, 1995.
To date, inflation has not had a significant effect on Primary Access'
operating results.
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<PAGE>
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information with respect to the
executive officers and directors of Primary Access:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH PRIMARY ACCESS
- ------------------------ --- -------------------------------------------------------
<S> <C> <C>
William R. Stensrud 44 President, Chief Executive Officer and Director
James R. Dunn 46 Chief Technical Officer, Vice President, Advanced
Development, and Director
Marcel Gani 42 Vice President and Chief Financial Officer
Dan Gatti 50 Vice President, Worldwide Sales
Carmen Genovese 49 Vice President, Operations
Gary Hodgman 52 Vice President, Engineering
John J. Kaufman 48 Vice President, Program Management
Joseph Markee 42 Vice President, Customer Support
Andrew May 34 Vice President, Marketing
James H. Berglund 63 Director
Tench Coxe 37 Director
Kathryn Gould 45 Director
V. Orville Wright 74 Director
</TABLE>
WILLIAM R. STENSRUD joined Primary Access as president and chief executive
officer in 1992 and was elected director at the same time. Previously, Mr.
Stensrud was co-founder and served as vice president of marketing and business
development for Stratacom, Inc., a manufacturer of fast packet switching
equipment, from 1986 to 1992. He was also co-founder and served as vice
president, marketing, for Sydis, a workstation manufacturer, from 1983 to 1985.
Mr. Stensrud previously held a number of senior marketing, sales and engineering
positions with AT&T, Rolm and DEC. Mr. Stensrud sits on the board of directors
of Pulse Engineering, Inc., a manufacturer of advanced electronic components
used for data and voice communications. Mr. Stensrud holds bachelor's degrees in
electrical engineering and computer science from Massachusetts Institute of
Technology.
JAMES DUNN is a co-founder of Primary Access and currently serves as chief
technical officer and vice president, advanced development, a position he has
held since 1991. Mr. Dunn served as vice president, engineering from 1988 to
1991. Mr. Dunn has served as a director of Primary Access from 1988 to the
present. From 1979 to 1988, Mr. Dunn served as vice president for product
development in the telephone network products group at M/A-Com Linkabit. Mr.
Dunn holds a bachelor's degree in applied physics and mathematics from the
University of California, San Diego.
MARCEL GANI joined Primary Access as vice president and chief financial
officer in 1993. Prior to joining Primary Access, Mr. Gani served as vice
president and chief financial officer of NeXT Computer, Inc. from 1992 to 1993.
He served as director of finance and treasurer for Cypress Semiconductor from
1990 to 1992 and held a variety of financial management positions during a
12-year career with Intel Corporation. Mr. Gani holds a master's degree in
business administration from the University of Michigan and a bachelor's degree
in computer science and applied mathematics from EPFL in Lausanne, Switzerland.
DAN GATTI joined Primary Access in 1994 as vice president, worldwide sales.
Previously, Mr. Gatti served as president and general manager of Whittaker
Communications, Inc. from 1992 to 1994. He has also served in senior sales and
marketing positions at Amdahl Corp. from 1988 to 1991, at Avanti Communications
Corp. from 1987 to 1988 and GTE from 1984 to 1987. Prior to that, Mr. Gatti
served in various sales and sales management positions for IBM for 16 years. Mr.
Gatti holds a bachelor's degree in history from Fairfield University and
graduated from Harvard University's Executive MBA program.
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<PAGE>
CARMEN GENOVESE joined Primary Access in 1992 as vice president, operations.
He previously served as president and chief executive officer of Technavision,
Inc. from 1989 to 1992. Mr. Genovese previously held senior operations and
engineering positions with Sutter Corp, from 1983 to 1989, and with IVAC Corp.,
from 1979 to 1983. Mr. Genovese holds a bachelor's degree in engineering from
Drexel University and did graduate study in management at University of
California, Los Angeles.
GARY HODGMAN joined Primary Access in 1994 as vice president, engineering.
Prior to joining Primary Access, Mr. Hodgman served as division president for
Evans & Sutherland from 1989 to 1993. He also served as president of Basis
Information Systems from 1984 to 1989 and held a variety of senior management
posts with Burroughs Corp. from 1973 to 1984. Mr. Hodgman holds a bachelor's
degree in electrical engineering from the University of Utah and a master's
degree in electrical engineering from University of California, Los Angeles.
JOHN J. KAUFMAN joined Primary Access in 1990 as vice president, program
management. He previously served as assistant vice president, engineering of
M/A-Com Linkabit from 1979 to 1990. Dr. Kaufman holds a bachelor's degree in
physics from Massachusetts Institute of Technology and a Ph.D. in applied
physics from University of California, San Diego in 1976.
JOSEPH MARKEE is a co-founder of Primary Access and currently serves as Vice
President, Customer Support, a position he has held since 1990. He has
previously served as a product engineer for the VideoCipher satellite television
scrambling system at M/A-Com Linkabit and General Instrument from 1984 to 1987.
Mr. Markee holds a bachelor's degree in electrical engineering and computer
science from University of California, Davis.
ANDREW MAY joined Primary Access in 1992 as vice president, marketing. Prior
to joining Primary Access, Mr. May served in various sales and marketing
positions within the network services division of CompuServe, Inc. from 1984 to
1992. Mr. May holds a bachelor's degree in economics from the University of New
Hampshire.
JAMES H. BERGLUND has served as a director of Primary Access since 1991.
Since 1985, Mr. Berglund has been a general partner of Enterprise Partners, a
venture capital and investment firm which manages private investment funds.
Funds affiliated with Enterprise Partners are principal shareholders of Primary
Access. Mr. Berglund currently serves as a director of eight privately-held
companies.
TENCH COXE has served as a director of Primary Access since 1988. Since
1987, Mr. Coxe has served as general partner of Sutter Hill Ventures, a venture
capital firm providing equity capital to technology companies throughout the
United States. Sutter Hill Ventures is a principal shareholder of Primary
Access. Prior to joining Sutter Hill Ventures, Mr. Coxe served in a variety of
positions with Digital Communications Associates from 1984 to 1987. Mr. Coxe
currently serves as a director of seven privately-held companies.
KATHRYN GOULD has served as a director of Primary Access since 1991. Since
1989, Ms. Gould has been a limited partner of MPAE V Management Company, L.P.,
the general partner of Merrill, Pickard, Anderson & Eyre V, L.P., a venture
capital and investment firm which manages private investment funds. Merrill,
Pickard, Anderson & Eyre V, L.P. is a principal shareholder of Primary Access.
Ms. Gould currently serves as a director of six privately-held companies.
V. ORVILLE WRIGHT has served as a director of Primary Access since 1992. Mr.
Wright served in a variety of executive positions with MCI Communications Corp.
from 1975 to 1991, including president and chief operating officer from 1975 to
1985, vice chairman from 1985 to 1986, vice chairman and chief executive officer
during 1987 and vice chairman and co-chief executive office from 1988 through
his retirement in 1991. Mr. Wright is currently a member of the advisory
committee to MCI Communications Corp, and a director of Netrix, Inc., a
telecommunications company, and a charitable foundation.
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<PAGE>
None of the officers or directors listed above will be officers or directors
of 3Com. The term of office of each person elected as a director will continue
until the next annual meeting of shareholders or until his or her successor has
been elected.
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of Primary Access' capital stock as of February 28, 1995, by (i) all
those known by Primary Access to be beneficial owners of more than 5% of its
outstanding Common Stock and Preferred Stock (ii) each director and each
executive officer of Primary Access and (iii) all directors and executive
officers of Primary Access as a group. There are currently no shares of Series B
Preferred Stock or Series D Preferred Stock issued or outstanding. Where an
individual is not listed below, such individual has no shares beneficially held.
Unless otherwise indicated, each of the shareholders listed below has sole
voting and investment power with respect to the shares beneficially owned.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED PRIOR TO THE
MERGER (1)
------------------------
OFFICERS, DIRECTORS AND 5% SHAREHOLDERS NUMBER PERCENT
----------- -----------
<S> <C> <C>
COMMON STOCK
Stensrud Family Trust (2)...................................................... 606,794 32.6%
Joseph D. Markee (3)........................................................... 261,781 16.1%
Teresa L. Boley (4)............................................................ 232,615 14.6%
James E. Dunn (5).............................................................. 195,656 12.0%
John R. Rosenlof (6)........................................................... 131,516 8.2%
Sam O. Takahashi (7)........................................................... 124,536 7.8%
Vernon Yates................................................................... 120,312 7.6%
285 Torrey Pines Terrace
Del Mar, CA 92014
Andrew S. May (8).............................................................. 95,123 5.8%
John J. Kaufman (9)............................................................ 79,896 4.9%
Marcel Gani (10)............................................................... 70,417 4.3%
Carmen E. Genovese (11)........................................................ 63,810 3.9%
V. Orville Wright (12)......................................................... 35,049 2.2%
Gary Hodgman (13).............................................................. 28,925 1.8%
All directors and executive officers as a group (13 persons) (14).............. 1,820,482 82.6%
PREFERRED STOCK
Sutter Hill Ventures, a California limited partnership (15).................... 2,538,431 30.2%
755 Page Mill Road, Suite A-200
Palo Alto, CA 94304
Funds affiliated with Enterprise Partners (16)................................. 1,442,307 17.2%
1205 Prospect Avenue, Suite 550
LaJolla, CA 92037
Merrill, Pickard, Anderson & Eyre V, L.P. (17)................................. 1,261,218 15.0%
2480 Sand Hill Road
Menlo Park, CA 94205
Funds affiliated with Mayfield (18)............................................ 1,107,372 13.2%
2200 Sand Hill Road
Menlo Park, CA 94205
Funds affiliated with Sorrento Ventures (19)................................... 961,538 11.4%
4225 Executive Square, Suite 1450
</TABLE>
92
<PAGE>
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED PRIOR TO THE
MERGER (1)
------------------------
OFFICERS, DIRECTORS AND 5% SHAREHOLDERS NUMBER PERCENT
----------- -----------
<S> <C> <C>
San Diego, CA 92037
TOW Partners, a California limited partnership................................. 86,879 1.0%
c/o Sutter Hill Ventures
Tench Coxe (15)................................................................ 61,461 *
All directors and executive officers as a group (13 persons)................... 7,459,206 88.8%
<FN>
- ------------------------
* Less than 1%
(1) Share ownership in each case includes shares issuable on exercise of
certain outstanding options held by the particular beneficial owners as
described in the footnotes below. Except as indicated in the footnotes to
this table, the persons in the table have sole voting and investment power
with respect to all shares of Common Stock and Preferred Stock shown as
beneficially owned by them, subject to community property laws where
applicable.
(2) Includes 275,934 shares issuable upon exercise of stock options that are
exercisable within 60 days of February 28, 1995.
(3) Includes 112,974 shares held by his spouse, Teresa Boley (see footnote (4))
and 35,833 shares issuable upon exercise of stock options held in Mr.
Markee's name that are exercisable within 60 days of February 28, 1995.
(4) Includes 112,974 shares held by her spouse, Joseph Markee (see footnote
(4)), and 6,667 shares issuable upon exercise of stock options held in Ms.
Boley's name that are exercisable within 60 days of February 28, 1995.
(5) Includes 41,250 shares issuable upon exercise of stock options that are
exercisable within 60 days of February 28, 1995, and 24,139 shares owned by
Mr. Dunn's spouse, a Primary Access employee.
(6) Includes 11,042 shares issuable upon exercise of stock options that are
exercisable within 60 days of February 28, 1995.
(7) Includes 6,249 shares issuable upon exercise of stock options that are
exercisable within 60 days of February 28, 1995.
(8) Includes 51,881 shares issuable upon exercise of stock options that are
exercisable within 60 days of February 28, 1995.
(9) Includes 31,771 shares issuable upon exercise of stock options that are
exercisable within 60 days of February 28, 1995.
(10) Includes 52,084 shares issuable upon exercise of stock options that are
exercisable within 60 days of February 28, 1995. Does not include 82,583
shares issuable upon exercise of stock options that will be accelerated and
exercisable immediately after the consummation of the Merger.
(11) Includes 40,157 shares issuable upon exercise of stock options that are
exercisable within 60 days of February 28, 1995.
(12) Includes 35,049 shares issuable upon exercise of stock options that are
exercisable within 60 days of February 28, 1995.
(13) Includes 28,925 shares issuable upon exercise of stock options that are
exercisable within 60 days of February 28, 1995.
(14) Includes 616,842 shares issuable upon exercise of stock options that are
exercisable within 60 days of February 28, 1995.
</TABLE>
93
<PAGE>
<TABLE>
<S> <C>
(15) Mr. Coxe, a director of Primary Access, is a general partner of Sutter Hill
Management, a California limited partnership which is the general partner
of Sutter Hill Ventures. Mr. Coxe disclaims beneficial ownership of these
shares other than to the extent of his individual partnership interest, but
exercises shared voting and investment power with respect to these shares.
Mr. Coxe claims direct ownership of those shares held by him individually.
(16) Includes 1,322,115 shares held by Enterprise Partners II, L.P. and 120,192
shares held by Enterprise Associates, L.P. Mr. Berglund, a director of
Primary Access, is a general partner of Enterprise Partners and Enterprise
Management Partners II, L.P., which is the general partner of Enterprise
Partners II, L.P. and Enterprise Associates, L.P. Mr. Berglund disclaims
beneficial ownership of these shares other than to the extent of his
individual partnership interest, but exercises shared voting and investment
power with respect to these shares.
(17) Ms. Gould, a director of Primary Access, is a limited partner of MPAE V
Management Company, L.P., the general partner of Merrill, Pickard, Anderson
& Eyre V, L.P. Ms. Gould disclaims beneficial ownership of these shares
other than to the extent of her individual partnership interest.
(18) Includes 1,063,077 shares held by Mayfield VI and 44,295 shares held by
Mayfield Associates.
(19) Includes 480,769 shares held by Sorrento Ventures and 480,769 shares held
by Sorrento Ventures II, L.P.
</TABLE>
94
<PAGE>
DESCRIPTION OF 3COM CAPITAL STOCK
The authorized capital stock of 3Com consists of 200,000,000 shares of
Common Stock, no par value, and 3,000,000 shares of Preferred Stock, no par
value.
COMMON STOCK
As of February 28, 1995, there were 66,480,931 shares of 3Com Common Stock
(as adjusted for 2 for 1 stock split effective as of September 1, 1994)
outstanding held of record by approximately 1,280 shareholders.
Subject to preferences that may be applicable to any outstanding Preferred
Stock, holders of 3Com Common Stock are entitled to receive ratably such
dividends as may be declared by the Board of Directors out of funds legally
available therefor. 3Com has not paid any cash dividends on its Common Stock and
is prohibited by certain of its borrowing arrangements from paying cash
dividends without prior approval from the lender. Each holder of 3Com Common
Stock is entitled to one vote for each share held of record by him or her and
may not cumulate votes for the election of directors. In the event of a
liquidation, dissolution or winding up of 3Com, holders of 3Com Common Stock are
entitled to share ratably in all assets remaining after payment of liabilities
and the liquidation preference of any outstanding Preferred Stock. Holders of
3Com Common Stock have no preemptive rights and have no rights to convert their
Common Stock into any other securities and there are no redemption provisions
with respect to such shares. All of the outstanding shares of 3Com Common Stock
are fully paid and non-assessable.
The transfer agent for 3Com Common Stock is The First National Bank of
Boston.
CERTAIN CHARTER PROVISIONS
3Com's Articles of Incorporation and Bylaws contain certain provisions that
could have the effect of delaying, deferring or preventing a change in control
of 3Com. These include the following: (i) a provision classifying the Board of
Directors into two classes; (ii) a provision permitting the Board of Directors
to consider factors other than price per share when evaluating a merger or
consolidation or certain other types of proposed business combination; and (iii)
a provision requiring that a vote of two thirds (2/3) of all of the outstanding
shares of 3Com, and the holders of at least a majority of the outstanding voting
shares other than shares held by interested shareholders, is required to approve
certain business combinations.
PREFERRED STOCK
As of February 28, 1995, there were no shares of 3Com Preferred Stock
outstanding. The 3Com Preferred Stock may be issued from time to time in one or
more series. 3Com's Board of Directors has authority to fix the designation,
preferences, and rights of each such series and the qualifications, limitations
and restrictions thereon and to increase or decrease the number of shares of
such series (but not below the number of shares of such series then
outstanding), without any further vote or action by the shareholders.
RIGHTS PLAN
In September 1989, the Board of Directors of 3Com declared a dividend
distribution of one Common Stock Purchase Right (each a "Right" and collectively
the "Rights") for each outstanding share of Common Stock, without par value
("Common Stock"), of 3Com. The distribution was paid as of September 20, 1989,
to shareholders of record on that date and subsequently to holders of shares
issued after that date. On December 13, 1994, the Board of Directors of 3Com
approved the amendment and restatement of the Rights Agreement. Each Right
entitles the registered holder to purchase from 3Com one share of 3Com Common
Stock at a purchase price of $250 per full share (the "Purchase Price").
The description and terms of the Rights are set forth in the Amended and
Restated Rights Agreement dated as of December 21, 1994 (the "Rights Agreement")
between 3Com and The First National Bank of Boston, as the Rights Agent, a copy
of which is attached to 3Com's Quarterly Report
95
<PAGE>
on Form 10-Q filed with the Commission on January 13, 1995. The Rights will
expire December 13, 2004, unless earlier redeemed or exchanged, and will become
exercisable and transferable separately from the Common Stock only (i) on the
earlier of (A) the acquisition of, or the public announcement of the intent of
any person or group to acquire, without the approval of the Board of Directors
of 3Com, beneficial ownership of 20% or more of the outstanding 3Com Common
Stock ("Acquiring Person"), or (B) the 10th day (unless extended by the Board
prior to the time a person becomes an Acquiring Person) following the
commencement, or announcement of an intention to commence by any person or group
of persons, a tender offer which would result in the offeror owning 20% or more
of the outstanding Common Stock of the Company (the earlier of such dates being
referred to as the "First Distribution Date") or (ii) with respect to any shares
of Common Stock issuable upon conversion of certain convertible notes of the
Company after the First Distribution Date, on the day immediately following the
date on which such notes are converted into shares of Common Stock (such date
and the First Distribution Date are collectively referred to as the Distribution
Date).
If 3Com or more than 50% of its assets is acquired in a merger or other
business combination transaction after the Distribution Date, each holder of a
Right shall thereafter have the right to purchase, upon payment of the Purchase
Price, such number of shares of common stock of the acquiring company having a
current market value equal to twice the Purchase Price. If any person or group
acquires 20% or more of 3Com's Common Stock, or if such 20% shareholder engages
in certain self-dealing transactions (as specified in the Rights Agreement) with
3Com, each holder of Rights other than such 20% shareholder will have the right
to purchase upon payment of the then current Purchase Price, in lieu of one
share of Common Stock per outstanding Right, such number of shares of Common
Stock having a market value at the time of the transaction equal to twice the
Purchase Price. After any of these events, 3Com may also exchange all or any
portion of the outstanding Rights, other than Rights held by such 20%
shareholder, for shares of 3Com's Common Stock at an exchange ratio of one-half
share of Common Stock per Right, subject to the provisions of the Rights
Agreement. The Board of Directors may redeem the Rights for $.01 per Right at
any time prior to the day a person or group becomes a 20% shareholder and in
certain other instances. Additionally, the exercise price and the value of stock
that may be acquired for that price are subject to adjustment from time to time
to prevent dilution.
The Rights are designed to protect and maximize the value of the outstanding
equity interests in 3Com in the event of an unsolicited attempt by an acquiror
to take over 3Com in a manner or on terms not approved by the Board of
Directors. The Rights may have the effect of rendering more difficult or
discouraging an acquisition of 3Com deemed undesirable by the Board of
Directors. The Rights may cause substantial dilution to a person or group that
attempts to acquire 3Com on terms or in a manner not approved by 3Com's Board of
Directors, except pursuant to an offer conditioned upon the negation, purchase
or redemption of the Rights.
COMPARISON OF RIGHTS OF HOLDERS OF 3COM
COMMON STOCK AND HOLDERS OF PRIMARY ACCESS STOCK
3Com and Primary Access are each incorporated under the laws of the State of
California. The following summarizes differences in the charter documents of
Primary Access and 3Com that could materially affect the rights of shareholders
of Primary Access after consummation of the Merger. A number of the provisions
of 3Com's Charter documents may have the effect of delaying, deferring or
preventing a change in control of 3Com.
ANNUAL MEETING. The 3Com Bylaws require that an annual meeting of
shareholders be held within three months following the close of the 3Com's
fiscal year. The Primary Access Bylaws require that an annual shareholder
meeting be held within 30 to 120 days following the close of the Primary Access
fiscal year.
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<PAGE>
ANNUAL REPORTS. The 3Com Bylaws require that an annual report be sent to
shareholders at least fifteen days prior to the annual meeting of shareholders.
The Primary Access Bylaws expressly waive the requirement of compiling and
distributing an annual report to shareholders.
NUMBER OF DIRECTORS. The 3Com Articles of Incorporation and Bylaws fix the
authorized number of directors at a range from seven to eleven, with the number
currently set at eight, with changes in the authorized number of directors
permitted by either the Board of Directors or the shareholders, through
amendment of either the Bylaws (if authorizing a number of directors between
seven and eleven, inclusive) or the Articles of Incorporation. In addition, the
Bylaws require that the Board include not less than two Independent Directors.
The Primary Access Bylaws fix the authorized number of directors at a range from
four to six, with the number currently set at six, with changes that do not
increase the authorized number of directors permitted by either the Board of
Directors or the shareholders, through amendment of the Bylaws (if authorizing a
number of directors between four and six, inclusive). Any amendment to the
Bylaws to increase the authorized number of directors requires the consent of at
least two-thirds of the holders of Primary Access Preferred Stock. In addition,
pursuant to the Primary Access Articles of Incorporation, so long as any shares
of Primary Access Preferred Stock are outstanding, the holders of Series E
Preferred Stock have the right to elect one member of the Board of Directors
until such time as funds affiliated with Enterprise Partners beneficially own
less than 475,000 shares of Series E Preferred Stock.
CUMULATIVE VOTING FOR DIRECTORS. The 3Com Articles of Incorporation and
Bylaws do not expressly provide for cumulative voting in director elections. The
Primary Access Bylaws provide that if, prior to voting, one or more shareholder
has given notice of his/her intent to cumulate his/her votes, every shareholder
shall have the right to cumulate his/her votes.
CLASSIFICATION OF DIRECTORS. The 3Com Articles of Incorporation and Bylaws
provide for two classes of directors elected for staggered two-year terms. The
Articles of Incorporation and Bylaws of Primary Access limit the term of a
director to one year and do not classify the Primary Access Board of Directors.
DIRECTOR VOTING. The 3Com Bylaws provide that unless the authorized number
of directors is one, the number constituting a quorum shall not be less than the
greater of one-third of the authorized number of directors or two directors. In
addition, if the number of elected directors is an even number, if all directors
are present at a meeting, and if the directors are evenly divided on a
particular vote, then the Chairman of the Board shall decide the issue. The
Primary Access Bylaws provide that a majority of the directors constitute a
quorum, but do not expressly provide for quorum requirements or tie breaking
procedures under the respective circumstances specified above.
LOANS TO OFFICERS. The 3Com Bylaws allow the Board of Directors to
authorize 3Com to make a loan to or guarantee the obligation of any officer of
the corporation without obtaining shareholder approval, provided that the Board
determines such action may reasonably be expected to benefit the corporation and
the number of shareholders of record on the date of approval is at least 100.
The Primary Access Bylaws do not contain any similar provisions.
ADVANCE NOTICE OF SHAREHOLDER PROPOSALS. The 3Com Bylaws provide that no
matter proposed by 3Com shareholders will be considered at an annual meeting or
special shareholder meeting unless (1) it is specified in the notice of meeting,
(2) it is brought by or at the direction of the Board of Directors or (3)
written notice of such matter is provided to 3Com no later than the date on
which shareholder proposals to be included in the 3Com proxy statement must be
received under Federal Securities laws. The Primary Access Bylaws do not
expressly require advance notice of shareholder proposals.
NOTICE OF SPECIAL MEETINGS OF SHAREHOLDERS. The 3Com Bylaws require that
any person at 3Com, who is entitled to call a special meeting of shareholders
upon proper written request and who receives such request, provide notice to the
shareholders entitled to vote not less than 35 nor more than
97
<PAGE>
60 days after receipt of request. The Primary Access Bylaws require that notice
of special meetings of shareholders be provided to all shareholders entitled to
vote not less than 10 (or, if notice is sent by third-class mail, 30) nor more
than 60 days before the meeting.
TRANSACTIONS WITH INTERESTED SHAREHOLDERS. The 3Com Articles of
Incorporation require at least a two-third majority of the combined voting power
of all outstanding shares of all outstanding classes and at least a majority of
the holders of such stock (other than shares held by an Interested Shareholder)
in order to approve any material business dealings involving an Interested
Shareholder, unless approved by a majority of Disinterested Directors. Neither
the Primary Access Articles of Incorporation nor the Primary Access Bylaws
expressly provide for procedures in transactions with Interested Shareholders.
AMENDMENT OF CHARTER DOCUMENTS. Approval of shareholders holding at least
two thirds of the voting shares of 3Com is required to amend those provisions of
the 3Com Articles of Incorporation addressing business combinations and those
provisions addressing amendment of the Articles of Incorporation. A majority of
the shareholders of Primary Access can amend any or all of the provisions of the
Primary Access Articles of Incorporation, but, so long as any shares of Primary
Access Preferred Stock are outstanding, Primary Access can not, without the
consent of at least two-thirds of the holders of Primary Access Preferred Stock,
adopt, amend or repeal any provision of its Articles of Incorporation, if such
action would alter any of the rights, preferences or privileges of any shares of
any series of its Preferred Stock.
AMENDMENT OF BYLAWS. The 3Com Bylaws may be amended by holders of a
majority of voting shares entitled to vote or by a majority of the directors.
The Primary Access Bylaws may be amended by holders of a majority of voting
shares entitled to vote or by a majority of the directors, except that a Bylaw
amendment changing the authorized number of directors may only be adopted if the
Board changes the authorized number of directors within the limits specified by
the Bylaws. In addition, so long as any shares of Primary Access Preferred Stock
are outstanding, Primary Access can not, without the consent of at least
two-thirds of the holders of Primary Access Preferred Stock, adopt, amend or
repeal any provision of its Bylaws, if such action would alter any of the
rights, preferences or privileges of any shares of any series of its Preferred
Stock.
INDEMNIFICATION. The 3Com Articles of Incorporation and Bylaws provide that
3Com shall indemnify any person to the full extent permitted by the California
Corporation Code in connection with claims arising by reason of that person
acting as a director, officer or agent of 3Com. The Board of Directors shall
determine whether such person has met the applicable standard of conduct to
establish indemnification under the standards set by the California Corporations
Code. If the Board of Directors find that the person has not met this standard,
the issue will be brought to a shareholder vote. The 3Com Articles of
Incorporation authorize it to provide insurance for its directors, officers
and/or agents, for breach of duty to the corporation and its shareholders to the
full extent under California law. The Primary Access Articles of Incorporation
and Bylaws provide that Primary Access shall indemnify any person to the full
extent permitted by the California Corporations Code in connection with claims
arising by reason of that person acting as a director, officer or agent of
Primary Access. The Primary Access Articles of Incorporation and Bylaws do not
expressly establish a procedure for processing indemnification requests nor do
they expressly authorize insurance for directors, officers and/or agents.
RESTRICTION ON SALES OF STOCK. 3Com is a public company whose shares are
traded on Nasdaq, and as such the 3Com Articles of Incorporation and Bylaws do
not provide for any restrictions on the transfer of outstanding shares, other
than those imposed by Federal Securities laws for shares offered under certain
exempt transactions. Primary Access is a private company, and as such its
Articles of Incorporation and Bylaws provide for various restrictions on the
resale or transfer of outstanding stock.
SHAREHOLDER RIGHTS PLAN. The Board of Directors of 3Com adopted a
Shareholder Rights Plan in September 1989, as amended in December 1994, which
provides for distribution of rights to holders of
98
<PAGE>
outstanding shares of 3Com Common Stock. Primary Access does not have a similar
rights plan. Therefore, after the Effective Date, the shares of 3Com Common
Stock held by former Primary Access' shareholders will be subject to the 3Com
Rights Plan. See "Description of 3Com Capital Stock -- Rights Plan" for a
description of the Rights Plan.
EXPERTS
The consolidated financial statements of 3Com Corporation as of May 31, 1994
and 1993 and for each of the three years in the period ended May 31, 1994
included in this Prospectus/Consent Solicitation Statement and the related
financial statement schedule included elsewhere in the Registration Statement,
have been audited by Deloitte & Touche LLP, independent auditors, as stated in
their reports appearing herein and elsewhere in the Registration Statement,
except for the premerger financial statements of Star-Tek, Inc. for the period
stated below (included in the fiscal 1992 consolidated financial statements of
3Com Corporation), and are included in reliance upon the reports of such firm
given upon their authority as experts in accounting and auditing.
The statements of income and retained earnings and cash flows of Star-Tek,
Inc. for the year ended December 31, 1991 (not separately presented herein) have
been audited by Levine, Zeidman & Daitch, P.C., independent auditors, as stated
in their report appearing herein and included in reliance upon the report of
such firm given upon their authority as experts in accounting and auditing.
The financial statements and schedule of Primary Access as of October 2,
1994 and October 3, 1993, and for the fifty-two weeks ended October 2, 1994, the
fifty-three weeks ended October 3, 1993, and the fifty-two weeks ended September
27, 1992 have been included herein and in the Registration Statement in reliance
upon the reports of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
The financial statements of NiceCom Ltd. as of December 31, 1993 and for the
year ended December 31, 1993 have been audited by Shachak & Co., certified
public accountants, as stated in their report appearing herein and included in
reliance upon the report of such firm given upon their authority of said firm as
experts in accounting and auditing.
LEGAL MATTERS
The validity of the 3Com Common Stock issuable pursuant to the Merger and
certain other legal matters relating to the Merger and the transactions
contemplated thereby will be passed upon for 3Com by Gray Cary Ware &
Freidenrich, A Professional Corporation, Palo Alto, California. Brobeck, Phleger
& Harrison, San Diego California, is acting as counsel for Primary Access in
connection with certain legal matters relating to the Merger and the
transactions contemplated thereby.
99
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
3COM CORPORATION
Years ended May 31, 1994, 1993 and 1992:
Report of Deloitte & Touche LLP.......................................................................... F-2
Report of Levine, Zeidman & Daitch, P.C.................................................................. F-3
Consolidated Statements of Operations for the Years ended May 31, 1994, 1993
and 1992................................................................................................ F-4
Consolidated Balance Sheets at May 31, 1994 and 1993..................................................... F-5
Consolidated Statements of Shareholders' Equity for the Years ended May 31, 1994, 1993 and 1992.......... F-6
Consolidated Statements of Cash Flows for the Years ended May 31, 1994, 1993
and 1992................................................................................................ F-7
Notes to Consolidated Financial Statements............................................................... F-8
Quarterly Results of Operations.......................................................................... F-18
Nine Months ended February 28, 1995 and 1994 (unaudited):
Condensed Consolidated Balance Sheets at February 28, 1995 and May 31, 1994.............................. F-19
Condensed Consolidated Statements of Income for the Nine Months ended February 28, 1995 and 1994......... F-20
Condensed Consolidated Statements of Cash Flows for the Nine Months ended February 28, 1995 and 1994..... F-21
Notes to Condensed Consolidated Financial Statements..................................................... F-22
PRIMARY ACCESS CORPORATION
Report of KPMG Peat Marwick LLP............................................................................ F-24
Balance Sheets at January 1, 1995 (unaudited), October 2, 1994 and October 3, 1993......................... F-25
Statements of Operations for the Thirteen Weeks ended January 1, 1995 and January 2, 1994 (unaudited) and
the Fifty-two Weeks ended October 2, 1994, the Fifty-three Weeks ended October 3, 1993 and the Fifty-three
Weeks ended September 27, 1992............................................................................ F-26
Statements of Stockholders' Equity (Deficit) for the Thirteen Weeks ended January 1, 1995 (unaudited) and
the Fifty-two Weeks ended October 2, 1994, the Fifty-three Weeks ended October 3, 1993 and the Fifty-two
Weeks ended September 27, 1992............................................................................ F-27
Statements of Cash Flows for the Thirteen Weeks ended January 1, 1995 and January 2, 1994 (unaudited) and
the Fifty-two Weeks ended October 2, 1994, the Fifty-three Weeks ended October 3, 1993 and the Fifty-two
Weeks ended September 27, 1992............................................................................ F-28
Notes to Financial Statements.............................................................................. F-29
NICECOM LTD.
Year ended December 31, 1993:
Report of Shachak & Co................................................................................... F-37
Balance Sheet as of December 31, 1993.................................................................... F-38
Income Statement for the Year ended December 31, 1993.................................................... F-39
Statement of Cash Flows for the Year ended December 31, 1993............................................. F-40
Notes to the Financial Statements........................................................................ F-42
Nine Months ended September 30, 1994 (unaudited):
Condensed Balance Sheet as of September 30, 1994......................................................... F-47
Condensed Income Statement for the Nine Months ended September 30, 1994.................................. F-48
Condensed Statement of Changes in Shareholders' Equity for the Nine Months ended September 30, 1994...... F-49
Condensed Statement of Cash Flows for the Nine Months ended September 30, 1994........................... F-50
Notes to the Condensed Financial Statements.............................................................. F-52
</TABLE>
F-1
<PAGE>
REPORT OF DELOITTE & TOUCHE LLP
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. 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 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.
/s/_DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
San Jose, California
June 15, 1994
F-2
<PAGE>
REPORT OF LEVINE, ZEIDMAN & DAITCH, P.C.
To the Board of Directors
Star-Tek, Inc.
Northboro, Massachusetts
We have audited the statements of income and retained earnings, 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
F-3
<PAGE>
3COM CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
-------------------------------------
1994 1993 1992
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
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............................................... 39,838 35,171 34,873
Purchased in-process technology.......................................... 134,481 -- 10,404
Non-recurring items...................................................... -- 1,316 --
----------- ----------- -----------
Total................................................................ 828,512 558,240 415,803
----------- ----------- -----------
Operating income (loss).................................................... (1,517) 58,928 7,998
Gain on sale of investment................................................. 17,746 -- --
Other income -- net........................................................ 3,309 1,318 3,336
----------- ----------- -----------
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.................................................................. $ (0.46) $ .61 $ 0.13
----------- ----------- -----------
----------- ----------- -----------
Fully-diluted............................................................ $ (0.46) $ .60 $ 0.13
----------- ----------- -----------
----------- ----------- -----------
Common and equivalent shares used in computing per share amounts:
Primary.................................................................. 62,620 63,248 59,858
----------- ----------- -----------
----------- ----------- -----------
Fully-diluted............................................................ 62,620 64,292 60,574
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
3COM CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
------------------------
1994 1993
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............................................................. $ 66,284 $ 40,046
Temporary cash investments............................................................ 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, 200,000,000 shares authorized; shares outstanding: 1994 --
65,052,900; 1993 -- 61,700,754....................................................... 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
----------- -----------
----------- -----------
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
3COM CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNAMORTIZED
RESTRICTED STOCK
GRANTS AND NOTES
COMMON STOCK RECEIVABLE FROM ACCUMULATED
-------------------- SALE OF COMMON RETAINED TRANSLATION
SHARES AMOUNT STOCK EARNINGS ADJUSTMENTS TOTAL
--------- --------- ----------------- ----------- ------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balances, June 1, 1991.................... 54,406 $ 119,760 $ (24) $ 73,206 $ 725 $ 193,667
Common stock issued under stock plans... 2,787 10,876 (131) 10,745
Stock warrants issued................... 1,400 1,400
Repurchase of common stock.............. (1,982) (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 of pooled entity......... 3,466 --
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.................... 58,677 129,063 (120) 71,354 2,128 202,425
Common stock issued under stock plans... 4,764 19,413 19,413
Stock warrants buyback.................. (1,300) (1,300)
Repurchase of common stock.............. (1,720) (4,042) (5,340) (9,382)
Tax benefit from employee stock
transactions........................... 11,955 11,955
Cancellation of restricted stock
grants................................. (20) (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
--------- --------- ------ ----------- ------------- ---------
Balances, June 1, 1993.................... 61,701 154,958 -- 103,163 142 258,263
Common stock issued under stock plans... 4,752 22,917 (255) 22,662
Repurchase of common stock.............. (1,400) (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.................... 65,053 $ 219,937 $ (202) $ 61,326 $ (305) $ 280,756
--------- --------- ------ ----------- ------------- ---------
--------- --------- ------ ----------- ------------- ---------
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
3COM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
-------------------------------
1994 1993 1992
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
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
</TABLE>
- ------------------------
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.
F-7
<PAGE>
3COM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 1994, 1993 AND 1992
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
product return reserves, warranty and royalty expenses upon shipment. 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
F-8
<PAGE>
3COM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1994, 1993 AND 1992
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
income -- 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. All share and per share amounts
have been restated to reflect the two-for-one stock split.
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.
F-9
<PAGE>
3COM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1994, 1993 AND 1992
NOTE 3: BUSINESS COMBINATIONS (CONTINUED)
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:
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
------------------------
1994 1993
----------- -----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Sales................................................................................... $ 838,953 $ 628,546
Net income.............................................................................. $ 96,033 $ 33,623
Net income per share:
Primary............................................................................... $ 1.42 $ .52
Fully-diluted......................................................................... $ 1.40 $ .52
Shares used in computing per share amounts:
Primary............................................................................... 67,434 64,132
Fully-diluted......................................................................... 68,360 64,618
</TABLE>
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 3.48 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
F-10
<PAGE>
3COM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1994, 1993 AND 1992
NOTE 3: BUSINESS COMBINATIONS (CONTINUED)
acquisition price consisted of approximately $22 million in cash and a warrant
to purchase 1,000,000 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 which approximate
their fair values calculated based on the spot rates at the balance sheet dates.
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:
<TABLE>
<CAPTION>
1994 1993
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Finished goods......................................................... $ 44,770 $ 41,331
Work-in-process........................................................ 8,232 4,912
Raw materials.......................................................... 18,350 21,818
--------- ---------
Total.............................................................. $ 71,352 $ 68,061
--------- ---------
--------- ---------
</TABLE>
F-11
<PAGE>
3COM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1994, 1993 AND 1992
NOTE 8: PROPERTY AND EQUIPMENT
Property and equipment at May 31 consists of:
<TABLE>
<CAPTION>
1994 1993
----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
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
----------- ---------
----------- ---------
</TABLE>
NOTE 9: ACCRUED AND OTHER LIABILITIES
Accrued and other liabilities at May 31 consist of:
<TABLE>
<CAPTION>
1994 1993
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
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
--------- ---------
--------- ---------
</TABLE>
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.
F-12
<PAGE>
3COM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1994, 1993 AND 1992
Future operating lease commitments are as follows:
<TABLE>
<CAPTION>
(DOLLARS IN
FISCAL YEAR THOUSANDS)
- ------------------------------------------------------------------------
<S> <C>
1995.................................................................... $ 14,302
1996.................................................................... 13,471
1997.................................................................... 12,230
1998.................................................................... 10,261
1999.................................................................... 10,145
Thereafter.............................................................. 16,984
--------
Total............................................................... $ 77,393
--------
--------
</TABLE>
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 $25. 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:
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
--------------------------------------------
1994 1993 1992
-------------- -------------- ------------
(IN THOUSANDS EXCEPT PRICE PER SHARE)
<S> <C> <C> <C>
Number of option shares:
Granted and assumed............................. 4,700 4,110 3,672
Exercised....................................... (3,718) (3,656) (1,824)
Cancelled....................................... (422) (642) (1,346)
Outstanding at end of year...................... 12,300 11,740 11,928
Option price per share:
Granted and assumed............................. $ 0.44-30.88 $ 5.00-19.69 $ 3.50-7.19
Exercised....................................... 0.44-25.88 2.82-17.50 3.00-5.88
Cancelled....................................... 0.45-28.19 3.32-17.55 3.00-9.94
Outstanding at end of year...................... $ 0.44-30.88 $ 2.82-19.69 $ 2.82-7.19
</TABLE>
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 858,000
shares of the Company's common stock at exercise prices of $0.44 to $11.63 per
share.
At May 31, 1994, options for 4.6 million shares were exercisable, 3.8
million shares were available for future grants, and 16.1 million shares were
reserved for issuance under the stock option plans.
F-13
<PAGE>
3COM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1994, 1993 AND 1992
NOTE 11: COMMON STOCK (CONTINUED)
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, 1.3 million shares
of common stock were reserved for issuance under this plan.
RESTRICTED STOCK PLAN. The Company has a Restricted Stock Plan, under which
200,000 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, 10,000 shares of common stock were issued under
this plan. At May 31, 1994, 190,000 shares were reserved for future issuance.
STOCK REPURCHASE PROGRAM. The Board of Directors has authorized the Company
to repurchase up to 15.0 million shares of common stock. Under this
authorization, 11.4 million shares have been repurchased and the Company may
repurchase up to an additional 3.6 million shares of common stock.
NOTE 12: OTHER INCOME -- NET
Other Income -- net consists of:
<TABLE>
<CAPTION>
1994 1993 1992
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Interest income.............................................. $ 3,954 $ 3,602 $ 5,080
Other........................................................ (645) (2,284) (1,744)
--------- --------- ---------
Total.................................................... $ 3,309 $ 1,318 $ 3,336
--------- --------- ---------
--------- --------- ---------
</TABLE>
Other includes primarily 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:
<TABLE>
<CAPTION>
1994 1993 1992
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
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
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-14
<PAGE>
3COM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1994, 1993 AND 1992
NOTE 13: INCOME TAXES (CONTINUED)
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:
<TABLE>
<CAPTION>
1994 1993 1992
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
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
--------- --------- ---------
--------- --------- ---------
</TABLE>
The components of the net deferred tax asset consist of:
<TABLE>
<CAPTION>
1994 1993
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
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
--------- ---------
--------- ---------
</TABLE>
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.
F-15
<PAGE>
3COM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1994, 1993 AND 1992
NOTE 13: INCOME TAXES (CONTINUED)
The provision for income taxes differs from the amount computed by applying
the federal statutory income tax rate to income before taxes as follows:
<TABLE>
<CAPTION>
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
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%
----- --- -----
----- --- -----
</TABLE>
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.
F-16
<PAGE>
3COM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1994, 1993 AND 1992
NOTE 14: GEOGRAPHIC AREA INFORMATION (CONTINUED)
Sales, operating income and identifiable assets, classified by the major
geographic areas in which the Company operates, are as follows:
<TABLE>
<CAPTION>
1994 1993 1992
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
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........................................ $ (60,808) $ 39,108 $ 21,310
Europe............................................... 55,214 17,086 5
Other................................................ 8,679 6,459 (12,403)
Eliminations......................................... (4,602) (3,725) (914)
----------- ----------- -----------
Total.............................................. $ (1,517) $ 58,928 $ 7,998
----------- ----------- -----------
----------- ----------- -----------
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
----------- -----------
----------- -----------
</TABLE>
Operating loss in the United States for the year ended 1994 of $60.8 million
included a charge of approximately $134.5 million for purchased in-process
technology resulting from the Company's acquisitions in fiscal 1994. 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.
F-17
<PAGE>
3COM CORPORATION
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
FISCAL 1995
QUARTERS ENDED FISCAL 1994 QUARTERS ENDED
------------------------------- ------------------------------------------
FEB. 28 NOV. 30 AUG. 31 MAY 31 FEB. 28 NOV. 30 AUG. 31
1995 1994 1994 1994 1994 1993 1993
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Sales..................... $ 338,676 $ 304,808 $ 249,280 $ 241,463 $ 218,166 $ 205,275 $ 162,091
--------- --------- --------- --------- --------- --------- ---------
Gross margin.............. 183,049 163,162 131,126 124,605 113,183 102,865 80,415
Gross margin %............ 54.0% 53.5% 52.6% 51.6% 51.9% 50.1% 49.6%
--------- --------- --------- --------- --------- --------- ---------
Operating income (loss)... 70,762 2,024 43,593 41,327 (94,680) 31,925 19,911
--------- --------- --------- --------- --------- --------- ---------
Net income (loss)......... 45,298 2,614 28,491 27,189 (103,460) 21,463 26,114
Net income (loss) %....... 13.4% 0.9% 11.4% 11.3% (47.4%) 10.5% 16.1%
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) per
share.................... $ 0.63 $ 0.04 $ 0.41 $ 0.39 $ (1.64) $ 0.32 $ 0.40
--------- --------- --------- --------- --------- --------- ---------
<CAPTION>
FISCAL 1993 QUARTERS ENDED
-------------------------------------------
MAY 31 FEB. 28 NOV. 30 AUG. 31
1993 1993 1992 1992
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Sales..................... $ 167,458 $ 161,396 $ 152,697 $ 135,617
--------- --------- --------- ---------
Gross margin.............. 83,093 78,396 73,809 61,484
Gross margin %............ 49.6% 48.6% 48.3% 45.3%
--------- --------- --------- ---------
Operating income (loss)... 20,376 16,493 14,672 7,387
--------- --------- --------- ---------
Net income (loss)......... 13,271 10,160 9,280 5,850
Net income (loss) %....... 7.9% 6.3% 6.1% 4.3%
--------- --------- --------- ---------
Net income (loss) per
share.................... $ 0.20 $ 0.16 $ 0.15 $ 0.10
--------- --------- --------- ---------
</TABLE>
Notes: Net income for the quarter ended November 30, 1994 included a charge
of approximately $60.8 million ($0.52 per share ) for purchased in-process
technology (see Note 6 to the condensed consolidated financial statements) and a
credit of $1.1 million ($0.01 per share) for a reduction in accrued
restructuring costs. Net loss for the quarter ended February 28, 1994 included a
charge of approximately $134.5 million ($2.00 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 ($0.18 per share) related to the sale of an
investment and a tax benefit of $1.2 million ($0.02 per share) resulting from
retroactive changes relating to the Revenue Reconciliation Act of 1993. Net
income for the quarter ended February 28, 1993 included a charge of
approximately $1.6 million ($0.03 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).
F-18
<PAGE>
PRIMARY ACCESS CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE FIFTY-TWO WEEKS ENDED SEPTEMBER 27, 1992, THE FIFTY-THREE WEEKS ENDED
OCTOBER 3, 1993,
THE FIFTY-TWO WEEKS ENDED OCTOBER 2, 1994 AND THE THIRTEEN WEEKS ENDED JANUARY
1, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK RETAINED NOTES TOTAL
(NOTE 6) COMMON STOCK EARNINGS RECEIVABLE STOCKHOLDERS'
----------------------- -------------------- (ACCUMULATED FROM EQUITY
SHARES AMOUNT SHARES AMOUNT DEFICIT) STOCKHOLDERS (DEFICIT)
---------- ----------- --------- --------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 29, 1991... 3,741,775 $ 8,745,000 999,850 $ 62,000 $(8,969,000) $ (10,000) $ (172,000)
Series E convertible preferred
stock issued for cash and
conversion of Series D
preferred stock, net of
issuance costs of $25,000...... 5,773,948 5,973,000 -- -- -- -- 5,973,000
Series D convertible preferred
stock converted to Series E.... (1,000,000) (2,492,000) -- -- -- -- (2,492,000)
Series B convertible preferred
stock repurchased.............. (112,000) (252,000) -- -- -- -- (252,000)
Common stock options exercised.. -- -- 6,781 3,000 -- -- 3,000
Common stock issued to
consultant in lieu of cash
compensation................... -- -- 16,875 7,000 -- -- 7,000
Common stock repurchased........ -- -- (111,980) (6,000) -- -- (6,000)
Repayment of stockholder's note
receivable..................... -- -- -- -- -- 5,000 5,000
Net income...................... -- -- -- -- 1,116,000 -- 1,116,000
---------- ----------- --------- --------- ------------ ------------ ------------
Balance at September 27, 1992... 8,403,723 11,974,000 911,526 66,000 (7,853,000) (5,000) 4,182,000
Common stock grants............. -- -- 900 -- -- -- --
Common stock options exercised.. -- -- 20,814 8,000 -- -- 8,000
Repayment of stockholder's note
receivable..................... -- -- -- -- -- 5,000 5,000
Net income...................... -- -- -- -- 4,478,000 -- 4,478,000
---------- ----------- --------- --------- ------------ ------------ ------------
Balance at October 3, 1993...... 8,403,723 11,974,000 933,240 74,000 (3,375,000) -- 8,673,000
Common stock options exercised.. -- -- 596,387 92,000 -- -- 92,000
Common stock grants............. -- -- 200 -- -- -- --
Common stock warrants
exercised...................... -- -- 22,000 49,000 -- -- 49,000
Common stock issued to
consultants in lieu of cash
compensation................... -- -- 2,375 3,000 -- -- 3,000
Net income...................... -- -- -- -- 3,000,000 -- 3,000,000
---------- ----------- --------- --------- ------------ ------------ ------------
Balance at October 2, 1994...... 8,403,723 11,974,000 1,554,202 218,000 (375,000) -- 11,817,000
Common stock options exercised.. -- -- 17,082 2,000 -- -- 2,000
Common stock grants............. -- -- 100 -- -- -- --
Net income...................... -- -- -- -- 874,000 -- 874,000
---------- ----------- --------- --------- ------------ ------------ ------------
Balance at January 1, 1995
(unaudited).................... 8,403,723 $11,974,000 1,571,384 $ 220,000 $ 499,000 $ -- $12,693,000
---------- ----------- --------- --------- ------------ ------------ ------------
---------- ----------- --------- --------- ------------ ------------ ------------
</TABLE>
See accompanying notes to financial statements.
F-27
<PAGE>
PRIMARY ACCESS CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE FOR THE
FIFTY-TWO FIFTY-THREE
WEEKS ENDED WEEKS ENDED
OCTOBER 2, OCTOBER 3,
1994 1993
------------ ------------
FOR THE FOR THE
THIRTEEN THIRTEEN
WEEKS ENDED WEEKS ENDED
JANUARY 1, JANUARY 2,
1995 1994
------------ ------------
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C> <C>
Net income................................................... $ 874,000 $ 554,000 $3,000,000 $4,478,000
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization.............................. 191,000 102,000 532,000 312,000
Provision for doubtful accounts............................ -- -- -- 104,000
Gain (loss) on sale of equipment........................... (14,000) 2,000 (64,000) --
Issuance of stock for consulting services.................. -- -- 3,000 --
Change in assets and liabilities:
(Increase) decrease in accounts receivable, net.......... (1,589,000) 1,069,000 1,746,000 (3,838,000)
(Increase) decrease in inventories....................... 273,000 428,000 726,000 (618,000)
Increase in prepaid expenses and other assets............ (564,000) (21,000) (292,000) (30,000)
Increase (decrease) in accounts payable.................. (7,000) (109,000) (329,000) 670,000
Increase in accrued salaries, payroll taxes and
vacations............................................... 45,000 105,000 277,000 269,000
Increase (decrease) in accrued warranty liability........ 46,000 (23,000) 330,000 75,000
Increase (decrease) in accrued expenses and other current
liabilities............................................. (222,000) (359,000) (319,000) 490,000
Increase in accrued income tax liability................. 353,000 120,000 -- --
Increase (decrease) in deferred customer support
revenue................................................. (150,000) 704,000 702,000 442,000
------------ ------------ ------------ ------------
Net cash provided by (used in) operating activities.... (764,000) 2,572,000 6,312,000 2,354,000
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment.......................... (225,000) (113,000) (994,000) (464,000)
Proceeds from sale of equipment.............................. 35,000 -- 116,000 --
------------ ------------ ------------ ------------
Net cash used in investing activities.................. (190,000) (113,000) (878,000) (464,000)
------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments under the line of credit.......................... -- -- -- (680,000)
Proceeds from long-term borrowings and bridge loans.......... -- -- -- 314,000
Principal repayments on long-term borrowings................. (180,000) (27,000) (99,000) (459,000)
Proceeds from issuance of convertible preferred stock, net of
issuance costs.............................................. -- -- -- --
Retirement of convertible preferred stock.................... -- -- -- --
Proceeds from issuance of common stock and common stock
options exercised........................................... 2,000 37,000 92,000 8,000
Repurchase of common stock................................... -- -- -- --
Proceeds from common stock warrants exercised................ -- 49,000 49,000 --
Repayment of stockholder's note receivable................... -- -- -- 5,000
------------ ------------ ------------ ------------
Net cash provided by (used in) financing activities.... (178,000) 59,000 42,000 (812,000)
------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents........... (1,132,000) 2,518,000 5,476,000 1,078,000
Cash and cash equivalents at beginning of year................. 8,960,000 3,484,000 3,484,000 2,406,000
------------ ------------ ------------ ------------
Cash and cash equivalents at end of year....................... $7,828,000 $6,002,000 $8,960,000 $3,484,000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest................................................. $ 3,000 $ 5,000 $ 19,000 $ 99,000
Income taxes............................................. 36,000 43,000 890,000 555,000
Supplemental disclosure of noncash investing and financing
activities:
The Company transferred inventory at cost to property and
equipment................................................... $ 75,000 $ 51,000 $ 117,000 $ 193,000
The Company converted a note payable to Series E convertible
preferred stock in 1993..................................... $ -- $ -- $ -- $ --
<CAPTION>
FOR THE
FIFTY-TWO
WEEKS ENDED
SEPTEMBER 27,
1992
-------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C>
Net income................................................... $ 1,116,000
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization.............................. 226,000
Provision for doubtful accounts............................ 9,000
Gain (loss) on sale of equipment........................... --
Issuance of stock for consulting services.................. 7,000
Change in assets and liabilities:
(Increase) decrease in accounts receivable, net.......... (1,922,000)
(Increase) decrease in inventories....................... (916,000)
Increase in prepaid expenses and other assets............ (1,000)
Increase (decrease) in accounts payable.................. 48,000
Increase in accrued salaries, payroll taxes and
vacations............................................... 203,000
Increase (decrease) in accrued warranty liability........ 159,000
Increase (decrease) in accrued expenses and other current
liabilities............................................. 524,000
Increase in accrued income tax liability................. --
Increase (decrease) in deferred customer support
revenue................................................. --
-------------
Net cash provided by (used in) operating activities.... (547,000)
-------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment.......................... (271,000)
Proceeds from sale of equipment.............................. --
-------------
Net cash used in investing activities.................. (271,000)
-------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments under the line of credit.......................... (50,000)
Proceeds from long-term borrowings and bridge loans.......... --
Principal repayments on long-term borrowings................. (187,000)
Proceeds from issuance of convertible preferred stock, net of
issuance costs.............................................. 2,974,000
Retirement of convertible preferred stock.................... (252,000)
Proceeds from issuance of common stock and common stock
options exercised........................................... 3,000
Repurchase of common stock................................... (6,000)
Proceeds from common stock warrants exercised................ --
Repayment of stockholder's note receivable................... 5,000
-------------
Net cash provided by (used in) financing activities.... 2,487,000
-------------
Net increase (decrease) in cash and cash equivalents........... 1,669,000
Cash and cash equivalents at beginning of year................. 737,000
-------------
Cash and cash equivalents at end of year....................... $ 2,406,000
-------------
-------------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest................................................. $ 164,000
Income taxes............................................. --
Supplemental disclosure of noncash investing and financing
activities:
The Company transferred inventory at cost to property and
equipment................................................... $ --
The Company converted a note payable to Series E convertible
preferred stock in 1993..................................... $ 507,000
</TABLE>
F-28
<PAGE>
PRIMARY ACCESS CORPORATION
NOTES TO FINANCIAL STATEMENTS
JANUARY 1, 1995, OCTOBER 2, 1994 AND OCTOBER 3, 1993
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) DESCRIPTION OF BUSINESS:
Primary Access Corporation (the Company) was organized as a California
corporation on June 7, 1988. The Company markets telecommunications software and
hardware products that provide access to the public switched telephone network
for transmitting data over dial-in computer networks.
The Company has adopted a 52-53 week fiscal year ending on the Sunday
nearest to September 30.
(b) CASH EQUIVALENTS:
For the purpose of financial statement presentation, the Company considers
all highly liquid investment instruments with original maturities of three
months or less to be cash equivalents. Cash equivalents consist primarily of
money market accounts and certificates of deposit.
(c) INVENTORIES:
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method.
(d) PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over estimated useful lives of the assets (three to
five years).
(e) RESEARCH AND DEVELOPMENT COSTS:
Research and development costs are expensed in the period incurred.
(f) REVENUE RECOGNITION AND WARRANTY COSTS:
Equipment and software revenue is recognized upon shipment of product
provided that no significant obligations remain outstanding and that the
collection of the resulting accounts receivable are probable. If significant
obligations are to be fulfilled in the future, revenue is recognized when all
obligations have been fulfilled. Customer support revenue is recognized ratably
over the term of the contracts, typically one year. Estimated costs of product
warranty and insignificant remaining obligations are accrued at the time the
Company sells the products.
(g) INCOME TAXES:
In February 1992, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109). SFAS 109 requires a change from the deferred method of accounting for
income taxes of APB Opinion 11 to the asset and liability method of accounting
for income taxes. Under the asset and liability method of SFAS 109, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. Under SFAS 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. The Company adopted SFAS 109 in 1994 and has
applied the provisions of SFAS 109 retroactively to September 30, 1991. There is
no impact on years prior to September 27, 1992.
(h) SIGNIFICANT CUSTOMERS:
For the fifty-two weeks ended October 2, 1994, the fifty-three weeks ended
October 3, 1993, the fifty-two weeks ended September 27, 1992 and the thirteen
weeks ended January 1, 1995 and
F-29
<PAGE>
PRIMARY ACCESS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
January 2, 1994, aggregate product sales to six principal customers accounted
for 57%, 75%, 78%, 71% and 76% of total sales, respectively. Aggregate balances
in accounts receivable from these six customers as of October 2, 1994, October
3, 1993 and January 1, 1995 were 55%, 89% and 71% of total accounts receivable,
respectively.
For the fifty-two weeks ended September 27, 1992, product sales to three
customers accounted for 33%, 17% and 12% of total sales. For the fifty-three
weeks ended October 3, 1993, product sales to three customers accounted for 35%,
16% and 13% of total sales. For the fifty-two weeks ended October 2, 1994,
product sales to two customers accounted for 22% and 18% of total sales. For the
thirteen weeks ended January 2, 1994, product sales to three customers accounted
for 26%, 17% and 13% of total sales. For the thirteen weeks ended January 1,
1995, product sales to two customers accounted for 39% and 14% of total sales.
No other sales to individual customers accounted for greater than 10% of total
revenue.
(i) NET INCOME PER SHARE:
Net income per share is computed based on the weighted average number of
common and common equivalent shares outstanding during the period. Common
equivalent shares include convertible preferred stock (using the if-converted
method) and common stock options and warrants (using the treasury stock method).
Common equivalent shares are excluded from the computation if their effect is
antidilutive.
(j) UNAUDITED FINANCIAL INFORMATION:
The financial information at January 1, 1995, and for the thirteen weeks
ended January 1, 1995 and January 2, 1994 is unaudited but includes all
adjustments, consisting only of normal recurring adjustments, that the Company
considers necessary for a fair presentation of the financial position as of such
date and the results of operations and cash flows for those periods. Results for
interim periods are not necessarily indicative of results to be expected for the
entire year.
(2) INVENTORIES
Inventories as of January 1, 1995, October 2, 1994 and October 3, 1993
consist of the following:
<TABLE>
<CAPTION>
1994 1993
1995 ------------- -------------
-----------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials.................................. $ 731,000 $ 930,000 $ 1,884,000
Work in process................................ -- -- 16,000
Finished goods................................. 84,000 233,000 106,000
----------- ------------- -------------
$ 815,000 $ 1,163,000 $ 2,006,000
----------- ------------- -------------
----------- ------------- -------------
</TABLE>
F-30
<PAGE>
PRIMARY ACCESS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(3) PROPERTY AND EQUIPMENT
At January 1, 1995, October 2, 1994 and October 3, 1993, property and
equipment consists of the following:
<TABLE>
<CAPTION>
1993 1993
1995 -------------- -------------
--------------
(UNAUDITED)
<S> <C> <C> <C>
Furniture and fixtures..................... $ 56,000 $ 56,000 $ 56,000
Computer equipment......................... 2,920,000 2,641,000 1,771,000
Leasehold improvements..................... 105,000 121,000 31,000
-------------- -------------- -------------
3,081,000 2,818,000 1,858,000
Less accumulated depreciation and
amortization.............................. (1,404,000) (1,229,000) (796,000)
-------------- -------------- -------------
$ 1,677,000 $ 1,589,000 $ 1,062,000
-------------- -------------- -------------
-------------- -------------- -------------
</TABLE>
(4) LINE OF CREDIT
At January 1, 1995 and October 2, 1994, the Company has a line of credit
agreement with a bank for working capital purposes that provides an amount up to
$2,000,000. The agreement requires interest only monthly payments, at the rate
of prime, and outstanding balances are secured by substantially all assets of
the Company. The line of credit expires May 15, 1996. The Company has no
borrowings against the line of credit as of January 1, 1995 and October 2, 1994.
In June 1994, the Company entered into a line of credit agreement with the
same bank for equipment acquisition purchases that provides for a maximum draw
of up to $1,000,000 through May 15, 1995. The agreement requires monthly
principal and interest payments, at prime plus .5%, and outstanding balances are
secured by substantially all assets of the Company. The Company has no
borrowings against the line of credit as of January 1, 1995 and October 2, 1994.
(5) LONG-TERM DEBT
Long-term debt consists of the following as of January 1, 1995, October 2,
1994 and October 3, 1993:
<TABLE>
<CAPTION>
1994 1993
------------ ------------
<S> <C> <C>
Prime plus 1.5% (effective rate of 9.25% at October 2, 1994),
$314,000 equipment note with a bank, fixed principal payments
of $9,000 and interest due monthly beginning June 15, 1993,
balance due May 15, 1996. Secured by substantially all fixed
assets. The note was repaid in full in November 1994......... $ 180,000 $ 279,000
Less current installments................................... (108,000) (108,000)
------------ ------------
Long-term debt, excluding current installments.............. $ 72,000 $ 171,000
------------ ------------
------------ ------------
</TABLE>
There was no long-term debt outstanding as of January 1, 1995.
(6) STOCKHOLDERS' EQUITY
(a) CONVERTIBLE PREFERRED STOCK:
Each share of the Series A, Series C and Series E preferred stock is
convertible into the Company's common stock on a one for one basis. In addition,
each share is entitled to the number of votes equal to the conversion ratio and
has a liquidating preference of $1.00, $4.00 and $1.04 for Series A, Series C
and Series E preferred stock, respectively, plus accrued and unpaid dividends.
The preferred
F-31
<PAGE>
PRIMARY ACCESS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(6) STOCKHOLDERS' EQUITY (CONTINUED)
stock is entitled to preference in dividends and distributions over the
Company's common stock. Dividends are $.10, $.40 and $.104 per share for Series
A, Series C and Series E preferred stock, respectively, when declared and are
noncumulative. Each share of preferred stock shall automatically be converted
into shares of common stock at the then effective applicable conversion price
immediately upon the closing of the sale of the Company's common stock in a
public offering of at least $5.00 per share with aggregate gross proceeds of at
least $5,000,000.
At any time after June 1994, or upon receipt by the Company in writing of
consents of a majority of Series A, Series C and Series E preferred
stockholders, the Company at its option may redeem in whole or in part the
Series A, Series C and Series E preferred stock by paying $1.00, $4.00 and $1.04
per share, respectively, for Series A, Series C and Series E preferred stock
then outstanding, adjusted for stock splits, stock dividends or
recapitalization. As of January 1, 1995 and October 2, 1994, no redemptions had
occurred.
Terms of the aforementioned classes of convertible preferred stock as of
January 1, 1995, October 2, 1994 and October 3, 1993, including capitalized
values, are as follows:
<TABLE>
<S> <C>
Series A convertible preferred stock, authorized 1,498,525
shares, issued and outstanding 1,498,525 shares in 1995,
1994 and 1993 (liquidating preference $1.00 per share,
aggregating $1,499,000)................................... $ 1,499,000
Series C convertible preferred stock, authorized 1,250,000
shares, issued and outstanding 1,131,250 shares in 1995,
1994 and 1993 (liquidating preference $4.00 per share,
aggregating $4,525,000)................................... 4,503,000
Series E convertible preferred stock, authorized 5,773,950
shares, issued and outstanding 5,773,948 shares in 1995,
1994 and 1993 (liquidating preference $1.04 per share,
aggregating $6,005,000)................................... 5,972,000
-----------
$11,974,000
-----------
-----------
</TABLE>
1,477,525 of the authorized preferred shares have not been designated to a
particular class and remain authorized but unissued.
(b) WARRANTS:
The Company has issued various warrants to purchase common stock, all of
which are exercisable as of January 1, 1995 and October 2, 1994. In November
1993, the September 1988 warrants were exercised and the Company issued 22,000
shares of common stock for $49,000.
The following summarizes warrants issued and outstanding as of January 1,
1995, October 2, 1994 and October 3, 1993:
<TABLE>
<CAPTION>
EXERCISE NUMBER
DATE OF GRANT EXPIRATION PRICE OUTSTANDING
- ---------------------------------------------------- ------------ ----------- -----------
<S> <C> <C> <C>
October............................................. 1990/1995 $ 2.25 67,000
March............................................... 1992/1997 1.04 50,000
-----------
Total warrants outstanding.......................... 117,000
-----------
-----------
</TABLE>
F-32
<PAGE>
PRIMARY ACCESS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(6) STOCKHOLDERS' EQUITY (CONTINUED)
(c) STOCK OPTION PLAN:
The Company maintains a Stock Option Plan (the "Plan") which provides for
the grant of incentive stock options and nonqualified stock options at fair
market value to key employees, directors and consultants of the Company. At
January 1, 1995 and October 2, 1994, there were 2,900,000 common shares reserved
for issuance under the Plan. Shares of common stock made subject to options vest
periodically from the date of grant, in accordance with schedules established by
the Board of Directors of the Company. Shares acquired through the exercise of
options are subject to the Company's first right of repurchase.
As of October 3, 1993, options for 1,750,492 shares were outstanding and are
exercisable at prices ranging from $.11 to $.40 per share. Options for 1,108,850
shares are unvested and options for 641,642 shares are vested and exercisable.
Options for 35,345 shares had been exercised as of October 3, 1993. Options for
212,091 shares had been cancelled as of October 3, 1993. Reserved, unissued
shares of common stock totaling 402,072 remain available as of October 3, 1993
for grant under the Plan.
As of October 2, 1994, options for 1,818,928 shares were outstanding and are
exercisable at prices ranging from $.11 to $3.75 per share. Options for
1,271,860 shares are unvested and options for 547,068 shares are vested and
exercisable. Options for 639,528 shares had been exercised as of October 2,
1994. Options for 264,274 shares had been cancelled as of October 2, 1994.
Reserved, unissued shares of common stock totaling 177,270 remain available as
of October 2, 1994 for grant under the Plan.
As of January 1, 1995, options for 1,943,795 shares were outstanding and are
exercisable at prices ranging from $.11 to $3.75 per share. Options for
1,277,295 shares are unvested and options for 666,500 are vested and
exercisable. Options for 659,790 shares had been exercised as of January 1,
1995. Options for 267,117 shares had been cancelled as of January 1, 1995.
Reserved, unissued shares of common stock totaling 29,298 remain available as of
January 1, 1995 for grant under the Plan.
(7) INCOME TAXES
As discussed in Note 1, the Company adopted SFAS 109 in 1994 and has applied
the provisions of SFAS 109 retroactively to September 30, 1991. There is no
impact on years prior to September 27, 1992.
F-33
<PAGE>
PRIMARY ACCESS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(7) INCOME TAXES (CONTINUED)
Income taxes consist of the following at October 2, 1994, October 3, 1993
and September 27, 1992:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
----------- ----------- -----------
<S> <C> <C> <C>
1994:
Federal............................................ $ 713,000 $ -- $ 713,000
State.............................................. 154,000 -- 154,000
----------- ----- -----------
Total income taxes............................. $ 867,000 $ -- $ 867,000
----------- ----- -----------
----------- ----- -----------
1993:
Federal............................................ $ 119,000 $ -- $ 119,000
State.............................................. 346,000 -- 346,000
----------- ----- -----------
Total income taxes............................. $ 465,000 $ -- $ 465,000
----------- ----- -----------
----------- ----- -----------
1992:
Federal............................................ $ 22,000 $ -- $ 22,000
State.............................................. 29,000 -- 29,000
----------- ----- -----------
Total income taxes............................. $ 51,000 $ -- $ 51,000
----------- ----- -----------
----------- ----- -----------
</TABLE>
Total income tax expense differed from the amount computed by applying the
U.S. federal income tax rates of 34% in 1994, 1993 and 1992 to income before
taxes as follows:
<TABLE>
<CAPTION>
1994 1993 1992
------------- ------------- -----------
<S> <C> <C> <C>
Computed "expected" tax expense........................................ $ 1,315,000 $ 1,681,000 $ 397,000
State tax, net of federal benefit...................................... 22,000 304,000 19,000
Research and experimentation credits................................... (508,000) -- --
Permanent differences:
Research and development tax credit limitation....................... -- -- 40,000
Foreign sales corporation adjustment................................. (30,000) -- --
Non-qualified stock options.......................................... (26,000) -- --
Temporary differences, net............................................. 45,000 296,000 59,000
Benefit of net operating loss carryforwards............................ (42,000) (1,820,000) (495,000)
Other, net............................................................. 91,000 4,000 31,000
------------- ------------- -----------
$ 867,000 $ 465,000 $ 51,000
------------- ------------- -----------
------------- ------------- -----------
</TABLE>
F-34
<PAGE>
PRIMARY ACCESS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(7) INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities as of October
2, 1994 and October 3, 1993 are as follows:
<TABLE>
<CAPTION>
1994 1993
-------------- --------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................................................ $ 991,000 $ 796,000
Research and experimentation credit carryforwards............................... 432,000 622,000
Warranty accrual................................................................ 301,000 270,000
State income taxes.............................................................. -- 99,000
Accrued vacation................................................................ 123,000 81,000
Allowance for doubtful accounts................................................. 37,000 46,000
Alternative minimum tax credit carryforwards.................................... 22,000 22,000
Other........................................................................... 348,000 317,000
-------------- --------------
Total gross deferred tax assets............................................... 2,254,000 2,253,000
Less valuation allowance........................................................ (2,084,000) (2,177,000)
-------------- --------------
Net deferred tax assets....................................................... 170,000 76,000
Deferred tax liabilities:
Differences in depreciation of equipment........................................ (90,000) (76,000)
State income taxes.............................................................. (51,000) --
Gain/loss on fixed asset disposal............................................... (29,000) --
-------------- --------------
Total gross deferred tax liabilities.......................................... (170,000) (76,000)
-------------- --------------
Net deferred tax assets....................................................... $ -- $ --
-------------- --------------
-------------- --------------
</TABLE>
The valuation allowance of $2,084,000 and $2,177,000 as of October 2, 1994
and October 3, 1993, respectively, represent deferred tax assets that may not be
realized through the reversal of future taxable temporary differences. In fiscal
year 1994, the Company recognized a decrease in the valuation allowance of
$93,000.
At October 2, 1994, the Company has net operating loss carryforwards for
federal tax purposes amounting to approximately $1,233,000 which begin to expire
in 2004. Additionally, the Company has net operating loss carryforwards for
California state tax reporting purposes amounting to approximately $1,292,000
which begin to expire in 1995. The Company has available research and
experimentation credit carryforwards of approximately $432,000 which begin to
expire in 2004.
In accordance with Internal Revenue Code Section 382, the annual utilization
of net operating loss carryforwards and tax credits is limited, since a greater
than 50% change in ownership occurred in the fiscal year ended September 30,
1990.
(8) RETIREMENT PLAN
The Company has a defined contribution plan which qualifies for treatment
under Section 401(k) of the Internal Revenue Code. The plan covers substantially
all employees over the age of 18. The plan allows participants to defer 2% to
15% of their salary on a pre-tax basis. The Company has made no employer
contributions to the plan.
F-35
<PAGE>
PRIMARY ACCESS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(9) COMMITMENTS AND CONTINGENCIES
(a) LEASES:
The Company leases its principal facility under an operating sublease which
expires March 31, 1997. Rental expense was $352,000, $525,000, $665,000,
$158,000 and $150,000 for the fifty-two weeks ended October 2, 1994, the
fifty-three weeks ended October 3, 1993, the fifty-two weeks ended September 27,
1992 and the thirteen weeks ended January 1, 1995 and January 2, 1994,
respectively.
Minimum rental payments due under noncancelable operating leases are as
follows:
<TABLE>
<S> <C>
1995........................................................... $ 520,000
1996........................................................... 490,000
1997........................................................... 247,000
----------
$1,257,000
----------
----------
</TABLE>
(b) PURCHASES:
Under a manufacturing services agreement with a principal supplier, the
Company has a commitment to purchase $2,800,000 of inventory during the period
from October 2, 1994 through March 1, 1995.
(c) LITIGATION:
Various claims and legal proceedings arising in the ordinary course of
business are pending against the Company seeking monetary damages and other
relief. The amount of liability from all claims and actions cannot be determined
with certainty, but in the opinion of management, based in part upon advice from
legal counsel, the ultimate liability from all pending legal proceedings,
asserted legal claims, and known potential legal claims which are probable of
assertion will not materially affect the financial position or operations of the
Company.
The Company is involved in a dispute with regard to claims for breach of
contract and commissions due related to a Manufacturer/Representative Agreement
and a letter agreement dated January 13, 1992. The case went to trial in May
1994. The jury found for the plaintiff and awarded it $2.8 million. On the basis
that there was no evidence to support the jury verdict, the Company was granted
a new trial. In the opinion of management, the outcome of this legal proceeding
will not materially affect the financial position or operations of the Company.
F-36
<PAGE>
REPORT OF SHACHAK & CO.
TO THE SHAREHOLDERS OF NICECOM LTD. (IN LIQUIDATION):
We have examined the Balance Sheet of NICECOM LTD. (IN LIQUIDATION) as of
December 31, 1993 and the statements of Income and Cash Flows for the year then
ended. Our examination was conducted in accordance with generally accepted
auditing standards, including those prescribed under the Auditor's Regulations
(Auditor's Mode of Performance), 1973, which does not differ significantly from
United States generally accepted auditing standards, and accordingly we have
applied such auditing procedures as we considered necessary under the
circumstances.
The financial statements referred to above, were prepared on the basis of
historical cost, adjusted to reflect the changes in the general purchasing power
of the Israeli currency, in accordance with the Opinions of the Institute of
Certified Public Accountants in Israel. Condensed nominal financial statements,
which served as the basis for the adjusted financial statements, are presented
in Note 17.
Information regarding events that occurred subsequent to December 31, 1993
has not been included in these financial statements.
In our opinion, except for the omission of the aforementioned information,
the financial statements referred to above, present fairly, in conformity with
generally accepted accounting principles in Israel, which do not differ in any
material respects pertaining to these financial statements, from generally
accepted accounting principles in the United States, except for the effects of
inflation which have not been eliminated, the financial position of the Company
at December 31, 1993, and the results of its operations and cash flows for the
year then ended (see Note 2(A)(4) of Notes to the Financial Statements).
Pursuant to Section 211 of the Companies Ordinance, we state that we have
obtained all the information and explanations we have required, and that our
opinion on the above Financial Statements is given according to the best of our
information and the explanations received by us and as shown by the books of the
Company.
Without qualifying our opinion on the above mentioned financial Statements,
we would like to draw your attention to Note 1 (D) to the financial statements,
regarding the Company's liquidation commenced in October, 1994.
This opinion is expressed in reliance on our previous opinion, dated April
28, 1994.
/s/ SHACHAK & CO.
Shachak & Co.
Certified Public Accountants (Israel)
Tel Aviv, December 26, 1994
F-37
<PAGE>
NICECOM LTD. (IN LIQUIDATION)
BALANCE SHEET AS OF DECEMBER 31, 1993
IN DECEMBER 1993 ADJUSTED NEW ISRAELI SHEKELS
<TABLE>
<CAPTION>
NOTE NIS
----- ------------
<S> <C> <C>
Current assets
Cash and cash equivalents.................................................................. 3 423,518
Due from related parties................................................................... 4 15,198
Accounts receivable and income receivable.................................................. 5 731,855
Other receivables and current assets....................................................... 6 834,224
Inventories................................................................................ 149,269
------------
2,154,064
------------
Fixed assets................................................................................. 7 1,092,290
------------
3,246,354
------------
------------
Current liabilities
Bank overdraft............................................................................. 1,878
Accounts payable........................................................................... 8 201,336
Due to related parties..................................................................... 4 74,066
Other payables and current liabilities..................................................... 9 683,718
------------
960,998
------------
Loan from a company that is an interested party.............................................. 10 4,725,943
Liability for the termination of the employee-employer relationship.......................... 11 54,597
------------
Commitments and contingent liabilities....................................................... 13
Capital deficit
Share capital.............................................................................. 12 11,125
Accumulated loss........................................................................... (2,506,309)
------------
(2,495,184)
------------
3,246,354
------------
------------
</TABLE>
David Ben-Ze'ev,
ATTORNEY LIQUIDATOR
December 26, 1994
Approval date of the financial statements.
The accompanying notes are an integral part of the financial statements.
F-38
<PAGE>
NICECOM LTD. (IN LIQUIDATION)
INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1993
IN DECEMBER 1993 ADJUSTED NEW ISRAELI SHEKELS
<TABLE>
<CAPTION>
NOTE NIS
----- -----------
<S> <C> <C>
Revenues from production...................................................................... 1,346,111
Cost of production............................................................................ 14 681,238
-----------
Gross profit................................................................................ 664,873
-----------
Expenses
Research and development costs.............................................................. 15 1,856,041
Marketing expenses.......................................................................... 510,655
Administrative expenses..................................................................... 16 845,728
-----------
3,212,424
-----------
Loss from operations.......................................................................... 2,547,551
Financial income, net......................................................................... (41,242)
-----------
Net loss...................................................................................... 2,506,309
-----------
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-39
<PAGE>
NICECOM LTD. (IN LIQUIDATION)
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1993
IN DECEMBER 1993 ADJUSTED NEW ISRAELI SHEKELS
<TABLE>
<CAPTION>
NIS
------------
<S> <C>
Cash flows from current operations:
Net loss.......................................................................................... (2,506,309)
Adjustments required to present cash flows from current operations................................ (655,521)
------------
Net cash flows used in current operations....................................................... (3,161,830)
------------
Cash flows from investment activities:
Acquisitions of fixed assets...................................................................... (1,153,598)
Loan received from a company that is an interested party.......................................... 4,725,943
------------
Net cash flows provided by investment activities................................................ 3,572,345
------------
Cash flows from financing activities:
Issuance of capital............................................................................... 11,125
Credit received from bank corporations............................................................ 1,878
------------
Net cash flows provided by financing activities................................................. 13,003
------------
Increase in cash and cash equivalents............................................................. 423,518
Balance of cash and cash equivalents -- beginning of the year....................................... --
------------
Balance of cash and cash equivalents -- end of the year............................................. 423,518
------------
------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-40
<PAGE>
NICECOM LTD. (IN LIQUIDATION)
STATEMENT OF CASH FLOWS
ADJUSTMENTS REQUIRED TO PRESENT CASH FLOWS
FROM CURRENT OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1993
IN DECEMBER 1993 ADJUSTED NEW ISRAELI SHEKELS
<TABLE>
<CAPTION>
NIS
----------
<S> <C>
Income and expenses not involving cash flows:
Depreciation and amortization......................................................................... 61,308
Increase in the liability for the termination of the employee-employer relationship................... 54,597
Changes in assets and liabilities:
Increase in accounts receivable and income receivable................................................. (731,855)
Increase in inventories............................................................................... (149,269)
Increase in other receivables and current assets...................................................... (834,224)
Increase in accounts payable.......................................................................... 201,336
Increase in other payables and current liabilities.................................................... 683,718
Increase in related parties........................................................................... 58,868
----------
(655,521)
----------
----------
</TABLE>
F-41
<PAGE>
NICECOM LTD. (IN LIQUIDATION)
NOTES TO THE FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1993
NOTE 1 -- GENERAL
A. The Company was incorporated and approved under the Companies Ordinance
on December 28, 1992, and commenced operations in January 1993.
B. These financial statements are the initial audited financial statements
prepared by the Company.
C. The Company develops, manufactures, and sells computer communication
products.
D. In October 1994, a resolution was adopted at an extraordinary meeting of
the shareholders of NICECOM LTD. to liquidate the Company.
NOTE 2 -- ACCOUNTING POLICY
A. MEASUREMENT BASE
1. The financial statements present the financial position as of balance
sheet date, and the results of the Company's operations measured in New
Israeli Shekels of the last month of the reported year (according to the
Consumer Price Index for December 31, 1993, which represents the average
price level for that month, as published in the following month). This
method of presentation conforms with the opinions of the Institute of
Certified Public Accountants in Israel, and is not meant to reflect the
assets, liabilities, capital or the changes therein, including the
results of operations, on a current basis or any other economic basis.
The reported data were prepared in accordance with generally accepted
accounting principles, whereby the the cost of non-monetary assets were
adjusted on the basis of the changes in the Consumer Price Index from the
date of acquisition or payment. Capital resources were adjusted
correspondingly, from the date received until the balance sheet month.
Income Statement items were adjusted according to the changes in the
Consumer Price Index as follows:
- Revenues and expenses, other than financial income and
expenses, were adjusted according to the changes in the
Index from the date the transaction was effected until
December 1993.
- Financial income and expenses include the net erosion in
the value of monetary items.
2. The Company maintains its accounts on a current basis in nominal New
Israeli Shekels. The nominal data were adjusted to NIS of a fixed
purchasing power, as aforesaid. Condensed nominal financial statements,
which served as the basis for preparation of the Company's adjusted
financial statements are presented in Note 17.
3. The balances in these financial statements have all been adjusted for
the changes in the general purchasing power of the Israeli currency,
unless stated otherwise.
4. The financial statements have been prepared in conformity with generally
accepted accounting principles in Israel, which do not differ in any
material respects pertaining to these financial statements, from
generally accepted accounting principles in the United States, except for
the effects of inflation which have not been eliminated.
B. FIXED ASSETS
1. Fixed assets are presented at cost.
F-42
<PAGE>
NICECOM LTD. (IN LIQUIDATION)
NOTES TO THE FINANCIAL STATEMENTS
NOTE 2 -- ACCOUNTING POLICY (CONTINUED)
2. Depreciation is computed by the straight-line method, at rates
considered sufficient to depreciate the assets over their estimated
useful lives.
C. FOREIGN CURRENCY BALANCES
Foreign currency balances are presented on the basis of the representative
exchange rate prevailing on balance sheet date - NIS 2.986 to the U.S. dollar.
NOTE 3 -- CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash denominated in foreign currency of
NIS 1,345 and marketable certificates of deposit totalling NIS 422,173.
NOTE 4 -- RELATED PARTIES
Balances with related parties bore interest at the level of the increase in
the Consumer Price Index.
NOTE 5 -- ACCOUNTS RECEIVABLE AND INCOME RECEIVABLE
<TABLE>
<CAPTION>
NIS
---------
<S> <C>
Composition as of December 31, 1993:
Open accounts.................................................................... 603,876
Income receivable................................................................ 127,979
---------
731,855
---------
---------
</TABLE>
NOTE 6 -- OTHER RECEIVABLES AND CURRENT ASSETS
<TABLE>
<CAPTION>
NIS
---------
<S> <C>
Composition as of December 31, 1993:
Receivable for participation in development expenses............................. 516,230
Companies tax.................................................................... 29,250
Institutions..................................................................... 288,744
---------
834,224
---------
---------
</TABLE>
NOTE 7 -- FIXED ASSETS
A. Composition as of December 31, 1993:
A. Composition
<TABLE>
<CAPTION>
OFFICE
FURNITURE
AND LEASEHOLD
VEHICLES EQUIPMENT COMPUTERS IMPROVEMENTS
NIS NIS NIS NIS TOTAL NIS
--------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Cost Acquisitions for year....................... 579,537 43,614 288,063 242,384 1,153,598
--------- ----------- ----------- ------------- -----------
Less - Accumulated depreciation for year......... 46,766 1,480 13,062 -- 61,308
--------- ----------- ----------- ------------- -----------
Depreciated cost................................. 532,771 42,134 275,001 242,384 1,092,290
--------- ----------- ----------- ------------- -----------
--------- ----------- ----------- ------------- -----------
</TABLE>
F-43
<PAGE>
NICECOM LTD. (IN LIQUIDATION)
NOTES TO THE FINANCIAL STATEMENTS
NOTE 7 -- FIXED ASSETS (CONTINUED)
B. Annual depreciation rates:
<TABLE>
<S> <C>
Vehicles %
Office furniture and equipment 15
Computers 6 - 10
Leasehold improvements 20
Over the period of the lease
</TABLE>
NOTE 8 -- ACCOUNTS PAYABLE
<TABLE>
<CAPTION>
NIS
---------
<S> <C>
Composition as of December 31, 1993:
Open accounts.......................................................... 191,274
Notes payable.......................................................... 10,062
---------
201,336
---------
</TABLE>
NOTE 9 -- OTHER PAYABLES AND CURRENT LIABILITIES
<TABLE>
<CAPTION>
NIS
---------
<S> <C>
Composition as of December 31, 1993:
Employees and institutions for salaries and related expenses........... 529,010
Institutions........................................................... 683
Expenses payable....................................................... 27,750
Miscellaneous.......................................................... 126,275
---------
683,718
---------
---------
</TABLE>
NOTE 10 -- LOAN FROM A COMPANY THAT IS AN INTERESTED PARTY
The loan is linked to the Consumer Price Index and does not bear interest.
No repayment date has been set. Subsequent to the date of the financial
statements, a portion of the loan equivalent to U.S. $600,000 was converted to
share capital (also see Note 12).
NOTE 11 -- LIABILITY FOR THE TERMINATION OF THE EMPLOYEE-EMPLOYER RELATIONSHIP
The Company's liability for the payment of severance pay to its employees is
computed on the basis of their last salary and their period of employment. The
liability is covered primarily by payments to insurance companies. The balance
of the liability is expressed by this provision.
NOTE 12 -- SHARE CAPITAL
A. Composition as of December 31, 1993
<TABLE>
<CAPTION>
REGISTERED ISSUED AND PAID UP
NIS NIS
----------- ------------------
<S> <C> <C>
Common shares NIS, 0.01 par value......... 10,000 10,000
----------- -------
----------- -------
</TABLE>
B. Subsequent events
1. Pursuant to an agreement dated February 13, 1994, the Company
allocated shares to a group of investors that grant 25% of the rights to
control and ownership in the Company, in consideration for the NIS
equivalent of U.S. five million dollars. In addition, the Company
allocated shares to its parent company, Nice Systems Ltd, and to its
subsidiary, Nice Software (1991) Ltd., in consideration for the NIS
equivalent of US $1,450,000.
F-44
<PAGE>
NICECOM LTD. (IN LIQUIDATION)
NOTES TO THE FINANCIAL STATEMENTS
NOTE 12 -- SHARE CAPITAL (CONTINUED)
2. The composition of share capital as of the issue date of the
financial statements:
<TABLE>
<CAPTION>
REGISTERED ISSUED AND PAID UP
NIS NIS
------------- ------------------
<S> <C> <C>
Common shares, NIS 0.01 par value...... 20,000,000 14,201,942
------------- ------------------
------------- ------------------
</TABLE>
3. The Company issued 1,133,334 options to its employees. Each
option may be exercised to purchase one ordinary NIS 1 par value share of
the Company in consideration for payment of its par value. The options
may be exercised over a four year period, conditioned upon the terms that
were stipulated.
NOTE 13 -- COMMITMENTS AND CONTINGENT LIABILITIES
The Company signed agreements with the Chief Scientist of the Ministry of
Industry and Trade, according to which the Company receives Government grants
for development programs. Pursuant to the terms of the grants, the Company must
pay royalties to the Government of Israel of 2% of the sales of the products
that result from the development program, until it has repaid a maximum of the
linked amount of the grant of NIS 1,057,157 plus linkage differences (in
accordance with the terms of the grant, products developed with grant funds must
be produced in Israel).
NOTE 14 -- COST OF PRODUCTION
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED DECEMBER
31, 1993
-----------------
<S> <C>
Composition:
Salaries and related expenses............................................ 196,914
Outside projects (includes NIS 412,683 from a company that is an
interested party)....................................................... 426,949
Other production costs................................................... 48,802
Depreciation............................................................. 8,573
--------
681,238
--------
--------
</TABLE>
NOTE 15 -- RESEARCH AND DEVELOPMENT COSTS
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED DECEMBER
31, 1993
-----------------
<S> <C>
Composition:
Salaries and related expenses............................................ 2,653,087
Outside projects......................................................... 26,157
Materials................................................................ 153,407
Other development costs (includes NIS 39,000 from a company that is an
interested party)....................................................... 93,730
Depreciation............................................................. 4,560
-----------------
2,930,941
Less -- the participation of others...................................... (1,074,900)
-----------------
1,856,041
-----------------
-----------------
</TABLE>
F-45
<PAGE>
NICECOM LTD. (IN LIQUIDATION)
NOTES TO THE FINANCIAL STATEMENTS
NOTE 16 -- GENERAL AND ADMINISTRATIVE EXPENSES
Includes depreciation of NIS 1,409.
NOTE 17 -- CONDENSED NOMINAL FINANCIAL STATEMENTS
A. Balance Sheet as of December 31, 1993:
<TABLE>
<CAPTION>
NIS
------------
<S> <C>
Current assets
Cash and cash equivalents..................................................... 423,518
Due from related parties...................................................... 15,198
Accounts receivable and income receivable..................................... 731,855
Other receivables............................................................. 834,224
Inventories................................................................... 143,571
------------
2,148,366
------------
Fixed assets.................................................................... 1,063,683
------------
3,212,049
------------
------------
Current liabilities
Bank overdraft................................................................ 1,878
Accounts payable.............................................................. 201,336
Due to related parties........................................................ 74,066
Other payables and current liabilities........................................ 683,718
------------
960,998
------------
Loan from a company that is an interested party................................. 4,725,943
------------
Liability for the termination of the employee-employer relationship............. 54,597
------------
Capital deficit
Share capital................................................................. 10,000
Accumulated loss.............................................................. (2,539,489)
------------
(2,529,489)
------------
3,212,049
------------
------------
</TABLE>
B. Income Statement for the year ended December 31, 1993
<TABLE>
<CAPTION>
NIS
------------
<S> <C>
Revenues from production........................................................ 1,293,548
Cost of production.............................................................. 660,284
------------
Gross profit................................................................ 633,264
------------
Expenses
Research and development costs................................................ 1,747,234
Marketing expenses............................................................ 481,358
Administrative expenses....................................................... 826,925
------------
3,055,517
------------
Loss from operations............................................................ 2,422,253
Financial expenses, net......................................................... 117,236
------------
Net loss........................................................................ 2,539,489
------------
------------
</TABLE>
F-46
<PAGE>
TRANSLATED FROM THE HEBREW ORIGINAL
NICECOM LTD.
CONDENSED BALANCE SHEET AS OF SEPTEMBER 30, 1994
ADJUSTED TO NIS OF SEPTEMBER 1994
<TABLE>
<CAPTION>
AS OF AS OF
SEPTEMBER 30, DECEMBER 31,
1994 1993
(UNAUDITED) (AUDITED)
NIS NIS
------------- -------------
<S> <C> <C>
Current assets...................................................................... 12,146,665 2,380,155
------------- -------------
Fixed assets (Net of depreciation).................................................. 2,634,059 1,206,937
------------- -------------
------------- -------------
14,780,724 3,587,092
------------- -------------
------------- -------------
Current liabilities (includes loan from an interested party company)................ 3,885,735 6,283,844
------------- -------------
Liability for termination of the employee-employer relationship..................... 90,098 60,327
------------- -------------
Shareholders' equity
Share capital..................................................................... 156,281 12,292
Capital reserves.................................................................. 20,034,952 --
Accumulated loss.................................................................. (9,386,342) (2,769,371)
------------- -------------
10,804,891 (2,757,079)
------------- -------------
------------- -------------
14,780,724 3,587,092
------------- -------------
------------- -------------
</TABLE>
<TABLE>
<S> <C>
Benjamin Levin Chanan Meiron
Chairman of the Board Chief Financial Officer
of Directors
</TABLE>
December 6, 1994
Approval date of the financial statements.
The accompanying notes are an integral part of the condensed financial
statements.
F-47
<PAGE>
TRANSLATED FROM THE HEBREW ORIGINAL
NICECOM LTD.
CONDENSED INCOME STATEMENT
ADJUSTED TO NIS OF SEPTEMBER 1994
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
SEPTEMBER 30, 1994
(UNAUDITED)
NIS
------------------
<S> <C>
Revenues from production...................................................................... 1,907,601
Cost of production............................................................................ 1,331,803
----------
----------
Gross profit................................................................................ 575,798
----------
Expenses
Research and development costs.............................................................. 4,543,697
Marketing expenses.......................................................................... 1,397,022
Administrative expenses..................................................................... 847,857
6,788,576
----------
----------
Operating loss................................................................................ 6,212,778
Financial expenses, net....................................................................... 405,226
Other income, net............................................................................. 1,033
----------
6,616,971
----------
----------
</TABLE>
The accompanying notes are an integral part of the condensed financial
statements.
F-48
<PAGE>
TRANSLATED FROM THE HEBREW ORIGINAL
NICECOM LTD.
CONDENSED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
ADJUSTED TO NIS OF SEPTEMBER 1994
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTH PERIOD ENDED
-----------------------------------------------------
SEPTEMBER 30, 1994
-----------------------------------------------------
SHARE CAPITAL ACCUMULATED
CAPITAL RESERVES LOSS TOTAL
NIS NIS NIS NIS
--------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Balance at beginning of period........................... 12,292 -- (2,769,371) (2,757,079)
Issuance of stock, net................................... 143,989 20,034,952 -- 20,178,941
Loss for the nine month period........................... -- -- (6,616,971) (6,616,971)
--------- ------------- ------------ -------------
Balance at end of period............................... 156,281 20,034,952 (9,386,342) 10,804,891
--------- ------------- ------------ -------------
--------- ------------- ------------ -------------
</TABLE>
The accompanying notes are an integral part of the condensed financial
statements.
F-49
<PAGE>
TRANSLATED FROM THE HEBREW ORIGINAL
NICECOM LTD.
CONDENSED STATEMENT OF CASH FLOWS
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1994
ADJUSTED TO NIS OF SEPTEMBER 1994
(UNAUDITED)
<TABLE>
<CAPTION>
NIS
--------------
<S> <C>
Cash flows from current operations:
Net loss........................................................................................ (6,616,971)
Adjustments required to present cash flows from current operations.............................. 1,109,362
--------------
Net cash used in current operations........................................................... (5,507,609)
--------------
Cash flows from investment activities:
Fixed Asset acquisitions........................................................................ (1,716,027)
Proceeds from the realization of fixed assets................................................... 16,529
Investment in marketable securities, net........................................................ (8,568,667)
--------------
Net cash used in investment activities........................................................ (10,268,165)
--------------
Cash flows from financing activities:
Proceeds from the realization of capital, net................................................... 15,438,398
Receipt of credit from bank corporations........................................................ 267,178
--------------
Net cash provided by financing activities..................................................... 15,705,576
--------------
--------------
Decrease in cash and cash equivalents............................................................. (70,198)
Balance of cash and cash equivalents -- beginning of period....................................... 467,970
--------------
Balance of cash and cash equivalents -- end of period............................................. 397,772
--------------
--------------
</TABLE>
The accompanying notes are an integral part of the condensed financial
statements.
F-50
<PAGE>
TRANSLATED FROM THE HEBREW ORIGINAL
NICECOM LTD.
CONDENSED STATEMENT OF CASH FLOWS
ADJUSTMENTS REQUIRED TO PRESENT CASH FLOWS
FROM CURRENT OPERATIONS
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1994
ADJUSTED TO NIS OF SEPTEMBER 1994
(UNAUDITED)
<TABLE>
<CAPTION>
NIS
------------
<S> <C>
Revenues and expenses not involving cash flows:
Depreciation...................................................................................... 273,409
Gain from the realization of fixed assets......................................................... (1,033)
Increase in liability for termination of the employee-employer relationship....................... 29,771
Loss from marketable securities................................................................... 106,940
Changes in assets and liabilities:
Increase in accounts receivable and income receivable............................................. (1,263,067)
Increase in inventories........................................................................... (533,312)
Decrease in other receivables and current assets.................................................. 421,396
Increase in other payables and current liabilities................................................ 2,075,258
------------
1,109,362
------------
------------
</TABLE>
31.3.94 -- Non-cash transaction -- Conversion of interested party loans
totalling NIS 4,740,543 into receipts on account of shares.
F-51
<PAGE>
TRANSLATED FROM THE HEBREW ORIGINAL
NICECOM LTD.
NOTES TO THE FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1994
(UNAUDITED)
NOTE 1 -- GENERAL
A. These financial statements were prepared as of September 30, 1994, and
for the nine month period then ended. These financial statements should
be viewed in conjunction with the annual financial statements and the
accompanying notes of the Company as of December 31, 1993.
B. These interim financial statements were reviewed by the Company's
auditors. The review was limited in scope, in conformity with the
procedures prescribed by the Institute of Certified Public Accountants
in Israel. The review did not constitute an audit in accordance with
generally accepted auditing standards, and therefore, the auditors have
not expressed an opinion thereon.
C. Comparative figures for the nine month period ended September 30, 1994
were not prepared, since the Company's operations were immaterial.
D. Pursuant to an agreement dated February 13, 1994, the Company allocated
shares to a group of investors that grant them 25% of the rights to
control and ownership in the Company, in consideration for the NIS
equivalent of five million US dollars. Furthermore, the Company
allocated shares to its parent company, Nice Systems Ltd. and to Nice
Software (1991) Ltd., in consideration for the NIS equivalent of US
$1,450,000. Subsequent to these allocations, they held 58.2% of the
rights in the company. The remaining shares are held by the Company's
employees.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies applied in the preparation of these
financial statements are identical to those applied in the preparation of the
most recent annual financial statements.
NOTE 3 -- ADJUSTED FINANCIAL STATEMENTS
The financial statements were prepared on the basis of the historical cost
convention, adjusted for the changes in the general purchasing power of the
Israel currency on the basis of the changes in the Consumer Price Index. During
the nine month period ended September 30, 1994, the Consumer Price Index rose
approximately 10.53%.
NOTE 4 -- SUBSEQUENT EVENTS
In October 1994, all of the assets and liabilities of the Company were sold
to a foreign company, in consideration for approximately 53 million US dollars.
The agreement is effective October 18, 1994.
F-52
<PAGE>
TRANSLATED FROM THE HEBREW ORIGINAL
NICECOM LTD.
AS OF SEPTEMBER 30, 1994
<TABLE>
<S> <C>
Cost of production
Salaries and related expense................................................. 747,739
Engineering projects......................................................... 59,183
Raw materials consumed....................................................... 348,932
Other production expenses.................................................... 62,846
Depreciation................................................................. 113,103
----------
1,331,803
----------
----------
Research and development costs
Salaries and related expenses................................................ 3,779,508
Outside projects............................................................. 907,721
Raw materials................................................................ 1,141,417
Other development costs...................................................... 278,778
Depreciation................................................................. 50,000
----------
6,157,424
Less: participation of others in development costs........................... 1,613,727
----------
4,543,697
----------
----------
Current assets
Cash......................................................................... 397,772
Marketable securities........................................................ 8,461,727
Accounts receivable and income receivable.................................... 2,088,531
Other receivables and current assets......................................... 500,388
Inventories.................................................................. 698,247
----------
12,146,665
----------
----------
Current liabilities
Bank overdraft............................................................... 269,253
Suppliers and other payables*................................................ 3,616,482
----------
3,885,735
----------
----------
- ------------------------
* Includes Nice Systems of................................................... 375,856
----------
----------
</TABLE>
F-53
<PAGE>
APPENDIX A
AGREEMENT
AND
PLAN OF REORGANIZATION
DATED MARCH 21, 1995
BY AND AMONG
3COM CORPORATION, ANUINUI ACQUISITION CORPORATION
AND
PRIMARY ACCESS CORPORATION
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C> <C> <C>
1. Definitions........................................................................................... 1
1.1 "PAC Common Stock"......................................................................... 1
1.2 "PAC Components"........................................................................... 1
1.3 "PAC Financial Statements"................................................................. 1
1.4 "PAC Options".............................................................................. 1
1.5 "PAC Preferred Stock"...................................................................... 1
1.6 "PAC Products"............................................................................. 1
1.7 "PAC Shares"............................................................................... 2
1.8 "PAC Stock"................................................................................ 2
1.9 "PAC Warrants"............................................................................. 2
1.10 "Adjustment"............................................................................... 2
1.11 "Adjustment Balance Sheet"................................................................. 2
1.12 "Affiliate"................................................................................ 2
1.13 "Aggregate Purchase Price"................................................................. 2
1.14 "Average Price"............................................................................ 2
1.15 "Best Efforts"............................................................................. 2
1.17 "Buyer Options"............................................................................ 2
1.18 "Buyer Warrants"........................................................................... 2
1.19 "Certificates"............................................................................. 2
1.20 "Closing" and "Closing Date"............................................................... 2
1.21 "Code"..................................................................................... 2
1.22 "Commission"............................................................................... 2
1.23 "Confidential Information"................................................................. 2
1.24 "DataNet Litigation"....................................................................... 2
1.25 "Dissenting Shares"........................................................................ 2
1.26 "Effective Date"........................................................................... 2
1.27 "Exchange Act"............................................................................. 2
1.28 "Exchange Ratio"........................................................................... 2
1.29 "Expiration Date".......................................................................... 2
1.30 "Initial Price"............................................................................ 2
1.31 "Material"................................................................................. 3
1.32 "Material Adverse Change".................................................................. 3
1.33 "Material Adverse Effect".................................................................. 3
1.34 "Merger"................................................................................... 3
1.35 "Agreement of Merger"...................................................................... 3
1.36 "Proprietary Rights"....................................................................... 3
1.38 "Securities"............................................................................... 3
1.39 "Securities Act"........................................................................... 3
1.40 "Surviving Corporation".................................................................... 3
1.41 "Third Party Technology"................................................................... 3
1.42 "Transaction Documents".................................................................... 3
2. Plan of Reorganization................................................................................ 3
2.1 The Merger................................................................................. 3
2.2 Exchange Ratio; Conversion of Shares and Assumption of Options............................. 4
2.3 Fractional Shares.......................................................................... 5
2.4 Escrow Agreement........................................................................... 5
2.5 Appraisal Rights........................................................................... 6
2.6 The Closing................................................................................ 6
2.7 Effective Date............................................................................. 6
</TABLE>
i
<PAGE>
TABLE OF CONTENTS, CONTINUED
<TABLE>
<CAPTION>
PAGE
---------
<S> <C> <C> <C>
2.8 Tax Free Reorganization.................................................................... 6
3. Representations and Warranties of PAC................................................................. 6
3.1 Organization............................................................................... 6
3.2 Capitalization............................................................................. 6
3.3 Power, Authority and Validity.............................................................. 6
3.4 Financial Statements....................................................................... 8
3.5 Tax Matters................................................................................ 9
3.6 Absence of Certain Changes or Events....................................................... 9
3.7 Title and Related Matters.................................................................. 11
3.8 Proprietary Rights......................................................................... 11
3.9 Employee Benefit Plans..................................................................... 12
3.10 Bank Accounts.............................................................................. 13
3.11 Contracts.................................................................................. 13
3.12 Orders, Commitments and Returns............................................................ 14
3.13 Compliance With Law........................................................................ 15
3.14 Labor Difficulties; No Discrimination...................................................... 15
3.15 Trade Regulation........................................................................... 15
3.16 Insider Transactions....................................................................... 16
3.17 Employees, Independent Contractors and Consultants......................................... 16
3.18 Insurance.................................................................................. 16
3.19 Litigation................................................................................. 16
3.20 Governmental Authorizations and Regulations................................................ 16
3.21 Section 341(f)(2).......................................................................... 16
3.22 Subsidiaries............................................................................... 16
3.23 Compliance with Environmental Requirements................................................. 17
3.24 Corporate Documents........................................................................ 17
3.25 No Brokers................................................................................. 17
3.26 Information Supplied....................................................................... 17
3.27 Pooling of Interests....................................................................... 17
3.28 Disclosure................................................................................. 18
4. Representations and Warranties of Buyer and Sub....................................................... 18
4.1 Organization and Good Standing............................................................. 18
4.2 Capital Structure.......................................................................... 18
4.3 Power, Authorization and Validity.......................................................... 18
4.4 No Violation of Existing Agreements........................................................ 18
4.5 Compliance With Other Instruments and Laws................................................. 19
4.6 Litigation................................................................................. 19
4.7 SEC Documents.............................................................................. 19
4.8 No Material Adverse Change................................................................. 19
4.9 Information Supplied....................................................................... 19
4.10 No Brokers................................................................................. 20
4.11 Pooling of Interests....................................................................... 20
4.12 Disclosure................................................................................. 20
4.13 Investigations............................................................................. 20
5. Preclosing Covenants of PAC........................................................................... 20
5.1 Material Consents.......................................................................... 20
5.2 Advice of Changes.......................................................................... 20
</TABLE>
ii
<PAGE>
TABLE OF CONTENTS, CONTINUED
<TABLE>
<CAPTION>
PAGE
---------
<S> <C> <C> <C>
5.3 Conduct of Business........................................................................ 20
5.4 Risk of Loss............................................................................... 21
5.5 Access to Information...................................................................... 22
5.6 Satisfaction of Conditions Precedent....................................................... 22
5.7 Other Negotiations......................................................................... 22
6. Preclosing and Other Covenants of Buyer and Sub....................................................... 22
6.1 Advice of Changes.......................................................................... 22
6.2 Reservation of Buyer Common Stock.......................................................... 22
6.3 Satisfaction of Conditions Precedent....................................................... 22
6.4 Nasdaq National Market Listing............................................................. 23
6.5 Preparation of S-4 and the Proxy Statement; Other Filings.................................. 23
6.6 Preparation of S-8......................................................................... 23
6.7 Escrow Agreement........................................................................... 24
7. Mutual Covenants...................................................................................... 24
7.1 Confidentiality............................................................................ 24
7.2 No Public Announcement..................................................................... 25
7.3 Regulatory Filings; Consents; Reasonable Efforts........................................... 25
7.4 Pooling Accounting......................................................................... 25
7.5 Tax Opinions............................................................................... 25
7.6 Further Assurances......................................................................... 26
8. Closing Matters....................................................................................... 26
8.1 Filing of Agreement of Merger.............................................................. 26
8.2 Exchange of Certificates................................................................... 26
8.3 Delivery of Documents...................................................................... 27
9. Conditions to PAC's Obligations....................................................................... 27
9.1 Accuracy of Representations and Warranties................................................. 27
9.2 Covenants.................................................................................. 27
9.3 No Litigation.............................................................................. 27
9.4 Authorizations............................................................................. 27
9.5 Effectiveness of the S-4................................................................... 27
9.6 Shareholder Approval....................................................................... 28
9.7 Opinion of Buyer's Counsel................................................................. 28
9.8 Government Consents........................................................................ 28
9.9 Date of Closing............................................................................ 28
9.10 Tax Opinions............................................................................... 28
9.11 Nasdaq Listing............................................................................. 28
10. Conditions to Buyer's and Sub's Obligations........................................................... 28
10.1 Accuracy of Representations and Warranties................................................. 28
10.2 Covenants.................................................................................. 28
10.3 No Litigation.............................................................................. 28
10.4 Authorizations............................................................................. 28
10.5 No Adverse Development..................................................................... 29
10.6 Required Consents.......................................................................... 29
10.7 Opinion of PAC's Counsel................................................................... 29
10.8 Employment and Non-compete Agreements...................................................... 29
10.9 Employment with Buyer...................................................................... 29
</TABLE>
iii
<PAGE>
TABLE OF CONTENTS, CONTINUED
<TABLE>
<CAPTION>
PAGE
---------
<S> <C> <C> <C>
10.10 Government Consents........................................................................ 29
10.11 Date of Closing............................................................................ 29
11. Registration of Buyer Common Stock.................................................................... 29
11.1 Effectiveness.............................................................................. 29
12. Termination of Agreement.............................................................................. 29
12.1 Termination................................................................................ 29
12.2 Liability for Termination.................................................................. 30
12.3 Certain Effects of Termination............................................................. 30
12.4 Remedies................................................................................... 30
12.5 Right to Damages........................................................................... 30
13. Escrow and Indemnification............................................................................ 31
13.1 Survival of Representations and Covenants.................................................. 31
13.2 Escrow Fund................................................................................ A-31
13.3 Escrow Fund Limitations.................................................................... A-31
13.4 Damage Threshold........................................................................... A-32
13.5 Escrow Period.............................................................................. A-32
13.6 Claims Upon Escrow Fund.................................................................... A-32
13.7 Valuation of Escrow Shares................................................................. A-33
13.8 Objections to Claims....................................................................... A-33
13.9 Resolution of Conflicts; Arbitration....................................................... A-33
13.10 Shareholders' Agents....................................................................... A-34
13.11 Actions of the Shareholders' Agents........................................................ A-34
13.12 Control of Litigation...................................................................... A-34
13.13 Other Provisions........................................................................... A-35
14. Miscellaneous......................................................................................... 35
14.1 Governing Laws............................................................................. 35
14.2 Binding upon Successors and Assigns........................................................ 35
14.3 Severability............................................................................... 35
14.4 Entire Agreement........................................................................... 36
14.5 Counterparts............................................................................... 36
14.6 Expenses................................................................................... 36
14.7 Amendment and Waivers...................................................................... 36
14.8 Survival of Agreements..................................................................... 36
14.9 Knowledge.................................................................................. 36
14.10 No Waiver.................................................................................. 36
14.11 Attorneys' Fees............................................................................ 36
14.12 Notices.................................................................................... 37
14.13 Time....................................................................................... 37
14.14 Construction of Agreement.................................................................. 37
14.15 No Joint Venture........................................................................... 37
14.16 Pronouns................................................................................... 37
14.17 Further Assurances......................................................................... 37
14.18 Absence of Third Party Beneficiary Rights.................................................. 38
</TABLE>
iv
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is entered into
this 21st day of March, 1995, by and among 3Com Corporation, a California
corporation ("Buyer"), Anuinui Acquisition Corporation, a California corporation
and a wholly-owned subsidiary of Buyer ("Sub"), and Primary Access Corporation,
a California corporation ("PAC").
RECITALS
WHEREAS, subject to and in accordance with the terms and conditions of this
Agreement and pursuant to the Agreement of Merger attached hereto as EXHIBIT A
("Agreement of Merger"), the respective Boards of Directors of Buyer, Sub and
PAC and Buyer, as sole shareholder of Sub, have approved the merger of Sub with
and into PAC (the "Merger"), whereby each issued and outstanding share of common
stock, no par value per share, of PAC ("PAC Common Stock") and each issued and
outstanding share of preferred stock, no par value per share, of PAC ("PAC
Preferred Stock") (together, the "PAC Stock") will be converted into the right
to receive common stock, no par value, of Buyer ("Buyer Common Stock"), as
provided herein;
WHEREAS, for federal income tax purposes, it is intended that the Merger
shall qualify as a plan of reorganization within the meaning of the regulations
issued pursuant to Section 368 of the Internal Revenue Code of 1986, as amended
(the "Code");
WHEREAS, the Merger is intended to be treated as a "pooling of interests"
transaction for accounting purposes and Deloitte & Touche LLP and KPMG Peat
Marwick LLP, the independent accountants for Buyer and PAC, respectively, have
each confirmed to Buyer and PAC in writing that they have reviewed to the extent
they deemed necessary the terms and structure of the Merger and that, as of the
date of this Agreement, they know of nothing that will prohibit the Merger from
being treated as a "pooling of interests" transaction for accounting purposes;
WHEREAS, certain PAC shareholders have executed voting agreements regarding
voting in favor of the Merger and PAC has granted an option to Buyer (the "Buyer
Merger Option") to acquire a number of PAC shares equal to 20% of the
outstanding shares of PAC (the "Related Agreements"); and
WHEREAS, the parties hereto desire to set forth certain representations,
warranties and covenants made by each to the other as an inducement to the
consummation of the Merger.
AGREEMENT
NOW, THEREFORE, in reliance on the foregoing recitals and in and for the
consideration and mutual covenants set forth herein, the parties agree as
follows:
1. DEFINITIONS.
1.1 "PAC Common Stock" shall have the meaning set forth in the
Recitals.
1.2 "PAC Components" shall have the meaning set forth in Section 3.8.
1.3 "PAC Financial Statements" shall have the meaning set forth in
Section 3.4(a).
1.4 "PAC Options" shall mean the outstanding options to acquire PAC
Stock held by PAC employees, consultants and non-employee directors other
than the Buyer Merger Option.
1.5 "PAC Preferred Stock" shall have the meaning set forth in the
Recitals.
1.6 "PAC Products" shall mean all versions and implementations of any
product which has been or is being marketed by PAC or currently is under
development, and all patents, patent applications, trade secrets,
copyrights, trademarks, trade names and other proprietary rights related
thereto.
A-1
<PAGE>
1.7 "PAC Shares" shall mean the shares of PAC capital stock issued and
outstanding at the Effective Date of the Merger, other than the Dissenting
Shares.
1.8 "PAC Stock" shall have the meaning set forth in the Recitals.
1.9 "PAC Warrants" shall mean the warrants or other similar rights
(other than PAC Options) to acquire shares of stock of PAC other than those
held by Buyer.
1.10 "Adjustment" shall have the meaning set forth in Section 2.2(a).
1.11 "Adjustment Balance Sheet" shall have the meaning set forth in
Section 2.2(a).
1.12 "Affiliate" shall have the meaning set forth in the rules and
regulations promulgated by the Commission pursuant to the Securities Act.
1.13 "Aggregate Purchase Price" shall have the meaning set forth in
Section 2.2(a).
1.14 "Average Price" shall have the meaning set forth in Section
2.2(b).
1.15 "Best Efforts" shall mean the efforts that a prudent person
desirous of achieving a result would use in similar circumstances to ensure
that such result is achieved as expeditiously as possible; provided,
however, that an obligation to use Best Efforts under this Agreement does
not require the person subject to that obligation to take actions that would
result in a Material Adverse Change in the benefits to such person of this
Agreement and the transactions contemplated hereby.
1.16 "Buyer Common Stock" shall have the meaning set forth in the
Recitals.
1.17 "Buyer Options" shall have the meaning set forth in Section
2.2(f).
1.18 "Buyer Warrants" shall mean the warrants or other similar rights
to acquire Buyer Common Stock issued by Buyer in exchange for PAC Warrants
pursuant to the Merger.
1.19 "Certificates" shall have the meaning set forth in Section 8.2.
1.20 "Closing" and "Closing Date" shall have the meanings set forth in
Section 2.6.
1.21 "Code" shall have the meaning set forth in the Recitals.
1.22 "Commission" shall mean the United States Securities and Exchange
Commission.
1.23 "Confidential Information" shall mean confidential information of
a party ("Disclosing Party") which is disclosed to another party ("Receiving
Party"). Confidential Information shall include, but not be limited to,
trade secrets, know-how, inventions, techniques, processes, algorithms,
software programs, schematics, designs, contracts, customer lists, financial
information, sales and marketing plans and business information.
1.24 "DataNet Litigation" shall have the meaning set forth in Section
13.2.
1.25 "Dissenting Shares" shall mean those shares held by holders of PAC
Stock who perfect their appraisal rights under the laws of California with
respect thereto.
1.26 "Effective Date" shall have the meaning set forth in Section 2.7.
1.27 "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, or any substituted federal statute and the rules and regulations
thereunder, all as the same shall be in effect at the time.
1.28 "Exchange Ratio" shall mean the fraction of a share of Buyer
Common Stock to be issued for a share of PAC Stock pursuant to Section 2.2.
1.29 "Expiration Date" shall have the meaning set forth in Section 5.7.
1.30 "Initial Price" shall have the meaning set forth in Section
2.2(b).
A-2
<PAGE>
1.31 "Material" shall mean that the financial impact of or liability
relating to a matter is of a magnitude that it would have been material
under U.S. generally accepted accounting principles ("GAAP") as to the
following financial statements (i) if the reference is to PAC, of PAC for
the period ending and as of January 1, 1995, and (ii) if the reference is as
to 3Com, of 3Com for the period ending and as of February 28, 1995.
1.32 "Material Adverse Change" shall mean a change which would have a
Material Adverse Effect.
1.33 "Material Adverse Effect" shall mean, with respect to any person
or entity, any event, change or effect that is material (as defined in
Section 1.31) and adverse to PAC or Buyer.
1.34 "Merger" shall have the meaning set forth in Recitals.
1.35 "Agreement of Merger" shall have the meaning set forth in the
Recitals.
1.36 "Proprietary Rights" shall have the meaning set forth in Section
3.8(a).
1.37 "Related Agreements" shall have the meaning set forth in the
Recitals.
1.38 "Securities" shall mean the PAC Shares, Dissenting Shares, the PAC
Options and PAC Warrants.
1.39 "Securities Act" shall mean the Securities Act of 1933, as
amended, or any substituted federal statute and the rules and regulations
thereunder, all as the same shall be in effect at the time.
1.40 "Surviving Corporation" shall have the meaning set forth in
Section 2.1.
1.41 "Third Party Technology" shall have the meaning set forth in
Section 3.8.
1.42 "Transaction Documents" shall mean all documents or agreements
required to be delivered by any party hereunder including the Agreement of
Merger and Escrow Agreement and the Related Agreements.
2. PLAN OF REORGANIZATION.
2.1 THE MERGER. Subject to the terms and conditions of this Agreement
and the Agreement of Merger, Sub shall be merged with and into PAC in
accordance with the applicable provisions of the laws of California and with
the terms and conditions of this Agreement and the Agreement of Merger, so
that:
(a) At the Effective Date, Sub shall be merged with and into PAC. As
a result of the Merger, the separate corporate existence of Sub shall
cease and PAC shall continue as the surviving corporation (sometimes
referred to herein as the "Surviving Corporation") and shall succeed to
and assume all of the rights and obligations of Sub in accordance with
the laws of California.
(b) The Articles of Incorporation and Bylaws of Sub in effect
immediately prior to the Effective Date shall be the Articles of
Incorporation and Bylaws, respectively, of Surviving Corporation after
the Effective Date unless and until further amended as provided by law.
(c) The directors and officers of Sub immediately prior to the
Effective Date shall be the directors and officers of the Surviving
Corporation after the Effective Date. Such directors
A-3
<PAGE>
and officers shall hold their position until the election and
qualification of their respective successors or until their tenure is
otherwise terminated in accordance with the Bylaws of Surviving
Corporation.
2.2 EXCHANGE RATIO; CONVERSION OF SHARES AND ASSUMPTION OF OPTIONS.
(a) The "Exchange Ratio" for the conversion of the PAC Common Stock
and the PAC Preferred Stock shall be determined by dividing the Aggregate
Purchase Price by the Average Price and then dividing such foregoing
quotient by the sum of (i) the total number of issued and outstanding
shares of PAC Common Stock, plus (ii) the total number of shares of PAC
Common Stock issuable upon conversion of all issued and outstanding
shares of PAC Preferred Stock, plus (iii) the total number of shares of
PAC Common Stock issuable upon exercise of PAC Options and PAC Warrants
outstanding at the Effective Date. The "Aggregate Purchase Price" shall
equal One Hundred Seventy Million Dollars ($170,000,000), less the amount
of the Adjustment. The "Adjustment" shall equal the decrease, if any,
between (a) the net book value of PAC as of January 1, 1995 as set forth
in financial statements previously delivered to Buyer (and attached
hereto as EXHIBIT B) and (b) the sum of (1) the net book value of PAC
(determined in accordance with GAAP) as of April 2, 1995 (the "Adjustment
Balance Sheet"), plus (2) the amount of any fees which are permitted to
and have been paid or accrued by or on account of PAC or any of its
shareholders under Section 14.6, plus (3) any amount of litigation costs
or settlement costs related to the DataNet Litigation (as defined in
Section 13.2) incurred by PAC between the date of this Agreement and the
Closing Date. The Adjustment shall be increased by the amount, if any,
required under Section 14.6 regarding fees and expenses of PAC, or its
shareholders, in excess of $1,750,000. The parties shall jointly prepare
the Adjustment Balance Sheet. In the event there is any disagreement
regarding the Adjustment Balance Sheet, the parties shall resolve such
disagreement prior to the Closing in good faith negotiation and, if it
cannot be promptly resolved, the matter shall be submitted to an
independent accountant not affiliated with either party to be mutually
agreed upon by both parties whose determination the parties shall accept,
provided that such determination does not result in an Adjustment in
excess of $750,000. If the determination of such accountant would result
in an Adjustment in excess of $750,000, PAC shall have the right to
submit any disagreement regarding the Adjustment Balance Sheet to a
binding arbitration in the manner set forth in Section 13.9 and shall not
be required to close the transactions contemplated under this Agreement
before such arbitration is completed.
(b) The "Average Price" shall mean the average of the closing sale
prices of Buyer Common Stock reported in the WALL STREET JOURNAL, on the
basis of information provided by the Nasdaq National Market for each of
the ten trading days immediately preceding (but not including) the
Closing Date. Notwithstanding the above, if the Average Price is greater
than 1.05 times the Initial Price, then the Exchange Ratio shall be the
number of shares resulting from dividing the Aggregate Purchase Price by
the product of 1.05 times the Initial Price, and then dividing the
foregoing quotient by the sum of (i), (ii) and (iii) in Section 2.2(a)
above. If the Average Price is less than .95 times the Initial Price,
then the Exchange Ratio shall be the number of shares resulting from
dividing the Aggregate Purchase Price by the product of .95 times the
Initial Price, and then dividing such quotient by the sum of (i), (ii)
and (iii) in Section 2.2(a) above. The "Initial Price" shall be the
closing sale price of Buyer Common Stock on March 13, 1995 as quoted on
the Nasdaq National Market and as reported in the WALL STREET JOURNAL.
(c) If, between the date of this Agreement and the Effective Date,
the outstanding shares of Buyer Common Stock shall have been changed into
a different number of shares or a different class by reason of any
reclassification, split-up, stock dividend or stock combination, then the
Exchange Ratio shall be correspondingly adjusted.
A-4
<PAGE>
(d) Each share of PAC Stock, issued and outstanding immediately prior
to the Effective Date, will by virtue of the Merger and at the Effective
Date, automatically and without further action on the part of any holder
thereof, be converted into such fraction of a share of fully paid and
nonassessable shares of Buyer Common Stock as is equal to the Exchange
Ratio.
(e) Each share of common stock of Sub issued and outstanding
immediately prior to the Effective Date shall automatically and without
any action on the part of the holder thereof be converted into one
validly issued, fully paid and nonassessable share of common stock of the
Surviving Corporation.
(f) Each PAC Option that is outstanding immediately prior to the
Effective Date shall, by virtue of the Merger and at the Effective Date,
automatically and without further action on the part of any holder
thereof, be assumed by Buyer and converted into an option (a "Buyer
Option") to purchase that number of shares of Buyer Common Stock which
equals the Exchange Ratio multiplied by the number of shares of PAC
Common Stock purchasable under the PAC Common Option immediately prior to
the Effective Date (with the resulting number of shares of Buyer Common
Stock rounded up to the nearest whole number). The exercise price per
share of Buyer Common Stock purchasable under each such Buyer Option will
be equal to the exercise price of the PAC Common Option (per share of PAC
Common Stock) divided by the Exchange Ratio (with the resulting amount
rounded up to the nearest whole cent). Continuous employment with PAC,
whether occurring before or after the Effective Date, shall be credited
to an optionee for purposes of determining the number of shares subject
to exercise, vesting or repurchase after the Effective Date. After the
Effective Date, Buyer shall issue to each holder of an outstanding PAC
Option a document evidencing the foregoing assumption by Buyer. No
fractional shares of Buyer Common Stock shall be issued in connection
with Buyer Options. All fractional shares which would otherwise be
issuable shall be rounded up to the next full share. All of the other
terms of each Buyer Option including, without limitation, the vesting
period, will remain the same as the corresponding assumed PAC Option.
(g) Each PAC Warrant that is outstanding immediately prior to the
Effective Date shall, by virtue of the Merger and without further action
on the part of any holder, be assumed by Buyer at the Effective Date and
converted into a Buyer Warrant. The Buyer Warrants will continue to be on
the terms and conditions set forth in the respective warrant agreements
of the PAC Warrants, except that: (i) the Buyer Warrant shall be
exercisable for a number of shares of Buyer Common Stock equal to the
number of shares of PAC Stock subject to the PAC Warrant immediately
prior to the Effective Date multiplied by the Exchange Ratio (with the
resulting number of shares of Buyer Common Stock rounded up to the
nearest whole number), (ii) the per share exercise price shall be an
amount equal to the per share exercise price of the PAC Warrant prior to
the Closing Date divided by the Exchange Ratio (with the resulting amount
rounded up to the nearest whole cent). No fractional shares of Buyer
Common Stock shall be issued in connection with the Buyer Warrants. All
fractional shares which would otherwise be issuable shall be rounded up
to the next full share.
2.3 FRACTIONAL SHARES. No fractional shares of Buyer Common Stock will
be issued in connection with the Merger, but in lieu thereof, holders of PAC
Stock who would otherwise be entitled to receive a fraction of a share of
Buyer Common Stock will receive from Buyer, promptly after the Effective
Date, an amount of cash equal to the Average Price of Buyer Common Stock
multiplied by the fraction of a share of Buyer Common Stock to which such
holder would otherwise be entitled.
2.4 ESCROW AGREEMENT. (i) At the Effective Date, Buyer will deposit in
escrow certificates representing ten percent (10%) of the shares of Buyer
Common Stock issued to the holders of PAC Stock in the Merger, on a pro rata
basis; and (ii) upon each exercise of the Buyer Options that are
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issued to holders of PAC Options in the Merger, if such occurs between the
Effective Date and on or before the final escrow release date, Buyer will
deposit in escrow certificates representing ten percent (10%) of the shares
of Buyer Common Stock issued upon such exercise. Such shares (the "Escrow
Shares") shall be held as collateral for PAC's indemnification obligations
under Section 13 and pursuant to the provisions of an escrow agreement (the
"Escrow Agreement") to be executed pursuant to Section 6.7.
2.5 APPRAISAL RIGHTS. If holders of PAC Stock are entitled to
appraisal rights in connection with the Merger, any Dissenting Shares shall
not be converted into a right to receive Buyer Common Stock but shall be
converted into the right to receive such consideration as may be determined
to be due with respect to such Dissenting Shares pursuant to the laws of the
State of California. PAC shall give Buyer prompt notice of any demand
received by PAC for appraisal of PAC capital stock, and Buyer shall have the
right to participate in all negotiations and proceedings with respect to
such demand. PAC agrees that, except with the prior written consent of Buyer
or as required under the General Corporation Law of the State of California
(the "CGCL"), it will not voluntarily make any payment with respect to, or
settle or offer to settle, any such demand for appraisal. Each holder of
Dissenting Shares ("Dissenting Shareholder") who, pursuant to the provisions
of the CGCL, becomes entitled to payment of the value of shares of PAC Stock
shall receive payment therefor from PAC (but only after the value therefor
shall have been agreed upon or finally determined pursuant to such
provisions). In the event of legal obligation, after the Effective Date of
the Merger, to deliver a right to receive Buyer Common Stock to a holder of
shares of PAC capital stock who shall have failed to make an effective
demand for appraisal or shall have lost his status as a Dissenting
Shareholder, Buyer shall issue and deliver, upon surrender by such
Dissenting Shareholder of his certificate or certificates representing
shares of PAC Stock, the Buyer Common Stock to which such Dissenting
Shareholder is then entitled under this Section 2.5 and the Agreement of
Merger.
2.6 THE CLOSING. Subject to termination of this Agreement as provided
in Section 12 below, the closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Gray Cary Ware
& Freidenrich, A Professional Corporation, 400 Hamilton Avenue, Palo Alto,
California, as soon as possible upon the satisfaction or waiver of all
conditions
set forth in Section 9 and Section 10 hereof (the "Closing Date"), or such
other time and place as is mutually agreeable to the parties.
2.7 EFFECTIVE DATE. Simultaneously with the Closing, the Agreement of
Merger, together with all required officers' certificates, shall be filed in
the offices of the Secretary of State of the State of California. The Merger
shall become effective immediately upon the date stamped by the California
Secretary of State upon the Agreement of Merger and such officers'
certificates (such date is referred to as the "Effective Date").
2.8 TAX FREE REORGANIZATION. The parties intend to adopt and hereby do
adopt this Agreement as a plan of reorganization within the meaning of the
regulations issued pursuant to Section 368 of the Code and intend to
consummate the Merger in accordance with the provisions of Sections
368(a)(1)(A) and (a)(2)(E) of the Code. Each party agrees that it will not
take or assert any position on any tax return, report, or otherwise which is
inconsistent with the qualification of the Merger as a reorganization within
the meaning of Section 368(a) of the Code. The provisions and
representations contained or referred to in this Section 2.8 shall survive
until the expiration of the applicable statute of limitations.
3. REPRESENTATIONS AND WARRANTIES OF PAC. Except as otherwise set forth in
the "PAC Disclosure Schedule" provided to Buyer on the date hereof, PAC
represents and warrants to Buyer as set forth below. No fact or circumstance
disclosed to Buyer shall constitute an exception to these representations and
warranties unless such fact or circumstance is set forth in the PAC Disclosure
Schedule attached hereto or such supplements thereto. Whenever the term
"enforceable in accordance with its terms" or like expression is used, it is
understood that excepted therefrom are any limitations on
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enforceability under applicable bankruptcy, insolvency, reorganization,
moratorium or other laws of general application affecting the enforcement of
creditor's rights and any limitations on the availability of equitable remedies
that are subject to the discretion of the court before which any proceeding
seeking such remedies may be brought.
3.1 ORGANIZATION. PAC is a corporation duly organized, validly
existing and in good standing under the laws of the State of California and
has corporate power and authority to carry on its business as it is now
being conducted. PAC is duly qualified or licensed to do business and in
good standing in each jurisdiction in which the nature of its business or
properties makes such qualification or licensing necessary. The PAC
Disclosure Schedule contains a true and complete listing of the locations of
all sales offices, manufacturing facilities, and any other offices or
facilities of PAC and a true and complete list of all states in which PAC
maintains any employees. The PAC Disclosure Schedule contains a true and
complete list of all states in which PAC is duly qualified to transact
business as a foreign corporation. True and complete copies of PAC's
Articles of Incorporation and By-laws, as in effect on the date hereof and
as to be in effect immediately prior to the Closing have been provided to
Buyer or its representatives.
3.2 CAPITALIZATION.
(a) The authorized capital stock of PAC as of the date of this
Agreement consists of: (i) 20,000,000 shares of Common Stock and (ii)
10,000,000 shares of Preferred Stock and as of the date of this Agreement
1,586,865 shares of PAC Common Stock and 8,403,722 shares of PAC
Preferred Stock are issued and outstanding and held of record by PAC's
shareholders as set forth and identified in the shareholder list provided
to Buyer or its representatives.
(b) On the date of this Agreement 2,900,000 shares of PAC Common
Stock are available or reserved for issuance under the PAC Stock Option
Plan (the "PAC Plan"), and as of the date of this Agreement 1,951,642
shares are subject to outstanding options and held of record by PAC's
option holders as set forth and identified in the option holder list
provided to Buyer or its representatives, and 117,000 shares of PAC
Common Stock are reserved for issuance and subject to outstanding PAC
Warrants. The holders of the PAC Warrants are set forth on the PAC
Disclosure Schedule.
(c) All of the outstanding Securities have been duly authorized and
are validly issued, fully paid and nonassessable. All outstanding
Securities were issued in compliance with applicable securities laws.
None of the outstanding Securities were issued in consideration in whole
or in part for any contribution, transfer or assignment of the PAC
Products or any proprietary rights incorporated therein or otherwise
related thereto. Except as otherwise set forth in the PAC Disclosure
Schedule, PAC does not have any other shares of its capital stock issued
or outstanding and does not have any other outstanding subscriptions,
options, warrants, rights or other agreements or commitments obligating
PAC to issue shares of its capital stock or other securities.
3.3 POWER, AUTHORITY AND VALIDITY.
(a) PAC has the corporate power and authority to enter into this
Agreement and the other Transaction Documents to which it is a party and
to carry out its obligations hereunder and thereunder. The execution and
delivery of this Agreement and the Transaction Documents to which it is a
party and the consummation of the transactions contemplated hereby and
thereby have been duly authorized by the Board of Directors of PAC, and
no other corporate proceedings, other than shareholder approval of the
Merger, are necessary to authorize this Agreement and the other
Transaction Documents. PAC is not subject to or obligated under any
charter, bylaw or contract provision or any license, franchise or permit,
or subject to any order or decree, which would be breached or violated in
a Material manner by or in Material conflict with its executing and
carrying out this Agreement and the
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transactions contemplated hereunder and under the Transaction Documents. To
PAC's knowledge, except for (i) the filing of a premerger notification and
report form by Buyer and PAC under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended (the "HSR Act"), (ii) the filing of the Agreement of
Merger and any required officers' certificates with the Secretary of State of
the State of California and appropriate documents with the relevant authorities
of other states in which the Buyer is qualified to do business, (iii) filings
under applicable securities laws and (iv) such other consents, approvals,
orders, authorizations, registrations, declarations and filings as may be
required under the laws of any foreign country in which Buyer or any of the
Buyer's subsidiaries conducts any business or owns any property or assets, no
consent of any person who is a party to a contract which is Material to PAC's
business, nor consent of any governmental authority, is required to be obtained
on the part of PAC to permit the transactions contemplated herein and continue
the business activities of PAC as previously conducted by PAC without a Material
Adverse Change. This Agreement is, and the other Transaction Documents to which
PAC is a party when executed and delivered by PAC shall be, the valid and
binding obligations of PAC enforceable in accordance with their respective
terms.
(b) All PAC Options outstanding as of the Effective Date have been
issued in accordance with the terms of the PAC Plan and pursuant to the
standard forms of option agreement previously provided to legal counsel
for Buyer. No option will by its terms require an adjustment in
connection with the Merger. Neither the transactions contemplated by this
Agreement nor any action taken by PAC will result in (i) any acceleration
of vesting in favor of any optionee under an option; (ii) any additional
benefits for any optionee under an option; or (iii) the inability of
Buyer after the Effective Date to exercise any right or benefit held by
PAC prior to the Effective Date with respect to an option assumed by
Buyer, including, without limitation, the right to repurchase an
optionee's unvested shares on termination of such optionee's employment.
The assumption by Buyer of PAC Options in accordance with Section 2.2(f)
hereunder will not (i) give the optionees additional benefits which they
did not have under their options prior to such assumption (after taking
into account the existing provisions of the options, such as their
respective exercise prices and vesting schedules) and (ii) constitute a
breach of the PAC Plan or any Material agreement entered into pursuant to
such plan.
3.4 FINANCIAL STATEMENTS.
(a) PAC has delivered to Buyer copies of PAC's unaudited balance
sheet as of January 1, 1995 and statements of operations, shareholders'
equity and cash flow for the period then-ended (the "PAC Unaudited
Financials") and the audited balance sheet as of October 2, 1994 and
statements of operations, shareholder's equity and cash flow for the
period then ended (collectively, the "PAC Financial Statements").
(b) The PAC Financial Statements are complete and in accordance with
the books and records of PAC and present fairly in all Material respects
the financial position of PAC as of their historical dates. The PAC
Financial Statements have been prepared in accordance with GAAP (except
as to the PAC Unaudited Financials, for the absence of footnotes) applied
on a basis consistent with prior periods. Except and to the extent
reflected or reserved against in such balance sheets (including the notes
thereto), PAC does not have, as of the dates of such balance sheets, any
Material liabilities or obligations (absolute or contingent) of a nature
required or customarily reflected in a balance sheet (or the notes
thereto) prepared in accordance with GAAP. The reserves, if any,
reflected on the PAC Financial Statements are adequate in light of the
contingencies with respect to which they are made. The statements of
operations, shareholder's equity and cash flow are complete and in
accordance with the books and records of PAC and present fairly in all
Material respects the results of operations, equity transactions and
changes of PAC for the periods indicated.
(c) PAC has no Material debt, liability, or obligation of any nature,
whether accrued, absolute, contingent, or otherwise, and whether due or
to become due, that is not reflected or
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reserved against in the PAC Unaudited Financials, except for those (i)
that may have been incurred after the date of the PAC Financial
Statements or (ii) that are not required by GAAP to be included in a
balance sheet or the notes thereto, except that PAC has not established
any reserves with respect to the costs and fees associated with this
Agreement and the transactions contemplated hereby. All Material debts,
liabilities, and obligations incurred after the date of the PAC Financial
Statements were incurred in the ordinary course of business, and are
usual and normal in amount both individually and in the aggregate.
3.5 TAX MATTERS.
(a) PAC has fully and timely, properly and accurately filed all
Material tax returns and reports required to be filed by it, including
all federal, foreign, state and local tax returns and estimates for all
years and periods (and portions thereof) for which any such returns,
reports or estimates were due. All such returns, reports and estimates
were prepared in the manner required by applicable law. All income,
sales, use, occupation, property or other taxes or assessments due from
PAC have been paid. There are no pending assessments, asserted
deficiencies or claims for additional taxes that have not been paid. The
reserves for taxes, if any, reflected on the PAC Financial Statements are
adequate and there are no tax liens on any property or assets of PAC. To
PAC's knowledge, there have been no audits or examinations of any tax
returns or reports by any applicable governmental agency. No state of
facts exists or has existed which would constitute grounds for the
assessment of any Material penalty or of any Material further tax
liability beyond that shown on the respective tax reports, returns or
estimates. There are no outstanding agreements or waivers extending the
statutory period of limitation applicable to any federal, state or local
income tax return or report for any period.
(b) All Material taxes which PAC has been required to collect or
withhold have been duly withheld or collected and, to the extent
required, have been paid to the proper taxing authority.
(c) PAC is not a party to any tax-sharing agreement or similar
arrangement with any other party.
(d) At no time has PAC been included in the federal consolidated
income tax return of any affiliated group of corporations.
(e) No payment which PAC is obliged to pay to any director, officer,
employee or independent contractor pursuant to the terms of an employment
agreement, severance agreement or otherwise will constitute an excess
parachute payment as defined in Section 280G of the Code.
(f) To PAC's knowledge, PAC will not be required to include any
Material adjustment in taxable income for any tax period (or portion
thereof) ending after the Closing Date pursuant to Section 481(c) of the
Code or any provision of the tax laws of any jurisdiction requiring tax
adjustments as a result of a change in method of accounting implemented
by PAC prior the Closing Date for any tax period (or portion thereof)
ending on or before the Closing Date or pursuant to the provisions of any
agreement entered into by PAC prior to the Closing Date with any taxing
authority with regard to the tax liability of PAC for any tax period (or
portion thereof) ending on or before the Closing Date.
(g) PAC is not currently under any contractual obligation to pay to a
governmental body or agency any tax obligations of, or with respect to
any transaction relating to, any other person or to indemnify any other
person with respect to any tax.
3.6 ABSENCE OF CERTAIN CHANGES OR EVENTS. From January 1, 1995, to the
date of this Agreement, PAC has not:
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(a) suffered any Material Adverse Change in its financial condition
or in the operations of its business, nor any Material Adverse Change in
its balance sheet (with the PAC Financial Statements and any subsequent
balance sheet analyzed as if each had been prepared according to GAAP),
and including but not limited to cash distributions or Material decreases
in the net assets of PAC;
(b) suffered any damage, destruction or loss, whether covered by
insurance or not that has resulted in a Material Adverse Effect on its
business;
(c) granted or agreed to make any increase in the compensation
payable or to become payable by PAC to its officers or employees, except
those occurring in the ordinary course of business;
(d) declared, set aside or paid any dividend or made any other
distribution on or in respect of the shares of the capital stock of PAC
or declared any direct or indirect redemption, retirement, purchase or
other acquisition by PAC of such shares;
(e) issued any shares of capital stock of PAC or any warrants,
rights, options or entered into any commitment relating to the shares of
PAC except for the issuance of PAC Shares pursuant to the exercise of
outstanding PAC Options and the Buyer Merger Option;
(f) made any change in the accounting methods or practices it
follows, whether for general financial or tax purposes, or any change in
depreciation or amortization policies or rates adopted therein or
increased the reserve for the DataNet Litigation;
(g) sold, leased, abandoned or otherwise disposed of any real
property or any machinery, equipment or other operating property other
than in the ordinary course of business;
(h) sold, assigned, transferred, licensed or otherwise disposed of
any Material patent, trademark, trade name, brand name, copyright (or
pending application for any patent, trademark or copyright) invention,
work of authorship, process, know-how, formula or trade secret or
interest thereunder or other intangible asset except in the ordinary
course of its business;
(i) suffered any dispute involving any employee organization;
(j) engaged in any activity or entered into any material commitment
or transaction (including without limitation any borrowing or capital
expenditure) other than in the ordinary course of business;
(k) incurred any Material liabilities except in the ordinary course
of business and consistent with past practice which would be required to
be disclosed in financial statements prepared in accordance with GAAP;
(l) permitted or allowed any of its Material property or assets to be
subjected to any mortgage, deed of trust, pledge, lien, security interest
or other encumbrance of any kind, except those permitted under Section
3.7 hereof, other than any purchase money security interests incurred in
the ordinary course of business;
(m) made any capital expenditure or commitment for additions to
property, plant or equipment individually in excess of $100,000, or in
the aggregate, in excess of $500,000;
(n) paid, loaned or advanced any amount to, or sold, transferred or
leased any properties or assets to, or entered into any agreement or
arrangement with any of its Affiliates, officers, directors or
shareholders or any Affiliate or associate of any of the foregoing;
(o) made any amendment to or terminated any agreement which, if not
so amended or terminated, would be required to be disclosed on the PAC
Disclosure Schedule; or
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(p) agreed to take any action described in this Section 3.6 or
outside of its ordinary course of business or which would constitute a
breach of any of the representations contained in this Agreement.
3.7 TITLE AND RELATED MATTERS. PAC has good and marketable title to
all the properties, interests in properties and assets, real and personal,
reflected in the PAC Financial Statements or acquired after the date of the
PAC Financial Statements (except properties, interests in properties and
assets sold or otherwise disposed of since the date of the PAC Financial
Statements in the ordinary course of business), free and clear of all
mortgages, liens, pledges, charges or encumbrances of any kind or character,
except the lien of current taxes not yet due and payable and except for
liens which in the aggregate do not secure more than Fifty Thousand Dollars
($50,000) in liabilities. The equipment of PAC used in the operation of its
business is in good operating condition and repair. To PAC's knowledge, all
real or personal property leases to which PAC is a party are valid, binding,
enforceable and effective in accordance with their respective terms. There
is not under any of such leases any existing Material default or event of
default or event which, with notice or lapse of time or both, would
constitute a Material default. The PAC Disclosure Schedule contains a
description of all material real and personal property leased or owned by
PAC, describing its interest in said property and with respect to real
property a description of each parcel and a summary description of the
buildings, structures and improvements thereon. True and correct copies of
PAC's material leases have been provided to Buyer or its representatives.
3.8 PROPRIETARY RIGHTS.
(a) PAC owns all right, title and interest in and to, or valid
licenses for use of, all material patents, copyrights, technology,
software, software tools, know-how, processes, trade secrets, trademarks,
service marks, trade names and other proprietary rights used in or
necessary for the conduct of PAC's business as conducted to the date
hereof including, without limitation, the material technology and all
material proprietary rights developed or discovered or used in connection
with or contained in the PAC Products, free and clear of all liens,
claims and encumbrances (including without limitation distribution
rights) (all of which are referred to as "Proprietary Rights"). The
foregoing representation as it relates to Third Party Technology (as
hereinafter defined) is limited to PAC's interest pursuant to the Third
Party Licenses (as hereinafter defined), all of which are valid and
enforceable and in full force and effect and which grant PAC such rights
to Third Party Technology as are material to the business of PAC as
conducted or proposed to be conducted. The PAC Disclosure Schedule
contains an accurate and complete description of (i) all material
patents, trademarks (with separate listings of registered and
unregistered trademarks), trade names, and registered copyrights in or
related to the PAC Products, all material applications and registration
statements therefor, and a list of all material licenses and other
agreements relating thereto, and (ii) a list of all material licenses and
other agreements with third parties (the "Third Party Licenses") relating
to any material software, inventions, technology, know-how, or processes
that PAC is licensed or otherwise authorized by such third parties to
use, market, distribute or incorporate into products distributed by PAC
(such software, inventions, technology, know-how and processes are
collectively referred to as the "Third Party Technology"). All of PAC's
material trademark or trade name registrations related to the PAC
Products and all of PAC's material copyrights in any of the PAC Products
are valid and in full force and effect; and consummation of the
transactions contemplated hereby will not alter or impair any such
rights. No Material claims have been asserted against PAC (and PAC is not
aware of any Material claims which are likely to be asserted against PAC
or which have been asserted against others) by any person challenging
PAC's use, possession, manufacture, sale or distribution of PAC Products
under any material patents, trademarks, trade names, copyrights, trade
secrets, software, technology, know-how or processes utilized by
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PAC (including, without limitation, the Third Party Technology) or
challenging or questioning the validity or effectiveness of any material
license or agreement relating thereto (including, without limitation, the
Third Party Licenses). To PAC's knowledge, there is no valid basis for
any claim of the type specified in the immediately preceding sentence
which could in any material way relate to or interfere with the continued
enhancement and exploitation by PAC of any of the PAC Products. To PAC's
knowledge, none of the PAC Products nor the use or exploitation of any
material patents, trademarks, trade names, copyrights, software,
technology, know-how or processes by PAC in its current business in any
material respect infringes on the rights of, constitutes misappropriation
of, or in any way involves unfair competition with respect to, any
proprietary information or intangible property right of any third person
or entity, including without limitation any patent, trade secret,
copyright, trademark or trade name.
(b) PAC has not knowingly granted any third party any right to
manufacture, reproduce, distribute, market or exploit any of the PAC
Products or any adaptations, translations, or derivative works based on
the PAC Products or any portion thereof. Except with respect to the
rights of third parties to the Third Party Technology, no third party has
any express right to manufacture, reproduce, distribute, market or
exploit any works or materials of which any of the PAC Products are a
"derivative work" as that term is defined in the United States Copyright
Act, Title 17, U.S.C. Section 101.
(c) All material designs, drawings, specifications, source code,
object code, documentation, flow charts and diagrams incorporating,
embodying or reflecting any of the PAC Products at any stage of their
development (the "PAC Components") were written, developed and created
solely and exclusively by employees of PAC without the assistance of any
third party or entity or were created by third parties who assigned
ownership of their rights to PAC by means of valid and enforceable
consultant confidentiality and invention assignment agreements, copies of
which have been delivered to Buyer. PAC has at all times used
commercially reasonable efforts to treat the PAC Products and PAC
Components as containing trade secrets and has not disclosed or otherwise
dealt with such items in such a manner as to cause the loss of such trade
secrets by release into the public domain.
(d) To PAC's knowledge, no employee of PAC is in violation in any
material respect of any term of any Material, written employment
contract, patent disclosure agreement or any other material, written
contract or agreement relating to the relationship of any such employee
with PAC or, to PAC's knowledge, any other party because of the nature of
the business conducted by PAC or proposed to be conducted by PAC.
(e) Since January 1, 1989, each person presently or previously
employed by PAC (including independent contractors, if any) with access
authorized by PAC to confidential information has executed a
confidentiality and non-disclosure agreement pursuant to the form of
agreement previously provided to Buyer or its representatives. Such
confidentiality and non-disclosure agreements constitute valid and
binding obligations of PAC and such person, enforceable in all material
respects in accordance with their respective terms.
(f) To PAC's knowledge, no product liability or warranty claims which
individually or in the aggregate could exceed the reserves therefor on
the PAC Financial Statements have been communicated in writing to or
threatened against PAC.
3.9 EMPLOYEE BENEFIT PLANS. PAC does not maintain, and is not
obligated to contribute to, any defined benefit pension plan or any employee
benefit plan that is subject to either Title IV of the Employee Retirement
Income Security Act of 1974 ("ERISA") or the minimum finding standards of
ERISA or the Internal Revenue Code. Each bonus, deferred compensation,
pension, profit-sharing, retirement, stock purchase, stock option, and other
employee benefit or fringe benefit plans, whether formal or informal,
maintained by PAC conforms in all material respects, to all applicable
requirements, if any, of ERISA. The PAC Disclosure Schedule lists and
describes
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all profit-sharing, bonus, incentive, deferred compensation, vacation,
severance pay retirement, stock option, group insurance or other plans
(whether written or not) providing employee benefits.
3.10 BANK ACCOUNTS. The PAC Disclosure Schedule sets forth the names
and locations of all banks, trusts, companies, savings and loan
associations, and other financial institutions at which PAC maintains
accounts of any nature and the names of all persons authorized to draw
thereon or make withdrawals therefrom.
3.11 CONTRACTS.
(a) PAC has no material agreements, contracts or commitments that
provide for the sale, licensing or distribution by PAC of any of its
products, inventions, technology, know-how, trademarks or trade names
except in the ordinary course of its business. True and correct copies of
each document or instrument described in the PAC Disclosure Schedule
pursuant to this Section 3.11(a) have been made available to Buyer or its
representatives.
(b) PAC has no agreements, contracts or commitments that call for
fixed and/or contingent payments or expenditures by or to PAC of more
than $150,000. True and correct copies of each document or instrument set
forth in the PAC Disclosure Schedule pursuant to this Section 3.11(b)
have been made available to Buyer or its representatives.
(c) Without limiting the provisions of Section 3.8 Proprietary Rights
and except for any agreements with Buyer, PAC has not granted to any
third party (including, without limitation, OEMs and site license
customers) any rights to reproduce or manufacture any of the PAC
Products, nor has PAC granted to any third party any exclusive rights of
any kind with respect to any of the PAC Products, including, without
limitation, territorial exclusivity or exclusivity with respect to
particular versions, implementations or translations of any of the PAC
Products, nor has PAC granted any third party any right to market any of
the PAC Products under any "private label" or "OEM" arrangements pursuant
to which PAC is not identified as the source of such goods. True and
correct copies of each document or instrument listed on the PAC
Disclosure Schedule pursuant to this Section 3.11(c) have been made
available to Buyer or its representatives.
(d) PAC has no purchase agreement, contract or commitment that calls
for fixed and/or contingent payments by PAC that are in excess of the
normal, ordinary and usual requirements of PAC's business.
(e) There is no outstanding sales contract, commitment or proposal
(including, without limitation, porting and development projects) of PAC
that PAC currently expects to result in any Material loss to PAC (before
allocation of overhead and administrative costs) upon completion or
performance thereof.
(f) PAC has no outstanding agreements, contracts or commitments with
officers, employees, agents, consultants, advisors, salesmen, sales
representatives, distributors or dealers that are not cancelable by it on
notice of not longer than ninety (90) days and without liability, penalty
or premium.
(g) PAC has not entered into any employment, independent contractor
or similar agreement, contract or commitment that is not terminable on no
more than ninety (90) days' notice without penalty or liability of any
type, including without limitation severance or termination pay.
(h) PAC has no currently effective collective bargaining or union
agreements, contracts or commitments.
(i) PAC is not restricted by agreement from competing with any person
or from carrying on its business anywhere in the world.
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(j) PAC is under no liability or obligation, and no such outstanding
claim has been made, with respect to the return to PAC of inventory or
merchandise in the possession of wholesalers, distributors, retailers, or
other customers, except such liabilities, obligations and claims as, in
the aggregate, do not exceed $300,000.
(k) PAC has not guaranteed any obligations of other persons or made
any agreements to acquire or guarantee any obligations of other persons.
(l) PAC has no outstanding loan or advance to any person; nor is it
party to any line of credit, standby financing, revolving credit or other
similar financing arrangement of any sort which would permit the
borrowing by PAC of any sum not reflected in the PAC Financial
Statements.
(m) All material contracts, agreements and instruments to which PAC
is a party are valid, binding, in full force and effect, and enforceable
by PAC in accordance with their respective terms. No such material
contract, agreement or instrument contains any material
liquidated-damages, penalty or similar provision. To the knowledge of the
President, Chief Financial Officer, and Vice Presidents of Sales and
Marketing of PAC, no party to any such material contract, agreement or
instrument intends to cancel, withdraw, modify or amend such contract,
agreement or arrangement.
(n) The PAC Disclosure Schedule lists all material agreements
pursuant to which PAC has agreed to manufacture for or supply to any
third party any PAC Products or components thereto. True and correct
copies of each document or instrument listed on the PAC Disclosure
Schedule pursuant to this Section 3.11(n) have been provided to Buyer or
its representatives. The PAC Disclosure Schedule also lists each vendor
who manufactures for or supplies to PAC any material product or component
included in the PAC Products or is the sole source for any material
product or component included in the PAC Products.
(o) PAC is not in material default under or in material breach or
violation of, nor, to PAC's knowledge, is there any valid basis for any
claim of material default by PAC under, or material breach or violation
by PAC of, any material contract, commitment or restriction to which PAC
is a party or to which it or any of its properties is bound where such
defaults, beaches, or violations would, in the aggregate, have a Material
Adverse Effect on the operations, assets, financial condition or
prospects of PAC. To PAC's knowledge, no other party is in material
default under or in material breach or violation of, nor is there any
valid basis for any claim of material default by any other party under or
any material breach or violation by any other party of, any material
contract, commitment, or restriction to which PAC is bound or by which
any of its properties is bound where such defaults, beaches, or
violations would, in the aggregate, have a Material Adverse Effect on the
operations, assets, financial condition or prospects of PAC.
(p) All material agreements, contracts and commitments (the "Material
Contracts") listed or described in the PAC Disclosure Schedule pursuant
to this Section 3.11 do not contain provisions which would require the
consent of third parties to the Merger or which would be altered as a
result of the Merger. If any of the Material Contracts contain any such
provisions, then PAC has described in the PAC Disclosure Schedule such
actions as is necessary with respect to such Material Contract to avoid
any adverse consequence as a result of the Merger and shall, prior to the
Closing Date, have obtained all necessary consents and taken such other
action with respect to the Material Contract.
3.12 ORDERS, COMMITMENTS AND RETURNS. All accepted and unfilled orders
entered into by PAC for the sale, license, or lease or other disposition by
PAC of its products, and all agreements, contracts, or commitments for the
purchase of supplies by PAC, were made in the ordinary course of business.
No outstanding purchase or outstanding lease commitment of PAC is in excess
of the normal, ordinary and usual requirements of its business or was made
at any price (on both a per
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unit and aggregate basis) materially in excess of the current market price
at the time made, or contains terms and conditions materially more onerous
to PAC than those usual and customary in the industry.
3.13 COMPLIANCE WITH LAW. PAC is in compliance in all material
respects with all applicable laws and regulations where the failure to
comply with such laws and regulations would have a Material Adverse Effect
on PAC. Neither PAC nor, to PAC's knowledge, any of its employees has
directly or indirectly paid or delivered any fee, commission or other sum of
money or item of property, however characterized, to any finder, agent,
government official or other party in the United States or any other
country, that was or is in violation of any federal, state, or local statute
or law or of any statute or law of any other country having jurisdiction.
PAC has not participated directly or indirectly in any boycotts or other
similar practices affecting any of its customers. PAC has complied in all
material respects at all times with any and all applicable federal, state
and foreign laws, rules, regulations, proclamations and orders relating to
the importation or exportation of its products where the failure to comply
which such laws, rules, regulations, proclamations or orders would have a
Material Adverse Effect on PAC.
3.14 LABOR DIFFICULTIES; NO DISCRIMINATION.
(a) To PAC's knowledge, PAC is not engaged in any unfair labor
practice and is not in material violation of any applicable laws
respecting employment and employment practices, terms and conditions of
employment, and wages and hours.
(b) There is no unfair labor practice complaint against PAC actually
pending or threatened before the National Labor Relations Board.
(c) There is no strike, labor dispute, slowdown, or stoppage actually
pending or threatened against PAC.
(d) No union representation question exists respecting the employees
of PAC and to PAC's knowledge no union organizing activities are taking
place.
(e) No grievance that might have a Material Adverse Effect on PAC or
the conduct of its business, nor any arbitration proceeding arising out
of or under any collective bargaining agreement is pending and no claims
therefor exist.
(f) No collective bargaining agreement that is binding on PAC
restricts it from relocating or closing any of its operations.
(g) PAC has not experienced any material work stoppage or other
material labor difficulty.
(h) There is and has not been within the two years immediately
preceding the date of this Agreement any claim against PAC and received
by PAC based on actual or alleged race, age, sex, disability or other
harassment or discrimination, or similar tortious conduct, nor to the
knowledge of the Chief Executive Officer, Chief Financial Officer of PAC,
is there any basis for any such claim.
3.15 TRADE REGULATION. PAC has not terminated its relationship with or
refused to ship PAC Products to any dealer, distributor, OEM, third party
marketing entity or customer which had theretofore paid or been obligated to
pay PAC in excess of ($50,000) over any consecutive twelve (12) month
period. All of the prices charged by PAC in connection with the marketing or
sale of any products or services have been in compliance in all material
respects with all applicable laws and regulations. No claims have been
communicated or threatened in writing against PAC with respect to wrongful
termination of any dealer, distributor or any other marketing entity,
discriminatory pricing, price fixing, unfair competition, false advertising,
or any other violation of
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any laws or regulations relating to anti-competitive practices or unfair
trade practices of any kind, and to PAC's knowledge, no specific situation,
set of facts, or occurrence provides any basis for any such claim.
3.16 INSIDER TRANSACTIONS. No Affiliate of PAC has any interest in (i)
any Material equipment or other material property, real or personal,
tangible or intangible, including, without limitation, any Material item of
intellectual property, used in connection with or pertaining to the business
of PAC, or (ii) any Material creditor, supplier, customer, manufacturer,
agent, representative, or distributor of products of PAC; provided, however,
that no such Affiliate or other person shall be deemed to have such an
interest solely by virtue of the ownership of less than 1% of the
outstanding stock or debt securities of any publicly-held company, the stock
or debt securities of which are traded on a recognized stock exchange or
quoted on the National Association of Securities Dealers Automated Quotation
System.
3.17 EMPLOYEES, INDEPENDENT CONTRACTORS AND CONSULTANTS. The PAC
Disclosure Schedule lists and describes all currently effective written or,
to PAC's knowledge, oral consulting, independent contractor and/or
employment agreements and other material agreements concluded with
individual employees, independent contractors or consultants to which PAC is
a party. True and correct copies of all such written agreements have been
provided to Buyer or its representatives. All salaries and wages paid by PAC
are in compliance in all material respects with applicable federal, state
and local laws. Also shown on the PAC Disclosure Schedule are the names of
all persons whose annual rate of compensation, including bonuses and other
payments of any kind, is in excess of $50,000 and the names of all employees
with a title of "Director" of a department or above and the salaries for
each such person. PAC's aggregate accrued vacation and severance pay as of
February 26, 1995 was approximately Three Hundred Sixty-One Thousand One
Hundred Thirteen Dollars ($361,113).
3.18 INSURANCE. The PAC Disclosure Schedule contains a list of the
principal policies of fire, liability and other forms of insurance held by
PAC. To PAC's knowledge, PAC has not done anything, either by way of action
or inaction, that might invalidate such policies in whole or in part.
3.19 LITIGATION. There are no suits, actions or proceedings pending
or, to the knowledge of the Chief Executive Officer, Chief Financial Officer
and Chief Technical Officer and Vice President of Marketing of PAC,
threatened in writing against or materially affecting PAC, in each case
other than immaterial matters, or which questions or challenges the validity
of this Agreement or the Transaction Documents. There is no material
judgment, decree, injunction, rule or order of any court, governmental
department, commission, agency, instrumentality or arbitrator outstanding
against PAC.
3.20 GOVERNMENTAL AUTHORIZATIONS AND REGULATIONS. To the knowledge of
PAC, all licenses, franchises, permits and other governmental authorizations
held by PAC and material to its business are valid and sufficient in all
material respects for the business presently carried on by PAC. To the
knowledge of PAC, the business of PAC is not being conducted in violation of
any law, ordinance or regulation of any governmental entity, except for
violations which either singly or in the aggregate do not and will not have
a Material Adverse Effect on the operations, assets or financial condition
of PAC.
3.21 SECTION 341(F)(2). PAC has not, with regard to any property or
assets held, acquired or to be acquired by it, at any time, filed a consent
to the application of Section 341(f)(2) of the Code nor will any such
consent be filed before the Closing.
3.22 SUBSIDIARIES. PAC has no subsidiaries. PAC does not own or
control (directly or indirectly) any capital stock, bonds or other
securities of, and does not have any proprietary interest in, any other
corporation, general or limited partnership, firm, association or business
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organization, entity or enterprise, and PAC does not control (directly or
indirectly) the management or policies of any other corporation, partnership,
firm, association or business organization, entity or enterprise.
3.23 COMPLIANCE WITH ENVIRONMENTAL REQUIREMENTS. To PAC's knowledge,
PAC has obtained all material permits, licenses and other authorizations
which are required under federal, state and local laws applicable to PAC and
relating to pollution or protection of the environment, including laws or
provisions relating to emissions, discharges, releases or threatened
releases of pollutants, contaminants, or hazardous or toxic materials,
substances, or wastes into air, surface water, groundwater, or land, or
otherwise relating to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport, or handling of pollutants,
contaminants or hazardous or toxic materials, substances, or wastes. Except
as set forth in the PAC Disclosure Schedule, to PAC's knowledge, PAC is in
material compliance with all terms and conditions of the required permits,
licenses and authorizations. Except as set forth in the PAC Disclosure
Schedule, PAC is not aware of, nor has PAC received written notice of, any
conditions, circumstances, activities, practices, incidents, or actions
which may form the basis of any claim, action, suit, proceeding, hearing, or
investigation of, by, against or relating to PAC, based on or related to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport, or handling, or the emission, discharge, release or threatened
release into the environment, of any pollutant, contaminant, or hazardous or
toxic substance, material or waste.
3.24 CORPORATE DOCUMENTS. PAC has furnished to Buyer for its
examination: (i) copies of its Articles of Incorporation and Bylaws; (ii)
its Minute Book containing all records required to be set forth of all
proceedings, consents, actions, and meetings of the shareholders, the board
of directors and any committees thereof; (iii) all material permits, orders,
and consents issued by any regulatory agency with respect to PAC, or any
securities of PAC, and all applications for such permits, orders, and
consents; and (iv) the stock transfer books of PAC setting forth all
transfers of any capital stock. The corporate minute books, stock
certificate books, stock registers and other corporate records of PAC are
complete and accurate in all material respects, and the signatures appearing
on all documents contained therein are the true signatures of the persons
purporting to have signed the same. All actions reflected in such books and
records were duly and validly taken in compliance in all material respects
with the laws of the applicable jurisdiction.
3.25 NO BROKERS. Neither PAC nor, to PAC's knowledge, any PAC
shareholder is obligated for the payment of fees or expenses of any broker
or finder in connection with the origin, negotiation or execution of this
Agreement or the Agreement of Merger or in connection with any transaction
contemplated hereby or thereby.
3.26 INFORMATION SUPPLIED. None of the information supplied or to be
supplied by PAC for inclusion in the Registration Statement on Form S-4 to
be filed with the Securities and Exchange Commission ("SEC") by Buyer in
connection with the issuance of the Buyer Common Stock on or as a result of
the Merger (the "S-4"), including the Proxy Statement included therein, at
the date such information is supplied and at the time of the meeting of
holders of PAC Stock, contains or will contain any untrue statement of a
material fact or omits or will omit to state any material fact required to
be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they are made, not misleading or
will, in the case of the S-4 at the time the S-4 becomes effective under the
Securities Act, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make
the statements therein not misleading.
3.27 POOLING OF INTERESTS. To PAC's knowledge, neither PAC nor any of
its Affiliates has, through the date of this Agreement, taken or agreed to
take any action which would prevent PAC from accounting for the business
combination to be effected by the Merger as a pooling of interests.
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3.28 DISCLOSURE. No statements by PAC contained in this Agreement, its
exhibits and schedules nor any of the certificates or documents required to
be delivered by PAC to Buyer or Sub under this Agreement contains any untrue
statement of a material fact or omits to state a material fact necessary in
order to make the statements contained herein or therein not misleading in
light of the circumstances under which they were made.
4. REPRESENTATIONS AND WARRANTIES OF BUYER AND SUB. Except as set forth
the Buyer Disclosure Schedule provided to PAC on the date hereof, Buyer and Sub
jointly and severally represent and warrant to PAC that:
4.1 ORGANIZATION AND GOOD STANDING. Buyer and Sub are corporations
duly organized, validly existing and in good standing under the laws of the
State of California and have full power and authority to carry on their
businesses as now conducted.
4.2 CAPITAL STRUCTURE. As of the date hereof the authorized capital
stock of Buyer consists of 200,000,000 shares of Buyer Common Stock, no par
value, and 3,000,000 shares of Buyer Preferred Stock, no par value. At the
close of business on February 28, 1995, 66,480,931 shares of Buyer Common
Stock were outstanding, 13,127,132 shares of Buyer Common Stock were subject
to outstanding stock options ("Existing Buyer Options"), no shares of Buyer
Common Stock were held by Buyer in its treasury, and no shares of Buyer
Preferred Stock were held by Buyer in its treasury, and no shares of Buyer
Preferred Stock were outstanding. All the outstanding shares of Buyer Common
Stock are validly issued, fully paid, nonassessable and free of preemptive
rights. The shares of Buyer Common Stock issuable in connection with the
Merger are duly authorized and reserved for issuance and, when issued in
accordance with the terms of this Agreement and Agreement of Merger, will be
validly issued, fully paid, nonassessable and free of preemptive rights. As
of the date hereof, the authorized capital stock of Sub consists of 1,000
shares of Common Stock, no par value, all of which are validly issued, fully
paid and nonassessable and owned by Buyer. Except for the shares listed
above issuable pursuant to Existing Buyer Options, there are not any
options, warrants, calls, conversion rights, commitments or agreements of
any character to which Buyer or any subsidiary of Buyer is a party or by
which any of them may be bound obligating Buyer or any subsidiary of Buyer
to issue, deliver, sell, or cause to be issued, delivered or sold,
additional shares of the capital stock of Buyer or any subsidiary of Buyer
or obligating Buyer or any subsidiary of Buyer to grant, extend or enter
into any such option, warrant, call, conversion right, commitment or
agreement.
4.3 POWER, AUTHORIZATION AND VALIDITY. Buyer and Sub have the right,
power, legal capacity and authority to enter into and perform their
respective obligations under this Agreement and the other Transaction
Documents to which they are a party. The execution and delivery of this
Agreement and the other Transaction Documents have been duly and validly
approved and authorized by the Boards of Directors of Buyer and Sub and the
shareholder of Sub. No authorization or approval, governmental or otherwise,
is necessary in order to enable Buyer and Sub to enter into and to perform
the terms of this Agreement or the other Transaction Documents on their
parts to be performed, except for (i) the filing of a premerger notification
and report form by Buyer and PAC under the HSR Act, (ii) the filing of the
Agreement of Merger and all required officers' certificates with the
Secretary of State of the State of California and appropriate documents with
the relevant authorities of other states in which the Buyer is qualified to
do business, (iii) filings under applicable securities laws and (iv) such
other consents, approvals, orders, authorizations, registrations,
declarations and filings as may be required under the laws of any foreign
country in which Buyer or any of the Buyer's subsidiaries conducts any
business or owns any property or assets. This Agreement is, and the other
Transaction Documents when executed and delivered by Buyer and/or Sub shall
be, the valid and binding obligations of Buyer and Sub enforceable in
accordance with their respective terms.
4.4 NO VIOLATION OF EXISTING AGREEMENTS. Neither the execution and
delivery of this Agreement nor the consummation of the transactions
contemplated hereby will conflict with, or result
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in a material breach or violation of, any provision of Buyer's Articles of
Incorporation or Sub's Articles of Incorporation, or their respective
Bylaws, as currently in effect, any instrument or contract to which Buyer or
Sub is a party or by which any such party is bound, or any federal, state or
local judgment, writ, decree, order, statute, rule or regulation applicable
to any such person. Neither the execution and delivery of this Agreement,
nor any Agreement attached hereto as an Exhibit, nor the consummation of the
transactions contemplated hereby or thereby will have a Material Adverse
Effect on the operations, assets, financial condition or prospects of Buyer.
4.5 COMPLIANCE WITH OTHER INSTRUMENTS AND LAWS. Buyer is not in
violation of any provisions of its Articles of Incorporation or Bylaws as
currently in effect or in effect at the Closing, or any federal, state or
local judgment, writ, decree, or order applicable to Buyer.
4.6 LITIGATION. There is no suit, action, proceeding, claim or
investigation pending or, to the best of Buyer's knowledge, threatened
against Buyer and Sub before any court or administrative agency which
questions or challenges the validity of this Agreement and which is not set
forth in the SEC Documents (as defined below) which could have a Material
Adverse Effect on the operations, assets, financial condition or prospects
of Buyer or Sub.
4.7 SEC DOCUMENTS. Buyer has delivered to PAC true, accurate and
complete copies of Buyer's most recent reports on Forms 10-K, 10-Q and any
report on Form 8-K filed since the most recent 10-Q (collectively, the "SEC
Documents"). As of their respective filing dates, the SEC Documents complied
in all material respects with the requirements of the Exchange Act or the
Securities Act, and taken together, the SEC Documents contained no untrue
statement of a material fact and did not omit to state a material fact
required to be stated therein or necessary to make the statements made
therein, in light of the circumstances in which they were made, not
misleading, except to the extent corrected by a subsequently filed SEC
Document. The financial statements of Buyer included in the Buyer SEC
Documents (the "Buyer Financial Statements") comply as to form in all
material respects with applicable accounting requirements and with the
published rules and regulations of the SEC with respect thereto, have been
prepared in accordance with GAAP (except as may be indicated in the notes
thereto or, in the case of unaudited statements, as permitted by Form 10-Q
of the SEC) and fairly present the consolidated financial position of Buyer
and its consolidated subsidiaries at the dates thereof and the consolidated
results of their operations and changes in financial position for the
periods then ended (subject, in the case of unaudited statements, to normal,
recurring audit adjustments, provided that the notes and accounts receivable
are collectible in the amounts shown thereon and inventories are not subject
to write-down, except in either case in an amount not Material or for which
Buyer has provided adequate reserves). There has been no change in Buyer's
accounting policies or estimates except as described in the notes to the
Buyer Financial Statements.
4.8 NO MATERIAL ADVERSE CHANGE. Since November 30, 1994, Buyer has
conducted its business in the ordinary course and there has not occurred:
(i) any Material Adverse Change in the business condition of Buyer; (ii) any
amendments or changes in the Articles of Incorporation or Bylaws of Buyer or
(since its inception) Sub; (iii) any damage, destruction or loss, whether
covered by insurance or not, that has resulted in a Material Adverse Effect
on the properties or business of Buyer; or (iv) any sale of a material
amount of property of Buyer, except in the ordinary course of business.
4.9 INFORMATION SUPPLIED. None of the information supplied by Buyer or
Sub for inclusion in the Proxy Statement or the S-4, at the time such
information is supplied and at the time of the meeting of holders of PAC
Stock, contains or will contain any untrue statement of a material fact or
omits or will omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not
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misleading, or will, in the case of the S-4, at the time the S-4 becomes
effective under the Securities Act, contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading.
4.10 NO BROKERS. Neither Buyer nor Sub is obligated for the payment of
fees or expenses of any broker or finder in connection with the origin,
negotiation or execution of this Agreement or the other Transaction
Documents or in connection with any transaction contemplated hereby or
thereby.
4.11 POOLING OF INTERESTS. To its knowledge, neither Buyer nor any of
its Affiliates has, through the date of this Agreement, taken or agreed to
take any action which would prevent Buyer from accounting for the business
combination to be effected by the Merger as a pooling of interests.
4.12 DISCLOSURE. Neither this Agreement, its exhibits and schedules,
nor any of the certificates or documents required to be delivered by Buyer
or Sub to PAC under this Agreement contains any untrue statement of a
material fact or omits to state any material fact necessary in order to make
the statements contained herein and therein not misleading in light of the
circumstances under which such statements were made.
4.13 INVESTIGATIONS. To the actual knowledge of Buyer's Vice President
of Business Development, including, but not limited to all of the
information made available to the accounting firm of Deloitte & Touche LLP,
Buyer's investigations conducted in connection with the transactions
contemplated by this Agreement, including those made pursuant to Section 5.6
hereof, have not resulted in Buyer discovering information which is
materially inconsistent with, or which could otherwise give rise to a breach
of, any of PAC's representations and warranties hereunder. Nothing contained
in this Section 4.13 shall be construed to impose any additional duty on
Buyer to investigate the transactions contemplated hereunder.
5. PRECLOSING COVENANTS OF PAC.
5.1 MATERIAL CONSENTS. PAC shall use its Best Efforts to obtain any
and all consents necessary for the assumption of those Material Contracts
listed on Schedule 5.1 of the PAC Disclosure Schedule by the Surviving
Corporation concurrent with the Merger (the "Material Consents").
5.2 ADVICE OF CHANGES. PAC will promptly advise Buyer in writing (i)
of any event occurring subsequent to the date of this Agreement which would
render any representation or warranty of PAC contained in this Agreement, if
made on or as of the date of such event or the Closing Date, untrue or
inaccurate in any material and adverse respect and (ii) of any Material
Adverse Change in PAC's business or financial condition, taken as a whole.
5.3 CONDUCT OF BUSINESS. Until the Closing, PAC will continue to
conduct its business and maintain its business relationships in the ordinary
and usual course and will not, except as set forth in the PAC Disclosure
Schedule or without the prior written consent of Buyer, which will not be
unreasonably withheld (provided that Buyer shall be entitled to withhold
consent as to matter (a) below, if Buyer is willing to provide financing as
to such items),
(a) borrow any money which borrowings exceed in the aggregate
$500,000;
(b) incur or commit to incur any capital expenditures in excess of
$500,000 in the aggregate or as to any individual matter in excess of
$100,000;
(c) lease, license, sell, transfer or encumber or permit to be
encumbered any asset, intellectual property right or other property
associated with the business of PAC (including sales or transfers to
Affiliates of PAC), except for sales of inventory in the usual and
ordinary course of business and except for cash applied in payment of
PAC's liabilities in the usual and ordinary course of its business;
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(d) dispose of any of its assets, except inventory in the regular and
ordinary course of business;
(e) enter into any lease or contract for the purchase or sale of any
property, real or personal except in the ordinary course of business;
(f) fail to maintain its equipment and other assets in good working
condition and repair according to the standards it has maintained up to
the date of this Agreement, subject only to ordinary wear and tear;
(g) pay any bonus, increased salary, or special remuneration to any
officer or employee, including any amounts for accrued but unpaid salary
or bonuses (other than amounts not in excess of normal payments made on a
regular basis);
(h) change accounting methods;
(i) declare, set aside or pay any cash or stock dividend or other
distribution in respect of capital, or redeem or otherwise acquire any of
its capital stock;
(j) amend or terminate any material contract, agreement or license
to which it is a party except in the ordinary course of business;
(k) loan any amount to any person or entity, or guaranty or act as a
surety for any obligation;
(l) waive or release any right or claim, except in the ordinary
course of business;
(m) issue or sell any shares of its capital stock of any class or any
other of its securities, or issue or create any warrants, obligations,
subscriptions, options, convertible securities, or other commitments to
issue shares of capital stock.
(n) split or combine the outstanding shares of its capital stock of
any class or enter into any recapitalization affecting the number of
outstanding shares of its capital stock of any class or affecting any
other of its securities;
(o) merge, consolidate or reorganize with any entity;
(p) amend its Articles of Incorporation or Bylaws;
(q) make or change any election, change any annual accounting period,
adopt or change any accounting method, file any amended tax return, enter
into any closing agreement, settle any tax claim or assessment relating
to PAC, surrender any right to claim refund of taxes, consent to any
extension or waiver of the limitation period applicable to any tax claim
or assessment relating to PAC, or take any other action or omit to take
any action, if any such election, adoption, change, amendment, agreement,
settlement, surrender, consent or other action or omission would have the
effect of increasing the tax liability of PAC or Buyer;
(r) do anything that is not contemplated by this Agreement or would
cause there to be a Material Adverse Change in the PAC Financial
Statements (with such PAC Financial Statements analyzed as if they had
been prepared according to GAAP, and including but not limited to cash
distributions or material decreases in the net assets of PAC), except as
would occur in the ordinary course of PAC's business, between the date of
the PAC Financial Statements and the Closing Date; or
(s) agree to do any of the things described in the preceding clauses
Section 5.3(a) through (r).
5.4 RISK OF LOSS. Except as otherwise provided in this Agreement, and
subject to Section 2.2(a), until the Closing, all risk of loss, damage or
destruction to PAC's assets shall be borne by PAC.
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5.5 ACCESS TO INFORMATION. Until the Closing, PAC shall allow Buyer
and its agents free access upon reasonable notice and during normal working
hours to its files, books, records, and offices, including, without
limitation, any and all information relating to taxes, commitments,
contracts, leases, licenses, and personal property and financial condition.
Until the Closing, PAC shall cause its accountants to cooperate with Buyer
and its agents in making available all financial information requested,
including without limitation the right to examine all working papers
pertaining to all financial statements prepared or audited by such
accountants.
5.6 SATISFACTION OF CONDITIONS PRECEDENT. PAC will use its Best
Efforts to satisfy or cause to be satisfied all the conditions precedent
which are set forth in Section 10, and PAC will use its Best Efforts to
cause the transactions contemplated by this Agreement to be consummated,
and, without limiting the generality of the foregoing, to obtain all
consents and authorizations of third parties and to make all filings with,
and give all notices to, third parties which may be necessary or reasonably
required on its part in order to effect the transactions contemplated
hereby.
5.7 OTHER NEGOTIATIONS. Between the date hereof and June 30, 1995
(subject to extension upon mutual agreement), or such earlier date as Buyer
and PAC mutually agree to discontinue discussions of the Merger (the
"Expiration Date"), PAC will not (and it will use its Best Efforts to assure
that its officers, directors, employees, agents and Affiliates do not on its
behalf) take any action to solicit, initiate, seek, encourage or support any
inquiry, proposal or offer from, furnish any information to, or participate
in any negotiations with, any corporation, partnership, person or other
entity or group (other than discussions with Buyer) regarding any
acquisition of PAC, any merger or consolidation with or involving PAC, or
any acquisition of any material portion of the stock or assets of PAC. PAC
shall discontinue, and instruct its agents to discontinue, any preparation
for a public offering, including but not limited to consulting in any manner
with its advisors regarding such an offering. PAC agrees that any such
negotiations in progress as of the date hereof will be terminated or
suspended during such period. In no event will PAC solicit or enter into an
agreement concerning any such third party transaction. PAC represents and
warrants that it has the legal right to terminate or suspend any such
pending negotiations. If between the date of this Agreement and the
termination of this Agreement, PAC receives from a third party any offer or
indication of interest regarding any of the transactions referred to above,
or any request for information regarding any of such transactions, PAC shall
(i) notify Buyer immediately of such offer, indication of interest or
request, including the full terms of any proposal therein, (ii) notify such
third party of PAC's obligations under this Agreement and (iii) reject any
offer so received.
5.8 CONSENTS. PAC shall use its Best Efforts to obtain the Material
consents as reasonably required by Buyer.
6. PRECLOSING AND OTHER COVENANTS OF BUYER AND SUB.
6.1 ADVICE OF CHANGES. Buyer and Sub will promptly advise PAC in
writing of any event occurring subsequent to the date of this Agreement
which would render any representation or warranty of Buyer or Sub contained
in this Agreement, if made on or as of the date of such event or the Closing
Date, untrue or inaccurate in any material respect.
6.2 RESERVATION OF BUYER COMMON STOCK. Buyer shall reserve for
issuance, out of its authorized but unissued capital stock, the maximum
number of shares of Buyer Common Stock as may be issuable upon consummation
of the Merger.
6.3 SATISFACTION OF CONDITIONS PRECEDENT. Buyer and Sub will use their
Best Efforts to satisfy or cause to be satisfied all the conditions
precedent which are set forth in Section 9, and Buyer and Sub will use their
Best Efforts to cause the transactions contemplated by this Agreement to be
consummated, and, without limiting the generality of the foregoing, to
obtain all
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consents and authorizations of third parties and to make all filings with,
and give all notices to, third parties which may be necessary or reasonably
required on its part in order to effect the transactions contemplated
hereby.
6.4 NASDAQ NATIONAL MARKET LISTING. Buyer shall cause the shares of
Buyer Common Stock issuable to the shareholders of PAC in the Merger
including shares of Buyer Common Stock issuable upon exercise of Buyer
Options and/or Buyer Warrants to be authorized for listing on the Nasdaq
National Market, subject to official notice of issuance.
6.5 PREPARATION OF S-4 AND THE PROXY STATEMENT; OTHER FILINGS. As
promptly as practicable after the execution of this Agreement, PAC shall
provide to Buyer and its counsel for inclusion in the Prospectus/Proxy
Statement included in the S-4 in form and substance satisfactory to Buyer
and its counsel, such information concerning PAC, its operations,
capitalization, technology, share ownership and other material as Buyer or
its counsel may reasonably request. Buyer shall use its Best Efforts to
prepare and file the S-4 in which the Proxy Statement will be included as a
prospectus with the SEC on or before three business days following execution
of the Agreement. Each of Buyer and PAC shall use its Best Efforts to
respond to any comments of the SEC, to have the S-4 declared effective under
the Securities Act as promptly as practicable after such filing and to cause
the Proxy Statement to be mailed to PAC's shareholders at the earliest
practicable time. For purposes hereof "Best Efforts" shall not include or
require Buyer agreeing in response to SEC comments that the transaction will
not be accounted for as a "pooling of interests." As promptly as practicable
after the date of this Agreement, Buyer and PAC shall prepare and file any
other filings required under the Exchange Act, the Securities Act or any
other Federal or state securities or "blue sky" laws relating to the Merger
and the transactions contemplated by this Agreement and the Agreement of
Merger, including, without limitation, under the HSR Act and any applicable
state laws of similar effect (collectively, the "Other Filings"). Buyer will
use its Best Efforts to prepare and file all filings required under the HSR
Act on or before three business days following the execution of this
Agreement. Each company will notify the other company promptly of the
receipt of any comments from the SEC or its staff and of any request by the
SEC or its staff or any other government officials for amendments or
supplements to the S-4, the Proxy Statement or any Other Filings or for
additional information and will supply the other company with copies of all
correspondence between such company or any of its representatives, on the
one hand, and the SEC, or its staff or any other government officials, on
the other hand, with respect to the S-4, the Proxy Statement, the Merger or
any of the Other Filings. The Proxy Statement, the S-4 and the Other Filings
shall comply in all material respects with all applicable requirements of
law. Whenever any event occurs which should be set forth in an amendment or
supplement to the Proxy Statement, the S-4 or any of the Other Filings,
Buyer or PAC, as the case may be, shall promptly inform the other company of
such occurrence and cooperate in filing with the SEC or its staff or any
other government officials, and/or mailing to shareholders of PAC, such
amendment or supplement. The Proxy Statement shall include the unanimous
recommendation of the Board of Directors of PAC that the shareholders of PAC
approve the Merger.
6.6 PREPARATION OF S-8. As soon as practicable after the Effective
Date, Buyer shall file a registration statement on Form S-8 (or any
successor or other appropriate form), or another appropriate form with
respect to the shares of Buyer Common Stock subject to such PAC Options
assumed by Buyer in the Merger and shall use its reasonable efforts to
maintain the effectiveness of such registration statement (and maintain the
current status of the prospectus or prospectuses contained therein) for so
long as such PAC Options remain outstanding. With respect to those
individuals who subsequent to the Merger will be subject to the reporting
requirements under Section 16(a) of the Exchange Act, where applicable,
Buyer shall administer the PAC Plan assumed pursuant to Section 2.2(f) in a
manner that complies with Rule 16b-3 promulgated by the SEC under the
Exchange Act.
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6.7 ESCROW AGREEMENT. On or before the Effective Date, the Escrow
Agent and the Shareholders' Agents (as defined in Section 13.10) shall have
entered into an Escrow Agreement in form acceptable to Buyer and PAC.
6.8 EMPLOYEE BENEFITS. For a period of one (1) year from the Closing,
Buyer shall not modify or terminate the (i) salaries, (ii) benefits, or
(iii) bonus plans of PAC in existence prior to the date of this Agreement or
otherwise make only Buyer's salaries, benefits or bonus plans available to
PAC's continuing employees, unless Buyer's proposed salaries, benefits or
bonus plans are better than the salaries, benefits or bonus plans such
employees enjoyed prior to the date of this Agreement, as determined by the
management of PAC. At such time as Buyer determines to transfer benefits
offered to PAC, Buyer agrees to the extent it is legally and contractually
able to do so to waive any probationary or waiting periods for participation
in such benefit programs.
6.9 DIRECTOR AND OFFICER INDEMNITY. For a period of seven (7) years
from the Closing, Buyer shall cause PAC (i) to continue to provide to all
officers and directors of PAC who held such positions with PAC prior to the
date of this Agreement the same rights to indemnification which were
available to such officers and directors under the charter documents of PAC
in existence prior to the date of this Agreement, (ii) not to terminate or
alter any indemnification agreement in existence prior to the date of this
Agreement, and (iii) to perform its obligations thereunder or exercise any
discretionary authority thereunder, to the fullest extent permissible by law
to provide each officer and director with all rights to indemnification
available thereunder. If Buyer takes any action which impairs the ability of
PAC to fulfill its indemnification obligations with respect to acts or
omissions prior to the Closing under its charter documents or any
indemnification agreements to which it is a party, Buyer shall assume PAC's
indemnification obligations under such charter documents and/or
indemnification agreements directly. This Section 6.9 shall survive the
Closing and is intended to benefit each officer and director of PAC and
shall be binding on all successors and assigns of Buyer and/or PAC.
7. MUTUAL COVENANTS.
7.1 CONFIDENTIALITY. Each party acknowledges that in the course of the
performance of this Agreement, it may obtain the Confidential Information of
the other party. The Receiving Party shall, at all times, both during the
term of this Agreement and thereafter, keep in confidence and trust all of
the Disclosing Party's Confidential Information received by it. The
Receiving Party shall not use the Confidential Information of the Disclosing
Party other than as expressly permitted under the terms of this Agreement or
by a separate written agreement. The Receiving Party shall take all
reasonable steps to prevent unauthorized disclosure or use of the Disclosing
Party's Confidential Information and to prevent it from falling into the
public domain or into the possession of unauthorized persons. The Receiving
Party shall not disclose Confidential Information of the Disclosing Party to
any person or entity other than its officers or employees (or outside legal
or accounting advisors) who need access to such Confidential Information in
order to effect the intent of this Agreement and who have entered into
confidentiality agreements with such person's employer or who are subject to
ethical restrictions on disclosure which protects the Confidential
Information of the Disclosing Party. The Receiving Party shall immediately
give notice to the Disclosing Party of any unauthorized use or disclosure of
Disclosing Party's Confidential Information. The Receiving Party agrees to
assist the Disclosing Party to remedy such unauthorized use or disclosure of
its Confidential Information. These obligations shall not apply to the
extent that Confidential Information includes information which:
(a) is already known to the Receiving Party at the time of
disclosure, which knowledge the Receiving Party shall have the burden of
proving;
(b) is, or, through no act or failure to act of the Receiving Party,
becomes publicly known;
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(c) is received by the Receiving Party from a third party without
restriction on disclosure (although this exception shall not apply if
such third party is itself violating a confidentially obligation by
making such disclosure);
(d) is independently developed by the Receiving Party without
reference to the Confidential Information of the Disclosing Party, which
independent development the Receiving Party will have the burden of
proving;
(e) is approved for release by written authorization of the
Disclosing Party; or
(f) is required to be disclosed by a government agency to further the
objectives of this Agreement or by a proper order of a court of competent
jurisdiction; provided, however that the Receiving Party will use its
best efforts to minimize such disclosure and will consult with and assist
the Disclosing Party in obtaining a protective order prior to such
disclosure.
7.2 NO PUBLIC ANNOUNCEMENT. The parties shall make no public
announcement concerning this Agreement, their discussions or any other
memos, letters or agreements between the parties relating to the Merger
until such time as they agree to the contents of a mutually satisfactory
press release which they intend to publicly-release on or before the close
of business on the third business day following execution of this Agreement.
Either of the parties, but only after reasonable consultation with the
other, may make disclosure if required under applicable law.
7.3 REGULATORY FILINGS; CONSENTS; REASONABLE EFFORTS. Subject to the
terms and conditions of this Agreement, PAC and Buyer shall use their
respective Best Efforts to (i) make all necessary filings with respect to
the Merger and this Agreement under the HSR Act, the Securities Act, the
Exchange Act and applicable blue sky or similar securities laws and obtain
required approvals and clearances with respect thereto and supply all
additional information requested in connection therewith; (ii) make merger
notification or other appropriate filings with federal, state or local
governmental bodies or applicable foreign governmental agencies and obtain
required approvals and clearances with respect thereto and supply all
additional information requested in connection therewith; (iii) obtain all
consents, waivers, approvals, authorizations and orders required in
connection with the authorization, execution and delivery of this Agreement
and the consummation of the Merger; and (iv) take, or cause to be taken, all
appropriate action, and do, or cause to be done, all things necessary,
proper or advisable to consummate and make effective the transactions
contemplated by this Agreement as promptly as practicable, but no later than
June 30, 1995.
7.4 POOLING ACCOUNTING. PAC and Buyer shall each use its Best Efforts
to cause the business combination to be effected by the Merger to be
accounted for as a pooling of interests. Each of PAC and Buyer shall use its
Best Efforts (i) to cause its respective Affiliates not to take any action
that would adversely affect the ability of Sub or Buyer to account for the
business combination to be effected by the Merger as a pooling of interests
and (ii) to cause its respective Affiliates to sign and deliver to Sub a
customary "Affiliates Agreement" in form and substance agreed upon by PAC
and Buyer. PAC acknowledges and agrees that it shall be a requirement and
condition of the Merger that PAC and the holders of PAC Stock shall not have
taken any action after the date of this Agreement, which in the reasonable
opinion of Deloitte & Touche LLP would prevent the Merger being accounted
for as a pooling of interests. Buyer shall not, and Buyer shall use its Best
Efforts to cause its Affiliates not to, take any action that would adversely
affect the ability of Sub to account for the business combination to be
effected by the Merger as a pooling of interests.
7.5 TAX OPINIONS. All parties intend the Merger to be a tax-free
reorganization within the meaning of Section 368(a) of the Code, and agree
to use their respective Best Efforts to take all action required or
appropriate to facilitate such tax treatment. To the extent that either of
such counsel can render such opinion both parties shall receive an opinion
of Gray Cary Ware & Freidenrich and an opinion of Brobeck, Phleger &
Harrison, in form and substance reasonably
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satisfactory to both parties, to the effect that, when the Merger is
consummated in accordance with the terms of this Agreement, for federal
income tax purposes the Merger will be treated as a reorganization within
the meaning of Section 368(a) of the Code and (i) no gain or loss will be
recognized by the shareholders of PAC who exchange all of their shares of
PAC Stock solely for Buyer Common Stock pursuant to the Merger; (ii) the
aggregate basis of Buyer Common Stock received by the PAC shareholders who
exchange all of their shares of the PAC Stock solely for Buyer Common Stock
will be the same as the aggregate basis of the shares of the PAC Stock
surrendered in exchange therefor; and (iii) the holding period of the Buyer
Common Stock received in such exchange will include the period during which
the shares of the PAC Stock exchanged therefor were held, provided such
shares of the PAC Stock were held as a capital asset on the Effective Date.
For purposes of rendering such opinion, counsel for the parties shall be
entitled to rely on reasonable assumptions and representations as to factual
matters to be provided by PAC, Sub, Buyer and certain PAC shareholders
pertinent to such opinion, including, without limitation, the existence of a
valid business purpose, and sufficient continuity of interest and business
activities following the Merger, and each party shall use its Best Efforts
to provide and cause its shareholders to provide such representations.
7.6 FURTHER ASSURANCES. Prior to and following the Closing, each party
agrees to cooperate fully with the other parties and to execute such further
instruments, documents and agreements and to give such further written
assurances, as may be reasonably requested by any other party to better
evidence and reflect the transactions described herein and contemplated
hereby and to carry into effect the intents and purposes of this Agreement.
8. CLOSING MATTERS.
8.1 FILING OF AGREEMENT OF MERGER. On the date of the Closing, but not
prior to the Closing, the Agreement of Merger together with all required
officer's certificates shall be filed with the offices of the Secretary of
State of the State of California and the merger of Sub with and into PAC
shall be consummated.
8.2 EXCHANGE OF CERTIFICATES.
(a) EXCHANGE AGENT. Prior to the Closing Date, Buyer shall appoint
Bank of Boston to act as exchange agent (the "Exchange Agent") in the
Merger.
(b) BUYER TO PROVIDE COMMON STOCK. Promptly after the Effective Date
of the Merger (but in no event later than five business days thereafter),
Buyer shall make available for exchange in accordance with Section 2 and
the Agreement of Merger, through such reasonable procedures as Buyer may
adopt, the shares of Buyer Common Stock issuable pursuant to Section 2
and the Agreement of Merger in exchange for outstanding shares of PAC
Stock (less the number of shares of Buyer Common Stock to be deposited in
escrow pursuant to Section 2.4).
(c) EXCHANGE PROCEDURES. As soon as practicable after the Effective
Date of the Merger (but no later than fifteen (15) days thereafter), the
Exchange Agent shall mail to each holder of record of a certificate or
certificates that immediately prior to the Effective Date of the Merger
represented outstanding shares of PAC Stock (the "Certificates"), whose
shares are being converted into Buyer Common Stock pursuant to Section 2
and the Agreement of Merger, (i) a letter of transmittal (which shall
specify that delivery shall be effected, and risk of loss and title to
the Certificates shall pass, only upon delivery of the Certificates to
the Exchange Agent and which shall be in such form and have such other
provisions as Buyer may reasonably specify) and (ii) instructions for use
in effecting the surrender of the Certificates in exchange for Buyer
Common Stock. Upon surrender of a Certificate for cancellation to the
Exchange Agent or to such other agent or agents as may be appointed by
Buyer together with such letter of transmittal, duly executed, the holder
of such Certificate shall be
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entitled to receive the number of shares of Buyer Common Stock to which such
holder is entitled pursuant to Section 2 hereof (less the number of shares of
Buyer Common Stock to be deposited in escrow pursuant to Section 2.4). The
Certificate so surrendered shall immediately be canceled. Buyer shall make
customary provisions for lost stock certificates. In the event of a transfer of
ownership of PAC Stock that is not registered in the transfer records of PAC,
the appropriate number of shares of Buyer Common Stock may be delivered to a
transferee if the Certificate represented such PAC Stock is presented to the
Exchange Agent and accompanied by all documents required to evidence and effect
such transfer and to evidence that any applicable stock transfer taxes have been
paid. Until surrendered as contemplated by this Section 8.2, each Certificate
shall be deemed at any time after the Effective Date of the Merger to represent
the right to receive upon such surrender the number of shares of Buyer Common
Stock as provided by this Section 8.2 and by the CGCL.
(d) NO FURTHER OWNERSHIP RIGHTS IN PAC STOCK. All Buyer Common Stock
delivered upon the surrender for exchange of shares of PAC Stock in
accordance with the terms hereof shall be deemed to have been delivered
in full satisfaction of all rights pertaining to such shares of PAC
Stock. There shall be no further registration of transfers on the stock
transfer books of the Surviving Corporation of the shares of PAC Stock
that were outstanding immediately prior to the Effective Date of the
Merger. If after the Effective Date of the Merger, Certificates are
presented to the Surviving Corporation for any reason, they shall be
canceled and exchanged as provided in this Section 8.2.
8.3 DELIVERY OF DOCUMENTS. At the Closing, the parties shall deliver
the documents, and shall perform the acts, which are set forth in Section 9
and Section 10, including delivery of the counterpart signature pages of the
Transaction Documents executed by PAC, Buyer and/or Sub, as the case may be.
All documents which PAC shall deliver or cause to be delivered shall be in
form and substance reasonably satisfactory to Buyer. All documents which
Buyer and Sub shall deliver or cause to be delivered shall be in form and
substance reasonably satisfactory to PAC.
9. CONDITIONS TO PAC'S OBLIGATIONS. The obligations of PAC to close the
transactions contemplated under this Agreement are subject to the fulfillment or
satisfaction on and as of the Closing, of each of the following conditions (any
one or more of which may be waived by PAC, but only in a writing signed by PAC):
9.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES. The representations
and warranties of Buyer and Sub set forth in Section 4 shall be true and
correct when made, and PAC shall receive a certificate to such effect from
an officer of Buyer and Sub, respectively.
9.2 COVENANTS. Buyer and Sub shall have performed and complied with
all of their covenants contained in Sections 6 and 7 on or before the
Closing, and PAC shall receive a certificate from Buyer and Sub to such
effect signed by an officer of Buyer and Sub, respectively.
9.3 NO LITIGATION. On and as of the Closing, no litigation or
proceeding shall be threatened or pending against Buyer or Sub for the
purpose or with the probable effect (in the reasonable opinion of Buyer's
counsel) of enjoining or preventing the consummation of any of the
transactions contemplated by this Agreement and PAC shall receive a
certificate from Buyer and Sub to such effect signed by an officer of Buyer
and Sub, respectively.
9.4 AUTHORIZATIONS. PAC shall have received from Buyer and Sub written
evidence that the execution, delivery and performance of Buyer and Sub's
obligations under this Agreement and the Agreement of Merger have been duly
and validly approved and authorized by the Board of Directors of Buyer and
Sub, respectively, and the shareholder of Sub.
9.5 EFFECTIVENESS OF THE S-4. The S-4 shall have been declared
effective by the SEC under the Securities Act. No stop order suspending the
effectiveness of the S-4 shall have been issued by the SEC and no
proceedings for that purpose and no similar proceeding with respect to the
Proxy Statement shall have been initiated by the SEC.
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9.6 SHAREHOLDER APPROVAL. This Agreement and the Agreement of Merger
shall have been approved by PAC's shareholders in accordance with applicable
laws and regulatory requirements. Notwithstanding anything in this Agreement
to the contrary, the issuance of shares of Buyer Common Stock, whether in
the Merger or in connection with the Merger or any transaction contemplated
hereby, shall have been approved by the shareholders of Buyer if required by
applicable law or by any requirement of the National Association of
Securities Dealers.
9.7 OPINION OF BUYER'S COUNSEL. PAC shall receive from counsel to
Buyer an opinion in substantially the form attached hereto as Exhibi C
("Opinion of Buyer's Counsel").
9.8 GOVERNMENT CONSENTS. There shall have been obtained at or prior to
the date of Closing such permits or authorizations and there shall have been
taken such other action, as may be required by any regulatory authority
having jurisdiction over the parties and the subject matter and the actions
herein proposed to be taken.
9.9 DATE OF CLOSING. The Closing shall occur on or before June 30,
1995, or such later date as the parties may mutually agree.
9.10 TAX OPINIONS. Counsel to PAC and to Buyer shall have delivered
the opinions required under Section 7.5.
9.11 NASDAQ LISTING. The shares of Buyer Common Stock issuable to
holders of PAC Stock, PAC Options and PAC Warrants in the Merger shall have
been approved for 1isting on the Nasdaq National Market.
10. CONDITIONS TO BUYER'S AND SUB'S OBLIGATIONS. The obligations of Buyer
and Sub are subject to the fulfillment or satisfaction on, and as of the
Closing, of each of the following conditions (any one or more of which may be
waived by Buyer, but only in a writing signed by Buyer):
10.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES. The representations
and warranties of PAC contained in Section 3 shall be true on and as of the
Closing with the same force and effect as if they had been made at the
Closing (subject to changes to the PAC Disclosure Schedule which constitute
immaterial changes), and Buyer shall receive a certificate from PAC to such
effect with respect to the representations and warranties of PAC executed by
the President and Chief Financial Officer of PAC. PAC has the right to
provide Buyer with one or more supplements to the PAC Disclosure Schedule
prior to the Closing, and PAC shall use its Best Efforts to provide any such
supplements at the earliest possible date prior to Closing.
10.2 COVENANTS. PAC shall have performed and complied with all of its
covenants contained in Sections 5 and 7 on or before the Closing, and Buyer
shall receive a certificate from PAC to such effect signed by the President
and Chief Financial Officer of PAC .
10.3 NO LITIGATION. On and as of the Closing, no litigation or
proceeding shall be threatened or pending against PAC for the purpose or
with the probable effect (in the reasonable opinion of PAC's counsel) (other
than the DataNet Litigation) of enjoining or preventing the consummation of
any of the transactions contemplated by this Agreement, or which would have
a Material Adverse Effect on the business, liabilities, income, property,
operations or prospects of PAC subsequent to the Closing, and no judgment,
decree, injunction, rule or order of any court, governmental department,
commission, agency, instrumentality or arbitrator shall be outstanding
against PAC, and Buyer shall receive a certificate from PAC to such effect
signed by the President and Chief Financial Officer of PAC.
10.4 AUTHORIZATIONS. Buyer shall have received from PAC written
evidence that (i) the execution, delivery and performance of this Agreement
and the Agreement of Merger have been duly and validly approved and
authorized by its Board of Directors and by the shareholders of PAC, and
(ii) shareholders of PAC holding no more than eight percent (8%) of the
outstanding
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shares of PAC capital stock have, or might be able to perfect, dissenters'
rights in connection with the Merger. Buyer shall have received a
certificate from PAC to such effect signed by the President and Chief
Financial Officer of PAC.
10.5 NO ADVERSE DEVELOPMENT. There shall not have been any Material
Adverse Change in the financial condition, results of operations, assets
liabilities, business or prospects of PAC since the date of this Agreement.
10.6 REQUIRED CONSENTS. Buyer shall have received all written
consents, assignments, waivers, authorizations or other certificates
(including Material Consents) reasonably deemed necessary by Buyer's legal
counsel to provide for the continuation in full force and effect or
assignment or termination of any and all contracts and leases of PAC.
10.7 OPINION OF PAC'S COUNSEL. Buyer shall have received from counsel
to PAC, an opinion in substantially the form attached hereto as EXHIBIT D
("Opinion of PAC's Counsel" ).
10.8 EMPLOYMENT AND NON-COMPETE AGREEMENTS. William Stensrud and James
Dunn shall have entered into non-compete and non-solicitation agreements,
substantially in the form satisfactory to Buyer ("Non-compete and
Non-solicitation Agreements").
10.9 EMPLOYMENT WITH BUYER. At least ninety percent (90%) of the
people employed by PAC on the date of this Agreement shall remain employed
by PAC, and there shall have been no resignations or other statements by
employees of PAC expressing an intention to terminate employment with Buyer
or PAC following the Closing in numbers inconsistent with the foregoing
(excluding from such calculation persons previously disclosed to Buyer).
10.10 GOVERNMENT CONSENTS. There shall have been obtained at or prior
to the date of Closing such permits or authorizations and there shall have
been taken such other action, as may be required by any regulatory authority
having jurisdiction over the parties and the subject matter and the actions
herein proposed to be taken.
10.11 DATE OF CLOSING. The Closing shall occur on or before June 30,
1995, or such later date as the parties may mutually agree.
11. REGISTRATION OF BUYER COMMON STOCK.
11.1 EFFECTIVENESS. Buyer will use its Best Efforts to maintain the
effectiveness for up to thirty (30) days of the S-4 pursuant to which any of
the shares of Buyer Common Stock are being offered, and from time to time
will amend or supplement such registration statements and the prospectuses
contained therein as and to the extent necessary to comply with the
Securities Act and any applicable state securities statute or regulation.
12. TERMINATION OF AGREEMENT.
12.1 TERMINATION. This Agreement may be terminated at any time prior
to the Closing by the mutual written consent of each of the parties hereto.
This Agreement may also be terminated and abandoned:
(a) By Buyer if any of the conditions precedent to Buyer's
obligations pursuant to Section 10 shall not have been fulfilled at and
as of the Closing and Buyer has not misrepresented or breached any of its
warranties or covenants under this Agreement; or
(b) By PAC if any of the conditions precedent to PAC's obligations
pursuant to Section 9 above shall not have been fulfilled at and as of
the Closing and PAC has not misrepresented or breached any of its
warranties or covenants under this Agreement.
(c) By either party for any reason (provided such party is not in
material breach of the Agreement) if the Closing has not occurred by June
30, 1995, or such later date as the parties may agree in writing.
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Any termination of this Agreement under this Section 12.1 shall be
effective by the delivery of written notice of the terminating party to the
other parties hereto.
12.2 LIABILITY FOR TERMINATION. Any termination of this Agreement
pursuant to this Section 12 shall be without further obligation or liability
upon any party in favor of any other party hereto; provided, that if such
termination shall result from the willful failure of a party to carry out
its obligations under this Agreement, then such party shall be liable for
losses incurred by the other parties. The foregoing notwithstanding if Buyer
or Sub fails to close the transactions contemplated under this Agreement by
June 30, 1995 or because any one or more of the closing conditions in
Section 10 hereof were not satisfied, Buyer shall reimburse PAC for any
reasonable legal and accounting expenses specifically incurred by PAC in
connection with this Agreement (but excluding any expenses incurred by PAC
in connection with PAC's contemplated initial public offering) in an
aggregate amount of up to $250,000; provided, however, that Buyer shall have
no obligation to reimburse PAC for such expenses if the transaction fails to
close because the condition in Section 10.1 is not satisfied due to Buyer's
discovery of or PAC providing notification of exceptions to PAC's
representations and warranties provided herein in addition to such
exceptions provided by PAC to Buyer prior to or on the date of this
Agreement. The provisions of this Section 12.2 and of Section 7.1 shall
survive termination.
12.3 CERTAIN EFFECTS OF TERMINATION. In the event of the termination
of this Agreement by either PAC or Buyer as provided in Section 12.1 hereof:
(a) each party, if so requested by the other party, will (i) return
promptly every document (other than documents publicly available)
furnished to it by the other party (or any subsidiary, division,
associate or affiliate of such other party) in connection with the
transactions contemplated hereby, whether so obtained before or after the
execution of this Agreement, and any copies thereof which may have been
made, and will cause its representatives and any representatives of
financial institutions and investors and others to whom such documents
were furnished promptly to return such documents and any copies thereof
any of them may have made, or (ii) destroy such documents and cause its
representatives and such other representatives to destroy such documents,
and such party shall deliver a certificate executed by its president or
vice president stating to such effect; and
(b) PAC and Buyer shall continue to abide by the provisions of the
Mutual Nondisclosure Agreement between Buyer and PAC. This Section 12.3
shall survive any termination of this Agreement.
12.4 REMEDIES. No party shall be limited to the termination right
granted in Section 12.1 hereto by reason of the nonfulfillment of any
condition to such party's closing obligations but may, in the alternative,
elect to do one of the following:
(a) proceed to close despite the nonfulfillment of any closing
condition, it being understood that consummation of the transactions
contemplated hereby shall be deemed a waiver of any misrepresentation or
breach of warranty or covenant and of any party's rights and remedies
with respect thereto (except for the remedies provided in Section 13) to
the extent that the other party shall have actual knowledge of such
misrepresentation or breach and the Closing shall nonetheless take place;
or
(b) decline to close, terminate this Agreement as provided in Section
12.1 hereof, and thereafter seek damages to the extent permitted in
Section 12.5 hereof.
12.5 RIGHT TO DAMAGES. If this Agreement is terminated pursuant to
Section 12.1 hereof, neither party hereto shall have any claim against the
other except for fees, if any, payable under Section 12.2 and except if the
circumstances giving rise to such termination were caused by the other
party's wilful failure to comply with a material covenant set forth herein,
in which event
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termination shall not be deemed or construed as limiting or denying any
legal or equitable right or remedy of said party, and said party shall be
entitled to recover its costs and expenses which are incurred in pursuing
its rights and remedies (including reasonable attorneys' fees).
13. ESCROW AND INDEMNIFICATION.
13.1 SURVIVAL OF REPRESENTATIONS AND COVENANTS. All representations
and warranties of PAC contained in this Agreement shall survive the Closing
and any investigation at any time made by or on behalf of Buyer for the
following periods: (i) for those items that would be expected to be
encountered in Buyer's audit process, until the date of completion of the
first audit of financial statements containing combined operations of Buyer
and PAC, and (ii) for all other items, for a period of 12 months after the
Closing. Notwithstanding the foregoing, if this Agreement shall terminate in
accordance with its terms prior to the expiration of the survival period
described above, all representations and warranties of PAC contained in this
Agreement shall terminate as of such termination of this Agreement. Buyer's
representations, warranties and covenants contained in this Agreement shall
terminate as of the earlier of the termination of this Agreement in
accordance with its terms or the Closing, provided that the covenants in
Section 6.9, 7.1, 12.2 and 12.3 which specifically provide for survival
beyond such date or covenants which by their nature would naturally survive
Closing shall continue in effect, as shall the representation in Section
4.13.
13.2 ESCROW FUND. As soon as practicable after the Effective Date, and
from time to time upon the exercise of any of the Buyer Options, the Escrow
Shares shall be registered in the name of, and be deposited with, Bank of
Boston (or other institution selected by Buyer with the reasonable consent
of PAC) as escrow agent (the "Escrow Agent"), such deposit to constitute the
Escrow Fund and to be governed by the terms set forth herein and in the
Escrow Agreement. The Escrow Fund (but only up to a maximum of the number of
Escrow Shares) shall be available to compensate Buyer for any loss
(excluding any consequential damages to Buyer, such as lost profits,
in-house costs of investigation of potential damages and in-house attorney's
fees), expense, liability or other damage, including attorneys' fees, to the
extent of the amount of such loss, expense, liability or other damage
(collectively "Damages") that Buyer has incurred by reason of (i) the breach
of PAC of any representation, warranty, covenant or agreement of PAC
contained herein, or by reason of any misrepresentation by PAC made in or
pursuant to Section 3 of this Agreement, or (ii) the claims raised in the
Wilcox & Gibbs/DataNet Litigation (the "DataNet Litigation"), and for which
Buyer has not received reimbursement pursuant to insurance or otherwise.
13.3 ESCROW FUND LIMITATIONS. The following limitations shall apply to
the Escrow Fund and claims against the Escrow Fund:
(i) If Buyer and Sub close the transactions contemplated under this
Agreement, all items disclosed by PAC to Buyer in any PAC Disclosure
Schedule or any supplements thereto and all matters otherwise actually
known to Buyer and all of PAC's unknown business risks shall be assumed
by Buyer, except for any claims arising from the DataNet Litigation or
any misrepresentations made by PAC.
(ii) Nothing herein shall limit the liability of PAC for any breach
of any representation, warranty or covenant if the Merger does not close.
If the Merger closes, resort to the Escrow Fund shall be the exclusive
remedy of Buyer (i) for any such breaches and misrepresentations and (ii)
for any claims against any officer, director, shareholder or employee of
PAC in connection with the Merger. The foregoing is not intended to limit
Buyer's remedies in the event of willful fraud.
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<PAGE>
(iii) Any claim shall be reduced by the amount of any net tax benefit
realized (by reason of a tax deduction, basis reduction, shifting of
income, credits and/or deductions or otherwise) by Buyer in connection
with the loss or damage suffered by Buyer which forms the basis of PAC's
liability hereunder. Damages shall exclude any amount considered in
calculating the amount of the Adjustment.
13.4 DAMAGE THRESHOLD. Notwithstanding the foregoing, Buyer may not
receive any shares from the Escrow Fund unless and until an Officer's
Certificate or Certificates (as defined in Section 13.6 below) identifying
the aggregate amount of Buyer's Damages has been delivered to the
Shareholders' Agents and to the Escrow Agent, and then, except as provided
in Section 13.13, only to the extent that such aggregate amount exceeds a
deductible of $750,000, provided that Damages from the DataNet Litigation in
excess of the reserve therefor existing at the date of this Agreement
(including legal fees or settlement costs incurred after the date of this
Agreement) shall not be subject to such threshold and deductible amount. To
receive any Escrow Shares, notice of such Damages must be delivered to the
Escrow Agent and Shareholders' Agents as provided in Section 13.5 below and
such amount as is determined pursuant to this Section 13 to be payable after
application of the $750,000 deductible, if applicable, in which case Buyer
shall receive the number of Escrow Shares equal in value (calculated in
accordance with Section 13.7 below) to the full amount of Damages. In no
event shall Buyer receive more than the number of Escrow Shares then
remaining in the Escrow Fund at the time of Buyer's claim, and the maximum
liability of all PAC shareholders and option holders under the Agreement
shall not exceed the forfeiture of the Escrow Shares in the Escrow Fund.
Damages shall not include any individual Damage items of $10,000 or less
unless such amounts exceed $50,000 in the aggregate.
13.5 ESCROW PERIOD. The Escrow Period shall terminate twelve (12)
months after the Effective Date; provided, however, that the number of
Escrow Shares, which, in the reasonable judgment of Buyer, subject to the
objection of the Shareholders' Agents and the subsequent arbitration of the
matter in the manner provided in Section 13.9 hereof, are necessary to
satisfy any unsatisfied claims specified in any Officer's Certificate
theretofore delivered to the Escrow Agent prior to termination of the Escrow
Period with respect to Damages incurred or litigation pending prior to
expiration of the Escrow Period, shall remain in the Escrow Fund until such
claims have been resolved. In no event will any amount be retained in the
Escrow Fund at the end of the Escrow Period, except as to claims made prior
to the end of the Escrow Period that relate to Damages actually incurred or
pending litigation. If the DataNet Litigation remains unresolved at the end
of the Escrow Period, no more than Three Million Dollars ($3,000,000) of the
Escrow Fund may be retained in Escrow to cover any claim arising from such
litigation.
13.6 CLAIMS UPON ESCROW FUND.
(a) Upon receipt by the Escrow Agent on or before the last day of the
Escrow Period of a certificate signed by any officer of Buyer (an
"Officer's Certificate"):
(b) stating (i) that Damages in excess of the reserve therefor as of
January 1, 1995 exist with respect to the DataNet Litigation, (ii) that
the aggregate amount of Buyer's other Damages exceeds $750,000 (which
aggregate amount cannot include any individual Damage items of $10,000 or
less unless such amounts exceed $50,000 in the aggregate of $10,000 or
less), or (iii) that Damages with respect to a matter subject to Section
13.13 have been incurred in excess of $50,000, and
(c) specifying in reasonable detail the individual items of such
Damages included in the amount so stated, the date each such item was
paid, or properly accrued or arose, the nature of the misrepresentation,
breach of warranty or claim to which such item is related,
the Escrow Agent shall, subject to the provisions of Section 13.9 hereof,
deliver to Buyer out of the Escrow Fund, as promptly as practicable, Escrow
Shares having a value equal to such Damages,
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but (i) as to matters other than DataNet Litigation, only to the extent such
Damages exceed $750,000 and (ii) as to matters subject to Section 13.13,
only to the extent of 50% of the amount thereof in excess of $50,000.
13.7 VALUATION OF ESCROW SHARES. For the purpose of compensating Buyer
for its Damages pursuant to this Agreement, the Escrow Shares shall be
valued at the Average Price.
13.8 OBJECTIONS TO CLAIMS. At the time of delivery of any Officer's
Certificate to the Escrow Agent, a duplicate copy of such Officer's
Certificate shall be delivered to the Shareholders' Agents (defined in
Section 13.7 below) and for a period of forty-five (45) days after such
delivery, the Escrow Agent shall make no delivery of Escrow Shares pursuant
to Section 13.6 hereof unless the Escrow Agent shall have received written
authorization from the Shareholders' Agents to make such delivery. After the
expiration of such forty-five (45) day period, the Escrow Agent shall make
delivery of the Escrow Shares in the Escrow Fund in accordance with Section
13.6 hereof, provided that no such delivery may be made if the Shareholders'
Agents shall object in a written statement to the claim made in the
Officer's Certificate, and such statement shall have been delivered to the
Escrow Agent and to Buyer prior to the expiration of such forty-five (45)
day period.
13.9 RESOLUTION OF CONFLICTS; ARBITRATION.
(a) In case the Shareholders' Agents shall so object in writing to
any claim or claims by Buyer made in any Officer's Certificate, Buyer
shall have forty-five (45) days to respond in a written statement to the
objection of the Shareholders' Agents. If after such forty-five (45) day
period there remains a dispute as to any claims, the Shareholders' Agents
and Buyer shall attempt in good faith for sixty (60) days to agree upon
the rights of the respective parties with respect to each of such claims.
If the Shareholders Agent and Buyer should so agree, a memorandum setting
forth such agreement shall be prepared and signed by both parties and
shall be furnished to the Escrow Agent. The Escrow Agent shall be
entitled to rely on any such memorandum and shall distribute the Escrow
Shares from the Escrow Fund in accordance with the terms thereof.
(b) If no such agreement can be reached after good faith negotiation,
either Buyer or the Shareholders' Agents may, by written notice to the
other, demand arbitration of the matter unless the amount of the damage
or loss is at issue in pending litigation with a third party, in which
event arbitration shall not be commenced until such amount is ascertained
or both parties agree to arbitration; and in either such event the matter
shall be settled by arbitration conducted by three arbitrators. Within
fifteen (15) days after such written notice is sent, Buyer and the
Shareholders' Agents shall each select one arbitrator, and the two
arbitrators so selected shall select a third arbitrator. The decision of
the arbitrators as to the validity and amount of any claim in such
Officer's Certificate shall be binding and conclusive upon the parties to
this Agreement, and notwithstanding anything in Section 13.6 hereof, the
Escrow Agent shall be entitled to act in accordance with such decision
and make or withhold payments out of the Escrow Fund in accordance
therewith.
(c) Judgment upon any award rendered by the arbitrators may be
entered in any court having jurisdiction. Any such arbitration shall be
held in Santa Clara or San Mateo County, California under the commercial
rules then in effect of the American Arbitration Association. For
purposes of this Section 13.9(c), in any arbitration hereunder in which
any claim or the amount thereof stated in the Officer's Certificate is at
issue, Buyer shall be deemed to be the Non-Prevailing Party unless the
arbitrators award Buyer more than one-half (1/2) of the amount in
dispute, plus any amounts not in dispute; otherwise, the PAC shareholders
for whom shares of Buyer Common Stock otherwise issuable to them have
been deposited in the Escrow Fund shall be deemed to be the
Non-Prevailing Party. The Non-Prevailing Party to an
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arbitration shall pay its own expenses, the fees of each arbitrator, the
administrative fee of the American Arbitration Association, and the
expenses, including with limitation, attorneys' fees and costs, incurred
by the other party to the arbitration.
13.10 SHAREHOLDERS' AGENTS.
(a) Tench Coxe, Kathryn Gould, and William Stensrud shall be
constituted and appointed as agents ("Shareholders' Agents") for and on
behalf of the PAC shareholders to give and receive notices and
communications, to authorize delivery to Buyer of the Escrow Shares or
other property from the Escrow Fund in satisfaction of claims by Buyer,
to object to such deliveries, to agree to, negotiate, enter into
settlements and compromises of, and demand arbitration and comply with
orders of courts and awards of arbitrators with respect to such claims,
and to take all actions necessary or appropriate in the judgment of the
Shareholders' Agents for the accomplishment of the foregoing. Such agency
may be changed by the holders of a majority in interest of the Escrow
Fund from time to time upon not less than ten (10) days' prior written
notice to Buyer. No bond shall be required of the Shareholders' Agents,
and the Shareholders' Agents shall receive no compensation for his
services. Notices or communications to or from the Shareholders' Agents
shall constitute notice to or from each of the PAC shareholders. Buyer
agrees to waive any conflict of interest of any type that may arise as a
result of Mr. Stensrud's acting as a Shareholders' Agent. The
Shareholders' Agents may, and are hereby authorized to, act by majority
approved as to any matter.
(b) The Shareholders' Agents shall not be liable for any act done or
omitted hereunder as Shareholders' Agents while acting in good faith and
in the exercise of reasonable judgment, and any act done or omitted
pursuant to the advice of counsel shall be conclusive evidence of such
good faith. The PAC shareholders shall severally indemnify the
Shareholders' Agents and hold him harmless against any loss, liability or
expense incurred without gross negligence or bad faith on the part of the
Shareholders' Agents and arising out of or in connection with the
acceptance or administration of his duties hereunder.
(c) The Shareholders' Agents shall have reasonable access to
information about PAC and Buyer and the reasonable assistance of PAC's
and Buyer's officers and employees for purposes of performing its duties
and exercising its rights hereunder, provided that the Shareholders'
Agents shall treat confidentially and not disclose any nonpublic
information from or about PAC or Buyer to anyone (except on a need to
know basis to individuals who agree to treat such information
confidentially).
13.11 ACTIONS OF THE SHAREHOLDERS' AGENTS. A decision, act, consent or
instruction of the Shareholders' Agents shall constitute a decision of all
PAC shareholders for whom shares of Buyer Common Stock otherwise issuable to
them are deposited in the Escrow Fund and shall be final, binding and
conclusive upon each such PAC shareholder, and the Escrow Agent and Buyer
may rely upon any decision, act, consent or instruction of the Shareholders'
Agents as being the decision, act, consent or instruction of each and every
such PAC shareholder. The Escrow Agent and Buyer are hereby relieved from
any liability to any person for any acts done by them in accordance with
such decision, act, consent or instruction of the Shareholders' Agents.
13.12 CONTROL OF LITIGATION. If any proceeding is commenced, or if any
claim, demand or assessment is asserted, in respect of which a claim for
indemnification is made against the Escrow Fund based on any matters other
than (i) the intellectual property of PAC, or (ii) claims made by customers
of the Buyer or PAC, the Shareholders' Agents may, at their option to
contest or defend any such action, proceeding, claim, demand or assessment,
with counsel of their own choosing; provided, however, that if 3Com shall
reasonably object to such control the Shareholders' Agent and 3Com shall
cooperate in the contesting and defense of such matter; provided, however,
that the Shareholders' Agents shall not admit any liability with respect
thereto or settle, compromise, pay or discharge the same without the prior
written consent of the Buyer, which consent shall not be unreasonably
withheld. In connection with the DataNet Litigation, the Shareholders'
Agents
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shall have sole control of the defense of such matter and discretion to
admit any liability with respect thereto or settle, compromise, pay or
discharge the same without the prior written consent of the Buyer, except if
any payment is required other than from the Escrow Fund, in which case the
prior written consent of the Buyer shall be required, which consent shall
not be unreasonably withheld. With respect to a claim for indemnification
based on matters relating to the intellectual property of PAC, or customers
of the Buyer or PAC, the Buyer shall have the option to contest or defend
any such action, proceeding, claim, demand or assessment, with counsel of
its own choosing; provided, however, that Buyer shall not admit any
liability with respect thereto or settle, compromise, pay or discharge the
same without the prior written consent of the Shareholders' Agents, which
consent shall not be unreasonably withheld. The Shareholders' Agents or
Buyer, whichever is not controlling the defense of any matter, shall be
entitled, at its or their expense, to participate in such defense.
13.13 OTHER PROVISIONS. In the event that the Buyer arrives at a good
faith and reasonable belief that there has been a breach with respect to the
representation in the last sentence of the PAC Disclosure Schedule section
3.17(c) and that a claim regarding a significant contribution as referenced
in such subsection is likely to be filed, in the foreseeable future by a
person who in fact has made a contribution described in such Disclosure
Schedule subsection, the procedures in this Section 13.13 shall be
applicable thereto. Buyer agrees that if such representation has been
breached, it shall, before taking any action with respect thereto, consult
with the Shareholder's Agents regarding such matter and the reasonable
measures to pursue to resolve such matter. Provided that either the
Shareholder's Agents agree that there has been a breach of such
representation and that Buyer has been or is reasonably likely to be damaged
as a result thereof (or in the absence of such agreement and the submission
of the matter to arbitration, that an the arbitrator so finds under Section
13.9), then, and only then, Buyer may communicate directly or through a
representative with such person. If Damages are actually incurred by Buyer
in connection with a person so contacted within one year of Closing or are
the subject of litigation pending at the end of one year from the date of
Closing, then the provisions of section 13.4 as to the amount of deductible
notwithstanding, Buyer may receive Escrow Shares to the extent that the
aggregate amount of Damages with respect to each separate such matter
exceeds $50,000 and then only to the extent of one-half of the Damages in
excess of $50,000 for each such matter. If Buyer takes action to precipitate
damages with respect the matters covered by this Section 13.13 without
having followed this procedure, no Escrow Shares shall be delivered from the
Escrow Fund with respect to any such Damages.
14. MISCELLANEOUS.
14.1 GOVERNING LAWS. It is the intention of the parties hereto that
the internal laws of the State of California (irrespective of its choice of
law principles) shall govern the validity of this Agreement, the
construction of its terms, and the interpretation and enforcement of the
rights and duties of the parties hereto.
14.2 BINDING UPON SUCCESSORS AND ASSIGNS. Subject to, and unless
otherwise provided in, this Agreement, each and all of the covenants, terms,
provisions, and agreements contained herein shall be binding upon, and inure
to the benefit of, the permitted successors, executors, heirs,
representatives, administrators and assigns of the parties hereto provided
that Buyer shall not assign this Agreement to any such entity without PAC's
prior written consent, not to be unreasonably withheld.
14.3 SEVERABILITY. If any provision of this Agreement, or the
application thereof, shall for any reason and to any extent be invalid or
unenforceable, the remainder of this Agreement and application of such
provision to other persons or circumstances shall be interpreted so as best
to reasonably effect the intent of the parties hereto. The parties further
agree to replace such void or
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LIST OF EXHIBITS:
<TABLE>
<S> <C>
EXHIBIT A: AGREEMENT OF MERGER
EXHIBIT B: PRIOR FINANCIAL STATEMENTS
EXHIBIT C: OPINION OF BUYER COUNSEL
EXHIBIT D: OPINION OF PAC COUNSEL
</TABLE>
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EXHIBIT A
AGREEMENT OF MERGER
OF
ANUINUI ACQUISITION CORPORATION
WITH AND INTO
PRIMARY ACCESS CORPORATION
This Agreement of Merger ("Agreement") is entered into as of this day of
April, 1995 by and among 3Com Corporation, a California corporation, ("3Com"),
Anuinui Acquisition Corporation, a newly-formed California corporation and
wholly owned subsidiary of 3Com ("Sub"), and Primary Access Corporation, a
California corporation ("PAC").
1. AGREEMENT TO ACQUIRE PAC. Subject to the terms of this Agreement and
the Agreement and Plan of Reorganization dated March 21, 1995 (the "Plan") by
and between 3Com, Sub and PAC, PAC shall be acquired by 3Com through a merger
(the "Merger") of Sub with and into PAC. The Plan and this Agreement are
intended to be construed together in order to effectuate their purposes.
2. EFFECTIVE DATE AND CLOSING OF MERGER. Pursuant to the California
General Corporation Law (the "California Code"), Sub shall be merged with and
into PAC and PAC shall be the surviving corporation of the Merger. The Merger
shall be effective immediately upon the date stamped by the California Secretary
of State upon this Agreement and such officers' certificates of each constituent
corporation (the "Effective Date").
3. SURVIVING CORPORATION. At the Effective Date, Sub shall be merged with
and into PAC. As a result of the Merger, the separate corporate existence of Sub
shall cease and PAC shall continue as the surviving corporation (sometimes
referred to herein as the "Surviving Corporation") and shall succeed to and
assume all of the rights and obligations of Sub in accordance with the laws of
California.
4. ARTICLES AND BYLAWS. The Articles of Incorporation and Bylaws of Sub in
effect immediately prior to the Effective Date shall be the Articles of
Incorporation and Bylaws, respectively, of Surviving Corporation after the
Effective Date unless and until further amended as provided by law.
5. DIRECTORS AND OFFICERS. The directors and officers of Sub immediately
prior to the Effective Date shall be the directors and officers of the Surviving
Corporation after the Effective Date. Such directors and officers shall hold
their position until the election and qualification of their respective
successors or until their tenure is otherwise terminated in accordance with the
Bylaws of Surviving Corporation.
6. EXCHANGE RATIO; CONVERSION OF SHARES AND ASSUMPTION OF OPTIONS.
a. The "Exchange Ratio" for the conversion of the PAC Common Stock (as
defined in the recitals of the Plan) and the PAC Preferred Stock (as defined
in the recitals of the Plan) shall be determined by dividing the Aggregate
Purchase Price (as defined below) by the Average Price (as defined below)
and then dividing such foregoing quotient by the sum of (i) the total number
of issued and outstanding shares of PAC Common Stock, plus (ii) the total
number of shares of PAC Common Stock issuable upon conversion of all issued
and outstanding shares of PAC Preferred Stock, plus (iii) the total number
of shares of PAC Common Stock issuable upon exercise of PAC Options (as
defined in Section 1.4 of the Plan) and PAC Warrants (as defined in Section
1.9 of the Plan) outstanding at the Effective Date. The "Aggregate Purchase
Price" shall equal One Hundred Seventy Million Dollars ($170,000,000), less
the amount of the Adjustment. The "Adjustment" shall equal the decrease, if
any, between (a) the net book value of PAC as of January 1, 1995 as set
forth in financial statements previously delivered to 3Com, and (b) the sum
of (1) the net book value of PAC (determined in accordance with GAAP) as of
April 2, 1995 (the "Adjustment Balance Sheet"), plus (2) the amount of any
fees which are permitted to and have been paid or accrued by or on account
of PAC or any of its shareholders under Section 14.6 of the Plan, plus
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(3) any amount of litigation costs or settlement costs related to the
DataNet Litigation (as defined in Section 13.2 of the Plan) incurred by PAC
between the date of the Plan and the Closing Date (as defined in Section 2.6
of the Plan). The Adjustment shall be increased by the amount, if any,
required under Section 14.6 of the Plan regarding fees and expenses of PAC,
or its shareholders, in excess of $1,750,000. The parties shall jointly
prepare the Adjustment Balance Sheet. In the event there is any disagreement
regarding the Adjustment Balance Sheet, the parties shall resolve such
disagreement prior to the Closing (as defined in Section 2.6 of the Plan) in
good faith negotiation and, if it cannot be promptly resolved, the matter
shall be submitted to an independent accountant not affiliated with either
party to be mutually agreed upon by both parties whose determination the
parties shall accept, provided that such determination does not result in an
Adjustment in excess of $750,000. If the determination of such accountant
would result in an Adjustment in excess of $750,000, PAC shall have the
right to submit any disagreement regarding the Adjustment Balance Sheet to a
binding arbitration in the manner set forth in Section 13.9 of the Plan and
shall not be required to close the transactions contemplated under the Plan
or this Agreement before such arbitration is completed.
b. The "Average Price" shall mean the average of the closing sale
prices of the common stock, no par value, of 3Com (the "3Com Common Stock")
reported in the WALL STREET JOURNAL, on the basis of information provided by
the Nasdaq National Market for each of the ten trading days immediately
preceding (but not including) the Closing Date. Notwithstanding the above,
if the Average Price is greater than 1.05 times the Initial Price (as
defined below), then the Exchange Ratio shall be the number of shares
resulting from dividing the Aggregate Purchase Price by the product of 1.05
times the Initial Price, and then dividing the foregoing quotient by the sum
of (i), (ii) and (iii) in Section 6(a) above. If the Average Price is less
than .95 times the Initial Price, then the Exchange Ratio shall be the
number of shares resulting from dividing the Aggregate Purchase Price by the
product of .95 times the Initial Price, and then dividing such quotient by
the sum of (i), (ii) and (iii) in Section 6(a) above. The "Initial Price"
shall be the closing sale price of 3Com Common Stock on March 13, 1995 as
quoted on the Nasdaq National Market and as reported in the WALL STREET
JOURNAL.
c. If, between the date of the Plan and the Effective Date, the
outstanding shares of 3Com Common Stock shall have been changed into a
different number of shares or a different class by reason of any
reclassification, split-up, stock dividend or stock combination, then the
Exchange Ratio shall be correspondingly adjusted.
d. Each share of PAC Stock (as defined in the recitals of the Plan),
issued and outstanding immediately prior to the Effective Date, will by
virtue of the Merger and at the Effective Date, automatically and without
further action on the part of any holder thereof, be converted into such
fraction of a share of fully paid and nonassessable shares of 3Com Common
Stock as is equal to the Exchange Ratio.
e. Each share of common stock of Sub issued and outstanding immediately
prior to the Effective Date shall automatically and without any action on
the part of the holder thereof be converted into one validly issued, fully
paid and nonassessable share of common stock of the Surviving Corporation.
f. Each PAC Option that is outstanding immediately prior to the
Effective Date will, by virtue of the Merger and at the Effective Date,
automatically and without further action on the part of any holder thereof,
be assumed by 3Com and converted into an option (a "3Com Option") to
purchase that number of shares of 3Com Common Stock which equals the
Exchange Ratio multiplied by the number of shares of PAC Common Stock
purchasable under the PAC Option immediately prior to the Effective Date
(with the resulting number of shares of 3Com Common Stock rounded up to the
nearest whole number). The exercise price per share of 3Com Common Stock
purchasable under each such 3Com Option will be equal to the exercise price
of the PAC Option (per share of PAC Common Stock) divided by the Exchange
Ratio (with the resulting
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amount rounded up to the nearest whole cent). Continuous employment with
PAC, whether occurring before or after the Effective Date, shall be credited
to an optionee for purposes of determining the number of shares subject to
exercise, vesting or repurchase after the Effective Date. After the
Effective Date, 3Com shall issue to each holder of an outstanding PAC Option
a document evidencing the foregoing assumption by 3Com. No fractional shares
of 3Com Common Stock shall be issued in connection with 3Com Options. All
fractional shares which would otherwise be issuable shall be rounded up to
the next full share. All of the other terms of each 3Com Option including,
without limitation, the vesting period, will remain the same as the
corresponding assumed PAC Option.
g. Each PAC Warrant outstanding at the Effective Date shall, by virtue
of the Merger and without further action on the part of any holder, be
assumed by 3Com at the Effective Date and converted into a 3Com Warrant. The
warrants or other similar rights to acquire 3Com Common Stock issued by 3Com
in exchange for PAC Warrants pursuant to the Merger (the "3Com Warrants")
will continue to be on the terms and conditions set forth in the respective
warrant agreements of the PAC Warrants, except that: (i) the 3Com Warrant
shall be exercisable for a number of shares of 3Com Common Stock equal to
the number of shares of PAC Stock subject to the PAC Warrant immediately
prior to the Effective Date multiplied by the Exchange Ratio (with the
resulting number of shares of 3Com Common Stock rounded up to the nearest
whole number), (ii) the per share exercise price shall be an amount equal to
the per share exercise price of the PAC Warrant prior to the Closing Date
divided by the Exchange Ratio (with the resulting amount rounded up to the
nearest whole cent). No fractional shares of 3Com Common Stock shall be
issued in connection with the 3Com Warrants. All fractional shares which
would otherwise be issuable shall be rounded up to the next full share.
7. FRACTIONAL SHARES. No fractional shares of 3Com Common Stock will be
issued in connection with the Merger, but in lieu thereof, holders of PAC Stock
who would otherwise be entitled to receive a fraction of a share of 3Com Common
Stock will receive from 3Com, promptly after the Effective Date, an amount of
cash equal to the Average Price of 3Com Common Stock multiplied by the fraction
of a share of 3Com Common Stock to which such holder would otherwise be
entitled.
8. ESCROW AGREEMENT. As provided in that certain Escrow Agreement dated
April , 1995 by and among 3Com, the Shareholders' Agent (as defined in Section
13.10 of the Plan) and the Escrow Agent named therein (the "Escrow Agreement"),
to be executed pursuant to Section 6.7 of the Plan, (i) at the Effective Date,
3Com will deposit in escrow certificates representing ten percent (10%) of the
shares of 3Com Common Stock issued to the holders of PAC Stock in the Merger, on
a pro rata basis; and (ii) upon each exercise of the 3Com Options that are
issued to holders of PAC Options in the Merger, if such occurs between the
Effective Date and on or before the final escrow release date, 3Com will deposit
in escrow certificates representing ten percent (10%) of the shares of 3Com
Common Stock issued upon such exercise. Such shares shall be held as collateral
for the indemnification obligations of PAC's shareholders under Section 13 of
the Plan and pursuant to the provisions of the Escrow Agreement.
9. EXCHANGE OF CERTIFICATES.
a. EXCHANGE AGENT. Prior to the Closing Date, 3Com shall appoint The
First National Bank of Boston to act as exchange agent (the "Exchange
Agent") in the Merger.
b. 3COM TO PROVIDE COMMON STOCK. Promptly after the Effective Date of
the Merger (but in no event later than five business days thereafter), 3Com
shall make available for exchange in accordance with Section 2 of the Plan
and the terms of this Agreement, through such reasonable procedures as 3Com
may adopt, the shares of 3Com Common Stock issuable pursuant to Section 2 of
the Plan and the terms of this Agreement in exchange for outstanding shares
of PAC Stock (less the number of shares of 3Com Common Stock to be deposited
in escrow pursuant to Section 2.4 of the Plan).
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<PAGE>
c. EXCHANGE PROCEDURES. As soon as practicable after the Effective
Date of the Merger (but no later than fifteen (15) days thereafter), the
Exchange Agent shall mail to each holder of record of a certificate or
certificates that immediately prior to the Effective Date of the Merger
represented outstanding shares of PAC Stock (the "Certificates"), whose
shares are being converted into 3Com Common Stock pursuant to Section 2 of
the Plan and the terms of this Agreement, (i) a letter of transmittal (which
shall specify that delivery shall be effected, and risk of loss and title to
the Certificates shall pass, only upon delivery of the Certificates to the
Exchange Agent and which shall be in such form and have such other
provisions as 3Com may reasonably specify) and (ii) instructions for use in
effecting the surrender of the Certificates in exchange for 3Com Common
Stock. Upon surrender of a Certificate for cancellation to the Exchange
Agent or to such other agent or agents as may be appointed by 3Com together
with such letter of transmittal, duly executed, the holder of such
Certificate shall be entitled to receive the number of shares of 3Com Common
Stock to which such holder is entitled pursuant to Section 2 of the Plan and
this Agreement (less the number of shares of 3Com Common Stock to be
deposited in escrow pursuant to Section 2.4 of the Plan). The Certificate so
surrendered shall immediately be canceled. 3Com shall make customary
provisions for lost stock certificates. In the event of a transfer of
ownership of PAC Stock that is not registered in the transfer records of
PAC, the appropriate number of shares of 3Com Common Stock may be delivered
to a transferee if the Certificate represented such PAC Stock is presented
to the Exchange Agent and accompanied by all documents required to evidence
and effect such transfer and to evidence that any applicable stock transfer
taxes have been paid. Until surrendered as contemplated by this Agreement
and Section 8.2 of the Plan, each Certificate shall be deemed at any time
after the Effective Date of the Merger to represent the right to receive
upon such surrender the number of shares of 3Com Common Stock as provided by
this Agreement and Section 8.2 of the Plan and by the California Code.
d. NO FURTHER OWNERSHIP RIGHTS IN PAC STOCK. All 3Com Common Stock
delivered upon the surrender for exchange of shares of PAC Stock in
accordance with the terms of the Plan and this Agreement shall be deemed to
have been delivered in full satisfaction of all rights pertaining to such
shares of PAC Stock. There shall be no further registration of transfers on
the stock transfer books of the Surviving Corporation of the shares of PAC
Stock that were outstanding immediately prior to the Effective Date of the
Merger. If after the Effective Date of the Merger, Certificates are
presented to the Surviving Corporation for any reason, they shall be
canceled and exchanged as provided in this Agreement and Section 8.2 of the
Plan.
10. FURTHER ASSIGNMENTS. After the Effective Date, PAC and its officers
and directors may execute and deliver such deeds, assignments and assurances and
do all other things necessary or desirable to vest, perfect or confirm title to
PAC property or rights in PAC and otherwise to carry out the purposes of the
Plan in the name of Sub or otherwise.
11. APPRAISAL RIGHTS. If holders of PAC Stock are entitled to appraisal
rights in connection with the Merger, any Dissenting Shares (as defined in
Section 1.25 of the Plan) shall not be converted into a right to receive 3Com
Common Stock but shall be converted into the right to receive such consideration
as may be determined to be due with respect to such Dissenting Shares pursuant
to the laws of the State of California. PAC shall give 3Com prompt notice of any
demand received by PAC for appraisal of PAC capital stock, and 3Com shall have
the right to participate in all negotiations and proceedings with respect to
such demand. PAC agrees that, except with the prior written consent of 3Com or
as required under the California Code, it will not voluntarily make any payment
with respect to, or settle or offer to settle, any such demand for appraisal.
Each holder of Dissenting Shares ("Dissenting Shareholder") who, pursuant to the
provisions of the California Code, becomes entitled to payment of the value of
shares of PAC Stock shall receive payment therefor from PAC (but only after the
value therefor shall have been agreed upon or finally determined pursuant to
such provisions). In the event of legal obligation, after the Effective Date of
the Merger, to deliver a right to receive 3Com Common Stock to a holder of
shares of PAC capital stock who shall have failed to make an effective demand
for appraisal or shall have lost his status as a Dissenting Shareholder, 3Com
shall
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issue and deliver, upon surrender by such Dissenting Shareholder of his
certificate or certificates representing shares of PAC Stock, the 3Com Common
Stock to which such Dissenting Shareholder is then entitled under this Agreement
and Section 2.5 of the Plan.
12. ASSIGNMENT. No party hereto may assign any of its rights or
obligations hereunder without the prior written consent of the other parties
hereto. This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective successors, personal representatives and
permitted assigns.
13. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of California applicable to contracts
entered into and to be performed wholly within the State of California without
regard to principles of conflict of laws.
14. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which will be an original as regards any party whose
signature appears thereon and all of which together will constitute one and the
same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed on the date and year first above written.
<TABLE>
<S> <C>
PRIMARY ACCESS CORPORATION 3COM CORPORATION
By: By:
Title: Title:
By: By:
Title: Secretary Title: Secretary
ANUINUI ACQUISITION CORPORATION
By:
Title:
By:
Title: Secretary
</TABLE>
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<PAGE>
CALIFORNIA CORPORATIONS CODE
CHAPTER 13
DISSENTERS' RIGHTS
SECTION1300. RIGHT TO REQUIRE PURCHASE -- "DISSENTING SHARES" AND "DISSENTING
SHAREHOLDER" DEFINED.
(a) If the approval of the outstanding shares (Section 152) of a corporation
is required for a reorganization under subdivisions (a) and (b) or subdivision
(e) or (f) of Section 1201, each shareholder of the corporation entitled to vote
on the transaction and each shareholder of a subsidiary corporation in a
short-form merger may, by complying with this chapter, require the corporation
in which the shareholder holds shares to purchase for cash at their fair market
value the shares owned by the shareholder which are dissenting shares as defined
in subdivision (b). The fair market value shall be determined as of the day
before the first announcement of the terms of the proposed reorganization or
short-form merger, excluding any appreciation or depreciation in consequence of
the proposed action, but adjusted for any stock split, reverse stock split or
share dividend which becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or short-form
merger either (A) listed on any national securities exchange certified by
the Commissioner of Corporations under subdivision (o) of Section 25100 or
(B) listed on the list of OTC margin stocks issued by the Board of Governors
of the Federal Reserve System, and the notice of meeting of shareholders to
act upon the reorganization summarizes this section and Sections 1301, 1302,
1303 and 1304; provided, however, that this provision does not apply to any
shares with respect to which there exists any restriction on transfer
imposed by the corporation or by any law or regulation; and provided,
further, that this provision does not apply to any class of shares described
in subparagraph (A) or (B) if demands for payment are filed with respect to
5 percent or more of the outstanding shares of that class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not voted
in favor of the reorganization or, (B) if described in subparagraph (A) or
(B) of paragraph (1) (without regard to the provisions in that paragraph),
were voted against the reorganization, or which were held of record on the
effective date of a short-form merger; provided, however, that subparagraph
(A) rather than subparagraph (B) of this paragraph applies in any case where
the approval required by Section 1201 is sought by written consent rather
than at a meeting.
(3) Which the dissenting shareholder has demanded that the corporation
purchase at their fair market value, in accordance with Section 1301.
(4) Which the dissenting shareholder has submitted for endorsement, in
accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the recordholder
of dissenting shares and includes a transferee of record. LEG.H. 1975 ch. 682,
1976 ch. 641, effective January 1, 1977, 1982 ch. 36, effective February 17,
1982, 1990 ch. 1018, 1993 ch. 543.
1993 NOTE: Nothing in this act shall be construed to modify or alter the
prohibition contained in Sections 15503 and 15616 of the Corporations Code or
Section 1648 of the Insurance Code, or modify or alter any similar prohibition
relating to the operation of a business in limited partnership form. Stats. 1993
ch. 543 Section24.
Nothing in this act shall be construed to modify or impair any rights of
limited partners under the Thompson-Killea Limited Partners Protection Act of
1992 (Chapter 1183 of the Statutes of 1992). Stats. 1993 ch. 543 Section25.
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SECTION1301. DEMAND FOR PURCHASE.
(a) If, in the case of a reorganization, any shareholders of a corporation
have a right under Section 1300, subject to compliance with paragraphs (3) and
(4) of subdivision (b) thereof, to require the corporation to purchase their
shares for cash, such corporation shall mail to each such shareholder a notice
of the approval of the reorganization by its outstanding shares (Section 152)
within 10 days after the date of such approval, accompanied by a copy of
Sections 1300, 1302, 1303, 1304 and this section, a statement of the price
determined by the corporation to represent the fair market value of the
dissenting shares, and a brief description of the procedure to be followed if
the shareholder desires to exercise the shareholder's right under such sections.
The statement of price constitutes an offer by the corporation to purchase at
the price stated any dissenting shares as defined in subdivision (b) of Section
1300, unless they lose their status as dissenting shares under Section 1309.
(b) Any shareholder who has a right to require the corporation to purchase
the shareholder's shares for cash under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder in
cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of record
by the shareholder which the shareholder demands that the corporation purchase
and shall contain a statement of what such shareholder claims to be the fair
market value of those shares as of the day before the announcement of the
proposed reorganization or short-form merger. The statement of fair market value
constitutes an offer by the shareholder to sell the shares at such price. LEG.H.
1975 ch. 682, 1976 ch. 641, effective January 1, 1977, 1980 chs. 501, 1155.
SECTION1302. ENDORSEMENT OF SHARES.
Within 30 days after the date on which notice of the approval by the
outstanding shares or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder, the shareholder shall submit to the corporation at
its principal office or at the office of any transfer agent thereof, (a) if the
shares are certificated securities, the shareholder's certificates representing
any shares which the shareholder demands that the corporation purchase, to be
stamped or endorsed with a statement that the shares are dissenting shares or to
be exchanged for certificates of appropriate denomination so stamped or endorsed
or (b) if the shares are uncertificated securities, written notice of the number
of shares which the shareholder demands that the corporation purchase. Upon
subsequent transfers of the dissenting shares on the books of the corporation,
the new certificates, initial transaction statement, and other written
statements issued therefor shall bear a like statement, together with the name
of the original dissenting holder of the shares. LEG.H. 1975 ch. 682, effective
January 1, 1977, 1986 ch. 766.
SECTION1303. AGREED PRICE -- TIME FOR PAYMENT.
(a) If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the fair
market value of any dissenting shares as between the corporation and the holders
thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair market
value of dissenting shares shall be made within 30 days after the amount thereof
has been agreed or within 30 days after
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any statutory or contractual conditions to the reorganization are satisfied,
whichever is later, and in the case of certificated securities, subject to
surrender of the certificates therefor, unless provided otherwise by agreement.
LEG.H. 1975 ch. 682, effective January 1, 1977, 1980 ch. 501, 1986 ch. 766.
SECTION1304. DISSENTER'S ACTION TO ENFORCE PAYMENT.
(a) If the corporation denies that the shares are dissenting shares, or the
corporation and the shareholder fail to agree upon the fair market value of the
shares, then the shareholder demanding purchase of such shares as dissenting
shares or any interested corporation, within six months after the date on which
notice of the approval by the outstanding shares (Section 152) or notice
pursuant to subdivision (i) of Section 1110 was mailed to the shareholder, but
not thereafter, may file a complaint in the superior court of the proper county
praying the court to determine whether the shares are dissenting shares or the
fair market value of the dissenting shares or both or may intervene in any
action pending on such a complaint.
(b) Two or more dissenting shareholders may join as plaintiffs or be joined
as defendants in any such action and two or more such actions may be
consolidated.
(c) On the trial of the action, the court shall determine the issues. If the
status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is in
issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares. LEG.H. 1975 ch.
682, effective January 1, 1977.
SECTION1305. APPRAISERS' REPORT -- PAYMENT -- COSTS.
(a) If the court appoints an appraiser or appraisers, they shall proceed
forthwith to determine the fair market value per share. Within the time fixed by
the court, the appraisers, or a majority of them, shall make and file a report
in the office of the clerk of the court. Thereupon, on the motion of any party,
the report shall be submitted to the court and considered on such evidence as
the court considers relevant. If the court finds the report reasonable, the
court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a report
within 10 days from the date of their appointment or within such further time as
may be allowed by the court or the report is not confirmed by the court, the
court shall determine the fair market value of the dissenting shares.
(c) Subject to the provisions of Section 1306, judgment shall be rendered
against the corporation for payment of an amount equal to the fair market value
of each dissenting share multiplied by the number of dissenting shares which any
dissenting shareholder who is a party, or who has intervened, is entitled to
require the corporation to purchase, with interest thereon at the legal rate
from the date on which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to
uncertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the corporation of the certificates for the
shares described in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on judgments from the date of compliance with Sections 1300,
1301 and 1302 if the value awarded by the court for the shares is more than 125
percent of the price offered by the corporation under subdivision (a) of Section
1301). LEG.H. 1975 ch. 682, 1976 ch. 641, effective January 1, 1977, 1977 ch.
235, 1986 ch. 766.
SECTION1306. DISSENTING SHAREHOLDER'S STATUS AS CREDITOR.
To the extent that the provisions of Chapter 5 prevent the payment to any
holders of dissenting shares of their fair market value, they shall become
creditors of the corporation for the amount
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thereof together with interest at the legal rate on judgments until the date of
payment, but subordinate to all other creditors in any liquidation proceeding,
such debt to be payable when permissible under the provisions of Chapter 5.
LEG.H. 1975 ch. 682, effective January 1, 1977.
SECTION1307. DIVIDENDS PAID AS CREDIT AGAINST PAYMENT.
Cash dividends declared and paid by the corporation upon the dissenting
shares after the date of approval of the reorganization by the outstanding
shares (Section 152) and prior to payment for the shares by the corporation
shall be credited against the total amount to be paid by the corporation
therefor. LEG.H. 1975 ch. 682, effective January 1, 1977.
SECTION1308. CONTINUING RIGHTS AND PRIVILEGES OF DISSENTING SHAREHOLDERS.
Except as expressly limited in this chapter, holders of dissenting shares
continue to have all the rights and privileges incident to their shares, until
the fair market value of their shares is agreed upon or determined. A dissenting
shareholder may not withdraw a demand for payment unless the corporation
consents thereto. Leg.H. 1975 ch. 682, effective January 1, 1977.
SECTION1309. TERMINATION OF DISSENTING SHAREHOLDER STATUS.
Dissenting shares lose their status as dissenting shares and the holders
thereof cease to be dissenting shareholders and cease to be entitled to require
the corporation to purchase their shares upon the happening of any of the
following:
(a) The corporation abandons the reorganization. Upon abandonment of the
reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter
all necessary expenses incurred in such proceedings and reasonable
attorneys' fees.
(b) The shares are transferred prior to their submission for endorsement
in accordance with Section 1302 or are surrendered for conversion into
shares of another class in accordance with the articles.
(c) The dissenting shareholder and the corporation do not agree upon the
status of the shares as dissenting shares or upon the purchase price of the
shares, and neither files a complaint or intervenes in a pending action as
provided in Section 1304, within six months after the date on which notice
of the approval by the outstanding shares or notice pursuant to subdivision
(i) of Section 1110 was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of the dissenting shares.
LEG.H. 1975 ch. 682, effective January 1, 1977.
SECTION1310. SUSPENSION OF PROCEEDINGS FOR PAYMENT PENDING LITIGATION.
If litigation is instituted to test the sufficiency or regularity of the
votes of the shareholders in authorizing a reorganization, any proceedings under
Section 1304 and 1305 shall be suspended until final determination of such
litigation. LEG.H. 1975 ch. 682, effective January 1, 1977.
SECTION1311. EXEMPT SHARES.
This chapter, except Section 1312, does not apply to classes of shares whose
terms and provisions specifically set forth the amount to be paid in respect to
such shares in the event of a reorganization or merger. LEG.H. 1975 ch. 682,
effective January 1, 1977, 1988 ch. 919.
SECTION1312. ATTACKING VALIDITY OF REORGANIZATION OR MERGER.
(a) No shareholder of a corporation who has a right under this chapter to
demand payment of cash for the shares held by the shareholder shall have any
right at law or in equity to attack the validity of the reorganization or
short-form merger, or to have the reorganization or short-form merger set aside
or rescinded, except in an action to test whether the number of shares required
to authorize or approve the reorganization have been legally voted in favor
thereof; but any holder of
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shares of a class whose terms and provisions specifically set forth the amount
to be paid in respect to them in the event of a reorganization or short-form
merger is entitled to payment in accordance with those terms and provisions or,
if the principal terms of the reorganization are approved pursuant to
subdivision (b) of Section 1202, is entitled to payment in accordance with the
terms and provisions of the approved reorganization.
(b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any shareholder of such party who has not demanded payment of cash for
such shareholder's shares pursuant to this chapter, but if the shareholder
institutes any action to attack the validity of the reorganization or short-form
merger or to have the reorganization or short-form merger set aside or
rescinded, the shareholder shall not thereafter have any right to demand payment
of cash for the shareholder's shares pursuant to this chapter. The court in any
action attacking the validity of the reorganization or short-form merger or to
have the reorganization or short-form merger set aside or rescinded shall not
restrain or enjoin the consummation of the transaction except upon 10 days'
prior notice to the corporation and upon a determination by the court that
clearly no other remedy will adequately protect the complaining shareholder or
the class of shareholders of which such shareholder is a member.
(c) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, in any action to attack the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that the
transaction is just and reasonable as to the shareholders of the controlled
party, and (2) a person who controls two or more parties to a reorganization
shall have the burden of proving that the transaction is just and reasonable as
to the shareholders of any party so controlled. LEG.H. 1975 ch. 682, 1976 ch.
641, effective January 1, 1977, 1988 ch. 919.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 317 of the California Corporations Code authorizes a corporation to
indemnify its directors, officers, employees or other agents in terms
sufficiently broad to permit indemnification (including reimbursement for
expenses incurred) under certain circumstances for liabilities arising under the
Securities Act of 1933, as amended. Registrant's Articles of Incorporation, as
amended, and Bylaws, as amended, provide for indemnification of its directors,
officers, employees and other agents to the maximum extent permitted by the
California Corporations Code. In addition, with the approval of the Board of
Directors and the shareholders, Registrant has entered into separate
indemnification agreements with its directors and officers which require
Registrant, among other things, to indemnify them against certain liabilities
which may arise by reason of their status or service (other than liabilities
arising from willful misconduct of a culpable nature, among certain other acts).
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- ----------------------------------------------------------------------------------------------
<S> <C>
2.1 Agreement and Plan of Reorganization, dated March 21, 1995, by and among 3Com Corporation,
Anuinui Acquisition Corporation and Primary Access Corporation (included as Appendix A).
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 (Exhibit 3.2 to
Form 10-K) (19)
3.3 Bylaws, as amended and restated (Exhibit 3.2 to Form 10-K) (10)
4.1 Reference is made to Exhibit 3.1 (Exhibit 4.1 to Form 10-K) (19)
4.2 Indenture Agreement between 3Com Corporation and the First National Bank of Boston for the
private placement of convertible subordinated notes dated as of November 1, 1994 (Exhibit 5.2
to Form 8-K) (22)
4.3 Placement Agreement for the private placement of convertible subordinated notes dated November
8, 1994 (Exhibit 5.1 to Form 8-K) (22)
4.4 Amended and Restated Rights Agreement dated December 31, 1994 (Exhibit 10.27 to Form 10-Q)
(23)
5.1 Opinion of Gray Cary Ware & Freidenrich*
8.1 Opinion of Gray Cary Ware & Freidenrich as to Tax Matters
8.2 Opinion of Brobeck, Phleger & Harrison as to Tax Matters
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)
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- ----------------------------------------------------------------------------------------------
10.8 3Com Headquarters Lease dated December 1, 1988, as amended (Exhibit 10.14 to Form 10-K) (10)
<S> <C>
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 (Exhibit 10.11 to Form 10-K) (16)
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 Escrow and Indemnification Agreement for Directors and Officers (Exhibit 10.15 to Form
10-Q) (18)
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 Escrow and Indemnification and Escrow Agreement dated February 2, 1994 (Exhibit 7.3 to Form
8-K) (15)
10.20 Amendment to Credit Agreement (Exhibit 10.20 to Form 10-Q) (17)
10.21 Second Amendment to Credit Agreement (Exhibit 10.21 to Form 10-Q) (17)
10.22 1994 Stock Option Plan (Exhibit 10.22 to Form 10-K) (19)
10.23 Lease Agreement between BNP Leasing Corporation, as Landlord, and 3Com Corporation, as Tenant,
effective as of July 14, 1994 (Exhibit 10.23 to Form 10-Q) (20)
10.24 Purchase Agreement between BNP Leasing Corporation and 3Com Corporation, dated July 14, 1994
(Exhibit 10.24 to Form 10-Q) (20)
10.25 Asset Purchase Agreement dated September 18, 1994 among 3Com Corporation, NiceCom Ltd., and
Nice Systems, Ltd.(Exhibit 7.1 to Form 8-K) (21)
10.26 First Amendment to Asset Purchase Agreement dated October 17, 1994 among 3Com Corporation,
NiceCom Ltd., and Nice Systems, Ltd. (Exhibit 7.2 to Form 8-K) (21)
10.27 Escrow Agreement, dated , 1995 by and among 3Com Corporation, The First National Bank of
Boston and Tench Coxe, Kathryn C. Gould and William R. Stensrud as Shareholders' Agents
21.1 Subsidiaries of the Registrant
23.1 Consent of Deloitte & Touche LLP (including Report on Schedule)
23.2 Consent of KPMG Peat Marwick LLP (including Report on Schedule)
23.3 Consent of Levine, Zeidman & Daitch, P.C.
23.4 Consent of Shachak & Co.
23.5 Consent of Gray Cary Ware & Freidenrich (included in Exhibits 5.1 and 8.1)*
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- ----------------------------------------------------------------------------------------------
23.6 Consent of Brobeck, Phleger & Harrison (included in Exhibit 8.2)*
<S> <C>
24.1 Power of Attorney (included on page II-5 of this Registration Statement)
99.1 Form of Consent of Shareholders of Primary Access Corporation
99.2 Fairness Opinion and Consent of Morgan Stanley & Co. Incorporated dated March 21, 1995
<FN>
- ------------------------
(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 Registrants 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 Registrants
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 Registrants
Form 10-K filed on August 28, 1989 (File No. 0-12867)
(6) Incorporated by reference to Exhibit 19.1 to Registrants Form 10-Q 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 Registrants
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 Registrants 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 Registrants 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 Registrants 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 Registrants 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 Registrants 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 Registrants Form 8-K filed on February
12, 1993 (File No. 9-12867)
(14) Incorporated by reference to the Exhibit identified in parentheses
previously filed as an Exhibit to Registrants 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 Registrants 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 Registrants 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 Registrants Form 10-Q filed on April 13,
1994 (File No. 0-12867)
</TABLE>
II-3
<PAGE>
<TABLE>
<S> <C>
(18) Incorporated by reference to the Exhibit identified in parentheses
previously filed as an Exhibit to Registrants Form 10-Q filed on January
14, 1994 (File No. 0-12867)
(19) Incorporated by reference to the Exhibit identified in parentheses
previously filed as an Exhibit to Registrants Form 10-K filed on August 31,
1994 (File No. 0-12867)
(20) Incorporated by reference to the Exhibit identified in parentheses
previously filed as an Exhibit to Registrant's Form 10-Q filed on October
16, 1994 (File No. 0-12867)
(21) Incorporated by reference to the Exhibit identified in parentheses
previously filed as an Exhibit to Registrant's Form 8-K filed on November
1, 1994 (File No. 0-12867)
(22) Incorporated by reference to the Exhibit identified in parentheses
previously filed as an Exhibit to Registrant's Form 8-K filed on November
16, 1994 (File No. 0-12867)
(23) Incorporated by reference to the Exhibit identified in parentheses
previously filed as an Exhibit to Registrant's Form 10-Q filed on January
13, 1995 (File No. 0-12867)
</TABLE>
(b) Financial Statement Schedules
The following schedules of (i) 3Com for each of the three years in the
period ended May 31, 1994 and (ii) Primary Access for the fifty-two weeks ended
October 2, 1994, and the fifty-three weeks ended October 3, 1993 and the
fifty-two weeks ended September 27, 1992 are included in this Registration
Statement on Form S-4. All other schedules have been omitted because they are
not applicable, or because the required information required is shown in the
financial statements or notes thereto.
Schedule VIII--Valuation and Qualifying Accounts (3Com).
Schedule VIII--Valuation and Qualifying Accounts (Primary Access).
ITEM 22. UNDERTAKINGS
(1) Registrant hereby undertakes as follows: that prior to any public
reoffering of the securities registered hereunder through use of a prospectus
which is a part of this Registration Statement, by any person or party who is
deemed to be an underwriter within the meaning of Rule 145(c), 3Com undertakes
that such reoffering prospectus will contain the information called for by the
applicable registration Form with respect to reofferings by persons who may be
deemed underwriters, in addition to the information called for by the other
Items of the applicable form.
(2) Registrant undertakes that every prospectus (i) that is filed pursuant
to paragraph (1) immediately preceding, or (ii) that purports to meet the
requirements of Section 10(a)(3) of the Securities Act and is used in connection
with an offering of securities subject to Rule 415, will be filed as a part of
an amendment to the Registration Statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) Registrant hereby undertakes to respond to requests for information that
is incorporated by reference into the Prospectus/Consent Solicitation Statement
pursuant to Items 4, 10(b), 11 or 13 of this Form S-4, within one business day
of receipt of such request, and to send the incorporated documents by first
class mail or other equally prompt means. This includes information contained in
documents filed subsequent to the effective date of the Registration Statement
through the date of responding to the request.
(4) Registrant hereby undertakes to supply by means of a post-effective
amendment all information concerning a transaction, and the company being
acquired involved therein, that was not the subject of and included in the
Registration Statement when it became effective.
II-4
<PAGE>
(5) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
Registrant pursuant to the foregoing provisions, or otherwise, Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by Registrant of expenses
incurred or paid by a director, officer or controlling person of Registrant in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(6) Registrant hereby undertakes:
(a) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
PROVIDED, HOWEVER, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply
if the registration statement is on Form S-3 or Form S-8, and the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the registrant pursuant
to Section 13 or Section 15(d) of the Exchange Act that are incorporated by
reference in the registration statement.
(b) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial BONA FIDE offering thereof.
(c) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, 3Com Corporation
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Santa Clara, State of
California, on the 28th day of April, 1995.
3Com CORPORATION
By: /s/ ERIC A. BENHAMOU
-----------------------------------
Eric A. Benhamou
CHAIRMAN, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities indicated on the 28th day of April, 1995.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ---------------------------------------- ------------------------------
<C> <S>
/S/ ERIC A. BENHAMOU* Chairman of the Board,
- ---------------------------------------- President, and Chief
Eric A. Benhamou Executive Officer (Principal
Executive Officer)
/s/ CHRISTOPHER B. PAISLEY Vice President, Finance and
- ---------------------------------------- Chief Financial Officer
Christopher B. Paisley (Principal Financial and
Accounting Officer)
/s/ JAMES L. BARKSDALE* Director
- ----------------------------------------
James L. Barksdale
/s/ GORDON A. CAMPBELL* Director
- ----------------------------------------
Gordon A. Campbell
/s/ JEAN-LOUIS GASSEE* Director
- ----------------------------------------
Jean-Louis Gassee
/s/ STEPHEN C. JOHNSON* Director
- ----------------------------------------
Stephen C. Johnson
/s/ PHILIP C. KANTZ* Director
- ----------------------------------------
Philip C. Kantz
/s/ WILLIAM F. ZUENDT* Director
- ----------------------------------------
William F. Zuendt
*By: /s/CHRISTOPHER B. PAISLEY
(Christopher B. Paisley,
Attorney-in-Fact)
</TABLE>
II-6
<PAGE>
SCHEDULE VIII
3COM CORPORATION
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED MAY 31, 1992, 1993 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE ADDITIONS
AT CHARGED TO RECLASSIFICATIONS POOLED
BEGINNING COSTS AND AND CHARGES TO BUSINESS BALANCE AT
DESCRIPTION OF PERIOD EXPENSES OTHER ACCOUNTS DEDUCTIONS -NET(1) END OF PERIOD
- -------------------------------- --------- ----------- ----------------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Year ended May 31, 1992:
Allowance for doubtful
accounts....................... $ 5,129 $ 3,683 $ 306(3) $ 2,019(2) -- $ 7,099
Product return reserve.......... 3,040 2,080 308(3) 1,421 -- 4,007
Accrued product warranty........ 5,370 6,587 -- 4,392 -- 7,565
Restructuring reserves:
Inventory reserve............. 2,974 -- -- 1,794 -- 1,180
Property and equipment
reserve...................... 2,633 -- 3,123(4) 1,598 -- 4,158
Accrued restructuring costs... 29,915 -- (3,123)(4) 14,219 -- 12,573
--------- ----------- ------- ---------- -------- -------------
Total restructuring
reserves................. 35,522 -- -- 17,611 -- 17,911
--------- ----------- ------- ---------- -------- -------------
Year ended May 31, 1993:
Allowance for doubtful
accounts....................... $ 7,099 $ 1,995 -- $ 2,636(2) $ 40 $ 6,498
Product return reserve.......... 4,007 2,088 -- 2,716 53 3,432
Accrued product warranty........ 7,565 9,494 -- 6,546 40 10,553
Restructuring reserves:
Inventory reserve............. 1,180 -- 1,834(4) 1,315 -- 1,699
Property and equipment
reserve...................... 4,158 (1,844)(5) 25(4) 2,246 -- 93
Accrued restructuring costs... 12,573 (1,502)(5) (1,859)(4) 5,155 -- 4,057
--------- ----------- ------- ---------- -------- -------------
Total restructuring
reserves................. 17,911 (3,346) -- 8,716 -- 5,849
--------- ----------- ------- ---------- -------- -------------
Year ended May 31, 1994:
Allowance for doubtful
accounts....................... $ 6,498 $ 4,459 $ 168(3) $ 723(2) $ -- $10,402
Product return reserve.......... 3,432 1,759 -- 1,422 -- 3,769
Accrued product warranty........ 10,553 11,776 863(3) 9,506 -- 13,686
Restructuring reserves:
Inventory reserve............. 1,699 -- -- 774 -- 925
Property and equipment
reserve...................... 93 -- -- -- -- 93
Accrued restructuring costs... 4,057 -- -- 1,321 -- 2,736
--------- ----------- ------- ---------- -------- -------------
Total restructuring
reserves................. 5,849 -- -- 2,095 -- 3,754
--------- ----------- ------- ---------- -------- -------------
<FN>
- --------------------------
(1) Pooled business -- net represents activity of Star-Tek for the period for
January 1, 1992 through May 31, 1992 (see Note 3 to the Consolidated
Financial Statements).
(2) Accounts written off, net of recoveries.
(3) Adjustments relating to purchased businesses.
(4) Accrued restructuring costs reclassified to other restructuring reserves.
(5) Reduction in restructuring reserves based on current estimates of future
costs.
</TABLE>
S-1
<PAGE>
SCHEDULE VIII
PRIMARY ACCESS CORPORATION
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE FIFTY-TWO WEEKS ENDED OCTOBER 2, 1994, THE FIFTY-THREE WEEKS
ENDED OCTOBER 3, 1993 AND THE FIFTY-TWO WEEKS ENDED SEPTEMBER 27, 1992
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO OTHER
BEGINNING COSTS AND (DEDUCTION) BALANCE AT
DESCRIPTION OF YEAR EXPENSES ADDITIONS END OF YEAR
- -------------------------------------------------------------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
For the fifty-two weeks ended September 27, 1992
Applied against asset accounts:
Allowance for doubtful accounts............................... $ 143,000 $ 9,000 (14,000) $ 138,000
----------- ------------ ----------- -----------
----------- ------------ ----------- -----------
For the fifty-three weeks ended October 3, 1993
Applied against asset accounts:
Allowance for doubtful accounts............................... $ 138,000 104,000 (127,000) $ 115,000
----------- ------------ ----------- -----------
For the fifty-two weeks ended October 2, 1994
Applied against asset accounts:
Allowance for doubtful accounts............................... $ 115,000 -- (24,000) $ 91,000
----------- ------------ ----------- -----------
----------- ------------ ----------- -----------
</TABLE>
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<S> <C>
2.1 Agreement and Plan of Reorganization, dated March 21, 1995, by and among 3Com Corporation, Anuinui
Acquisition Corporation and Primary Access Corporation (included as Appendix A).
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 (Exhibit 3.2 to Form
10-K) (19)
3.3 Bylaws, as amended and restated (Exhibit 3.2 to Form 10-K) (10)
4.1 Reference is made to Exhibit 3.1 (Exhibit 4.1 to Form 10-K) (19)
4.2 Indenture Agreement between 3Com Corporation and the First National Bank of Boston for the private
placement of convertible subordinated notes dated as of November 1, 1994 (Exhibit 5.2 to Form 8-K) (22)
4.3 Placement Agreement for the private placement of convertible subordinated notes dated November 8, 1994
(Exhibit 5.1 to Form 8-K) (22)
4.4 Amended and Restated Rights Agreement dated December 31, 1994 (Exhibit 10.27 to Form 10-Q) (23)
5.1 Opinion of Gray Cary Ware & Freidenrich*
8.1 Opinion of Gray Cary Ware & Freidenrich as to Tax Matters
8.2 Opinion of Brobeck, Phleger & Harrison as to Tax Matters
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 (Exhibit 10.11 to Form 10-K) (16)
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 Escrow and Indemnification Agreement for Directors and Officers (Exhibit 10.15 to Form 10-Q)
(18)
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)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<S> <C>
10.18 Agreement and Plan of Reorganization dated January 18, 1994 (Exhibit 7.2 to Form 8-K) (15)
10.19 Escrow and Indemnification and Escrow Agreement dated February 2, 1994 (Exhibit 7.3 to Form 8-K) (15)
10.20 Amendment to Credit Agreement (Exhibit 10.20 to Form 10-Q) (17)
10.21 Second Amendment to Credit Agreement (Exhibit 10.21 to Form 10-Q) (17)
10.22 1994 Stock Option Plan (Exhibit 10.22 to Form 10-K) (19)
10.23 Lease Agreement between BNP Leasing Corporation, as Landlord, and 3Com Corporation, as Tenant, effective
as of July 14, 1994 (Exhibit 10.23 to Form 10-Q) (20)
10.24 Purchase Agreement between BNP Leasing Corporation and 3Com Corporation, dated July 14, 1994 (Exhibit
10.24 to Form 10-Q) (20)
10.25 Asset Purchase Agreement dated September 18, 1994 among 3Com Corporation, NiceCom Ltd., and Nice
Systems, Ltd.(Exhibit 7.1 to Form 8-K) (21)
10.26 First Amendment to Asset Purchase Agreement dated October 17, 1994 among 3Com Corporation, NiceCom Ltd.,
and Nice Systems, Ltd. (Exhibit 7.2 to Form 8-K) (21)
10.27 Escrow Agreement, dated , 1995 by and among 3Com Corporation, The First National Bank of Boston
and Tench Coxe, Kathryn C. Gould and William R. Stensrud as Shareholders' Agents
21.1 Subsidiaries of the Registrant
23.1 Consent of Deloitte & Touche LLP (including Report on Schedule)
23.2 Consent of KPMG Peat Marwick LLP (including Report on Schedule)
23.3 Consent of Levine, Zeidman & Daitch, P.C.
23.4 Consent of Shachak & Co.
23.5 Consent of Gray Cary Ware & Freidenrich (included in Exhibits 5.1 and 8.1)*
23.6 Consent of Brobeck, Phleger & Harrison (included in Exhibit 8.2)*
24.1 Power of Attorney (included on page II-5 of this Registration Statement)
99.1 Form of Consent of Shareholders of Primary Access Corporation
99.2 Fairness Opinion and Consent of Morgan Stanley & Co. Incorporated dated March 21, 1995
<FN>
- ------------------------
(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 Registrants 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 Registrants
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 Registrants
Form 10-K filed on August 28, 1989 (File No. 0-12867)
(6) Incorporated by reference to Exhibit 19.1 to Registrants Form 10-Q 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 Registrants
Form 10-K filed on August 28, 1990 (File No. 0-12867)
</TABLE>
<PAGE>
<TABLE>
<S> <C>
(8) Incorporated by reference to the Exhibit identified in parentheses
previously filed as an Exhibit to Registrants 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 Registrants 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 Registrants 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 Registrants 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 Registrants 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 Registrants Form 8-K filed on February
12, 1993 (File No. 9-12867)
(14) Incorporated by reference to the Exhibit identified in parentheses
previously filed as an Exhibit to Registrants 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 Registrants 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 Registrants 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 Registrants 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 Registrants Form 10-Q filed on January
14, 1994 (File No. 0-12867)
(19) Incorporated by reference to the Exhibit identified in parentheses
previously filed as an Exhibit to Registrants Form 10-K filed on August 31,
1994 (File No. 0-12867)
(20) Incorporated by reference to the Exhibit identified in parentheses
previously filed as an Exhibit to Registrant's Form 10-Q filed on October
16, 1994 (File No. 0-12867)
(21) Incorporated by reference to the Exhibit identified in parentheses
previously filed as an Exhibit to Registrant's Form 8-K filed on November
1, 1994 (File No. 0-12867)
(22) Incorporated by reference to the Exhibit identified in parentheses
previously filed as an Exhibit to Registrant's Form 8-K filed on November
16, 1994 (File No. 0-12867)
(23) Incorporated by reference to the Exhibit identified in parentheses
previously filed as an Exhibit to Registrant's Form 10-Q filed on January
13, 1995 (File No. 0-12867)
</TABLE>
<PAGE>
__________________, 1995
Primary Access Corporation
12230 World Trade Drive
San Diego, CA 92128
3Com Corporation
5400 Bayfront Plaza
Santa Clara, CA 95052
Re: Merger pursuant to the Agreement and Plan of Reorganization (the
"Agreement), dated March 21, 1995, between 3Com Corporation, a
California corporation ("3Com"), Anuinui Acquisition Corporation, a
California corporation ("Sub"), and Primary Access Corporation, a
California corporation ("Primary Access")
Gentlemen:
This opinion is being delivered to you pursuant to Section 7.5 of the
Agreement and Plan of Reorganization (the "Agreement") by and among 3Com
Corporation, a California corporation ("3com"), Anuinui Acquisition Corporation,
and a wholly-owned subsidiary of 3Com ("Sub"), and Primary Access Corporation,
a California corporation, ("Primary Access"), dated as of March 21, 1995.
Pursuant to the Agreement, Sub will merge with and into Primary Access (the
"Merger"), and Primary Access will become a wholly-owned subsidiary of 3Com.
Except as otherwise provided, capitalized terms referred to herein have the
meanings set forth in the Agreement. All section references, unless otherwise
indicated, are to the Internal Revenue Code of 1986, as amended (the "Code").
We have acted as legal counsel to 3Com and Sub in connection with the
Merger. As such, and for the purpose of rendering this opinion, we have
examined (or will examine on or prior to the Effective Date of the Merger) and
are relying (or will rely) upon (without any independent investigation or review
thereof), the truth and accuracy, at all relevant times, of the statements,
covenants, representations and warranties contained in the following documents:
1. The Agreement;
2. The Registration Statement (the "Registration Statement") on Form S-4
(File No. 33-5823) initially filed by 3Com with the Securities and Exchange
Commission (the "Commission") on March 23, 1995, for the purpose of registering
the 3Com Common Stock to be issued in connection with the Merger under the
Securities Act of 1933, as amended; and the final Prospectus in the form filed
with the Commission on March 23, 1995, pursuant to Rule 424(b) under the Act;
and the
<PAGE>
Primary Access Corporation __________________, 1995
3Com Corporation Page 2
documents incorporated by reference into the Registration Statement, as amended,
and into the final Prospectus.
3. Representations made to us by 3Com and Sub in a letter dated
______________, 1995 (the "3Com Letter");
4. Representations made to us by Primary Access in a letter dated
______________, 1995 (the "Primary Access Letter");
5 Representations made by certain shareholders of Primary Access in
certain Affiliates' Letters or Continuity of Interest Certificates; and
6. Such other instruments and documents related to the formation,
organization and operation of 3Com, Primary Access and Sub or to the
consummation of the Merger and the transactions contemplated thereby as we have
deemed necessary or appropriate.
In connection with rendering this opinion, we have assumed or obtained
representations (and are relying thereon, without any independent investigation
or review thereof) that:
1. Original documents (including signatures) are authentic, documents
submitted to us as copies conform to the original documents, and there has been
(or will be by the Effective Date of the Merger) due execution and delivery of
all documents where due execution and delivery are prerequisites to
effectiveness thereof;
2. The Merger will be effective under the laws of the State of
California;
3. The shareholders of Primary Access do not, and will not on or before
the Effective Date of the Merger, have an existing plan or intent to dispose of
any amount of 3Com Common Stock to be received in the Merger (or to dispose of
Primary Access capital stock in anticipation of the Merger) such that the
shareholders of Primary Access will not receive and retain a meaningful
continuing equity ownership in 3Com that is sufficient to satisfy the continuity
of interest requirements as specified in Treas. Reg. Section 1.368-1(b) and as
interpreted in certain Internal Revenue Service rulings and federal judicial
decisions;
4. After the Merger, Primary Access will hold "substantially all" of its
and Sub's properties within the meaning of Section 368(a)(2)(E)(i) of the Code
and the regulations promulgated thereunder;
<PAGE>
Primary Access Corporation __________________, 1995
3Com Corporation Page 3
5. To the extent any expenses relating to the Merger (or the "plan of
reorganization" within the meaning of Treas. Reg. Section 1.368-1(c) with
respect to the Merger) are funded directly or indirectly by a party other than
the incurring party, such expenses will be within the guidelines established in
Revenue Ruling 73-54, 1973-1 C.B. 187;
6. No Primary Access shareholder guaranteed any Primary Access
indebtedness outstanding during the Pre-Merger Period (as defined in the 3Com
Letter), and at all relevant times, including as of the Effective Date of the
Merger, (i) instruments or arrangements not denominated as equity of Primary
Access, 3Com or Sub has not or will not represent equity or tax purposes; and
(ii) no outstanding equity of Primary Access, 3Com or Sub has or will represent
indebtedness for tax purposes;
7. At all relevant times 3Com will control Primary Access. As used in
the preceding sentence "control" shall have the meaning set forth in Section
368(c) of the Code; and
8. As to all matters in the 3Com Letter or the Primary Access Letter in
which a signatory thereto has represented that such signatory either is not a
party to, does not have, or is not aware of, any plan, intention, understanding
or agreement, there is in fact no such plan, intention, understanding or
agreement.
Based on our examination of the foregoing items and subject to the
assumptions, exceptions, limitations and qualifications set forth herein, we are
of the opinion that, for federal income tax purposes, the Merger will be a
"reorganization" as defined in Section 368(a) of the Code and (i) no gain or
loss will be recognized by the shareholders of Primary Access who exchange all
of their shares of Primary Access stock solely for 3Com Common Stock pursuant to
the Merger; (ii) the aggregate basis of the 3Com Common Stock received by the
Primary Access shareholders who exchange all of their shares of the Primary
Access stock for 3Com Common Stock will be the same as the aggregate basis of
the shares of the Primary Access stock surrendered in exchange therefor; and
(iii) the holding period of the 3Com Common Stock received in such exchange will
include the period during which the shares of the Primary Access stock exchanged
therefor were held, provided such shares of the Primary Access stock were held
as a capital asset on the Effective Date.
We are also of the opinion that the statements in the Prospectus under the
caption "Certain Federal Income Tax Considerations" to the extent they
constitute matters of law or legal conclusions with respect thereto, are correct
in all material respects.
<PAGE>
Primary Access Corporation __________________, 1995
3Com Corporation Page 4
In addition to the assumptions set forth above, the opinions expressed in
this letter are subject to the exceptions, limitations and qualifications set
forth below.
1. This opinion letter addresses only the classification of the Merger as
a reorganization under Section 368(a) of the Code and the tax consequences
expressly set forth above. This opinion letter does not address any other
federal, state, local or foreign tax consequences that may result from the
Merger or any other transaction (including any transaction undertaken in
connection with the Merger). In particular, we express no opinion regarding (i)
whether and the extent to which any Primary Access shareholder who has provided
or will provide services to Primary Access, 3Com or Sub will have compensation
income under any provision of the Code; (ii) the effects of such compensation
income, including but not limited to the effect upon the basis and holding
period of the 3Com Common Stock received by any such shareholder in the Merger;
(iii) the potential application of the "golden parachute" provisions (Section
280G, 3121(v)(2) and 4999) of the Code, the alternative minimum tax provisions
(Sections 55, 56 and 57 of the Code) or Sections 108,305,306,357,424, and 708,
or the regulations promulgated thereunder; (v) the corporate level tax
consequences of the Merger to 3Com, Sub or Primary Access, including without
limitation the recognition of any gain and the survival and/or availability,
after the Merger, of any of the federal income tax attributes or elections of
Primary Access, after application of any provision of the Code, as well as the
regulations promulgated thereunder and judicial interpretations thereof; (vi)
the basis of any equity interest in Primary Access acquired by 3Com in the
Merger; (vii) the tax consequences of any transaction in which Primary Access
stock or a right to acquire Primary Access stock was received; (viii) the tax
consequences of the Merger to holders of options, warrants or other rights to
acquire Primary Access stock; and (ix) the tax consequences of the Merger
(including the opinion set forth above) as applied to specific shareholders of
Primary Access or that may be relevant to particular classes of Primary Access
shareholders such as dealers in securities, corporate shareholders subject to
the alternative minimum tax, foreign persons, and holders of shares acquired
upon exercise of stock options or in other compensatory transactions.
2. No opinion is expressed as to (i) any transaction other than the
Merger as described in the Agreement (including without limitation any
transaction in which the Primary Access capital stock that was exchanged in the
Merger was acquired by the exchanging shareholder) or (ii) any transaction
whatsoever (including the Merger) if all the transactions described in the
Agreement are not consummated in accordance with the terms of the Agreement and
without waiver or breach of any material provision thereof, or if any of the
representations, warranties, statements and assumptions upon which we relied are
not true and accurate at all relevant times. in the event any one of the
statements, representations, warranties or assumptions upon
<PAGE>
Primary Access Corporation __________________, 1995
3Com Corporation Page 5
which we have relied to issue this opinion is incorrect, our opinion might be
adversely affected and may not be relied upon.
3. This opinion letter represents and is based upon our best judgment
regarding the application of federal income tax laws arising under the Code,
existing judicial decisions, administrative regulations and published rulings
and procedures. Our opinion is not binding upon the Internal Revenue Service or
the courts, and there is no assurance that the Internal Revenue Service will not
successfully assert a contrary position. Furthermore, no assurance can be given
that future legislative, judicial or administrative changes, on either a
prospective or retroactive basis, would not adversely affect the accuracy of the
conclusions stated herein. Nevertheless, we undertake no responsibility to
advise you of any new developments in the application or interpretation of the
federal income tax laws.
4. This opinion letter is given for the purpose of satisfying the
condition set forth in Section 7.5 of the Agreement and is intended solely for
your benefit. This opinion may not be relied upon by any other person or entity
or for any other purpose, and may not be made available to any other person or
entity, without our prior written consent. We do hereby consent to the filing
of this opinion as an exhibit to the Registration Statement and further consent
to all references to us in the Registration Statement, the Prospectus
constituting a part thereof and any further amendments thereto. In giving this
consent, we do not admit that we are in the category of persons whose consent is
required under Section 7 of the Securities Act of 1933, as amended, or the Rules
and Regulations of the Commission thereunder.
Very truly yours,
GRAY CARY WARE & FREIDENRICH
<PAGE>
(619) 699-0221 ____________, 1995
Primary Access Corporation
12230 World Trade Drive
San Diego, California 92128
3Com Corporation
5400 Bayfront Plaza
Santa Clara, California 95052
Re: Merger pursuant to the Agreement of Merger (the "Agreement"),
dated March 21, 1995, between 3Com Corporation, a California
corporation ("3Com"), Anuinui Acquisition Corporation, a
California corporation ("Sub"), and Primary Access Corporation, a
California corporation ("Primary Access")
Gentlemen:
This opinion is being delivered to you pursuant to Section 7.5 of the
Agreement of Merger (the "Agreement") by and among 3Com Corporation, a
California corporation ("3Com"), Anuinui Acquisition Corporation, a California
corporation ("Sub"), and Primary Access Corporation, a California corporation
("Primary Access"), dated as of March 21, 1995. Pursuant to the Agreement, Sub
will merge with and into Primary Access (the "Merger"), and Primary Access will
become a wholly-owned subsidiary of 3Com.
Except as otherwise provided, capitalized terms referred to herein
have the meanings set forth in the Agreement. All section references, unless
otherwise indicated, are to the Internal Revenue Code of 1986, as amended (the
"Code").
We have acted as legal counsel to Primary Access in connection with
the Merger. As such, and for the purpose of rendering this opinion, we have
examined (or will examine on or prior to the Effective Date of the Merger) and
are relying (or will rely) upon (without any independent investigation or review
thereof) the truth and
<PAGE>
Primary Access Corporation April 27, 1995
3Com Corporation Page 2
accuracy, at all relevant times, of the statements, covenants, representations
and warranties contained in the following documents:
1. The Agreement;
2. The Registration Statement on Form S-4 (File No. 33-58203)
initially filed by 3Com with the Securities and Exchange Commission (the
"Commission") on March 24, 1995, for the purpose of registering the 3Com Common
Stock to be issued in connection with the Merger under the Securities Act of
1933, as amended;
3. Representations made to us by 3Com and Sub in letter dated______,
1995 (the "3Com Letter");
4. Representations made to us by Primary Access in a letter dated
______, 1995 (the "Primary Access Letter");
5. Representations made by certain Shareholders of Primary Access in
certain Affiliates' Letters or Continuity of Interest Certificates; and
6. Such other instruments and documents related to the formation,
organization and operation of 3Com, Primary Access and Sub or to the
consummation of the Merger and the transactions contemplated thereby as we have
deemed necessary or appropriate.
In connection with rendering this opinion, we have assumed or obtained
representations (and are relying thereon, without any independent investigation
or review thereof) that:
1. Original documents (including signatures) are authentic,
documents submitted to us as copies conform to the original documents, and there
has been (or will be by the Effective Date of the Merger) due execution and
delivery of all documents where due execution and delivery are prerequisites to
effectiveness thereof;
2. The Merger will be effective under the laws of the State of
California;
3. The shareholders of Primary Access do not, and will not on or
before the Effective Date of the Merger, have an existing plan or intent to
dispose of an amount of 3Com Common Stock to be received in the Merger (or to
dispose of Primary Access capital stock in anticipation of the Merger) such that
the shareholders of Primary
<PAGE>
Primary Access Corporation April 27, 1995
3Com Corporation Page 3
Access will not receive and retain a meaningful continuing equity ownership in
3Com that is sufficient to satisfy the continuity of interest requirements as
specified in Treas. Reg. Section 1.368-1(b) and as interpreted in certain
Internal Revenue Service rulings and federal judicial decisions;
4. After the Merger, Primary Access will hold "substantially all" of
its and Sub's properties within the meaning of Section 368(a)(2)(E)(i) of the
Code and the regulations promulgated thereunder;
5. To the extent any expenses relating to the Merger (or the "plan
of reorganization" within the meaning of Treas. Reg. Section 1.368-1(c) with
respect to the Merger) are funded directly or indirectly be a party other than
the incurring party, such expenses will be within the guidelines established in
Revenue Ruling 73-54, 1973-1 C.B. 187.
6. No Primary Access shareholder guaranteed any Primary Access
indebtedness outstanding during the Pre-Merger Period (as defined in the 3Com
Letter), and at all relevant times, including as of the Effective Date of the
Merger, (i) instruments or arrangements not denominated as equity of Primary
Access, 3Com or Sub has not or will not represent equity for tax purposes; and
(ii) no outstanding equity of Primary Access, 3Com or Sub has or will represent
indebtedness for tax purposes;
7. At all relevant times 3Com will control Primary Access. As used
in the preceding sentence "control" shall have the meaning set forth in Section
368(c) of the Code; and
8. As to all matters in the 3Com Letter or the Primary Access Letter
in which a signatory thereto has represented that such signatory either is not a
party to, does not have, or is not aware of, any plan, intention, understanding
or agreement, there is in fact no such plan, intention, understanding or
agreement.
Based on our examination of the foregoing items and subject to the
assumptions, exceptions, limitations and qualifications set forth herein, we are
of the opinion that, for federal income tax purposes, the Merger will be a
"reorganization" as defined in Section 368(a) of the Code and (i) no gain or
loss will be recognized by the shareholders of Primary Access who exchange all
of their shares of Primary Access Stock solely for 3Com Common Stock pursuant to
the Merger; (ii) the aggregate basis of the 3Com Common Stock received by the
Primary Access shareholders who exchange all of their shares of the Primary
Access Stock for 3Com Common Stock will be the same as the aggregate basis of
the shares of the Primary Access Stock surrendered in exchange
<PAGE>
Primary Access Corporation April 27, 1995
3Com Corporation Page 4
therefor; and (iii) the holding period of the 3Com Common Stock received in such
exchange will include the period during which the shares of the Primary Access
Stock exchanged therefor were held, provided such shares of the Primary Access
Stock were held as a capital asset on the Effective Date.
We are also of the opinion that the statements in the Prospectus under
the caption "Certain Federal Income Tax Consequences" to the extent they
constitute matters of law or legal conclusions with respect thereto, have been
prepared or reviewed by us and are correct in all material respects.
In addition to the assumptions set forth above, the opinions expressed
in this letter are subject to the exceptions, limitations and qualifications set
forth below.
1. This opinion letter addresses only the classification of the
Merger as a reorganization under Section 368(a) of the Code and the tax
consequences expressly set forth above. This opinion letter does not address
any other federal, state, local or foreign tax consequences that may result
from the Merger or any other transaction (including any transaction undertaken
in connection with the Merger). In particular, we express no opinion regarding
(i) whether and the extent to which any Primary Access shareholder who has
provided or will provide services to Primary Access, 3Com or Sub will have
compensation income under any provision of the Code; (ii) the effects of such
compensation income, including but not limited to the effect upon the basis and
holding period of the 3Com stock received by any such shareholder in the Merger;
(iii) the potential application of the "golden parachute" provisions (Sections
280G, 3121(v)(2) and 4999) of the Code, the alternative minimum tax provisions
(Sections 55, 56 and 57) of the Code or Sections 108, 305, 306, 357, 424, and
708, or the regulations promulgated thereunder; (v) the corporate level tax
consequences of the Merger to 3Com, Sub or Primary Access, including without
limitation the recognition of any gain and the survival and\or availability,
after the Merger, of any of the federal income tax attributes or elections of
Primary Access, after application of any provision of the Code, as well as the
regulations promulgated thereunder and judicial interpretations thereof; (vi)
the basis of any equity interest in Primary Access acquired by 3Com in the
Merger; (vii) the tax consequences of any transaction in which Primary Access
stock or a right to acquire Primary Access stock was received; (viii) the tax
consequences of the Merger to holders of options, warrants or other rights to
acquire Primary Access stock; and (ix) the tax consequences of the Merger
(including the opinion set forth above) as applied to specific shareholders of
Primary Access or that may be relevant to particular classes of Primary Access
shareholders such as dealers in securities, corporate shareholder subject to the
alternative minimum tax, foreign persons, and holders of shares acquired upon
exercise of stock options or in other compensatory transactions.
<PAGE>
Primary Access Corporation April 27, 1995
3Com Corporation Page 5
2. No opinion is expressed as to (i) any transaction other than the
Merger as described in the Agreement (including without limitation any
transaction in which the Primary Access capital stock that was exchanged in the
Merger was acquired by the exchanging shareholder) or (ii) any transaction
whatsoever (including the Merger) if all the transactions described in the
Agreement are not consummated in accordance with the terms of the Agreement and
without waiver or breach of any material provision thereof, or if any of the
representations, warranties, statements and assumptions upon which we relied are
not true and accurate at all relevant times. In the event any one of the
statements, representations, warranties or assumptions upon which we have relied
to issue this opinion is incorrect, our opinion might be adversely affected and
may not be relied upon.
3. This opinion letter represents and is based upon our best
judgment regarding the application of federal income tax laws arising under the
Code, existing judicial decisions, administrative regulations and published
rulings and procedures. Our opinion is not binding upon the Internal Revenue
Service or the courts, and there is no assurance that the Internal Revenue
Service will not successfully assert a contrary position. Furthermore, no
assurance can be given that future legislative, judicial or administrative
changes, on either a prospective or retroactive basis, would not adversely
affect the accuracy of the conclusions stated herein. Nevertheless, we
undertake no responsibility to advise you of any new developments in the
application or interpretation of the federal income tax laws.
4. This opinion is given for the purpose of satisfying the condition
set forth in Section 7.5 of the Agreement and is intended solely for your
benefit. This opinion may not be relied upon by any other person or entity or
for any other purpose, and may not be made available to any other person or
entity without our prior written consent. We do hereby consent to the filing of
this opinion as an exhibit to the Registration Statement and further consent to
all references to us in the Registration Statement, the prospectus constituting
a part thereof and any further amendments thereto. In giving this consent, we
do not admit that we are in the category of persons whose consent is required
under Section 7 of the Securities Act of 1933, as amended, or the Rules and
Regulations of the Commission thereunder.
Very truly yours,
BROBECK, PHLEGER & HARRISON
<PAGE>
EXHIBIT 10.27
ESCROW AGREEMENT
This Escrow Agreement (the "Agreement") is entered into as of ,
1995, by and among 3Com Corporation, a California corporation ("Buyer"), the
Escrow Agent named herein, and the Shareholders' Agents named in Section 6
hereof with respect to the shares of stock held by the shareholders and option
holders (collectively, the "Holders") of Primary Access Corporation, a
California corporation ("PAC").
A. Buyer and PAC have entered into an Agreement and Plan of Reorganization
dated as of March 21, 1995 (together with all exhibits, schedules, supplements
and any amendments thereto, the "Plan") pursuant to which Anuinui Acquisition
Corporation ("Sub"), a wholly-owned subsidiary of Buyer, will merge with and
into PAC, with PAC surviving the Merger. Capitalized terms used in this
Agreement and not otherwise defined herein shall have the meanings given them in
the Plan.
B. The Plan provides that Buyer will deposit into escrow (i) at the
Effective Date, ten percent (10%) of the shares of Buyer Common Stock issued to
the holders of PAC Stock in the Merger, on a pro rata basis, and (ii) upon each
exercise of the Buyer Options that are issued to the holders of PAC Options in
the Merger, if such exercise occurs between the Effective Date and on or before
the final escrow release date, ten percent (10%) of the shares of Buyer Common
Stock issued upon such exercise (collectively, the "Escrow Shares") to be placed
in an escrow account (the "Escrow Account") to secure certain indemnification
obligations to Buyer under the Plan on the terms and conditions set forth
herein. The Escrow Shares required to be deposited in the Escrow Account
pursuant to this Agreement are shown on EXHIBIT A attached hereto.
C. The parties hereto desire to establish the terms and conditions pursuant
to which the Escrow Shares will be deposited, held in, and disbursed from the
Escrow Account.
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. ESCROW AND INDEMNIFICATION.
(a) ESCROW OF SHARES. The Escrow Shares will be held in escrow by The
First National Bank of Boston (or other institution selected by Buyer with
the reasonable consent of the Shareholders' Agents) (the "Escrow Agent"), as
collateral for the Holders' indemnification obligations under Section 13.2
of the Plan and Section 1(b) of this Agreement, until Buyer is required to
release such Escrow Shares pursuant to the terms of this Agreement and the
Plan. Such indemnification obligations are subject to the limitations and
procedural requirements set forth in Section 13 of the Plan and as set forth
herein. The Escrow Shares will include "Additional Escrow Shares" as that
term is defined in Section 2(b) of this Agreement. The Escrow Agent agrees
to accept delivery of the Escrow Shares and to hold such Escrow Shares in
escrow subject to the terms and conditions of this Agreement and the Plan.
(b) INDEMNIFICATION. The Escrow Fund (but only up to a maximum of the
number of Escrow Shares) will be available to compensate Buyer for any loss
(excluding any consequential damages to Buyer, such as lost profits,
in-house costs of investigation of potential damages and in-house attorneys'
fees), expense, liability or other damage, including attorneys' fees, to the
extent of the amount of such loss, expense, liability or other damage
(collectively "Damages") that Buyer has incurred by reason of (i) the breach
of PAC of any representation, warranty, covenant or agreement of PAC
contained in the Plan, or by reason of any misrepresentation by PAC made in
or pursuant to Section 3 of the Plan, or (ii) the claims raised in the
Wilcox & Gibbs/DataNet Litigation (the "DataNet Litigation"), and for which
Buyer has not received reimbursement pursuant to insurance or otherwise;
PROVIDED, HOWEVER, that the representation s and warranties of PAC contained
in the Plan shall survive the Closing and any investigation at any time made
by or on behalf of Buyer for the following periods: (i) for those items that
would be expected to be
1
<PAGE>
encountered in Buyer's audit process, until the date of completion of the
first audit of financial statements containing combined operations of Buyer
and PAC, and (ii) for all other items, for a period of twelve (12) months
after the Closing.
(c) LIMITATION ON LIABILITY. The following limitations will apply to
the Escrow Fund and claims against the Escrow Fund:
(i) If Buyer and Sub close the transactions contemplated under the
Plan, all items disclosed by PAC to Buyer in any PAC Disclosure Schedule
or any supplements thereto and all matters otherwise actually known to
Buyer and all of PAC's unknown business risks will be assumed by Buyer,
except for any claims arising from the DataNet Litigation or any
misrepresentations made by PAC.
(ii) If the Merger closes, resort to the Escrow Fund will be the
exclusive remedy of Buyer (i) for any breaches of any warranty or
covenant and/or misrepresentations contained in the Plan and (ii) for any
claims against any officer, director, shareholder or employee of PAC in
connection with the Merger. The foregoing is not intended to limit
Buyer's remedies in the event of willful fraud.
(iii) Any claim will be reduced by the amount of any net tax benefit
realized (by reason of a tax deduction, basis reduction, shifting of
income, credits and/or deductions or otherwise) by Buyer in connection
with the loss or damage suffered by Buyer which forms the basis of PAC's
liability hereunder. Damages will exclude any amount considered in
calculating the amount of the Adjustment.
(d) DAMAGE THRESHOLD. Notwithstanding the foregoing, Buyer may not
receive any shares from the Escrow Fund unless and until an Officer's
Certificate or Certificates (as defined in Section 3 below) identifying the
aggregate amount of Buyer's Damages has been delivered to the Shareholders'
Agents, and to the Escrow Agent, and then, except as provided in Section 10
hereof and Section 13.13 of the Plan, only to the extent that such aggregate
amount exceeds a deductible of $750,000, provided that Damages from the
DataNet Litigation in excess of the reserve therefor existing at the date of
the Plan (including legal fees or settlement costs incurred after the date
of the Plan) will not be subject to such threshold and deductible amount. To
receive any Escrow Shares, notice of such Damages must be delivered to the
Escrow Agent and Shareholders' Agents as provided in Section 3 below and
such amount as is determined pursuant to this Section 1 and Section 13 of
the Plan to be payable after application of the $750,000 deductible, if
applicable, in which case Buyer will receive the number of Escrow Shares
equal in value (calculated in accordance with Section 4 to the full amount
of Damages. In no event will Buyer receive more than the number of Escrow
Shares then remaining in the Escrow Fund at the time of Buyer's claim, and
the maximum liability of all PAC shareholders and option holders under the
Plan and/or this Agreement will not exceed the forfeiture of the Escrow
Shares in the Escrow Fund. Damages will not include any individual Damage
items of $10,000 or less unless such amounts exceed $50,000 in the
aggregate.
2. DEPOSIT OF ESCROW SHARES: RELEASE FROM ESCROW.
(a) DELIVERY OF ESCROW SHARES. On the Closing Date, the Escrow Shares
issued to the holders of PAC Stock in the Merger and (ii) upon each exercise
of the Buyer Options issued to holders of PAC Options in the Merger, if the
exercise occurs between the Effective Date and on or before the final escrow
release date, the Escrow Shares issued upon such exercise will be delivered
by Buyer to the Escrow Agent in the form of a duly authorized stock
certificate or certificates issued in the name of the Escrow Agent or its
nominee. In the event Buyer issues any Additional Escrow Shares (as defined
below), such shares will be issued in the name of the Escrow Agent and
delivered to the Escrow Agent in the same manner as the Escrow Shares
delivered on the Closing Date.
2
<PAGE>
(b) DIVIDENDS, VOTING AND RIGHTS OF OWNERSHIP. Except for tax-free
dividends paid in stock declared with respect to the Escrow Shares pursuant
to Section 305(a) of the Internal Revenue Code of 1986, as amended (the
"Code") ("Additional Escrow Shares"), any cash dividends, dividends payable
in securities or other distributions of any kind made in respect of the
Escrow Shares will be distributed currently to the Holders. Each Holder will
have voting rights with respect to the Escrow Shares deposited in the Escrow
Account with respect to such Holder so long as such Escrow Shares are held
in escrow, and Buyer will take all reasonable steps necessary to allow the
exercise of such rights. While the Escrow Shares remain in the Escrow
Agent's possession pursuant to this Agreement and the Plan, the Holders will
retain and will be able to exercise all other incidents of ownership of said
Escrow Shares which are not inconsistent with the terms and conditions
hereof and thereof.
(c) DISTRIBUTION TO HOLDERS. The Escrow Period will terminate twelve
(12) months after the Effective Date and the Escrow Agent will release from
escrow to the Holders their respective Escrow Shares plus all Additional
Escrow Shares; provided, however, that the number of Escrow Shares, which,
in the reasonable judgment of Buyer, subject to the objection of the
Shareholders' Agents and the subsequent arbitration of the matter in the
manner provided in Section 6 hereof, are necessary to satisfy any
unsatisfied claims specified in any Officer's Certificate theretofore
delivered to the Escrow Agent prior to termination of the Escrow Period with
respect to Damages incurred or litigation pending prior to expiration of the
Escrow Period, will remain in the Escrow Fund until such claims have been
resolved. In no event will any amount be retained in the Escrow Fund at the
end of the Escrow Period, except as to claims made prior to the end of the
Escrow Period that relate to Damages actually incurred or pending
litigation. If the DataNet Litigation remains unresolved at the end of the
Escrow Period, no more than Three Million Dollars ($3,000,000) of the Escrow
Fund may be retained in Escrow to cover any claim arising from such
litigation.
(d) RELEASE OF SHARES. The Escrow Shares will be held by the Escrow
Agent until required to be released pursuant to Section 2(c) above. Within 5
business days after the applicable release condition is met, the Escrow
Agent will deliver to each Holder the requisite number of Escrow Shares to
be released on such date as identified by Buyer and the Shareholders' Agents
to the Escrow Agent in writing, in the form of stock certificate(s) issued
in the name of such Holder. Buyer and Shareholders' Agents undertake to
deliver a notice to the Escrow Agent identifying the number of Escrow Shares
to be released within such five-day period and Buyer agrees to take such
action as may be necessary to cause such certificates to be issued in the
names of the appropriate Holders and delivered to the Escrow Agent together
with the notice from Buyer and Shareholders' Agents. Escrow Shares will be
released to the respective Holders in proportion to their respective
interests as set forth in EXHIBIT A. Certificates representing Escrow Shares
so issued that are subject to resale restrictions under applicable
securities laws will bear a legend to that effect. Cash will be paid in lieu
of fractions of Escrow Shares in an amount equal to the product determined
by multiplying such fraction by the Closing Price of Buyer Common Stock as
quoted on the Nasdaq National Market on the Closing Date as set forth in the
Plan. Within five business days after written request from the Shareholders'
Agents, Buyer will deposit with the Escrow Agent sufficient funds to pay
such cash amounts for fractional shares.
(e) NO ENCUMBRANCE. No Escrow Shares or any beneficial interest
therein may be pledged, sold, assigned or transferred, including by
operation of law, by a Holder or be taken or reached by any legal or
equitable process in satisfaction of any debt or other liability of a
Holder, prior to the delivery to such Holder of the Escrow Shares by the
Escrow Agent.
(f) POWER TO TRANSFER ESCROW SHARES. The Escrow Agent is hereby
granted the power to effect any transfer of Escrow Shares contemplated by
the Plan and this Agreement. Buyer will cooperate with the Escrow Agent in
promptly issuing stock certificates to effect such transfers.
3
<PAGE>
3. CLAIMS UPON ESCROW FUND. Upon receipt by the Escrow Agent on or before
the last day of the Escrow Period of a certificate signed by any officer of
Buyer (an "Officer's Certificate"):
(a) stating (i) that Damages in excess of the reserve therefor as of
January 1, 1995 exist with respect to the DataNet Litigation, (ii) that the
aggregate amount of Buyer's other Damages exceeds $750,000 (which aggregate
amount cannot include any individual Damage items of $10,000 or less unless
such amounts exceed $50,000 in the aggregate of $10,000 or less), or (iii)
that Damages with respect to a matter subject to Section 10 have been
incurred in excess of $50,000, and
(b) specifying in reasonable detail the individual items of such Damages
included in the amount so stated, the date each such item was paid, or
properly accrued or arose, and the nature of the misrepresentation, breach
of warranty or claim to which such item is related, the Escrow Agent will,
subject to the provisions of Section 6 hereof, deliver to Buyer out of the
Escrow Fund, as promptly as practicable, Escrow Shares having a value equal
to such Damages, but (i) as to matters other than DataNet Litigation, only
to the extent such Damages exceed $750,000 and (ii) as to matters subject to
Section 10 , only to the extent of 50% of the amount thereof in excess of
$50,000.
4. VALUATION OF ESCROW SHARES. For the purpose of compensating Buyer for
its Damages pursuant to this Agreement, the Escrow Shares will be valued at the
Average Price of Buyer Common Stock as determined pursuant to the Plan. Any
release of Escrow Shares under this Agreement shall be made pro rata among the
Holders in proportion to their respective interests as set forth on Exhibit A
hereto.
5. OBJECTIONS TO CLAIMS. At the time of delivery of any Officer's
Certificate to the Escrow Agent, a duplicate copy of such Officer's Certificate
will be delivered to the Shareholders' Agents and for a period of forty-five
(45) days after such delivery, the Escrow Agent will make no delivery of Escrow
Shares pursuant to Section 3 hereof unless the Escrow Agent has received written
authorization from the Shareholders' Agents to make such delivery. After the
expiration of such forty-five (45) day period, the Escrow Agent will make
delivery of the Escrow Shares in the Escrow Fund in accordance with Section 3
hereof, provided that no such delivery may be made if the Shareholders' Agents
will object in a written statement to the claim made in the Officer's
Certificate, and such statement has been delivered to the Escrow Agent and to
Buyer prior to the expiration of such forty-five (45) day period.
6. RESOLUTION OF CONFLICTS; ARBITRATION.
(a) In case the Shareholders' Agents so object in writing to any claim
or claims by Buyer made in any Officer's Certificate, Buyer will have
forty-five (45) days to respond in a written statement to the objection of
the Shareholders' Agents. If after such forty-five (45) day period there
remains a dispute as to any claims, the Shareholders' Agents and Buyer will
attempt in good faith for sixty (60) days to agree upon the rights of the
respective parties with respect to each of such claims. If the Shareholders'
Agents and Buyer should so agree, a memorandum setting forth such agreement
will be prepared and signed by both parties and will be furnished to the
Escrow Agent. The Escrow Agent will be entitled to rely on any such
memorandum and will distribute the Escrow Shares from the Escrow Fund in
accordance with the terms thereof.
(b) If no such agreement can be reached after good faith negotiation,
either Buyer or the Shareholders' Agents may, by written notice to the
other, demand arbitration of the matter unless the amount of the damage or
loss is at issue in pending litigation with a third party, in which event
arbitration will not be commenced until such amount is ascertained or both
parties agree to arbitration; and in either such event the matter will be
settled by arbitration conducted by three arbitrators. Within fifteen (15)
days after such written notice is sent, Buyer and the Shareholders' Agents
will each select one arbitrator, and the two arbitrators so selected will
select a third arbitrator. The decision of the arbitrators as to the
validity and amount of any claim in such Officer's Certificate will be
binding and conclusive upon the parties to this Agreement, and
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<PAGE>
notwithstanding anything in Section 3 hereof, the Escrow Agent will be
entitled to act in accordance with such decision and make or withhold
payments out of the Escrow Fund in accordance therewith.
(c) Judgment upon any award rendered by the arbitrators may be entered
in any court having jurisdiction. Any such arbitration will be held in Santa
Clara or San Mateo County, California under the commercial rules then in
effect of the American Arbitration Association. For purposes of this Section
6(c), in any arbitration hereunder in which any claim or the amount thereof
stated in the Officer's Certificate is at issue, Buyer will be deemed to be
the Non-Prevailing Party unless the arbitrators award Buyer more than
one-half (1/2) of the amount in dispute, plus any amounts not in dispute;
otherwise, the PAC shareholders for whom shares of Buyer Common Stock
otherwise issuable to them have been deposited in the Escrow Fund will be
deemed to be the Non-Prevailing Party. The Non-Prevailing Party to an
arbitration will pay its own expenses, the fees of each arbitrator, the
administrative fee of the American Arbitration Association, and the
expenses, including with limitation, attorneys' fees and costs, incurred by
the other party to the arbitration.
7. SHAREHOLDERS' AGENTS.
(a) Pursuant to the terms of the Plan as approved by the Holders, the
Holders have consented to the appointment of Tench Coxe, Kathryn C. Gould,
and William R. Stensrud as the agents ("Shareholders' Agents") for and on
behalf of each of the Holders to give and receive notices and
communications, to authorize delivery to Buyer of the Escrow Shares or other
property from the Escrow Fund in satisfaction of claims by Buyer, to object
to such deliveries, to agree to, negotiate, enter into settlements and
compromises of, and demand arbitration and comply with orders of courts and
awards of arbitrators with respect to such claims, and to take all actions
necessary or appropriate in the judgment of the Shareholders' Agents for the
accomplishment of the foregoing. Such agency may be changed by the holders
of a majority in interest of the Escrow Fund from time to time upon not less
than ten (10) days' prior written notice to Buyer. No bond will be required
of the Shareholders' Agents, and the Shareholders' Agents will receive no
compensation for their services. Notices or communications to or from the
Shareholders' Agents will constitute notice to or from each of the Holders.
Buyer agrees to waive any conflict of interest of any type that may arise as
a result of Mr. Stensrud's acting as one of the Shareholders' Agents. The
Shareholders' Agents may, and are hereby authorized to, act by majority
approved as to any matter.
(b) The Shareholders' Agents will not be liable for any act done or
omitted hereunder as Shareholders' Agents while acting in good faith and in
the exercise of reasonable judgment, and any act done or omitted pursuant to
the advice of counsel will be conclusive evidence of such good faith. The
Holders will severally indemnify the Shareholders' Agents and hold them
harmless against any loss, liability or expense incurred without gross
negligence or bad faith on the part of the Shareholders' Agents and arising
out of or in connection with the acceptance or administration of their
duties hereunder.
(c) The Shareholders' Agents will have reasonable access to information
about PAC and Buyer and the reasonable assistance of PAC's and Buyer's
officers and employees for purposes of performing their duties and
exercising their rights hereunder, provided that the Shareholders' Agents
will treat confidentially and not disclose any nonpublic information from or
about PAC or Buyer to anyone (except on a need to know basis to individuals
who agree to treat such information confidentially).
8. ACTIONS OF THE SHAREHOLDERS' AGENTS. A decision, act, consent or
instruction of the Shareholders' Agents will constitute a decision, act, consent
or instruction of all Holders and will be final, binding and conclusive upon
each such Holder, and the Escrow Agent and Buyer may rely upon any decision,
act, consent or instruction of the Shareholders' Agents as being the decision,
act, consent or
5
<PAGE>
instruction of each and every such Holder. The Escrow Agent and Buyer are hereby
relieved from any liability to any person for any acts done by them in
accordance with such decision, act, consent or instruction of the Shareholders'
Agents.
9. CONTROL OF LITIGATION. If any proceeding is commenced, or if any claim,
demand or assessment is asserted, in respect of which a claim for
indemnification is made against the Escrow Fund based on any matters other than
(i) the intellectual property of PAC, or (ii) claims made by customers of the
Buyer or PAC, the Shareholders' Agents may, at their option contest or defend
any such action, proceeding, claim, demand or assessment, with counsel of their
own choosing; provided, however, that if Buyer reasonably objects to such
control the Shareholders' Agents and Buyer will cooperate in the contesting and
defense of such matter; provided, however, that the Shareholders' Agents will
not admit any liability with respect thereto or settle, compromise, pay or
discharge the same without the prior written consent of the Buyer, which consent
will not be unreasonably withheld. All fees and expenses incurred by PAC in
connection with the defense of the DataNet Litigation shall be paid by Buyer;
after payment of such fees and expenses the Escrow Agent shall release to Buyer
the number of Escrow Shares from escrow equal to the value of such fees and
expenses. In connection with the DataNet Litigation, the Shareholders' Agents
will have sole control of the defense of such matter and discretion to admit any
liability with respect thereto or settle, compromise, pay or discharge the same
without the prior written consent of the Buyer, except if any payment is
required other than from the Escrow Fund, in which case the prior written
consent of the Buyer will be required, which consent will not be unreasonably
withheld. With respect to a claim for indemnification based on matters relating
to the intellectual property of PAC, or customers of the Buyer or PAC, the Buyer
will have the option to contest or defend any such action, proceeding, claim,
demand or assessment, with counsel of its own choosing; provided, however, that
Buyer will not admit any liability with respect thereto or settle, compromise,
pay or discharge the same without the prior written consent of the Shareholders'
Agents, which consent will not be unreasonably withheld. The Shareholders'
Agents or Buyer, whichever is not controlling the defense of any matter, will be
entitled, at its or their expense, to participate in such defense.
10. OTHER PROVISIONS. In the event that the Buyer arrives at a good faith
and reasonable belief that there has been a breach with respect to the
representation in the last sentence of the PAC Disclosure Schedule Section
3.17(c) and that a claim regarding a significant contribution as referenced in
such subsection is likely to be filed, in the foreseeable future by a person who
in fact has made a contribution described in such Disclosure Schedule
subsection, the procedures in this Section 10 will be applicable thereto. Buyer
agrees that if such representation has been breached, it will, before taking any
action with respect thereto, consult with the Shareholders' Agents regarding
such matter and the reasonable measures to pursue to resolve such matter.
Provided that either the Shareholders' Agents agree that there has been a breach
of such representation and that Buyer has been or is reasonably likely to be
damaged as a result thereof (or in the absence of such agreement and the
submission of the matter to arbitration, that an the arbitrator so finds under
Section 6), then, and only then, Buyer may communicate directly or through a
representative with such person. If Damages are actually incurred by Buyer in
connection with a person so contacted within one year of Closing or are the
subject of litigation pending at the end of one year from the date of Closing,
then the provisions of Section 1(d) as to the amount of deductible
notwithstanding, Buyer may receive Escrow Shares to the extent that the
aggregate amount of Damages with respect to each separate such matter exceeds
$50,000 and then only to the extent of one-half of the Damages in excess of
$50,000 for each such matter. If Buyer takes action to precipitate damages with
respect the matters covered by this Section 10 without having followed this
procedure, no Escrow Shares will be delivered from the Escrow Fund with respect
to any such Damages.
11. LIMITATION OF THE ESCROW AGENT'S LIABILITY.
(a) The Escrow Agent will incur no liability with respect to any action
taken or suffered by it in reliance upon any notice, direction, instruction,
consent, statement or other document believed by it to be genuine and duly
authorized, nor for any other action or inaction, except its own willful
6
<PAGE>
misconduct or negligence. The Escrow Agent will not be responsible for the
validity or sufficiency of this Agreement. In all questions arising under
the Agreement, the Escrow Agent may rely on the advice of counsel, and for
anything done, omitted or suffered in good faith by the Escrow Agent based
on such advice, the Escrow Agent will not be liable to anyone. The Escrow
Agent will not be required to take any action hereunder involving any
expense unless the payment of such expense is made or provided for in a
manner satisfactory to it.
(b) In the event conflicting demands are made or notices are served upon
the Escrow Agent with respect to the Escrow Account, the Escrow Agent will
have the absolute right, at the Escrow Agent's election, to do either or
both of the following: resign so a successor can be appointed pursuant to
Section 15 or file a suit in interpleader and obtain an order from a court
of competent jurisdiction requiring the parties to interplead and litigate
in such court their several claims and rights among themselves. In the event
such interpleader suit is brought, the Escrow Agent will thereby be fully
released and discharged from all further obligations imposed upon it under
this Agreement, and Buyer will pay the Escrow Agent (subject to
reimbursement from the Holders pursuant to Section 14) all costs, expenses
and reasonable attorney's fees expended or incurred by the Escrow Agent
pursuant to the exercise of the Escrow Agent's rights under this Section 11
(such costs, fees and expenses will be treated as extraordinary fees and
expenses for the purposes of Section 14 hereof).
12. NOTICES. Any notice provided for or permitted under this Agreement
will be treated as having been given when (i) delivered personally, (ii) sent by
confirmed telex or telecopy, (iii) sent by commercial overnight courier with
written verification of receipt, or (iv) mailed postage prepaid by
7
<PAGE>
certified or registered mail, return receipt requested, to the party to be
notified, at the address set forth below, or at such other place of which the
other party has been notified in accordance with the provisions of this Section
12.
<TABLE>
<S> <C>
Escrow Agent: The First National Bank of Boston
Corporate Trust Department
Mail Stop 45-02-15
Canton, MA 02021
Attention: Traci Martin
Telecopy: (617) 575-2078
Shareholders' Agents:
With copy to: Brobeck Phleger & Harrison
550 West "C" Street, Suite 1300
San Diego, CA 92101
Attention: Craig S. Andrews
Telecopy: (619) 234-3848
Buyer: 3Com Corporation
5400 Bayfront Plaza
Santa Clara, CA 95052
Attention: General Counsel
Telecopy: (408) 764-6434
With copy to: Gray Cary Ware & Freidenrich
400 Hamilton Avenue
Palo Alto, CA 94301
Attention: J. Howard Clowes
Telecopy: (415) 327-3699
</TABLE>
8
<PAGE>
Such notice will be treated as having been received upon actual receipt.
13. GENERAL.
(a) GOVERNING LAWS. It is the intention of the parties hereto that the
internal laws of the State of California (irrespective of its choice of law
principles) shall govern the validity of this Agreement, the construction of
its terms, and the interpretation and enforcement of the rights and duties
of the parties hereto.
(b) BINDING UPON SUCCESSORS AND ASSIGNS. Subject to, and unless
otherwise provided in, this Agreement, each and all of the covenants, terms,
provisions, and agreements contained herein shall be binding upon, and inure
to the benefit of, the permitted successors, executors, heirs,
representatives, administrators and assigns of the parties hereto.
(c) COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be an original as against any party whose
signature appears thereon and all of which together shall constitute one and
the same instrument. This Agreement shall become binding when one or more
counterparts hereof, individually or taken together, shall bear the
signatures of all of the parties reflected hereon as signatories.
(d) ENTIRE AGREEMENT. Except as set forth in the Plan and the
Agreement of Merger, this Agreement, the exhibits hereto, the documents
referenced herein, and the exhibits thereto, constitute the entire
understanding and agreement of the parties hereto with respect to the
subject matter hereof and thereof and supersede all prior and
contemporaneous agreements or understandings, inducements or conditions,
express or implied, written or oral, between the parties with respect hereto
and thereto. The express terms hereof control and supersede any course of
performance or usage of the trade inconsistent with any of the terms hereof.
(e) CONFLICTS. In the event of any conflict or inconsistency between
the terms of this Agreement and the terms of the Plan, the terms of the Plan
shall control.
(f) WAIVERS. No waiver by any party hereto of any condition or of any
breach of any provision of this Agreement will be effective unless in
writing. No waiver by any party of any such condition or breach, in any one
instance, will be deemed to be a further or continuing waiver of any such
condition or breach or a waiver of any other condition or breach of any
other provision contained herein.
(g) AMENDMENT. This Agreement may be amended with the written consent
of Buyer, the Escrow Agent and the Shareholders' Agents, provided that if
the Escrow Agent does not agree to an amendment agreed upon by Buyer and the
Shareholders' Agents, Buyer will appoint a successor Escrow Agent in
accordance with Section 15 below.
14. EXPENSES.
(a) ESCROW AGENT. All fees and expenses of the Escrow Agent incurred
in the ordinary course of performing its responsibilities hereunder will be
paid by Buyer upon receipt of a written invoice by the Escrow Agent. Any
extraordinary fees and expenses, including without limitation any fees or
expenses incurred by the Escrow Agent in connection with a dispute over the
distribution of Escrow Shares or the validity of a claim or claims by Buyer
made in an Officer's Certificate, will be paid 50% by Buyer and 50% by the
Holders. The Escrow Agent shall deliver a written invoice of such fees to
Buyer and Shareholders' Agents. The Holders' liability for any such fees
shall be pro rata among the Holders in proportion to their respective
interests as set forth on EXHIBIT A hereto. The Holders' shall have the
option to pay such fees in cash rather than through the transfer of Escrow
Shares upon written notice to the Escrow Agent within five (5) business days
of receipt of the Escrow Agent's invoice. The valuation of the Escrow
Shares, if any, used to satisfy any obligation of the Holders for such fees
shall be as set forth in Section 4 hereof. The Holders' liability for the
fees and expenses of the Escrow Agent may be paid by Buyer and recovered as
a claim hereunder out of the Escrow Fund. If Buyer has paid the Holders'
portion of
9
<PAGE>
such fees and expenses as permitted hereunder, then the Escrow Agent will,
upon demand by Buyer, transfer to Buyer a number of Escrow Shares having a
value equal to such portion of fees and expenses.
(b) SHAREHOLDERS' AGENTS. Any fees and expenses incurred by the
Shareholders' Agents in connection with actions taken pursuant to the terms
of this Agreement will be paid by the Holders to the Shareholders' Agents in
proportion to their percentage interests set forth on EXHIBIT A. The
Shareholders' Agents will not be entitled to receive any other compensation
from Buyer or the Holders in connection with this Agreement.
15. SUCCESSOR ESCROW AGENT. In the event the Escrow Agent becomes
unavailable or unwilling to continue in its capacity herewith, the Escrow Agent
may resign and be discharged from its duties or obligations hereunder by
delivering its written resignation to the parties to this Agreement, specifying
not less than sixty (60) days' prior written notice of such a date when such
resignation will take effect. Buyer will designate a successor Escrow Agent
prior to the expiration of such 60-day period by giving written notice to the
Escrow Agent and the Shareholders' Agents. Buyer may appoint a successor Escrow
Agent without the consent of the Holders or the Shareholders' Agents so long as
such successor is a bank with assets of at least $50 million and prompt notice
of such appointment is provided to the Holders and Shareholders' Agents, and
Buyer may appoint any other successor Escrow Agent with the consent of the
Shareholders' Agents, which will not be unreasonably withheld. The Escrow Agent
will promptly transfer the Escrow Shares to such designated successor.
16. LIMITATION OF RESPONSIBILITY: NOTICES. The Escrow Agent's duties are
limited to those set forth in this Agreement and the Escrow Agent may rely upon
the written notices delivered to the Escrow Agent hereunder.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
10
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the
day and year first above written and will be effective as to all the Holders
when executed by Buyer, the Escrow Agent, the Shareholders' Agents and Holders
holding a majority of the Escrow Shares.
<TABLE>
<S> <C>
BUYER:
ESCROW AGENT:
3COM CORPORATION The First National Bank of Boston
By: By:
Its: Its:
SHAREHOLDERS' AGENTS:
Tench Coxe
Kathryn C. Gould
William R. Stensrud
</TABLE>
11
<PAGE>
EXHIBIT A
TO ESCROW AGREEMENT
<TABLE>
<CAPTION>
ESCROW PERCENTAGE
SHAREHOLDER PAC BUYER SHARES OF ESCROW
- -------------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Common Stock
Preferred Stock
Option Holders
</TABLE>
12
<PAGE>
EXHIBIT 23.3
CONSENT OF LEVINE, ZEIDMAN & DAITCH, P.C.
We consent to the use in this Amendment No. 1 to Registration Statement No.
33-58203 of 3Com Corporation of our report dated February 24, 1992 relating to
the financial statements of Star-Tek, Inc. for the year ended December 31, 1991
appearing in the Prospectus/Consent Solicitation Statement which is a part of
this Registration Statement, and to the reference to us under the heading
"Experts" in such Prospectus/Consent Solicitation Statement.
/s/ LEVINE, ZEIDMAN & DAITCH, P.C.
LEVINE, ZEIDMAN & DAITCH, P.C.
Wellesley Hills, Massachusetts
April 27, 1995
<PAGE>
EXHIBIT 23.2
CONSENT OF KPMG PEAT MARWICK LLP
The Board of Directors
Primary Access Corporation:
The audits referred to in our report dated November 4, 1994, included the
related financial statement schedule as of October 2, 1994 and October 3, 1993,
and for the fifty-two weeks ended October 2, 1994, the fifty-three weeks ended
October 3, 1993, and the fifty-two weeks ended September 27, 1992, included in
the registration statement. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement schedule based on our audits. In our
opinion, such financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
We consent to the use of our reports included herein and to the reference to
our firm under the heading "Experts" in the prospectus.
Our report dated November 4, 1994 refers to a change in the method of
accounting for income taxes in 1994.
/s/ KPMG Peat Marwick LLP
San Diego, California
April 28, 1995
<PAGE>
EXHIBIT 23.3
CONSENT OF LEVINE, ZEIDMAN & DAITCH, P.C.
We consent to the use in this Amendment No. 1 to Registration Statement No.
33-58203 of 3Com Corporation of our report dated February 24, 1992 relating to
the financial statements of Star-Tek, Inc. for the year ended December 31, 1991
appearing in the Prospectus/Consent Solicitation Statement which is a part of
this Registration Statement, and to the reference to us under the heading
"Experts" in such Prospectus/Consent Solicitation Statement.
/s/ LEVINE, ZEIDMAN & DAITCH, P.C.
LEVINE, ZEIDMAN & DAITCH, P.C.
Wellesley Hills, Massachusetts
April 27, 1995
<PAGE>
EXHIBIT 23.4
CONSENT OF SHACHAK & CO.
We consent to the use in this Amendment No. 1 to Registration Statement No.
33-58203 of 3Com Corporation of our report dated December 26, 1994 relating to
the financial statements of NiceCom Ltd. for the year ended December 31, 1993
included herein and to the reference to our firm under the heading "Experts" in
the Prospectus/Consent Solicitation Statement, which is part of this
Registration Statement.
/s/ SHACHAK & CO.
SHACHAK & CO.
Tel Aviv, Israel
April , 1995
<PAGE>
Morgan Stanley Letterhead
March 21, 1995
Board of Directors
3Com Corporation
5400 Bayfront Plaza
Santa Clara, CA 95052-8145
Members of the Board:
We understand that Primary Access Corporation ("Primary Access"), 3Com
Corporation ("3Com") and Anuinui Acquisition Corporation ("Sub"), a
wholly-owned subsidiary of 3Com, have entered into an Agreement and Plan of
Reorganization (the "Merger Agreement"), dated as of the date hereof, which
provides, among other things, for the merger (the "Merger") of Sub with and
into Primary Access. Pursuant to the Merger, each issued and outstanding
share of common stock, no par value, of Primary Access and each issued and
outstanding share of convertible preferred stock of Primary Access will be
converted into the right to receive that number of shares of common stock of
3Com, no par value, (the "3Com Common Stock") determined by dividing $170.0
million (minus certain adjustments) by a value ranging from $55.34 to $61.16
(based on the average closing price of 3Com Common Stock for the ten trading
days immediately preceding, but not including, the closing date) and then
dividing such foregoing quotient by the sum of (i) the total number of issued
and outstanding shares of common stock of Primary Access, no par value (the
"Primary Access Common Stock"), plus (ii) the total number of shares of
Primary Access Common Stock issuable upon conversion of all issued and
outstanding shares of preferred stock of Primary Access, plus (iii) the total
number of shares of Primary Access Common Stock issuable upon exercise of
outstanding options and warrants to purchase Primary Access Common Stock (the
"Exchange Ratio"). The terms and conditions of the Merger are more fully
set forth in the Merger Agreement.
You have asked for our opinion as to whether the Exchange Ratio pursuant to
the Merger Agreement is fair from a financial point of view to 3Com.
For purposes of the opinion set forth herein, we have:
(i) analyzed certain internal financial statements and other financial
and operating data concerning Primary Access prepared by the management
of Primary Access;
(ii) analyzed certain financial projections prepared by the management of
Primary Access;
(iii) discussed the past and current operations and financial condition
and the prospects of Primary Access with senior management of 3Com and
Primary Access;
(iv) analyzed certain financial projections concerning 3Com prepared by
the management of 3Com;
(v) discussed the past and current operations and financial condition
and the prospects of 3Com with senior management of 3Com, and analyzed
the pro forma impact of the Merger on 3Com's earnings per share and
consolidated capitalization;
(iv) compared the financial performance of Primary Access with that of
certain other comparable publicly-traded companies and their
securities;
<PAGE>
(vii) reviewed the reported prices and trading activity for the common
stock of certain publicly-traded companies deemed comparable to
Primary Access;
(viii) reviewed the financial terms, to the extent publicly available, of
certain comparable merger and acquisition transactions;
(ix) discussed with the senior management of 3Com the strategic rationale
for the Merger and the benefits of the Merger to 3Com;
(x) participated in discussions and negotiations among representatives
of Primary Access and 3Com and their financial advisors;
(xi) reviewed the Merger Agreement; and
(xii) performed such other analyses as we have deemed appropriate.
We have assumed and relied upon without independent verification the accuracy
and completeness of the information reviewed by us for the purposes of this
opinion. With respect to the financial projections, we have assumed that they
have been reasonably prepared on bases reflecting the best currently
available estimates and judgments of the future financial performance of
3Com and Primary Access, respectively. We have not made any independent
valuation or appraisal of the assets, liabilities or technology of Primary
Access or 3Com, nor have we been furnished with any such appraisals. We have
assumed that the Merger will be accounted for as a "pooling-of-interests"
business combination in accordance with U.S. Generally Accepted Accounting
Principles and will be consummated in accordance with the terms set forth in
the Merger Agreement. We have also relied upon 3Com management's assessment
of Primary Access' technology as well as the technological validity of the
products being developed by Primary Access and the strategic rationale for
the Merger. Our opinion is necessarily based on economic, market and other
conditions as in effect on, and the information made available to us as of,
the date hereof.
We have acted as financial advisor to the Board of Directors of 3Com in
connection with this transaction and will receive a fee for our services. In
the past, Morgan Stanley & Co. Incorporated and its affiliates have provided
financial advisory and financing services for 3Com and have received fees for
the rendering of these services.
It is understood that this letter is for the information of the Board of
Directors of 3Com only and may not be used for any other purpose without our
prior written consent.
Based on, and subject to, the foregoing, we are of the opinion on the date
hereof that the Exchange Ratio pursuant to the Merger Agreement is fair from
a financial point of view to 3Com.
Very truly yours,
MORGAN STANLEY & CO. INCORPORATED
By: /s/ George F. Boutros
-----------------------------
George F. Boutros
Managing Director
