__________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended May 31, 1995 Commission File No. 0-12867
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
3COM CORPORATION
(Exact name of registrant as specified in its charter)
California 94-2605794
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Identification No.)
5400 Bayfront Plaza
Santa Clara, California 95052
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (408) 764-5000
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value.
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes XX No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ X ]
The aggregate market value of the Registrant's Common Stock held by
non-affiliates, based upon the closing price of the Common Stock on May
31, 1995, as reported by the Nasdaq National Market, was approximately
$3,364,000,000. Shares of Common Stock held by each executive officer
and director and by each person who owns 5% or more of the outstanding
Common Stock have been excluded since such persons may be deemed
affiliates. This determination of affiliate status is not necessarily
a conclusive determination for other purposes.
As of May 31, 1995, 69,230,946 shares of the Registrant's Common Stock
were outstanding.
The Registrant's definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on September 28, 1995 is incorporated by
reference in Part III of this Form 10-K to the extent stated herein.
__________________________________________________________________________
3Com Corporation
Form 10-K
For the Fiscal Year Ended May 31, 1995
Table of Contents
Part I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Executive Officers of the Registrant
Part II
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
Part III
Item 10. Directors and Executive Officers of 3Com
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial
Owners and Management
Item 13. Certain Relationships and Related Transactions
Part IV
Item 14. Exhibits, Financial Statement Schedule, and Reports
on Form 8-K
Exhibit Index
Signatures
Financial Statement Schedule
3Com, Boundary Routing, CardBoard, EtherLink, LANplex, LinkBuilder,
NETBuilder, NETBuilder II and TokenLink are registered trademarks of
3Com Corporation. AccessBuilder, FDDILink, FMS, LinkSwitch, Impact,
MSH, SuperStack Parallel Tasking and Transcend are trademarks of 3Com
Corporation. 3ComFacts is a service mark of 3Com Corporation. Primary
Access is a registered trademark of 3Com Primary Access. Aperture is a
trademark of 3Com Primary Access. Apreggio is a registered trademark
of 3Com Sonix in the United Kingdom. Micro Channel is a registered
trademark of International Business Machines Corporation. TROPIC is a
registered trademark of National Semiconductor Corporation. All other
trademarks belong to their respective organizations.
PART I
ITEM 1. Business
3Com Corporation (referred to herein as 3Com, Registrant or the Company)
was founded on June 4, 1979 and pioneered the networking industry. Since
then, 3Com has evolved from a supplier of discrete networking products to a
broad-based supplier of local area network (LAN) and network access systems
for the large enterprise, small business, home and telco markets. Today,
3Com is a $1.3 billion company offering customers a broad range of ISO
9000-compliant global data networking solutions that include routers, hubs,
remote access servers, switches and adapters for Ethernet, Token Ring, fiber
distributed data interface (FDDI), Asynchronous Transfer Mode (ATM) and
other high speed networks. Additionally, the Company offers Integated
Services Digital Network (ISDN) adapters and internetworking products for
small sites and home users and integrated digital remote access systems used
by network service providers and telecommunications carriers. 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 and 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;
- value by providing high-performance products, managed through a
single, powerful network management application, that lower the
overall cost of the network ownership.
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 percent. 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 focused on building its product
portfolio with the introduction of 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 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.
In fiscal 1994, the Company introduced its High Performance Scalable
Networking (HPSN) architecture with a focus on scaling network performance
and extending network reach. Combined with Transcend network management,
HPSN demonstrates 3Com's ability to deliver complete connectivity systems
for the enterprise and beyond, and provides 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 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
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 fiscal 1995, there was accelerated customer migration toward higher
performance and geographically dispersed networks. 3Com expanded its product
line to address this trend 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 Israel-based NiceCom, Ltd.,
(NiceCom) 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.
The Company is also capitalizing on what it views as a substantial
opportunity in providing connectivity solutions to the small and home office
markets and to the commercial remote access market which provides dial-up
connectivity to users of on-line information services, value-added networks,
and transaction networks. In the third quarter of fiscal 1995, 3Com
acquired its ISDN adapter development partner, New Jersey-based AccessWorks
Communications Inc., (AccessWorks). In the fourth quarterof fiscal 1995,
the Company announced the acquisition of all of the outstanding stock of
Sonix Communications, Ltd., (Sonix) a U.K.-based innovator in ISDN
internetworking technology, in exchange for approximately 1.2 million shares
of 3Com common stock (with a value of approximately $70 million as of March
22, 1995, the date of the agreement). The transaction was closed on May 1,
1995, and was accounted for as a pooling-of-interests. Sonix is a market
leader in ISDN internetworking in the United Kingdom, and manufactures and
markets a portfolio of network access products specifically designed for
data and voice. Sonix products include low-cost Ethernet-to-ISDN,
leased-line or dial-up bridges and routers and provide connectivity among
small dispersed workgroups and simple, high-performance, low-end, low-cost
connectivity between central sites and remote offices. Sonix operates as a
wholly-owned subsidiary of 3Com, known as 3Com Sonix.
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 the Company
to take advantage of market trends that are extending the reach, scope and
performance of today's data networks.
Recent Developments
In the fourth quarter of fiscal 1995 ended May 31, the Company announced
the agreement to acquire all of the outstanding stock, stock options and
warrants of San Diego-based Primary Access Corporation (Primary Access), a
leading supplier of integrated remote access systems to network service
providers worldwide, in exchange for approximately 2.3 million shares of
3Com common stock and approximately 500,000 options and warrants to purchase
3Com common stock (with a value of approximately $170 million as of March
21, 1995, the date of the agreement). The transaction was accounted for as a
pooling-of-interests and closed early in fiscal 1996 on June 9, 1995.
Primary Access pioneered software-defined access to public telephone
networks with its digital Aperture platform. Sold to interexchange
carriers, cellular and local carriers, as well as providers of on-line
information services, value added networks (VANs) and transaction networks,
the Aperture platform replaces fixed-function hardware devices such as
channel banks, modems, ISDN devices and remote access servers in central
data processing sites or points of presence (POPs). Customers of Primary
Access include Compuserve, AT&T, MCI, Sprint, regional Bell operating
companies, more than 15 cellular carriers and leading banks and oil
companies.
INDUSTRY SEGMENT INFORMATION
3Com operates in one industry segment as described above.
PRODUCTS
3Com believes that its 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.
In addition to the five enterprise connectivity environments defined by
HPSN, 3Com also offers software-defined digital access platforms that
deliver local access to the public telephone data network at sites known as
points of presence (POPs) through its 3Com Primary Access subsidiary. The
five types of enterprise connectivity environments and the point of presence
central access site are defined as:
Workgroup. While 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, 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 with the additional requirement that all
products plug-and-play. 3Com's SuperStack system provides hubbing,
switching, and routing in a single stackable system that meets the special
needs of the remote office for simple, easy to maintain, high-performance
connectivity. 3Com's innovative Boundary Routing software, running on the
NETBuilder Remote Office router "slice" of the SuperStack system, simplifies
remote access to the corporate network and allows managers to maximize their
resources and reduce expenses by consolidating complex operations at
headquarters. Further, the Transcend network management applications
centralize the network management function as well. Arpeggio products from
3Com Sonix, currently marketed in Europe, provide simplified ISDN
connectivity for wide-area workgroups, enabling high-performance, low-cost
connectivity between central sites and remote offices. Designed from
inception to optimize ISDN technology from the perspective of the small
office, 3Com believes the Arpeggio line of ISDN bridges and routers are
ideally suited to network applications that require occasional connectivity,
such as retail outlets transmitting daily sales receipts, where the cost of
a leased-line cannot be justified.
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 analog or digital (ISDN) 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's Impact, a family of internal and external ISDN adapters,
replaces traditional modem devices and provides high-speed digital
connectivity to individual users accessing corporate networks, on-line
services and the Internet.
Points of Presence. Increasingly, businesses and organizations of all
sizes, from large diversified companies to small offices and home offices,
need to connect their data networks to the public telephone network to take
advantage of a growing array of new data services, on-line services and
public information networks. The growth in the use of the public network
for data has created new market opportunities for network service providers
and telecommunications carriers. Carriers, for example, are increasingly
delivering managed data network services from POPs, or central processing
sites housing the hardware and telco equipment used for transaction
processing and switching. 3Com Primary Access' Aperture integrated remote
access platform is used in the access sites or points of presence in many
major U.S. networks. Applications include on-line information services such
as CompuServe, cellular data networks such as United Parcel Service's Total
Trak, and transaction networks such as VisaNet.
For the five environments, 3Com offers a broad range of connectivity
products categorized as network adapters and network systems products:
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 LAN. According to International Data Corporation (IDC), a
leading market research firm, the Company has gained five market share points
in calendar 1994 and is the worldwide leader in Ethernet network adapters with
a 34 percent market share.
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 the Company believes are
inherently more reliable, easier to install and configure, and less
expensive to manufacture.
In fiscal 1995, 3Com introduced a new, higher performance, lower cost
version of its popular 10 Mbps EtherLink III adapters and extended the
technology to include the new Fast Ethernet (100 Mbps Ethernet) standard.
The Fast EtherLink III family of network adapters are dual speed Ethernet
adapters capable of transmitting data at either 10 Mbps or 100 Mbps. The
Company believes the Fast EtherLink family of adapters provides network
managers with a smooth upgrade path to higher speed workgroup connectivity.
In addition to Ethernet and Fast Ethernet adapters, 3Com offers Token
Ring, FDDI and ISDN adapters. Based on the IBM-designed TROPIC chipset,
3Com's TokenLink III 16/4 family of ISA, EISA and MicroChannel adapters are
designed to work seamlessly with IBM drivers and applications while offering
enhanced installation and network management features. 3Com's FDDILink
family of adapters connect 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.
Network Systems Products: 3Com's network systems products include hubs,
internetworking bridge/routers, LAN switches and remote access servers,
which, when combined within the HPSN framework, create a network
infrastructure that delivers scalable, cost-effective solutions for each of
the five connectivity environments. In addition, network systems products
also include 3Com Primary Access' integrated network access systems.
Internetworking Products: 3Com's internetworking products include the
high-performance RISC-based NETBuilder II bridge/routers 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-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.
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, including the high density LANplex 6000 Ethernet/FDDI data center
switch, the LANplex 2500 Ethernet/FDDI departmental switch the LinkSwitch
family of stackable workgroup switches. LinkSwitch switches can operate
either stand-alone or as part of the Company's SuperStack network systems.
Additionally, the LinkSwitch 1200 Ethernet/FDDI switch is available as a
module for the LinkBuilder Multi-Services Hub ("MSH") chassis-based hub.
The development of custom ASICs for switching is central to 3Com's
switching strategy. Virtually all of 3Com's internally developed switches
are based on custom-designed ASICs, which 3Com believes will dramatically
improve performance and reliability while reducing costs. Switching ASICs
developed by 3Com include the Intelligent Switching Engine (ISE) chip for
Ethernet-to-FDDI switching, the Brasica chip for Ethernet and Fast Ethernet
switching, the ZipChip for Ethernet-to-ATM switching and the Token Ring
Switching Engine for Token Ring switching.
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.
In fiscal 1995, 3Com enhanced its RMON network management capabilities
across its hub products line, introduced internetworking bridge modules for
its stackable hubs, and introduced new products designed for telco and
small/home office markets. The LinkBuilder TP/8, a simple unmanaged 8-port
hub with an extremely small footprint, is designed specifically for the
growing number of small businesses and home users who want to connect
multiple devices in a simple structured wiring network without making a
major hardware investment.
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 simplify network
administration, Transcend products also leverage administrative resources by
consolidating repetitive tasks, such as downloading router software, into a
single command.
Integrated network access systems: Integrated network access systems,
offered through 3Com Primary Access, are installed in the point of presence
central access site to provide local access to data over the public switched
network. For example, a user calling up information on CompuServe would
dial a local number to be connected to CompuServe's data network, regardless
of where the data actually resided. 3Com Primary Access' software defined
network access system, known as Aperture, replaces a variety of hardware
components traditionally used in the POP, such as channel banks, dial or
leased-line modems, channel service units (CSUs), data service units (DSUs)
terminal servers, packet assembler/disassemblers (PADs) and switches. Since
Aperture is software defined, users can re-define and change access
capabilities to meet changing market conditions by simply downloading new
software from a central location. Contrasted with the hardware solution,
which requires site visits to replace equipment and make modifications,
Aperture's software-based approach enables network providers to get data
services to market faster, improves network flexibility and reliability and
reduces costs for network management, maintenance and access.
Other products: 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, integrated network access systems and
network systems products. 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 manufacturing costs and increase
functionality. In addition to the development of custom ASICs to improve
performance, increase reliability and reduce costs, 3Com is investing in the
following areas: Fast Ethernet (100 Mbps Ethernet), wireless local area
network communications, ATM capabilities, LAN switching, ISDN connectivity,
enhanced connectivity in IBM environments, and 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 advantage of technological advances. The
Company will continue to make strategic acquisitions where appropriate.
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. With the acquisition of
Primary Access, 3Com gained important presence within the telco and network
service provider markets.
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
(see Note 2 of the Notes to the Consolidated Financial Statements relating
to major customers).
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 30 countries, including new offices opened in fiscal 1995
in India, Korea, Poland and Chile. 3Com primarily markets its products
internationally through subsidiaries, sales offices and relationships with
local distributors in Europe, Canada, Asia/Pacific and Latin America. (See
Note 16 of the Notes to Consolidated Financial Statements relating to
geographic area information).
Customer Service: Since 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 has invested in
a comprehensive worldwide service and support organization capable of
providing virtually around-the-clock customer support regardless of
geographic location. 3Com is also developing new service programs that
will expand customers' support options.
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.
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 receiving 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 procures 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 both fiscal 1994 and 1995, 3Com added new automated production
lines in both its California and Ireland plants. Additionally, in fiscal
1995 construction began on a new 225,000 square feet manufacturing facility
at its headquarters in Santa Clara. The new facility, which will initially
produce the EtherLink and TokenLink families of network adapters and the
SuperStack network system components, triples the existing manufacturing
square footage in Santa Clara.
The Company is committed to being an environmentally conscious
manufacturer and pioneered implementation of a chlorofluorocarbon (CFC)-free
semi-aqueous cleaning process at its California plant with DuPont and
Corpane Corporations. The same process is used at the Ireland facility and
3Com met its goal of being CFC-free by the end of calendar year 1993.
Components purchased by 3Com are generally available from multiple
suppliers. However, certain components may be available from sole sources.
The inability of 3Com to obtain certain components could require 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 would not be interrupted due to the unavailability
of components. The Company believes that its inventory levels of these
components, combined with finished components held by 3Com's suppliers, are
adequate for its currently 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 primarily in designing,
manufacturing and marketing on-premises equipment, and is expanding its
presence in the off-premises point-of-presence market. 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 are pursuing 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 traditional adapter
market include Intel Corporation, IBM Corporation, Madge N.V., Olicom A/S,
Standard Microsystems Corporation and Xircom. The market for ISDN remote
access adapters is currently characterized by many small companies in both
the U.S. and Europe. As ISDN becomes increasingly available to individual
users and small businesses, these companies may combine to achieve greater
market presence, or new, larger competitors, such as modem companies, may
enter the market.
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. 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. Principal competitors in the network systems
products market include Bay Networks, Cabletron and Cisco Systems.
Integrated Remote Access Systems: Until very recently, the market for
point-of-presence connectivity equipment has been characterized by a large
number of vendors with many complementary hardware products. Until
recently, a traditional point-of-presence might include modems, channel
banks, and packet assembler/disassemblers (PADs) from a number of different
suppliers. Integrated remote access systems, such as 3Com's Primary Access'
Aperture, replace these multiple, single function hardware products with a
single software-defined platform capable of handling both digital and analog
signals. 3Com Primary Access competes against various manufacturers of the
products mentioned above, as well as Ascend Communications and U.S. Robotics
who manufacture integrated remote access systems.
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 believes that its products typically enjoy a reputation
for both high quality and reliability.
PATENTS, LICENSES AND RELATED MATTERS
The Company relies on U.S. and foreign patents, copyright, trademark and
trade secrets to establish and maintain proprietary rights in its technology
and products. 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 the Company's products exists. The Company's general
policy has been to seek patent protection for those inventions and
improvements likely to be incorporated in its products or otherwise expected
to be of value. The Company has been issued 28 utility patents and four
design patents in the U.S., and has been issued one foreign patent. Numerous
other patent applications are currently pending which relate to the
Company's research and development.
There can be no assurance that any of these patents would be upheld as
valid if litigated. While the Company believes that its patents and
applications have value, it also believes that its competitive position
depends primarily on the innovative skills, technological expertise and
management abilities of its employees.
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 44 trademarks in the United States and has
registered 16 trademarks in one or more of 39 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 May 31, 1995, 3Com had 3,072 full-time employees, of whom 719 were
employed in engineering, 1,082 in sales, marketing and customer service, 860
in manufacturing, and 411 in finance and administration. None of 3Com's
employees is represented by a labor organization and 3Com considers its
employee relations to be excellent.
ITEM 2. Properties
3Com's headquarters facility consists of a 495,000 square foot
marketing, administrative, manufacturing and research and development campus in
Santa Clara, California. The facility is leased from a limited partnership of
which a subsidiary of 3Com is a limited 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.
In July 1994, the Company signed a five-year lease for 225,000 square
feet of office and manufacturing space to be built on land adjacent to its
existing headquarters in Santa Clara. The arrangement provides the Company
with an option to purchase the related property during the lease term, and
at the end of the lease term the Company is obligated to either purchase the
property or arrange for the sale of the property to a third party with a
guaranteed residual value of up to $33.5 million to the seller of the
property. 3Com estimates that it will commence occupancy of portions of the
facility in June 1995, with payments on the lease estimated to start in
September 1995.
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 September 1995. 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. In April
1995, the Company signed an eight-year lease for 80,000 square feet of
office and manufacturing space in Boxborough, Massachusetts to consolidate
the existing facilities in that area. Concurrent with this lease, the
Company entered into an agreement pursuant to which the Company has the
option to purchase the property in November 1995.
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 manu-
facturing 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 adjacent to 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.
ITEM 3. Legal Proceedings
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
Executive Officers of the Registrant
The following table lists the names, ages and positions held with the
Registrant of all executive officers of the Registrant. There are no family
relationships between any director or executive officer and any other
director or executive officer of the Registrant. Executive officers serve
at the discretion of the Board of Directors.
Name Age Position
---- --- --------
Eric A. Benhamou 39 Chairman, President and Chief
Executive Officer
Debra J. Engel 43 Vice President, Corporate Services
Robert J. Finocchio, Jr. 44 Executive Vice President and
General Manager, Network Systems
Operations
John H. Hart 49 Vice President and Chief
Technical Officer
Richard W. Joyce 39 Vice President, New Business
Operations
Alan J. Kessler 37 Vice President, Customer Service
Operations
William G. Marr 48 Executive Vice President,
Worldwide Sales
Christopher B. Paisley 42 Vice President, Finance and
Chief Financial Officer
Janice M. Roberts 39 Vice President, Marketing
Douglas C. Spreng 51 Vice President and General Manager,
Network Adapter Division
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. and Legato Systems, Inc. Mr. Benhamou is also
a member of the Board of Directors of Smart Valley, Inc.
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.
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 became Vice President, New Business Operations in June
1995. From June 1993 to June 1995, Mr. Joyce served as Vice President,
Sales Europe and Asia/Pacific Rim (APR). From January 1990 to June 1995,
Mr. Joyce served as President, 3Com Europe Limited. Mr. Joyce joined the
Company in November 1987 as Sales Manager of 3Com (UK) Limited, a position
he held until September 1988. From September 1988 until January 1990, Mr.
Joyce served as Managing Director of 3Com (UK) Limited. Most recently prior
to joining the Company, Mr. Joyce held the position of Managing Director
Europe for State Street Trade Development Corporation from 1985 to 1987.
Alan J. Kessler became Vice-President, Customer Service Operations in
June 1995. From June 1993 through June 1995, Mr. Kessler served as Vice
President, Systems Sales-North Americas. 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.
William G. Marr joined the Company as Executive Vice President,
Worldwide Sales in June 1995. Prior to joining the Company, Mr. Marr was with
Sun Microsystems, Inc. for ten years, most recently as Vice President, North
American and Australian Field Operations.
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.
From February 1994 to June 1995, Ms. Roberts also served as General Manager,
Personal Office Division. 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.
PART II
ITEM 5. Market for Registrant's Common Stock and Related Stockholder Matters
Fiscal 1995 High Low Fiscal 1994 High Low
First Quarter $34 9/16 $20 1/8 First Quarter $14 5/8 $ 9 13/16
Second Quarter 46 31 1/2 Second Quarter 18 1/2 12 1/16
Third Quarter 53 1/4 40 1/8 Third Quarter 31 5/8 17 11/16
Fourth Quarter 69 1/4 51 3/8 Fourth Quarter 31 7/8 23 7/32
3Com Corporation common stock has been traded in the over-the-counter
market under the symbol COMS since the Company's initial public offering on
March 21, 1984. The preceding table sets forth the high and low sales
prices as reported on the Nasdaq National Market during the last two years
(adjusted to reflect a 2-for-1 stock split on September 1, 1994). As of May
31, 1995, the Company had approximately 1,394 shareholders of record. 3Com
has not paid and does not anticipate it will pay cash dividends on its
common stock.
ITEM 6. Selected Financial Data
The following selected financial information has been derived from the
audited Consolidated Financial Statements. The information set forth below
is not necessarily indicative of results of future operations, and should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial
statements and related notes thereto included elsewhere in this Form 10-K.
Years ended May 31,
(Dollars in thousands, except
per share and employee data)
1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------
Sales $1,295,311 $826,995 $617,168 $423,801 $413,239
Net income (loss) 125,706 (28,694) 38,561 7,958 (23,831)
Net income (loss) per share:
Primary 1.73 (0.46) 0.61 0.14 (0.40)
Fully-diluted 1.71 (0.46) 0.60 0.13 (0.40)
- --------------------------------------------------------------------------------
Total assets $839,676 $444,343 $367,578 $298,306 $275,056
Working capital 443,858 198,543 196,231 144,564 149,930
Long-term obligations 111,094 1,058 1,134 7,807 8,128
Retained earnings 168,037 61,326 103,163 71,354 73,206
Shareholders' equity 464,888 280,756 258,263 202,425 193,667
- -------------------------------------------------------------------------------
Number of employees 3,072 2,306 1,971 1,963 1,731
- -------------------------------------------------------------------------------
Notes: Net income for fiscal 1995 included a charge of approximately
$60.8 million ($.51 per share) for purchased in-process technology, a $4.4
million ($.06 per share) charge for merger costs and a credit of $1.1
million ($.01 per share) for a reduction in accrued restructuring costs (see
Notes 3 and 13 to the consolidated financial statements). Net loss for
fiscal 1994 included a charge of approximately $134.5 million ($1.92 per
share) for purchased in-process technology (see Notes 3 and 12 to the
consolidated financial statements), a gain of $17.7 million ($.17 per share)
on the sale of an investment and a tax benefit of $1.2 million ($.02 per
share) resulting from tax law changes. Net income for fiscal 1993 included
a charge of approximately $1.3 million ($.02 per share) for non-recurring
items (see Note 13 to the consolidated financial statements). Net income
for fiscal 1992 included a charge of approximately $10.4 million ($.15 per
share) for purchased in-process technology. Net loss for fiscal 1991
included a charge of approximately $67.0 million ($.72 per share) for
restructuring costs.
Excluding the non-recurring items noted above, pro forma net income per
share on a fully diluted basis would have been as follows:
Years ended May 31,
1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------
Pro forma net income
per share $2.27 $1.27 $0.62 $0.28 $0.32
- -------------------------------------------------------------------------------
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes thereto.
Acquisitions
During the fiscal year ended May 31, 1995, 3Com enhanced its High
Performance Scalable Networking (HPSN) solutions with several strategic
acquisitions. The Company completed the acquisition of Sonix
Communications, Ltd. (Sonix), a provider of ISDN connectivity solutions in
the United Kingdom on May 1, 1995. The Company issued approximately 1.2
million shares of 3Com common stock in exchange for all the outstanding
stock of Sonix. The acquisition was accounted for as a pooling-of-interests
and all financial data of the Company for fiscal 1995 has been restated to
include the operating results of Sonix. As the historical operations of
Sonix were not significant to any year presented, the Company's financial
statements for prior years have not been restated and the financial effect
of Sonix's prior-year results have been accounted for as a $2.1 million
charge against retained earnings in fiscal 1995.
On October 18, 1994, the Company acquired substantially all of the
assets and assumed substantially all the liabilities of NiceCom, Ltd. (NiceCom),
an innovator of ATM technology. 3Com also acquired a company developing
network adapter technology on October 14, 1994. 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 of approximately $55.5 million
was 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 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 fiscal quarter of
1995. The Company's consolidated results of operations for the fiscal year
ended May 31, 1995 include the operating results of the acquired companies
from their dates of acquisition.
In fiscal 1994, the Company acquired Synernetics, Inc. (Synernetics), a
market leader in LAN switching products and Centrum Communications, Inc.
(Centrum), an innovator of remote access products. Both acquisitions were
accounted for as purchases. The Company also entered into a technology
licensing agreement with Pacific Monolithics, Inc., a developer of wireless
communications (see Note 12 of Notes to Consolidated Financial Statements).
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.
In fiscal 1993, the Company acquired Star-Tek, Inc. (Star-Tek), a
company specializing in Token Ring technology. The transaction was accounted
for as a pooling-of-interests.
See Note 3 of Notes to Consolidated Financial Statements for additional
information on the above business combinations.
Subsequent to the end of fiscal 1995, the Company consummated the
acquisition of Primary Access, a provider of integrated network access
systems, on June 9, 1995. The Company issued approximately 2.3 million
shares of 3Com common stock in exchange for all the outstanding stock of
Primary Access. The Company also assumed and exchanged all options and
warrants to purchase Primary Access stock for options and warrants to
purchase approximately 500,000 shares of the Company's common stock. The
acquisition was accounted for as a pooling-of-interests.
Results of Operations
Fiscal 1995 sales increased 57 percent to $1,295.3 million from
$827.0 million in fiscal 1994. This compares to a 34 percent increase in
sales in fiscal 1994 from fiscal 1993 sales of $617.2 million.
The Company believes that the increase in 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 53 percent of total
sales in fiscal 1995, an increase from 32 percent and 48 percent of total
sales in fiscal 1994 and 1993, respectively.
Sales of network adapters in fiscal 1995 represented 53 percent of total
sales and increased 45 percent from fiscal 1994 sales. This followed a 31
percent sales increase in network adapters in fiscal 1994 from fiscal 1993.
Sales of network adapters in fiscal years 1994 and 1993 represented 57
percent and 58 percent of total sales, respectively. The increase in
network adapter sales represented an increase in unit volume partially
offset by continuation of the industry-wide trend toward decreasing average
selling prices, 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 adapter).
Sales of network systems products (i.e., internetworking platforms,
remote access servers, hubs and switching products) in fiscal 1995
represented 43 percent of total sales and increased 81 percent from fiscal
1994. This followed a 49 percent increase in systems sales in fiscal 1994
from fiscal 1993. Sales of systems products in fiscal years 1994 and 1993
represented 37 percent and 34 percent of total sales, respectively. The
increase was led primarily by the LinkBuilder FMS II stackable hub, a
component of 3Com's SuperStack family of network systems 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. The Company 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 hubs, remote office routers, LAN switching products and
a redundant power system in a stackable format, which can be used in various
combinations within the Company's SuperStack network system.
Sales of other products (i.e., terminal servers, customer service,
protocols and other products) represented four percent of total sales in
fiscal 1995. Sales of other products increased 14 percent from fiscal 1994,
although they continued to represent a decreasing percentage of the
Company's total sales, as expected.
Sales outside of the United States comprised 54 percent of total sales
in fiscal 1995, compared to 52 percent in fiscal 1994 and 50 percent in fiscal
1993. International sales increased in all geographic regions, especially
in the Asia Pacific and Latin American regions. The Company believes that
this increase reflected its continued global expansion 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
fiscal years 1995, 1994 and 1993.
Cost of sales as a percentage of sales was 46.5 percent in fiscal 1995,
compared to 49.1 percent in fiscal 1994 and 51.9 percent in fiscal 1993.
The 2.6 percentage point improvement in gross margin in fiscal 1995 resulted
primarily from a favorable shipment mix of the Company's products and
reductions in product material costs which improved gross margins by 2.2
percentage points. Lower inventory obsolescence costs improved gross
margins by an additional .5 percentage points. The 2.8 percentage point
improvement in gross margin in fiscal 1994 resulted primarily from improved
efficiency of manufacturing operations and higher volume shipments which
improved gross margins by 1.7 percentage points. A favorable shipment mix
of the Company's products and reductions in product material costs, improved
gross margins by .6 percentage points and lower freight and duties, which
resulted from an increase in the volume of products manufactured in the
Ireland plant, improved gross margins by .6 percentage points.
Total operating expenses in fiscal 1995 were $497.7 million, compared to
$422.6 million in fiscal 1994 and $237.9 million in fiscal 1993. Excluding
the charge of $60.8 million for purchased in-process technology and the non-
recurring charge of $3.3 million, which consisted of approximately $4.4
million in merger costs associated with the acquisitions of Sonix and
Primary Access and a credit of $1.1 million for the reduction in accrued
costs relating to the fiscal 1991 restructuring, total operating expenses in
fiscal 1995 would have been $433.6 million, or 33.5 percent of sales.
Excluding the charge of $134.5 million for purchased in-process technology
resulting from the acquisitions of Synernetics and Centrum and the
technology licensing agreement with Pacific Monolithics, total operating
expenses in fiscal 1994 would have been $288.1 million, or 34.8 percent of
sales. Excluding the non-recurring charge of $1.3 million (see Note 13 of
Notes to Consolidated Financial Statements), total operating expenses in
fiscal 1993 would have been $236.5 million, or 38.3 percent of sales.
Summary of Operating Expenses
- -----------------------------
Percent Percent Percent
Fiscal of Fiscal of Fiscal of
(Dollars in thousands) 1995 Sales 1994 Sales 1993 Sales
------------------------------------------------------
Sales and marketing $253,127 19.5% $171,799 20.8% $137,021 22.2%
Research and development 127,378 9.8 76,467 9.2 64,346 10.4
General and administrative 53,118 4.1 39,838 4.8 35,171 5.7
Non-recurring charges:
Purchased in-process
technology 60,796 4.7 134,481 16.3 - -
Non-recurring items 3,300 0.3 - - 1,316 0.2
-------- ----- -------- ----- -------- -----
Total operating expenses 497,719 38.4 422,585 51.1 237,854 38.5
-------- ----- -------- ----- -------- -----
Total operating expenses
excluding non-recurring
charges $433,623 33.5% $288,104 34.8% $236,538 38.3%
======== ===== ======== ===== ======== =====
Sales and marketing expenses in fiscal 1995 increased $81.3 million or
47 percent from fiscal 1994. As a percentage of sales, sales and marketing
expenses decreased to 19.5 percent in fiscal 1995, from 20.8 percent in
fiscal 1994. The increase in such expenses reflected increased selling
costs related to the 57 percent increase in sales volume, the cost of
promoting the Company's new and existing products, and a year-over-year
increase in sales and marketing personnel of 35 percent.
Research and development expenses in fiscal 1995 increased $50.9 million
or 67 percent from fiscal 1994. As a percentage of sales, such expenses
increased to 9.8 percent in fiscal 1995, compared to 9.2 percent in fiscal
1994. The increase in research and development expenses was primarily
attributable to the cost of developing 3Com's new products including a 41
percent increase in full time research and development personnel from the
prior year. The Company believes the introduction of new technologies and
products to the market in a timely manner is crucial to its success, and
will continue to make strategic acquisitions where appropriate. Several of
the research and development projects acquired in connection with the
Company's strategic acquisitions since December 1993 have been completed. Of
the projects that are still in process, development work is proceeding as
expected. Such development activities primarily included the development of
ATM-based products for the enterprise market and products based on ISDN
technology for the small office/home office environments. The nature of
costs for such development activities is primarily employee-related costs
for design, prototype development and testing. The Company estimates that
an aggregate of approximately $13 to $18 million will be expensed over the
next four to twelve months in connection with completion of all acquired
research and development projects. The Company anticipates future research
and development spending, including costs remaining for the completion of
these purchased in-process projects, will not significantly differ from the
historical trend of research and development expenses as a percent of sales.
General and administrative expenses in fiscal 1995 increased $13.3
million or 33 percent from fiscal 1994. As a percentage of sales, such
expenses decreased to 4.1 percent in fiscal 1995, from 4.8 percent in fiscal
1994. The increase in general and administrative expenses reflects expansion
of the Company's infrastructure through internal growth and acquisitions and
an increase in the provision for bad debt expense associated with the higher
sales volume.
The increase in operating expenses in fiscal 1994 compared to fiscal
1993 reflected increased selling costs associated with higher sales, the cost of
developing and promoting the Company's systems products, increased
cooperative advertising expenses, and growth in the number of employees to
support the higher volume of business. Research and development expenses
increased consistent with the Company's continued commitment to develop and
introduce high quality, innovative products.
Non-operating income was favorably impacted during fiscal 1994, as the
Company realized a non-recurring gain of $17.7 million from the sale of the
Company's investment in Madge N.V.
Other income (net) was $2.9 million in fiscal 1995, compared to $3.3
million in fiscal 1994 and $1.3 million in fiscal 1993. These amounts
consist primarily of interest income, which increased $5.9 million in fiscal
1995 due to larger cash and investment balances and higher interest rates,
and was offset by the increase in interest expense associated with the
$110.0 million of convertible subordinated notes issued in the second
quarter of fiscal 1995. The increase in fiscal 1994 from fiscal 1993
resulted primarily from more favorable foreign exchange results of $1.3
million and higher interest income of $.4 million.
The Company's effective income tax rate was 37 percent in fiscal 1995.
Excluding the merger costs associated with the Sonix and Primary Access
acquisitions, which were not tax deductible, the effective tax rate would
have been 36 percent. In fiscal 1994, 3Com provided $48.2 million for
income taxes on income before income taxes of $19.5 million because a
significant portion of the purchased in-process technology charges were not
tax deductible. In addition, the income tax rate in fiscal 1994 reflected
the recognition of a net benefit of $1.2 million which resulted from
retroactive changes to the Revenue Reconciliation Act of 1993. Excluding
the effect of the non-recurring items in fiscal 1994, the effective tax rate
would have been 35 percent. 3Com's effective tax rate in fiscal 1993 was 36
percent.
Net income for fiscal 1995 was $125.7 million, or $1.71 per share,
compared to a net loss of $28.7 million, or $0.46 per share, for fiscal 1994
and net income for fiscal 1993 of $38.6 million, or $0.60 per share. Net
income for fiscal 1995 included the aforementioned $60.8 million charge
associated with purchased in-process technology, the $4.4 million charge for
merger costs and the $1.1 million credit for the reduction in the
restructuring reserve. Excluding these one-time charges and gains, the
Company would have realized net income of $166.8 million or $2.27 per share
for fiscal 1995. Excluding the charges for purchased in-process technology,
the gain from the sale of an investment and the tax benefit, net income for
fiscal 1994 would have been $86.9 million, or $1.27 per share. Excluding
the effect of non-recurring items in fiscal 1993, the Company would have
realized net income of $39.8 million, or $0.62 per share. Net loss per
share for fiscal 1994 and net income per share for fiscal 1993 have been
restated to reflect the two-for-one stock split on September 1, 1994.
Business Environment and Risk Factors
The Company's future operating results may be affected by various trends
and factors which the Company must successfully manage in order to achieve
favorable operating results. In addition, there are trends and factors
beyond the Company's control which affect its operations. Such trends and
factors include adverse changes in general economic conditions, governmental
regulation or intervention affecting communications or data networking,
fluctuations in foreign exchange rates, and other factors listed below. The
data networking industry has become increasingly competitive, and the
Company's results may be adversely affected by the actions of existing or
future competitors. Such actions may include the development or acquisition
of new technologies, the introduction of new products, the assertion by
third parties of patent or similar intellectual property rights, and the
reduction of prices by competitors to gain or retain market share. Industry
consolidation or alliances may also affect the competitive environment.
The market for the Company's products is characterized by rapidly
changing technology. The Company's success depends in substantial part on
the timely and successful introduction of new products. 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 the Company's operating results. The Company's
operating results could be adversely affected if there is an unexpected
change in demand for products based on such technology or if the Company
does not respond timely and effectively to expected changes. The
Company is engaged in research and development activities in certain
emerging LAN and WAN high-speed technologies, such as ATM and ISDN. As the
industry standardizes on high-speed technologies, there can be no assurance
that the Company will be able to respond timely to compete in the
marketplace.
Some key components of the Company's products are currently available
only from single sources. There can be no assurance that in the future the
Company's suppliers will be able to meet the Company's demand for components
in a timely and cost effective manner. The Company's operating results and
customer relationships could be adversely affected by either an increase in
prices for, or an interruption or reduction in supply of, any key
components.
The Company is currently increasing its manufacturing facility
capabilities in the United States and Ireland. While the Company 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.
Acquisitions of complementary businesses and technologies under
development are an active part of the Company's overall business strategy.
The Company has recently consummated acquisitions of several companies,
including NiceCom, Sonix and Primary Access. There can be no assurance that
products, technologies and businesses of acquired companies will be
effectively assimilated into the Company's business or product offerings.
There can be no assurance that any acquired products, technologies or
businesses will contribute to the Company's revenues or earnings to any
material extent. Further, the challenge of managing the integration of
several companies and new technologies into the Company's product offerings
simultaneously is significant, and there can be no assurance that the
Company will be able to successfully manage such integration.
The market price of the Company's common stock has been, and may
continue to be, extremely volatile. Factors such as new product announcements by
the Company or its competitors, quarterly fluctuations in the Company's
operating results and general conditions in the data networking market may
have a significant impact on the market price of the Company's common stock.
These conditions, as well as factors which generally affect the market for
stocks of high technology companies, could cause the price of the Company's
stock to fluctuate substantially over short periods.
The Company's corporate headquarters and a large portion of its research
and development activities and other critical business operations are
located near major earthquake faults. Operating results could be materially
adversely affected in the event of a major earthquake. Because of the
foregoing factors, as well as other factors affecting the Company's
operating results, past trends should not be used by investors to anticipate
future results or trends. Further, the Company's prior performance should
not be presumed to be an accurate indicator of future performance.
Liquidity and Capital Resources
Cash, cash equivalents and temporary cash investments at May 31, 1995
were $323.5 million, increasing $193.8 million from May 31, 1994. At the
end of fiscal 1994 and 1993, cash, cash equivalents and temporary cash
investments were $129.7 million and $117.2 million, respectively.
For the fiscal year ended May 31, 1995, net cash generated from
operating activities was $220.5 million. Trade receivables at May 31, 1995
increased $78.4 million from May 31, 1994 due primarily to an increase in sales.
Days sales outstanding in receivables was 46 days at the end of fiscal 1995,
compared to 44 days at May 31, 1994. Inventory levels at May 31, 1995
increased $50.8 million from the prior fiscal year-end, with inventory
turnover improving from 6.5 turns at May 31, 1994 to 6.6 turns at May 31,
1995.
During the fiscal year ended May 31, 1995, the Company made $76.2
million in capital expenditures. Major capital expenditures included upgrades
and additions to product manufacturing lines and facilities in Santa Clara and
Ireland, development of a new worldwide accounting and information system,
and upgrades of desktop systems. As of May 31, 1995, 3Com had outstanding
approximately $29 million in capital expenditure commitments primarily
associated with the expansion and upgrade of product manufacturing lines and
facilities. The Company spent approximately $65.8 million in net cash for
acquisitions during fiscal 1995 (see Note 3 of Notes to Consolidated
Financial Statements), which included the final payment of $14.3 million to
Centrum shareholders in the first quarter of fiscal 1995 for the acquisition
of Centrum Communications in fiscal 1994. Cash paid for acquisitions in
fiscal 1995 were funded through existing cash balances.
In the second quarter of fiscal 1995, the Company received net proceeds
of $107.3 million from the issuance of convertible subordinated notes (see
Note 8 of Notes to Consolidated Financial Statements). During fiscal 1995,
3Com repurchased 785,000 shares of common stock with a total cash outlay of
$19.6 million. As of May 31, 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. The Company received cash of $28.1 million from
the sale of its common stock to employees through its employee stock
purchase and option plans.
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. This arrangement
provides the Company with an option to purchase the related property during
the lease term, and at the end of the lease term the Company is obligated to
either purchase the property or arrange for the sale of the property to a
thid party with a guaranteed residual value of up to $33.5 million to the
seller of the property. The Company estimates that it will commence
occupancy of portions of the facility in June 1995, with payments on the
lease estimated to start in September 1995.
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.
Based on current plans and business conditions, the Company believes
that its existing cash and equivalents, temporary cash investments, cash
generated from operations and the available revolving credit agreement will
be sufficient to satisfy anticipated operating cash requirements through
fiscal 1996.
ITEM 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements and Financial Statement Schedule
- ---------------------------------------------------------------------------
Financial Statements:
Independent Auditors' Report
Consolidated Statements of Operations for the years ended May 31, 1995,
1994 and 1993
Consolidated Balance Sheets at May 31, 1995 and 1994
Consolidated Statements of Shareholders' Equity for the years ended
May 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows for the years ended May 31, 1995,
1994 and 1993
Notes to Consolidated Financial Statements
Quarterly Results of Operations (Unaudited)
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts and Reserves
All other schedules are omitted, because they are not required, are not
applicable, or the information is included in the consolidated financial
statements and notes thereto.
Independent Auditors' Report
- ----------------------------
To the Shareholders and Board of Directors of 3Com Corporation:
We have audited the accompanying consolidated balance sheets of 3Com
Corporation and its subsidiaries as of May 31, 1995 and 1994, and the
related consolidated statements of operations, shareholders' equity, and
cash flows for each of the three years in the period ended May 31, 1995.
Our audits also included the financial statement schedule listed in the
accompanying Index to Consolidated Financial Statements and Financial
Statement Schedule at Item 8. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the accompanying consolidated financial statements present
fairly, in all material respects, the financial position of 3Com Corporation
and its subsidiaries at May 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period
ended May 31, 1995 in conformity with generally accepted accounting
principles. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly in all material respects the information set
forth therein.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
San Jose, California
June 14, 1995
Consolidated Statements of Operations
- -------------------------------------
Years Ended May 31,
-------------------------------
(In thousands, except per share data) 1995 1994 1993
Sales $1,295,311 $826,995 $617,168
Costs and Expenses:
Cost of sales 602,087 405,927 320,386
Sales and marketing 253,127 171,799 137,021
Research and development 127,378 76,467 64,346
General and administrative 53,118 39,838 35,171
Purchased in-process technology 60,796 134,481 -
Non-recurring items 3,300 - 1,316
--------- --------- ---------
Total 1,099,806 828,512 558,240
--------- --------- ---------
Operating income (loss) 195,505 (1,517) 58,928
Gain on sale of investment - 17,746 -
Other income-net 2,932 3,309 1,318
--------- --------- ---------
Income before income taxes 198,437 19,538 60,246
Income tax provision 72,731 48,232 21,685
--------- --------- ---------
Net income (loss) $ 125,706 $ (28,694) $ 38,561
========= ========== =========
Net income (loss) per common and equivalent share:
Primary $ 1.73 $ (0.46) $ 0.61
Fully-diluted $ 1.71 $ (0.46) $ 0.60
Common and equivalent shares used in
computing per share amount:
Primary 72,809 62,620 63,248
Fully-diluted 73,627 62,620 64,292
See notes to consolidated financial statements.
Consolidated Balance Sheets
- ---------------------------
Years Ended May 31,
-------------------
(Dollars in thousands) 1995 1994
Assets
Current Assets:
Cash and cash equivalents $139,176 $ 66,284
Temporary cash investments 184,338 63,413
Trade receivables, less allowance
for doubtful accounts
($16,121 in 1995 and $10,402 in 1994) 197,099 118,653
Inventories 122,129 71,352
Deferred income taxes 43,922 31,236
Other 20,888 10,134
-------- --------
Total current assets 707,552 361,072
Property and equipment--net 108,194 67,001
Other assets 23,930 16,270
-------- --------
Total $839,676 $444,343
======== ========
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable $ 89,059 $ 51,827
Accrued and other liabilities 122,008 91,130
Income taxes payable 52,430 19,090
Current portion of long-term obligations 197 482
-------- --------
Total current liabilities 263,694 162,529
Long-term debt 110,000 -
Other long-term obligations 1,094 1,058
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: 1995--69,230,946;
1994--65,052,900 298,873 219,937
Unamortized restricted stock grants (2,037) (202)
Retained earnings 168,037 61,326
Unrealized gain on available-for-sale securities 184 -
Accumulated translation adjustments (169) (305)
-------- --------
Total shareholders' equity 464,888 280,756
-------- --------
Total $839,676 $444,343
======== ========
See notes to consolidated financial statements.
<TABLE>
Consolidated Statements of Shareholders' Equity
- -----------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Unrealized
Unamortized Gain on
Common Stock Restricted Available- Accumulated
---------------- Stock Retained for-sale Translation
(In thousands) Shares Amount Grants Earnings Securities Adjustments Total
----------------------------------------------------------------------------
Balances, June 1, 1992 58,676 $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, May 31, 1993 61,700 154,958 - 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 65,052 219,937 (202) 61,326 - (305) 280,756
Common stock issued under
stock plans and for
business acquisitions 3,756 33,952 (2,128) 31,824
Repurchase of common stock (785) (2,674) (16,916) (19,590)
Tax benefit from employee
stock transactions 40,306 40,306
Amortization of restricted
stock grants 293 293
Stock options assumed
in connection with
acquisitions 6,508 6,508
Adjustment to conform
pooled entity 1,208 844 (2,079) (69) (1,304)
Unrealized gain on available
for-sale securities 184 184
Accumulated translation adjustments 205 205
Net income 125,706 125,706
----------------------------------------------------------------------------
Balances, May 31, 1995 69,231 $298,873 $(2,037) $168,037 $184 $(169) $464,888
============================================================================
</TABLE>
See notes to consolidated financial statements
Consolidated Statements of Cash Flows
- -------------------------------------
Years Ended May 31,
------------------------------
(Dollars in thousands) 1995 1994 1993
Cash flows from operations:
Net income (loss) $125,706 $(28,694) $ 38,561
Adjustments to reconcile net income (loss)
to cash provided by operations:
Depreciation and amortization 46,688 30,610 25,135
Gain on sale of investment - (17,746) -
Deferred income taxes (24,175) (9,865) (3,523)
Purchased in-process technology 60,796 134,481 -
Adjustment to conform fiscal year
of pooled entity - - 2,163
Pro forma provision for income taxes - - 1,604
Non-cash restructuring costs (1,100) - (3,346)
Changes in assets and liabilities
net of effects of acquisitions:
Trade receivables (74,045) (30,045) (20,991)
Inventories (50,031) 1,637 (19,139)
Other current assets (10,205) 6,190 (3,889)
Accounts payable 34,725 8,886 11,525
Accrued and other liabilities 38,500 (2,461) 6,016
Income taxes payable 73,646 34,927 17,618
-------- ------- -------
Net cash provided by operations 220,505 127,920 51,734
-------- ------- -------
Cash flows from investment activities:
Proceeds from sale of investment - 18,066 -
Purchase of property and equipment (76,235) (36,474) (22,263)
Purchase of temporary cash investments (183,232) (76,841) (72,962)
Proceeds from temporary cash investments 60,585 90,612 40,496
Acquisition of businesses and related
purchase-price adjustment (65,832) (98,128) 2,946
Other-net 4,008 (3,020) 908
-------- -------- -------
Net cash used for investment activities (260,706) (105,785) (50,875)
-------- -------- -------
Cash flows from financing activities:
Sale of stock 28,144 22,662 19,413
Repurchase of common stock (19,590) (16,644) (9,382)
Repurchase of stock warrants - - (1,300)
Net proceeds from issuance of
convertible debt 107,330 - -
Notes payable - - 3,326
Repayments of notes payable and capital
lease obligations (2,996) (1,462) (513)
Equity distributions of pooled entity - - (5,179)
Other-net 205 (453) (1,872)
-------- ------- -------
Net cash provided by financing activities 113,093 4,103 4,493
-------- ------- -------
Increase in cash and cash equivalents 72,892 26,238 5,352
-------- ------- -------
Cash and cash equivalents at
beginning of year 66,284 40,046 34,694
-------- ------- -------
Cash and cash equivalents at end of year $139,176 $66,284 $40,046
======== ======= =======
Other cash flow information:
Interest paid $ 5,517 $ 66 $ 254
Income taxes paid 24,041 21,614 5,910
Non-cash investing and financing activities
Tax benefit from employee
stock transactions 40,306 24,474 11,955
Stock issued and options assumed
in business acquisitions 10,188 21,089 -
- -----------------------------------------------------------------------------
In connection with the purchase acquisitions in fiscal 1995 (see Note 3),
the Company paid cash, net of cash acquired, of $51.6 million, and recorded
non-cash value of stock issued and options assumed of $3.7 million and $6.5
million, respectively. The fair value of assets acquired, excluding the
$60.8 million purchased in-process technology charged to operations, was
$4.3 million, and liabilities of $2.6 million were assumed. In connection
with acquisition of Centrum in fiscal 1994 (see Note 3), the Company made a
final payment in cash of $14.3 million in fiscal 1995.
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.
See notes to consolidated financial statements.
Notes to Consolidated Financial Statements
- ------------------------------------------
Note 1: Description of Business
Founded in 1979, 3Com Corporation pioneered the data networking industry and
is committed to providing customers global access to information. Today,
3Com offers a broad range of ISO 9000-compliant global data networking
connectivity solutions which include routers, hubs, remote access servers,
switches, adapters and network management for Ethernet, Token Ring, FDDI,
ATM and other high-speed data networks. Headquartered in Santa Clara,
California, 3Com has 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-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 acquired with
maturities exceeding three months. Effective June 1, 1994, the Company
adopted Statement of Financial Accounting Standards (SFAS) No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." This
statement requires the Company to classify debt and equity securities with
readily determinable fair values as "held-to-maturity," "available-for-sale"
or "trading". Adoption of SFAS 115 did not have a significant effect on the
Company's financial position or results of operations. While the Company's
intent is to hold debt securities to maturity, the Company has classified
all securities held as available-for-sale securities as the sale of such
securities may be required prior to maturity to implement management
strategies. Such securities are reported at fair value with unrealized
gains or losses excluded from earnings and reported as a separate component
of shareholders' equity, net of applicable taxes. Prior to the adoption of
SFAS 115, all investment securities were carried at amortized cost.
Concentration of credit risk and major customer. 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 high-credit-
quality financial institutions. 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.
In fiscal 1995, the Company had one customer which accounted for
approximately 11 percent of total sales. The Company did not have any
customers which individually accounted for more than 10 percent of total
sales in fiscal 1994 and 1993, respectively.
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, except for buildings
which are at 25 years.
Revenue recognition. The Company recognizes revenue and accrues related
product return reserves, warranty and royalty expenses upon shipment. At
the time of sale, no material vendor or post-contract support obligations
remain outstanding, except as provided by separate service agreement, and
collection of the resulting receivable is probable. Service and
subscription revenue is recognized over the contract term. The Company
extends limited product return and price protection rights to certain
distributors and resellers. Such rights are generally limited to a certain
percentage of sales over a three-month period. Historically, actual amounts
recorded for product returns and price protection have not varied
significantly from estimated amounts. The Company warrants products for
periods which range from 90 days to life depending upon the product.
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 and were not significant for any of the years presented.
Net income (loss) per common and equivalent share is computed using the
weighted average number of common and common equivalent shares outstanding
and the dilutive effects of stock options, using the treasury stock method.
The effect of the assumed conversion of the 10.25% convertible subordinated
notes was antidilutive for the periods presented.
Reclassifications. Certain prior year amounts have been reclassified to
conform to the current year presentation.
Note 3: Business Combinations
For the Year Ended May 31, 1995. On October 18, 1994, the Company
acquired substantially all the assets and assumed substantially all the
liabilities of NiceCom, Ltd. (NiceCom), and assumed all outstanding
NiceCom stock options. The purchase price consisted of approximately
$53.2 million which was paid using funds from the Company's working
capital and the issuance of 93,162 shares of common stock of the Company,
with an aggregate value of $3.7 million. In addition, the Company assumed
stock options with an associated value of $5.7 million. NiceCom is
engaged in the development of asynchronous transfer mode (ATM) switches
and an Ethernet-to-ATM solution to provide a migration path from existing
Ethernet LANs to ATM networking.
On October 14, 1994, the Company acquired all of the outstanding shares
and assumed all outstanding stock options of a company engaged in the
development of network adapter technology. The purchase price consisted
of approximately $2.3 million in cash plus the assumption of stock options
with an associated value of approximately $400,000. The purchase price
was paid using funds from the Company's working capital.
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 acquisitions. The aggregate purchase price
of $61.6 million, plus $2.0 million of costs directly attributable to the
completion of the acquisitions, has been allocated to the assets and
liabilities acquired. Approximately $60.8 million of the total purchase
price represented the value of in-process technology that had not yet
reached technological feasibility and had no alternative future use and
was charged to the Company's operations in the second quarter of fiscal
1995.
On February 28, 1995, the Company acquired AccessWorks Communications, a
company involved in developing, manufacturing and marketing Integrated
Services Digital Network (ISDN) transmission products. The acquisition
was accounted for as a purchase. The purchase price and costs directly
attributable to the completion of the acquisition were not significant.
The Company's consolidated results of operations include the operating
results of the acquired companies from their acquisition dates. Pro forma
results of operations of 3Com and the aforementioned acquired companies
are not presented as the amounts would not significantly differ from the
Company's historical results.
On May 1, 1995, the Company acquired Sonix Communications Limited (Sonix) by
issuing approximately 1.2 million shares of common stock for all of the
outstanding stock of Sonix. Sonix develops, manufactures and markets a
range of networking connectivity solutions using ISDN technology. The
acquisition was accounted for as a pooling-of-interests. All financial data
of the Company for fiscal 1995 has been restated to include the operating
results of Sonix. As the historical operations of Sonix were not
significant to any year presented, the Company's financial statements for
prior years have not been restated and the financial effect of the prior
year's results of operations of Sonix have been accounted for as a $2.1
million charge against retained earnings in fiscal 1995.
The following table shows the effect on the results of operations for the
fiscal year in which the combination was effected:
Year ended
(in thousands, except per share amounts) May 31, 1995
- --------------------------------------------------------------
Sales:
3Com $1,269,908
Sonix 25,403
Combined $1,295,311
- --------------------------------------------------------------
Net income:
3Com $ 123,450
Sonix 2,256
Combined $ 125,706
- --------------------------------------------------------------
For the Year Ended May 31, 1994. 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 at the time of the acquisition and
$14.3 million was paid in cash in August 1994 pursuant to the acquisition
agreement. 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 had no alternative future use and was charged to the
Company's operations.
The Company's consolidated results of operations include the operating
results of the acquired companies since their acquisition dates.
For the Year Ended May 31, 1993. On January 29, 1993, the Company acquired
Star-Tek, Inc. (Star-Tek) by issuing approximately 3.5 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
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.
Note 4: Temporary Cash Investments
Available-for-sale securities consist of:
May 31, 1995
------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
(in thousands) Cost Gains Losses Fair Value
-------- ------- ------- ----------
State and municipal securities $108,625 $214 $(22) $108,817
Corporate debt securities 49,773 76 - 49,849
U.S. Government and agency
securities 25,633 39 - 25,672
-------- ---- ----- --------
Total $184,031 $329 $(22) $184,338
======== ==== ===== ========
There were no realized gains or losses for the year ended May 31, 1995.
The contractual maturity of available-for-sale securities at May 31, 1995
was as follows:
Amortized Estimated
(in thousands) Cost Fair Value
- ------------------------------------------------------------------
Within one year $142,158 $142,312
Over one year to two years 41,873 42,026
-------- --------
Total $184,031 $184,338
======== ========
Note 5: Inventories
Inventories at May 31 consist of:
(in thousands) 1995 1994
- ----------------------------------------------------------------
Finished goods $ 73,057 $44,770
Work-in-process 14,035 8,232
Raw materials 35,037 18,350
-------- -------
Total $122,129 $71,352
======== =======
Note 6: Property and Equipment
Property and equipment at May 31 consists of:
(in thousands) 1995 1994
- ---------------------------------------------------------------
Land $ 1,303 $ 1,303
Building 7,365 7,365
Machinery and equipment 172,189 122,899
Furniture and fixtures 19,533 14,591
Leasehold improvements 16,656 15,446
Construction in progress 15,613 -
-------- --------
Total 232,659 161,604
Accumulated depreciation and
amortization (124,465) (94,603)
-------- --------
Property and equipment - net $108,194 $ 67,001
======== ========
Note 7: Accrued and other liabilities
Accrued and other liabilities at May 31 consist of:
(in thousands) 1995 1994
- ----------------------------------------------------------------
Accrued payroll and related expenses $ 37,723 $21,387
Accrued product warranty 20,054 13,686
Accrued cooperative advertising 12,015 11,544
Accrued payment to Centrum shareholders - 14,267
Other accrued liabilities 52,216 30,246
-------- -------
Accrued and other liabilities $122,008 $91,130
======== =======
Note 8: Borrowing Arrangements and Commitments
In November 1994, the Company completed a private placement of $110 million
aggregate principal amount of convertible subordinated notes under Rule
144A of the Securities Act of 1933. The notes mature in 2001. Interest is
payable semi-annually at 10.25% per annum. The notes are convertible at
the option of the note holders into the Company's common stock at an
initial conversion price of $69.125 per share. Beginning in November 1997,
the notes are redeemable at the option of the Company at an initial
redemption price of 102.929% of the principal amount. The Company has
reserved 1,591,320 shares of common stock for the conversion of these
notes.
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. This arrangement provides the Company
with an option to purchase the related property during the lease term, and
at the end of the lease term the Company is obligated to either purchase the
property or arrange for the sale of the property to a third party with a
guaranteed residual value of up to $33.5 million to the seller of the
property. The Company estimates that it will commence occupancy of portions
of the facility in June 1995, with payments on the lease estimated to start
in September 1995. Future minimum lease payments are included in the table
below.
In April 1995, the Company signed an eight-year lease for 80,000 square feet
of office and manufacturing space in Boxborough, Massachusetts to
consolidate existing facilities in that area. Concurrent with this lease,
the Company entered into an agreement pursuant to which the Company has the
option to purchase the property in November 1995. Future minimum lease
payments are included in the table below.
As of May 31, 1995, the Company had approximately $29 million in capital
expenditure commitments, primarily associated with the expansion and upgrade
of product manufacturing lines and facilities.
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. At May 31, 1995, all such requirements were met and
there were no outstanding borrowings under the agreement. The Company has
no restrictions on paying cash dividends on its common stock.
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 leases its facilities and certain equipment under operating
leases. Leases expire at various dates from 1996 to 2013 and certain
facility leases have renewal options with rentals based upon changes in the
Consumer Price Index or the fair market rental value of the property.
Future operating lease commitments are as follows:
(in thousands)
- --------------------------------------------------------------
Fiscal year
1996 $20,022
1997 17,701
1998 13,242
1999 12,247
2000 9,919
Thereafter 15,416
-------
Total $88,547
=======
Rent expense was $17.0 million, $13.5 million, and $13.4 million for fiscal
1995, 1994, and 1993, respectively.
Note 9: Common Stock
The Company's common stock was split two-for-one on September 1, 1994 for
shareholders of record on August 16, 1994. All applicable share and per
share data in these financial statements have been restated to give effect
to this stock split.
Shareholder Rights Plan. In September 1989, the Company's Board of Directors
approved an amendment and restatement of the stock purchase rights plan and
declared a dividend distribution of one common stock purchase right for each
outstanding share of its common stock. The Company's Board of Directors
approved an amendment and restatement of the rights plan in December 1994.
The rights become exercisable based on certain limited conditions related to
acquisitions of stock, tender offers and certain business combination
transactions of the Company. In the event one of the limited conditions is
triggered, each right entitles the registered holder to purchase for $250 a
number of shares of 3Com common stock (or any acquiring company) with a fair
market value of $500. The rights are redeemable at the Company's option for
$.01 per right and expire on December 13, 2004.
Stock Option Plans. The Company has stock option plans under which
employees and directors may be granted options to purchase common stock.
Options are generally granted at not less than the fair market value at
grant date, vest over a four-year period, and expire ten years after the
grant date.
A summary of option transactions under the plans follows:
Years ended May 31,
(in thousands except
price per share) 1995 1994 1993
- ----------------------------------------------------------------
Number of option shares:
Granted and assumed 3,446 4,700 4,110
Exercised (2,956) (3,718) (3,656)
Cancelled (577) (422) (642)
Outstanding at end of year 12,213 12,300 11,740
- ----------------------------------------------------------------
Option price per share:
Granted and assumed $0.03-68.25 $0.44-30.88 $5.00-19.69
Exercised 0.44-48.75 0.44-25.88 2.82-17.50
Cancelled 0.73-52.19 0.45-28.19 3.32-17.55
Outstanding at end of year $0.03-68.25 $0.44-30.88 $2.82-19.69
In connection with the fiscal 1995 purchase 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 164,000
shares of the Company's common stock at exercise prices of $0.03 to $3.44
per share.
At May 31, 1995, options for 5.1 million shares were exercisable, 4.8
million shares were available for future grants, and 17.0 million shares
were reserved for issuance under the stock option plans.
Employee Stock Purchase Plan. The Company has an employee stock purchase
plan, under which eligible employees may authorize payroll deductions of up
to 10 percent of their compensation (as defined) to purchase common stock at
a price not less than 85 percent of the lower of the fair market values as
of the beginning or the end of the offering period. At May 31, 1995,
629,000 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. Any compensation expense is recognized as the granted shares
vest over a one to four year period. Through May 31, 1995, 57,000 shares of
common stock have been issued under this plan. At May 31, 1995, 143,000
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, 12.3 million shares have been repurchased and the Company may
repurchase up to an additional 2.7 million shares of common stock.
Note 10: Foreign Exchange Contracts
Intercompany balances and balance sheet exposures. The Company enters into
foreign exchange forward 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 income - net, which offset foreign exchange gains or losses from
revaluation of foreign currency-denominated balance sheet items and
intercompany balances.
At May 31, 1995 and 1994, the Company had outstanding foreign exchange
forward contracts of $16.7 million and $14.6 million, respectively,
excluding the foreign exchange contracts related to the Irish manufacturing
facility. The contracts require the Company to exchange foreign currencies
for U.S. dollars or vice versa, and generally mature in one month.
Irish manufacturing facility. The Company has entered into foreign exchange
forward contracts to minimize fluctuation in the expected U.S. dollar cost
of expanding its Irish manufacturing facility due to movements in the Irish
pound to U.S. dollar exchange rate. Gains and losses on the forward
contracts, when material, are included in construction in progress. At May
31, 1995, the outstanding foreign exchange contracts related to the
construction in Ireland were $10.1 million. The contracts require the
Company to exchange U.S. dollars for Irish pounds and have maturities from
one to seven months.
Note 11: Financial Instruments Fair Value Disclosure
The following summary disclosures are made in accordance with the provisions
of SFAS No. 107, "Disclosures About Fair Value of Financial Instruments,"
which requires the disclosure of fair value information about both on- and
off-balance sheet financial instruments where it is practicable to estimate
the value. Fair value is defined in SFAS No. 107 as the amount at which an
instrument could be exchanged in a current transaction between willing
parties, other than in a forced or liquidation sale. It is not the
Company's intent to enter into such exchanges.
Because SFAS No. 107 excludes certain financial instruments and all non-
financial instruments from its disclosure requirements, any aggregation of
the fair value amounts presented would not represent the underlying value of
the Company.
May 31, 1995 May 31, 1994
--------------------- ---------------------
Carrying Estimated Carrying Estimated
(in thousands) Amount Fair Value Amount Fair Value
- ------------------------------------------------------------------------------
Assets:
Cash and cash equivalents $139,176 $139,176 $66,284 $66,284
Temporary cash investments 184,338 184,338 63,413 63,208
Liabilities:
Convertible subordinated notes $110,000 $138,050 $ - $ -
Commitments:
Foreign exchange contracts $ 26,796 $ 26,782 $14,634 $14,648
The following methods and assumptions were used in estimating the fair
values of financial instruments:
Cash and cash equivalents. The carrying amounts reported in the balance
sheets for cash and cash equivalents approximate their estimated fair
values.
Temporary cash investments, foreign exchange contracts and convertible
subordinated notes. The fair value of temporary cash investments, foreign
exchange contracts and convertible subordinated notes are based on quoted
market prices.
Note 12: License
In fiscal 1994, the Company licensed certain in-process wireless technology
from Pacific Monolithics, Inc. This technology was 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
fiscal 1994.
Note 13: Non-recurring Items
Non-recurring items for the year ended May 31, 1995 consists of merger costs
of $4.4 million related to the acquisitions of Sonix (see Note 3) and
Primary Access (see Note 18) offset by a $1.1 million reduction in accrued
costs associated with the fiscal 1991 restructuring based on revised
estimates of future costs.
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 17), 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 based on
revised estimates of future costs.
Note 14: Other Income - Net
Other income - net consists of:
(in thousands) 1995 1994 1993
- -----------------------------------------------------------------
Interest income $9,804 $3,954 $3,602
Interest expense (6,865) (66) (255)
Other (7) (579) (2,029)
------ ------ ------
Total $2,932 $3,309 $1,318
====== ====== ======
Note 15: Income Taxes
The provision for income taxes consists of:
(in thousands) 1995 1994 1993
- ----------------------------------------------------------------
Current:
Federal $55,227 $31,761 $13,786
State 19,142 7,862 3,110
Foreign 22,537 16,771 8,293
------- ------- -------
Total current 96,906 56,394 25,189
------- ------- -------
Deferred:
Federal (17,600) (9,266) (1,658)
State (6,885) - -
Foreign 310 1,104 (1,846)
------- ------- -------
Total deferred (24,175) (8,162) (3,504)
------- ------- -------
Total $72,731 $48,232 $21,685
======= ======= =======
The components of the net deferred tax asset consist of:
(in thousands) 1995 1994
- -----------------------------------------------------------------
Deferred tax assets:
Amortization and depreciation $29,299 $ 4,244
Reserves not recognized for tax purposes 31,641 31,483
Other 13,640 3,058
Valuation allowance (4,829) (6,097)
------- -------
Total deferred tax asset 69,751 32,688
------- -------
Deferred tax liabilities -
Unremitted earnings (12,828) -
Net unrealized gain on securities
available-for-sale (123) -
Other (85) (25)
------- -------
Net deferred tax asset $56,715 $32,663
======= =======
Valuation allowance relates primarily to expenses, the realization of which
is not assured on future state income tax returns. The valuation allowance
decreased $1.3 million in fiscal 1995, and increased $926,000 and $1.1
million in 1994 and 1993, respectively.
Tax carryforwards of acquired businesses consist of $1.0 million and $800,000
of net operating loss and tax credit carryforwards, respectively, that expire
in 2004 through 2008.
The provision for income taxes differs from the amount computed by applying
the federal statutory income tax rate to income before taxes as follows:
1995 1994 1993
- ----------------------------------------------------------------
Tax computed at federal
statutory rate 35.0% 35.0% 34.0%
State income taxes, net
of federal effect 4.0 3.0 3.4
Foreign sales corporation (0.6) (5.2) (1.3)
Tax exempt investment income (0.8) (5.7) (1.5)
Provision for combined foreign
and U.S. taxes on certain
foreign income at rates less
than U.S. rates (4.2) (7.5) (0.4)
Research tax credits (1.2) (8.7) (0.2)
Non-deductible purchased
in-process technology 2.7 241.5 -
Effect of tax law changes - (6.4) -
Other 1.8 0.9 2.0
----- ----- ----
Total 36.7% 246.9% 36.0%
===== ===== ====
Income before income taxes for the years ended 1995, 1994, and 1993 includes
income of $131.2 million, $58.2 million and $18.7 million from the Company's
foreign subsidiaries. The Company has not provided for federal income taxes
on approximately $38.7 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 $10.7 million.
Note 16: 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 primarily of central distribution and order
administration, manufacturing and research and development facilities in
Western Europe, and sales, marketing and customer service activities
conducted through sales subsidiaries throughout the world.
Sales, operating income and identifiable assets, classified by the major
geographic areas in which the Company operates, are as follows:
(in thousands) 1995 1994 1993
- ----------------------------------------------------------------
Revenues from unaffiliated
customers:
United States operations $ 592,771 $399,836 $308,879
Export sales from United
States operations 179,225 103,127 69,237
European operations 523,151 324,032 224,891
Other 164 - 14,161
---------- -------- --------
Total $1,295,311 $826,995 $617,168
========== ======== ========
Transfers from geographic areas
(eliminated in consolidation):
United States operations $144,862 $112,418 $101,570
European operations 123,360 52,595 39,920
Other 439 - 23,354
-------- -------- --------
Total $268,661 $165,013 $164,844
======== ======== ========
Operating income (loss):
United States operations $ 78,105 $(60,808) $ 39,108
European operations 141,367 63,306 23,757
Other (2,149) 587 (212)
Eliminations (21,818) (4,602) (3,725)
-------- -------- --------
Total $195,505 $ (1,517) $ 58,928
======== ======== ========
Identifiable assets:
United States operations $628,942 $332,651
European operations 235,634 123,144
Other 10,009 2,498
Eliminations (34,909) (13,950)
-------- --------
Total $839,676 $444,343
======== ========
Operating income (loss) for the United States operations for the years ended
May 31, 1995 and 1994 included charges of approximately $60.8 million and
$134.5 million, respectively, for purchased in-process technology resulting
from the Company's acquisitions in those years. Transfers between
geographic areas are accounted for at prices representative of unaffiliated
party transactions.
Note 17: 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 believes 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.
Note 18: Subsequent Event
On March 21, 1995, the Company entered into an Agreement and Plan of
Reorganization with Primary Access Corporation. Primary Access develops,
manufactures and markets integrated network access systems. The acquisition
was consummated on June 9, 1995, and the Company issued approximately 2.3
million shares of its common stock in exchange for all of the outstanding
stock of Primary Access. The Company also assumed and exchanged all options
and warrants to purchase Primary Access stock for options and warrants to
purchase approximately 500,000 shares of the Company's common stock. The
merger was accounted for as a pooling-of-interests. 3Com Primary Access
survives the merger as a wholly-owned subsidiary of the Company.
The following unaudited pro forma summary presents the consolidated results
of operations assuming that the acquisition of Primary Access had occurred
on June 1, 1992. No significant adjustments are required to conform the
accounting policies of the Company and Primary Access. These pro forma
results have been prepared for comparative purposes only and do not purport
to be indicative of what would have occurred had this transaction been
effected on the date indicated above or of results which may occur in the
future.
(in thousands, except per share amounts)
1995 1994 1993
- ---------------------------------------------------------------------
Sales $1,325,693 $851,047 $630,966
Net income (loss) $ 125,999 $(24,216) $ 39,677
Net income (loss) per share
(fully diluted basis) $ 1.65 $ (0.37) $ 0.60
If the merger with Primary Access had been consummated on May 31, 1995,
consolidated assets, liabilities, shareholders' equity and working capital
would have increased by $18.1 million, $8.2 million, $9.9 million and $7.6
million, respectively.
<TABLE>
Quarterly Results of Operations (Unaudited)
- -------------------------------------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fiscal 1995 Quarters Ended Fiscal 1994 Quarters Ended
-------------------------------------- -----------------------------------------
May 31 Feb. 28 Nov. 30 Aug. 31 May 31 Feb. 28 Nov. 30 Aug. 31
1995 1995 1994 1994 1994 1994 1993 1993
Sales $384,919 $346,484 $309,947 $253,962 $241,463 $218,166 $205,275 $162,091
-------- -------- -------- -------- -------- --------- -------- --------
Gross margin 208,351 186,149 165,406 133,318 124,605 113,183 102,865 80,415
Gross margin % 54.1% 53.7% 53.4% 52.5% 51.6% 51.9% 50.1% 49.6%
-------- -------- -------- -------- -------- --------- -------- --------
Operating income (loss) 76,464 71,841 2,722 44,480 41,327 (94,680) 31,925 19,911
-------- -------- -------- -------- -------- --------- -------- --------
Net income (loss) 47,581 45,730 3,162 29,233 27,189 (103,460) 21,463 26,114
Net income (loss) % 12.4% 13.2% 1.0% 11.5% 11.3% (47.4%) 10.5% 16.1%
-------- -------- -------- -------- -------- --------- -------- --------
Fully diluted net income
(loss) per share $ 0.64 $ 0.62 $ 0.04 $ 0.41 $ 0.39 $ (1.64) $ 0.32 $ 0.40
-------- -------- -------- -------- -------- --------- -------- --------
</TABLE>
Notes: Net income for the quarter ended May 31, 1995 included a charge
of approximately $4.4 million ($.06 per share) for merger costs associated
with the acquisitions of Sonix and Primary Access (see Notes 3 and 18 to the
consolidated financial statements). Net income for the quarter ended
November 30, 1994 included a charge of approximately $60.8 million ($.52 per
share) for purchased in-process technology (see Note 3 to the consolidated
financial statements) and a credit of $1.1 million ($.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 $17.7 million ($.18 per share)
related to the sale of an investment and a tax benefit of $1.2 million ($.02
per share) resulting from tax law changes.
Excluding the non-recurring items noted above, pro forma net income per
share on a fully diluted basis would have been as follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fiscal 1995 Quarters Ended Fiscal 1994 Quarters Ended
------------------------------------- ----------------------------------------
May 31 Feb. 28 Nov. 30 Aug. 31 May 31 Feb. 28 Nov. 30 Aug. 31
1995 1995 1994 1994 1994 1994 1993 1993
Pro forma net income
per share $ 0.70 $ 0.62 $ 0.55 $ 0.41 $ 0.39 $ 0.36 $ 0.32 $ 0.20
------- ------- ------- ------- ------- ------- ------- -------
</TABLE>
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
ITEM 10. Directors and Executive Officers of 3Com
The information required by Item 10 of Form 10-K with respect to
identification of directors is incorporated by reference to the information
contained in the section captioned "Election of Directors: in 3Com's
definitive Proxy Statement for the Annual Meeting of Shareholders to be held
September 28, 1995 (the "Proxy Statement"), a copy of which will be filed
with the Securities and Exchange Commission before the meeting date. For
information with respect to the executive officers of the Registrant, see
"Executive Officers of the Registrant" at the end of Part I of this report.
ITEM 11. Executive Compensation
The information required by Item 11 of Form 10-K is incorporated by
reference to the information contained in the section captioned "Executive
Compensation and Other Matters" in the Proxy Statement.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The information required by Item 12 of Form 10-K is incorporated by
reference to the information contained in the section captioned "General
Information" in the Proxy Statement.
ITEM 13. Certain Relationships and Related Transactions
The information required by Item 13 of Form 10-K is incorporated by
reference to the information contained in the section captioned
"Compensation Committee Interlocks and Insider Participation" in the Proxy
Statement.
PART IV
ITEM 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K
(a) (1) Financial Statements--See Index to Consolidated
Financial Statements and Financial Statement Schedule
of this Form 10-K.
(2) Financial Statement Schedule--See Index to Consolidated
Financial Statements and Financial Statement Schedule
of this Form 10-K.
(3) Exhibits--See Exhibit Index of this Form 10-K.
(b) The Registrant filed or amended reports on Form 8-K during
the last quarter of the fiscal year ended May 31, 1995, as
follows:
(i) A report on Form 8-K filed on May 16, 1995, reporting
under Item 2 the completion of the acquisition of Sonix
Communications Limited, effective May 1, 1995.
(ii) A report on Form 8-K/A amending the Report on Form 8-K,
dated January 14, 1994, was filed on May 11, 1995, and
included the conforming signature of the independent
accountant's report on the EDGAR filing.
(iii) A report on Form 8-K/A amending the Report on Form 8-K,
dated November 1, 1994, was filed on May 11, 1995 and
included the unaudited financial statements of NiceCom,
Ltd. for the nine months ended September 30, 1994.
(c) See Exhibit Index of this Form 10-K.
(d) See Index to Consolidated Financial Statements and Financial
Statement Schedule of this Form 10-K.
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
3.1 Amended and Restated Articles of Incorporation (Exhibit 19.1
to Form 10-Q) (8)
3.2 Certificate of Amendment of the Amended and Restated
Articles of Incorporation (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)
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)
10.18 Agreement and Plan of Reorganization dated January 18, 1994. (Exhibit
7.2 to Form 8-K) (15)
10.19 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 Acquisition and Exchange Agreement dated March 22, 1995 among 3Com
Corporation and Shareholders of Sonix Communications Limited (Exhibit
7.1 to Form 8-K) (24)
10.28 Agreement and Plan of Reorganization, dated March 21, 1995, by and
among 3Com Corporation, Anuinui Acquisition Corporation and Primary
Access Corporation (Appendix A to prospectus included in Form S-4) (25)
10.29 Amendment to Agreement and Plan of Reorganization, dated May 30, 1995
by and among 3Com Corporation, Anuinui Acquisition Corporation and
Primary Access Corporation (Appendix A-1 to prospectus included in
Form S-4) (25)
10.30 Escrow Agreement, dated June 9, 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 (Exhibit 10.27 to Form S-4)
(25)
21.1 Subsidiaries of the Registrant
23.1 Consent of Deloitte & Touche LLP
27. Financial Data Schedule
- ------------------------------------------------------------------------------
* Indicates a management contract or compensatory plan.
(1) Incorporated by reference to the corresponding Exhibit previously filed
as an Exhibit to Registrant's Registration Statement on Form S-1 filed
January 25, 1984 (File No. 2-89045).
(2) Incorporated by reference to the Exhibit identified in parentheses
previously filed as an Exhibit to Registrant's Registration Statement
on Form S-8 filed October 13, 1987 (File No. 33-17848).
(3) Incorporated by reference to the corresponding Exhibit or the Exhibit
identified in parentheses previously filed as an Exhibit to Registrant's
Form 10-K filed August 29, 1987 (File No. 0-12867).
(4) Incorporated by reference to Exhibit 10.2 to Registrant's Registration
Statement on Form S-4 filed on August 31, 1987 (File No. 33-16850).
(5) Incorporated by reference to the corresponding Exhibit or the Exhibi
identified in parentheses previously filed as an Exhibit to Registrant's
Form 10-K filed on August 28, 1989 (File No. 0-12867).
(6) Incorporated by reference to Exhibit 19.1 to Registrant's Form 10-Q
filed on April 14, 1990 (File No. 0-12867).
(7) Incorporated by reference to the corresponding Exhibit or the Exhibit
identified in parentheses previously filed as an Exhibit to Registrant's
Form 10-K filed on August 28, 1990 (File No. 0-12867).
(8) Incorporated by reference to the Exhibit identified in parentheses
previously filed as an Exhibit to Registrant's Form 10-Q filed on
January 2, 1991 (File No. 0-12867).
(9) Incorporated by reference to the Exhibit identified in parentheses
previously filed as an Exhibit to Registrant's Form 10-Q filed on
April 15, 1991 (File No. 0-12867).
(10) Incorporated by reference to the Exhibit identified in parentheses
previously filed as an Exhibit to Registrant's Form 10-K filed on
August 27, 1991 (File No. 0-12867).
(11) Incorporated by reference to the Exhibit identified in parentheses
previously filed as an Exhibit to Registrant's Form 10-Q filed
January 10, 1992 (File No. 0-12867).
(12) Incorporated by reference to the Exhibit identified in parentheses
previously filed as an Exhibit to Registrant's Form 8-K filed on
February 18, 1992 (File No. 0-12867).
(13) Incorporated by reference to the Exhibit identified in parentheses
previously filed as an Exhibit to Registrant's Form 8-K filed on
February 12, 1993 (File No. 0-12867).
(14) Incorporated by reference to the Exhibit identified in parentheses
previously filed as an Exhibit to Registrant's Form 8-K filed on
January 31, 1994 (File No. 0-12867).
(15) Incorporated by reference to the Exhibit identified in parentheses
previously filed as an Exhibit to Registrant's Form 8-K filed on
February 11, 1994 (File No. 0-12867).
(16) Incorporated by reference to the Exhibit identified in parentheses
previously filed as an Exhibit to Registrant's Form 10-K filed on
August 27, 1993 (File No. 0-12867).
(17) Incorporated by reference to the Exhibit identified in parentheses
previously filed as an Exhibit to Registrant's Form 10-Q filed on
April 13, 1994 (File No. o-12867).
(18) Incorporated by reference to the Exhibit identified in parentheses
previously filed as an Exhibit to Registrant's Form 10-Q filed on
January 14, 1994 (File No. 0-12867).
(19) Incorporated by reference to the Exhibit identified in parentheses
previously filed as an Exhibit to Registrant's 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)
(24) Incorporated by reference to the Exhibit identified in parentheses
previously filed as an Exhibit to Registrant's Form 8-K filed on
May 16, 1995 (File No. 0-12867)
(25) Incorporated by reference to the Exhibit or other item identified in
parentheses previously filed as an Exhibit to or included in
Registrant's Registration Statement on Form S-4, originally filed on
March 23, 1995 (File No. 33-58203)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, on the
29th day of June, 1995.
3Com Corporation
(Registrant)
By: /s/ Eric A. Benhamou
---------------------
Eric A. Benhamou
Chairman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the 29th day of June, 1995.
Signature Title
--------- -----
/s/ Eric A. Benhamou Chairman of the Board,
----------------------------- President and
(Eric A. Benhamou) Chief Executive Officer
(Principal Executive Officer)
/s/ Christopher B. Paisley Vice President, Finance and
----------------------------- Chief Financial Officer
(Christopher B. Paisley) (Financial and
Accounting Officer)
/s/ James L. Barksdale Director
-----------------------------
(James L. Barksdale)
/s/ Gordon A. Campbell Director
-----------------------------
(Gordon A. Campbell)
Director
-----------------------------
(David W. Dorman)
/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)
SCHEDULE II
3Com Corporation
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
For the Years Ended May 31, 1993, 1994 and 1995
(in thousands)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Additions Reclassi-
Balance charged fications Balance
at to and charges Pooled at
beginning costs and to other Business- end of
Description of period expenses accounts Deductions Net (1) period
- ----------- --------- -------- -------- ---------- ------- ------
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
------- ------- ------- ------- ------- -------
Year ended May 31, 1995:
Allowance for doubtful accounts $10,402 $ 5,742 $ 72 (3) $ 95 (2) - $16,121
Product return reserve 3,769 6,935 29 (3) 3,320 - 7,413
Accrued product warranty 13,686 20,074 - 13,706 - 20,054
Restructuring reserves:
Inventory reserve 925 - - 925 - -
Property and equipment reserve 93 (93)(5) - - - -
Accrued restructuring costs 2,736 (1,007)(5) - 1,729 - -
------- ------- ------- ------- ------- -------
Total restructuring reserves $ 3,754 $(1,100) - $ 2,654 - -
------- ------- ------- ------- ------- -------
</TABLE>
- --------------------
(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.
EXHIBIT 21.1
3COM CORPORATION SUBSIDIARIES
3Com Asia Limited (Hong Kong)
3Com Benelux B.V. (The Netherlands)
3Com Canada Inc. (Canada)
3Com Credit Corporation (California, U.S.A.)
3Com do Brasil Servicos Ltda. (Brazil)
3Com de Chile S.A. (Chile)
3Com de Mexico, S.A. de C.V. (Mexico)
3Com Development Corporation (California, U.S.A.)
3Com Engineering Limited (United Kingdom)
3Com Europe Limited (United Kingdom)
3Com Far East Limited (Cayman Islands)
3Com GmbH (Germany)
3Com Holdings Limited (Cayman Islands)
3Com International, Inc. (Delaware, U.S.A.)
3Com Ireland (Cayman Islands)
3Com Ireland Technologies Limited (Ireland)
3Com Israel Limited (Israel)
3Com Limited (United Kingdom)
3Com Japan K.K. (Japan)
3Com Korea Limited (Korea)
3Com Mediteraneo S.r.l. (Italy)
3Com Nordic AB (Sweden)
3Com Primary Access
3Com S.A. (France)
3Com Sonix Communications Limited (United Kingdom)
3Com U.K. Holdings Limited (United Kingdom)
3Com (U.K.) Limited (United Kingdom)
3Com World Trade, Inc. (U.S. Virgin Islands)
The LAN Guys, Inc. (California, U.S.A.)
NiceCom, Inc. (Delaware, U.S.A.)
EXHIBIT 23.1
CONSENT OF DELOITTE & TOUCHE LLP
To the Shareholders and Board of Directors of 3Com Corporation:
We consent to the incorporation by reference in Registration Statements Nos.
2-92053, 33-2171, 33-17848, 33-33803, 33-33807, 33-39323, 33-36911, 33-
45176, 33-45231, 33-45233, 33-56952, 33-58708, 33-72158, 33-55265 and 33-
60379 of 3Com Corporation on Form S-8 of our report dated June 14, 1995
appearing in this Annual Report on Form 10-K of 3Com Corporation for the
year ended May 31, 1995.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
San Jose, California
June 28, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1995
<PERIOD-END> MAY-31-1995
<CASH> 139,176
<SECURITIES> 184,338
<RECEIVABLES> 213,220
<ALLOWANCES> (16,121)
<INVENTORY> 122,129
<CURRENT-ASSETS> 707,552
<PP&E> 232,659
<DEPRECIATION> (124,465)
<TOTAL-ASSETS> 839,676
<CURRENT-LIABILITIES> 263,694
<BONDS> 0
<COMMON> 298,873
0
0
<OTHER-SE> 166,015
<TOTAL-LIABILITY-AND-EQUITY> 839,676
<SALES> 1,295,311
<TOTAL-REVENUES> 1,295,311
<CGS> 602,087
<TOTAL-COSTS> 855,214
<OTHER-EXPENSES> 229,460
<LOSS-PROVISION> 5,743
<INTEREST-EXPENSE> 6,457
<INCOME-PRETAX> 198,437
<INCOME-TAX> 72,731
<INCOME-CONTINUING> 125,706
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 125,706
<EPS-PRIMARY> 1.73
<EPS-DILUTED> 1.71
</TABLE>
